[Federal Register Volume 66, Number 174 (Friday, September 7, 2001)]
[Rules and Regulations]
[Pages 46902-46925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-22475]



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Part III





Department of Health and Human Services





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Center for Medicare & Medicaid Services



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42 CFR Part 412



Medicare Program; Payments for New Medical Services and New 
Technologies Under the Acute Care Hospital Inpatient Prospective 
Payment System; Final Rule

  Federal Register / Vol. 66, No. 174 / Friday, September 7, 2001 / 
Rules and Regulations  

[[Page 46902]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS 1176-F]
RIN 0938-AL09


Medicare Program; Payments for New Medical Services and New 
Technologies Under the Acute Care Hospital Inpatient Prospective 
Payment System

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

ACTION: Final rule.

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SUMMARY: This final rule establishes a mechanism for increased Medicare 
payments for new medical services and technologies furnished to 
Medicare beneficiaries under the acute care hospital inpatient 
prospective payment system. The rule implements section 533 of the 
Medicare, Medicaid, and SCHIP [State Children's Health Insurance 
Program] Benefits Improvement and Protection Act of 2000; and finalizes 
related regulatory provisions that were addressed in a proposed rule 
published in the Federal Register on May 4, 2001 (66 FR 22646).

EFFECTIVE DATE: This final rule is effective October 9, 2001.

FOR FURTHER INFORMATION CONTACT: Stephen Phillips, (410) 786-4548.

SUPPLEMENTARY INFORMATION:

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I. Background

    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. Under the prospective payment system, we pay 
for inpatient hospital services on a rate per discharge basis that 
varies according to the diagnosis-related group (DRG) to which a 
Medicare beneficiary's stay is assigned. The formula used to calculate 
payment for a specific case multiplies an individual hospital's payment 
rate per case by the weight of the DRG to which the case is assigned. 
Each DRG weight represents the average resources required to care for 
cases in that particular DRG relative to the average resources used to 
treat cases in all DRGS.
    On December 21, 2000, Congress passed the Medicare, Medicaid, and 
SCHIP [State Children's Health Insurance Program] Benefits Improvement 
and Protection Act of 2000 (Pub. L. 106-554). Section 533 of Public Law 
106-554 requires the Secretary to establish a mechanism to recognize 
the costs of new medical services and technologies under the hospital 
inpatient prospective payment system by October 1, 2001, and to report 
to Congress on ways to more expeditiously incorporate new services and 
technologies into the DRG system under the hospital inpatient 
prospective payment system.

II. Issuance of Proposed Rule

    On May 4, 2001 (66 FR 22646), as part of the annual hospital 
inpatient prospective payment system proposed rule, we proposed a 
mechanism to recognize the costs of new medical services and 
technologies and qualifying criteria for payments for these services 
and technologies. We received 61 public comments (which are addressed 
throughout this preamble) on our proposed criteria to qualify for this 
special payment and on the proposed mechanism to pay for qualifying new 
technologies. Due to this large number of public comments, we decided 
not to finalize the proposed mechanism and qualifying criteria in the 
FY 2002 hospital inpatient prospective payment system final rule 
(August 1, 2001, 66 FR 39828), but to publish a separate final rule.
    In the August 1, 2001 hospital inpatient prospective payment system 
final rule, we indicated that although we intend to establish the 
mechanism by October 2001, we will not make additional payments under 
the mechanism for cases involving new technology during Federal fiscal 
year (FY) 2002 because it is not feasible. This is due to the timing of 
the enactment of Public Law 106-554 on December 21, 2000, the 
requirement that we establish the mechanism through notice and an 
opportunity for public comment, and the requirement that the payments 
be implemented in a budget neutral manner. That is, it was not feasible 
to establish the criteria by which new technologies would qualify 
through a proposed rule with opportunity for public comment as part of 
the May 4, 2001 proposed rule, finalize those criteria in response to 
public comments, allow technologies to qualify under those criteria, 
and implement payments for any qualified technologies in a budget 
neutral manner. Making the special payments in a budget neutral manner 
requires an adjustment to the standardized amounts (which must be 
published in final by August 1 each year) that we use to pay acute care 
hospitals under the prospective payment system.

III. Incorporating New Medical Services and Technologies in the 
Hospital Inpatient Prospective Payment System

    Much attention recently has focused on how well Medicare 
incorporates the cost of new medical services and technologies into its 
payment systems. Of particular concern is the adequacy of Medicare's 
payment systems in facilitating access to new technologies for Medicare 
beneficiaries. Thus, section 533 of Public Law 106-554 was enacted. The 
discussion that follows addresses the requirements of section 533 of 
Public Law 106-554 for establishing a mechanism for recognizing the 
costs of new medical services and technologies, and for reporting to 
Congress on the ways to more expeditiously incorporate new services.

A. Overview

    Medicare payment for an inpatient hospital discharge under the 
inpatient

[[Page 46903]]

prospective payment system is determined by multiplying the relative 
weight associated with a particular DRG by the national average 
standardized amount (adjusted for other hospital characteristics such 
as a geographic wage index, teaching status, and treating a high 
percentage of low-income patients). Cases are classified into DRGs for 
payment under the prospective payment system based on the principal 
diagnosis, up to eight additional diagnoses, and up to six procedures 
performed during the stay, as well as age, sex, and discharge status of 
the patient. The diagnosis and procedure information is reported by the 
hospital using codes from the International Classification of Diseases, 
Ninth Revision, Clinical Modification (ICD-9-CM). The DRG relative 
weights are recalculated each year to reflect the average resources 
expended across all hospitals to treat patients within a particular 
DRG.
    In general, the inpatient prospective payment system makes payments 
for new medical services and technologies as soon as these items are 
payable. New items or services generally fit within existing DRGs, and 
hospitals using these items and services will be paid at established 
payment rates for the applicable DRGs. Payment rates subsequently may 
be adjusted through the annual process of evaluating the assignment of 
cases within DRGs and recalculating the relative weights associated 
with each DRG based on average charges. These annual adjustments are 
made to reflect changes in treatment patterns, technology, and any 
other factors that may change the relative use of hospital resources.
    Since the prospective payment system was first implemented in 
October 1983, the pace of innovation in medical technology has been 
rapid. Generally speaking, the system appears to have accommodated 
these innovations without occasioning significant concerns regarding 
access to new technologies. In its March 2001 report to the Congress, 
the Medicare Payment Advisory Commission stated ``the design of the 
inpatient PPS [prospective payment system] makes it easier to ensure an 
appropriate distribution of payments while accommodating technological 
advances'' (page 44).

B. Current Practice--Coding and Payment

    A number of issues arise relating to present methods of 
incorporation of new technologies in the inpatient hospital prospective 
payment system. One issue is the appropriate ICD-9-CM code to be 
assigned to the new technology. This issue is discussed in detail 
below. Assuming the new technology is or can be covered by Medicare, a 
determination must be made concerning to which DRG should the new 
technology be assigned. The DRG (and the value of the relative weight 
associated with that DRG) to which the new technology is assigned 
determines the payment rate for the new technology. Under the DRG 
system, the condition of the patient is the primary consideration in 
the decision to assign a new technology to a DRG. Therefore, a new 
technology generally will be assigned to the same DRG as the DRG's 
predecessor technologies and treatment modalities. In this way, 
hospitals can receive payment for new technology under the inpatient 
hospital prospective payment system quickly. As use of the new 
technology diffuses among hospitals, we have gradually and largely 
automatically recalibrated DRG payment rates based on hospital claims 
data to reflect increasing or decreasing costs of cases assigned to the 
DRG. Generally, it takes 2 years for claims data to be reflected in 
recalibrated DRG weights. Considering the actual costs as reflected in 
the claims data, we may also reassign new technologies to different 
DRGs. However, because a new technology is often more costly initially 
than the predecessor technologies, the adequacy of the initial payment 
rate occasionally becomes an issue.
    At present, if payment is to be made other than by routine 
assignment of the new technology to an existing DRG, it is necessary to 
establish a new ICD-9-CM code. The lag between application for a new 
code and its being made effective for payment is at least a year. 
Because we use actual charge data from hospitals, additional costs or 
savings from the new technology are not reflected in the DRG weight for 
2 years after a new code is effective. For example, the costs or 
savings attributable to any new technologies that were assigned new 
ICD-9-CM codes effective October 1, 1999, will be reflected in the DRG 
relative weights effective for discharges on or after October 1, 2001.
    The lag before new technology affected payment has been viewed by 
some observers as a useful check on payment changes, helping to ensure 
that these changes reflect the benefit of a new technology. Hospitals 
would adopt and utilize the new technology, it was reasoned, with a 
speed and to a degree commensurate with its medical advantages. Any 
differences in the resource requirements between the new and existing 
technologies would then be reflected over time in claims data and in 
changes in the DRG weights. To the extent particular new technologies 
may have been initially given relatively low payment, the design of the 
system provided incentives to compensate by achieving efficiencies 
elsewhere. Conversely, if a particular new technology reduced costs 
compared to existing technologies, hospitals would reap the payment 
benefits until such time as the DRG weights began to reflect the lower 
costs.

C. Current Practice--Data

    Recently, we provided an explicit avenue to permit more rapid 
payment adjustment through use of additional data. The Conference 
Report that accompanied the Balanced Budget Act of 1997 (Pub. L. 105-
33) stated that ``in order to ensure that Medicare beneficiaries have 
access to innovative new drug therapies, the conferees believe that 
HCFA [now CMS] should consider, to the extent feasible, reliable, 
validated data other than Medicare Provider Analysis and Review 
(MedPAR) data in annually recalibrating and reclassifying the DRGs'' 
(H.R. Conf. Rep. No. 105-217, 105th Cong., 1st Sess., at 734 (1997)). 
The MedPAR data contains records for all Medicare hospital discharges 
and is the source data used for DRG recalibration. Although we had 
never precluded the use of non-MedPAR data, we established an explicit 
process for the submission of such data in a manner consistent with the 
annual recalibration of the DRG weights. We stated in the July 30, 1999 
Federal Register that, in the case of external data, a significant 
sample of the data should be submitted by August 1, approximately 8 
months prior to the publication of the proposed rule. This would allow 
us to verify and test the data and make a preliminary assessment as to 
the feasibility of the data's use (64 FR 41499). Subsequently, a 
complete database must be submitted no later than December 1, 
approximately 4 months prior to the publication of the proposed rule. 
On the issue of the use of sample data, we stated in the Federal 
Register that we were not establishing specific criteria regarding 
sample sizes or data collection methodologies prior to gaining 
experience that would enable us to realistically reflect the 
availability of external data based on actual experience. We also 
encouraged anyone interested in submitting such data in the future to 
contact us to discuss the specific data they wish to submit and whether 
the data may be adequate.

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D. New Legislation

    Section 533 of Public Law 106-554 addresses the issue of how new 
technologies are introduced into the DRGs, and how DRG payment rates 
must be adapted to accommodate them. Specifically, the provision 
requires that the Secretary:
     Not later than April 1, 2001, submit a report to Congress 
on methods of expeditiously incorporating new medical services and 
technologies into the clinical coding system.
     Not later than October 1, 2001, implement the preferred 
methods described in the report.
     Effective October 1, 2001, establish a mechanism to 
recognize the costs of new medical services and technologies after 
notice and opportunity for public comment.
     Establish criteria to identify new medical services or 
technologies after notice and an opportunity for public comment.

