[Federal Register Volume 66, Number 9 (Friday, January 12, 2001)]
[Rules and Regulations]
[Pages 3358-3376]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-909]



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Part XI





Department of Health and Human Services





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Health Care Financing Administration



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42 CFR Parts 413 and 422



Medicare Program; Payment for Nursing and Allied Health Education; 
Final Rule



Medicare Program; Payment for Clinical Psychology Training Programs; 
Proposed Rule

  Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Rules 
and Regulations  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 413 and 422

[HCFA-1685-F, previously BPD-685-F]
RIN 0938-AE79


Medicare Program; Payment for Nursing and Allied Health Education

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

ACTION: Final rule.

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SUMMARY: This final rule sets forth in regulations Medicare policy for 
the payment of costs of approved nursing and allied health education 
programs. In addition, the rule clarifies the payment methodology for 
certified registered nurse anesthetist education programs.
    In general, the final rule clarifies and restates payment policies 
previously established in the Provider Reimbursement Manual and other 
documents, but never specifically addressed in regulations. The final 
rule carries out a directive made in the Omnibus Budget Reconciliation 
Act of 1989 and addresses changes required by the Omnibus Budget 
Reconciliation Act of 1990.

DATES: These regulations are effective on March 13, 2001.
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FOR FURTHER INFORMATION CONTACT: Rebecca Hirshorn, (410) 786-3411.

SUPPLEMENTARY INFORMATION: The sections contained within this document 
have been constructed according to the framework outlined in the table 
of contents that follows. We have summarized pertinent material from 
our proposed rule followed by public comments and our responses, along 
with explanations of the provisions of the final rule. Other tools to 
assist the reader in navigating the document include a crosswalk of 
reorganized text for Sec. 413.85 and a list of frequently used 
acronyms.

Table of Contents

I. Background
    A. Legislative Summary
    B. The Omnibus Budget Reconciliation Act of 1989
    C. The Omnibus Budget Reconciliation Act of 1990
II. Provisions of the Proposed Rule and Responses to Public Comments
    A. Determining Provider-Operated Programs
    B. Nursing and Allied Health Education Specialties and 
Accrediting Bodies
    C. Determination of Net Costs
    D. Payment for Certain Nonprovider-Operated Programs under 
Public Law 101-508
    E. Costs of Education Activities Considered to be Normal 
Operating Costs
    F. Net Costs of Approved Certified Registered Nurse Anesthetist 
(CRNA) Educational Programs
III. Provisions of the Final Rule
IV. Regulatory Impact Analysis
V. Information Collection Requirements Regulations Text

Alphabetical List of Acronyms Appearing in the Final Rule

AMA  American Medical Association
APTA American Physical Therapy Association
CAHEA Committee on Allied Health Education and Accreditation
CAAHEP Commission on Accreditation of Allied Health Education 
Programs
CRNA  Certified Registered Nurse Anesthetist
EMT-P  Emergency Medical Technician and Paramedic Programs
GME  Graduate Medical Education
HHA  Home Health Agency
MSA  Metropolitan Statistical Area
NAACLS  National Accrediting Agency for Clinical Laboratory Sciences
SNF  Skilled Nursing Facility
OBRA  Omnibus Budget Reconciliation Act
OMB  Office of Management and Budget
RFA  Regulatory Flexibility Act
WAIS  Wide Area Information Server

I. Background

    In 1992, we issued a proposed rule in the Federal Register (57 FR 
43659) that addressed Medicare payment for costs of approved nursing 
and allied health education programs, including the requirements 
imposed by the provisions of the Omnibus Budget Reconciliation Act of 
1989 (Public Law 101-239) and the Omnibus Budget Reconciliation Act of 
1990 (Public Law 101-508).
     Since the inception of Medicare in 1965, we have 
recognized an obligation to share in the costs of educational 
activities sponsored by participating providers until the community at 
large chose to bear them in some other manner. Medicare has 
historically reimbursed providers for the program's share of costs 
associated with approved educational activities. The activities may be 
broken down into three general categories, each with distinct payment 
policies:
     Approved graduate medical education (GME) programs in 
medicine, osteopathy, dentistry, and podiatry. Medicare makes direct 
and indirect GME payment to hospitals for the training of interns and 
residents. The existing rules for direct GME payment policy are found 
at 42 CFR 413.86; the rules for indirect GME payment policy are found 
at 42 CFR 412.105.
     Approved nursing and allied health (paramedical) education 
programs operated by the provider. (In this document, we use the term 
``allied health'' rather than ``paramedical,'' since Medicare currently 
allows the costs of approved training programs for medical records 
librarians, medical technologists, and other disciplines for which the 
term ``allied health'' is more appropriate. ``Allied health'' is the 
term most commonly used to refer to these health care profession 
specialties.) Costs for these programs are excluded from inpatient 
operating cost definitions, payment rate calculations under the 
prospective payment system, and target amount calculations subject to 
rate-of-increase ceilings for hospitals and hospital units excluded 
from the prospective payment system. These costs are separately 
identified and ``passed through'' (that is, paid separately on a 
reasonable cost basis).
     Other educational programs and activities. All other costs 
that can be categorized as educational programs and activities are 
considered to be part of normal operating costs and are covered on a 
per-case basis for hospitals subject to the inpatient prospective 
payment system, or on a reasonable cost basis

[[Page 3359]]

subject to the rate-of-increase limits for hospitals and hospital units 
excluded from the prospective payment system.

A. Legislative Summary

    The following milestones offer a brief historical perspective of 
the regulations, Congressional actions, court decisions, and manual 
revisions that have led to our current policy concerning the costs of 
nursing and allied health education:
     The first regulation to address HCFA's obligation to share 
in the costs of nursing and allied health education was published in 
the Federal Register on November 22, 1966 (31 FR 14814) at 20 CFR 
405.421 (redesignated as 42 CFR 405.421 on September 30, 1977, and 
further redesignated as 42 CFR 413.85 on September 30, 1986). In that 
regulation, the net cost of approved educational programs was defined 
as ``the cost of approved educational activities (including stipends of 
trainees, compensation of teachers, and other costs), less any 
reimbursement from grants, tuition, and specific donations.'' The 
regulation also defined approved educational activities as ``formally 
organized or planned programs of study usually engaged in by providers 
in order to enhance the quality of patient care in an institution'' (20 
CFR 405.421(b)(1)).
     The types of costs that were allowable as costs of 
approved educational activities were set forth in both the regulations 
and the Provider Reimbursement Manual (Chapter 4). Both the regulations 
and the manual repeated the Congressional Committee Report language 
from the Social Security Amendments of 1965 (Public Law 89-97) that 
Medicare would share in the costs of educational activities until 
communities bore them in some other way (S. Rep. No. 404, 89th Cong., 
1st Sess., 36 (1965) and H.R. Rept. No. 213, 89th Cong., 1st Sess., 32 
(1965)). In addition, both sources clearly stated that it was not 
intended that Medicare should pay for increased costs resulting from a 
redistribution of costs from educational institutions to providers (20 
CFR 405.421(c) and section 404.2 of the manual).
     The Social Security Amendments of 1972 (Public Law 92-603) 
authorized the Secretary to set prospective limits on the costs 
reimbursed by Medicare. At that time, the costs of approved educational 
activities were not excluded from costs subject to the limits. Instead, 
the regulations allowed a provider to apply for an exception to the 
limits for costs attributable to the operation of an approved medical 
education program (20 CFR 405.460(f)(2)).
     Section 404.2 of the Provider Reimbursement Manual was 
revised in November 1975 to specify that in order for costs to be 
allowable for approved educational activities, an approved nursing or 
allied health education program had to be operated by a provider.
     Over the next several years, attempts by intermediaries to 
apply this policy were consistently overruled by the Provider 
Reimbursement Review Board. These Board decisions were consistently 
reversed by the Administrator of HCFA. Several of these cases were then 
litigated in the Federal courts, and in each case that went to a 
decision on the merits, the courts upheld the Board.
     The most significant of these cases was generally 
considered to be St. John's Hickey Memorial Hospital, Inc. v. Califano, 
599 F.2d 803 (7th Cir. 1979). In that case, the U.S. Court of Appeals 
for the Seventh Circuit sustained the decision of the Provider 
Reimbursement Review Board that Sec. 405.421(c), as it existed at that 
time, did not require the provider to be the operator of the associate 
degree nursing program, but only required the provider to engage in 
such activity. On October 1, 1979, Medicare policy was amended to 
correspond with the ruling of the court in the HCFA Administrator's 
decision on Provider Reimbursement Review Board Decision No. 79-D50.
     A final Federal Register notice (44 FR 31806) issued on 
June 1, 1979, established the schedule of limits on hospital inpatient 
general routine operating costs, effective for cost reporting periods 
beginning on or after July 1, 1979. In that notice, the costs of 
``approved medical education programs'' were excluded from the costs 
subject to the limits.
     The Tax Equity and Fiscal Responsibility Act of 1982 
(Public Law 97-248) was enacted on September 3, 1982. Section 101 of 
that law replaced the existing cost limits with an expanded overall 
limit on hospital inpatient operating costs and a limit on the rate of 
increase of these costs for cost reporting periods beginning on or 
after October 1, 1982. Section 1886(a)(2)(A) of the Social Security Act 
(the Act), as added by section 101 of Public Law 97-248, requires the 
Secretary to provide for such exemptions from, and exceptions and 
adjustments to, the hospital cost limits as the Secretary deems 
appropriate to take into account ``medical and paramedical education 
costs'' in implementing these limits.
     HCFA revised Chapter 4 of the Provider Reimbursement 
Manual in January 1983 to reflect policy changes resulting from the St. 
John's Hickey decision. Revised Sec. 404.2 specified that provider 
costs incurred for clinical training associated with an approved 
program operated by an entity other than a provider could be allowable. 
Further, it specified that costs incurred by a provider associated with 
the classroom portion of the program could be allowable if they did not 
constitute a redistribution of nonprovider costs to the provider, the 
provider received a benefit for the support furnished, and the cost of 
the provider's support was less than the cost the provider would incur 
in operating its own program.
     The Social Security Amendments of 1983 (Public Law 98-21) 
provided for Medicare payment for the operating costs of hospital 
inpatient services under a prospective payment system rather than on a 
reasonable cost basis. Section 601(a)(2) of that law amended section 
1886(a)(4) of the Act to specify that costs of approved educational 
activities were excluded from the definition of inpatient hospital 
operating costs under the prospective payment system and the target 
amount for hospitals excluded from that system. Instead, these costs 
were to be separately identified and ``passed through.''
     In the September 1, 1983 interim final rule that 
implemented the prospective payment system (48 FR 39752), 
Sec. 405.421(d) was amended to provide that costs relating to six types 
of activities were outside the scope of the pass-through provision. 
Included among those costs were those related to ``other activities 
which do not involve the actual operation or support (except through 
tuition or similar payments) of an approved education program.'' Thus, 
effective with cost reporting periods beginning on or after October 1, 
1983, the costs of only those programs operated directly by the 
hospital were excluded from the prospective payment system and the 
target amount for excluded hospitals and paid on a reasonable cost 
basis.
     The January 3, 1984 prospective payment system final rule 
(49 FR 234) clarified that only the costs of programs operated directly 
by providers were excluded from the prospective payment system and 
eligible for payment on a pass-through basis and that the cost of 
clinical training for students enrolled in programs operated outside 
the provider were normal operating costs.

B. The Omnibus Budget Reconciliation Act of 1989

    The Omnibus Budget Reconciliation Act of 1989 (Public Law 101-239)

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contained three provisions concerning nursing and allied health 
education. Section 6205(a) created a temporary category of ``hospital-
based nursing schools.'' Costs incurred by hospitals for training 
nursing students in these schools are to be paid on the basis of 
reasonable cost as though the hospital met the criteria set forth at 
Sec. 413.85, ``Cost of educational activities.'' This provision was 
effective for cost reporting periods beginning on or after December 19, 
1989, and before the issuance of a final rule as required by section 
6205(b)(2) of Public Law 101-239. We implemented this provision in a 
final rule with comment period published in the Federal Register on 
April 20, 1990 (55 FR 15159) and made further revisions in the final 
rule that implemented changes to the hospital inpatient prospective 
payment system for fiscal year 1991, which was published on September 
4, 1990 (55 FR 35998).
    Under this provision, a hospital may claim as pass-through costs 
the costs incurred in training students from a nursing school if all of 
the following criteria are met:
     The hospital incurs at least 50 percent of the net costs, 
that is, the costs after deduction of tuition revenues incurred for 
classroom and clinical training provided to students enrolled in an 
approved nursing education program at the hospital-based nursing 
school.
     At least 50 percent of the board of directors of either 
the hospital or the nursing school, whichever board has the fewer 
members, are also members of the board of the other entity. If 
application of this criterion requires either board to have more than 
four common board members, the hospital will meet this criterion by 
having at least four common board members.
     All instruction is provided at the hospital, or on the 
immediate grounds.
     The preceding three criteria were met on June 15, 1989, 
and have been met continuously since that date.
    Section 6205(b)(1) of Public Law 101-239 imposed a moratorium for 
the period on or after December 19, 1989, and before October 1, 1990, 
on the recoupment of overpayments attributable to a determination by a 
provider's intermediary that costs claimed by a provider for the 
operation of a school of nursing or allied health are not eligible for 
payment on a reasonable cost basis. The basis for this determination is 
generally that a neighboring or related college or university, not the 
hospital, is the operator of the program. We announced the provisions 
of the moratorium in a program memorandum issued to our fiscal 
intermediaries (Transmittal No. A-90-9, June 1990).
    Section 6205(b)(2) of Public Law 101-239 directed the Secretary to 
publish regulations clarifying the rules governing which costs of 
approved educational activities are allowable and when those costs are 
eligible for pass-through under the prospective payment system, 
including--
     The relationship required between an approved nursing or 
allied health education program and a hospital in order for the 
program's costs to be attributed to the hospital;
     The types of costs related to nursing or allied health 
education programs that are allowable by Medicare;
     The distinction between costs of approved educational 
activities as recognized under section 1886(a)(4) of the Act and 
educational costs treated as operating costs of inpatient hospital 
services; and
     The treatment of other funding sources for the program.

