[Federal Register Volume 66, Number 114 (Wednesday, June 13, 2001)]
[Rules and Regulations]
[Pages 32172-32196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14732]



[[Page 32171]]

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Part VII





Department of Health and Human Services





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Health Care Financing Administration



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42 CFR Parts 410 et al.



Medicare Program; Provisions of the Benefits Improvement and Protection 
Act of 2000; Inpatient Payments and Rates and Costs of Graduate Medical 
Education; Interim Final Rule

  Federal Register / Vol. 66 , No. 114 / Wednesday, June 13, 2001 / 
Rules and Regulations  

[[Page 32172]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 410, 412, 413, and 485

[HCFA-1178-IFC]
RIN 0938-AK74


Medicare Program; Provisions of the Benefits Improvement and 
Protection Act of 2000; Inpatient Payments and Rates and Costs of 
Graduate Medical Education

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

ACTION: Interim final rule with comment period.

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SUMMARY: This interim final rule with comment period implements, or 
conforms the regulations to, certain statutory provisions relating to 
Medicare payments to hospitals for inpatient services that are 
contained in the Medicare, Medicaid, and SCHIP (State Children's Health 
Insurance Program) Benefits Improvement and Protection Act of 2000 
(BIPA).
    Many of the provisions of BIPA modify changes to the Social 
Security Act made by the Balanced Budget Refinement Act of 1999 or the 
Balanced Budget Act of 1997 or both. Some of the provisions of BIPA 
have effective dates that are prior to its passage on December 21, 
2000.

DATES: Effective Date: This interim final rule with comment period is 
effective on June 13, 2001.
    Comment Period: Comments will be considered if received at the 
appropriate address, as provided below, no later than 5 p.m. on July 
13, 2001.

ADDRESSES: Mail written comments (an original and three copies) to the 
following address only: Health Care Financing Administration, 
Department of Health and Human Services, Attention: HCFA-1178-IFC, P.O. 
Box 8010, Baltimore, MD 21244-1850.
    If you prefer, you may deliver by hand or courier your written 
comments (an original and three copies) to one of the following 
addresses:

Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW, 
Washington, DC 20201, or
Room C5-14-03, Central Building, 7500 Security Boulevard, Baltimore, MD 
21244-1850.

    Comments mailed to the addresses indicated as appropriate for 
courier delivery may be delayed and could be considered late.
    Because of staffing and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code HCFA-1178-IFC.
    Comments received timely will be available for public inspection as 
they are received, generally beginning approximately 3 weeks after 
publication of a document, in the Department's offices at 7500 Security 
Boulevard, Baltimore, MD on Monday through Friday of each week from 
8:30 a.m. to 5 p.m. (phone: (410) 786-9994).
    For comments that relate to information collection requirements, 
mail a copy of comments to the following addresses:

Health Care Financing Administration, Office of Information Services, 
Security and Standards Group, Division of HCFA Enterprise Standards, 
Room N2-14-26, 7500 Security Boulevard, Baltimore, Maryland 21244-1850. 
Attn: John Burke HCFA-1178-IFC; and
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 3001, New Executive Office Building, Washington, DC 20503, 
Attn: Allison Eydt Herron, HCFA-1178-IFC, HCFA Desk Officer.

FOR FURTHER INFORMATION CONTACT:
Steve Phillips, (410) 786-4548, Operating Prospective Payment, Sole 
Community Hospitals, Disproportionate Share Hospitals and Medicare-
Dependent, Small Rural Hospitals.
Tzvi Hefter, (410) 786-4487, Excluded Hospitals, Graduate Medical 
Education, and Critical Access Hospital Issues.

SUPPLEMENTARY INFORMATION:

Availability of Copies and Electronic Access

    Copies: To order copies of the Federal Register containing this 
document, send your request to: New Orders, Superintendent of 
Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date 
of the issue requested and enclose a check or money order payable to 
the Superintendent of Documents, or enclose your Visa or Master Card 
number and expiration date. Credit card orders can also be placed by 
calling the order desk at (202) 512-1800 or by faxing to (202) 512-
2250. The cost for each copy is $9. As an alternative, you can view and 
photocopy the Federal Register document at most libraries designated as 
Federal Depository Libraries and at many other public and academic 
libraries throughout the country that receive the Federal Register.
    This Federal Register document is also available from the Federal 
Register online database through GPO Access, a service of the U.S. 
Government Printing Office. The Website address is: http://www.access.gpo.gov/nara/index.html.

I. Background: Program Summary

    Section 1886(d) of the Social Security Act (the Act) sets forth a 
system of payment for the operating costs of acute care hospital 
inpatient stays under Medicare Part A (Hospital Insurance) based on 
prospectively set rates. Section 1886(g) of the Act requires the 
Secretary to pay for the capital-related costs of hospital inpatient 
stays under a prospective payment system. Under these prospective 
payment systems, Medicare payment for hospital inpatient operating and 
capital-related costs is made at predetermined, specific rates for each 
hospital discharge. Discharges are classified according to a list of 
diagnosis-related groups (DRGs). Payment for cases within each DRG is 
weighted to account for the average resources used to treat patients 
within that DRG. In addition, these payments are adjusted by a wage 
index (and a geographic adjustment factor derived from the wage index 
in the case of capital payments) to account for the varying costs of 
labor across areas, and by separate adjustment factors for the 
additional indirect operating costs associated with medical education 
(IME) and for treating a disproportionate share of low-income patients.
    Certain specialty hospitals are excluded from the prospective 
payment system. Under section 1886(d)(1)(B) of the Act, the following 
classes of hospitals and hospital units are excluded from the 
prospective payment system: psychiatric hospitals and units, 
rehabilitation hospitals and units, children's hospitals, long-term 
care hospitals, and cancer hospitals. For these hospitals and units, 
Medicare payment for operating costs is based on reasonable costs 
subject to a hospital-specific annual limit.
    Under sections 1820 and 1834(g) of the Act, payments are made to 
critical access hospitals (CAHs) (that is, rural hospitals that meet 
certain statutory requirements) for inpatient and outpatient services 
on a reasonable cost basis. Reasonable cost is determined under the 
provisions of section 1861(v)(1)(A) of the Act and existing regulations 
under 42 CFR Parts 413 and 415.
    Under section 1886(a)(4) of the Act, costs of approved educational 
activities are excluded from the operating costs of inpatient hospital 
services. Hospitals with approved graduate medical education (GME) 
programs are paid for the direct costs of GME in accordance

[[Page 32173]]

with section 1886(h) of the Act; the amount of payment for direct GME 
costs for a cost reporting period is based on the hospital's costs per 
resident in a base year and the hospital's number of residents in that 
cost reporting period.
    The regulations governing the hospital inpatient prospective 
payment system are located in 42 CFR Part 412. The regulations 
governing excluded hospitals and hospital units and the regulations 
governing direct GME are located in 42 CFR Part 413. The regulations 
governing CAHs are located in 42 CFR Parts 413 and 485.

II. Provisions of the Interim Final Rule With Comment Period

    On December 21, 2000 the Medicare, Medicaid, and SCHIP Benefits 
Improvement and Protection Act of 2000 (Pub. L. 106-554) was enacted. 
Public Law 106-554 made a number of changes to the Act affecting 
Medicare payments to hospitals for inpatient services. Many of the 
provisions of Public Law 106-554 are modifications to provisions of the 
Act included in the Balanced Budget Act of 1997 (Pub. L. 105-33) or the 
Balanced Budget Refinement Act of 1999 (Pub. L. 106-113) or both. Some 
of the provisions of Pub. L. 106-554 have effective dates that are 
prior to its passage on December 21, 2000. Other provisions do not 
become effective until April 1, 2001 or later.
    The following chart is a summary of the effective dates of the 
policy changes we are implementing in this interim final rule with 
comment period as a result of Public Law 106-554. The individual 
changes are summarized below.

 Effective Date of the Provisions of Public Law 106-554 Included in This
                 Interim Final Rule With Comment Period
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            Section No.                     Title         Effective date
------------------------------------------------------------------------
201...............................  Clarification of No       11/29/1999
                                     Beneficiary Cost-
                                     Sharing for
                                     Clinical Diagnostic
                                     Laboratory Test
                                     Furnished by
                                     Critical Access
                                     Hospitals.
202...............................  Assistance with Fee       07/01/2001
                                     Schedule Payment
                                     for Professional
                                     Services under All-
                                     Inclusive Rate.
211...............................  Treatment of Rural        04/01/2001
                                     Disproportionate
                                     Share Hospitals.
212...............................  Option to Base            04/01/2001
                                     Eligibility for
                                     Medicare-Dependent,
                                     Small Rural
                                     Hospital Program on
                                     Discharges during
                                     Two of the Three
                                     Most Recently
                                     Audited Cost
                                     Reporting Periods.
213...............................  Extension of Option       10/01/2000
                                     to use Rebased
                                     Target Amounts to
                                     All Sole Community
                                     Hospitals.
301...............................  Revision of Acute         04/01/2001
                                     Care Hospital
                                     Payment Update for
                                     2001.
302...............................  Additional                04/01/2001
                                     Modification in
                                     Transition for
                                     Indirect Medical
                                     Education
                                     Adjustment.
303...............................  Decrease in               04/01/2000
                                     Reductions for
                                     Disproportionate
                                     Share Hospitals.
306...............................  Payment for               10/01/2000
                                     Inpatient Services
                                     of Psychiatric
                                     Hospitals.
307...............................  Payment for               10/01/2000
                                     Inpatient Services
                                     of Long-Term Care
                                     Hospitals.
512...............................  Change in                 01/01/2001
                                     Distribution
                                     Formula for
                                     Medicare+Choice-
                                     Related Nursing and
                                     Allied Health
                                     Education Costs.
541...............................  Increase in               10/01/2000
                                     Reimbursement for
                                     Bad Debt.
------------------------------------------------------------------------

    The following is a summary of the policy changes we are 
implementing in this interim final rule with comment period as a result 
of Public Law 106-554:

A. Changes Relating to Payments for Operating Costs Under the Hospital 
Inpatient Prospective Payment System

     Treatment of Rural and Small Urban Disproportionate Share 
Hospitals (DSH). We are implementing the provisions of section 211 of 
Public Law 106-554 which lowers thresholds by which certain classes of 
hospitals qualify for DSH, with repsect to discharges occurring on or 
after April 1, 2001.
     Decrease in Reductions for Disproportionate Share Hospital 
Payments. We are implementing section 303 of Public Law 106-554 which 
modifies the previous reduction in the DSH payment to be 2 percent in 
FY 2001 and 3 percent in FY 2002.
     Medicare-Dependent, Small Rural Hospitals (MDH). We are 
implementing section 212 of Public Law 106-554 which provides an option 
to base eligibility for MDH status on discharges during two of the 
three most recently audited cost reporting periods, effective with cost 
reporting periods beginning on or after April 1, 2001.
     Revision of Prospective Payment System Standardized 
Amounts. We are implementing section 301 of Public Law 106-554 which 
revises the update factor increase for the inpatient prospective 
payment rates for FY 2001.
     Indirect Medical Education Adjustment (IME). We are 
implementing section 302 of Public Law 106-554 which provides that for 
the purposes of making the IME payment, the formula multiplier, or `c', 
for discharges occurring on or after April 1, 2001 and before October 
1, 2001 will be determined as if `c' equaled 1.66, rather than 1.54.
     Sole Community Hospitals (SCHs). We are implementing 
section 213 of Public Law 106-554 which further extends the 1996 
rebasing option, for hospital cost reporting periods beginning October 
1, 2000, to all SCHs and provides that this extension is effective as 
if it had been included in section 405 of Public Law 106-113.

B. Payments for Nursing and Allied Health Education: Utilization of 
Medicare+Choice Enrollees

    We are implementing section 512 of Public Law 106-554 which revised 
the formula for determining the additional payment amounts to hospitals 
for Medicare+Choice nursing and allied health education costs.

C. Changes Relating to Payments for Capital-Related Costs Under the 
Hospital Inpatient Prospective Payment System

    As a result of implementing section 301 of Public Law 106-554, 
which provides increased inpatient operating payment rates, the unified 
outlier threshold for inpatient operating and inpatient capital-related 
costs was recalculated. Therefore, we are revising the capital outlier 
offset which also requires us to revise the capital-related rates.

D. Changes Relating to Hospitals and Hospital Units Excluded from the 
Prospective Payment System

     Increase in the Incentive Payment for Excluded Psychiatric 
Hospitals and Units. We are implementing section 306 of Public Law 106-
554, which provides

[[Page 32174]]

that for cost reporting periods beginning on or after October 1, 2000, 
for psychiatric hospitals and units, if the allowable net inpatient 
operating costs do not exceed the hospital's ceiling, payment is the 
lower of: (1) Net inpatient operating costs plus 15 percent of the 
difference between inpatient operating costs and the ceiling; or, (2) 
net inpatient costs plus 3 percent of the ceiling.
     Increase in the Wage Adjusted 75th Percentile Cap on the 
Target Amounts for Long-Term Care Hospitals. We are implementing 
section 307(a) of Public Law 106-554, which provides a 2 percent 
increase to the wage-adjusted 75th percentile cap on the target amount 
for long-term care hospitals, effective for cost reporting periods 
beginning during FY 2001.
     Increase in the Target Amounts for Long-Term Care 
Hospitals. We are implementing section 307(a) Public Law 106-554, which 
provides a 25 percent increase to the target amounts for long-term care 
hospitals for cost reporting periods beginning in FY 2001, up to the 
cap on target amounts.

E. Changes Relating to Critical Access Hospitals (CAHs)

     Elimination of Coinsurance for Clinical Diagnostic 
Laboratory Tests Furnished by a CAH. We are implementing section 201(a) 
of Public Law 106-554, which amends section 1834(g) of the Act to state 
that there will be no collection of coinsurance, deductible, 
copayments, or any other type of cost sharing from Medicare 
beneficiaries with respect to outpatient clinical diagnostic laboratory 
services furnished as outpatient CAH services furnished as an 
outpatient CAH service, and that those services will be paid for on a 
reasonable cost basis.
     Assistance With Fee Schedule Payment for Professional 
Services Under All Inclusive Rate. We are implementing section 202 of 
Public Law 106-554, which amends section 1834(g)(2)(B) of the Act to 
provide that when a CAH elects to be paid for Medicare outpatient 
services under the reasonable costs for facility services plus fee 
schedule amounts for professional services method, Medicare will pay 
115 percent of the amount it otherwise pays for the professional 
services.
     Condition of Participation With Hospital Requirements at 
the Time of Application for CAH Designation
(Sec. 485.612). We are implementing a conforming change to correct 
Sec. 485.612 to reflect that certain entities are not required to have 
a provider agreement prior to CAH designation.

F. Other Inpatient Costs

     Increase in Reimbursement for Bad Debts. We are 
implementing section 541 of Public Law 106-554 which provides a 30 
percent decrease of allowable hospital bad debt reimbursement for cost 
reporting periods, beginning during FY 2001 and all subsequent fiscal 
years. This section modifies section 4451 Of Public Law 105-33 that 
reduced the total allowable bad debt reimbursement for hospitals by 45 
percent.

III. Disproportionate Share Hospitals (Sections 211 and 303 of 
Public Law 106-554 and 42 CFR 412.106 (c) and 412.106(d))

A. Qualifying Thresholds for DSHs

    Section 1886(d)(5)(F) of the Act provides for additional payments 
to prospective payment hospitals that serve a disproportionate share of 
low-income patients. Hospitals that meet the DSH patient percentage 
criteria are entitled to adjustments to their payments, including 
outlier payments.
    Under section 1886(d)(5)(F)(v) of the Act, as it existed prior to 
enactment of Public Law 106-554 and under Sec. 412.106(c) of the 
existing regulations, a hospital qualifies for DSH if the hospital has 
a disproportionate patient percentage equal to:
     At least 15 percent for an urban hospital with 100 or more 
beds or a rural hospital with 500 or more beds;
     At least 40 percent for an urban hospital with fewer than 
100 beds;
     At least 45 percent for a rural hospital with 100 beds or 
fewer, if it is not also classified as an SCH;
     At least 30 percent for a rural hospital with more than 
100 beds and fewer than 500 beds or which is classified as an SCH; or
     The hospital has 100 or more beds, is located in an urban 
area, and receives more than 30 percent of its net inpatient revenues 
from State and local government sources for the care of indigent 
patients not eligible for Medicare or Medicaid.
    Section 211(a) of Public Law 106-554 amended section 
1886(d)(5)(F)(v), to provide that, beginning with discharges occurring 
on or after April 1, 2001, the qualifying threshold is reduced to 15 
percent for all hospitals. Therefore, we are revising Sec. 412.106(c) 
to reflect the change in DSH qualifying threshold percentages.

B. Calculation of the Disproportionate Share Adjustment

    Section 211(b) of Public Law 106-554 further amends section 
1886(d)(5)(F) to revise the calculation of the disproportionate share 
percentage adjustment for hospitals affected by the revised thresholds 
as specified in section 211(a) of the Act. These adjustments, which are 
effective for discharges occurring on or after April 1, 2001, are as 
follows:
     Urban hospitals with fewer than 100 beds and whose 
disproportionate patient percentage is equal to or greater than 15 
percent and less than 19.3 percent receive the disproportionate share 
adjustment percentage determined using the following formula:

(Disproportionate patient percentage--15) (.65) + 2.5.

     Urban hospitals with fewer than 100 beds and whose 
disproportionate patient percentage is equal to or greater than 19.3 
percent:
    Receive a flat add on of 5.25 percent.
     Rural hospitals that are both Rural Referral Centers 
(RRCs) and SCHs receive the disproportionate share adjustment 
percentage determined using the following:
    Higher of SCH or RRC adjustment.
     Rural hospitals that are SCHs and are not RRCs and whose 
disproportionate patient percentage is equal to or greater than 15 
percent and less than 19.3 percent receive the disproportionate share 
adjustment percentage determined using the following formula:

(Disproportionate patient percentage--15) (.65) + 2.5.