E. DRG Assignment Issues

    As background for discussion of how the DRGs should be changed to 
better accommodate new technology, this section will discuss the 
rationale for basing the initial DRG assignment on patient condition. 
The underlying assumption of the prospective payment system is that 
because hospitals are responsible for the delivery of care they can 
respond to the incentives to control costs inherent in the system. The 
success of any payment system that is predicated on providing 
incentives for cost control is almost totally dependent on the 
effectiveness with which the incentives are communicated. The DRGs were 
designed to be a management tool that is used also as the basis for 
prospective payments. The key distinction between a management tool and 
payment method is the ability of the hospital to use the information to 
take action in response to the incentives in the system. Thus, a 
management tool communicates information in a form and at a level of 
detail that can lead to specific actions. The effectiveness of any 
incentive-based payment system is enhanced if the payment method is 
simultaneously a management tool.
    Because the DRGs were developed to group clinically similar 
patients, an extremely important means of communication between the 
clinical and financial aspects of care was created. DRGs provided 
administrators and physicians with a meaningful basis for evaluating 
both the process of providing care and the associated financial 
impacts. Development of care pathways by DRG and profit-and-loss 
reports by DRG product lines became commonplace. With the adoption of 
these new management methods, length of stay and the use of ancillary 
services dropped dramatically.
    The DRGs not only provided a communications tool for hospital 
management, but they also provided an effective means for hospitals and 
Medicare to communicate. Instead of accountants and lawyers arguing the 
fine points of cost accounting, the focus of payment deliberations 
became the determination of a fair payment rate for patients with 
specific clinical problems. The vast majority of modifications to the 
DRGs since the inception of the Medicare inpatient hospital prospective 
payment system have resulted from recommendations from hospitals. The 
recommendations have almost always been the result of clinicians 
identifying specific types of patients with unique needs. A recent 
example of such a clinical dialogue relates to the DRGs for burns. The 
FY 1999 update to the DRGs included a major restructuring of the burn 
DRGs. This restructuring was the direct result of detailed and specific 
clinical recommendations provided to CMS by burn specialists.
    Central to the success of the Medicare inpatient hospital 
prospective payment system is that DRGs have remained a clinical 
description of why the patient required hospitalization. We believe it 
would be undesirable to transform DRGs into detailed descriptions of 
the technology and processes used by the hospital to treat the patient. 
If such a transformation were to happen, the DRGs would become largely 
a repackaging of fee-for-service without the management and 
communication benefits. A fundamental assumption underlying DRGs is 
that the hospital has the responsibility for deciding what technology 
and process to employ in treating a particular type of patient. As 
hospitals in the aggregate make treatment decisions, these decisions 
are reflected in the DRG payment weights. The separation of the 
clinical and payment weight methodologies allows a stable clinical 
methodology to be maintained while the payment weights evolve in 
response to changing practice patterns. The packaging of all services 
associated with the care of a particular type of patient into a single 
payment amount provides the incentive for efficiency inherent in a DRG-
based prospective payment system. Substantial disaggregation of the 
DRGs into smaller units of payment, or a substantial number of cases 
receiving extra payments, would undermine the incentives and 
communication value in the DRG system.

F. Coding Issues

    To permit us to identify use of a new technology on hospital claims 
and hence to make different payments than would otherwise be 
applicable, we would require a code that can be used to specify when 
that technology is used.
1. Process for Establishing New Codes
    The ICD-9-CM Coordination and Maintenance Committee is responsible 
for discussing potential changes to ICD-9-CM. This is a Federal 
interdepartmental committee, co-chaired by the National Center for 
Health Statistics (NCHS) and CMS. The NCHS has lead responsibility for 
the ICD-9-CM diagnosis codes, while CMS has lead responsibility for the 
ICD-9-CM procedure codes. The Committee holds meetings twice a year, 
usually in May and November. Agendas for the discussions about 
procedure codes are published on CMS' Internet website a month before 
the meeting. A Federal Register notice is also published listing topics 
to be discussed. The meetings are open to the public and are held 
usually in Baltimore, Maryland. Shortly afterwards, an extensive 
summary of the meeting is published on CMS' website and the public is 
given an additional opportunity to comment. Final comments are due by 
early January. A complete, current timeline is included in the Summary 
Report of the Committee at: www.hcfa.gov/medicare/icd9cm.htm.
    For a topic to be discussed at one of the two yearly meetings of 
the Committee, the Committee must receive a request 2 months prior to 
the meeting. This timeframe allows CMS to publish the agendas in the 
Federal Register notices and allows individuals and organizations to 
review the agenda and to determine if they wish to attend the public 
meetings. The timeframe is also necessary to allow the Committee to 
research the topic and prepare a draft solution in time for the 
meeting. During the meetings, the Committee provides a brief 
description of the topic (such as a new technology that may not be 
adequately identified by the current code) and then describes the 
technology or procedure through a formal presentation. Frequently, 
medical experts who perform the procedure make a presentation to 
describe the procedure and how it might be different from other 
procedures in the current code. Proposals are made to either continue 
capturing the procedure in the existing code, revise existing codes, or 
create a new code. The public then discusses the merits of the 
proposals and offers any alternate suggestions.

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    The ICD-9-CM is updated once a year, effective October 1. This date 
coincides with the annual updates to the DRGs within the inpatient 
hospital prospective payment system. Each spring we publish a proposed 
rule that includes proposed changes to the inpatient hospital 
prospective payment system. This notice also includes final decisions 
on changes to ICD-9-CM codes. By August 1, we publish the new codes in 
the Addendum to ICD-9-CM, which is a technical presentation of actual 
changes to be made in both the index and tabular sections of the ICD-9-
CM coding books. The Addendum is available on CMS' website and is also 
sent to organizations such as the American Hospital Association (AHA) 
and the American Health Information Management Association (AHIMA) to 
distribute to their members. By October 1 of each year, the Department 
of Health and Human Services also produces a CD-ROM version of the ICD-
9-CM, which may be purchased through the Government Printing Office. 
Since the ICD-9-CM is not a copyrighted system, many publishers and 
organizations distribute and sell books or other publications that 
include the changes to ICD-9-CM.
    Although the Committee's process for discussing proposed changes to 
the ICD-9-CM fully involves and informs the public, the deliberative 
nature of the process does require some time. Topics discussed at the 
May and November 2000 meetings of the Committee are for changes to ICD-
9-CM in October 2001. Therefore, depending on whether a request is 
considered at the May or November meeting, resulting changes may not be 
effective for approximately a year to a year-and-a-half later.
2. Options To Expedite the Implementation of Coding Changes
    Several constraints upon the system would complicate implementing 
extensive changes. One significant complication is the interaction 
between the DRG system and the ICD-9-CM diagnosis and procedure codes 
(in the case of new services and technologies, the discussion focuses 
on procedure rather than diagnosis codes). When a new procedure code is 
created, a decision must be made as to whether the new code affects DRG 
assignment (for example, resulting in a case being assigned to a 
surgical rather than a medical DRG). Currently, new technology is 
generally assigned to the same DRG as its predecessor codes. Even if 
new codes do not affect DRG assignment, the GROUPER software (used to 
assign cases to DRGs) must be reprogrammed to recognize and classify 
all the new codes. This is necessary to allow Medicare's claims 
processing systems to process the claim.
    In addition to the changes to the GROUPER software, implementing 
changes to ICD-9-CM codes is a detailed and far-reaching process 
involving modifications to code books and software coding systems, as 
well as changes to hospitals' claims processing systems. As described 
above, the current process is organized around the annual publication 
of coding changes in the Federal Register as part of the updates and 
changes to the inpatient hospital prospective payment system. The 
changes are made available during the summer, and communicated via 
multiple channels to hospitals. This process allows for the necessary 
processing changes to be thoroughly tested prior to implementation, 
both by CMS and by the hospitals. This testing procedure is essential 
given the volume (generally 11 million claims annually) and dollar 
impact (approximately $76 billion during FY 2002) of Medicare inpatient 
discharges.
    Another important issue when considering expediting the process of 
making coding changes is that the annual DRG reclassification and 
recalibration of the relative weights must be made in a manner that 
ensures that aggregate payments to hospitals are not affected (section 
1886(d)(4)(C)(iii) of the Act). If ICD-9-CM changes were made at 
multiple times during the year, the budget neutrality requirement would 
mean the standardized amounts, and potentially the cost outlier 
thresholds, would change as well. These changes would compromise the 
prospective nature of the payment system, whereby hospitals are able to 
project their revenues for the year and plan accordingly. Because we do 
not believe the requirement in section 533 of Public Law 106-554 to 
explore ways to expedite coding changes was intended to disrupt the 
prospective nature of the payment system, we did not consider options 
that would require revising the DRG weights and the standardized 
amounts more than once a year.
    With these considerations in mind, in the May 4, 2001 proposed 
rule, we explored the potential for shortening the current process.
    First, we proposed to move the November meeting of the Coordination 
and Maintenance Committee to December. To move it further would disrupt 
the process for production of the annual inpatient prospective payment 
system regulation. This step would shorten the code assignment process 
by a month and permit coding changes resulting in payment changes to be 
implemented within a year.
    Second, we proposed to expedite the process by issuing new coding 
decisions resulting from the spring meeting of the Committee (currently 
in May) that would be effective the following October 1. We also stated 
it may be necessary to move the May meeting to April to accommodate 
this change. Because the timing of this process would not allow the 
coding changes to be incorporated into the proposed rule published in 
the spring, cases with the new codes would have to be assigned to the 
same DRG to which they would have been assigned without the new code 
and no other payment adjustments would be possible. These coding 
changes would thus not affect the DRG weights or the budget neutrality 
calculations. However, more rapid introduction of new codes would 
permit reflection of the codes in claims data more quickly, and thus 
would permit eventual adjustment of payment rates sooner than otherwise 
possible. This capability could be of particular use where otherwise 
available data were not sufficient to support an immediate payment 
change, because hospital claims data permitting identification of use 
of the new technology would be available more quickly.
    This proposed change would reduce the time between discussion of a 
proposed code and its implementation from a minimum of 11 months to 6 
months. It would allow for the collection of MedPAR data a full year 
earlier than under the current process, providing the possibility that 
DRG revisions based on new codes could be expedited by up to 1 year.
    As noted in the May 4, 2001 proposed rule, there would be 
significant challenges to making this proposed process work. Because 
the changes would not be included in the proposed rule published in the 
spring, the public would be given less opportunity to consider the 
merits of the proposals, and it would have to either attend the spring 
meeting of the Committee or respond to the summary report within a few 
weeks. The decisions from the spring meeting must be finalized by the 
middle of June in order for us to include the changes in the Addendum 
to ICD-9-CM and in order to make changes in the GROUPER software to be 
effective October 1; it may be necessary to schedule the spring meeting 
earlier to meet this deadline. The opportunity to solicit additional 
input from industry groups and experts would be curtailed because of 
the short time lines. There would be an increased risk of errors 
related to revisions in the procedure

[[Page 46906]]

code index (a manual process performed by CMS), as there would be less 
time available to review and revise the procedure index to ensure that 
all changes are accurately reflected.
    For example, in the final rule published on August 1, 2001 (66 FR 
40065), we created a new procedure code to capture percutaneous 
gastrojejunostomy (code 44.32). All coding instructions (indexing, 
inclusion terms, and exclusion terms) must be verified so that the 
procedure is appropriately indexed. If one of the many index entries 
for gastrojejunostomy is not correctly updated, percutaneous 
gastrojejunostomy would be assigned to another gastroenterostomy (code 
44.39), which is an operating room procedure. This can have a 
significant impact on national health care data. Coders at different 
hospitals may follow different entries and arrive at different codes. 
To limit the potential for confusion in the hospital and coding 
communities resulting from two separate schedules for implementing code 
changes, we proposed to limit these changes to those that meet our 
definition of new technology eligible for special treatment as 
described below. Under the proposal, it would not be necessary, 
however, to demonstrate that the cases involving the new technology 
would be inadequately paid, since there would be no payment impacts of 
these changes.
    The changes would be included in the Addendum to ICD-9-CM for the 
inpatient hospital prospective payment system, and placed on the 
website for use by the industry in updating books and software systems. 
They also would be published in the final rule, and included in the CD-
ROM version of ICD-9-CM that is distributed by the Government Printing 
Office.
    Comment: Comenters generally supported changing the ICD-9-CM 
Coordination and Maintenance Committee meetings from May and November 
to April and December each year. They believed this would provide a 
greater opportunity to have topics considered in a timely fashion. The 
commenters also supported implementing codes discussed at the April 
meeting the following October. Commenters recommended that all topics 
discussed at the April meeting be implemented the following October, 
and disagreed that these more rapid changes should be limited to new 
technologies. One commenter wrote that it would be confusing to 
implement procedural coding decisions from a single Coordination and 
Maintenance Committee meeting in two different years.
    One commenter expressed concern regarding the scheduling of 
Committee meetings in December and April. The commenter was concerned 
that, by implementing code changes from the April meeting as part of 
the October updates, the proposed DRG assignments would not be included 
in the proposed rule usually published in the spring for the fiscal 
year that begins October 1. The commenter stated that this would be a 
major concern to the hospital industry because hospitals need time to 
comment on all proposed changes to the DRGs, analyze the changes for 
budgeting, train staff on coding changes, and implement software 
changes.
    Response: We appreciate the support of the majority of the 
commenters that Committee meetings should be held in April and December 
of each year to expedite the revision of ICD-9-CM codes and are 
adopting the proposed change in the schedules as final. We will begin 
this revised schedule in calendar year 2002. The meeting scheduled for 
November 1 and 2, 2001, will be held as scheduled because many 
organizations have already planned their travel schedule around these 
days. The spring 2002 meeting is currently scheduled for April 18 and 
19, 2002.
    We also agree, based on the comments, that attempts should be made 
to include all proposals discussed and approved at the April meeting as 
part of code revisions the following October. This may not always be 
possible if additional issues are raised that require analysis and 
further research. Therefore, with the extremely short timelines from 
the April meeting to publication of the final addendum in June, we 
encourage those seeking new codes to submit complete documentation for 
consideration prior to the April meeting. We note that we are retaining 
the requirement that requestors must notify the Committee 2 months 
prior to the meeting in order to have an issue addressed.
    We acknowledge the commenter's concern that, by implementing code 
changes discussed at the April meeting by the following October, there 
will not be the opportunity to propose DRG reclassifications associated 
with these new codes in the annual proposed rule published in the 
spring. Therefore, as stated above, these new codes will be assigned to 
(and paid according to) the same DRG as their predecessor technology. 
The DRG classifications of these new codes will be discussed in the 
annual final rule.
    There will also be less time to communicate and prepare for the 
changes. Nevertheless, we believe the requirement to expeditiously 
incorporate new technology into the ICD-9-CM coding system necessarily 
entails tradeoffs.
    Comment: One commenter questioned why new codes approved by the 
Committee at its April meeting could not be published in the proposed 
rule. The commenter noted that the proposed rule has not been published 
until May the last several years.
    Response: The preparation of the proposed rule and the calculations 
associated with the proposed payment rates begin in January and 
February. In particular, if a code is being proposed for reassignment 
to another DRG, it is necessary to perform calculations of the payment 
effects of such a change to ensure budget neutrality. Therefore, even 
though the actual publication of the proposed rule may occur after the 
Committee's meeting has been held, it would not be possible to 
incorporate coding changes approved at the April meeting in time for 
publication in the proposed rule.
    Comment: Commenters argued that a 23-month delay could still exist 
after new codes for new technologies are approved by the Committee 
before actual payment is available to hospitals for these new 
technologies. For example, if a new technology is introduced after the 
October deadline for consideration at the December ICD-9-CM 
Coordination and Maintenance Committee meeting, the earliest such a 
technology could qualify for special new technology payments under 
section 533 of Public Law 106-554 would be almost 2 years later, when a 
new ICD-9-CM code would become effective.
    Response: The commenter is incorrect that payment would not be 
available to hospitals for a new technology until a new code is 
effective. After the Committee approves a new technology for an ICD-9-
CM code, coders would assign the new technology to an appropriate 
existing code until such time as a new code, if necessary, could be 
established. Payment would be made in accordance with the DRG to which 
that existing code was assigned.
    We believe that product sponsors will anticipate when their new 
products will come to market and begin the process of attaining a new 
code (if necessary) to coincide with the introduction of the product 
into the marketplace. That is, it is unlikely that a new product coming 
onto the market in November could not have been anticipated in time for 
consideration at the December Committee meeting (requests must be 
submitted by October for consideration at the December meeting). 
Therefore, we believe the actual time between the marketing of a new 
product and the