C. The Omnibus Budget Reconciliation Act of 1990

    On November 5, 1990, before the issuance of the proposed 
regulations required by section 6205(b)(2) of Public Law 101-239, 
Congress enacted the Omnibus Budget Reconciliation Act of 1990 (Public 
Law 101-508). Section 4004(b) of Public Law 101-508 contained several 
provisions addressing Medicare payment for nursing and allied health 
education costs on a reasonable cost basis under Medicare Part A. 
Section 4159(b) of Public Law 101-508 set forth parallel provisions 
concerning payment on a reasonable cost basis under Medicare Part B for 
these costs. (The language in section 4159(b) is identical to the 
language in section 4004(b), except that section 4004(b) applies to 
Part A and section 4159(b) applies to Part B. For ease of reference in 
this document, we refer solely to the provisions of section 4004(b); 
however, each of these references is deemed to be a reference to the 
corresponding provision of section 4159(b)).
    Section 4004(b)(1) provides that, effective with cost reporting 
periods beginning on or after October 1, 1990, if certain conditions 
are met, the costs incurred by a hospital (or by an educational 
institution related to the hospital by common ownership or control) for 
clinical training (as defined by the Secretary) conducted on the 
premises of the hospital under an approved nursing or allied health 
education program that is not operated by the hospital are treated as 
pass-through costs and paid on the basis of reasonable cost. Section 
4004(b)(2) sets forth the following conditions that a hospital must 
meet to receive payment on a reasonable cost basis under this 
provision:
     The hospital must have claimed and have been paid for 
clinical training costs as described in section 4004(b)(1) during its 
latest cost reporting period that ended on or before October 1, 1989.
     The proportion of the hospital's total allowable costs 
attributable to the clinical training costs of the approved program and 
allowable under section 4004(b)(1) during a cost reporting period does 
not exceed the proportion of total allowable costs that were 
attributable to the clinical training costs during the hospital's 
latest cost reporting period that ended on or before October 1, 1989.
     The hospital receives a benefit for the support it 
furnishes to the education program through the provision of clinical 
services by nursing and allied health students participating in the 
program.
     The costs incurred by the hospital for the program do not 
exceed the costs that would have been incurred by the hospital if it 
had operated the program.
    We published a proposed rule in the Federal Register on September 
22, 1992, which set forth proposed regulations to satisfy the 
requirements of section 6205(b)(2) of Public Law 101-239, as well as 
the provisions of sections 4004(b)(1) and (2) of Public Law 101-508 (57 
FR 43659).
    In addition to the new payment provision under sections 4004(b)(1) 
and (b)(2) of Public Law 101-508, section 4004(b)(3) prohibited 
recoupment of Medicare overpayments made to hospitals for pass-through 
costs related to approved nursing and allied health education programs 
for cost reporting periods beginning on or after October 1, 1983 and 
before October 1, 1990. This section also required us to refund 
previously recouped overpayments for these costs. We issued a program 
memorandum (Transmittal No. A-91-3, May 1991) and amended section 404.2 
of the Provider Reimbursement Manual (Transmittal No. 368, September 
1992) to instruct our fiscal intermediaries on implementing the 
provisions of section 4004(b)(3) of Public Law 101-508.

II. Provisions of the Proposed Rule and Responses to Public 
Comments

    In accordance with the mandate of section 6205(b)(2) of Public Law 
101-239, the September 22, 1992 proposed rule addressed the Medicare 
rules governing which costs of nursing and allied health educational 
programs are allowable and when these costs are

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eligible for the pass-through payment to a hospital paid under the 
prospective payment system.
    In general, we proposed to continue our existing policies with 
respect to payment to providers for provider-operated approved nursing 
and allied health education programs on a reasonable cost basis. That 
is, we proposed to retain the provisions in existing regulations under 
Sec. 413.85 that Medicare payments be determined on a reasonable cost 
basis for a provider's net costs of approved nursing and allied health 
educational programs and proposed the conditions under which we would 
make these payments. We proposed to amend Sec. 413.85 to explicitly set 
forth criteria that define approved nursing and allied health 
educational programs considered provider-operated, and rules for 
determining the net costs of provider-operated nursing and allied 
health educational programs. We also proposed to allow reasonable cost 
payment for the clinical training costs of certain nonprovider-operated 
programs to comply with the requirements of section 4004(b) of Public 
Law 101-508, and addressed the conditions for payment for the net costs 
of approved certified registered nurse anesthetist (CRNA) educational 
programs. Finally, we proposed to clarify our policy on the nursing and 
allied health educational activities we consider as normal operating 
costs.
    We received 31 timely items of correspondence from the public and 
other interested parties in response to the proposed rule. The specific 
comments and our responses are set forth below following each section 
describing the specific provisions of the proposed rule.

A. Determining Provider-Operated Programs

    We proposed to revise Sec. 413.85 (``Cost of educational 
activities.'') to clarify our policies on paying providers for the 
costs incurred for nursing and allied health education activities. We 
proposed to retain the general rule specified under existing 
Sec. 413.85 that payment for a provider's net cost of approved 
educational activities is made on a reasonable cost basis. We also 
proposed to set forth at Sec. 413.85(e) criteria we would use to 
identify programs operated by a provider. The proposed regulations 
reflected that, except as provided in section 4004(b) of Public Law 
101-508, the key factor to be considered in determining whether the 
classroom instruction and clinical training costs of approved nursing 
and allied health educational programs are eligible to be passed 
through is the degree to which the provider controls all aspects of the 
program. For example, we proposed that if a clear separation of 
function exists, such as when a college or university directs and 
operates the classroom portion of the program and the provider 
furnishes only the setting for clinical training, then the educational 
program costs would not be eligible to be paid on a pass-through basis. 
In these cases, clinical training would flow from the part of the 
program conducted by the institution other than the provider. Thus, the 
majority of the training costs would be borne by the college or 
university and not by the provider. While the provider may incur some 
costs associated with its provision of clinical training to students 
enrolled in a nearby institution, the provider would also gain in 
return. For example, it would obtain the services of the trainee, often 
at no direct cost to itself.
    In addition to the value of the services of students in an approved 
program, providers would receive a number of other benefits from 
participation in a nursing and allied health educational program 
operated by another entity. One benefit is the fact that a significant 
percentage of the graduates of these programs become employees of the 
provider at which they trained. This would allow the provider to avoid 
costs it would otherwise have to incur for recruitment.
    We proposed that, for purposes of determining the operator of an 
approved nursing or allied health education program, the fact that a 
provider and a college or university are considered related 
organizations under Sec. 413.17 (``Cost to related organizations.'') 
would not be sufficient to allow a university-operated program to be 
considered provider operated. As we explain in section II.C. of this 
preamble, our policy concerning related organizations was established 
to avoid program recognition of costs of a provider for goods or 
services furnished by a related organization in excess of the costs 
incurred by the related organization.
    We proposed that all of the following criteria must be met to be 
considered the operator of a nursing or allied health education 
program:
     The provider must incur the costs associated with both the 
clinical training and classroom instruction portions of the programs, 
where the classroom instruction is a requirement for completion of the 
program. For example, the provider must incur the costs for books, 
supplies, and faculty salaries, where such costs are applicable.
     The provider must directly control the program curriculum, 
that is, the provider must determine the requirements to be met for 
graduation. In meeting this requirement, a provider may enter into an 
agreement with a college or university to provide the basic academic 
course requirements leading to a degree, diploma, or other certificate, 
while the provider is directly responsible for providing the courses 
relating to the theory and practice of the nursing or allied health 
profession that are required for the degree, diploma, or certificate 
awarded at completion of the program.
     The provider must control the administrative duties 
relating to the program. These duties include the collection of tuition 
(where applicable), maintaining payroll records of the teaching staff 
or students, or both (where applicable), and being responsible for the 
day-to-day operation of the entire training program.
     The provider must employ the faculty.
     The provider must provide and control both classroom 
instruction and clinical training, (where the classroom instruction is 
a requirement for the completion of the program), subject to the 
provision in the second criterion of provider-operated programs above 
that a provider may enter into an agreement with a college or 
university to provide the basic academic course requirements leading to 
a degree, diploma, or other certificate, while the provider is directly 
responsible for providing the courses relating to the theory and 
practice of the nursing or allied health profession that are required 
for the degree, diploma, or certificate awarded at completion of the 
program.
    We note that proposed Sec. 413.85(e)(2) (Sec. 413.85(f)(2) in this 
final rule) reflected a special rule that a provider that is licensed 
or accredited to (1) operate the program and (2) issue degrees, 
diplomas, or certificates to its students upon graduation is assumed, 
absent evidence to the contrary, to meet the criteria listed above and 
to be the operator of the program.
    In certain situations, providers are entering into arrangements 
with colleges and universities that, in many cases, have involved 
provider representation on a joint committee with certain oversight 
responsibilities. Under these provider/college educational arrangements 
the provider might not have direct responsibility for the curriculum 
and control of day-to-day operation of the training programs. We 
proposed that unless the provider can demonstrate that it meets the 
requirements enumerated above, the

[[Page 3362]]

costs incurred by the provider in connection with such joint programs 
would not be paid as separate pass-through costs.
    There are other situations, however, that involve sequential 
operation of a program by an educational institution and a provider. 
These situations frequently involve providers that are changing from 
offering a certificate or diploma program to offering an associate or 
baccalaureate degree. The provider may create a program leading to a 
degree in which instruction in general academic requirements is 
provided by a college or university and subsequent specialized 
classroom instruction and clinical training are given by the provider. 
We proposed that if the provider establishes and controls the 
curriculum and requirements for graduation, the provider would be 
considered to be the operator of the program for purposes of receiving 
pass-through payment under Sec. 413.85. However, no costs incurred by 
the college may be claimed as provider costs.
    As stated above, we proposed that a provider must provide and 
control both clinical training and classroom instruction in order to 
meet the criteria of provider-operated under proposed Sec. 413.85(e). 
Since publication of the proposed rule, it has come to our attention 
that some nursing and allied health education specialties do not have 
classroom instruction components. We are therefore clarifying in this 
final rule that, in such instances, the provider must only provide and 
control the clinical training, subject to the other conditions 
specified in redesignated Sec. 413.85(d)(1). Thus, the language at 
Sec. 413.85(f)(1) of this final rule accounts for situations where the 
nursing and allied health program does not have a classroom instruction 
as part of the program. For example, at Sec. 413.85(f)(1)(v), instead 
of indicating that the provider is required to provide both clinical 
training and classroom instruction as we had specified in the proposed 
rule, we now state that the provider must ``provide and control both 
classroom instruction and clinical training (where the classroom 
instruction is a requirement for the completion of the program).'' 
Where the nursing and allied health program has a classroom instruction 
component in addition to a clinical training component, the provider 
must provide and control both components in order to receive pass-
through payment. In addition, as discussed below, we note that we are 
further clarifying in this final rule proposed Sec. 413.85(e)(1)(v) in 
order to address a public comment on sequentially operated nursing and 
allied health education programs by specifying at Sec. 413.85(f)(1)(v) 
of this final rule that this paragraph is subject to the parenthetical 
sentence in the second criterion of the provider-operated criteria 
(Sec. 413.85(f)(1)(ii) of this final rule) which states that a provider 
may enter into an agreement with a college or university to provide the 
basic academic course requirements leading to a degree, diploma, or 
other certificate, while the provider is directly responsible for 
providing all of the courses relating to the theory and practice of the 
nursing or allied health profession that are required for the degree, 
diploma, or certificate awarded at completion of the program.
    In proposed Sec. 413.85(c)(3) and (4), we proposed separate 
specific definitions of clinical training and classroom instruction 
costs to allow providers and intermediaries to differentiate between 
clinical training and classroom instruction. These definitions (as 
modified slightly for purely editorial changes in this final rule) are 
as follows:
     Clinical training costs involves costs associated with the 
acquisition and use of the skills of a nursing or allied health 
profession or trade in the actual environment in which these skills 
will be used by the student upon graduation. While clinical training 
may involve occasional or periodic meetings to discuss or analyze 
cases, critique performance, or discuss specific skills or techniques, 
it involves no classroom instruction.
     Classroom instruction costs are costs associated with the 
formal, didactic instruction on a specific topic or subject provided in 
a class that meets at regular, scheduled intervals over a specific time 
period (for example, semester or quarter) and for which a student 
receives a grade.
    We received many comments on our proposed criteria for provider-
operated programs. The majority of the commenters believed the criteria 
are too restrictive and would result in the exclusion of many nursing 
and allied health education programs from receiving pass-through 
payment.
    Comment: The majority of those who commented on this provision were 
concerned that the criteria do not appear to allow reasonable cost 
payment to programs operated by both a provider and an educational 
institution. These arrangements, which have become common as the 
industry moves away from provider-operated education programs to those 
based at colleges and universities, would not meet the proposed 
criteria. The commenters indicated that providers have often been 
forced to create these arrangements because accrediting agencies would 
not approve programs operated solely under the control of the provider. 
They believed that, in some cases, HCFA has been providing payment 
under the pass-through for these programs based at educational 
institutions under the theory that the provider controls and wholly 
owns the subsidiary college. In other cases, hospitals have entered 
into joint programs with already established educational institutions. 
The commenters requested that the final rule clearly delineate which of 
these programs would be considered to be operated by the provider and, 
thus, eligible for the pass-through, and which would not be eligible.
    One commenter stated that, although the proposed rule is intended 
to be a codification in regulations of current policy, we did not 
include a current list of hospital-based nursing programs that meet the 
criteria set forth in section 6205(b)(2) of Public Law 101-239. The 
commenter believed that, to be consistent, the final regulations need 
to provide that these programs meet the definition of provider-
operated.
    Response: Except as provided in OBRA 1990, we do not make pass-
through payments to a hospital for the costs of a nursing and allied 
health education program not operated by a hospital because the costs 
are considered normal operating costs and the hospital receives payment 
for those costs through the inpatient prospective payment system 
payments. We believe that, in the case of programs that are not 
operated by a hospital, the majority of the training costs of the 
program are incurred by an entity (the college or university) other 
than the hospital; to the extent that a hospital incurs costs for a 
nonprovider-operated program, the inpatient PPS payment encompasses 
payment for those costs.
    In addition, as indicated in the proposed rule, the hospital 
benefits in a number of ways from its participating in a nonprovider-
operated educational program: the hospital obtains services of the 
trainee during the training; the hospital might receive payments from 
the college or university for the costs incurred by the hospital; and 
the hospital might save staffing costs, as well as recruiting costs 
(many of the trainees ultimately become employees of the hospital). 
Furthermore, the distinction between provider-operated programs and 
nonprovider-operated programs is consistent with the provisions of OBRA 
1989 and OBRA 1990.
    In the case where a hospital enters into a joint program with an 
educational