     Rural hospitals that are SCHs and are not RRCs and whose 
disproportionate patient percentage is equal to or greater than 19.3 
percent and less than 30 percent:
    Receive a flat add on of 5.25 percent.
     Rural hospitals that are SCHs and are not RRCs and whose 
disproportionate patient percentage is equal to or greater than 30 
percent:
    Receive 10 percent.
     Rural referral centers whose disproportionate patient 
percentage is greater than or equal to 15 percent and less than 19.3 
percent receive the disproportionate share adjustment percentage 
determined using the following formula:

(Disproportionate patient percentage--15) (.65) + 2.5.

     Rural referral centers whose disproportionate patient 
percentage is equal to or greater than 19.3 percent but less than 30 
percent:
    Receive a flat add on of 5.25 percent.
     Rural referral centers whose disproportionate patient 
percentage is equal to or greater than 30 percent receive the 
disproportionate share adjustment percentage determined using the 
following formula:


[[Page 32175]]


(Disproportionate patient percentage--30) (.6) + 5.25.

     Rural hospitals with fewer than 500 beds and whose 
disproportionate patient percentage is equal to or greater than 15 
percent and less than 19.3 percent receive the disproportionate share 
adjustment percentage using the following formula:

(Disproportionate patient percentage--15) (.65) + 2.5.

     Rural hospitals with fewer than 500 beds and whose 
disproportionate patient percentage is equal to or greater than 19.3 
percent:
    Receive a flat add on of 5.25 percent.
    If we calculate disproportionate patient percentages to the 
hundredth place (our current practice), these payment formulas result 
in an anomaly for some disproportionate patient percentages just below 
19.3 percent (but greater than 19.2 percent). That is, as the 
percentage values approach 19.3, the DSH adjustment resulting from the 
formula exceeds 5.25 percent. This would result in a higher DSH 
adjustment for percentages just below 19.3 than for percentages of 19.3 
and above. Because we believe it would be contrary to the Congress' 
intent for hospitals with a disproportionate patient percentage of less 
than 19.3 percent to receive a greater payment than those hospitals of 
the same class that have a disproportionate patient percentage of 19.3 
or greater, we are implementing this provision so that, for 
disproportionate patient percentages below 19.3 for affected hospitals, 
the DSH adjustment will not exceed 5.25 percent.
    We are revising Sec. 412.106(d) to reflect the changes in the 
disproportionate share adjustment.

C. Changes Relating to the DSH Reduction in Payments

    Section 4403(a) of Public Law 105-33 amended section 1886(d)(5)(F) 
of the Act to reduce the payment a hospital would otherwise receive 
under the DSH formula in effect prior to Public Law 106-554 by 1 
percent for FY 1998, 2 percent for FY 1999, 3 percent for FY 2000, 4 
percent for FY 2001, 5 percent for FY 2002, and 0 percent for FY 2003 
and each subsequent fiscal year. Subsequently, section 112 of Public 
Law 106-113 modified the amount of the reductions under Public Law 105-
33 by changing the reduction to 3 percent for FY 2001 and 4 percent for 
FY 2002. Section 303 of Public Law 106-554 further modified the amount 
of the reductions under Public Law 106-113 by changing the reduction to 
3 percent for discharges occurring on or after October 1, 2000 and 
before April 1, 2001, and to 1 percent for discharges occurring on or 
after April 1, 2001 and before October 1, 2001. Therefore, we are 
revising Sec. 412.106(e) to reflect the changes made by section 303 of 
Public Law 106-554.

IV. Medicare-Dependent, Small Rural Hospitals (Section 212 of 
Public Law 106-554 and 42 CFR 412.108(a)(1)(iii))

    Section 6003(f) of Public Law 101-239 added section 1886(d)(5)(G) 
of the Act and created the category of Medicare-dependent, small rural 
hospitals (MDHs) (defined in Sec. 412.108) which are eligible for a 
special payment adjustment under the hospital inpatient prospective 
payment system. (For a more detailed discussion see the April 20, 1990 
Federal Register (55 FR 15154)). The special payment adjustment for 
MDHs is effective for cost reporting periods beginning on or after 
April 1, 1990 and ending before October 1, 1994, or beginning on or 
after October 1, 1997 and ending before October 1, 2006.
    Section 1886(d)(5)(G)(iii) of the Act and Sec. 412.108(a)(1) of the 
regulations define an MDH as any hospital that meets all of the 
following criteria:
     The hospital is located in a rural area (as defined in 
Sec. 412.63(b)).
     The hospital has 100 or fewer beds (as defined in 
Sec. 412.105(b)) during the cost reporting period.
     The hospital is not also classified as an SCH (as defined 
in Sec. 412.92).
     In the hospital's cost reporting period that began during 
FY 1987, at least 60 percent of the hospital's inpatient days or 
discharges were attributable to individuals receiving Medicare Part A 
benefits during the hospital's cost reporting period.
    If the cost reporting period is for less than 12 months, the 
hospital's most recent 12-month or longer cost reporting period before 
the short period is used.
    Section 212 of Public Law 106-554 provides that, effective with 
cost reporting periods beginning on or after April 1, 2001, hospitals 
have the option to base MDH eligibility on two of the three most 
recently audited cost reporting periods for which the Secretary has a 
settled cost report, rather than on the cost reporting period that 
began during FY 1987. The criteria for at least 60 percent Medicare 
utilization will be met if in at least two of the three most recently 
audited cost reporting periods for which the Secretary has a settled 
cost report, at least 60 percent of the hospital's inpatient days or 
discharges were attributable to individuals receiving Medicare Part A 
benefits.
    Hospitals that qualify under this new provision are subject to the 
other provisions already in place for MDHs, that is, the payment 
methodology as defined in Sec. 412.108(c) and the volume decrease 
provision as defined in Sec. 412.108(d).
    A hospital must notify its fiscal intermediary to be considered for 
MDH status under this new provision. Any hospital that believes it 
meets the criteria to qualify as an MDH, based on at least two of the 
three most recently audited cost reporting periods, must submit a 
written request to its intermediary. The hospital's request must be 
submitted within 180 days from the date of the notice of amount of 
program reimbursement for the cost reporting period in question. The 
intermediary will make its determination and notify the hospital within 
180 days from the date it receives the hospital's request and all of 
the required documentation.
    We are revising Sec. 412.108(a)(1)(iii) to reflect the additional 
option provided by section 212 of Public Law 106-554.

V. Changes to the Prospective Payment Rates for Inpatient Operating 
Costs (Section 301 of Public Law 106-554 and 42 CFR 412.63(s))

    Section 301(a) of Public Law 106-554 amended section 
1886(b)(3)(B)(i) of the Act by changing the percentage increase for the 
hospital inpatient payment rates for FYs 2001, 2002, and 2003. 
Previously, section 1886(b)(3)(B)(i) (as amended by section 406 of 
Public Law 106-113) established the update factor to the payment rates 
for inpatient prospective payment system hospitals (other than SCHs, 
who received the full market basket update effective October 1, 2000) 
as market basket minus 1.1 percent for FYs 2001 and 2002; the update 
factor for FY 2003 and subsequent fiscal years was established as the 
full market basket. Section 301(a) of Public Law 106-554 amended 
section 1886(b)(3)(B)(i) of the Act and changed the update factor for 
FY 2001 to the full market basket. Section 301(a) also revised the 
update factors applied to FYs 2002 and 2003. Prior to enactment of 
Public Law 106-554, the update factor for FY 2002 was the market basket 
minus 1.1 percentage points and the update factor for FY 2003 was the 
full market basket. Section 301(a) of Public Law 106-554 amended 
section 1886(b)(3)(B)(i) of the Act to revise the update factor for FYs 
2002 and 2003 to be the market basket minus 0.55 percentage points.
    Further, section 301(b) of Public Law 106-554 provided a special 
rule to implement the full market basket update

[[Page 32176]]

to inpatient hospital prospective payment rates for FY 2001. Under this 
special rule, for discharges occurring on or after October 1, 2000 and 
before April 1, 2001, the update factor for inpatient prospective 
payment system hospitals (other than SCHs) is equal to the market 
basket minus 1.1 percentage points. For discharges occurring on or 
after April 1, 2001 and before October 1, 2001, the update factor for 
the payment rates for inpatient prospective payment system hospitals 
(other than SCHs) is equal to the market basket plus 1.1 percentage 
points. Section 547 of Public Law 106-554 makes this special rule 
applicable solely to payments in FY 2001 and the payment increases 
resulting for FY 2001 are not taken into account in developing payments 
for future fiscal years.
    As directed by the special rule in section 301(b) of Public Law 
106-554, any discharges occurring on or after October 1, 2000, and 
before April 1, 2001, will be paid in accordance with the standardized 
amounts set forth in the FY 2001 hospital inpatient prospective payment 
system final rule published in the August 1, 2000, Federal Register (65 
FR 47126). These rates were calculated using the market basket 
percentage increase of 3.4 percent minus 1.1 percentage points, for a 
2.3 percent increase (see 65 FR 47112), as directed by section 
1886(b)(3)(B)(i) of the Act, prior to the passage of Public Law 106-
554.
    To implement the special rule under section 301(b) of Public Law 
106-554, we have recomputed the standardized amounts effective for 
discharges occurring on or after April 1, 2001. That is, we replaced 
the update factor of 2.3 percent applied to the standardized amounts in 
the August 1, 2000, final rule, with the update factor of 4.5 percent 
(the market basket percentage plus 1.1, or 3.4 plus 1.1 percentage 
points).

----------------------------------------------------------------------------------------------------------------
                                                      Large urban areas                    Other areas
                                             -------------------------------------------------------------------
                                                                  Nonlabor-                         Nonlabor-
                                               Labor- related      related       Labor- related      related
----------------------------------------------------------------------------------------------------------------
National....................................        $2,925.82        $1,189.26        $2,879.51        $1,170.43
National PR.................................         2,900.64         1,179.02         2,900.64         1,179.02
Puerto Rico.................................         1,402.79           564.66         1,380.58           555.72
SCHs........................................         2,895.02         1,176.74         2,849.20         1,158.11
----------------------------------------------------------------------------------------------------------------


                       Final FY 2001 Capital Rates
------------------------------------------------------------------------
 
------------------------------------------------------------------------
National.....................................................    $380.85
Puerto Rico..................................................     184.61
------------------------------------------------------------------------

A. Budget Neutrality

    Section 1886(d)(4)(C)(iii) of the Act specifies that, beginning in 
FY 1991, the annual diagnosis-related group (DRG) reclassification and 
recalibration of the relative weights must be made in a manner that 
ensures that aggregate payments to hospitals are projected to be the 
same as those that would have been made without such adjustments. 
Section 1886(d)(3)(E) of the Act requires us to update the hospital 
wage index on an annual basis beginning October 1, 1993. This provision 
also requires us to make any updates or adjustments to the wage index 
in a manner that ensures that aggregate payments to hospitals are 
projected to be the same as those that would have been made without the 
change in the wage index.
    Finally, under section 1886(d)(8)(D) of the Act, the Secretary is 
required to adjust the standardized amounts so as to ensure that final 
aggregate payments under the prospective payment system are projected 
to equal the aggregate prospective payments that would have been made 
absent the geographic reclassification provisions of sections 
1886(d)(8)(B) and (C) and 1886(d)(10) of the Act.
    The distributive effects on hospital payments of the IME and DSH 
changes also included in Public Law 106-554 required us to recalculate 
the budget neutrality factors that are required by section 
1886(d)(8)(D) of the Act.
    The budget neutrality factors that were used to establish the 
standardized amounts effective for discharges occurring on or after 
October 1, 2000 were: 0.997225 for the DRG reclassification and 
recalibration and updated wage index (65 FR 47112); and 0.993187 for 
geographic reclassification (65 FR 47113). Using the same methodology 
that was used to calculate the budget neutrality factors in the August 
1, 2000 final rule, the corresponding budget neutrality factors for the 
standardized amounts effective for discharges occurring on or after 
April 1, 2001 and before October 1, 2001 are: 0.997122 and 0.993279. 
The budget neutrality factor for Puerto Rico did not change. Therefore, 
the budget neutrality factor for Puerto Rico as published in the August 
1, 2000 Federal Register (65 FR 47112) is still in effect.

B. Outliers

    In accordance with section 1886(d)(3)(B) of the Act, which directs 
the Secretary to adjust the national standardized amounts to account 
for the estimated proportion of total payments made to outlier cases, 
the fixed-loss outlier threshold was also revised as a result of the 
change made by Public Law 106-554 to the update factor for the 
operating standardized amounts. For discharges occurring on or after 
April 1, 2001 and before October 1, 2001, we are establishing a fixed-
loss cost outlier threshold equal to: The prospective payment rate for 
the DRG, plus IME and DSH payments, plus $16,500 ($14,940 for hospitals 
that have not yet entered the prospective payment system for capital-
related costs). In determining the outlier threshold, we used the same 
methodology employed to determine the outlier threshold for FY 2001 (65 
FR 47113 through 47114). Outlier payments for discharges occurring on 
or after October 1, 2000 and before April 1, 2001, will be determined 
in accordance with the standardized amounts and outlier thresholds set 
forth in the FY 2001 final rule published in the August 1, 2000 Federal 
Register (65 FR 47113).
    Although the market basket percentage used to update SCHs was not 
revised by Public Law 106-554, the standardized rates applied to these 
hospitals for discharges occurring on or after April 1, 2001 and before 
October 1, 2001 also increase slightly. This increase in SCH rates is 
due to the budget neutrality factors effective for this portion of the 
fiscal year.
    For discharges occurring on or after April 1, 2001 and before 
October 1, 2001, the outlier adjustment factors are as follows:

[[Page 32177]]



------------------------------------------------------------------------
                                           Operating
                                          standardized       Capital
                                            amounts        Federal rate
------------------------------------------------------------------------
National..............................         0.948929         0.937854
Puerto Rico...........................         0.973671         0.967355
------------------------------------------------------------------------

VI. Changes to the IME Adjustment (Section 302 of Public Law 106-
554 and 42 CFR 412.105(d)(3))

    Section 1886(d)(5)(B) of the Act provides that prospective payment 
hospitals that have residents in an approved GME program receive an 
additional payment to reflect the higher indirect operating costs 
associated with GME. The regulations regarding the calculation of this 
additional payment, known as the IME adjustment, are located at 
Sec. 412.105. The additional payment is based in part on the applicable 
IME adjustment factor. The IME adjustment factor is calculated using a 
hospital's ratio of residents-to beds, which is represented as r, and a 
multiplier, which is represented as c, in the following equation: c  x  
[(1 + r)\.405\ -1]. The formula c represents a certain percentage 
increase in payment for every 10 percent increase in the resident-to-
bed ratio.
    Public Law 106-113 revised the formula multiplier for discharges 
occurring during FY 2001 to 1.54. However, section 302(b) of Public Law 
106-554 provides a special payment rule which states that, for 
discharges occurring on or after April 1, 2001 and before October 1, 
2001, IME payments are to be made as if ``c'' equaled 1.66, rather than 
1.54. The multiplier of 1.54 for the first 6 months of FY 2001 
represents a 6.24 percent increase in the level of the IME adjustment 
for every 10 percent increase in the resident-to-bed ratio, and the 
multiplier for the second 6 months of FY 2001 represents a 6.72 percent 
increase in the level of the IME adjustment for every 10 percent 
increase in the resident-to-bed ratio. This results in an aggregate 6.5 
percent increase for every 10 percent increase in the resident-to-bed 
ratio for FY 2001. Section 547(a)(2) of Public Law 106-554 provides 
further clarification that these payment increases will not apply to 
discharges occurring after FY 2001 and will not be taken into account 
in calculating the payment amounts applicable for discharges occurring 
after FY 2001.
    Under amendments enacted by section 302(a) of Public Law 106-554, 
for discharges occurring during FY 2002, the formula multiplier is 1.6. 
For discharges occurring during FY 2003 and thereafter, the formula 
multiplier is 1.35. Changes to the factor for discharges occurring in 
FY 2002 and thereafter are addressed in the proposed rule on FY 2002 
hospital inpatient prospective payment system rates and changes (66 FR 
22688). We are amending Sec. 412.105(d)(3) to reflect the additional 
payment provided for discharges occurring during FY 2001 under section 
302(b) of Public Law 106-554.