[[Page 46907]]

effective date of a new ICD-9-CM code to capture the associated 
procedure would generally be substantially less than 23 months.
    Comment: Several commenters representing hospital groups strongly 
urged us to continue with annual updates to ICD-9-CM. They stated that 
more frequent code changes would be burdensome to hospitals. They 
further stated that ICD-9-CM changes require coding personnel to become 
familiar with the new codes and their systems, clinical data 
abstraction systems, laboratory systems, order-entry systems, as well 
as decision-support systems.
    Commenters pointed out that some hospitals, especially small and 
rural hospitals, do not have automated encoding systems and coding 
personnel do not have access to the Internet. These hospitals utilize 
books to assign codes. They added that keeping up with a quarterly 
change in ICD-9-CM codes would be quite a challenge unless code book 
publishers adopted a quarterly update publication schedule. Several 
commenters stated that hospitals had great difficulty with the 
quarterly coding changes introduced with the outpatient hospital 
prospective payment system. Another commenter stated that the 
complexity associated with quarterly updates and billing requirements 
should be of utmost concern and must be avoided.
    Other commenters representing medical technology manufacturers 
supported more frequent changes to ICD-9-CM. One commenter suggested 
that codes be changed twice a year, after each ICD-9-CM Coordination 
and Maintenance Committee meeting. The commenter believed that vendors 
that provide new technologies and the providers that use them would be 
motivated to accurately report any new codes as soon as possible. The 
commenter pointed out that the only constraint to issuing codes twice a 
year would be the need to update software programs such as the Clinical 
Data Editor which lists current ICD-9-CM codes. The commenter believed 
that because many software companies update their software quarterly, 
this should not be a problem.
    Several commenters recommended that codes be updated quarterly. 
They believed this would lead to more rapid data gathering on new 
technologies. One commenter suggested that because DRGs are updated 
once a year, the new codes created on a quarterly basis be assigned to 
existing DRGs. Another commenter recommended updating the DRGs on a 
quarterly basis along with quarterly updates of ICD-9-CM codes.
    Finally, a commenter emphasized the need to decouple the 
introduction of new codes from payment determinations. The commenter 
believed this will allow the expedited introduction of new codes 
without disrupting the prospectivity of the payment system.
    Response: We agree that it is important to update ICD-9-CM in an 
organized and timely fashion. As some of the commenters suggested, 
coding changes have a great impact on other activities such as software 
development and coding book updates. When the codes are changed, all 
software using these codes must be updated. Code books would also have 
to be updated, at an expense to hospitals.
    We understand the desire for more expeditious introduction of new 
codes from the perspective of tracking the data associated with new 
technology. However, we also understand the concerns expressed in the 
comments submitted by the hospital community with introducing new ICD-
9-CM codes on a more frequent basis than annually. We believe the 
change to the ICD-9-CM Coordination and Maintenance Committee meetings 
discussed above appropriately balances these concerns. We will continue 
to pursue ways to further expedite the introduction of new codes.
    Comment: Several commenters disagreed that the introduction of new 
codes and the assignment of those codes to DRGs at multiple times 
during the year would compromise the prospective nature of the payment 
system.
    Response: Our statement in the proposed rule that changes to the 
ICD-9-CM codes at multiple times during the year would compromise the 
prospective nature of the payment system assumed these changes would 
affect the DRG assignment and, therefore, the payments for affected 
cases. We agree that, if the coding changes had no impact on payment, 
the principles of certainty and predictability that underlie the 
prospective payment system would not be compromised. However, as 
reflected in the previous comment and response, implementing new ICD-9-
CM codes at multiple times during the year would be a labor-intensive, 
and thereby costly, undertaking for hospitals.
    Comment: Some commenters recommended that the Committee hold three 
meetings a year. Other commenters that addressed this issue supported 
plans to hold two meetings a year.
    Response: To date, the Committee has been able to sufficiently 
address requests by lengthening the time allotted for meetings as 
opposed to adding additional meetings. This has worked well in the 
past. Should the need arise, we will consider scheduling a third 
meeting. For now, we plan to hold only two meetings a year.
    Comment: Several commenters supported the open process involved 
with the ICD-9-CM Coordination and Maintenance Committee. They also 
supported the continuance of this process.
    Response: We agree that the open process involved with the 
Committee has worked well. These open meetings allow the public to 
fully evaluate proposed changes to ICD-9-CM. Those participating in the 
meetings have brought expertise in coding, medicine, data systems, as 
well as code book preparation to the discussions. This has consistently 
led to useful changes to the coding system. Frequently, these 
discussions lead to alternate suggestions on how to resolve coding 
problems. We will continue this open process for updating ICD-9-CM.
    Comment: One commenter suggested that procedures associated with a 
new technology for which the Food and Drug Administration (FDA) has 
issued an ``approvable letter'' should be provided an ICD-9-CM 
procedure code. According to the commenter, the FDA may issue an 
approvable letter setting forth the actions that must be taken before 
final approval.
    Response: One of the questions asked by participants at the 
Committee meetings is whether or not the procedure is investigational. 
The public participants tend to oppose the creation of new codes for 
relatively new, unproven procedures. They usually recommend waiting to 
see how widespread the technology will become. Because of space 
limitations in the code book, the public participants tend to recommend 
waiting to see if the device or procedure is approved by the FDA. We 
will continue to discuss new procedures at the Committee meetings. On 
occasion, we may discuss procedures or devices that are under FDA 
investigation. As is currently the case, public participants at the 
meetings will be given the opportunity to discuss whether or not the 
code is needed.
3. Limitations of ICD-9-CM
    While the updating process currently in use may not lend itself to 
expeditiously incorporating new medical services and technologies into 
the ICD-9-CM coding system, another important factor is the dated and 
limited structure of the ICD-9-CM system. The ICD-9-CM system was 
developed in the 1970s and implemented in 1979.

[[Page 46908]]

Dramatic advances have occurred in medicine since that time. Although 
the ICD-9-CM Coordination and Maintenance Committee has attempted to 
make coding modifications to capture new technology, it has sometimes 
been difficult to achieve a reasonable result.
    The ICD-9-CM procedure codes are made up of four digits: two 
numerical characters followed by a decimal, and then two additional 
numerical characters. The first two digits indicate a category, such as 
36--Operations on the vessels of the heart. The third digit provides 
additional breakdown, such as 36.0--Removal of coronary artery 
obstruction and insertion of stents. When the fourth digit is added, 
the code is fully described. There are only 10 codes available within 
each category (fourth digits 0-9). Once a category is full, we must 
either combine types of similar procedures under one code, or find a 
place in another section of the code book for a new code. The benefit 
of such a system is that we can collapse the codes into categories when 
analyzing claims data to capture a wide range of similar procedures. 
However, if similar codes are placed in separate sections of the code 
book, coders may not easily find them. Errors may occur when trying to 
identify particular types of cases when codes are not carefully placed 
within a system such as the current ICD-9-CM.
    ICD-9-CM is 22 years old and the premises on which the coding 
system was established are dated. A number of approaches and techniques 
used for procedures such as lasers and the use of scopes were not 
anticipated when the structure of ICD-9-CM was developed. Consequently, 
the basic categories were established on technology that is now 
outdated. Making needed coding changes each year has been quite 
difficult and involves making compromises that effect the precision of 
the coding.
4. Short-Term Solutions Within the ICD-9-CM Structure
    To consider how we might better respond to requests for new codes 
in the short term, we examined ICD-9-CM to attempt to identify an open 
series of codes that could be used for new procedures and technologies. 
There are currently 16 categories of procedure codes. However, codes 
17.00 through 17.99 are not in use. These codes are found between 
category 3, ``Operations on the Eye,'' and category 4, ``Operations on 
the Ear.'' This series of 100 codes could be used to provide codes for 
new procedures and technology. To fully utilize this new series of 
codes, we would assign new procedures to the next available code.
    A limitation of this approach would be that this category would 
capture a diverse group of procedures potentially affecting all body 
systems. Assigning diverse procedure codes to this category would 
undoubtedly create considerable confusion for coders. Currently, 
procedures are grouped by body system, and similar procedures are 
placed in categories. This arrangement assists the coder in choosing 
the most appropriate code because he or she can quickly review closely 
related codes that are together. Using category 17 for new technology 
codes, on the other hand, would mean that closely related codes would 
be widely separated.
    Use of category 17 would also require a major revision of coding 
rules since coders are taught to identify codes within a group of 
similar procedures. They are not accustomed to looking for a list of 
unrelated procedures in a separate section of the coding book.
    To supplement the category 17 codes, the Coordination and 
Maintenance Committee may be able to assign vacant codes in other 
categories. However, large numbers of sequences are already fully or 
nearly fully occupied, and this strategy would only provide limited 
availability of new codes.
    Comment: Several commenters supported the need to develop short-
term solutions to the limitations of ICD-9-CM. They generally supported 
creating a new series of codes in category 17 of ICD-9-CM for new 
technologies. However, some commenters stressed the need to assign new 
codes to the appropriate place in the body of ICD-9-CM as the first 
priority. They believed this will maintain the structure of ICD-9-CM 
and reduce confusion. They recommended that only when unused codes 
within the appropriate section of ICD-9-CM are not available should 
category 17 codes be used.
    One commenter pointed out another series of unused procedure codes: 
the codes in category 0 (codes 00.00 through 00.99). The commenter 
suggested using these codes when slots are not available in the 
appropriate section of ICD-9-CM. The commenter further recommended that 
we use codes from category 0 prior to using the codes in category 17.
    Response: We agree with the commenters that new codes should be 
created in the appropriate section of ICD-9-CM as a first priority. 
Only when there are no available slots in other chapters should codes 
be created in category 17. We also agree that using codes 00.00 through 
00.99 is an excellent idea. Using these two empty categories would 
create 200 available slots for new codes. We will discuss this issue as 
part of the ICD-9-CM Coordination and Maintenance Committee meetings.
    Comment: One commenter supported the use of category 17 of ICD-9-CM 
for new procedures, but pointed out that ICD-9-CM was designed to 
report the procedure performed, not the device or other specific 
technology used. The commenter went on to state that ICD-9-CM was never 
intended to report information on a single procedure reflecting a 
single technology or a single manufacturer's technology. The commenter 
also suggested that if new codes were created for individual devices 
instead of groups of similar procedures, the available empty codes 
would be quickly used up.
    Response: We agree with the commenter that ICD-9-CM should continue 
to develop new codes for new types of procedures. We do not believe it 
should be converted to a system which tries to identify all new devices 
created by individual manufacturers. We believe the ICD-9-CM 
Coordination and Maintenance Committee should continue to evaluate the 
merits for requests for new codes and consider them in the context of 
the structure and limitations of ICD-9-CM.
5. Alternative Short-Term Approaches
    Some observers have expressed concern that the additional codes 
available within the ICD-9-CM code set may not be adequate to 
accommodate both routine changes in coding and the new technologies 
under consideration, particularly if a long-term change, such as 
adoption of ICD-10--Procedure Coding System (ICD-10-PCS), is 
significantly delayed. We have examined several alternative short-term 
options in the event the additional available codes are used before a 
long-term solution is reached. In evaluating these alternatives, we 
must consider the changes each entails to hospitals' and CMS' coding 
and claims processing systems, and the time necessary to implement such 
changes (balanced against the timeframe for adopting a long-term coding 
solution).
    Expanding ICD-9-CM procedure codes by making them alphanumeric or 
adding a fifth digit would make available a substantial number of new 
codes for new technology but would require substantial system changes 
and create standards issues. This approach was extensively discussed in 
meetings of the ICD-9-CM Coordination and Maintenance Committee prior 
to the development of ICD-10-PCS. Input from the public indicated that 
such a