[[Page 3363]]

institution, the distinction between provider-operated and nonprovider-
operated programs also reflects the community support principle, 
because the program has moved away from the provider-operated mode and 
into the community assumption of costs. The House and Senate Committee 
reports accompanying Public Law 89-97 reflect that Congress 
contemplated that Medicare would share the costs of educational 
activities until the community assumed the costs. If the university 
undertakes the classroom education of the students, including the 
collection of the tuition, the employment of the faculty, the control 
of the curriculum, and the awarding of the degree, the community has 
undertaken the responsibility for training nurses and allied health 
personnel and relieved the hospital of this cost. Again, to the extent 
that the hospital incurs costs for the nonprovider-operated program, 
the hospital receives payment for these costs through the inpatient PPS 
payments.
    Concerning those hospitals that have established their own 
educational institution to meet accrediting standards, we believe that, 
in some cases, these providers can be eligible to receive payment for 
the classroom and clinical training of students in approved programs. 
If the provider demonstrates that the educational institution it has 
established is wholly within the provider's control and ownership and 
that the provider continues to incur the costs of both the classroom 
and clinical training portions of the program, the costs would continue 
to be paid on a reasonable cost basis. An independent college would not 
meet these criteria.
    An example of a program that could be considered provider-operated 
would be one in which the hospital is the sole corporate member of the 
college, elects the board of trustees, has board members in common, 
employs the faculty and pays the salaries, controls the administration 
of the program and the curriculum, and provides the site for the 
clinical and classroom training on the premises of the hospital. We 
believe that, in these situations, the community has not undertaken to 
finance the training of health professionals; the provider has merely 
restructured its provider-operated program to meet certain State or 
accrediting requirements. In most cases, providers have aligned 
themselves with already established educational institutions. We note 
that a program operated by an educational institution that is related 
to the provider through common ownership or control would not be 
considered to meet the criteria for provider operated.
    In response to the commenter who was concerned that the proposed 
regulations did not incorporate those programs receiving reasonable 
cost payment under the provisions of section 6205(a)(1) of Public Law 
101-239, we note that Congress clearly recognized this provision to be 
temporary. The provision is to expire 30 days after publication of the 
final rule required by section 6205(b)(2), that is, this final rule.
    Comment: One commenter stated that HCFA should not treat provider-
operated and nonprovider-operated programs differently. Providers that 
are providing support to another institution by providing clinical 
training are incurring costs and these costs should be eligible to be 
paid under the pass-through payment. The commenter believed that it is 
highly unlikely that a university would allow a hospital to have sole 
control of the curriculum or graduation requirements or to employ the 
faculty. Thus, it would be impossible for these programs to meet the 
provider-operated criteria. However, HCFA should allow the clinical 
training costs in all situations.
    Response: Please see our response to the previous comment. The 
proposed criteria set forth in Sec. 413.85(e) (Sec. 413.85(f)(1) in the 
final rule) are those to be used in identifying those nursing and 
allied health programs operated by providers. The commenter appears to 
be describing programs that are operated by educational institutions 
for which a provider offers support in clinical training. As discussed 
in detail above, we believe that Congress intended to support nursing 
and allied health education programs operated by hospitals only until 
the community undertakes the costs of the programs itself. Nursing and 
allied health education programs operated by colleges and universities 
are considered to be programs in which the costs are borne by the 
community, since much of the costs of operating the programs are 
incurred by the colleges and universities. Therefore, we believe it is 
contrary to Congressional intent for Medicare to provide pass-through 
payments to providers, in addition to inpatient PPS payments, for the 
costs of non-provider operated programs (that do not meet the criteria 
under OBRA 1990).
    Comment: One commenter described a CRNA program in which the 
hospital is allowed to grant a certificate to a student upon completion 
of the program. This may occur when an affiliated university also 
grants a degree to the same student. According to the commenter, the 
Council on Accreditation of Nurse Anesthetist Programs does not 
prohibit the awarding of an ``anesthesia certificate'' in addition to 
the award of the master's degree for a hospital-based program. The 
commenter believed that this could be interpreted as the hospital 
meeting the criteria to be the operator of the program since the 
hospital awards a certificate, and requested that we clarify this in 
the final rule.
    Response: The program described above where the hospital awards a 
certificate and an affiliated university confers a degree upon the same 
student appears to be a university-controlled nursing or allied health 
program. The certificate awarded by the hospital seems to be an adjunct 
to the actual degree awarded by the educational institution. In fact, 
as indicated by the commenter, the certificate is awarded ``in 
addition'' to the master's degree awarded by the university. This 
indicates the program is under the control of the university and the 
hospital has merely provided support to that program. We note, however, 
that if the hospital described by the commenter can show that it, in 
fact, meets the criteria of Sec. 413.85(e) (Sec. 413.85(f) in this 
final rule) of operating the program, it may receive pass-through 
payment.
    Comment: One commenter requested that we include the language 
concerning sequentially conducted education programs in the regulation 
text. Also, the commenter believed that we need to expand on this 
discussion. For example, the commenter asked whether a program would be 
considered provider-operated if a hospital employs only the faculty for 
the clinical portion of the program.
    Response: As noted above, and also in the preamble to the proposed 
rule, sequential operation of a nursing and allied health education 
program involves providers that enter into agreements with a college or 
university in which instruction in general academic requirements 
leading to a degree is provided by the educational institution, and 
subsequent specialized didactic and clinical training is given by the 
provider. The provider may receive pass-through payment for the costs 
of the program that the provider incurs if the provider meets all of 
the criteria for operating the program, including the requirement at 
proposed Sec. 413.85(e)(1)(ii) (Sec. 413.85(f)(1)(ii) of this final 
rule) that the provider must directly control the curriculum. We note 
that under this section of the regulations, there is a provision (also 
cited at Sec. 413.85(f)(1)(v) of this final

[[Page 3364]]

rule) which states that a provider may enter into an agreement with an 
educational institution to furnish basic academic courses required for 
completion of the program, but the provider must provide all of the 
courses related to the theory and practice of the nursing or allied 
health profession involved that are required for the degree, diploma, 
or certificate awarded at the completion of the program. No costs 
incurred by the college or university may be claimed as provider costs.
    In regard to the commenter's question about employment of the 
teaching faculty, providers that employ faculty only for the clinical 
training portion of the program, where there is a classroom component 
relating to the theory and practice of the nursing and allied health 
profession involved, would not be considered as a provider operating 
the program.
    Comment: One commenter argued that, through these regulations, the 
Federal Government is encouraging the provision of nursing and allied 
health education through provider-operated programs, which is contrary 
to the movement of these training programs to academic settings. The 
commenter believed that Medicare costs would be reduced if hospitals 
provided only clinical training and allowed educational institutions to 
provide the classroom instruction. Another commenter stated that very 
few nurses currently graduate from provider-operated programs and that 
the proposed regulations do not reflect the current state of nursing 
and allied health education. Rather than erect barriers to receiving 
funding, the rules should be revised to allow hospitals to claim 
clinical training costs as a pass-through regardless of operation. 
Finally, one commenter stated that the clinical training for all 
programs should be eligible for the pass-through without a 
corresponding reduction in the prospective payment system standardized 
amounts.
    Response: Our payment policies are designed to make appropriate 
payments for provider-operated programs and nonprovider-operated 
programs, not to encourage one type of program over another. We 
recognize the impact of the current policy of paying on a pass-through 
basis only for provider-operated nursing and allied health programs 
(except the narrowly defined nonprovider-operated programs specified at 
Sec. 413.85(g) of this final rule) when there is a movement of these 
training programs towards academic settings. We accept the comments 
that Medicare will provide pass-through payment to hospitals for the 
classroom and clinical costs of programs only when the programs are 
provider-operated, while nursing education has been increasingly 
occurring in baccalaureate and advanced-level nurse training programs 
in colleges and universities. However, as explained above, we believe 
hospitals should only receive pass-through Medicare payments for 
training students in provider-operated programs. We note Congress' 
implicit acceptance of our longstanding provider-operated policy via 
its enactment of a narrow exception to the provider-operated policy as 
set forth by section 4004(b)(2) of Public Law 101-508 of the 
nonprovider-operated nursing and allied health education programs.
    The commenters encouraged HCFA to allow for pass-through payments 
for the clinical portion of all nursing and allied health education 
programs, even all of those programs that are nonprovider-operated 
programs in addition to those that meet the criteria under section 
4004(b) of Public Law 101-508. However, under the current inpatient 
hospital prospective payment system, costs incurred by hospitals for 
clinical training in nonprovider-operated programs are paid within the 
prospective payment system per discharge payments. If a legislative 
change provided for pass-through payment for a hospital's clinical 
training in all nonprovider-operated programs, we believe an adjustment 
would be necessary to carve out those costs from the Federal rate.
    Comment: Two commenters were concerned that no hospitals control 
their own curriculum and, therefore, no hospitals could meet the 
criterion set forth in the proposed regulations. One commenter stated 
that the accrediting agencies dictate which courses a student must 
complete in order to obtain a degree or certificate. Another commenter 
stated that, in today's educational programs, the curriculum is 
determined by the institution of higher learning.
    Response: We understand that a teaching hospital must provide 
certain required courses and training in order to be accredited. This 
does not mean that these requirements prohibit a provider from directly 
controlling the curriculum. Although many courses are required by the 
accrediting agencies, there are other courses generally provided by the 
providers. Also, the provider determines in what manner its students 
will accomplish the course work that will allow them to be accredited. 
In addition, control of the curriculum also means the provider actually 
provides all the courses or arranges for an outside organization to 
provide those academic courses necessary to complete the course work.
    Comment: One commenter believed that the definitions of ``clinical 
training costs'' and ``classroom costs'' are too inflexible and do not 
account for the classroom time needed to review and discuss clinical 
assignments and engage in group learning. Classroom activity related to 
clinical experience should not be separated from clinical training.
    Response: We believe that the definitions of classroom instruction 
and clinical training costs are necessary so that they can be 
differentiated in relation to the payment policies that apply to them. 
For example, hospitals that operate nursing or allied health education 
programs would be eligible to receive pass-through payment for both the 
clinical training and classroom instruction costs of the program. 
However, under OBRA 1990, certain nonprovider-operated programs are 
eligible to receive pass-through payment for only the clinical training 
costs of the programs. Clinical training does encompass some occasional 
or periodic meetings that relate to the acquisition of clinical 
training skills. However, these meetings are not formal, didactic 
classroom instruction. Classroom instruction consists of classes that 
meet at regularly scheduled intervals over a specific period of time 
and the students' participation is graded by the instructor. Costs 
incurred in meetings or discussions held between students' and clinical 
trainers are covered costs to the extent they meet the definition of 
incremental costs incurred because of the provider's participation in 
the clinical training program.