VII. Sole Community Hospitals (Section 213 of Public Law 106-554 
and 42 CFR 412.92)

    Under the hospital inpatient prospective payment system, special 
payment protections are provided to SCHs. Section 1886(d)(5)(D)(iii) of 
the Act defines an SCH as, among other things, a hospital that, by 
reason of factors such as isolated location, weather conditions, travel 
conditions, travel time, or absence of other like hospitals (as 
determined by the Secretary), is the sole source of inpatient hospital 
services reasonably available to Medicare beneficiaries. The 
regulations that set forth the criteria a hospital must meet to be 
classified as an SCH are located at Sec. 412.92(a).
    Prior to FY 2001, SCHs were paid based on whichever of the 
following rates yielded the greatest aggregate payment to the hospital 
for the cost reporting period: (1) The Federal national rate applicable 
to the hospital; (2) the updated hospital-specific rate based on FY 
1982 costs per discharge; or (3) the updated hospital-specific rate 
based on FY 1987 costs per discharge.
    Section 405 of Public Law 106-113, which amended section 1886(b)(3) 
of the Act, provides that an SCH that was paid for its cost reporting 
period beginning during 1999 on the basis of either its updated FY 1982 
or FY 1987 cost per discharge (the hospital-specific rate as opposed to 
the Federal rate) may elect to receive payment under a methodology 
using a third hospital-specific rate, based on the hospital's FY 1996 
costs per discharge. This amendment to the statute means that, for cost 
reporting periods beginning on or after October 1, 2000, eligible SCHs 
can elect to use the allowable FY 1996 operating costs for inpatient 
hospital services as the basis for their target amount, rather than 
either their FY 1982 or FY 1987 costs.
    Section 213 of Public Law 106-554, extends to all SCHs the option 
to rebase using their FY 1996 operating costs. That is, in order to 
rebase using its allowable FY 1996 operating costs, it is not necessary 
that the SCH was paid for its cost reporting period beginning during 
1999 on the basis of the either its FY 1982 or FY 1987 costs. The 
provision is effective as if it were included in the enactment of 
section 405 of Public Law 106-113. Therefore, it applies to all SCHs 
for cost reporting periods beginning on or after October 1, 2000.
    As discussed in the August 1, 2000 final rule implementing the 1996 
rebasing under section 405 of Public Law 106-113 (65 FR 47083), when 
calculating an eligible SCH's FY 1996 hospital-specific rate, we 
utilize the same basic methodology used to calculate FY 1982 and FY 
1987 base period amounts. That methodology is set forth in Secs. 412.71 
through 412.75 of the regulations, and discussed in detail in several 
prospective payment system documents published in the Federal Register 
on September 1, 1983 (48 FR 39752); January 3, 1984 (49 FR 256); June 
1, 1984 (49 FR 23010); and April 20, 1990 (55 FR 15150).
    Our fiscal intermediaries will identify those SCHs that were not 
included in the FY 1996 rebasing provision prior to enactment of Public 
Law 106-554, and calculate the FY 1996 hospital-specific rate. If this 
rate exceeds the Federal rate and the higher of the FY 1982 or FY 1987 
updated costs per discharge, the hospital will receive payment based on 
the FY 1996 hospital-specific rate (based on the blended amounts 
described in section 1886(b)(3)(I)(i) of the Act).
    The fiscal intermediary will notify affected hospitals of their FY 
1996 hospital-specific rate prior to October 1, 2001. Consistent with 
our policies relating to FY 1982 and FY 1987 hospital-specific rates, 
we will permit hospitals to appeal a fiscal intermediary's 
determination of the FY 1996 hospital-specific rate under the 
procedures set forth in 42 CFR part 405, subpart R, which concern 
provider payment determinations and appeals. In the event of a 
modification of base period costs for FY 1996 rebasing due to a final 
nonappealable court judgment or certain administrative actions (as 
defined in Sec. 412.72(a)(3)(i)), the

[[Page 32178]]

adjustment would be retroactive to the time of the fiscal 
intermediary's initial calculation of the base period costs, consistent 
with the policy for rates based on FY 1982 and FY 1987 costs.
    For purposes of payment to SCHs for which the FY 1996 hospital-
specific rate yields the greatest aggregate payment, section 213 of 
Public Law 106-554 utilizes a formula similar to that set forth in 
section 405 of Public Law 106-113, except that the Federal rate will 
now be included in the blend, as set forth below:
     For discharges during FY 2001,
     75 percent of the Federal amount or the greater of the 
updated FY 1982 or FY 1987 former target (identified in the statute as 
the subsection (d)(5)(D)(i) amount), plus 25 percent of the updated FY 
1996 amount (identified in the statute as the ``rebased target 
amount'').
     For discharges during FY 2002,
     50 percent of the greater of the Federal amount or the 
updated FY 1982 or FY 1987 former target, plus 50 percent of the 
updated FY 1996 amount.
     For discharges during FY 2003,
     25 percent of the Federal amount or the greater of the 
updated FY 1982 or FY 1987 former target, plus 75 percent of the 
updated FY 1996 amount.
     For discharges during FY 2004 or any subsequent fiscal 
year, the hospital-specific rate would be determined based on 100 
percent of the updated FY 1996 amount.
    We are revising Sec. 412.92(d) to incorporate the provisions of 
section 1886(b)(3)(I) of the Act as amended by section 213 of Public 
Law 106-554.

VIII. Additional Payment to Hospitals That Operate Approved Nursing 
and Allied Health Education Programs (Section 512 of Public Law 
106-554 and 42 CFR 413.87)

    Under sections 1861(v) and 1886(a) of the Act, hospitals that 
operate approved nursing or allied health education programs may be 
eligible for the reimbursement of their reasonable costs of operating 
such programs. Section 1886(h) of the Act establishes the methodology 
for determining payments to hospitals for the direct costs of GME 
programs. Section 1886(h) of the Act, as implemented in regulations at 
42 CFR 413.86, specifies that Medicare payments for direct costs of GME 
are based on a prospectively determined per resident amount (PRA). The 
PRA is multiplied by the number of full-time equivalent residents 
working in all areas of the hospital complex (and nonhospital sites, 
where applicable), and the product is then multiplied by the hospital's 
Medicare share of total inpatient days to determine Medicare's direct 
GME payment.
    Section 1886(h)(3)(D) of the Act, as added by section 4624 of 
Public Law 105-33, provides a 5-year phase-in of payments to teaching 
hospitals for direct costs of GME associated with services to 
Medicare+Choice (managed care) enrollees for portions of cost reporting 
periods occurring on or after January 1, 1998. The amount of payment 
for direct GME is calculated by (1) multiplying the aggregate approved 
amount (that is, the product of the PRA and the number of FTE residents 
working in all areas of the hospital (and nonhospital sites, if 
applicable)), by the ratio of the number of inpatient bed days that are 
attributable to Medicare+Choice enrollees to total inpatient bed days, 
and (2) multiplying the result by an applicable percentage.
    The applicable percentages are 20 percent for portions of cost 
reporting periods occurring in calendar year (CY) 1998, 40 percent in 
CY 1999, 60 percent in CY 2000, 80 percent in CY 2001, and 100 percent 
in CY 2002 and subsequent years. (Section 1886(d)(11) of the Act, as 
added by section 4622 of Public Law 105-33, provides a 5-year phase-in 
of payments to teaching hospitals for IME associated with services to 
Medicare+Choice enrollees for portions of cost reporting periods 
occurring on or after January 1, 1998, as well. However, the 
Medicare+Choice IME payments are irrelevant for the purposes of this 
section of the interim final rule, because although section 541 of 
Public Law 106-113 affects the payments for Medicare+Choice direct GME, 
it in no way affects the payments for Medicare+Choice IME.)
    Section 541 of Public Law 106-113 further amended section 1886 of 
the Act by adding subsection (l) and amending section 1886(h)(3)(D) to 
provide for additional payments to hospitals for nursing and allied 
health education programs associated with services to Medicare+Choice 
enrollees. Hospitals that operate approved nursing or allied health 
education programs, as defined under the regulations at 42 CFR 413.85, 
and receive Medicare reasonable cost reimbursement for these programs, 
would receive additional payments. This provision is effective for 
portions of cost reporting periods occurring in a calendar year, 
beginning with calendar year 2000.
    Section 1886(l) of the Act, as added by section 541 of Public Law 
106-113, specifies the methodology to be used to calculate these 
additional payments and places a limitation, that is, $60 million, on 
the total amount that is projected to be expended in any calendar year. 
We refer to the total amount of $60 million or less as the payment 
``pool.'' We emphasize that we use the term ``pool'' solely for ease of 
reference; the term reflects an estimated dollar figure, a number that 
is plugged into a formula to calculate the amount of additional 
payments. The term ``pool'' does not refer to a discrete fund of money 
that is set aside in order to make the additional payments (thus, for 
example, if the estimated ``pool'' is $50 million, we use the number 
$50 million to calculate the amount of additional payments, but this 
does not mean that we set aside $50 million in a separate fund from 
which we make the additional payments). The total amount of additional 
payments is based on the ratio of estimated total direct GME payments 
for Medicare+Choice enrollees to estimated total Medicare direct GME 
payments, multiplied by the total Medicare nursing and allied health 
education payments. Under section 541 of Public Law 106-113, a hospital 
would receive its share of these additional payments in proportion to 
the amount of Medicare nursing and allied health education payments 
received in the cost reporting period that ended in the fiscal year 
that is 2 years prior to the current calendar year, to the total amount 
of nursing and allied health payments made to all hospitals in that 
cost reporting period. Section 541(b) of Public Law 106-113 amended 
section 1886(h)(3) of the Act to provide that direct GME payments for 
Medicare+Choice utilization will be reduced to account for the 
additional payments that are made for nursing and allied health 
education programs under the provisions of section 1886(l) of the Act.
    We implemented section 541 by establishing regulations at 42 CFR 
413.87 to incorporate the provisions of section 1886(l) of the Act. We 
specified the rules for a hospital's eligibility to receive the 
additional payment under section 1886(l), the requirements for 
determining the additional payment to each eligible hospital, and the 
methodologies for calculating each additional payment and for 
calculating the payment ``pool.'' The preamble language regarding 
Sec. 413.87 can be found in the August 1, 2000 interim final rule with 
comment period (65 FR 47036 through 47039).
    Public Law 106-554 further amended section 1886(l)(2)(C) of the 
Act. Specifically, section 512 of Public Law 106-554 changed the 
formula for determining the additional amounts to be paid to hospitals 
for Medicare+Choice nursing and allied health costs. Under Public Law 
106-113, as described above, the additional

[[Page 32179]]

payment amount was determined based on the proportion of each 
individual hospital's nursing and allied health education payments to 
total nursing and allied health education payments made across all 
hospitals. This formula does not account for a hospital's specific 
Medicare+Choice utilization. Section 512 of Public Law 106-554 revised 
this payment formula to specifically account for each hospital's 
Medicare+Choice utilization. Accordingly, we are making conforming 
changes at Sec. 413.87 to reflect this change. The changes are 
effective for portions of cost reporting periods occurring on or after 
January 1, 2001. The revised methodology for calculating the additional 
payments is described below.

A. Calculating the Additional Payment Amount

    For portions of cost reporting periods occurring on or after 
January 1, 2001, an eligible hospital will receive the additional 
payment amount calculated according to the following steps:
    Step 1: Determine for each eligible hospital the--
     Total Medicare payments received for approved nursing or 
allied health education programs based on data from the settled cost 
reports for the period(s) ending in the fiscal year that is 2 years 
prior to the current calendar year;
     Total inpatient days for that same cost reporting period; 
and
     Total Medicare+Choice inpatient days for that same cost 
reporting period.
    For example, if the current calendar year is 2001, determine the 
hospital's total nursing or allied health education payments made in 
its cost reporting period(s) ending in FY 1999. Also, determine the 
hospital's total inpatient days and total Medicare+Choice inpatient 
days for its cost reporting period ending in FY 1999. If a hospital has 
more than one cost reporting period ending in that fiscal year, the 
fiscal intermediary will add the nursing and allied health payments 
made to the hospital over those cost reporting periods. The inpatient 
days and Medicare+Choice inpatient days for the cost reporting periods 
would be added, as well.
    Step 2: Using the data in step 1, determine the ratio of the 
individual hospital's total nursing or allied health payments, to its 
total inpatient days. Multiply this ratio by the hospital's total 
Medicare+Choice inpatient days.
    Step 3: HCFA will determine the following:
     The total of all nursing and allied health education 
program payments made to all hospitals for all cost reporting periods 
ending in the fiscal year that is 2 years prior to the current calendar 
year.
     The total of all inpatient days from those same cost 
reporting periods.
     The total of all Medicare+Choice inpatient days for those 
same cost reporting periods.
    Step 4: HCFA will use the data in step 3 to determine the ratio of 
the total of all nursing and allied health education program payments 
made to all hospitals for all cost reporting periods ending in the 
fiscal year that is 2 years prior to the current calendar year, to the 
total of all inpatient days from that cost reporting period. HCFA will 
multiply this ratio by the total of all Medicare+Choice inpatient days 
for that cost reporting period.
    Step 5: Calculate the ratio of the product determined in step 2 to 
the product determined in step 4.
    Step 6: Multiply the ratio determined in step 5 by the 
Medicare+Choice nursing and allied health payment ``pool'' (as 
determined below). This is the additional payment amount for the 
current calendar year for an eligible hospital.
    Example: In its cost reporting period ending in FY 1999, Hospital A 
received $100,000 in total Medicare payments for approved nursing and 
allied health education programs. Hospital A's total inpatient days 
were 28,000. Total Medicare+Choice inpatient days were 2,800.
    For all cost reporting periods ending in FY 1999, Medicare paid 
$250,000,000 in total nursing and allied health education program 
payments. The total number of inpatient days across all hospitals in 
that year was 142,000,000, and the total number of Medicare+Choice 
inpatient days was 14,200,000.
    The CY 2001 Medicare+Choice nursing and allied health payment 
``pool'' is $26,000,000. Thus, Hospital A's Medicare+Choice nursing and 
allied health education payment for CY 2001 will be calculated as 
follows:
[GRAPHIC] [TIFF OMITTED] TR13JN01.029

    To determine these totals, we will use the best available cost 
reporting data for the applicable hospitals from the Hospital Cost 
Report Information System (HCRIS) for cost reporting periods in the 
fiscal year that is 2 years prior to the current calendar year. If the 
necessary data are not included in HCRIS because a hospital files a 
manual cost report, we will obtain the necessary data from the fiscal 
intermediaries that serve those hospitals. If a hospital has more than 
one cost reporting period ending in the fiscal year that is 2 years 
prior to the current calendar year, we will include all of the 
hospital's cost reports for those periods in our calculations. If a 
hospital does not have a cost reporting period ending in the fiscal 
year that is 2 years prior to the current calendar year (such as a 
hospital with a long cost reporting period), the hospital's data will 
be included in the calculations for the calendar year that is 2 years 
after the fiscal year in which the long cost reporting period ends.

B. HCFA Calculation of Medicare+Choice Nursing and Allied Health 
Payment ``Pool''

    In accordance with section 1886(l) of the Act, each calendar year, 
HCFA estimates a total amount, not to exceed $60 million, which is the 
basis for determining the additional payments for nursing and allied 
health education associated with Medicare+Choice enrollees to hospitals 
that operate approved nursing or allied health education programs. The 
``pool'' is calculated for each calendar year by determining the 
product of: (1) The ratio of total projected Medicare+Choice direct GME 
payments to total projected direct GME payments, and (2) the total 
projected nursing and allied health education payments. This 
methodology is explained in more detail in the August 1, 2000 interim 
final rule with comment period (65 FR 47038).
    The projections of direct GME, Medicare+Choice direct GME, and 
nursing and allied health payments for a calendar year are based on the 
best available cost report data from HCRIS. (For example, for CY 2001, 
the

[[Page 32180]]

projections are based on the best available cost report data from HCRIS 
1999). These payment amounts are then increased to the appropriate 
calendar year using the increases allowed by section 1886(h) of the Act 
for these services (using the Consumer Price Index (CPI) increases for 
direct GME, the percentage applicable for the current calendar year for 
Medicare+Choice direct GME, and assuming nursing and allied health 
remains a constant percentage of inpatient hospital spending).

C. Proportional Reduction to Medicare+Choice Direct GME Payments

    In order for the Secretary to make the additional payments to 
eligible hospitals operating approved nursing or allied health 
education programs, section 1886(h)(3)(D) of the Act, as amended by 
section 541(b) of Public Law 106-113, specifies that the Secretary will 
carve out an estimated percentage of payments that are made to teaching 
hospitals for direct GME associated with services to Medicare+Choice 
enrollees. Specifically, the law provides that the estimated reductions 
in Medicare+Choice direct GME payments must equal the estimated total 
additional Medicare+Choice nursing and allied health education 
payments. The percentage reduction is estimated by calculating the 
ratio of the Medicare+Choice nursing and allied health payment ``pool'' 
for the current calendar year to the projected total Medicare+Choice 
direct GME payments made to all hospitals for the current calendar 
year. Accordingly, the regulations at Sec. 413.86(d)(4) state that for 
portions of cost reporting periods occurring in a calendar year, each 
hospital that receives Medicare+Choice direct GME payments will have 
these payments reduced by a certain percentage.

D. Calculation of Amounts for CY 2001

    In order for the Medicare+Choice nursing and allied health payments 
to be made in CY 2001 (as described in section A above), HCFA must 
provide the appropriate data to the fiscal intermediaries. The data 
that HCFA will provide include the Medicare+Choice nursing and allied 
health payment ``pool'' for CY 2001, the total amount of Medicare 
nursing and allied health education payments made to all hospitals for 
cost reporting periods ending in FY 1999, the total number of inpatient 
days from all hospitals for cost reporting periods ending in FY 1999, 
the total Medicare+Choice inpatient days from all hospitals for cost 
reporting periods ending in FY 1999, and the percent reduction to 
Medicare+Choice direct GME payments in CY 2001. (The fiscal 
intermediaries will obtain the data for each individual hospital from 
the hospital's cost report to complete the calculation). We are not 
publishing this data in this interim final rule with comment period, 
because the FY 1999 data in HCRIS is not complete at this time. Rather, 
we will provide the necessary data to the fiscal intermediaries in a 
Program Memorandum as soon as more complete data is available later 
this calendar year.

E. Regulation Changes

    We are revising Sec. 413.87 to incorporate the provisions of 
section 512 of Public Law 106-554.

F. Technical Amendment

    It has come to our attention that the regulations at 
Sec. 413.86(d)(4) and Sec. 413.87(d) contain errors. The regulations at 
Sec. 413.86(d)(4) currently read, ``Effective for cost reporting 
periods beginning on or after January 1, 2000, the product derived from 
step three is reduced in accordance with the provisions of 
Sec. 413.87(f).'' Consistent with the statutory effective date and to 
clarify the intent of the reference to Sec. 413.87(f), we are revising 
Sec. 413.86(d)(4) to state that, ``Effective for portions of cost 
reporting periods occurring on or after January 1, 2000, the product 
derived from step three is reduced by a percentage equal to the ratio 
of the Medicare+Choice nursing and allied health payment ``pool'' for 
the current calendar year as described at Sec. 413.87(f), to the 
projected total Medicare+Choice direct GME payments made to all 
hospitals for the current calendar year.'' We are also making a 
conforming change to Sec. 413.87(d), which currently reads, ``Subject 
to the provisions of paragraph (f) of this section * * *'' instead, we 
are revising this language to state, ``Subject to the provisions of 
Sec. 413.86(d)(4) * * *.''