[[Page 46909]]

significant modification to a limited and dated system would only make 
the system worse. The time it would take to make this system work well 
would be longer than that required to build a new system and the 
resources needed for system changes would be significant. Such a 
modification of the ICD-9-CM standard code set would require the formal 
standards modification and adoption process prescribed by the 
regulations implementing the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA), Public Law 104-191.
    Using the V-code section of ICD-9-CM diagnosis codes to report new 
technology would not require any systems changes or create any 
standards issues and would create a moderate number of codes for new 
technology. We have discussed this recommendation with NCHS. NCHS 
opposed this option as an inappropriate use of diagnosis codes. While 
``V'' codes are used for the classification of factors influencing 
health status and contact with health services, they are not a 
substitute for procedure coding. By adding procedure coding concepts to 
the diagnosis coding system, confusion could easily lead to increased 
errors. Furthermore, the V-code section has only a limited number of 
available spots.
    We also considered using HCFA (the Health Care Financing 
Administration was recently renamed the Centers for Medicare & Medicaid 
Services (CMS)) Common Procedure Coding System (HCPCS) codes to report 
use of new technology for inpatient cases. However, using HCPCS would 
require a moderate amount of systems change and would require the 
formal standards modification and adoption process prescribed by Public 
Law 104-191, since the HCPCS code set is not the standard code set 
prescribed for inpatient services. However, it would make a substantial 
number of codes available for new technology. Alphanumeric HCPCS codes 
are currently used in outpatient departments and physician offices for 
reporting services, and they are used on a limited basis by hospitals 
in reporting the use of hemophilia clotting factors used during an 
inpatient stay.
    Use of HCPCS codes would require that a new service or technology 
either be assigned a code through otherwise applicable processes for 
HCPCS coding or that CMS assign a specific, temporary code for use in 
connection with new technology payments for inpatient hospital 
services. Specifically assigned codes could be assigned relatively 
quickly. However, use of such codes would run the risk of confusion if 
other codes were assigned to the same service or items when used in 
other settings. More generally, HCPCS coding would duplicate 
information found in the ICD-9-CM procedure codes. Careful attention to 
integration of coding across the two systems would be necessary, and 
dissemination of information about correct coding to hospital coders 
would present challenges. Even with excellent integration and 
dissemination, the risk of confusion by hospital coders would be high.
    The use of HCPCS codes would also raise questions on how the 
accuracy of claims data will be assessed. CMS contracts with Peer 
Review Organizations to validate the accuracy of coded data. 
Consideration would need to be given to how the accuracy of these data 
could be verified. If two separate coding systems with overlapping 
information are used, considerable variations in reporting practices 
might arise.
    Similar to the option of using alphanumeric ICD-9-CM procedure 
codes, changes in systems and in hospital coding procedures that would 
be associated with this approach would take time and resources to 
implement for hospitals, CMS, and potentially other payers such as 
Medicare secondary insurers.
    In recognition of these considerations, we proposed not to proceed 
with use of HCPCS codes for this purpose at the present. We believed 
this possibility should be revisited later if the ICD-9-CM codes in 
fact prove inadequate and if a longer term solution is not yet 
available. However, we solicited public comments on the concept of 
using HCPCS codes to identify specific new technologies on inpatient 
hospital claims.
    Comment: One commenter suggested that V codes be used in 
combination with existing procedure codes to act as a flag and 
differentiate the new technology procedures from the old procedures. 
The commenter suggested that the following new V codes be created to 
identify new technology:

V00  Admission/Encounter for New Technology Procedures
    The following categories would be used to identify new technology:

V00.0  New Technology--Drugs
V00.1  New Technology--Musculoskeletal/Integumentary
V00.2  New Technology--Respiratory, Nose, Throat
V00.3  New Technology--Cardiovascular
V00.4  New Technology--Digestive System
V00.5  New Technology--Urinary
V00.6  New Technology--Genital System/Male and Female
V00.7  New Technology--Nervous System
V00.8  New Technology--Eye, Ear
V00.9  New Technology--NEC/NOS

    The commenter suggested that we use these codes beginning October 
1, 2001. If this were not possible, the commenter suggested that we 
implement the codes after discussion at the next meeting of the ICD-9-
CM Coordination and Maintenance Committee.
    Another commenter opposed the use of V codes as a way of 
supplementing the procedure codes. The commenter believed that this was 
an inappropriate use of diagnosis codes. The commenter stated that the 
ICD-9-CM diagnosis codes have space constraints as well. The commenter 
suggested that it is possible that there might not be sufficient 
available codes to meet the need for new procedure codes, but using 
available V codes for procedures would seriously restrict the ability 
to create new diagnosis codes when necessary.
    Response: The use of V codes for new technology is on the agenda to 
be discussed at the November 1, 2001 meeting of the ICD-9-CM 
Coordination and Maintenance Committee. The NCHS is responsible for the 
diagnosis part of the meeting. However, it should be mentioned that 
previous discussions at the meeting have not been supportive of 
proposals such as this. This use of diagnosis codes to help identify 
procedures or technologies is contrary to the usual structure and 
content of ICD-9-CM diagnosis codes.
    Moreover, it would not be possible to implement the use of V codes 
as recommended by the commenter on October 1, 2001. The addendum to 
ICD-9-CM, which lists code revisions, has already been distributed. 
Software vendors and publishers have already begun preparing their 
coding products. We believe the Committee should continue its open 
process of discussion of code revisions in this regard. To implement a 
code change without providing the public an opportunity to comment 
would not be consistent with that process.
    Comment: One commenter opposed expanding ICD-9-CM procedure codes 
by making them alphanumeric or adding an additional digit. The 
commenter believed that this approach would be difficult and costly to 
implement. The commenter also stated that it would essentially convert 
ICD-9-CM into a new coding system, and thus the system would not be a 
``short-term'' approach, as it would have to undergo

[[Page 46910]]

the formal standards modification and adoption process of Public Law 
104-191. In addition, the commenter stated that, if a new procedure 
coding system is going to be formally adopted through the standards 
modification and adoption process, it should be ICD-10-PCS, which is a 
significant improvement over ICD-9-CM.
    Response: We agree with the commenter's explanation for why it 
would be unwise to initiate a process of modifying ICD-9-CM procedure 
codes involving the use of alphanumeric characters or the addition of 
digits, as this effort would utilize extensive resources and offer few 
overall improvements.
    Comment: Several commenters supported our proposal not to use HCPCS 
codes for inpatient claims. The commenters stated that hospitals have 
had great difficulty with the quarterly coding changes introduced with 
the outpatient prospective payment system. One commenter stated that 
some hospitals have not been able to keep their systems current with 
the onslaught of HCPCS coding changes, especially the device pass-
through C-codes. The commenter also stated that many hospitals have 
separate coding staffs for inpatient records and for outpatient 
records. The commenter further stated that introducing HCPCS coding 
into the inpatient Medicare reporting system would create significant 
burdens and training issues and that there would also need to be 
information system changes to activate the HCPCS codes.
    Another commenter opposed the use of both HCPCS codes and CPT codes 
on inpatient claims. The commenter stated that the use of another 
procedure coding system in addition to ICD-9-CM for inpatient claims 
increases the complexity and destroys clinical analysis capability of 
the DRG system.
    Several commenters supported using HCPCS codes as procedure codes 
in the inpatient hospital setting. One commenter urged CMS to adopt the 
same process it uses for the outpatient hospital prospective payment 
system, in order to expedite the assignment of temporary new technology 
codes that qualify for additional payment under the inpatient hospital 
prospective payment system.
    One commenter supported the use of level two of HCPCS codes for new 
technology, but not for all medical services and technology. The 
commenter stated that the best approach would be to use a combination 
of HCPCS and ICD-9-CM procedure codes to report new medical services 
and new technologies. The commenter supported the continued use of ICD-
9-CM procedure codes for any new service or technology that represents 
a new procedure. However, if the new service or technology represents 
an item, drug, or device, as opposed to a procedure, then a HCPCS code 
should be assigned. This commenter did not support the use of temporary 
HCPCS codes (for example, G codes) in connection with new technology 
payments for inpatient hospital services, as this could result in 
duplicative or overlapping codes among different coding systems. The 
commenter recommended that new items, drugs, or devices meeting the 
definition of new technology should be assigned a HCPCS code through 
the usual HCPCS process. Consideration should also be given to the 
feasibility of implementing new HCPCS codes more frequently than once a 
year. The commenter also stated that a number of payers already report 
HCPCS codes in Form Locator 44 on the billing form (UB-92). The 
commenter recommended that CMS approach the National Uniform Billing 
Committee to explore this option.
    Response: We agree that introducing HCPCS coding into the inpatient 
system as a solution to limitations with ICD-9-CM would be burdensome 
to hospitals and increase the complexity and confuse the logic of the 
inpatient hospital coding scheme. In addition, HCPCS codes could not be 
used for reporting diagnosis and treatment of hospital inpatients 
unless and until the HCPCS code set was formally adopted under the 
modifications and adoption procedures required for national standards 
under Public Law 104-191. As noted above, using categories 0 and 17 of 
ICD-9-CM appears to offer workable short-term solutions. As discussed 
below, a longer term solution is the adoption of a more flexible coding 
system such as ICD-10. Therefore, we are not introducing the use of 
HCPCS codes for inpatient use at this time.
    Comment: One commenter recommended that we require the use of 
Universal Product Numbers (UPNs) as a means of reporting all new 
medical devices qualifying as new technologies. The commenter mentioned 
that there are currently two industry standards with different formats 
for UPN codes. The commenter recommended that both of these formats be 
accepted, and added that the UPNs would facilitate the use of a bar 
code that would assist in ordering, tracking, and validating inventory. 
The commenter also stated that the use of UPNs would substantially 
reduce administrative costs. The commenter recommended that UPN codes 
be incorporated into the existing ICD-9-CM coding system--the ICD-9-CM 
procedure code descriptor would identify the procedure and the UPN code 
would then make clear which products qualify as new technologies.
    Response: We have been exploring the use of UPN codes for 
ambulatory bills. Since this coding system is not currently in 
widespread use, it was not selected as one of the national standards 
for medical coding under Public Law 104-191. If UPN codes were to be 
implemented, they would first have to be evaluated under the standards 
modification and adoption procedures for designating national standards 
under Public Law 104-191. Designating any new coding system as a 
national standard is a lengthy process that involves public discussions 
as well as proposed and final rulemaking. We will continue our process 
of evaluating UPN codes as a future national coding standard.
6. Development of ICD-10-PCS; A Possible Long-Term Solution
    While acknowledging the limitations of the ICD-9-CM coding system, 
the Secretary designated the ICD-9-CM coding system as the national 
standard for reporting, among other things, diagnosis and treatment of 
hospital inpatients, in a final rule published in the Federal Register 
on August 17, 2000 (65 FR 50311), following notice and comment 
rulemaking in accordance with Public Law 104-191. In that same final 
rule, the public was advised that ICD-10-PCS has great promise as a 
future replacement of ICD-9-CM. However, it was also noted that ICD-10-
PCS, at that time, required additional testing and revision prior to a 
decision on whether to use it as a national standard. At that time, 
work was proceeding on an updated variant of the ICD system, ICD-10, 
that could replace ICD-9-CM, but this system was not yet completed. The 
World Health Organization developed ICD-10 as an international 
diagnosis coding system. NCHS has been modifying ICD-10 to replace the 
diagnosis section of ICD-9-CM. This system is being referred to as ICD-
10-CM. At the same time, CMS has been developing the ICD-10-PCS as a 
possible replacement for the ICD-9-CM procedure codes.
    Criteria for the development of a new procedure coding system were 
established in 1993 by the National Committee on Vital and Health 
Statistics (NCVHS) in a report concerning recommendations for a single 
procedure classification system. The criteria included the following:
     Completeness--all substantially different procedures have 
a unique code.