B. Nursing and Allied Health Education Specialties and Accrediting 
Bodies

    Under existing regulations, one condition that must be met in order 
for a provider to receive reasonable cost payment for the net costs of 
its nursing or allied health educational program is that the program 
must be recognized by a national approving body or State licensing 
organization. A nursing and allied health education program that wanted 
to be paid on a reasonable cost basis, in addition to being a provider-
operated program, either needed to be included on the list of approved 
programs under existing Sec. 413.85(e) or needed to qualify to be an 
approved program under existing Sec. 413.85(f). Recently, it has come 
to our attention that the list of approved programs contained in 
existing Sec. 413.85(e) is inaccurate to the extent some of the names 
of the specialties, as well as their

[[Page 3365]]

respective accrediting bodies, have changed. In addition, some 
specialties listed at existing Sec. 413.85(e), while previously meeting 
the criteria of programs that are provider operated, may no longer meet 
these criteria. Because we find that nursing and allied health 
education is a constantly evolving field, we are clarifying our policy 
on approved nursing and allied health education programs by removing 
the current specific list of approved nursing and allied health 
programs and, instead, framing the issue in general terms by 
considering a nursing or allied health education program eligible for 
pass-through payment if the program is recognized by a national 
approving body or State licensing authority and it meets the other 
criteria under Sec. 413.85(d) of this final rule. By requiring the 
nursing and allied health education activity to be recognized by either 
of these bodies, we ensure that the programs we pay for under Medicare 
meet at least a minimum standard of accreditation.
    We note that this requirement that the nursing and allied health 
program be accredited by one of these approving bodies is simply one of 
the requirements under the general payment rule under Sec. 413.85(d) of 
this final rule for a provider to receive reasonable cost payment for 
the net cost of nursing and allied health education activities. That 
is, accreditation by a national approving body or State licensing 
organization for a particular nursing and allied health education 
activity does not mean that the activity qualifies for pass-through 
payments; in order to qualify for pass-through payments, the provider 
must meet the other general payment rule requirements (including the 
provider-operated criteria). In addition to requiring the program to be 
recognized by a national approving body or State licensing authority, 
we also give examples under Sec. 413.85(f) of this final rule of 
national nursing and allied health approving bodies. The examples we 
list are: the Commission on Accreditation of Allied Health Education 
Programs; the National League of Nursing Accrediting Commission; the 
Association for Clinical Pastoral Education, Inc.; and the American 
Dietetic Association. In addition, our research has shown that there 
are currently other national approving bodies of nursing and allied 
health programs that also meet at least a minimum standard of 
accreditation. They are: the American Society of Hospital Pharmacists; 
the National Accrediting Agency for Clinical Laboratory Sciences; the 
Council on Accreditation of Nurse Anesthesia Educational Programs; the 
American College of Nurse-Midwives; the Joint Review Committee for 
Education of Radiologic Technology; the Joint Review Committee on 
Nuclear Technology; and the American Physical Therapy Association.
    In the September 1992 proposed rule, we proposed to update the 
listing of approved nursing and allied health programs. We solicited 
and received many comments about additions and deletions to the list. 
Because in this final rule we are deleting the specific list of 
programs and replacing it with a general requirement that the program 
must be recognized by a national or State licensing approving body, our 
responses to the comments on the specialties note whether or not we 
consider the specialty as an approved nursing and allied program, and 
do not address whether we should add the specialty to or delete the 
specialty from a list of approved programs.
    We also proposed that only those nursing and allied health 
education programs listed in the regulations may be paid as approved 
educational activities. We proposed to add a redesignated provision to 
the regulations (proposed Sec. 413.85(d)) that would provide for other 
national approving bodies or State licensing authorities to apply to 
HCFA for inclusion on our list of approved programs. Because we are 
clarifying our policy in Sec. 413.85(e) of this final rule by 
eliminating the list of accrediting organizations from our regulations, 
this proposed provision is no longer necessary. In addition, we 
proposed to revise the list of approved programs to include the 
specific title or titles used by the appropriate accrediting 
organization. The Committee on Allied Health Education and 
Accreditation (CAHEA), now called the Commission on Accreditation of 
Allied Health Education Programs (CAAHEP), cooperates with many 
committees and collaborates with academies, associations, boards, and 
societies in its accreditation process. In the interest of brevity, and 
for the convenience of those entities seeking approval for those 
programs accredited by CAAHEP in collaboration with other 
organizations, we listed only CAAHEP in the proposed regulations.
    Some of the programs that had been previously accredited by CAAHEP 
are now accredited by the National Accrediting Agency for Clinical 
Laboratory Sciences (NAACLS), the Joint Review Committee for Education 
of Nuclear Medicine Technology, the Joint Review Committee for 
Education of Radiologic Technology, and the American Occupational 
Therapy Association. For the convenience of those programs seeking 
accreditation, we also note that the name of the accrediting 
organization, the Commission on Accreditation in Physical Therapy 
Education (CAPTE), has been changed by the organization to the American 
Physical Therapy Association (APTA). Lastly, we will acknowledge the 
American College of Nurse Midwives as a national approving body, for 
reasons that are explained below.
    Comment: We received several comments requesting that we expand our 
list of approved programs to include nonprovider-operated programs that 
do not qualify for pass-through payment.
    Response: As stated above, we are clarifying our policy of not 
paying on a pass-through basis for nonprovider-operated programs in 
this final rule and, to avoid confusion as to which programs are 
currently being paid for, we have eliminated the specific listing and 
replaced it with a general requirement for accreditation or State 
licensure.
    Comment: One commenter asserted that the proposed rule clearly 
allows nonprovider-operated programs to receive payment under the OBRA 
1990 pass-through; therefore, restricting the list to programs operated 
by providers is inconsistent. Another commenter believed that this 
requirement unnecessarily restricts new programs at nonprovider sites.
    Response: As noted above, we have eliminated the specific listing 
and replaced it with a general requirement for accreditation or State 
licensure; therefore, comments regarding additions to or the nature of 
the approved list of programs are no longer relevant. However, as 
reflected in 42 CFR 413.85(g) of this final rule, any nonprovider-
operated programs that meet the requirements under OBRA 1990 and also 
meet accreditation requirements, may be eligible to receive pass-
through payments.
    Comment: One commenter stated that the Higher Education Act 
Amendments of 1992 (Public Law 102-235) require that the American 
Medical Association (AMA) separate itself from the CAHEA. As a result, 
that organization may cease to exist. The final regulations should 
provide for the successor organization. Another commenter stated that 
since the AMA may withdraw support from the CAHEA, the regulations 
should list the actual accrediting agencies.
    Response: In late October 1992, the AMA announced that the CAHEA 
would be phased out at the close of 1994 and that it would support the

[[Page 3366]]

establishment of a successor agency. By May 1994, the Commission on 
Accreditation of Allied Health Education Programs (CAAHEP) was 
established to assume the accreditation programs previously associated 
with CAHEA. This final rule reflects this change; we list CAAHEP as an 
example of a national approving body under Sec. 413.85(e). Since an 
actual successor agency has been established, we do not believe that it 
is necessary to list the individual agencies that cooperate with this 
new organization.
    Comment: The American College of Nurse-Midwives and the American 
Academy of Physicians Assistants formally requested that their allied 
health education programs be included in our list of approved programs.
    Response: These comments are no longer applicable because we are 
clarifying our policy in this final rule by stating a general 
requirement rather than including a specific listing.
    Comment: We received several comments protesting our proposal to 
exclude emergency medical technician and paramedic programs (EMT-P) 
from the list of approved education programs. These commenters disagree 
with our conclusion that there is a tenuous relationship between the 
care provided by these individuals and the quality of patient care in a 
hospital. All of the commenters urged that we pay for these programs 
because the care and services provided by these personnel prior to 
admission are often vital in determining the patient's condition and 
prognosis and, thus, there is an essential link between these personnel 
and inpatient care. One commenter believed that the preadmission 
services provided by paramedics are crucial to patient outcomes through 
early intervention and delivery to the appropriate hospital. Another 
commenter stated that the care provided en route to the hospital has a 
direct result on the condition of the patient's condition when 
admitted, which has an impact on the amount and intensity of inpatient 
services required. Also, hospital emergency room care is a coordinated 
effort. The emergency medical technicians and paramedics are in 
communication with and often receive direction from the emergency room 
physician while en route to the hospital. Several commenters indicated 
that emergency medical technicians and paramedics often provide 
services in the emergency room and are used elsewhere in the hospital 
in areas such as the operating room, the intensive care units, and 
labor and delivery. Therefore, they do contribute to patient care. 
Finally, one commenter stated that, since HCFA provides payment for 
EMT-P under the existing regulations, excluding them from the list as 
proposed is contrary to the statement in the proposed rule that HCFA is 
merely codifying existing policy into regulations.
    Response: As we indicated earlier, we are deleting the listing of 
approved programs in the final regulations. However, after 
consideration of these comments and other information we have learned 
about EMT-P education programs since publication of the proposed rule, 
we are persuaded that there is a sufficient relationship between the 
services of EMT-P education programs and the quality of inpatient care. 
As the commenters indicated, EMT-P trainees provide essential 
preadmission services to (potential) hospital inpatients, and the 
trainees work in several inpatient care areas of the hospital. We note 
that there may be some EMT-P education programs that might meet the 
provider-operated criteria and thus would qualify for pass-through 
payment under the nursing and allied health education provider-operated 
provisions. We also note that the accrediting organization is the Joint 
Review Committee on Educational Programs for the EMT-Paramedic in 
collaboration with the CAAHEP.
    Comment: One commenter disagreed with our inclusion of clinical 
pastoral counseling in the list of approved programs. The commenter 
believed that this policy violates the separation of church and state. 
In addition, the commenter asserted that such a major use of the 
Medicare Trust Fund should occur only after notice and public comment 
as provided in the Administrative Procedure Act. Finally, the commenter 
did not believe that pastoral counseling qualifies as direct patient 
care since these services are not medical services and Medicare does 
not pay directly for the care provided by pastoral counselors.
    Response: The existing regulations at Sec. 413.85(e) list several 
approved nursing and allied health education programs that are eligible 
for the pass-through payment. Paragraph (f) of that section states that 
the fiscal intermediary and HCFA will give appropriate consideration to 
programs not listed in paragraph (e) that a provider conducts that come 
within the purview of the principle of the regulations. Thus, the 
regulation in effect when these programs were approved was subject to 
appropriate notice and public comment. Over the years, we have approved 
many types of allied health education programs under the authority of 
this section.
    Although there is no direct payment by Medicare for the services of 
pastoral counselors, the services they provide to hospital inpatients 
are included in the hospital's allowable costs under the Medicare 
program. The costs are included in the administrative and general (A&G) 
cost center. As early as the mid-1970s, Medicare recognized pastoral 
care as having a beneficial and therapeutic effect on the medical 
condition of a patient, and, therefore, the costs a provider incurs to 
furnish such care to its patients are considered patient care related 
costs. Therefore, we do not agree with the commenter that these 
programs should be excluded from receiving education payments.
    Comment: We received requests from several commenters to expand our 
list of approved programs. These programs include: nurse practitioners, 
nurse-midwives, clinical nurse specialists, physician assistants, 
phlebotomists, central supply technicians, social workers, and 
biomedical engineering.
    Response: In the proposed regulations, we stated that national 
approving bodies or State licensing authorities may apply to HCFA for 
inclusion in the list of approved programs. As discussed above, we are 
no longer including a list of approved programs in our regulations. We 
note, however, that hospitals with programs approved by national 
approving bodies or State licensing organizations may submit a request 
to receive Medicare payments on a reasonable cost basis, and the fiscal 
intermediary will determine whether the program meets the definition as 
an approved program.
    Comment: One commenter requested that we add the phrase ``operated 
by providers'' to proposed Sec. 413.85(d) (Sec. 413.85(e) in this final 
rule) to make it clear that we will approve programs only if they are 
the type operated by providers.
    Response: This comment is no longer applicable since we are 
clarifying our policy under Sec. 413.85(e) in this final rule to 
provide that a program must be approved by the appropriate accrediting 
body in order to receive Medicare payment for nursing and allied health 
education activities on a reasonable cost basis. We note that it is no 
longer necessary to address the issue of other programs not listed in 
the regulation (which was previously addressed by proposed 
Sec. 413.85(d)) because we are now stating that all programs must be 
recognized, or continue to be recognized by the appropriate accrediting 
body, in addition to meeting the other general payment requirements 
listed under Sec. 413.85(d) of this final rule in order to

[[Page 3367]]

receive Medicare payment on a reasonable cost basis.

C. Determination of Net Costs

    We proposed to revise our policy for determining the net costs of 
approved nursing and allied health education programs in proposed 
Sec. 413.85(c)(1) (Sec. 413.85(d)(2) of this final rule). The formula 
for determining the net costs at existing Sec. 413.85(g) states that 
``Net costs of approved educational activities are determined by 
deducting, from a provider's total costs of these activities, revenues 
it receives from tuition.''
    When the existing regulation was drafted, we assumed that the 
tuition paid by students enrolled in approved nursing and allied health 
educational programs was intended to cover all facilities and services 
for which a provider would incur costs. It was not our intention to 
imply that costs for which a provider charges a separate fee, in 
addition to tuition, were not to be considered as part of the cost of 
the approved nursing and allied health educational activity. Two 
examples of these costs are the purchase of textbooks for resale to 
students and the provision of housing or room and board in exchange for 
an additional fee.
    We clarified in the proposed regulations that the term ``tuition'' 
includes these additional charges and fees and specified a proposed 
formula for determining the net costs to indicate that ``total costs'' 
includes only direct and indirect costs incurred by a provider that are 
directly attributable to the operation of an approved educational 
activity. These costs do not include usual patient care costs that 
would be incurred in the absence of the educational activity, such as 
the salary costs for nursing supervisors who oversee the floor nurses 
and student nurses. Moreover, these costs do not include costs incurred 
by a related organization.
    The existing regulation concerning related organizations set forth 
at Sec. 413.17 was established to avoid program recognition of 
artificially inflated costs that might be generated from less than 
arm's length transaction. This policy was not intended to expand the 
range of items and services for which a provider could claim payment. 
With respect to educational costs (with the limited exception for 
certain graduate medical education costs incurred by a related medical 
school as provided in Intermediary Letter 78-7) our policy has been 
that the provider, rather than the related organization, must directly 
incur the costs on its books and records before the costs will be 
recognized for Medicare payment purposes. Otherwise, the principle that 
Medicare payment for medical education costs should not result in a 
redistribution of costs from the educational institution to the 
provider would be violated.
    Whereas providers that operate their own programs may receive 
reasonable cost reimbursement for both the classroom instruction and 
the clinical training costs, but no reimbursement for costs incurred by 
a related educational institution, providers that would qualify under 
section 4004(b) of Public Law 101-508 may receive reasonable cost 
reimbursement for the clinical training costs only, and for the 
clinical training costs incurred by a related educational institution. 
We believe that the language included in the Committee Report that 
accompanied Public Law 101-508 supports this distinction between total 
allowable costs for provider-operated and nonprovider-operated 
programs. In that report, the conferees noted that--

``in the case of hospital-operated nursing and allied health 
education programs, the Secretary does not recognize costs incurred 
by a related educational organization as allowable educational costs 
since such costs are a redistribution of costs from the educational 
institution to the hospital. Although [section 4004 of Public Law 
101-508] provides for recognition of the costs incurred by a related 
educational organization for clinical training on the hospital's 
premises in the case of a hospital-supported program, the conferees 
intend that nothing in [section 4004 of Public Law 101-508] should 
be construed as requiring the Secretary to modify his current policy 
in regard to the determination of reasonable costs for a hospital-
operated program'' (H.R. Rept. No. 964, 101st Cong., 2d Sess. 719 
(1990)).