IX. Changes to the Capital Prospective Payment System Rates 
(Section 301 of Public Law 106-554)

    Section 301(b) of Public Law 106-554 provides for a special rule 
for payment for the operating standardized amounts for hospitals other 
than SCHs for FY 2001. For discharges occurring on or after April 1, 
2001, and before October 1, 2001, the update to the operating 
standardized amounts for hospitals other than SCHs is equal to the 
market basket percentage increase plus 1.1 percentage points. This 
provision amends the prior statutory 1.1 percent reduction to the 
update to the FY 2001 operating standardized amounts for hospitals 
other than SCHs as provided by section 4401(a)(1) of Public Law 105-33 
and section 406 of Public Law 106-113.
    Section 1886(d)(3)(B) of the Act directs the Secretary to adjust 
the inpatient operating national standardized amounts to account for 
the estimated proportion of operating DRG payments made to payments in 
outlier cases. Accordingly, as a result of this change to the update to 
the operating standardized amounts for discharges occurring on or after 
April 1, 2001 and before October 1, 2001, we are revising the fixed-
loss outlier thresholds. The regulations at Sec. 412.312(c) establish a 
unified outlier methodology for inpatient operating and inpatient 
capital-related costs, which utilizes a single set of thresholds to 
identify outlier cases for both inpatient operating and inpatient 
capital prospective payment system payments. Because operating DRG 
payments will increase as a result of section 301 of Public Law 106-
554, we decreased the fixed-loss threshold. The decrease in the outlier 
threshold also results in an increase in the estimated outlier payments 
for capital from 5.91 percent to 6.21 percent. Thus, the capital 
national outlier adjustment factor is revised from 0.9409 (as specified 
in the August 1, 2000 final rule (65 FR 47121)) to 0.9379.
    The basic methodology for determining the capital Federal rate is 
set forth in Secs. 412.308 through 412.352. Although the operating 
update was affected by section 301 of Public Law 106-554, the standard 
capital Federal rate update remains unchanged (0.9 percent). The 
exceptions adjustment factor is determined based on an estimate of the 
ratio of exception payments to total capital payments. As a result of 
the fixed-cost outlier threshold, which affects total capital payments, 
in order to maintain budget neutrality for exception payments, we are 
revising the exception adjustment factor from 0.9785 to 0.9787. The 
national GAF/DRG budget neutrality factor is revised from 0.9979 to 
0.9978. The Puerto Rico GAF/DRG budget neutrality factor remains 
unchanged (1.0037). Accordingly as a result of the revisions to the 
capital outlier reduction factor and the capital exceptions adjustment 
factor, for discharges occurring on or after April 1, 2001 and before 
October 1, 2001, the national capital Federal rate is revised from 
$382.03 (65 FR 47127) to $380.85 and the Puerto Rico capital rate is 
revised from $185.06 (65 FR 47127) to $184.61 as set forth in section 
IX of this interim final rule with comment period.

[[Page 32181]]

    In accordance with Sec. 412.328(e), the hospital-specific rate is 
determined using the update factor and the exceptions adjustment 
factor. As a result of revising the exceptions adjustment factor to 
account for the change to the fixed-loss outlier threshold resulting 
from the special payment rule for FY 2001 provided for under section 
301(b) of Public Law 106-554, for discharges occurring on or after 
April 1, 2001 and before October 1, 2001, the cumulative net adjustment 
to the hospital-specific rate has been revised from 1.0147 (65 FR 
47124) to 1.0145. For discharges occurring on or after April 1, 2001, 
and before October 1, 2001, the hospital-specific rate is determined by 
multiplying the FY 2000 hospital-specific rate by the cumulative net 
adjustment of 1.0145.

X. Changes for Excluded Hospitals and Hospital Units

A. Increase in the Incentive Payment for Excluded Psychiatric Hospitals 
and Units (Section 306 of Public Law 106-554 and 42 CFR 413.40(d)(2))

    For cost reporting periods beginning before October 1, 1997, a 
hospital that had inpatient operating costs less than, or equal to, its 
ceiling was paid its costs plus the lower of 50 percent of the 
difference between inpatient operating costs and the ceiling or 5 
percent of the ceiling.
    Section 4415 of Public Law 105-33 amended section 1886(b)(1)(A) of 
the Act to provide that for cost reporting periods beginning on or 
after October 1, 1997, if a hospital's net inpatient operating costs 
are less than or equal to, the ceiling, the amount of the bonus payment 
would be the lower of 15 percent of the difference between the 
inpatient operating costs and the ceiling or 2 percent of the ceiling.
    Section 306 of the Public Law 106-554 has further amended section 
1886(b)(1)(A) of the Act, as it applied to a psychiatric hospital or 
unit, to provide that effective for cost reporting periods beginning on 
or after October 1, 2000, and before October 1, 2001, if a psychiatric 
hospital or unit's net inpatient operating costs are less than, or 
equal to, the ceiling, the amount of the bonus payment is the lower of 
15 percent of the difference between the inpatient operating costs and 
the ceiling, or 3 percent of the ceiling.
    We are revising the regulations at Sec. 413.40(d)(2) to incorporate 
this change.

B. Payment for Long-Term Care Hospital Costs (Section 307 of Public Law 
106-554 and 42 CFR 413.40(c)(4)

1. Increase in the Limitation on the Target Amounts for Long-Term Care 
Hospitals
    In the August 29, 1997 final rule with comment period (62 FR 
46018), in accordance with section 4414 of Public Law 105-33, we 
implemented section 1886(b)(3)(H) of the Act, which provides for caps 
on the target amounts for existing and new excluded hospitals and units 
for cost reporting periods beginning on or after October 1, 1997, 
through September 30, 2002. The caps on the target amounts apply to 
three classes of excluded hospitals: psychiatric hospitals and units, 
rehabilitation hospitals and units, and long-term care hospitals. In 
establishing the caps on the payment amounts within each class of 
hospital for new hospitals, section 1886(b)(7)(C) of the Act, as 
amended by section 4416 of Public Law 105-33, instructed the Secretary 
to provide an appropriate adjustment to take into account area 
differences in average wage-related costs. However, because the 
statutory language under section 4414 of Public Law 105-33 did not 
provide for the Secretary to adjust for area differences in wage-
related costs in establishing the caps on the target amounts within 
each class of hospital for existing hospitals, we did not adjust for 
wage-related differences for existing facilities.
    In the August 1, 2000 interim final rule with comment period (65 FR 
47039), we implemented section 121 of Public Law 106-113, which further 
amended section 1886(b)(3)(H) of the Act by directing the Secretary to 
provide for an appropriate wage adjustment to the caps on the target 
amounts for all psychiatric hospitals and units, rehabilitation 
hospitals and units and long-term care hospitals, effective for cost 
reporting periods beginning on or after October 1, 1999, through 
September 30, 2002. For purposes of calculating the caps, section 
1886(b)(3)(H)(ii) of the Act requires the Secretary to first ``estimate 
the 75th percentile of the target amounts for such hospitals within 
such class for cost reporting periods ending during fiscal year 1996.'' 
Section 1886(b)(3)(H)(iii) of the Act, as added by section 121 of 
Public Law 106-113, requires the Secretary to provide for ``an 
appropriate adjustment to the labor-related portion of the amount 
determined under such subparagraph to take into account differences 
between average wage-related costs in the area of the hospital and the 
national average of such costs within the same class of hospital.''
    The August 1, 2000 final rule (65 FR 47096) listed the FY 2001 
labor-related share and nonlabor-related share of the national 75th 
percentile wage-neutralized cap for long-term care hospitals as 
follows:

 Labor-related Share: $29,284.
 Nonlabor-related Share: $11,642.

The final rule also discussed that within each class a hospital's wage-
adjusted cap on its target amount is determined by adding the 
hospital's nonlabor-related portion of the national wage-neutralized 
cap to its wage-adjusted labor-related portion of the national wage-
neutralized cap. A hospital's wage-adjusted labor-related portion is 
calculated by multiplying the labor-related portion of the national 
wage-neutralized 75th percentile cap for the hospital's class by the 
hospital's applicable wage index. For FY 2001, a hospital's applicable 
wage index is the wage index under the hospital inpatient prospective 
payment system as shown in Tables 4A and 4B of the August 1, 2000 final 
rule (65 FR 47149 through 47156) corresponding to the area in which the 
hospital is physically located (MSA or rural area).
    Section 307(a) of Public Law 106-554 further amends section 
1886(b)(3) of the Act and provides for a 2-percent increase to the 
wage-adjusted 75th percentile cap on the target amount for long-term 
care hospitals effective for cost reporting periods beginning during FY 
2001. This provision is only applicable to long-term care hospitals 
that were subject to the cap for existing excluded providers as 
specified in Sec. 413.40(c).
    In accordance with section 1886(b)(3) of the Act as amended, for 
cost reporting periods beginning during FY 2001, the revised labor-
related and nonlabor-related shares of the cap on the target amount for 
long-term care hospitals, which reflect the 2-percent increase, are as 
follows:

        Revised FY 2001 National Cap for Long-Term Care Hospitals
------------------------------------------------------------------------
    FY 2001 Labor- Related Share        FY 2001 Nonlabor-Related Share
------------------------------------------------------------------------
                 $29,870                              $11,875
------------------------------------------------------------------------

    Note that the national 75th percentile wage-neutralized caps on the 
target amount for the other excluded hospitals and units subject to the 
caps under section 1886(b)(3)(H) of the Act (psychiatric and 
rehabilitation) are not affected by section 307 of Public Law 106-554. 
We are revising the regulations

[[Page 32182]]

at Sec. 413.40(c)(4)(iii) to incorporate this change.
2. Increase in the Target Amounts for Long-Term Care Hospitals
    In the August 29, 1997 final rule with comment period (62 FR 
46016), we implemented the amendment to section 1886(b)(3)(B) of the 
Act, as made by section 4411 of Public Law 105-33, which set forth the 
applicable rate-of-increase percentage for cost reporting periods 
beginning during FY 1999 through FY 2002. The rate-of-increase is equal 
to the market basket increase percentage minus an amount based on the 
percentage by which the hospital's operating costs exceed the 
hospital's ceiling for the most recent available cost reporting period. 
The applicable rate-of-increase percentages (update factors) for FY 
2001 are described in the August 1, 2000 final rule (65 FR 47125). For 
FY 2001, the market basket increase percentage was forecast at 3.4 
percent, which results in an update for long-term care hospitals for FY 
2001 of between 0.9 percent and 3.4 percent, or 0 percent, depending on 
the hospital's costs in relation to its rate-of-increase limit.
    In addition to the increase to the cap on the target amounts for 
long-term care hospitals, section 307(a) of Public Law 106-554 also 
amends section 1886(b)(3) of the Act to provide for a 25 percent 
increase to the target amounts determined under section 1886(b)(3)(A) 
of the Act for long-term care hospitals, for cost reporting periods 
beginning in FY 2001, subject to the applicable cap on the target 
amounts. Thus, this provision requires a revision to the determination 
of each long-term care hospital's FY 2001 target amount as specified 
Sec. 413.40(c)(4). For cost reporting periods beginning during FY 2001, 
the hospital-specific target amount otherwise determined for a long-
term care hospital as specified in the regulations at 
Sec. 413.40(c)(4)(ii) is multiplied by 1.25 (that is, increased by 25 
percent), subject to the limitation that the revised FY 2001 target 
amounts for a long-term care hospital cannot exceed its wage-adjusted 
national cap as required by section 1886(b)(3) of the Act, as amended 
by section 307(a) of Public Law 106-554. Note that the 25 percent 
increase to the target amount under section 307(a) of Public Law 106-
554 is applicable only to long-term care hospitals, and not to other 
excluded hospitals as defined by section 1886(d)(1)(B) of the Act 
(psychiatric and rehabilitation hospitals and units, children's and 
cancer hospitals).
    We are revising the regulations at Sec. 413.40(c)(4)(iii) to 
incorporate this change.

XI. Critical Access Hospitals (CAHs)

A. Elimination of Coinsurance for Clinical Diagnostic Laboratory Tests 
Furnished by a CAH (Secs. 410.52 and 413.70)

    Under section 1834(g) of the Act, prior to the enactment of the 
Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, 
Public Law 106-113, clinical diagnostic laboratory services furnished 
by a CAH to its outpatients were, like other outpatient CAH services, 
paid for on a reasonable cost basis, subject to the Part B deductible 
and coinsurance provisions. With respect to coinsurance, this meant 
that the beneficiary was responsible for payment of 20 percent of the 
CAH's customary charges for the services and the CAH received payment 
from the Medicare program equal to 80 percent of its reasonable costs 
of furnishing the services.
    Section 403(e) of Public Law 106-113 amended section 1833(a) of the 
Act and eliminated the Part B coinsurance and deductible for laboratory 
tests furnished by a CAH on an outpatient basis. Thus, CAHs were not 
permitted to impose a deductible or coinsurance charge on the 
beneficiary for these services. Also, in accordance with section 
1833(a)(1)(D) and (a)(2)(d), as also amended by section 403(e) of 
Public Law 106-113, Medicare Part B was to pay 100 percent of the 
lesser of the amount determined under the local laboratory fee 
schedule, the national limitation amount for that test, or the amount 
of the charges billed for the tests.
    The effect of this change was that clinical diagnostic laboratory 
tests furnished by a CAH to its outpatients, were paid for on the same 
basis as clinical diagnostic laboratory tests furnished by full-service 
hospitals to outpatients. Section 403(e)(2) of Public Law 106-113 
provided that this provision was effective with respect to services 
furnished on or after November 29, 1999.
    Section 201(a) of the Medicare, Medicaid, and SCHIP Benefits 
Improvement and Protection Act (BIPA), Public Law 106-554 amends 
section 1834(g) of the Act to provide that there will be no collection 
of coinsurance, deductible, copayments, or any other type of cost 
sharing from Medicare beneficiaries with respect to outpatient clinical 
diagnostic laboratory services in a CAH.
    Section 201(a) further provides that payment for these services 
will be made on a reasonable cost basis. Section 201(b) of the Public 
Law 106-554, amends section 1833(a) of the Act by eliminating any 
reference to CAHs receiving payment for outpatient clinical diagnostic 
laboratory services on a fee schedule basis. These amendments are 
effective for services furnished on or after November 29, 1999.
    We are incorporating the provisions of section 201 of Public Law 
106-554 in section 413.70 of the regulations and changing the 
references cited in Sec. 410.152(k)(2). To prevent any misunderstanding 
of the scope of section 201(a), we are further revising 
Sec. 413.70(b)(3)(iii) to clarify that payment to a CAH for clinical 
diagnostic laboratory tests for individuals who are not inpatients of 
the CAH will be made on a reasonable cost basis only if the individuals 
are outpatients of the CAH at the time the specimens are collected. 
Outpatient status will be determined under the definition in 
Sec. 410.2, which provide that an ``outpatient'' is a person who has 
not been admitted as an inpatient but is registered as an outpatient 
and receives services (rather than supplies alone) from the CAH.
    We recognize that CAHs may appropriately function as reference 
laboratories, by performing clinical diagnostic laboratory tests on 
specimens from persons who do not meet the ``outpatient'' definition 
but have the specimens drawn at other locations, such as physician 
offices. Payment for clinical diagnostic laboratory tests for these 
other individuals (that are persons who are not patients of the CAH 
when the specimens are collected) will be made in accordance with the 
provisions of sections 1833(a)(1)(D) and 1833(a)(2)(D) of the Act.
    Revised program instructions and billing systems changes to 
implement these provisions are being developed and will be released as 
soon as possible.

B. Assistance With Fee Schedule Payment for Professional Services Under 
All Inclusive Rate

    Prior to enactment of Public Law 106-113, section 1834(g) of the 
Act provided that the amount of payment for outpatient CAH services 
would be the reasonable costs of the CAH in providing such services. 
However, the reasonable costs of the CAH's services to outpatients 
included only the CAH's costs of providing facility services, and did 
not include any payment for professional services. Physicians and other 
practitioners who furnished professional services to CAH outpatients 
billed the Part B carrier for these services and were paid under the

[[Page 32183]]

physician fee schedule in accordance with the provisions of section 
1848 of the Act.
    Section 403(d) of Public Law 106-113 amended section 1834(g) of the 
Act to permit the CAH to elect to be paid for its outpatient services 
under an optional method. CAHs making this election would be paid 
amounts equal to the sum of the following costs, less the amount that 
the hospital may charge as described in section 1866(a)(2)(A) of the 
Act (that is, Part A and Part B deductibles and coinsurance amounts):
     For facility services, not including any services for 
which payment may be made as outpatient professional services, the 
reasonable costs of the CAH in providing the services; and
     For professional services otherwise included within 
outpatient CAH services, the amounts that would otherwise be paid under 
Medicare if the services were not included as outpatient CAH services.
    Section 403(d) of Public Law 106-113 added section 1834(g)(3) to 
the Act to further specify that payment amounts under this optional 
method are to be determined without regard to the amount of the 
customary or other charge. The amendment made by section 403(d) was 
effective for cost reporting periods beginning on or after October 1, 
2000.
    Section 202 of Public Law 106-554, amends section 1834(g) of the 
Act to provide that when a CAH elects the option to be paid for 
Medicare outpatient services under the reasonable costs for facility 
services plus fee schedule amounts for professional services method, 
Medicare will pay 115 percent of the amount it would otherwise pay for 
the professional services. This provision is effective for items and 
services furnished on or after July 1, 2001.
    We are revising the regulations at Sec. 413.70(b)(3) to reflect the 
change in the level of payment for professional services under the 
alternative payment method for outpatient CAH services.