[[Page 46911]]

     Expandability--the structure of the system allows 
incorporation of new procedures and technologies as unique codes.
     Standardized terminology--the coding system includes 
definitions of the terminology used. While the meaning of the specific 
words can vary in common usage, the coding scheme does not include 
multiple meanings for the same term. Each term is assigned a specific 
meaning.
     Multiaxial--the system has a multiaxial structure with 
each code character having the same meaning within the specific 
procedure section and across procedure sections to the extent possible.
     Diagnostic information is not included in the procedure 
description.
    Using these criteria, CMS developed the ICD-10-PCS through a 
contract with 3M Health Information Systems. The ICD-10-PCS system 
provides much greater code capacity because all substantially different 
procedures have a unique code. While the ICD-9-CM procedure coding 
system is limited to a maximum of 10,000 codes, the current draft of 
ICD-10-PCS contains 197,769 codes and the number could be expanded 
further.
7. Public Meeting on Implementing ICD-10-PCS
    The Department of Health and Human Services is starting the process 
of soliciting public comments on whether it should proceed to adopt 
ICD-10-PCS as the national standard for coding inpatient hospital 
services to replace the ICD-9-CM procedures code set. A public meeting 
on this issue was held May 17, 2001, in the CMS Auditorium in 
Baltimore, Maryland. The complete report summarizing the results of 
that meeting, including the presenters' position papers, can be found 
at: http://www.hcfa.gov/medicare/icd9cm.htm. The public was encouraged 
to attend and participate in the discussion on whether ICD-10-PCS 
should become a national standard. Organizations and groups were given 
the opportunity to make a brief presentation on their members' behalf.
    Comment: Several commenters supported the ICD-10-PCS as a long-term 
solution for replacing the ICD-9-CM. One commenter noted the number of 
interested parties during the May 17, 2001 ICD-9-CM Coordination and 
Maintenance Committee meeting who endorsed ICD-10-PCS. Other commenters 
suggested that we coordinate the implementation of ICD-10-PCS at the 
same time as the ICD-10-CM diagnosis code set. One commenter objected 
to the potential adoption of ICD-10-PCS.
    Response: We agree that ICD-10-PCS is the best long-term solution 
to replace ICD-9-CM. As mentioned earlier, organizations were given the 
opportunity to submit a position paper and make a presentation on this 
issue. Several organizations requested the opportunity to present on 
this issue. The position papers developed are posted as part of the 
Summary Report of the ICD-9-CM Coordination and Maintenance Committee. 
The presenters' remarks summarized these position papers. The following 
are excerpts from the position papers.

    ``ICD-10-PCS represents a significant improvement over ICD-9-CM 
and substantially meets the characteristics of a procedural coding 
system outlined by the NCVHS as described above. ICD-10-PCS also 
meets all of the HIPAA requirements outlined earlier * * * 
Replacement with a new procedural coding system for inpatient 
services is absolutely necessary and ICD-10-PCS meets the criteria 
for such a replacement system.''

American Health Information Management Association

    ``AHA has worked closely with institutional members in the 
field-testing of ICD-10-PCS. The field-testing results are very 
positive. Results indicate that ICD-10-PCS can easily accommodate 
the expansion of new procedure codes. Coders working with ICD-10-PCS 
also found the new system to be efficient, logical, and easy to 
understand and learn * * * Based on the testing, the new procedure 
classification system holds a great deal of promise and should be 
considered for future use * * * Therefore, the AHA supports the HIS 
industry in requesting that ICD-10-PCS implementation be carried out 
in tandem with the migration to ICD-10-CM.''

American Hospital Association

    ``Our position is that ICD-9-CM is not adequate for long-term 
future use and that providers, payers, and Medicare beneficiaries 
would be well served by a conversion to ICD-10-PCS.''

Federation of American Hospitals

    ``Based on AMA's support for the elimination of complex 
regulatory burdens mandated by the Medicare program, the AMA does 
not support the adoption of ICD-10-PCS. The AMA believes that the 
implementation of ICD-10-PCS will only add to the regulatory burden 
faced by physicians and other health care providers. ICD-10-PCS is a 
substantial departure from ICD-9 and from all existing health care 
code sets. As a result, it would require significant resources to 
implement and problems inherent in the system suggest that it may 
not be worth the cost.''

American Medical Association

    ``ASHA appreciates having had the opportunity to provide input 
on the development of this system and is pleased to see that many of 
our recommendations have been incorporated into the final version of 
the ICD-10-PCS * * *. Again, ASHA supports the implementation of the 
ICD-10-PCS as a replacement for Volume 3 of the ICD-9-CM.''

American Speech-Language Hearing Association

    ``AdvaMed supports the rapid adoption of the International 
Classification of Disease, Procedural Coding System, 10th Edition 
(ICD-10-PCS), for use in hospital inpatient billing* * *It is a 
system that has been developed over the past decade with substantial 
input from the clinical community and offers tremendous versatility 
in describing the differences in the use and characteristics of 
medical technologies.''

AdvaMed

    ``The transition from ICD-9-CM to ICD-10-PCS will help enhance 
the quality of care available for Medicare beneficiaries and provide 
better management tools for healthcare professionals * * * ICD-10-
PCS should be implemented to bring our coding system up to the 
standards of the rest of the world, to improve our ability to 
understand the impact on procedure and technology selection on 
patient outcomes, and to provide better options for paying hospitals 
appropriately for the care they provide.''

Medical Technology Partners

    ``Importantly, ICD-10-PCS has the capacity to grow as medical 
science grows * * * ICD-10-PCS may have the flexibility and 
durability to span this century--a statement that cannot be made 
about any other medical coding system currently proposed or in use. 
A coding system that could be updated decade after decade would 
provide an unprecedented continuity of medical data.''

Ingenix Syndicated Content Group

    ``We believe that the ICD-10-PCS fulfills these criteria, and we 
urge the Health Care Financing Administration to implement the ICD-
10-PCS as a national standard for coding inpatient procedures as 
quickly as possible.''

Princeton Reimbursement Group

The only organization presenting at the meeting that did not support 
the adoption of ICD-10-PCS as the national standard for inpatient 
procedure coding was the American Medical Association.

    While it is widely acknowledged that the ICD-9-CM diagnoses and 
procedures coding system is dated, we are not yet ready to begin the 
final decisionmaking process as to which coding system will become the 
next national standard. The NCHS has not yet completed the final draft 
of ICD-10-CM diagnosis code set. While CMS has completed ICD-10-PCS and 
held public meetings on its possible implementation, we are not yet 
ready to proceed with making final recommendations. CMS believes that 
further action on naming new coding systems should not begin until NCHS 
has completed ICD-10-CM. Most

[[Page 46912]]

organizations commenting on this topic want decisionmaking action 
deferred until both systems are complete. At that time, the formal 
standards modification and adoption process will begin, to determine if 
both ICD-10-CM and ICD-10-PCS should be implemented as new standards 
and whether they should be implemented at the same time.
    The May 4, 2001 proposed rule stated that implementation of ICD-10-
CM and ICD-10-PCS could not occur before October 2003. Linking the ICD-
10-PCS implementation date to ICD-10-CM could postpone such 
implementation well beyond 2003. To date, there has not been any public 
evaluation of or testimony on ICD-10-CM. In addition, ICD-10-PCS and 
ICD-10-CM could not be used for reporting diagnosis and treatment of 
inpatients until those code sets were formally adopted under the 
national standards modification and adoption process of Public Law 104-
191. Those procedures are very involved and the process can be very 
lengthy.
8. Methods of Expeditiously Incorporating New Medical Services and 
Technologies Into the Coding System
    In summary, we are developing a two-part strategy for expeditiously 
incorporating new medical services and technologies into the clinical 
coding system used with respect to payment for inpatient hospital 
services. First, we are shortening the timeframe for implementing new 
codes by processing changes without first publishing them in the 
proposed rule in the spring. This means new codes approved at the 
spring meeting of the ICD-9-CM Coordination and Maintenance Committee 
could be implemented by October of the same year, although the DRG 
assignment for these new codes would initially be the same as the 
predecessor technologies. We also are moving the November meeting to 
December (and the May meeting to April, to allow more time to implement 
decisions from the spring meeting by October). These changes will 
reduce the time it currently takes to implement new codes, as well as 
reduce the time required to collect data through the MedPAR by up to a 
year in many cases.
    Second, to make more codes available to identify new technology, we 
will begin immediately to work with the public to use categories 0 and 
17 of ICD-9-CM procedures. This will provide room for 200 additional 
procedure codes. We also will continue the current process of adding 
and revising codes within the current categories as room and structure 
allow. Our long-range strategy is to consider the implementation of the 
ICD-10-PCS and ICD-10-CM code sets as replacement systems for ICD-9-CM. 
However, because such a change would require proceeding in accordance 
with the standards modification and adoption process under Public Law 
104-191, in addition to the need to revise both our payment systems and 
those of hospitals, this would be a lengthy process.

IV. New Requirements Relative to New Services and Technologies

    Section 533(b) of Public Law 106-554 amended section 1886(d)(5) of 
the Act to add new subparagraphs (K) and (L) to address a process of 
identifying and ensuring adequate payment for new medical services and 
technologies under Medicare. Under new section 1886(d)(5)(K)(i) of the 
Act, effective for discharges beginning on or after October 1, 2001, 
the Secretary is required to establish (after notice and opportunity 
for public comment) a mechanism to recognize the costs of new services 
and technologies under the inpatient hospital prospective payment 
system. New section 1886(d)(5)(K)(ii)(I) of the Act specifies that the 
mechanism must apply to a new medical service or technology if, ``based 
on the estimated costs incurred with respect to discharges involving 
such service or technology, the DRG prospective payment rate otherwise 
applicable to such discharges * * * is inadequate.'' New section 
1886(d)(5)(K)(vi) of the Act specifies that a medical service or 
technology will be considered ``new'' if it meets criteria established 
by the Secretary (after notice and opportunity for public comment).
    New sections 1886(d)(5)(K)(ii) through (vi) of the Act further 
provide--
     For an additional payment for new medical services and 
technology in an amount beyond the DRG prospective payment system 
payment rate that adequately reflects the estimated average cost of the 
service or technology.
     That the requirement for an additional payment for a new 
service or technology may be satisfied by means of a new-technology 
group (described in new section 1886(d)(5)(L) of the Act), an add-on 
payment, a payment adjustment, or any other similar mechanism for 
increasing the amount otherwise payable with respect to a discharge.
     For the collection of data relating to the cost of new 
medical services or technology for not less than 2 years and no more 
than 3 years after an appropriate inpatient hospital services code is 
issued. The statute further provides that discharges involving new 
services or technology that occur after the collection of these data 
will be classified within a new or existing DRG group with a weighting 
factor derived from cost data collected for discharges occurring during 
such period.
    In the May 4, 2001 proposed rule, we included a discussion of how 
we proposed to implement the provisions of section 533(b) of Public Law 
106-554 (66 FR 22693). This final rule establishes a mechanism to 
implement those provisions.