    We note that this clear statement of Congressional intent is also 
consistent with our policy on provider-operated programs stated above 
of not recognizing the costs of related organizations in determining a 
provider's total costs of approved educational programs.
    In the January 3, 1984 final rule, the definition of net costs 
(proposed Sec. 413.85(g)) was revised by eliminating grants and 
donations from revenues that were to be offset against the cost of 
approved educational activities. This revision was made in response to 
a public comment to ensure that the policy on net costs of educational 
activity would be consistent with the policy that deals with the 
treatment of grants, gifts, and income from endowments under reasonable 
cost payment under Sec. 413.5(c)(3). However, in the proposed rule, we 
stated that we were reconsidering our position on this issue. As a 
result, we requested public comment on whether the net costs of 
approved educational activities should be defined as the costs 
determined by deducting the revenues that a provider receives from 
tuition, student fees, and the allocable amounts from any donations and 
grants from the provider's total allowable costs that are directly 
related to approved educational activities.
    Also, in our discussion in the preamble of the September 1992 
proposed rule relating to what types of revenues a provider receives 
that should be deducted from the provider's total allowable costs to 
determine the net cost of approved educational activities, we 
inadvertently included ``non-Medicare public funding''. This inclusion 
erroneously implied that Medicare's policy has been to consider State 
appropriations as grants or donations that are not offset from a 
provider's allowable costs. Our response to a comment in a final 
regulation concerning Medicare GME policy, published on September 22, 
1989 (54 FR 40302), also had been mistakenly interpreted as including 
State appropriations in the definition of grants. In the response to a 
comment about whether there is a redistribution of GME costs when State 
appropriations or other funding sources are sufficient to cover the 
cost of operating, we explained our policy and section 1134 of the Act 
as it relates to offsets from allowable costs of gifts, grants, and 
donations. Our response was intended to describe private philanthropy 
and other grants but not to include State appropriations in the 
definition of grants. In administrative, legal, and policy matters, we 
have consistently maintained that State appropriations for the cost of 
medical education activities constitute community support that is to be 
offset from a provider's allowable costs.
    We note that several courts have upheld Medicare's policy of 
including State appropriations in the definition of community support. 
On May 3, 1991, the U.S. District Court for the Southern District of 
Mississippi ruled that the Secretary's offset of nursing and allied 
health costs of State appropriations was appropriate. Additionally, the 
U.S. District Court for the Eastern District of Pennsylvania in Thomas 
Jefferson University (993 F.2d. 879 (1993)) in a decision affirmed by a 
U.S. Appeals Court stated that the Secretary's definition of community 
support, which includes ``State-funded support,'' is reasonable. This 
decision was upheld by the U.S. Supreme Court on the redistribution 
principle discussed

[[Page 3368]]

elsewhere in this preamble (114 S. Ct. 2381 (1994)).
    We note that the proposed revisions in the proposed rule 
inadvertently did not include community support as the basis for an 
offset from the allowed cost of a GME or nursing and allied health 
program. In this final rule, we restate our longstanding policy that 
Medicare will only share in the costs of educational activities of 
providers where communities have not assumed responsibility for 
financing these programs. Medicare's policy is to offset from otherwise 
allowable education costs, community funding for these activities.
    Comment: We received all unfavorable comments on our 
reconsideration of existing policy that excludes grants and donations 
from the revenues that are used to offset the cost of approved 
educational activities. One commenter stated that it seeks outside 
support in the form of grants for the purpose of recruiting students. 
The commenter indicated that these monies, which are used to help 
alleviate current shortages of trained professionals, should not be 
deducted in determining net costs. Another commenter stated that we did 
not provide any rationale for changing our policy on grants and 
donations. An additional commenter believed that if we adopted the 
revised policy, only those grants and donations that are specifically 
restricted to supporting education programs should be deducted.
    Response: We are persuaded by the commenters that, in this time of 
shrinking revenues, hospitals should not be discouraged from seeking 
additional support through grants and donations. Therefore, we are not 
adopting the proposed revision in this final rule. We will retain the 
existing policy.
    Comment: One commenter requested that student fees that are used to 
cover costs that are not included in Medicare allowable costs should 
not be deducted from a provider's total costs. Another commenter 
believed that since the revenues a provider obtains for housing costs 
and textbook purchase for resale are not used to offset clinical 
instruction costs, they should not be included in the definition of 
tuition and used to offset total costs.
    Response: We believe that the total amount of payments made to a 
provider on behalf of a student it is training should be deducted from 
the allowable costs the provider is claiming. If the provider operates 
the program, it is claiming the cost of student stipends, student 
housing, and the purchase of books and materials for student use. If 
the provider receives revenues in exchange for the provision of these 
services, those revenues should be deducted from total costs, 
regardless of the name given to the fee. If the provider collects a fee 
from students that does not involve any allowable cost, such as monies 
used for recreational activities for which the provider does not seek 
Medicare payment, these revenues need not be deducted. However, any 
general fund for student activities would probably be required to be 
deducted. A provider that does not operate the nursing or allied health 
education program and is claiming only clinical costs would not be 
including housing fees in that cost. Any housing fees should be the 
responsibility of the educational institution.
    Comment: One commenter disagreed with the proposed policy that 
providers that do not operate their own education programs but receive 
reasonable cost payments under the provisions of section 4004(b) of 
Public Law 101-508 may include costs of the educational institution 
related to the provider. These costs are excluded from the total costs 
of a provider that operates its own programs. The commenter believed 
that it is unfair to make this distinction.
    Response: As we explained in the proposed rule (57 FR 43668), when 
Congress included a provision in Public Law 101-508 that the costs of a 
related educational institution should be allowed as part of total 
costs for those providers that are eligible to receive reasonable cost 
payment for education programs they do not operate, specific language 
in the Conference Report made clear that this provision did not 
prohibit the Secretary from continuing to consider these costs as 
redistribution costs and excluding them from allowable costs of 
provider-operated programs.

D. Payment for Certain Nonprovider-Operated Programs Under Public Law 
101-508

    In accordance with the provisions of sections 4004(b)(1) and (b)(2) 
of Public Law 101-508, proposed Sec. 413.85(f) (Sec. 413.85(g)(1) and 
(2) of this final rule) provided that the net costs incurred by a 
provider, or by an educational institution that is related to the 
provider by common ownership or control (that is, a related 
organization as defined in Sec. 413.17(b)), for the clinical training 
of students enrolled in an approved nursing or allied health program 
that is not operated by the provider would be paid on a reasonable cost 
basis if the following conditions are met:
     The clinical training must occur on the premises of the 
provider.
     The provider must have claimed and been paid for clinical 
training costs on a reasonable cost basis during its most recent cost 
reporting period that ended on or before October 1, 1989. (We proposed 
that, in this context, we would consider a provider to be ``paid'' for 
clinical training costs if, for its most recent cost reporting period 
ending on or before October 1, 1989, the provider's intermediary 
included the clinical training costs in the allowable costs used to 
determine the interim payment rate for that cost reporting period, and 
the provider subsequently claimed the clinical training costs as a 
pass-through cost on its initially submitted cost report for that 
period.)
     In any cost reporting period, the percentage of total 
allowable provider cost attributable to allowable clinical training 
cost cannot exceed the percentage of total allowable cost attributable 
to clinical training in the provider's most recent cost reporting 
period ending on or before October 1, 1989.
     The students in the educational program must provide a 
benefit to the provider through the provision of clinical services to 
patients of the provider.
     The clinical training costs must be incurred by the 
provider or by an educational institution related to the provider by 
common control on ownership as defined in Sec. 413.17(b). Costs 
incurred by a third party, regardless of its relationship to either the 
provider or the educational institution, would not be allowed.
     The costs incurred by a provider do not exceed the costs 
the provider would incur if it operated the program itself.
    Section 4004(b)(1) of Public Law 101-508 also required that we 
define allowable clinical training costs under this provision for 
payment for certain nonprovider-operated programs. At 57 FR 43667 in 
the September 22, 1992 proposed rule, we proposed to define these costs 
as the incremental costs that, in the absence of the students, would 
not be incurred by the provider. These incremental costs would include 
the costs of clinical instructors and administrative and clerical 
support staff whose function is to coordinate rotations with a nursing 
school and to schedule clinical rotation for each student nurse. They 
would not, however, include the costs of a charge or floor supervisor 
nurse who may spend a portion of his or her time supervising student 
nurses but who, in the absence of the students, would still have to be 
employed by the provider. In general, these costs are payroll and 
related salary costs. Although some

[[Page 3369]]

provider-incurred overhead costs directly related to the cost of the 
students would be allowable, overhead costs incurred by the related 
organization generally would not be considered allowable.
    In the proposed rule, we stated that, if, after implementation of 
the provisions of sections 4004(b)(1) and (b)(2) of Public Law 101-508, 
we found a wide variation in the clinical cost per student among 
different hospitals' nursing and allied health programs, we would 
consider methods to narrow that variation under the definition of 
reasonable cost as set forth in section 1861(v)(1) of the Act. We 
specifically requested public comment on how we could best evaluate the 
reasonable cost of these programs. We received the following comments 
on our proposed implementation of the provisions of Public Law 101-508.
    Comment: Many commenters objected to the retroactive nature of the 
special exception for providers to receive pass-through payment for the 
clinical training they provide in support of nonprovider-operated 
programs. These commenters believed that allowing ongoing payment only 
for those programs for which providers claimed and were paid costs for 
cost reporting periods that ended on or before October 1, 1989, 
discriminates against newer programs. They believed this criterion 
unjustly penalizes those providers that did not claim pass-through 
costs in the past due to lack of clear guidelines or because they were 
following the direction provided by HCFA in the preamble of the January 
3, 1984 final rule. One commenter requested that the rule should be 
based on cost reports filed after the effective date of the final rule 
or allow providers to reopen their fiscal year 1989 cost reports to 
include nursing and allied health education costs. Another commenter 
suggested that hospitals be allowed to claim clinical training costs in 
future years if they had claimed them in their capital base year cost 
report.
    Response: The October 1, 1989 cost reporting period date set forth 
in the proposed rule was mandated by section 4004(b)(2)(A) of Public 
Law 101-508. The practical effect of this provision is that providers 
may receive payment on a reasonable cost basis under this provision for 
the clinical training of students enrolled in a nonprovider-operated 
program only if they had claimed and received payment for periods prior 
to the enactment of the statute. This protects those providers that 
were relying on the payments.
    Comment: Other commenters disagreed with the requirement that, for 
cost reporting periods ending after October 1, 1989, the percentage of 
allowable clinical training costs is limited to the percentage 
allowable for the provider's previous cost reporting period. Again, 
commenters view this provision as a limitation on the development of 
new programs and as a disincentive to hospitals' participation as 
clinical training sites.
    Response: The proposed regulations incorporated the provisions of 
section 4004(b)(2)(A) of Public Law 101-508 concerning which providers 
can claim pass-through payment for clinical training and how much they 
may claim. The commenters are correct in their assessment that, under 
these rules, providers that expand the magnitude of the support they 
provide to educational institutions would not receive a corresponding 
increase in Medicare pass-through payment. However, the rules merely 
limit the percentage of the costs, so if a provider expands some 
programs and decreases others, then there might be no adverse Medicare 
payment impact. Again, we believe that the Congressional intent was to 
protect providers who had come to rely on Medicare payments for 
nonprovider-operated education programs without increasing Medicare 
expenditures.
    Comment: One commenter believed that the language at proposed 
Sec. 413.85(f)(1) (Sec. 413.85(g)(2)(i) of this final rule) implies 
that in order for clinical training to be eligible for the pass-
through, all training must take place at the provider. The commenter 
believed that providers should be limited to claiming the costs for 
training that takes place solely on the premises of the provider, but 
that the students should be allowed to spend time in training in other 
settings as long as the costs are not claimed by the provider.
    Response: The language set forth at proposed paragraph (f)(1) is 
intended to limit providers to claiming as clinical training pass-
through costs only those costs associated with training that takes 
place on the premises of the provider. It is not our intention to 
prevent students enrolled in educational institutions from obtaining 
clinical training at more than one provider setting. However, if that 
off-site training is part of the education program, it would be subject 
to the rules specified earlier defining a provider-operated program.
    Comment: Several commenters objected to our proposal that clinical 
training costs would be allowable only if they were costs that the 
provider would not have incurred in the absence of the students. That 
is, only incremental costs would be recognized under the pass through. 
The commenters believed this to be inequitable. For example, even if 
the floor charge nurse directs the training of the students as part of 
the nurse's usual duties, it may be necessary for the hospital to hire 
additional support personnel to perform duties previously provided by 
the floor nurse or there may be an increase in overtime to compensate 
for time devoted to students. One commenter believed that this 
restriction will encourage providers to increase their allowable costs 
through the hiring of additional staff dedicated to clinical training 
instead of allocating a portion of existing staff time. The commenters 
recommended that the final rule allow providers to claim the portion of 
the employee's salary or related costs associated with the time devoted 
to clinical training.
    Response: We believe that allowable clinical training costs should 
be limited to those incremental costs that the provider actually incurs 
in the course of training nursing or allied health students. If a 
provider must hire additional staff or increase the salaried hours of 
existing staff to accomplish the clinical training, the costs of the 
staff time for providing the training would be considered allowable 
costs. These staff could include clinical training instructors and 
administrative and clerical support. However, if the provider merely 
adds the supervision of students to a floor nurse's list of duties and 
this is accomplished without the provider incurring additional costs, 
there is no incremental cost to be claimed.
    Comment: Several commenters objected to our statement in the 
preamble to the proposed rule that, in the future, we might consider 
methods to narrow variation in the clinical cost per student among 
hospital programs. The commenters stated that the complexity of care in 
different programs and the mandates imposed by States may contribute to 
a great deal of variation. Thus, they believed that it would be 
extremely difficult to determine an appropriate limit on the per 
student costs. One commenter requested that, before such a limit is 
imposed, HCFA should define a list of components for cost per student. 
These elements should be separately assigned a cost and then averaged 
to create a range of reasonable cost. The commenter encouraged us to 
include adjustments for type of facility, region, and type of facility 
ownership to make the range as accurate as possible.
    Response: We agree with the commenters that determining an 
appropriate limit on per student costs