C. Conforming Change--Conditions of Participation Relating to 
Compliance With Hospital requirements at Time of Application for CAH 
Designation (Sec. 485.612)

    Under the law in effect prior to enactment of the Medicare, 
Medicaid and SCHIP Balanced Budget Refinement Act of 1999 (Public Law 
106-113), CAH status was available to facilities only if they were 
hospitals at the time of their application for designation as CAHs. 
This requirement was implemented through regulations, at Sec. 485.610 
(Condition of Participation: Status and limitations) and Sec. 485.612 
(Condition of Participation: Compliance with hospital requirements at 
time of application). Section 403(c) of the Public Law 106-113 added 
subparagraphs (C) and (D) to section 1820(c)(2) of the Act to specify 
that recently closed facilities and facilities that had downsized from 
hospital status to being a clinic or health center would also be 
eligible to apply for CAH designation.
    In the August 1, 2000 final rule (65 FR 47052), we revised our 
regulations at Sec. 485.610 to reflect the provisions of section 403(c) 
of the Public Law 106-113. However, we inadvertently did not make a 
conforming change to Sec. 485.612, which continues to state that the 
applicant facility must be a hospital with a provider agreement to 
participate in the Medicare program at the time it applies for 
designation as a CAH. To correct this oversight and reflect the 
provisions of section 403(c) in the regulations at Sec. 485.612, we are 
revising Sec. 485.612 to state that the requirement to have a provider 
agreement as a hospital at the time of application does not apply to 
recently closed facilities as described in Sec. 485.610(a)(2) or to 
health clinics or health centers as described in Sec. 485.610(a)(3).

XII. Payment for Bad Debts (Section 541 of Public Law 106-554 and 
42 CFR 413.80)

    Section 4451 of Public Law 105-33 required that allowable bad debt 
reimbursement for hospitals be reduced by 25 percent for cost reporting 
periods beginning during FY 1998, by 40 percent for cost reporting 
periods beginning during FY 1999, and by 45 percent for cost reporting 
periods beginning during a subsequent fiscal year.
    Section 541 of Public Law 106-554 amended section 1861(v)(1)(T) 
thereby modifying the reduction in payment for Medicare beneficiary bad 
debt for hospitals made by section 4451 of Public Law 105-33. 
Specifically, this provision reduces the amount of bad debts otherwise 
treated as allowable reductions in revenue, attributable to the 
deductibles and coinsurance amounts, by 30 percent for cost reporting 
periods beginning during FY 2001 and later. Therefore, for cost 
reporting periods beginning during the year 2001 and later, hospital 
bad debt amounts otherwise allowable will be reimbursed at 70 percent 
of the total allowable amount. We are revising Sec. 413.80 to implement 
this change.

XIII. Waiver of Notice of Proposed Rulemaking and Delay in the 
Effective Date

    We ordinarily publish a notice of proposed rulemaking in the 
Federal Register to provide a period for public comment before the 
provisions of the rule take effect. However, section 1871(b) of the Act 
provides that publication of a notice of proposed rulemaking is not 
required before a rule takes effect where ``a statute establishes a 
specific deadline for the implementation of the provision and the 
deadline is less than 150 days after the date of enactment of the 
statute in which the deadline is contained.'' In addition, we may waive 
a notice of proposed rulemaking if we find good cause that notice and 
comment are impracticable, unnecessary, or contrary to the public 
interest.
    On August 1, 2000, we published a final rule addressing FY 2001 
payment rates and policies for prospective payment system hospitals and 
excluded hospitals and hospital units (65 FR 47054). Subsequently, on 
December 21, 2000, Public Law 106-554 was enacted. This public law 
contains a number of provisions relating to issues addressed in the 
final rule that have effective dates of October 1, 2000, April 1, 2001, 
or other dates prior to the end of FY 2001.
    In accordance with section 1871(b) of the Act, publication of a 
notice of proposed rulemaking is not required before implementing the 
statutory provisions of Public Law 106-554 that take effect October 1, 
2000 or April 1, 2001. In addition, notice and comment would be 
unnecessary because the provisions of Public Law 106-554 that are 
addressed in this rule do not permit the exercise of discretion. 
Delaying publication of the rule to provide for notice and a comment 
period would also be impracticable and contrary to the public interest 
because it is important that the rule be published as soon as possible, 
in order for the public to know how we are implementing the statutory 
provisions covered by the rule, and in order to revise our current 
regulations to conform with the changes mandated by Public Law 106-554.
    We are providing a 30-day period for public comments on all of 
these provisions.
    This rule has been determined to be a major rule as defined in 
Title 5, United State Code, section 804(2), that is, one with an 
anticipated annual effect of $100 million or more on the economy. 
Ordinarily, under 5 U.S.C. 801, as added by section 251 of Public Law 
104-121, a major rule shall take effect 60 days after the later of (1) 
the

[[Page 32184]]

date a report on the rule is submitted to Congress or (2) the date the 
rule is published in the Federal Register. However, section 808(2) of 
Title 5, United States Code, provides that, notwithstanding 5 U.S.C. 
801, a major rule shall take effect at such time as the Federal agency 
promulgating the rule determines, if for good cause, the agency 
determines that notice and public procedure are impracticable, 
unnecessary, or contrary to the public interest. As indicated above, 
for good cause we find that it was unnecessary, impracticable and 
contrary to the public interest to complete notice and comment 
procedures before publication of this rule and to delay the effective 
date of this rule. Accordingly, pursuant to 5 U.S.C. 808, these 
regulations are effective April 1, 2001.

XIV. Response to Comments

    Because of the large number of items of correspondence we normally 
receive on Federal Register documents published for comment, we are not 
able to acknowledge or respond to them individually. Comments on the 
provisions of this interim final rule with comment period will be 
considered if we receive them by the date specified in the DATES 
section of this preamble.

XV. Regulatory Impact Analysis

A. Introduction

    We have examined the impacts of this rule as required by Executive 
Order 12866. Although not required to do so, due to the interim final 
nature of this rule, we have also examined the impacts of this rule 
under the criteria of the Regulatory Flexibility Act (RFA) Public Law 
96-354, section 1102(b) of the Act, and the Unfunded Mandate Reform Act 
of 1995 (UMRA) Public Law 104-4. 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 rules that 
constitute significant regulatory action, including rules that have an 
economic effect of $100 million or more annually (major rules). We have 
determined that this is a major rule within the meaning of Executive 
Order 12866.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses in issuing a proposed rule and a final rule that 
has been preceded by a proposed rule. For purposes of the RFA, small 
entities include small businesses, nonprofit organizations and 
government agencies. Most hospitals and most other providers and 
suppliers are small entities, either by nonprofit status or by having 
revenues of $25 million or less annually. For purposes of the RFA, all 
hospitals are considered small entities. Individuals and States are not 
included in the definition of a small entity.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a proposed rule or a final rule preceded 
by a proposed rule may have a significant impact on the operations of a 
substantial number of small rural hospitals. This analysis must conform 
to the provisions of section 604 of the RFA. For purposes of section 
1102(b) of the Act, we define a small rural hospital as a hospital that 
is located outside of an MSA and has fewer than 100 beds.
    Section 202 of the UMRA also requires that agencies assess 
anticipated costs and benefits before issuing any proposed rule or any 
final rule preceded by a proposed rule that may result in expenditures 
in any one year by State, local, or tribal governments, in the 
aggregate, or by the private sector, of $110 million or more. This 
interim final rule with comment period does not mandate any 
requirements for State, local, or tribal governments.

B. Anticipated Effects

    We estimated the impact of the changes described in this interim 
final rule with comment period resulting from the passage of Public Law 
106-554 on the inpatient prospective payment systems to be $1.04 
billion. The changes, discussed separately below are as follows:
    The effects of the change in the DSH payment reduction factor and 
the DSH payment qualification criteria as set forth by sections 211 and 
303 of Public Law 106-554.
     The effects of introducing the option to base eligibility 
for Medicare dependent hospitals (MDHs), for hospitals otherwise 
qualifying for MDH status, on discharges during two of the three most 
recently audited cost reporting periods as directed by section 212 of 
Public Law 106-554.
     The total change in payments for hospitals, other than 
SCHs, including the increase in the update factor from market basket 
minus 1.1 percentage points, or 2.3 percent, to market basket plus 1.1 
percentage points, or 4.5 percent, based on the policies in effect for 
the first half of FY 2001, relative to payments based on the policies 
in effect for the second half of FY 2001. (As directed by section 301 
of Public Law 106-554). We estimate the financial impact of this 
provision will be $700 million.
    Table 1 displays the estimated payment impacts of the provisions of 
Public Law 106-554 for all hospitals under the inpatient hospital 
prospective payment system. Specifically, this table compares simulated 
payments for hospitals using the policy and payment rate updates in 
effect for discharges occurring on or after October 1, 2000 and before 
April 1, 2001, to simulated payments using the policy changes and 
payment rate updates published in this interim final rule with comment. 
The hospital categories in the table are identical to those published 
in the August 1, 2000 final rule. Also, the simulation methodology here 
is identical to the methodology described in that final rule.
    The estimated overall impact of the changes in policy and the 
update to the standardized amounts is a 2.9 percent increase in 
payments across all hospitals, and the average payment per case 
increased $202, from $6,883 to $7,085.
     The effects of the change to the IME adjustment factor as 
directed by section 302 of Public Law 106-554.
     The effects of expanding the 1996 rebasing option to all 
SCHs as directed by Section 213 of Public Law 106-554.
     The effects of the changes made to the TEFRA payment 
mechanism under section 1886(b) by sections 306 and 307(a) of 106-554.
    1. Decrease In Reductions for DSH Payments and Changes in Treatment 
of Rural and Small Urban Disproportionate Share Hospitals.
    Under section 303 of Public Law 106-554, reductions in the 
otherwise applicable DSH payment formula amounts would be 2 percent in 
FY 2001 and 3 percent in FY 2002. We estimate that the financial impact 
of this amendment from October 1, 2000 through FY 2002 will be $40 
million. To implement the FY 2001 provision, DSH payments for 
discharges occurring on or after October 1, 2000 and before April 1, 
2001, are reduced by 3 percent (which was the reduction in effect prior 
to enactment of Public Law 106-554), and for discharges occurring on or 
after April 1, 2001 and before October 1, 2001, DSH amounts would be 
reduced by only 1 percent.
    Additionally, Section 211 of Public Law 106-554 amended section 
1886(d)(5)(F)(v) of the Act, by lowering the thresholds by which 
certain classes of hospitals qualify for DSH. Specifically, for 
discharges occurring on or after April 1, 2001, the qualifying

[[Page 32185]]

disproportionate payment percentage is reduced to 15 percent for SCHs, 
RRCs, and other small rural and urban hospitals. Also, a formula will 
be used to calculate DSH adjustments for these groups of hospitals that 
have a DSH patient percentage equal to or greater than 15 percent and 
less than 19.3 percent. For SCHs and RRCs with a disproportionate 
patient percentage equal to or greater than 19.3 percent, but less than 
30 percent, a flat 5.25 percent adjustment applies, and a formula again 
applies to the DSH adjustment for these same hospitals with a 
disproportionate patient percentage equal to or greater than 30 
percent. A hospital that is both an SCH and an RRC, or a small rural 
hospital, receives a flat 5.25 percent adjustment if its 
disproportionate patient percentage is equal to or greater than 19.3 
percent but less than 30 percent, and if that hospital has a 
disproportionate patient percentage equal to or greater than 30 
percent, it receives the greater of the SCH or RRC adjustment. We 
estimate the financial impact of this amendment from October 2000 
through FY 2002 will be $60 million.
    In column 1 of Table 1 we present the combined effect of the two 
DSH provisions, as discussed in section III of this interim final rule 
with comment period. We compared estimated aggregate payments for the 
first half of FY 2001 to estimated aggregate payments for the second 
half of FY 2001 keeping all payment factors constant except those 
affected by the DSH changes. Because the criteria for qualifying for 
DSH payment status was changed as discussed above, more hospitals 
should be receiving DSH payments for the second half of FY 2001.
    Comparing Table 1 of this section to the Table 1 in the Inpatient 
Prospective Payment System Final Rule that appeared in the August 1, 
2000 Federal Register (65 FR 47192), there are significant increases in 
the estimated number of hospitals receiving DSH payments. Specifically, 
whereas 3,070 hospitals were estimated not to qualify for DSH payments 
for the first half of FY 2001, that number is expected to decrease to 
1,914, meaning that for the second half of FY 2001, 1,156 more 
hospitals are expected to receive DSH payments. The 1,156 new DSH 
hospitals in our estimate are primarily small urban or rural hospitals, 
which are the same groups of hospitals targeted for assistance by 
Section 211 of Public Law 106-554.
    For example, the DSH payment category for urban hospitals with 
fewer than 100 beds is estimated to increase by 284, from 72 hospitals 
in the first half of FY 2001 to 356 hospitals in the second half of FY 
2001. Rural SCHs estimated to qualify for DSH payments rose by 389, 
from 149 in the first half of FY 2001 to 538 hospitals in the second 
half of FY 2001. RRCs appear to experience an increase of 83 providers, 
with the number of providers estimated to qualify for DSH payments 
moving from 56 to 139. Other rural DSH hospitals with fewer than 100 
beds appear to benefit as well, with the number of those eligible for 
DSH payments estimated to increase by 364 from 103 to 467.
    Overall, we estimate that hospitals experience a 0.4 percent 
increase in payments, with rural hospitals receiving an increase of 1.7 
percent and large urban and other urban hospitals both receiving a 0.2 
percent increase.
    Rural DSH hospitals with between 0 and 100 beds are estimated to 
receive the largest increase, 4.1 percent. Urban DSH hospitals with 
between 0 and 100 beds are estimated to receive a 3.5 percent increase 
in payments. We anticipate that no hospitals were negatively impacted 
by these changes in DSH policy.
2. Changes to Qualifications for MDHs
    Section 212 of Public Law 106-554 provides an option to base 
eligibility for an MDH on discharges during two of the three most 
recently audited cost reporting periods. An otherwise qualifying 
hospital would be able to be classified as an MDH if at least 60 
percent of its inpatient days or discharges were attributable to 
Medicare Part A beneficiaries during two of the three most recently 
audited cost reporting periods, for which the Secretary has a settled 
cost report, effective with discharges on or after April 1, 2001.
    To estimate the effect of this change we examined cost report data 
from 1994 through 1999, and selected all hospitals with settled and 
audited cost reports for each prospective payment system year (1994 
through 1999). We then took these subsets of settled and audited cost 
reports and selected providers who met the criteria for MDH status and 
who had at least 60 percent of inpatient days or discharges 
attributable to Medicare Part A beneficiaries, for 1 year.
    We then combined the sets of qualifying providers from each 
prospective payment system year during the period of 1994 through 1999 
and selected those providers who met the 60 percent criterion for 2 out 
of 3 cost reports and would therefore meet the MDH criteria as stated 
in Section 212 of Public Law 106-554. Although we identified 139 
hospitals through this analysis, these providers were already listed as 
MDH providers in our records. However, it is important to note that our 
most complete data set for hospital cost reports is still 1998 and we 
are therefore unable to measure the effects of this provision on the 
most recent data. Therefore, while the results of one analysis appear 
to indicate that this provision will not have the first half of FY 2001 
to the second half of FY 2001. We have estimated the financial impact 
of this amendment to be $10 million.
3. Indirect Medical Education (IME)
    Section 302 of the Public Law 106-554 modified the transition for 
the IME adjustment that was first established by Public Law 105-33 and 
revised by Public Law 106-113. Specifically, the new transition 
schedule (where c is represented in the following formula: c * [(1 + 
resident-to-bed ratio) \.405\ -1]) is:
     For discharges occurring on or after October 1, 2000 and 
before April 1, 2001, c equals 1.54;
     For discharges occurring on or after April 1, 2001 and 
before October 1, 2001, c equals 1.66;
     For discharges occurring during FY 2002, c equals 1.66;
     For discharges occurring on or after October 1, 2002, c 
equals 1.35.
    We have estimated the financial impact of this provision to be $200 
million. To estimate the impact of this change, we compared estimated 
aggregate payments for the first half of FY 2001 to estimated aggregate 
payments for the second half of FY 2001, keeping all payment factors 
except those affected by the IME changes constant.
    Overall, hospitals appear to be experiencing a 0.4 percent increase 
in payments, with large urban hospitals receiving a 0.6 percent 
increase and other urban hospitals receiving an increase of 0.3 
percent. Rural hospitals are estimated to receive a 0.1 percent 
increase. Teaching hospitals with 100 or more residents are estimated 
to receive a 1.2 percent increase in payments. Additionally, urban 
hospitals in the New England region are projected to experience an 0.8 
percent increase, while rural hospitals in the New England region are 
projected to experience an increase of 0.4 percent.
4. Sole Community Hospitals (SCHs)
    Section 405 of the Public Law 106-113 included a 1996 rebasing 
option for cost reporting periods beginning October 1, 2000, that was 
limited to SCHs that received payment based on their hospital-specific 
rate for reporting periods beginning in 1999. This