A. Criteria for Identifying New Medical Services and Technology

    New section 1886(d)(5)(K)(vi) of the Act specifies that a medical 
service or technology will be considered ``new'' if it meets criteria 
established by the Secretary (after notice and opportunity for public 
comment). (For convenience, hereafter we refer to ``new medical 
services and technology'' as ``new technology.'') In the May 4, 2001 
proposed rule, we proposed that a new technology would be an 
appropriate candidate for an additional payment when, in the judgment 
of the Secretary, it represents an advance in medical technology that 
substantially improves, relative to technologies previously available, 
the diagnosis or treatment of Medicare beneficiaries (proposed 
Sec. 412.87(b)(1)). This proposed criterion was intended to ensure that 
new technology can be demonstrated to provide a substantial clinical 
improvement based on verifiable evidence. In the May 4, 2001 proposed 
rule, we proposed to make determinations regarding which new 
technologies meet this criterion using a panel of Federal clinical and 
other experts, supplemented as appropriate with outside expertise. As 
explained below, we also proposed that new technologies meeting this 
clinical definition must also be demonstrated to be inadequately paid 
otherwise under the DRG system to receive special payment treatment 
(proposed Sec. 412.87(b)(3)). New technologies that do not meet these 
proposed standards would be paid through other applicable DRG payments. 
These payments would be recalibrated over time to reflect the actual 
use of the new technologies.
    In addition to the clinical and cost criteria, we proposed that, in 
order to qualify for the special payment treatment provided under new 
section 1886(d)(5)(K)(ii)(I) of the Act, a specific technology must be 
new (proposed Sec. 412.87(b)(2)). We believe the new provision 
contemplates the special payment treatment for new technologies until 
such time as data are available to reflect the cost of the technology 
in the

[[Page 46913]]

DRG weights through recalibration (generally 2 years). Specifically, 
new section 1886(d)(5)(K)(ii)(II) of the Act states that the Secretary 
must ``provide for the collection of data with respect to the costs of 
a new medical service or technology * * * for a period of not less than 
two years and not more than three years beginning on the date on which 
an inpatient hospital code is issued with respect to the service or 
technology.'' In addition, new section 1886(d)(5)(K)(ii)(III) states 
that the Secretary must ``provide for additional payment to be made * * 
* with respect to discharges involving a new medical service or 
technology described in subclause (I) that occur during the period 
described in subclause (II) in an amount that adequately reflects the 
estimated average costs of such service or technology.''
    We also proposed in the May 4 proposed rule that the results of all 
determinations would be announced in the Federal Register as part of 
the annual updates and changes to the inpatient hospital prospective 
payment system (proposed Sec. 412.87(b)(1)). In addition, we noted that 
this determination is separate and distinct from the coverage decision 
process.
    We solicited comments on these proposals. In particular, given that 
this process is the result of new legislation with possibly major 
implications for the hospital inpatient prospective payment system, we 
invited public comment on: Our definition of new medical services and 
technologies; the use of Federal clinical and other experts to make 
determinations regarding which criteria meet our definition of a new 
service or technology; the information necessary to determine whether 
payment would be inadequate; and our payment mechanism (see the 
following discussions for these latter two issues).
    Comment: Commenters argued that our proposed rule did not establish 
a clear means whereby new technologies may qualify for additional 
payments to be effective for discharges occurring on or after October 
1, 2001. These commenters believed that section 533 of Public Law 106-
554 requires new technologies to be identified and special payments to 
be made at that point.
    Several commenters argued that particular new technologies should 
be recognized for special payment under this provision beginning 
October 1, 2001. On the other hand, a commenter representing hospitals 
encouraged us to proceed carefully and deliberately.
    Response: Although we are establishing the methodology by which new 
technologies may become eligible for special payments in this final 
rule, we will not make additional payments under the methodology during 
FY 2002. This is due to the timing of the enactment of Public Law 106-
554 on December 21, 2000, the requirement that we establish the 
mechanism through notice and an opportunity for public comment, and the 
requirement that the payments be implemented in a budget neutral 
manner. That is, it was not feasible to establish the criteria by which 
new technologies would qualify through a proposed rule with opportunity 
for public comment as part of the May 4, 2001 proposed rule, finalize 
those criteria in response to public comments, allow technologies to 
qualify under those criteria, and implement payments for any qualified 
technologies in a budget neutral manner. Making the special payments in 
a budget neutral manner requires an adjustment to the standardized 
amounts (which must be published in final by August 1 each year) that 
we use to pay acute care hospitals under the prospective payment 
system.
    It was not possible to establish a process through proposed and 
final rulemaking, whereby new technologies could qualify for this 
special payment provision, prior to publishing a proposed rule for FY 
2002. As noted previously, Public Law 106-554 was enacted on December 
21, 2000. We are required to publish our proposed rule updating the 
standardized amounts and including other changes to the hospital 
inpatient prospective payment system by April 1 of each year, and to 
publish a final rule by August 1 of each year.
    We did, however, carefully evaluate all technologies of which we 
were aware, including those submitted for consideration during the 
public comment period on the May 4, 2001 proposed rule, that might seek 
designation as ``new'' under this provision. All of those that were 
submitted during the public comment period were previously existing 
technologies with data already available in the MedPAR file. Therefore, 
they would not be eligible under our criterion to be considered new. Of 
new technologies that we considered prior to publication of the 
proposed rule, none submitted data we believe were sufficient to 
document that the technology would be inadequately paid under existing 
DRGs. However, one new technology, intravascular brachytherapy, was 
assigned to a higher weighted DRG based on the clinical characteristics 
of the procedure.
    Comment: A number of comments addressed our proposed eligibility 
requirements for a medical service or technology to qualify as ``new 
technology''. Several commenters were concerned that the criteria were 
too vague and subjective to be implemented. Specifically, commenters 
took issue with the ``substantial improvement'' requirement, stating 
that the statute does not require such a stringent test and that the 
term is too subjective and cumbersome to administer properly.
    The Medicare Payment Advisory Commission (MedPAC), which stated it 
was in general agreement with the criteria overall, commented that it 
would be difficult to operationalize the ``substantial improvement'' 
criterion, which makes judgements about the extent to which a given 
technology improves diagnosis or treatment. Another commenter suggested 
rewording the criterion to say ``substantial differences'' and stated 
that these differences should be measured based on diagnostic or 
therapeutic effects.
    Other commenters, representing national associations of hospitals, 
supported our proposed criteria for identifying new technology, 
although one commenter also expressed reservations about the ambiguity 
of the ``substantial improvement'' criterion.
    Response: As stated previously, we proposed the ``substantial 
improvement'' criterion to limit these special payments for those 
technologies that afford clear improvements over the use of previously 
available technologies. We believe the special payments for new 
technology established by this final rule should be limited to those 
new technologies that have been demonstrated to represent a substantial 
improvement in caring for Medicare beneficiaries, such that there is a 
clear advantage to creating a payment incentive for physicians and 
hospitals to utilize the new technology. Where such an improvement is 
not demonstrated, we continue to believe the incentives of the DRG 
system provide a useful balance to the introduction of new 
technologies.
    In that regard, we would point out that various new technologies 
introduced over the years have been demonstrated to have been less 
effective than initially thought, or in some cases even potentially 
harmful. We believe it is in the best interest of Medicare 
beneficiaries to proceed very carefully with respect to the incentives 
created to quickly adopt new technology.
    Therefore, we are adopting our proposed requirement that a new 
technology must represent a substantial improvement, and are clarifying 
the way it will be applied. We will evaluate a request for special 
payment for a new

[[Page 46914]]

technology against the following criteria in order to determine if the 
new technology meets the substantial improvement requirement:
     The device offers a treatment option for a patient 
population unresponsive to, or ineligible for, currently available 
treatments.
     The device offers the ability to diagnose a medical 
condition in a patient population where that medical condition is 
currently undetectable or offers the ability to diagnose a medical 
condition earlier in a patient population than allowed by currently 
available methods. There must also be evidence that use of the device 
to make a diagnosis affects the management of the patient.
     Use of the device significantly improves clinical outcomes 
for a patient population as compared to currently available treatments. 
Some examples of outcomes that are frequently evaluated in studies of 
medical devices are the following:
    \ Reduced mortality rate with use of the device.
    \ Reduced rate of device-related complications.
    \ Decreased rate of subsequent diagnostic or therapeutic 
interventions (for example, due to reduced rate of recurrence of the 
disease process).
    \ Decreased number of future hospitalizations or physician visits.
    \ More rapid beneficial resolution of the disease process treatment 
because of the use of the device.
    \ Decreased pain, bleeding, or other quantifiable symptom.
    \ Reduced recovery time.
    We will require the requester to submit evidence that the 
technology meets one or more of these criteria. We note that these 
criteria are not intended for use in making coverage decisions under 
section 1862(a)(1)(A) of the Act.
    Comment: Several commenters requested that we clarify the time 
period in which a technology would be considered new for purposes of 
qualifying for this special add-on payment. The commenters noted that 
proposed Sec. 412.87(b)(2) states that `` [a] medical service or 
technology may be considered new within 2 or 3 years after it becomes 
available on the market * * *.'' The commenters argued that this 
requirement should be clarified to state that the 2-year to 3-year 
period begins with the assignment of an appropriate tracking code, not 
the point at which the technology becomes available on the market. 
Several commenters indicated that this would enable previously existing 
technologies to qualify if they receive a new code that better enables 
tracking of their data.
    Response: The 2-year to 3-year period referenced in section 
1886(d)(5)(K)(ii)(II) of the Act is the time that is required for 
discharge data associated with a new technology to be reflected in the 
DRG weights. Therefore, the most appropriate point to begin the period 
during which a technology may be considered new is the point at which 
the technology becomes available on the market and the ICD-9-CM code 
issued by the ICD-9-CM Coordination and Maintenance Committee becomes 
effective. The 2-year to 3-year time period provided under the Act 
recognizes the lag between market approval and a new ICD-9-CM code 
becoming effective.
    Technology will no longer be considered new after the point at 
which data begin to become available reflecting the code assigned to 
the technology by the Committee. We do not believe it would be 
appropriate to consider technologies that have been on the market for 
more than 2 or 3 years for approval under this provision on the basis 
that the Committee subsequently issues a more precise procedural code. 
Data reflecting the costs of these technologies are already available 
in the MedPAR data. We would, however, continue our past practice of 
evaluating whether existing procedures are appropriately classified to 
a DRG. To the extent the introduction of a new code for existing 
technology helps to better identify higher costs associated with a 
procedure, we would work to expedite the appropriate assignment of that 
code (for example, using more recent MedPAR data).
    Comment: Several commenters objected to our proposal to consult a 
Federal panel of experts in evaluating new technology under the 
``substantial improvement'' criterion. One commenter referred to the 
panel as an unnecessary layer of bureaucracy that should be eliminated. 
The commenter believed the panel would be unnecessary and that CMS 
should automatically deem drugs and biologicals approved by FDA through 
its ``fast-track'' processes as new technology.
    A number of commenters requested further details regarding the 
composition of the panel and its review process. They requested that 
CMS establish clear timelines on when the panel will review 
applications for new technologies and publish these timelines on the 
CMS website. The commenters further stated that meetings of the panel 
should be open to the public and the meeting date and agenda announced 
in advance, with technology sponsors allowed to present their request 
at the meetings. The commenters also requested that a reconsideration 
process be established.
    Response: The role of the Federal panel will be to evaluate whether 
a new technology represents a substantial improvement in the diagnosis 
or treatment of Medicare beneficiaries. Because there is not another 
body currently making such determinations, it is necessary to establish 
the panel. The panel will be comprised of CMS clinical staff, 
supplemented with coding and claims processing experts on staff at CMS. 
The panel may be supplemented with outside expertise as appropriate.
    The panel will consider all relevant information (including FDA 
``fast-track'' approval) in making its determinations. However, we do 
not envision an automatic approval process under this provision.
    The panel will consider applications on an ongoing, ad hoc basis. 
As described below, the initial data submission must be no later than 
early October, approximately 6 months prior to the publication of the 
proposed annual update rule, and a complete dataset must be submitted 
no later than mid-December. Similarly, initial clinical data (peer-
reviewed articles, study results, etc.) to demonstrate the substantial 
improvement associated with the new technology must be submitted by 
early October. This will permit the panel to request further 
documentation if necessary prior to reaching a decision. It will also 
allow time to consider whether outside expertise is needed, and, if so, 
to convene appropriate experts. It is anticipated that consultations 
with the sponsors of technologies will be utilized as necessary.
    Decisions of the panel will be published in the annual proposed 
rule announcing updates to the inpatient prospective payment system, 
along with summaries of the documentation considered. This will permit 
the sponsors of the technology to request a reconsideration of a 
negative decision, as well as allow the public to evaluate the 
decisions and request reconsideration.
    Comment: Commenters requested we clarify how subsequent versions of 
an approved new technology will be treated under this provision. The 
commenters suggested that the special payment provision should be 
available to any new technology that is introduced while the first 
eligible version of the technology is still eligible for special 
payment. The commenters further suggested that if the subsequent 
variations of the new technology are substantially similar, they should 
be automatically eligible for the special