[[Page 3370]]

would be a difficult undertaking and it is not a policy that we will 
pursue at this time. If, in the future, we decide that it is necessary, 
we will not implement any change in policy without first publishing it 
under the notice and public comment procedure.
    Comment: One commenter was concerned that the proposal does not 
allow a hospital to claim costs incurred by a third party. The 
commenter's hospital sends its CRNA students to other hospitals to 
receive training that the commenter's hospital cannot provide. These 
other hospitals employ a CRNA clinical coordinator. The commenter 
requested clarification on whether the other hospitals can claim 
reasonable cost payment for the coordinator.
    Response: The pass-through payment can be made to any provider that 
trains students in a nursing and allied health program as long as the 
program is operated by the provider, whether the provider is the 
originator of the program or whether the provider is one to which the 
students are rotated. However, the original provider of the program (or 
any other provider) may not claim the costs of training the students in 
the program while the students are rotating to another provider--only 
the provider actually training the students and incurring the clinical 
training costs may be paid on a reasonable cost basis. That is, a 
provider may not claim the costs of a third party provider.
    Comment: One commenter requested that we clarify our policy that 
clinical training must be provided on ``the premises of the provider.''
    Response: We will consider that the training is on the hospital's 
premises if it is in the physical area immediately adjacent to the 
provider's main buildings, other areas and structures that are not 
strictly contiguous to the main buildings but are located within 250 
yards of the main buildings. This clarification would encompass not 
only institutions that are located in self-contained, well-defined 
settings, but other locations, such as in central city areas, where 
there may be a group of buildings that function as a campus but are not 
strictly contiguous and may even be crossed by public streets. We are 
clarifying Sec. 413.85(f)(1) (Sec. 413.85(g)(2)(i) in this final rule) 
accordingly.

E. Costs of Educational Activities Considered To Be Normal Operating 
Costs

    As we have previously discussed, the final hospital inpatient 
prospective payment system rule published January 3, 1984, attempted to 
clarify the Medicare policy on the classification of training costs 
incurred by providers as costs of approved educational activities paid 
on a reasonable cost basis. Since that time, questions have arisen 
about some types of training programs that are neither listed as 
approved programs under existing Sec. 413.85(e) nor readily 
identifiable under existing Sec. 413.85(d) as activities not within the 
scope of approved educational activities.
    The programs that had been included in our list of approved 
programs were generally programs of long duration designed to develop 
trained practitioners in a nursing or allied health discipline, such as 
professional nursing or occupational therapy. This is contrasted with a 
continuing education program of a month to a year in duration in which 
a practitioner, such as a registered nurse, receives training in a 
specialized skill, such as enterostomal therapy. While such training is 
undoubtedly valuable in enabling the nurse to treat patients with 
special needs and in improving the level of patient care in a provider, 
the nurse, upon completion of the program, continues to function as a 
registered nurse, albeit one with special skills. Further distinction 
can be drawn between this situation and one in which a registered nurse 
undergoes years of training to become a CRNA. The costs of continuing 
education training programs are not classified as costs of approved 
educational activities that are passed through and paid on a reasonable 
cost basis. Rather, they are classified as normal operating costs 
covered by the prospective payment rate or, for providers excluded from 
the prospective payment system, as costs subject to the target rate-of-
increase limits. In proposed Sec. 413.85(g)(3) (Sec. 413.85(h)(3) of 
this final rule), we proposed to revise the regulations to include 
continuing educational programs in the same category as ``educational 
seminars and workshops that increase the quality of medical care or 
operating efficiency of the provider.''
    Proposed Sec. 413.85(g), like existing Sec. 413.85(d), stated that 
the costs of certain activities are recognized as normal operating 
costs and are paid in accordance with applicable principles.
    Comment: One commenter questioned the language in proposed 
Sec. 413.85(g)(6) which describes the allowable costs of the clinical 
training and classroom instruction of students enrolled in an approved 
educational program that is not operated by the provider. The commenter 
requested clarification as to whether these costs are allowable as 
normal operating costs or as pass-through costs.
    Response: The title of proposed paragraph (g) is ``Activities 
treated as normal operating costs.'' All costs listed in this paragraph 
(paragraph (h) in this final rule) are costs that are recognized as 
normal operating costs and, as such, are not eligible to be paid under 
the pass-through. Although we believe that the language in the proposed 
rule is clear, we are revising paragraph (h)(6) in this final rule for 
better comprehension.
    Comment: In the existing regulations, the costs of residents in 
anesthesiology who are employed to replace anesthetists are 
specifically included in normal operating costs and excluded from the 
pass-through. One commenter was concerned that this language was 
deleted from the proposed regulations.
    Response: The language concerning residents working in a hospital 
and not participating in a medical education program was added as a 
part of the original hospital inpatient prospective payment system 
regulations in order to ensure that hospitals that hired residents to 
replace anesthetists in an attempt to circumvent the rebundling 
provision did not attempt to include the costs of those residents as 
education costs. Since that time, revised regulations governing 
Medicare payment for the direct medical education of residents have 
been published. These regulations are set forth in Sec. 413.86. Those 
regulations clearly exclude residents not in an approved program from 
receiving payment under the medical education provisions. We believe 
that it is no longer necessary to include this language in the 
regulations governing nursing and allied health education programs, and 
therefore proposed to delete it from the regulations. We are adopting 
this deletion in this final rule. We note that this action does not 
signify a change in our policy.
    Comment: One commenter stated that HCFA should consider allowing 
outpatient, nonacute care clinical training as eligible for the 
reasonable cost payment. Many of these auxiliary service sites are 
operated by a Medicare provider or under an agreement with such a 
provider. The commenter urged HCFA to consider the advantages to 
Medicare beneficiaries, health system costs, and future health 
professionals in allowing as reasonable costs the clinical training 
costs occurring outside the inpatient, acute care facility.
    Response: Based on this comment and others we received, we believe 
that there is a fair amount of confusion surrounding Medicare payment 
for medical education, which we will attempt to clarify. The following 
is a brief overview of Medicare payment for

[[Page 3371]]

graduate medical education and payment for nursing and allied health 
education.
     Payment for Graduate Medical Education (GME)
    Regulations governing Medicare payment for the direct cost of GME 
programs are set forth in Sec. 413.86. In general, Medicare payment for 
the direct costs of GME is based on the hospital's historical per 
resident costs in a base year (fiscal year 1984), updated for 
inflation. Payment to the hospital in the current year is determined 
based on the product of the hospital's updated per resident amount, the 
actual number of residents (capped by the number of allopathic and 
osteopathic residents in a hospital's most recent cost reporting period 
ending on or before December 31, 1996), and Medicare's inpatient 
utilization in that year.
    Under regulations at Sec. 409.26(a), the Medicare Skilled nursing 
facility (SNF) benefit includes coverage of medical services that are 
furnished by an intern or resident (who is training in a hospital 
teaching program approved in accordance with the provisions of 
Sec. 409.15), if the resident is in a participating hospital with which 
the SNF has in effect a transfer agreement. Payment for these services 
is included in the SNF prospective payment system per diem global 
payment. In addition, under regulations at Sec. 409.45(g), the Medicare 
home health benefit includes services provided by interns and 
residents. To the extent that these services were paid on a reasonable 
cost basis and covered under the home health benefit, there cannot be 
separate payment for these services under the home health prospective 
payment system. These services will be subject to the consolidated 
billing requirements. However, the home health prospective payment 
system rates and consolidated billing requirements do not affect 
Medicare payments to hospitals for graduate medical education or 
physician billing requirements under the fee schedule.
     Payment for Other Medical Education (Nursing and Allied 
Health Education)
    The direct costs of all other medical education in which providers 
engage are covered by the regulations at Sec. 413.85. Hospitals may 
receive payment for nursing and allied health education programs they 
operate on a reasonable cost basis. For hospitals subject to the 
prospective payment system, these costs are paid on a reasonable cost 
basis. For hospitals excluded from that system and paid on a reasonable 
cost basis subject to cost limits, the medical education costs are 
excluded from application of the limits. Hospitals that participate in 
a nursing and allied health program that is a nonprovider-operated 
program may receive pass-through payment if they meet the criteria set 
forth at Sec. 413.85(g)(2) in this final rule.
     Provider-Operated Requirement for Nursing and Allied 
Health Education
    One of the main distinctions between payment for GME and nursing 
and allied health education is that, generally, a facility can only 
receive separate payment for nursing and allied health education if the 
program is provider-operated. Hospitals, however, can receive payment 
for residents participating in approved programs regardless of whether 
the program is operated by a provider. We have consistently applied 
this policy since the inception of the Medicare program.
    The January 3, 1984 prospective payment system final rule (49 FR 
267) states that only the costs of provider-operated approved medical 
education programs are excluded from the prospective payment system and 
paid on a reasonable cost basis. This language only applied to nursing 
and allied health education. That final rule states the following:

    ``If a program is operated by another institution, such as a 
nearby college or university, it must be noted that by far the 
majority of the costs of that program are borne by that other 
institution, and not by the hospital. While it is true that the 
hospital may incur some costs associated with the provision of 
clinical training to students enrolled in a nearby institution, the 
hospital also gains in return.'' (Emphasis added.)

    The reference to students and not residents indicates our intention 
to apply this language only to nursing and allied health education. 
Furthermore, we believe hospitals do incur significant costs associated 
with providing a clinical setting for training residents even when they 
do not operate an approved program. Thus, the statement that the 
majority of costs are borne by that other institution reflects our 
views only with respect to nursing and allied health education.
    We have always recognized costs associated with GME programs 
regardless of whether or not they are provider operated. The September 
29, 1989 (54 FR 40286) regulations implemented a GME payment system 
based on per resident amounts, provided that the hospital's per 
resident amount would be based on its GME costs divided by the number 
of full-time equivalent residents working in all areas of the hospital 
complex. We provided a specific example of how to determine the 
hospital's per resident amount when the approved program is operated by 
another institution. In addition, we noted that, in accordance with 
section 1886(h)(5)(A) of the Act, the definition of an approved medical 
residency program at Sec. 413.86(b) does not provide that the program 
must be provider-operated. In contrast, Sec. 413.85, which set forth 
regulations governing payment of nursing and allied health education, 
included a definition of ``approved educational activities'' which 
refers to programs that ``can be operated by providers.''
    Concerning the commenters' more specific comment that providers be 
allowed to claim the costs incurred when students receive clinical 
training in outpatient, nonacute care or nonhospital settings, we 
believe that the issue regarding allowing pass-through payment for the 
costs of training nursing and allied health students in these settings 
does not revolve around whether the hospital operates the program and 
incurs the costs, but, rather, whether training in these settings 
enhances the quality of inpatient care. Current nursing and allied 
health policy at Sec. 413.85(2)(b) defines ``approved educational 
activities'', in part, as enhancing the quality of patient care in an 
institution. We have further clarified this definition as a requirement 
under the general payment rule at Sec. 413.85(d)(1)(i)(C) of this final 
rule; that is, a program must ``enhance the quality of inpatient care'' 
to be considered an approved educational activity. This phrase refers 
only to training while providing care directly to hospital inpatients. 
Thus, we feel it is inappropriate to allow pass-through payment for the 
time students train in outpatient departments, nonacute care, or 
nonhospital settings.