[[Page 32186]]

amendment allowed eligible SCHs to use this 1996 target amount rather 
than either their FY 1982 or FY 1987 costs. Section 213 of Public Law 
106-554 extends this rebasing option to all SCHs and provides that this 
extension is effective for cost reporting periods beginning on or after 
October 1, 2000.
    In estimating the impact of this change, we compared estimated 
aggregate payments for the first half of FY 2001 to estimated aggregate 
payments for the second half of FY 2001, keeping all payment factors 
except those effected by the SCH changes constant. Overall, hospitals 
do not appear to be experiencing any change in payments due to this 
provision, though some categories of hospitals, for example rural SCH 
and RRC hospitals, are estimated to receive a 0.1 percent increase.
5. Hospitals and Hospital Units Excluded From the PPS
    We are implementing sections 306 and 307(a) of Public Law 106-554 
which makes several modifications to the TEFRA payment mechanism under 
section 1886(b). Section 306 amends section 1886(b)(1)(A) of the Act, 
as it applies to a psychiatric hospital or unit, to provide that if a 
psychiatric hospital or unit's net inpatient operating costs are less 
than, or equal to, the ceiling for cost reporting periods beginning on 
or after October 1, 2000 and before October 1, 2001, the amount of 
bonus payment is the lower of 15 percent of the difference between the 
inpatient operating costs and the ceiling, or 3 percent of the ceiling.
    Prior to enactment of Public Law 106-554, for cost reporting 
periods beginning before October 1, 1997, a hospital (or unit) that had 
net inpatient operating costs that were less than its ceiling was paid 
the lower of 50 percent of the difference between inpatient operating 
costs and the ceiling, or 5 percent of the ceiling. Section 4415 of 
Public Law 105-33 amended section 1886(b)(1)(A) of the Act to provide 
that for cost reporting periods beginning on or after October 1, 1997, 
the amount of the bonus payment would be based on the lower of 15 
percent of the difference between the net inpatient operating costs and 
the ceiling, or 2 percent of the ceiling.
    The impact on hospitals of the increase in the bonus payment from 2 
percent to 3 percent depends on the hospital's or unit's total 
allowable net inpatient operating costs based on its current cost 
report. Because a hospital's or unit's cost reporting period generally 
covers a 12-month period of time and this provision is effective for 
cost reporting periods beginning on or after October 1, 2000 and before 
October 1, 2001, the relevant cost data needed to determine the impact 
of this provision will not be available until sometime after October 1, 
2001. Our initial estimate of the financial impact of this provision is 
$20 million; however, given the lack of available data we are unable to 
fully estimate the financial impact this provision will have on the 
Medicare program.
    We are also implementing section 307(a) of Public Law 106-554 which 
amended section 1886(b)(3) of the Act to provide for a 2 percent 
increase to the wage-adjusted 75th percentile cap on the target amount 
for LTCHs, effective for cost reporting periods beginning during FY 
2001. This provision is applicable to LTCHs that were subject to the 
cap for existing excluded providers, as specified in Sec. 413.40(c).
    In addition to the increase to the cap on the target amounts for 
LTCHs, section 307(a) of Public Law 106-554 also amends section 
1886(b)(3) of the Act to provide for a 25 percent increase to the 
target amounts determined under 1886(b)(3)(A) of the Act for all LTCHs, 
effective for cost reporting periods beginning during FY 2001. Thus, 
this provision requires a revision to the determination of each LTCH's 
FY 2001 target amount as specified in Sec. 413.40(c)(4). For cost 
reporting periods beginning during FY 2001, the hospital-specific 
target amount otherwise determined for a LTCH as specified in the 
regulations at Sec. 413.40(c)(4)(ii) is multiplied by 1.25 (that is, 
increased by 25 percent). However, the revised FY 2001 target amount 
for the LTCH cannot exceed its wage-adjusted national cap as required 
by 1886(b)(3) of the Act, as amended by section 307(a) of Public Law 
106-554.
    In order to estimate the impact of the 25 percent increase in the 
hospital-specific target amount as well as the 2 percent increase in 
the LTCH cap, we adjusted the historical hospital-specific target 
amounts for each LTCH, as specified in Sec. 413.40(c)(4)(iii)(A), by a 
factor of 1.25 (that is, the 25 percent increase). We then determined 
the wage-adjusted cap for these LTCHs and increased the cap by 2 
percent to calculate the applicable cap on the hospital's adjusted 
target amount. An analysis of the best available data indicates that 
64.6 percent of the LTCHs will benefit only from the 25 percent 
increase; in other words, these hospitals' target amounts were at least 
25 percent below their cap. Our analysis also indicated that 22.9 
percent of the hospitals will only benefit from the 2 percent increase 
in the wage-adjusted cap (their target amounts prior to the BIPA 
provision were equal to or exceeded the cap). The analysis also showed 
that 13.5 percent of the hospitals will benefit from both the 25 
percent increase and the 2 percent increase provisions. These hospitals 
will not benefit from the full 25 percent increase to their target 
amounts because prior to this Public Law 106-554 provision their target 
amounts were not less than 25 percent below their cap. Thus, these 
hospitals received a portion of the 25 percent increase to their target 
amounts plus the 2 percent increase to the payment limitations.
    The impact of the increases in hospital-specific target amounts and 
wage-adjusted caps for LTCHs was estimated based on FY 1998 cost 
reporting data as this was the most complete data source available. We 
note that these changes will also have somewhat of an impact on 
incentive payments, continuous improvement bonus payments, or other 
payment adjustment for excluded hospitals outlined in the regulations 
at Sec. 413.40(d). However, in making this comparative analysis, we did 
not attempt to determine the impact on those payments. Our initial 
estimate of the financial impact of this provision is $10 million; 
however, given the lack of available data we are unable to fully 
estimate the financial impact this provision will have on the Medicare 
program.
6. Critical Access Hospitals (CAH)
    Section 201(a) of Public Law 106-554 amends section 1834(g) of the 
Act to state that there will be no collection of coinsurance, 
deductible, copayments, or other type of cost sharing from Medicare 
beneficiaries with respect to outpatient clinical diagnostic laboratory 
services in a CAH. This provision also provides for the payment of 
those services on a reasonable cost basis. Furthermore, section 201(b) 
of Public Law 106-554 amends section 1833(a) of the Act by eliminating 
any reference to a CAH receiving payment for outpatient clinical 
diagnostic laboratory services on a fee schedule basis. These 
amendments are effective for services furnished on or after November 
29, 1999.
    There are approximately 365 facilities that qualify as CAHs. These 
CAHs are paid based on reasonable costs rather than a fee schedule 
amount for outpatient clinical diagnostic laboratory services furnished 
on or after November 29, 1999. We estimate that the financial impact of 
this amendment from November 29, 1999 through fiscal year 2001 will be 
$4.5 million.

[[Page 32187]]

    Section 202 of Public Law 106-554 amends section 1834(g) of the Act 
to provide that when a CAH elects to be paid for Medicare outpatient 
services under the reasonable costs for facility services plus fee 
schedule amounts for professional services method, Medicare will pay 
115 percent of the amount it would otherwise pay for the professional 
services. This provision is effective for items and services furnished 
on or after July 1, 2001.
    At this point, our information indicates that very few CAHs have 
elected this option. We note that, with the enactment of this 
provision, which increases payment levels, that there may be an 
increase in the number of CAHs that make the election. We do not have 
adequate data to develop a reliable estimate of the financial impact of 
the change. Based on current levels of interest, we believe the 
financial impact will be minimal.

C. Overall Impact of Inpatient Operating Changes

    Overall, the changes implemented by Public Law 106-554 are 
estimated to increase payments to providers by 2.9 percent. Given the 
0.22 percentage increase in the update factor for the inpatient 
hospital payment rates as discussed in section V. of this interim final 
rule, the increase in hospitals eligible for DSH payments, the changes 
to the DSH formulas and the increase in the IME adjustment factor, this 
is not suprising. Additionally, the lowered threshold for outlier 
payments enabled some classes of providers to more easily qualify for 
outlier status. For example, urban hospitals with neither DSH nor IME 
are estimated to experience a 0.1 percent increase from each of those 
two provisions due to the effects of the provisions on payment 
distribution and outliers. Therefore, it appears that all classes of 
hospitals in this analysis will benefit from the changes instituted by 
Public Law 106-554.

 Table I.--Impact Analysis of Changes for the Second Half of FY 2001 (Discharges Occurring on or After April 1,
                      2001 and Before October 1, 2001) Operating Prospective Payment System
                                     [Percent changes in payments per case]
----------------------------------------------------------------------------------------------------------------
                                                   DSH  changes    IME  changes    SCH  changes     All FY 2001
                                     Number of       \2\  (1)        \3\  (2)        \4\  (3)       changes \5\
                                  hosps.\1\  (0)                                                        (4)
----------------------------------------------------------------------------------------------------------------
By Geographic Location:
    All Hospitals...............           4,888             0.4             0.4             0.0             2.9
    Urban Hospitals.............           2,756             0.2             0.5             0.0             2.9
        Large Urban Areas.......           1,573             0.2             0.6             0.0             3.0
        Other Urban Areas.......           1,183             0.2             0.3             0.0             2.7
    Rural Hospitals.............           2,132             1.7             0.1             0.0             3.3
Bed Size (Urban):
    0-99 Beds...................             720             1.5             0.1             0.0             3.8
    100-199 Beds................             944             0.2             0.2             0.0             2.6
    200-299 Beds................             548             0.1             0.3             0.0             2.6
    300-499 Beds................             401             0.1             0.5             0.0             2.9
    500 or More Beds............             143             0.2             1.0             0.0             3.3
Bed Size (Rural):
    0-49 Beds...................           1,229             1.7             0.0             0.0             3.1
    50-99 Beds..................             535             2.0             0.0             0.0             3.4
    100-149 Beds................             219             1.7             0.1             0.0             3.3
    150-199 Beds................              81             1.6             0.1             0.1             3.4
    200 or More Beds............              68             1.3             0.2             0.1             3.6
Urban by Census Division:
    New England.................             146             0.1             0.8             0.1             3.2
    Middle Atlantic.............             422             0.1             0.6             0.0             3.0
    South Atlantic..............             404             0.3             0.3            -0.1             2.7
    East North Central..........             467             0.1             0.6             0.0             2.9
    East South Central..........             161             0.2             0.3             0.0             2.7
    West North Central..........             188             0.2             0.5             0.0             2.8
    West South Central..........             350             0.4             0.3             0.0             2.9
    Mountain....................             133             0.2             0.3             0.0             2.4
    Pacific.....................             440             0.4             0.4             0.0             2.9
    Puerto Rico.................              45             0.1             0.2             0.1             2.5
Rural by Census Division:
    New England.................              52             0.9             0.4             0.0             2.8
    Middle Atlantic.............              79             1.4             0.2             0.1             3.4
    South Atlantic..............             277             2.0             0.1             0.0             3.9
    East North Central..........             279             1.0             0.0             0.1             2.7
    East South Central..........             266             2.4             0.0             0.0             4.5
    West North Central..........             492             0.8             0.1             0.0             2.1
    West South Central..........             341             2.6             0.0             0.0             4.1
    Mountain....................             201             1.3             0.0             0.0             1.7
    Pacific.....................             140             2.2             0.1             0.0             3.4
    Puerto Rico.................               5             0.3             0.0             0.1             2.5
By Payment Categories:
    Urban Hospitals.............           2,838             0.2             0.5             0.0             2.9
        Large Urban.............           1,665             0.2             0.6             0.0             3.0
        Other Urban.............           1,168             0.2             0.3             0.0             2.7
    Rural Hospitals.............           2,055             1.8             0.1             0.0             3.3
Teaching Status:
    Non-Teaching................           3,770             0.7             0.1             0.0             2.8
    Fewer Than 100 Residents....             876             0.2             0.4             0.1             2.7

[[Page 32188]]

 
    100 or More Residents.......             242             0.1             1.2             0.0             3.5
Disproportionate Share Hospitals
 (DSH):
    Non-DSH.....................           1,914             0.0             0.3            -0.2             2.4
    Urban DSH:
        100 Beds or More........           1,390             0.2             0.6             0.0             2.9
        Fewer Than 100 Beds.....             356             3.5             0.1             0.0             5.8
    Rural DSH:
        Sole Community (SCH)....             538             1.6             0.0             0.0             2.1
        Referral Centers (RRC)..             139             2.5             0.1             0.0             4.4
Other Rural DSH Hospitals:
    100 Beds or More............              84             2.9             0.1             0.1             5.1
    Fewer Than 100 Beds.........             467             4.1             0.0             0.1             6.4
Urban Teaching and DSH:
    Both Teaching and DSH.......             748             0.2             0.8             0.0             3.1
    Teaching and No DSH.........             305             0.0             0.6            -0.1             2.8
    No Teaching and DSH.........             998             0.5             0.1             0.0             2.8
    No Teaching and No DSH......             787             0.1             0.1             0.1             2.4
Rural Hospital Types:
    Nonspecial Status Hospitals.             829             2.8             0.0             0.1             5.0
        RRC.....................             150             1.8             0.2             0.0             4.2
        SCH.....................             662             0.8             0.0             0.0             0.8
        MDH.....................             352             1.6             0.0             0.0             3.8
        SCH and RRC.............              57             1.3             0.1             0.0             1.8
Type of Ownership:
    Voluntary...................           2,834             0.4             0.5             0.0             2.9
    Proprietary.................             776             0.6             0.2             0.1             2.9
    Government..................           1,278             0.8             0.5            -0.3             3.3
    Unknown.....................               0             0.0             0.0             0.0             0.0
Medicare Utilization as a
 Percent of Inpatient Days:
    0-25........................             381             0.4             0.9             0.0             3.4
    25-50.......................           1,830             0.3             0.7             0.0             3.1
    50-65.......................           1,893             0.5             0.2             0.1             2.8
    Over 65.....................             699             0.8             0.1             0.1             2.9
    Unknown.....................              85            -3.0            -2.5            -3.5           -0.1
----------------------------------------------------------------------------------------------------------------
\1\ Because data necessary to classify some hospitals by category were missing, the total number of hospitals in
  each category may not equal the national total. Discharge data are from FY 1999, and hospital cost report data
  are from reporting periods beginning in FY 1997 and FY 1998.
\2\ This column displays the payment impact of the change in DSH payment policy between the first and second
  half of FY 2001.
\3\ This column displays the payment effects of the increase in the IME adjustment factor between the first and
  second half of FY 2001.
\4\ This column displays the payment impact of allowing all SCHs to rebase using 1996 cost data between the
  first and second half of FY 2001.
\5\ This column shows changes in payments from the first half of FY 2001 to the second half of FY 2001. It
  incorporates all of the changes displayed in columns 1, 2, and 3. It also displays the impact of the increase
  in the FY 2001 update rates, the difference in outlier offsets from FY 2000 to FY 2001, and the increase to
  payments from the IME adjustment and DSH changes taking effect during FY 2001. It also reflects the SCHs
  rebasing provision contained in Public Law 106-554.

D. Impact of Changes in the Capital Prospective Payment System

    In this impact analysis, we dynamically model the impact of the 
capital prospective payment system for the periods from October 2000 
through March 2001 and April 2001 through September 2001. We have used 
the actuarial model described in Appendix B of the August 1, 2001 final 
rule (65 FR 47204 through 47207) to estimate the changes in capital-
related costs. Table III shows the effect of the capital prospective 
payment system on low capital costs hospitals and high capital costs 
hospitals by their capital prospective payment system transition period 
payment methodology (fully prospective or hold harmless). Assuming no 
behavioral changes, Table III displays the percentage change in 
payments per discharge for the periods between October 2000 through 
March 2001 and April 2001 through September 2001. Overall, there will 
be no significant impact on capital prospective payment system 
payments. We project low cost hospitals will experience a 0.04 percent 
decrease in payments per case, while high cost hospitals will 
experience a 0.16 percent increase in payments per case.

[[Page 32189]]



                             Table III.--Impact of Proposed Changes for April 2001-September 2001 on Payments per Discharge
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                 Percent
                                                                          Adjusted    Average    Hospital      Hold                              change
                                                Number of   Discharges     Federal    Federal    specific    harmless    Exceptions    Total    over Oct-
                                                hospitals                  payment    percent     payment     payment     payment     payment    00-Mar-
                                                                                                                                                   01
--------------------------------------------------------------------------------------------------------------------------------------------------------
10/2000-03/2001 Payments per Discharge:
    Low Cost Hospitals.......................       3,188     6,835,493     $637.91      99.74  ..........       $2.42        $9.69    $650.02  ........
    Fully Prospective........................       3,014     6,356,216      638.58     100.00  ..........  ..........         9.20     647.79  ........
    100% Federal Rate........................         159       445,296      638.34     100.00  ..........  ..........         4.35     642.69  ........
    Hold Harmless............................          15        33,981      506.60      60.11  ..........      486.54       170.96   1,164.09  ........
    High Cost Hospitals......................       1,594     4,146,176      653.32      98.38  ..........       15.35        21.47     690.14  ........
    100% Federal Rate........................       1,390     3,793,344      664.47     100.00  ..........  ..........        10.65     675.12  ........
    Hold Harmless............................         204       352,832      533.52      80.86  ..........      180.41       137.76     851.69  ........
        Total Hospitals......................       4,782    10,981,669      643.73      99.21  ..........        7.30        14.14     665.17  ........
04/2001-09/2001 Payments per Discharge:
    Low Cost Hospitals.......................       3,188     6,835,493      637.72      99.74  ..........        2.42         9.63     649.77      -0.0
    Fully Prospective........................       3,014     6,356,216      638.34     100.00  ..........  ..........         9.15     647.49      -0.0
    100% Federal Rate........................         159       445,296      638.64     100.00  ..........  ..........         4.37     643.01       0.0
    Hold Harmless............................          15        33,981      509.14      60.15  ..........      486.54       168.45   1,164.13       0.0
    High Cost Hospitals......................       1,594     4,146,176      654.60      98.38  ..........       15.35        21.28     691.23       0.1
    100% Federal Rate........................       1,390     3,793,344      665.70     100.00  ..........  ..........        10.55     676.25       0.1
    Hold Harmless............................         204       352,832      535.28      80.86  ..........      180.41       136.65     852.34       0.0
        Total Hospitals......................       4,782    10,981,669      644.09      99.21  ..........        7.30        14.03     665.42       0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Table IV presents a cross-sectional summary of hospital groupings 
(geographic location, region, and payment classification) by capital 
prospective payment system transition period payment methodology 
generated by our actuarial model. The percentage of hospitals within a 
particular hospital grouping is not projected to change significantly 
from those shown in the Table IV of the impact section of the August 1, 
2001 final rule (65 FR 47201 through 47202).