[[Page 46915]]

payment provision. If the subsequent versions are different or broader 
than the initial technology, there should be an abbreviated application 
process available.
    Response: We agree with the commenters that subsequent new 
technologies that are substantially similar to a currently approved 
(for special payment) technology should be eligible for special payment 
as well. Otherwise, our payment policy would bestow an advantage to the 
first applicant representing a particular new technology to receive 
approval.
    Applicants would still be required to submit data showing they 
would be inadequately paid and that the subsequent technology meets the 
criterion that it be new (case data are not currently available in the 
MedPAR data). Once data become available to incorporate the costs of 
the new technology into the DRG recalibration process, subsequent 
versions must demonstrate they meet the substantial improvement 
criterion (with the previously new technology included in the 
comparative baseline) in order to qualify for special treatment.
    For example, Company A and Company B are simultaneously developing 
a new technology. Company A applies and is approved for additional 
payments under this provision for FY 2003. Company B then submits an 
application to demonstrate its product is substantially similar to 
Company A's product, and is approved for additional payments for FY 
2004. In FY 2005, data are available on Company A's product to be used 
for DRG recalibration. Therefore, no additional payments are made for 
Company A's product during FY 2005, and, because Company B's product is 
substantially similar to Company A's product, no additional payments 
will be made for Company B's product during FY 2005. Similarly, if 
Company A developed a variation of the new technology in FY 2005, this 
variation must meet all three criteria in order to be eligible 
(substantial clinical improvement, inadequately paid otherwise, and 
data unavailable for DRG recalibration).
    Presumably, a substantially similar technology would be assigned 
the same ICD-9-CM code as the initial new technology. Because the 
approval of additional new technologies would affect the budget 
neutrality calculations and the requirement for the public to have the 
opportunity to review and comment on decisions that would impact on 
hospital payments, we will implement subsequently approved technologies 
through the annual notice of proposed and final rulemaking.
    Comment: One commenter requested clarification whether a new use of 
an existing technology would qualify as new under our criteria.
    Response: If the new use of the existing technology was for 
treating patients not expected to be assigned to the same DRG as the 
patients receiving the existing technology, it may be considered for 
approval, but it must also meet the substantial improvement and 
inadequacy of payment criteria in order to qualify for special payment.
    Comment: One commenter requested that, when a procedure is approved 
as a new technology under the proposed criteria outlined in section 
IV.F. of the May 4, 2001 proposed rule (66 FR 22693), it automatically 
be issued a new ICD-9-CM code without the requestor having to contact 
the ICD-9-CM Coordination and Maintenance Committee.
    Response: Before any procedure can be uniquely classified either 
within the regular DRGs or under the new technology process, it first 
must be identified. A procedure is identified through an ICD-9-CM code. 
This code may be a general code, such as for a bronchial dilation. It 
also may be more precise, such as for the implantation of an external, 
pulsatile heart-assist system. Participants at the public meetings of 
the ICD-9-CM Coordination and Maintenance Committee carefully evaluate 
the need for a new, unique ICD-9-CM code. They consider factors such 
as: whether or not there is an existing code that adequately identifies 
the procedure; whether the procedure is so unique that it warrants a 
unique code; whether there is room within ICD-9-CM for a new code; 
whether the structure of ICD-9-CM allows for the capture of the needed 
data; and whether documentation in the medical record will allow for 
the identification of the procedure to the extent specified by the 
proposed code.
    These are very different considerations than those suggested by the 
criteria to qualify for special payment under this provision. 
Therefore, it would not be appropriate to allow technologies to bypass 
the Committee review process.

B. Determining Adequacy of Current Payments for New Services and 
Technology

    Because the inpatient hospital prospective payment system includes 
costs associated with all aspects of a patient's stay in the hospital, 
it is not enough to simply identify a technology as ``new'' and pay an 
additional amount. A single DRG may encompass many different treatment 
approaches for a particular illness, with an array of costs associated 
with those approaches. Clinicians are expected to select the 
appropriate approach based on the needs of the patient, with the 
payments averaging out over time to approximate the level of resources 
needed to treat the average patient in the DRG.
    Section 1886(d)(5)(K)(ii) of the Act, as added by section 533(b) of 
Public Law 106-554, requires that the Secretary make a determination 
whether the payment otherwise applicable under the existing DRG is 
inadequate compared to the estimated costs incurred with respect to new 
technology (as defined earlier in this final rule). We believe that, in 
order to evaluate whether the DRG payment inadequately reflects the 
costs of new technology, we must be able to assess the costs of cases 
involving the new technology against other cases in the DRG. In other 
words, the criteria for identifying new technology that will receive 
special payment treatment should reflect whether the new technology is 
so expensive that hospitals are unlikely to offset the higher costs 
with other less costly cases within the DRG. In the May 4 proposed 
rule, we proposed that this threshold be set at one standard deviation 
beyond the mean standardized charge for all cases in the DRG to which 
the new technology is assigned (or the case-weighted average of all 
relevant DRGs, if the new technology occurs in many different DRGs) 
(proposed Sec. 412.87(b)(3)). (Standardization adjusts the actual 
charges of a case by the payment factors such as the wage index, the 
indirect medical education adjustment factor, and the disproportionate 
share adjustment factor.)
    We proposed to make this comparison preferably using Medicare cases 
identifiable in our MedPAR database, although data from a clinical 
trial (including FDA clinical trials) where no bills were submitted for 
payment may be considered. To the extent possible, CMS proposed to rely 
on existing information in making these determinations. In most 
instances, the information would include the Medicare provider number 
of the hospital where each case was treated, the beneficiary 
identification numbers of the Medicare patients, the dates of admission 
and discharge, the charges associated with each case, and all relevant 
ICD-9-CM codes associated with each case (individual patient 
information is needed to permit matching of the hospital data with the 
Medicare payment file on the patient). We proposed to assess the 
charges of identified cases involving the new

[[Page 46916]]

technology, accounting for the additional costs of the new technology 
that might not be included in the charges if the new technology is 
being provided by the manufacturer as part of a clinical trial. If the 
costs of the new technology are not included in the total charges, we 
proposed to require the requestor to submit adequate documentation upon 
which to formulate an estimate of the likely costs to hospitals of the 
new technology.
    We proposed that a significant sample of the data must be submitted 
no later than early October, approximately 6 months prior to the 
publication of the proposed rule. Subsequently, a complete database 
must be submitted no later than mid-December. This proposed timetable 
was necessary to allow CMS adequate time to assess and verify the data, 
as well as to work with the submitters to deal with any unique 
situations with respect to data availability. It was also necessary to 
allow us to accurately incorporate the data into the annual proposed 
rule, which we begin preparing in January. We solicited public comments 
on this process.
    To illustrate the proposed use of the standard deviation 
thresholds, the proposed rule considered DRG 8 (Peripheral and Cranial 
Nerve and Other Nervous System Procedures Without CC). The average 
standardized charge of cases assigned to this DRG based on discharges 
during FY 2000 was $13,212, and the standard deviation was $8,978. 
Therefore, under our proposal, if a requestor were to seek assignment 
of a new technology that would otherwise be assigned to DRG 8 to a 
different DRG, the requestor would be expected to provide data 
indicating that the average standardized charge of cases receiving this 
new technology will exceed $22,190. We proposed that these data must be 
of a sufficient sample size to demonstrate a significant likelihood 
that the true mean across all cases likely to receive the new 
technology will exceed the mean for the cases in DRG 8 by one standard 
deviation.
    We explained in the proposed rule that using standard deviation as 
the threshold takes into account the distribution of charges associated 
with different treatment modalities around the mean charge for a 
particular DRG, and the extent to which lower cost cases in the DRG 
should be expected to offset higher cost cases. Using this method, new 
technology in a DRG with very little variation in charges would be more 
likely to meet the criteria. This would be appropriate because there 
are fewer opportunities within such a DRG to recover the costs of very 
high cost cases from excess payments for very low cost cases.
    In the proposed rule, we noted that, we will continue to evaluate 
the appropriateness of all DRG assignments. This applies not only to 
new technology but existing technologies as well.
    Comment: Some commenters disagreed with our proposed timetable for 
submitting data. One commenter recommended that, if MedPAR data are 
available for review, the timeline for applying for consideration for 
this special provision should be February 1, for inclusion in the 
proposed rule scheduled to be published April 1 each year. If only 
manufacturer (non-MedPAR) data are available, the commenter recommended 
a deadline of December 1 for submitting data for consideration. Another 
commenter recommend a two-step process for submitting data, where CMS 
would accept the manufacturer's ``good faith estimate'' of the 
hospitals' acquisition costs, then validate that initial estimate based 
upon actual claims experience.
    Response: The proposed timetable originated from the one 
established in the July 30, 1999 final rule (64 FR 41500). We have 
attempted to balance the mandate to expedite incorporation of new 
technology into the clinical coding system for the hospital inpatient 
prospective payment system with the integrity and incentives of the 
inpatient hospital prospective payment system. In particular, because 
the payments under this provision are to be budget neutral, meaning 
overall payments are reduced to pay for higher payments for new 
technology cases, it is imperative to provide adequate opportunity to 
validate the data submitted. If we did not validate the data, then 
technologies that do not warrant special payment might qualify, which 
means other payments might be reduced more than is appropriate under 
the budget neutrality adjustment.
    The December 1 deadline for submitting data not currently in the 
MedPAR database would not allow sufficient time to process, verify, and 
analyze the data prior to reaching a decision by mid-January for 
inclusion in the proposed rule, particularly if there is a large volume 
of requests submitted.
    In particular, because these data are not currently in the MedPAR 
database, it will be necessary to independently verify the data 
submitted, especially the costs of the technology and the DRGs where 
the new technology will likely be assigned.
    Although the availability of data in the MedPAR database will 
facilitate our analyses, a February 1 deadline would be unworkable due 
to the lead time needed to prepare the proposed rule (DRG 
reclassification decisions must be completely programmed during 
February to complete the calculation of the proposed standardized 
amounts). In addition, it is unclear what data will be available in the 
MedPAR database. New technology under this provision is defined by the 
fact that data are otherwise not available to reflect the costs of the 
new technology in the DRG weights through recalibration. Therefore, 
even if some MedPAR data were available, it is presumed additional data 
not available in MedPAR on the costs of the new technology will be 
needed in all instances.
    For these reasons, we believe the timetable we set forth in the 
proposed rule is appropriate, and we are implementing it effective for 
applications to be eligible for special new technology payments during 
FY 2003.
    With regard to the two-step process suggested by the commenter, our 
process does accommodate the fact that actual hospital acquisition 
costs may not be available at the time a request is being considered. 
However, we require manufacturers to provide sufficient information to 
allow their pricing estimate to be substantiated at the time the 
request is being considered.
    Comment: Several commenters suggested we delete the proposed 
requirement that a ``significant sample'' of the data be submitted no 
later than early October. The commenters suggested that instead we 
should rely on data that can be reasonably provided by the manufacturer 
at the time of introduction of the new technology. Furthermore, the 
commenters believed that any economic data required should be 
reasonably derived from the clinical trials conducted in conjunction 
with submissions to FDA for marketing approval or for an 
investigational device exemption. These data may include economic 
models that reflect manufacturer list price and other variables, as 
well as published data to estimate likely volume of use in Medicare 
patients.
    Another commenter requested that we clarify that, where the charges 
of a new technology are not included in the charges of trial 
participants because the technology is provided at no cost, we will 
adjust the standardized charges of cases involving the new technology 
to reflect that fact.
    Response: We agree with the commenters' characterization of the 
types of data that are likely to be available to demonstrate a 
technology would be inadequately paid. As stated