F. Net Costs of Approved Certified Registered Nurse Anesthetist (CRNA) 
Educational Programs

    On January 26, 1989, we published a proposed rule (54 FR 3803) to 
implement section 9320 of the Omnibus Budget Reconciliation Act of 1986 
(Pub. L. 99-509). That rule proposed to change the classification of 
patient care services of CRNAs to permit payment under the Medicare 
Part B fee schedule for such services furnished on or after January 1, 
1989. This policy created difficulties in distinguishing between the 
training and patient care activities of teaching CRNAs. To minimize the 
possibility of duplicate payments, we proposed to modify the 
regulations at Sec. 413.85(b)(3) (Sec. 413.85(d)(2)(iii) of this final 
rule) to recognize the special circumstances that exist with regard to 
the costs of approved CRNA training programs. While, for the most part, 
the

[[Page 3372]]

costs of these programs would continue to be paid under the generally 
applicable rules set forth at Sec. 413.85, we proposed to exclude from 
allowable costs the costs providers incur in connection with 
compensating teaching CRNAs for the time spent with student 
anesthetists in clinical training during surgical procedures. These 
activities involve the provision of patient care services that are 
payable under Medicare Part B under the CRNA fee schedule.
    In developing the proposed rule, we considered requiring that all 
teaching CRNAs complete allocation agreements, similar to those 
completed for provider-compensated physicians, detailing how the CRNAs 
spend their time at the provider. In the interest of administrative 
simplicity and reducing provider recordkeeping burden, we proposed that 
it would be sufficient that providers present auditable documentation 
to intermediaries justifying CRNA faculty compensation costs related to 
hours spent in classroom instruction or in administrative activities 
related to the approved program. No other compensation costs for CRNA 
faculty members would be allowable. Compensation costs for faculty 
members who are not CRNAs would continue to be allowable since the 
duplicate payment potential would not exist for these personnel. We 
specifically sought comments on whether the proposal was an equitable 
way to deal with the problems arising from the change in the payment 
method for the services of CRNAs. We received a number of comments 
regarding this proposal.
    Comment: In general, commenters did not believe that it would be 
equitable to have different rules for CRNA clinical training costs. One 
commenter stated that CRNAs are providing double service when they 
supervise students in anesthesia procedures and deserve the additional 
Part B payment. Other commenters stated that CRNAs are not always 
allowed to bill under Part B for the services they provide. One 
commenter pointed out that CRNAs who work under the direction of a 
physician cannot bill under Part B unless the physician is directing 
two or more cases. Another commenter noted that CRNAs can bill under 
Part B only when they are supervising no more than one student. The 
hospital at which the commenter provides services generally requires 
CRNAs to supervise two or more students and the CRNA cannot bill under 
Part B under these circumstances. These latter two commenters, as well 
as others, indicated support for allowing the clinical costs of CRNAs 
supervising students to be included in the pass-through payment as long 
as the CRNA cannot bill under Part B.
    Response: Under the provisions of the existing regulation that 
implemented the CRNA fee schedule, a CRNA who is supervising student 
anesthetists cannot receive payment under Part B when supervising more 
than one student because supervision of more than one student is 
considered to be a teaching activity (42 CFR 414.46). In addition, this 
regulation also stated that if an anesthesiologist and a CRNA are 
involved in a single procedure, the procedure is considered to be 
personally performed by the physician. However, this policy was revised 
in the December 8, 1995 Federal Register (60 FR 63152), (as implemented 
in Sec. 414.46), effective for services furnished on or after January 
1, 1998, to specify that the ``medical direction payment'' rules apply 
if an anesthesiologist and a CRNA are both involved in a single 
anesthesia case. The payment for both the CRNA service and the 
physician medical direction service are paid at 50 percent of the fee 
otherwise recognized for the anesthesiologist who performs the case 
alone.
    We are revising the regulations at Sec. 413.85(d)(2)(iii) 
(previously proposed Sec. 413.85(b)(3)) to state that the clinical 
training costs of a CRNA who is continuously supervising one student 
anesthetist are not allowable under the pass-through because the CRNA 
may bill for this service under the Medicare Part B fee schedule. The 
clinical training costs of a CRNA are also not allowable under the 
pass-through when the CRNA may bill for fifty percent of a service 
under the Part B fee schedule. We expect that the fiscal intermediaries 
will be careful to review the documentation the hospital maintains to 
support its request for payment under the pass-through for CRNA 
clinical training. In general, the teaching portion of the pass-through 
is not allowed in situations where any practitioner (including CRNAs) 
can bill for the service under the Medicare Part B fee schedule.
    Comment: Three commenters stated that CRNAs should be required to 
complete allocation agreements, like those completed by provider-
compensated physicians, that detail the way the physicians spend their 
time at the provider. This would allow a consistent set of rules under 
Medicare. Another commenter, who believed that the requirements for 
physicians are more precise, requested that the final rule present 
examples of what we would consider to be ``adequate documentation.''
    Response: We do not agree with the commenters' suggestion that we 
impose elaborate recordkeeping requirements on providers concerning the 
allocation of a CRNA's time spent in the clinical training of students. 
A provider is free to require that the CRNAs that it employs complete 
allocation agreements or similar documents that detail the CRNAs 
services. However, we believe that there are less burdensome ways in 
which the provider can keep track of a CRNA's time in order to support 
the costs that the provider is claiming under the Medicare Part A pass-
through. Examples of documentation may include operating room 
assignments, schedules, or any other information indicating the portion 
of time the CRNA spends in activities which are billable under Medicare 
Part B. We do not believe we need to include these examples as part of 
the regulation text.

III. Provisions of the Final Rule

    In this final rule, we are adopting the provisions of approved 
nursing and allied health education activities as proposed with the 
following changes to Sec. 413.85. For the sake of clarity, we are 
reorganizing the text of Sec. 413.85. For ease of reference, a 
crosswalk appears below:

------------------------------------------------------------------------
                 Proposed                               Final
------------------------------------------------------------------------
Paragraph (a).............................  Paragraph (d)
Paragraph (b)(1)..........................  Paragraph (b)(2)
Paragraph (b)(2)..........................  Paragraph (b)(3)
Paragraph (b)(3)..........................  Paragraph (d)(2)(iii)
Paragraph (c)(1)..........................  Paragraph (d)(2)(i), (ii)
                                             and (iv)
Paragraph (c)(2)..........................  Paragraph (c), definition
Paragraph (c)(3)..........................  Paragraph (c), definition
Paragraph (c)(4)..........................  Paragraph (c), definition
Paragraph (c)(5)..........................  Paragraphs (c) definition,
                                             and (e)
Paragraph (d).............................  Paragraph (e)
Paragraph (e)(1)..........................  Paragraph (f)(1)
Paragraph (e)(2)..........................  Paragraph (f)(2)
Paragraph (f).............................  Paragraph (g)
Paragraph (g).............................  Paragraph (h)
------------------------------------------------------------------------

    All substantive revisions made to the section are summarized below.
     We are renaming Sec. 413.85 to read ``Cost of approved 
nursing and allied health education activities,'' instead of ``Cost of 
approved educational activities,'' and generally refer to ``approved 
educational activities'' as ``approved nursing and allied health 
education activities'' under this section. We are using the phrase 
``nursing and allied health education activities'' in connection with 
``approved educational activities'' because it clarifies that this 
section addresses only nursing and

[[Page 3373]]

allied health education activities, and no other types of educational 
activities, such as graduate medical education.
     We are revising paragraphs (c) and (e) to reflect our 
clarification in policy that, as part of a provider's requirements for 
receiving Medicare payment on a reasonable cost basis for the net costs 
of its nursing and allied health education activities, the activities 
must be recognized by a national approving body or State licensing 
organization.
     We are revising and reorganizing proposed Sec. 413.85, and 
are making editorial revisions where necessary, to clarify our policy 
on approved nursing and allied health education activities. The 
reorganized editorial revisions do not reflect a change from the 
proposed policy on approved nursing and allied health education 
programs.
     We are redesignating the existing paragraph (h) of 
Sec. 413.85 as Sec. 422.270 (with appropriate revision of the paragraph 
codes) because paragraph (h) more properly belongs in the 
Medicare+Choice sections of the Medicare regulation.
     We are revising paragraph (a) to include the statutory 
basis for implementing this policy on nursing and allied health 
education programs.
     We are revising redesignated paragraph (g)(2)(i) to 
clarify the meaning of ``on the premises of the provider.''
     We are revising redesignated paragraph (d)(2)(iii) to 
provide that the clinical training costs of CRNAs who are medically 
directing student anesthetists are not allowable under the pass through 
if the CRNA may bill for the services under the Part B fee schedule.
     We are revising redesignated paragraph (h) to clarify 
those costs that are allowable as normal operating costs.
     We are revising one of the criteria for identifying 
programs operated by a provider to indicate that the provider must 
provide and control both classroom instruction and clinical training 
``where the classroom instruction is a requirement for program 
completion.'' In addition, we are further revising this criterion that 
it is subject to the parenthetical sentence in paragraph (f)(1)(ii) of 
this final rule.

IV. Regulatory Impact Analysis

    We have examined the impacts of this rule 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, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). A regulatory impact 
analysis (RIA) must be prepared for major rules with economically 
significant effects ($100 million or more annually).
    We generally prepare a regulatory flexibility analysis that is 
consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 
through 612) unless we certify that a final rule will not have a 
significant impact on a substantial number of small entities. For 
purposes of the RFA, all providers are treated as small entities.
    In general, the provisions that are set forth in this final rule 
conform the regulations to the statute and to our existing policy as 
set forth in the Provider Reimbursement Manual and other instructions. 
These provisions have no impact on those providers that operate their 
own nursing and allied health education program. We note, however that 
section 6205(b)(1) of Public Law 101-239 imposed a moratorium for the 
period on or after December 19, 1989, and before October 1, 1990, on 
the recoupment of overpayments attributable to a determination by a 
provider's intermediary that costs claimed by a provider for the 
operation of a school of nursing or allied health are not eligible for 
payment on a reasonable cost basis. The basis for this determination is 
generally that a neighboring or related college or university, not the 
hospital, is the operator of the program.
    As discussed earlier in this preamble, some hospitals that do not 
operate their own nursing and allied health education programs received 
overpayments for nursing and allied health education costs for cost 
reporting periods beginning on or after October 1, 1983 and ending 
before October 1, 1990. However, we were prohibited from collecting 
these overpayments and were required to refund previously collected 
overpayments under section 4004(b)(3) of Public Law 101-508. The 
statute did not substantially alter payments to hospitals that did not 
operate their own programs prior to Public Law 101-508. Sections 
4004(b)(1) and (2) of Public Law 101-508 required the Secretary to 
continue making pass-through payments to these hospitals for the 
clinical training costs of nursing and allied health education 
programs. Funding for nursing and allied health education for these 
hospitals has only been affected to the extent that prior overpayments 
included payment for classroom education which are not provided for 
under Public Law 101-508. If Medicare had not made pass-through 
payments hospitals prior to Public Law 101-508 for programs they do not 
operate, there would have been no subsequent pass-through payment under 
OBRA 1990 for any of these nursing and allied health programs. Thus, 
relative to Medicare's policy prior to enactment of Public Law 101-508, 
Public Law 101-508 substantially benefited a small number of hospitals 
that do not operate their own programs.
    Although we have data on Medicare's expenditures for nursing and 
allied health education both before and after enactment of Public Law 
101-508, we do not have data broken down on the respective shares 
accounted for by provider and nonprovider-operated programs. For this 
reason, we cannot make an accurate estimate of the impact of Public Law 
101-508 and this final rule on payment for nursing and allied health 
education. However, we note that this provision only affected a small 
number of hospitals with existing nonprovider-operated programs.
    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis if a final rule will have 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. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area (MSA) and has fewer than 50 beds. We are not preparing 
a rural impact statement, since we have determined, and certify, that 
this final rule will not have a significant economic impact on the 
operations of a substantial number of small rural hospitals.
    We have reviewed this final rule under the threshold criteria of 
Executive Order 13132, Federalism, and have determined that the final 
rule will not have any negative impact on the rights, roles, and 
responsibilities of State, local, or tribal governments.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in an expenditure in any one year by 
State, local or tribal governments, in the aggregate, or by the private 
sector, of $100 million. This final rule does not mandate any 
requirements for State, local, or tribal governments.
    In accordance with the provisions of Executive Order 12866, this 
final rule was reviewed by the Office of Management and Budget.

V. Information Collection Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and

[[Page 3374]]

solicit public comment before a collection of information requirement 
is submitted to the Office of Management and Budget (OMB) for review 
and approval. In order to fairly evaluate whether an information 
collection should be approved by OMB, section 3506(c)(2)(A) of the 
Paperwork Reduction Act of 1995 requires that we solicit comment on the 
following issues:
     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.
    In this final rule, Sec. 413.85(e) requires that, in order for an 
activity to be considered an approved nursing and allied health 
education activity, the activity must be recognized by a national 
approving body or State licensing authority (in addition to meeting the 
other requirements listed in paragraph (d)(1) of this section). For 
example, such national accrediting bodies include, but are not limited 
to, the Commission on Accreditation of Allied Health Education 
Programs, the National League of Nursing Accrediting Commission, the 
Association for Clinical Pastoral Education, Inc., and the American 
Dietetic Association. The burden associated with this requirement is 
the time necessary for the provider to maintain documentation 
demonstrating that this requirement has been met. We estimate that 
1,400 providers will be required to maintain documentation and that it 
will take each organization 5 minutes on an annual basis to maintain 
the documentation, for a total burden of 117 hours.
    We have submitted a copy of this final rule to OMB for its review 
of the information collection requirement in Sec. 413.85(e). Compliance 
with this requirement is not required until it has been approved by 
OMB.

List of Subjects

42 CFR Part 413

    Health facilities, Kidney diseases, Medicare, Reporting and record-
keeping requirements.

42 CFR Part 422

    Health maintenance organizations (HMO), Medicare+Choice, Provider 
sponsored organizations (PSO).

    42 CFR Chapter IV is amended as set forth below:

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

    A. Part 413 is amended as follows:
    1. The authority citation for part 413 continues to read as 
follows:


    Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), and 
(n), 1861(v), 1871, 1881, 1883, and 1886 of the Social Security Act 
(42 U.S.C. 1302, 1395f(b), 1395g, 1395l, 1395l(a), (i), and (n), 
1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww).