  Table IV.--Distribution by Method of Payment (Hold-Harmless/Fully Prospective) of Hospitals Receiving Capital
                                                    Payments
----------------------------------------------------------------------------------------------------------------
                                                                        (2)  Hold-harmless              (3)
                                                    (1)  Total   --------------------------------   Percentage
                                                    number  of      Percentage      Percentage      paid fully
                                                     hospitals      paid hold-      paid fully      prospective
                                                                   harmless (A)     federal (B)        rate
----------------------------------------------------------------------------------------------------------------
By Geographic Location:
    All hospitals...............................           4,782             4.6            32.4            63.0
    Large urban areas (populations over 1                  1,516             4.3            41.0            54.7
     million)...................................
    Other urban areas (populations of 1 million            1,147             5.8            39.5            54.7
     or fewer)..................................
    Rural areas.................................           2,119             4.1            22.4            73.5
    Urban hospitals.............................           2,663             5.0            40.3            54.7
        0-99 beds...............................             652             6.3            33.6            60.1
        100-199 beds............................             927             7.2            45.6            47.1
        200-299 beds............................             542             3.3            41.3            55.4
        300-499 beds............................             400             0.8            37.0            62.3
        500 or more beds........................             142             2.1            42.3            55.6
    Rural hospitals.............................           2,119             4.1            22.4            73.5
        0-49 beds...............................           1,219             2.9            16.6            80.6
        50-99 beds..............................             532             6.8            26.9            66.4
        100-149 beds............................             219             5.9            35.2            58.9
        150-199 beds............................              81             2.5            25.9            71.6
        200 or more beds........................              68             1.5            47.1            51.5
By Region:
    Urban by Region.............................           2,663             5.0            40.3            54.7
        New England.............................             145             0.7            25.5            73.8
        Middle Atlantic.........................             407             2.9            34.6            62.4
        South Atlantic..........................             396             5.6            51.8            42.7
        East North Central......................             454             4.2            29.7            66.1
        East South Central......................             153             8.5            46.4            45.1
        West North Central......................             181             6.1            37.0            56.9
        West South Central......................             326             8.9            58.0            33.1
        Mountain................................             124             4.8            48.4            46.8

[[Page 32190]]

 
        Pacific.................................             432             4.2            36.3            59.5
        Puerto Rico.............................              45             2.2            26.7            71.1
    Rural by Region.............................           2,119             4.1            22.4            73.5
        New England.............................              52             0.0            23.1            76.9
        Middle Atlantic.........................              78             5.1            19.2            75.6
        South Atlantic..........................             276             2.2            33.3            64.5
        East North Central......................             279             3.9            16.5            79.6
        East South Central......................             265             3.4            32.8            63.8
        West North Central......................             490             3.3            14.5            82.2
        West South Central......................             335             4.5            26.6            69.0
        Mountain................................             200             9.5            15.0            75.5
        Pacific.................................             139             5.0            23.7            71.2
By Payment Classification:
    Large urban areas (populations over 1                  1,612             4.2            41.3            54.5
     million)...................................
    Other urban areas (populations of 1 million            1,133             6.0            38.8            55.2
     or fewer)..................................
    Rural areas.................................           2,037             4.1            21.8            74.1
    Teaching Status:
        Non-teaching............................           3,673             5.1            31.6            63.3
        Fewer than 100 residents................             871             2.9            35.9            61.2
        100 or more residents...................             238             2.1            32.4            65.5
Disproportionate Share Hospitals (DSH):
    Non-DSH.....................................           1,841             4.5            29.2            66.3
    Urban DSH:
        100 or more beds........................           1,377             4.6            42.6            52.8
        Less than 100 beds......................             342             5.8            32.2            62.0
    Rural DSH:
        Sole Community (SCH/EACH)...............             538             6.1            20.1            73.8
        Referral Center (RRC/EACH)..............             139             6.5            36.0            57.6
    Other Rural:
        100 or more beds........................              84             1.2            36.9            61.9
        Less than 100 beds......................             461             2.0            27.3            70.7
    Urban teaching and DSH:
        Both teaching and DSH...................             741             2.7            36.7            60.6
        Teaching and no DSH.....................             303             2.6            33.7            63.7
        No teaching and DSH.....................             978             6.5            43.4            50.1
        No teaching and no DSH..................             723             6.1            42.5            51.5
    Rural Hospital Types:
        Non special status hospitals............             817             1.5            24.0            74.5
        RRC/EACH................................             150             2.7            36.0            61.3
        SCH/EACH................................             662             8.5            18.3            73.3
        Medicare-dependent hospitals (MDH)......             351             1.4            16.5            82.1
        SCH, RRC and EACH.......................              57            10.5            26.3            63.2
    Type of Ownership:
        Voluntary...............................           2,520             4.5            32.4            63.1
        Proprietary.............................             653             7.2            57.1            35.7
        Government..............................           1,093             4.1            19.2            76.7
    Medicare Utilization as a Percent of
     Inpatient Days:
        0-25....................................             367             5.4            27.5            67.0
        25-50...................................           1,820             4.3            35.1            60.7
        50-65...................................           1,882             4.7            31.2            64.1
        Over 65.................................             688             4.8            32.1            63.1
----------------------------------------------------------------------------------------------------------------

    In Table V we present the results of the cross-sectional analysis 
using the results from our actuarial model and the aggregate impact 
resulting from section 301 of Public Law 106-554 that will affect 
capital prospective payment system payments for discharges occurring on 
or after April 1, 2001 and before October 1, 2001. Our comparison of 
payments for the periods from October 2000 through March 2001 and April 
2001 through September 2001 by geographic location, region, payment 
classification, and type of ownership shows no significant effect 
(ranging from -0.2 percent to 0.2 percent) on payments for hospitals in 
all groupings.

[[Page 32191]]



                                 Table V.--Comparison of Total Payments Per Case
                [October 2000-March 2001 Payments Compared to April 2001-September 2001 Payments]
----------------------------------------------------------------------------------------------------------------
                                                                                                      Portion
                                Number of    Average Oct 00-    Average Apr 01-                    attributable
                                hospitals    Mar 01 payments/  Sept 01 payments/    All changes     to Federal
                                                   case               case                          rate change
----------------------------------------------------------------------------------------------------------------
By Geographic Location:
    All hospitals............        4,782                665                665             0.0             0.1
    Large urban areas                1,516                772                773             0.1             0.1
     (populations over 1
     million)................
    Other urban areas                1,147                653                653             0.0             0.0
     (populations of 1
     million or fewer).......
    Rural areas..............        2,119                449                449            -0.1            -0.1
    Urban hospitals..........        2,663                720                720             0.1             0.1
        0-99 beds............          652                518                518             0.1             0.1
        100-199 beds.........          927                630                630             0.0             0.0
        200-299 beds.........          542                684                685             0.0             0.1
        300-499 beds.........          400                754                754             0.1             0.1
        500 or more beds.....          142                923                924             0.1             0.1
    Rural hospitals..........        2,119                449                449            -0.1            -0.1
        0-49 beds............        1,219                378                377            -0.2            -0.2
        50-99 beds...........          532                429                429            -0.2            -0.2
        100-149 beds.........          219                461                460            -0.2            -0.1
        150-199 beds.........           81                489                489            -0.1            -0.1
        200 or more beds.....           68                547                548             0.1             0.2
By Region:
    Urban by Region..........        2,663                720                720             0.1             0.1
        New England..........          145                751                750             0.0             0.0
        Middle Atlantic......          407                797                798             0.1             0.1
        South Atlantic.......          396                693                694             0.1             0.1
        East North Central...          454                692                692             0.0             0.0
        East South Central...          153                660                660             0.0             0.1
        West North Central...          181                715                715             0.1             0.1
        West South Central...          326                678                680             0.2             0.2
        Mountain.............          124                723                723             0.0             0.0
        Pacific..............          432                804                805             0.1             0.2
        Puerto Rico..........           45                311                311             0.0             0.0
    Rural by Region..........        2,119                449                449            -0.1            -0.1
        New England..........           52                544                542            -0.3            -0.3
        Middle Atlantic......           78                469                468             0.0             0.3
        South Atlantic.......          276                462                462             0.0             0.0
        East North Central...          279                459                458            -0.2            -0.2
        East South Central...          265                411                411             0.0             0.0
        West North Central...          490                440                438            -0.3            -0.3
        West South Central...          335                404                404            -0.1            -0.1
        Mountain.............          200                478                477            -0.1            -0.1
        Pacific..............          139                543                543            -0.1            -0.1
By Payment Classification:
    All hospitals............        4,782                665                665             0.0             0.1
    Large urban areas                1,612                763                764             0.1             0.1
     (populations over 1
     million)................
    Other urban areas                1,133                650                651             0.0             0.0
     (populations of 1
     million or fewer).......
    Rural areas..............        2,037                446                445            -0.1            -0.1
Teaching Status:
    Non-teaching.............        3,673                549                549             0.0             0.0
    Fewer than 100 Residents.          871                694                695             0.0             0.1
    100 or more Residents....          238              1,022              1,023             0.1             0.1
    Urban DSH:
        100 or more beds.....        1,377                759                760             0.1             0.1
        Less than 100 beds...          342                506                506            -0.1            -0.1
    Rural DSH:
        Sole Community (SCH/           538                420                419            -0.1            -0.2
         EACH)...............
        Referral Center (RRC/          139                505                505             0.0             0.2
         EACH)...............
    Other Rural:
        100 or more beds.....           84                422                421            -0.2            -0.2
        Less than 100 beds...          461                379                378            -0.2            -0.2
    Urban teaching and DSH:
        Both teaching and DSH          741                837                837             0.1             0.1
        Teaching and no DSH..          303                729                729             0.0             0.0
        No teaching and DSH..          978                609                609             0.0             0.1
        No teaching and no             723                600                601             0.1             0.1
         DSH.................
    Rural Hospital Types:
        Non special status             817                394                394            -0.2            -0.2
         hospitals...........
        RRC/EACH.............          150                515                514            -0.1            -0.1
        SCH/EACH.............          662                448                448            -0.1            -0.1

[[Page 32192]]

 
        Medicare-dependent             351                377                376            -0.2            -0.2
         hospitals (MDH).....
        SCH, RRC and EACH....           57                516                517             0.0             0.3
    Type of Ownership:
        Voluntary............        2,520                680                680             0.0             0.0
        Proprietary..........          653                643                644             0.2             0.2
        Government...........        1,093                602                602             0.0             0.0
    Medicare Utilization as a
     Percent of Inpatient
     Days:
        0-25.................          367                838                839             0.1             0.1
        25-50................        1,820                763                764             0.1             0.1
        50-65................        1,882                590                590             0.0             0.0
        Over 65..............          688                528                528             0.0             0.0
----------------------------------------------------------------------------------------------------------------

D. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications.
    Although not required to do so, we have examined this interim final 
rule with comment period, under the criteria set forth in, Executive 
Order 13132 and have determined that this interim final rule with 
comment period will not have any negative impact on the rights, rules, 
and responsibilities of State, local, or tribal governments.

E. Executive Order 12866

    In accordance with the provisions of Executive Order 12866, this 
interim final rule with comment period was reviewed by the Office of 
Management and Budget.

List of Subjects

42 CFR Part 410

    Health facilities, Health professions, Kidney diseases, 
Laboratories, Medicare, Reporting and recordkeeping requirements, Rural 
areas, X-rays.

42 CFR Part 412

    Administrative practice and procedure, Health facilities, Medicare, 
Puerto Rico, Reporting and recordkeeping requirements.

42 CFR Part 413

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

42 CFR Part 485

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


    42 CFR Chapter IV is amended as set forth below:

PART 410--SUPPLEMENTARY MEDICAL INSURANCE (SMI) BENEFITS

    A. Part 410 is amended as follows:
    1. The authority citation for Part 410 continues to read as 
follows:

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

    2. Section 410.152 is amended by revising paragraph (k)(2) to read 
as follows:


Sec. 410.152  Amounts of payment.

* * * * *
    (k) * * *
    (2) Payment for CAH outpatient services is subject to the 
applicable Medicare Part B deductible and coinsurance amounts, except 
as described in Sec. 413.70(b)(2)(iii) of this chapter, with Part B 
coinsurance being calculated as 20 percent of the customary (insofar as 
reasonable) charges of the CAH for the services.
* * * * *

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

    B. Part 412 is amended as follows:
    1. The authority citation for Part 412 continues to read as 
follows:

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


    2. Section 412.63 is amended by revising paragraph(s) to read as 
follows:


Sec. 412.63  Federal rates for inpatient operating costs for fiscal 
years after Federal fiscal year 1984

* * * * *
    (s) Applicable percentage change for fiscal year 2001. The 
applicable percentage change for discharges occurring in fiscal year 
2001 is the percentage increase in the market basket index for 
prospective payment hospitals (as defined in Sec. 413.40(a) of this 
subchapter) for hospitals in all areas as follows:
    (1) For discharges occurring on October 1, 2000 or before April 1, 
2001 the percentage increase in the market basket index for prospective 
payment hospitals (as defined in Sec. 413.40(a) of this subchapter) for 
sole community hospitals and the increase in the market basket index 
minus 1.1 percentage points for other hospitals in all areas; and
    (2) For discharges occurring on April 1, 2001 or before October 1, 
2001 the percentage increase in the market basket index for prospective 
payment hospitals (as defined in Sec. 413.40(a) of this subchapter) for 
sole community hospitals and the increase in the market basket index 
plus 1.1 percentage points for other hospitals in all areas.
* * * * *
    3. Section 412.77 is amended by:

    A. Revising the section heading.
    B. Revising paragraph (a)(1).
    C. Removing paragraph (a)(2).
    D. Redesignating paragraphs (a)(3) and (a)(4) as paragraphs (a)(2) 
and (a)(3).


Sec. 412.77  Determination of the hospital-specific rate for inpatient 
operating costs for sole community hospitals based on a Federal fiscal 
year 1996 base period

    (a) * * *
    (1) This section applies to a hospital that has been designated as 
a sole community hospital, as described in

[[Page 32193]]

Sec. 412.92. If the 1996 hospital-specific rate exceeds the rate that 
would otherwise apply, that is, either the Federal rate under 
Sec. 412.63 or the hospital-specific rates for either fiscal year 1982 
under Sec. 412.73 or fiscal year 1987 under Sec. 412.75, this 1996 rate 
will be used in the payment formula set forth in Sec. 412.92(d)(1).
* * * * *

    4. Section 412.92 is amended by revising paragraphs (d)(1)(iv), 
(d)(2)(i), (d)(2)(ii), and (d)(2)(iii) to read as follows:


Sec. 412.92  Special treatment: Sole community hospitals.

* * * * *
    (d) * * *
    (1) * * *
    (iv) For cost reporting periods beginning on or after October 1, 
2000, the hospital-specific rate as determined under Sec. 412.77 
(calculated under the transition schedule set forth in paragraph (d)(2) 
of this section).
    (2) * * *
    (i) For Federal fiscal year 2001, the hospital-specific rate is the 
sum of 75 percent of the greater of the amounts specified in paragraph 
(d)(1)(i), (d)(1)(ii), or (d)(1)(iii) of this section, plus 25 percent 
of the hospital-specific rate as determined under Sec. 412.77.
    (ii) For Federal fiscal year 2002, the hospital-specific rate is 
the sum of 50 percent of the greater of the amounts specified in 
paragraph (d)(1)(i), (d)(1)(ii), or (d)(1)(iii) of this section, plus 
50 percent of the hospital-specific rate as determined under 
Sec. 412.77.
    (iii) For Federal fiscal year 2003, the hospital-specific rate is 
the sum of 25 percent of the greater of the amounts specified in 
paragraph (d)(1)(i), (d)(1)(ii), or (d)(1)(iii) of this section, plus 
75 percent of the hospital-specific rate as determined under 
Sec. 412.77.
* * * * *

    5. Section 412.105 is amended by:
    A. Republishing the introductory text of paragraphs (d) and (d)(3).
    B. Revising paragraph (d)(3)(v).


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

* * * * *
    (d) Determination of education adjustment factor. Each hospital's 
education adjustment factor is calculated as follows:
* * * * *
    (3) Step three. The factor derived from completing steps one and 
two is multiplied by `c', and where `c' is equal to the following:
* * * * *
    (v) For fiscal year 2001--
    (A) For discharges occurring on or after October 1, 2000 and before 
April 1, 2001, 1.54.
    (B) For discharges occurring on or after April 1, 2001 and before 
October 1, 2001, the adjustment factor is determined as if ``c'' 
equaled 1.66, rather than 1.54. This payment increase will not apply to 
discharges occurring after fiscal year 2001 and will not be taken into 
account in calculating the payment amounts applicable for discharges 
occurring after fiscal year 2001.
* * * * *

    6. Section 412.106 is amended by:
    A. Republishing the introductory text to paragraph (c)(1).
    B. Revising paragraphs (c)(1)(i), (c)(1)(ii), (c)(1)(iii), and 
(c)(1)(iv).
    C. Revising paragraphs (d)(2)(ii)(A), (d)(2)(ii)(B), (d)(2)(ii)(C), 
and (d)(2)(ii)(D).
    D. Revising paragraphs (d)(2)(iii) and (d)(2)(iv).
    E. Revising paragraph (e)(4).