    2. In Sec. 413.85, the section heading is revised, paragraph (h) is 
redesignated as a new Sec. 422.270, and the remainder of the section is 
revised to read as follows:


Sec. 413.85  Cost of approved nursing and allied health education 
activities.

    (a) Statutory basis. This section implements section 1861(v)(1)(A) 
of the Act and section 4004(b) of the Omnibus Budget Reconciliation Act 
of 1990 (Public Law 101-508) by establishing the methodology for 
Medicare payment of the costs of approved nursing and allied health 
education activities.
    (b) Scope. (1) This section sets forth the rules for determining 
Medicare payments to hospitals for the costs of nursing and allied 
health education activities.
    (2) This section does not address Medicare payments for the direct 
and indirect costs of graduate medical education (that is, approved 
residency programs in medicine, osteopathy, dentistry, and podiatry). 
Medicare payment for these costs is determined as provided in 
Sec. 412.105 of this subchapter and Sec. 413.86.
    (3) The rules under this section do not apply to activities that 
are specified in paragraph (h) of this section and identified as normal 
operating costs.
    (c) Definitions. For purposes of this section, the following 
definitions apply:
    Approved educational activities means formally organized or planned 
programs of study of the type that:
    (1) Are operated by providers as specified in paragraph (f) of this 
section;
    (2) Enhance the quality of inpatient care at the provider; and
    (3) Meet the requirements of paragraph (e) of this section for 
State licensure or accreditation.
    Classroom instruction costs are those costs associated with formal, 
didactic instruction on a specific topic or subject in a class that 
meets at regular, scheduled intervals over a specific time period (for 
example, semester or quarter), and for which a student receives a 
grade.
    Clinical training costs means costs of training for the acquisition 
and use of the skills of a nursing or allied health profession or trade 
in the actual environment in which these skills will be used by the 
student upon graduation. Clinical training may involve occasional or 
periodic meetings to discuss or analyze cases, critique performance, or 
discuss specific skills or techniques; it involves no classroom 
instruction.
    Community support means funding that is provided by the community 
and generally includes all non-Medicare sources of funding (other than 
payments made for furnishing services to individual patients), 
including State and local government appropriations. Community support 
does not include grants, gifts, and endowments of the kind that are not 
to be offset in accordance with section 1134 of the Act.
    Redistribution of costs means an attempt by a provider to increase 
the amount, or to expand the types, of the costs of educational 
activities that are allowed for Medicare payment purposes by claiming 
costs that previously were not claimed by the provider and were 
considered costs of an educational institution. For example, costs for 
a school of nursing or allied health education or a medical school that 
were incurred by an educational institution and were not allowable to 
the provider in its prospective payment or rate-of-increase limit base 
year cost report, or graduate medical education per resident amount 
calculated under Sec. 413.86, are not allowable costs in subsequent 
fiscal years.
    (d) General payment rules. (1) Payment for a provider's net cost of 
nursing and allied health education activities is determined on a 
reasonable cost basis, subject to the following conditions and 
limitations:
    (i) An approved educational activity--
    (A) Is recognized by a national approving body or State licensing 
authority as specified in paragraph (e) of this section;
    (B) Meets the criteria specified in paragraph (f) of this section 
for identification as an operator of an approved education program.
    (C) Enhances the quality of inpatient care at the provider.
    (ii) The cost for certain nonprovider-operated programs are 
reimbursable on a reasonable cost basis if the programs meet the 
criteria specified in paragraph (g)(2) of this section.
    (2) Determination of net cost. (i) Subject to the provisions of 
paragraph (d)(2)(iii) of this section, the net cost of approved 
educational activities is

[[Page 3375]]

determined by deducting the revenues that a provider receives from 
tuition and student fees from the provider's total allowable 
educational costs that are directly related to approved educational 
activities.
    (ii) A provider's total allowable educational costs are those costs 
incurred by the provider for trainee stipends, compensation of 
teachers, and other costs of the activities as determined under the 
Medicare cost-finding principles in Sec. 413.24. These costs do not 
include patient care costs, costs incurred by a related organization, 
or costs that constitute a redistribution of costs from an educational 
institution to a provider or costs that have been or are currently 
being provided through community support.
    (iii) The net costs of approved certified registered nurse 
anesthetist (CRNA) education programs that are determined on a 
reasonable cost basis are subject to the additional condition that 
allowable compensation costs for faculty members who are CRNAs are 
limited to the compensation costs for administrative activities related 
to the educational program, the compensation costs directly related to 
hours spent in classroom instruction, and the costs related to the 
clinical training of students for which the CRNA may not receive 
payment under the CRNA fee schedule. No pass-through compensation costs 
are allowable for the time a CRNA spends in the clinical training of a 
student anesthetist during a surgical procedure in the operating room 
for which the CRNA may receive payment under the CRNA fee schedule. As 
specified at Sec. 414.46 of this chapter, if the CRNA continuously 
supervises the services of a single student nurse anesthetist, or where 
the medical direction rules allow a CRNA to bill for the service, 
payment can be made under the CRNA fee schedule.
    (iv) Net costs are subject to apportionment for Medicare 
utilization as described in Sec. 413.50.
    (e) Approved nursing and allied health education programs. HCFA 
will consider an activity an approved nursing and allied health 
education program if the program is a planned program of study that is 
licensed by State law, or if licensing is not required, is accredited 
by the recognized national professional organization for the particular 
activity. Such national accrediting bodies include, but are not limited 
to, the Commission on Accreditation of Allied Health Education 
Programs, the National League of Nursing Accrediting Commission, the 
Association for Clinical Pastoral Education Inc., and the American 
Dietetic Association.
    (f) Criteria for identifying programs operated by a provider. (1) 
Except as provided in paragraph (f)(2) of this section, for cost 
reporting periods beginning on or after October 1, 1983, in order to be 
considered the operator of an approved nursing or allied health 
education program, a provider must meet all of the following 
requirements:
    (i) Directly incur the training costs.
    (ii) Have direct control of the program curriculum. (A provider may 
enter into an agreement with an educational institution to furnish 
basic academic courses required for completion of the program, but the 
provider must provide all of the courses relating to the theory and 
practice of the nursing or allied health profession involved that are 
required for the degree, diploma, or certificate awarded at the 
completion of the program.)
    (iii) Control the administration of the program, including 
collection of tuition (where applicable), control the maintenance of 
payroll records of teaching staff or students, or both (where 
applicable), and be responsible for day-to-day program operation. (A 
provider may contract with another entity to perform some 
administrative functions, but the provider must maintain control over 
all aspects of the contracted functions.)
    (iv) Employ the teaching staff.
    (v) Provide and control both classroom instruction and clinical 
training (where classroom instruction is a requirement for program 
completion), subject to the parenthetical sentence in paragraph 
(f)(1)(ii) of this section.
    (2) Absent evidence to the contrary, the provider that issues the 
degree, diploma, or other certificate upon successful completion of an 
approved education program is assumed to meet all of the criteria set 
forth in paragraph (f)(1) of this section and to be the operator of the 
program.
    (g) Payment for certain nonprovider-operated programs. (1) Payment 
rule. Costs incurred by a provider, or by an educational institution 
that is related to the provider by common ownership or control (that 
is, a related organization as defined in Sec. 413.17(b)), for the 
clinical training of students enrolled in an approved nursing or allied 
health education program that is not operated by the provider, are paid 
on a reasonable cost basis if the conditions specified in paragraph 
(g)(2) of this section are met.
    (2) Criteria for identification of nonprovider-operated education 
programs. Payment for the incurred costs of educational activities 
identified in paragraph (g)(1) of this section will be made if the 
following conditions are met:
    (i) The clinical training must occur on the premises of the 
provider, that is, in the hospital itself or in the physical area 
immediately adjacent to the provider's main buildings, or in other 
areas and structures that are not strictly contiguous to the main 
buildings but are located within 250 yards of the main buildings.
    (ii) The provider must have claimed and been paid for clinical 
training costs on a reasonable cost basis during the most recent cost 
reporting period that ended on or before October 1, 1989. This 
condition is met if a notice of program reimbursement (NPR) was issued 
for that cost reporting period by November 5, 1990, and the clinical 
training costs were included as pass-through costs. If an NPR was not 
issued by that date, or an NPR was issued but did not treat the 
clinical training costs as pass-through costs, the condition is met 
if--
    (A) The intermediary included the clinical training costs in the 
allowable costs used to determine the interim rate for the most recent 
cost reporting period ending on or before October 1, 1989; or
    (B) The provider claimed the clinical training costs as pass-
through costs when the cost report for the most recent cost reporting 
period ending on or before October 1, 1989, was initially submitted.
    (iii) In any cost reporting period, the percentage of total 
allowable provider cost attributable to allowable clinical training 
cost does not exceed the percentage of total cost for clinical training 
in the provider's most recent cost reporting period ending on or before 
October 1, 1989.
    (iv) The students in the educational program must provide a benefit 
to the provider through the provision of clinical services to patients 
of the provider.
    (v) The clinical training costs must be incurred by the provider or 
by an educational institution related to the provider by common control 
or ownership as defined in Sec. 413.17(b) (``Cost to related 
organizations.'') Costs incurred by a third-party, regardless of its 
relationship to either the provider or the educational institution, are 
not allowed.
    (vi) The costs incurred by a provider does not exceed the costs the 
provider would have incurred if it was the sole operator of the 
program.
    (h) Cost of educational activities treated as normal operating 
costs. The costs of the following educational activities incurred by a 
provider but not

[[Page 3376]]

operated by that provider are recognized only as normal operating costs 
and paid in accordance with the reimbursement principles specified in 
Part 412 of this subchapter. They include:
    (1) Orientation and on-the-job training.
    (2) Part-time education for bona fide full-time employees at 
properly accredited academic or technical institutions (including other 
providers) devoted to undergraduate or graduate work.
    (3) Educational seminars, workshops, and continuing education 
programs in which the employees participate that enhance the quality of 
medical care or operating efficiency of the provider.
    (4) Maintenance of a medical library.
    (5) Training of a patient or patient's family in the use of medical 
appliances or other treatments.
    (6) Except as provided in paragraph (g) of this section, clinical 
training and classroom instruction of students enrolled in an 
educational program that is not operated by the provider. The following 
are clinical training and classroom instruction costs that are 
allowable as normal operating costs:
    (i) Costs incurred in the clinical training of students, including 
the clinical training or clerkship of undergraduate medical school 
students that takes place in a provider.
    (ii) Classroom instruction costs incurred by a provider that meet 
the following criteria:
    (A) The provider's support does not constitute a redistribution of 
nonprovider costs to the provider. The support must be in addition to 
the costs already being incurred by the nonprovider-operated program. 
If the nonprovider entity reduces its costs due to receiving provider 
support, this reduction constitutes a redistribution of costs from an 
educational institution to a patient care institution and is a 
nonallowable provider cost.
    (B) The provider receives a benefit for the support it furnishes.
    (C) The cost of the provider's support is less than the cost the 
provider would incur were it to operate the program.
    (7) Other activities that do not involve the actual operation of an 
approved educational program.

PART 422--MEDICARE+CHOICE PROGRAM

    B. Part 422 is amended as follows:
    1. The authority citation for part 422 is revised to read as 
follows:

    Authority: Secs. 1851 and 1855 of the Social Security Act (42 
U.S.C. 1395w-21 and 1395w-25).

    2. Newly designated Sec. 422.270 is revised to read as follows:


Sec. 422.270  Payments to M+C organizations for graduate medical 
education costs.

    (a) Effective January 1, 1999, Medicare+Choice organizations may 
receive direct graduate medical education payments for the time that 
residents spend in nonhospital provider settings such as freestanding 
clinics, nursing homes, and physicians' offices in connection with 
approved programs.
    (b) Medicare+Choice organizations may receive direct graduate 
medical education payments if all of the following conditions are met:
    (1) The resident spends his or her time assigned to patient care 
activities.
    (2) The Medicare+Choice organization incurs ``all or substantially 
all'' of the costs for the training program in the nonhospital setting 
as defined in Sec. 413.86(b) of this subchapter.
    (3) There is a written agreement between the Medicare+Choice 
organization and the nonhospital site that indicates the 
Medicare+Choice organization will incur the costs of the resident's 
salary and fringe benefits and provide reasonable compensation to the 
nonhospital site for teaching activities.
    (c) A Medicare+Choice organization's allowable direct graduate 
medical education costs, subject to the redistribution and community 
support principles specified in Sec. 413.85(c) of this subchapter, 
consist of--
    (1) Residents' salaries and fringe benefits (including travel and 
lodging where applicable); and
    (2) Reasonable compensation to the nonhospital site for teaching 
activities related to the training of medical residents.
    (d) The direct graduate medical education payment is equal to the 
product of--
    (1) The lower of--
    (i) The Medicare+Choice organization's allowable costs per resident 
as defined in paragraph (c) of this section; or
    (ii) The national average per resident amount; and
    (2) Medicare's share, which is equal to the ratio of the number of 
Medicare beneficiaries enrolled to the total number of individuals 
enrolled in the Medicare+Choice organization.
    (e) Direct graduate medical education payments made to 
Medicare+Choice organizations under this section are made from the 
Federal Supplementary Medical Insurance Trust Fund.

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance and Program No. 93.774, Medicare--
Supplementary Medical Insurance)

    Dated: January 5, 2001.
Robert A. Berenson,
Acting Deputy Administrator,, Health Care Financing Administration.
    Dated: January 5, 2001.
Donna E. Shalala,
Secretary.
[FR Doc. 01-909 Filed 1-9-01; 10:21 am]
BILLING CODE 4120-01-P