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

* * * * *
    (c) * * *
    (1) The hospital's disproportionate patient percentage, as 
determined under paragraph (b)(5) of this section, is at least equal to 
one of the following:
    (i) 15 percent, if the hospital is located in an urban area, and 
has 100 or more beds, or is located in a rural area and has 500 or more 
beds.
    (ii) 30 percent for discharges occurring before April 1, 2001, and 
15 percent for discharges occurring on or after April 1, 2001, if the 
hospital is located in a rural area and either has more than 100 beds 
and fewer than 500 beds or is classified as a sole community hospital 
under Sec. 412.92.
    (iii) 40 percent for discharges before April 1, 2001, and 15 
percent for discharges occurring on or after April 1, 2001, if the 
hospital is located in an urban area and has fewer than 100 beds.
    (iv) 45 percent for discharges before April 1, 2001, and 15 percent 
for discharges occurring on or after April 1 2001, if the hospital is 
located in a rural area and has 100 or fewer beds.
* * * * *
    (d) * * *
    (2) * * *
    (ii) * * *
    (A) If the hospital is classified as a rural referral center, for 
discharges prior to April 1, 2001, the payment adjustment factor is 4 
percent plus 60 percent of the difference between the hospital's 
disproportionate patient percentage and 30 percent. For discharges 
occurring on or after April 1, 2001, the following applies:
    (1) If the hospital's disproportionate patient percentage is less 
than 19.3 percent, the applicable payment adjustment factor is 2.5 
percent plus 65 percent of the difference between 15 percent and the 
hospital's disproportionate patient percentage.
    (2) If the hospital's disproportionate patient percentage is 
greater than 19.3 percent and less than 30 percent, the payment 
adjustment factor is 5.25 percent.
    (3) If the hospital's disproportionate patient percentage is 
greater than or equal to 30 percent, the applicable payment adjustment 
factor is 5.25 percent plus 60 percent of the difference between 30 
percent and the hospital's disproportionate patient percentage.
    (B) If the hospital is classified as a sole community hospital, for 
discharges prior to April 1, 2001, the payment adjustment factor is 10 
percent. For discharges occurring on or after April 1, 2001, the 
following applies:
    (1) If the hospital's disproportionate patient percentage is less 
than 19.3 percent, the adjustment factor is 2.5 percent plus 65 percent 
of the difference between 15 percent and the hospital's 
disproportionate patient percentage.
    (2) If the hospital's disproportionate patient percentage is equal 
to or greater than 19.3 percent and less than 30 percent, the payment 
adjustment factor is 5.25 percent.
    (3) If the hospital's disproportionate patient percentage is equal 
to or greater than 30 percent the applicable payment adjustment factor 
is 10 percent.
    (C) If the hospital is classified as both a rural referral center 
and a sole community hospital, the payment adjustment factor is:
    (1) For discharges occurring before April 1, 2001, the greater of--
    (i) 10 percent; or
    (ii) 4 percent plus 60 percent of the difference between the 
hospital's disproportionate patient percentage and 30 percent.
    (2) For discharges occurring on or after April 1, 2001, the greater 
of the adjustments determined under paragraph (d)(2)(ii)(A) or 
(d)(2)(ii)(B) of this section.
    (D) If the hospital is classified as a rural hospital and is not 
classified as either a sole community hospital or a rural referral 
center, and has 100 or more beds, for discharges prior to April 1, 
2001, the payment adjustment factor is 4 percent. For discharges 
occurring on or after April 1, 2001, the following applies:

[[Page 32194]]

    (1) If the hospital's disproportionate patient percentage is less 
than 19.3 percent the applicable payment adjustment factor is 2.5 
percent plus 65 percent of the difference between the hospital's 
disproportionate patient percentage and 15 percent.
    (2) If the hospital's disproportionate patient percentage is equal 
to or greater than 19.3 percent the applicable payment adjustment 
factor is 5.25 percent.
    (iii) If the hospital meets the criteria of paragraph (c)(1)(iii) 
of this section, the payment adjustment factor is as follows:
    (A) For discharges occurring before April 1, 2001, 5 percent.
    (B) For discharges occurring on or after April 1, 2001:
    (1) If the hospital's disproportionate patient percentage is less 
than 19.3 percent, the applicable payment adjustment factor is 2.5 
percent plus 65 percent of the difference between the hospital's 
disproportionate patient percentage and 15 percent.
    (2) If the hospital's disproportionate patient percentage is equal 
to or greater than 19.3 percent, the applicable payment adjustment 
factor is 5.25 percent.
    (iv) If the hospital meets the criteria of paragraph (c)(1)(iv) of 
this section, the payment adjustment factor is as follows:
    (A) For discharges occurring before April 1, 2001, 5 percent.
    (B) For discharges occurring on or after April 1, 2001:
    (1) If the hospital's disproportionate patient percentage is less 
than 19.3 percent, the applicable payment adjustment factor is 2.5 
percent plus 65 percent of the difference between the hospital's 
disproportionate patient percentage and 15 percent.
    (2) If the hospital's disproportionate patient percentage is equal 
to or greater than 19.3 percent, the applicable payment adjustment 
factor is 5.25 percent.
* * * * *
    (e) * * *
    (4) For FY 2001:
    (i) For discharges occurring on or after October 1, 2000 and before 
April 1, 2001, 3 percent.
    (ii) For discharges occurring on or after April 1, 2001 and before 
October 1, 2001, 1 percent.
* * * * *

    7. Section 412.108 is amended by:
    A. Revising paragraphs (a)(1)(iii) introductory text and (b).
    B. Adding a new paragraph (a)(1)(iii)(C).
    C. Adding a sentence at the end of (d)(3)(iii).


Sec. 412.108  Special treatment: Medicare-dependent, small rural 
hospitals.

    (a) * * *
    (1) * * *
    (iii) At least 60 percent of the hospital's inpatient days or 
discharges were attributable to individuals receiving Medicare Part A 
benefits during the hospital's cost reporting period or periods as 
follows, subject to the provisions of paragraph (a)(1)(iv) of this 
section:
* * * * *
    (C) At least two of the last three most recent audited cost 
reporting periods for which the Secretary has a settled cost report.
* * * * *
    (b) Classification procedures. The fiscal intermediary determines 
whether a hospital meets the criterion in paragraph (a) of this 
section. A hospital must notify its fiscal intermediary to be 
considered for MDH status based on the criterion under paragraph 
(a)(1)(iii)(C) of this section. Any hospital that believes it meets 
this criterion to qualify as an MDH, based on at least two of the three 
most recently audited cost reporting periods, must submit a written 
request to its intermediary. The hospital's request must be submitted 
within 180 days from the date of the notice of amount of program 
reimbursement (NPR) for the cost reporting period in question. The 
intermediary will make its determination and notify the hospital within 
180 days from the date that it receives the hospital's request and all 
of the required documentation. If a hospital disagrees with an 
intermediary's determination, it should notify its intermediary and 
submit documentable evidence that it meets the criteria. The 
intermediary determination is subject to review under subpart R of part 
405 of this chapter. The time required by the intermediary to review 
the request is considered good cause for granting an extension of the 
time limit for the hospital to apply for such a review.
* * * * *
    (d) * * *
    (3) * * *
    (iii) * * * The time required by the intermediary to review the 
request is considered good cause for granting an extension of the time 
limit for the hospital to apply for that review.

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

    C. 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), 1871, 1881, 1883, and 1886 of the Social Security Act (42 
U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 1395l(a), (i), and (n), 
1395hh, 1395rr, 1395tt, and 1395ww).

    2. Section 413.40 is amended by:
    A. Republishing the introductory text of paragraph (c)(4).
    B. Revising paragraphs (c)(4)(iii) introductory text and 
(c)(4)(iii)(A).
    C. Republishing the introductory text of paragraphs (c)(4)(iii)(B) 
and (c)(4)(iii)(B)(4).
    D. Revising paragraph (c)(4)(iii)(B)(4)(i).
    E. Revising paragraph (d)(2).


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

* * * * *
    (c) * * *
    (4) Target amounts. The intermediary will establish a target amount 
for each hospital. The target amount for a cost reporting period is 
determined as follows:
* * * * *
    (iii) In the case of a psychiatric hospital or unit, rehabilitation 
hospital or unit, or long-term care hospital, the target amount is the 
lower of the amounts specified in paragraph (c)(4)(iii)(A) or 
(c)(4)(iii)(B) of this section.
    (A) The hospital-specific target amount.
    (1) In the case of all hospitals and units, except long-term care 
hospitals for cost reporting periods beginning on or after October 1, 
2001, the hospital-specific target amount is the net allowable costs in 
a base period increased by the applicable update factors.
    (2) In the case of long-term care hospitals, for cost reporting 
periods beginning on or after October 1, 2001, the hospital-specific 
target amount is the net allowable costs in a base period increased by 
the applicable update factors multiplied by 1.25.
* * * * *
    (B) One of the following for the applicable cost reporting period--
* * * * *

[[Page 32195]]

    (4) For cost reporting periods beginning during fiscal years 2001 
through 2002--
    (i) The amounts determined under paragraph (c)(4)(iii)(B)(3)(i) of 
this section are: increased by the market basket percentage up through 
the subject period; or in the case of a long-term care hospital, for 
cost reporting periods beginning on or after October 1, 2001, the 
amounts determined under paragraph (c)(4)(iii)(B)(3)(i) of this section 
increased by the market basket percentage up through the subject period 
and further increased by 2 percent.
* * * * *
    (d) * * *
    (2) Net inpatient operating costs are less than or equal to the 
ceiling.
    (i) For cost reporting periods beginning on or after October 1, 
1997, if a hospital's allowable net inpatient operating costs do not 
exceed the hospital's ceiling, payment to the hospital will be 
determined on the basis of the lower of the--
    (A) Net inpatient operating costs plus 15 percent of the difference 
between inpatient operating costs and the ceiling; or
    (B) Net inpatient operating costs plus 2 percent of the ceiling.
    (ii) For psychiatric hospitals and units, for cost reporting 
periods beginning on or after October 1, 2000 and before October 1, 
2001, if a hospital's allowable net inpatient operating costs do not 
exceed the hospital's ceiling, payment to the hospital will be 
determined on the basis of the lower of the--
    (A) Net inpatient operating costs plus 15 percent of the difference 
between inpatient operating costs and the ceiling; or
    (B) Net inpatient costs plus 3 percent of the ceiling.
* * * * *

    3. Section 413.70 is amended by revising paragraphs (b)(2)(ii), 
(b)(2)(iii), (b)(3)(ii)(B), and (b)(3)(iii).


Sec. 413.70  Payment for services of a CAH.

* * * * *
    (b) * * *
    (2) * * *
    (ii) Payment to a CAH under paragraph (b)(2) of this section does 
not include any costs of physician services or other professional 
services to CAH outpatients and, other than for clinical diagnostic 
laboratory tests, is subject to the Part B deductible and coinsurance 
amounts as determined under Secs. 410.152(k), 410.160, and 410.161 of 
this chapter.
    (iii) Payment for outpatient clinical diagnostic laboratory tests 
is not subject to the Medicare Part B deductible and coinsurance 
amounts. Payment to a CAH for clinical diagnostic laboratory tests will 
be made on a reasonable cost basis under this section only if the 
individuals are outpatients of the CAH, as defined in Sec. 410.2 of 
this chapter, at the time the specimens are collected. Clinical 
diagnostic laboratory tests performed for persons who are not patients 
of the CAH when the specimens are collected will be made in accordance 
with the provisions of sections 1833(a)(1)(D) and 1833(a)(2)(D) of the 
Social Security Act.
    (3) * * *
    (ii) * * *
    (B) For professional services otherwise payable to the physician or 
other practitioner, 115 percent of the amounts that otherwise would be 
paid for the services if the CAH had not elected payment under this 
method.
    (iii) Payment to a CAH, other than for clinical diagnostic 
laboratory tests, is subject to the Part B deductible and coinsurance 
amounts, as determined under Secs. 410.152(k), 410.160, and 410.161 of 
this chapter.
* * * * *

    4. Section 413.80 is amended by revising paragraph (h)(3) and 
adding a new paragraph (h)(4).


Sec. 413.80  Bad debts, charity, and courtesy allowances.

* * * * *
    (h) * * *
    (3) For cost reporting periods beginning during fiscal year 2000, 
by 45 percent.
    (4) For cost reporting periods beginning during a subsequent fiscal 
year, by 30 percent.
* * * * *

    5. Section 413.86 is amended by revising paragraph (d)(4) to read 
as follows:


Sec. 413.86  Direct graduate medical education payments.

* * * * *
    (d) * * *
    (4) Step four. Effective for portions of cost reporting periods 
occurring on or after January 1, 2000, the product derived from step 
three is reduced by a percentage equal to the ratio of the 
Medicare+Choice nursing and allied health payment ``pool'' for the 
current calendar year as described at Sec. 413.87(f), to the projected 
total Medicare+Choice direct GME payments made to all hospitals for the 
current calendar year.
* * * * *

    6. Section 413.87 is amended by:
    A. Redesignating the introductory text of (c) as (c)(1) 
introductory text.
    B. Redesignating paragraphs (c)(1) and (c)(2) as paragraphs 
(c)(1)(i) and (c)(1)(ii) respectively.
    C. Revising the newly redesignated paragraph (c)(1).
    D. Adding a new paragraph (c)(2).
    E. Revising the introductory text of paragraph (d).
    F. Revising paragraph (d)(3)
    G. Redesignating paragraph (e) as paragraph (f).
    H. Adding a new paragraph (e).
    I. Revising newly redesignated paragraphs (f)(1) introductory text, 
(f)(1)(ii), and (f)(2).


Sec. 413.87  Payments for Medicare+Choice nursing and allied health 
education programs.

* * * * *
    (c) Qualifying conditions for payment.
    (1) For portions of cost reporting periods occurring on or after 
January 1, 2000 and before January 1, 2001, a hospital that operates 
and receives payment for a nursing or allied health education program 
under Sec. 413.85 may receive an additional payment amount associated 
with Medicare+Choice utilization. The hospital may receive the 
additional payment amount, which is calculated in accordance with the 
provisions of paragraph (d) of this section, if both of the conditions 
specified in paragraphs (c)(1)(i) and (c)(1)(ii) of this section are 
met.
    (i) The hospital must have received Medicare reasonable cost 
payment for an approved nursing or allied health education program 
under Sec. 413.85 in its cost reporting period(s) ending in the fiscal 
year that is 2 years prior to the current calendar year. (For example, 
if the current year is calendar year 2000, the fiscal year that is 2 
years prior to calendar year 2000 is FY 1998.) For a hospital that 
first establishes a nursing or allied health education program after FY 
1998 and receives reasonable cost payment for the program as specified 
under Sec. 413.85 after FY 1998, the hospital is eligible to receive an 
additional payment amount in a calendar year that is 2 years after the 
respective fiscal year so long as the hospital also meets the condition 
under paragraph (c)(1(ii) of this section.
    (ii) The hospital must be receiving reasonable cost payment for an 
approved nursing or allied health education program under Sec. 413.85 
in the current calendar year.
    (2) For portions of cost reporting periods occurring on or after 
January 1, 2001, in addition to meeting the conditions specified in 
paragraphs (c)(1)(i) and (c)(1)(ii) of this section, the hospital must 
have had a Medicare+Choice utilization greater

[[Page 32196]]

than zero in its cost reporting period(s) ending in the fiscal year 
that is 2 years prior to the current calendar year.
* * * * *
    (d) Calculating the additional payment amount for portions of cost 
reporting periods occurring on or after January 1, 2000 and before 
January 1, 2001. For portions of cost reporting periods occurring on or 
after January 1, 2000 and before January 1, 2001, subject to the 
provisions of Sec. 413.86(d)(4) relating to calculating a proportional 
reduction in Medicare+Choice direct GME payments, the additional 
payment amount specified in paragraph (c) of this section is calculated 
according to the following steps:
* * * * *
    (3) Step three. Multiply the ratio calculated in step two by the 
Medicare+Choice nursing and allied health payment ``pool'' determined 
in accordance with paragraph (f) of this section for the current 
calendar year. The resulting product is each respective hospital's 
additional payment amount.
* * * * *
    (e) Calculating the additional payment amount for portions of cost 
reporting periods occurring on or after January 1, 2001. For portions 
of cost reporting periods occurring on or after January 1, 2001, 
subject to the provisions of Sec. 413.86(d)(4) relating to calculating 
a proportional reduction in Medicare+Choice direct GME payments, the 
additional payment amount specified in paragraph (c) of this section is 
calculated according to the following steps:
    (1) Step one. Each calendar year, determine for each eligible 
hospital the total--
    (i) Medicare payments received for approved nursing or allied 
health education programs based on data from the settled cost reports 
for the period(s) ending in the fiscal year that is 2 years prior to 
the current calendar year; and
    (ii) Inpatient days for that same cost reporting period.
    (iii) Medicare+Choice inpatient days for that same cost reporting 
period.
    (2) Step two. Using the data from step one, determine the ratio of 
the individual hospital's total nursing or allied health payments, to 
its total inpatient days. Multiply this ratio by the hospital's total 
Medicare+Choice inpatient days.
    (3) Step three. HCFA will determine, using the best available data, 
for all eligible hospitals the total of all--
    (i) Nursing and allied health education program payments made to 
all hospitals for all cost reporting periods ending in the fiscal year 
that is 2 years prior to the current calendar year;
    (ii) Inpatient days from those same cost reporting periods; and
    (iii) Medicare+Choice inpatient days for those same cost reporting 
periods.
    (4) Step four. Using the data from step three, HCFA will determine 
the ratio of the total of all nursing and allied health education 
program payments made to all hospitals for all cost reporting periods 
ending in the fiscal year that is 2 years prior to the current calendar 
year, to the total of all inpatient days from those same cost reporting 
periods. HCFA will multiply this ratio by the total of all 
Medicare+Choice inpatient days for those same cost reporting periods.
    (5) Step 5. Calculate the ratio of the product determined in step 
two to the product determined in step four.
    (6) Step 6. Multiply the ratio calculated in step five by the 
amount determined in accordance with paragraph (f) of this section for 
the current calendar year. The resulting product is each respective 
hospital's additional payment amount.
* * * * *
    (f) Calculation of the payment ``pool.''
    (1) Subject to paragraph (f)(3) of this section, each calendar 
year, HCFA will calculate a Medicare+Choice nursing and allied health 
payment ``pool'' according to the following steps:
    (i) * * *
    (ii) Multiply the ratio calculated in paragraph (f)(1)(i) of this 
section by projected total Medicare nursing and allied health education 
reasonable cost payments made to all hospitals in the current calendar 
year.
    (2) The resulting product of the steps under paragraphs (f)(1)(i) 
and (f)(1)(ii) of this section is the Medicare+Choice nursing and 
allied health payment ``pool'' for the current calendar year.
* * * * *

PART 485--CONDITIONS OF PARTICIPATION: SPECIALIZED PROVIDERS

    D. Part 485 is amended as follows:
    1. The authority citation for Part 485 continues to read as 
follows:

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


    2. Section 485.612 is revised to read as follows:


Sec. 485.612  Condition of participation: Compliance with hospital 
requirements at the time of application.

    Except for recently closed facilities as described in 
Sec. 485.610(a)(2), or health clinics or health centers as described in 
Sec. 485.610(a)(3), the facility is a hospital that has a provider 
agreement to participate in the Medicare program as a hospital at the 
time the hospital applies for designation as a CAH.

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

    Dated: March 28, 2001.
Michael McMullan,
Acting Deputy Administrator, Health Care Financing Administration.

    Dated: April 18, 2001.
Tommy G. Thompson,
Secretary.
[FR Doc. 01-14732 Filed 6-12-01; 8:45 am]
BILLING CODE 4120-01-P