[[Page 46917]]

in the proposed rule and above, the timetable we established is 
designed to allow adequate time to assess and verify the data, as well 
as to work with the submitters to deal with any unique situations with 
respect to data availability.
    Commenters may have misunderstood our reference to a ``significant 
sample'' of data by early October. Apart from any statistical 
implications of that term, we intended to convey that requestors would 
need to submit a sample of sufficient size to enable us to undertake an 
initial validation and analysis of the data. Any problems we 
encountered in our review of this sample of data could then potentially 
be addressed prior to the December deadline to submit all of the data 
for analysis.
    Finally, in cases where charges related to a new technology are not 
reflected in the total billed charges for a case, we intend to rely on 
verifiable pricing information supplied by the manufacturer. The 
estimated charges of the new technology will be added to the 
standardized charges for determining whether the average standardized 
charges of a new technology meets the one standard deviation threshold.
    Comment: Several commenters expressed concern that our proposed 
requirement that the data submitted include Medicare beneficiary 
patient identifiers would lead to burdensome compliance issues with 
respect to patient confidentiality.
    Response: We appreciate the concern that our data submission 
requirement not place requesters in the position of potential patient 
privacy violations. These concerns are significant because the final 
rules on privacy of individually identifiable health data became 
effective on April 14, 2001. Health plans, including Medicare, and 
providers that conduct certain transactions electronically, including 
the hospitals that will receive payment under this final rule, will be 
required to come into compliance with the final privacy rules no later 
than April 14, 2003. The privacy rules, however, permit providers to 
share with health plans information needed to ensure correct payment if 
they have obtained consent from the patient to use that patient's data 
for treatment, payment, or health care operations. (See 45 CFR 164.502 
and 164.506.) Since the information to be provided here is needed to 
ensure correct payment, no additional consents will be required. 
However, we will continue to evaluate the need for this information as 
we acquire more experience analyzing requests.
    Comment: Many commenters objected to using a threshold of one 
standard deviation above the mean charges of other cases in the DRG for 
determining that a new technology would be inadequately paid. 
Commenters stated that, using this threshold, virtually no new 
technology in recent years would qualify for the special payment 
provision.
    To illustrate the impact of the standard deviation threshold, 
commenters included analysis of the standard deviation for each DRG in 
MDC 5 (Diseases and Disorders of the Circulatory System) as a 
percentage of the average charges for the DRG. Across all DRGs in MDC 
5, the analysis found that the standard deviation was 69 percent of the 
average DRG charges. Some commenters suggested alternative criteria, 
such as the lower of 120 percent of the base DRG payment amount, or 
$2,500 in average increased costs.
    One commenter suggested that high-cost outlier cases should be 
removed from the calculation of the mean and standard deviation because 
these cases have a disproportionate effect on those statistics. 
Alternatively, the commenter suggested the threshold should be set 
based on the distribution of the charges using a logarithmic 
transformation of the arithmetic charge values. The commenter believed 
this would produce a more normal distribution and result in mean and 
standard deviation values that are less effected by outliers.
    On the other hand, several commenters believed that the standard 
deviation threshold was appropriate. MedPAC stated that this approach 
maintains the case-based payment inherent in the system, and 
appropriately recognizes the variability in costs per case. Hospital 
associations also generally approved of the criteria, although at least 
one expressed reservations that this may result in a threshold that is 
too high for some DRGs. Another national hospital association, however, 
expressed concern that the threshold may be too low for some DRGs. This 
commenter suggested the threshold be set at the greater of one standard 
deviation or $10,000.
    Response: The suggestions from the commenters reflect the divergent 
opinions within the healthcare community about how far this policy 
should go to provide special payment for new technologies. We do not 
believe a set minimum dollar threshold, such as $2,500 is appropriate. 
For many DRGs this would represent a relatively small percentage of the 
costs of a case. Similar to MedPAC, we believe it is important to 
establish thresholds that recognize the variability in costs per case 
within DRGs and maintain the fundamental financial incentives of the 
prospective payment system as much as possible. We continue to believe 
a threshold based on the standard deviation is appropriate for that 
purpose.
    We did explore whether a logarithmic specification to estimate the 
standard deviation would be a more appropriate method in light of the 
concern expressed by the commenters that our proposed threshold was 
unduly influenced by outlier cases. We first converted the charges of 
all cases in each DRG to their logarithmic values, and then calculated 
the mean and standard deviations of those logarithmic values. Next, we 
added together the mean and standard deviations, and then transformed 
that number back to charges.
    Using this methodology, the average standard deviation as a 
percentage of the mean charges for the DRG declines from 75 percent 
using the proposed methodology to 50 percent using the logarithmic 
transformation. The average amount by which a new technology would have 
to exceed the DRG charges declines as well, from $11,794 in the 
proposed rule, to $7,799.
    We believe the standard deviation based on a logarithmic 
transformation of the charges is an appropriate methodology to use to 
establish the threshold. Charge data for most DRGs tend to be skewed 
toward high cost cases, and a few extremely costly cases can have a 
disproportionate effect on the calculation of the standard deviation. 
Therefore, in order to qualify for the special payment provision, a new 
technology must result in average charges above the DRG mean charges 
plus one standard deviation of charges based on the logarithmic 
distribution.
    Comment: Several commenters pointed out that the proposed language 
of Sec. 412.87(b)(3) indicated we would compare the costs of the cases 
involving a new medical service or technology with the average charges 
for all cases in the DRG. Because hospital charges are much greater 
than costs, this criterion further disadvantages new technologies.
    Response: We agree that it would be inappropriate to require new 
technologies to exhibit costs in excess of one standard deviation of 
average charges. In this final rule, we are revising the proposed 
language of Sec. 412.87(b)(3) to refer to the charges of cases 
involving new technologies rather than costs.
    Comment: Some commenters objected to our proposal to use the case-
weighted average standard deviation of all relevant DRGs for a 
particular new technology, rather than determining

[[Page 46918]]

eligibility separately for each DRG involved. The commenters believed 
it would be more appropriate to apply thresholds separately.
    Another commenter supported our proposed approach. Several 
commenters requested clarification of how we would calculate the 
standard deviation when a new technology involves more than one DRG.
    Response: We believe a single threshold should apply to each new 
technology as proposed. We would expect hospitals will evaluate whether 
to adopt a new technology on the basis of all cases where it is 
applicable, rather than assessing the technology on a DRG-by-DRG basis. 
As described above, a fundamental premise of a prospective payment 
system is that hospitals will receive payments in excess of costs for 
some cases, and vice versa. The same is likely to occur for a specific 
technology across several DRGs. Therefore, for purposes of determining 
whether the technology should qualify for special payment treatment, it 
is most appropriate to evaluate the adequacy of payments across all 
DRGs.
    To clarify this calculation, we would determine a case-weighted 
mean standardized charge and standard deviation for all of the DRGs to 
which a technology is likely to be assigned (based on the number of 
cases estimated to be assigned to each relevant DRG). The resulting 
mean standardized charge and standard deviation would then be the 
threshold amount that the new technology would have to exceed in order 
to qualify. That is, in order to qualify, a new technology that would 
be applicable across multiple DRGs would need to demonstrate that the 
mean standardized charge and the standard deviation for all cases 
likely to receive the new technology, across all DRGs, must exceed the 
case-weighted mean standardized charge and standard deviation for all 
cases currently in the DRGs to which the new technology would be 
assigned.
    Comment: Commenters requested that we include either in this final 
rule or on our Internet website a listing of qualifying thresholds for 
each DRG.
    Response: We have included this information in Table 1 of this 
final rule. The data are based on the discharge data used to calculate 
the DRG relative weights for FY 2002, as published in the August 1, 
2001 final rule (66 FR 40054).

C. Developing a Payment Mechanism

    Section 1886(d)(5)(K)(v) of the Act, as added by section 533(b) of 
Public Law 106-554, provides flexibility to the Secretary in terms of 
deciding exactly how the requirement for an additional payment will be 
satisfied: a new-technology group, an add-on payment, a payment 
adjustment, or any other similar mechanism for increasing the amount 
otherwise payable. In the May 4 proposed rule, we stated that we 
believe the approach most consistent with the design and incentives of 
the inpatient hospital prospective payment system would be to assign 
new technology to the most appropriate DRG based on the condition of 
the patient as described above, and adjust payments for individual 
cases that involve the new technology when the costs of those cases 
exceed a threshold amount. That is, we proposed to pay an additional 
amount not for every case involving the new technology, but only where 
the costs of the entire case exceed the DRG payment amount. This 
proposal reflected our concern that the establishment of new DRGs 
specifically for the purpose of recognizing costly new technology could 
potentially disrupt the DRG classification structure. In particular, 
some new technologies may involve large numbers of cases across 
multiple DRGs. If we were to create new DRGs specifically for new 
technology, this could pull cases out of existing DRGs, possibly 
leading to distortions in the relative weights and inadequate payments 
for cases remaining in the existing DRGs.
    In the May 4, 2001 proposed rule, we proposed that Medicare provide 
higher payments for cases with higher costs involving identified new 
technologies, while preserving some of the incentives under the 
average-based payments for all treatment modalities for a particular 
patient category. The payment mechanism we proposed would be based on 
the cost to hospitals for the new technology. We proposed under 
Sec. 412.88 that Medicare would pay a marginal cost factor of 50 
percent for the costs of the new technology in excess of the full DRG 
payment. This would be calculated before any outlier payments under 
section 1886(d)(5)(A) of the Act, if applicable. Similarly, cases 
involving new technology would be eligible for outlier payments, with 
the additional amounts paid for the new technology included in the base 
payment amount. Costs would be determined by applying the cost-to-
charge ratio in a manner identical to that currently used for outlier 
payments. Under the proposal, if the costs of a new technology case 
exceed the DRG payment by more than the estimated costs of the new 
technology, Medicare payment would be limited to the DRG payment plus 
50 percent of the estimated costs of the new technology, except if the 
case qualified for outlier payments. (We proposed a conforming change 
to Sec. 412.80 by adding a new paragraph (a)(3) to provide that outlier 
qualifying thresholds and payments would be in addition to standard DRG 
payments and additional payments for new medical services and 
technology (effective October 2001).)
    In the proposed rule, we gave the following example: consider a new 
technology estimated to cost $3,000, in a DRG that pays $20,000. A 
hospital submits three claims for cases involving this new technology. 
After applying the hospital's cost-to-charge ratio, it is determined 
the costs of these three cases are $19,000, $22,000, and $25,000. Under 
the proposed approach, Medicare would pay $20,000 (the DRG payment) for 
the first claim. For the second claim, Medicare would pay one half of 
the amount by which the costs of the case exceed the DRG payment, up to 
the estimated cost of the new technology, or $21,000 ($20,000 plus one 
half of $2,000). For the third claim, Medicare would pay $21,500 
($20,000 plus one half of the total estimated costs of the new 
technology).
    In the May 4 proposed rule we stated that we believe it is 
appropriate to limit the additional payment to 50 percent of the 
additional cost to appropriately balance the incentives. We stated that 
this proposed limit would provide hospitals an incentive for continued 
cost-effective behavior in relation to the overall costs of the case. 
In addition, we believe hospitals would face an incentive to balance 
the desirability of using the new technology versus the old; otherwise, 
there would be a large and perhaps inappropriate incentive to use the 
new technology. For example, in the late 1980s, we considered whether 
to establish a special payment adjustment for tissue plasminogen 
activator (TPA), a thrombolytic agent used in treating blockages of 
coronary arteries, reflecting the high costs of the drug. We did not 
establish such an adjustment because we believed that the updates to 
the standardized amounts, combined with the potential for continuing 
improvements in hospital productivity, would be adequate to finance 
appropriate care of Medicare patients. In fact, the costs of the drug 
were offset by shorter hospital stays and an overall reduction in costs 
per case. As clinical experience with TPA accumulated, furthermore, it 
appeared that the drug was not as widely beneficial as its original 
proponents expected. Establishing an add-on payment for this drug might 
have actually led to more extensive use of this drug for patients who 
would not

[[Page 46919]]

have benefited, and might have even been harmed, by its blood-thinning 
characteristics.
    Comment: Several commenters representing hospital associations 
suggested that we prospectively adjust the DRG weights to account for 
the expected additional costs of new technology. They further stated 
that this would incorporate the additional costs into the DRG weights, 
rather than providing a separate add-on amount on a case-by-case basis. 
The commenters argued that the add-on payment methodology increases the 
complexity of the system.
    One commenter suggested our proposed payment mechanism violates 
section 1886(d)(5)(K)(v) of the Act, which prohibits the Secretary from 
establishing a separate fee schedule for payments for new technologies 
under this provision. The commenter believed that the proposed 
methodology amounts to a fee schedule, with the vast majority of new 
technologies being paid at the marginal cost of such technologies.
    Response: We considered all options, including the one suggested 
here, prior to proposing an add-on payment. However, as noted above, we 
believe the proposed payment mechanism appropriately balances the 
incentives for cost-effective behavior with the incentives created to 
utilize eligible new technologies due to the increased payments.
    It should be noted that CMS had discretion prior to Public Law 106-
554 to use data other than MedPAR as part of the recalibration process. 
In the July 30, 1999 Federal Register, we described the process whereby 
we would consider non-MedPAR data in the DRG reclassification and 
recalibration. This was in response to the Conference Report that 
accompanied Public Law 105-33, which stated ``in order to ensure that 
Medicare beneficiaries have access to innovative new drug therapies, 
the conferees believe that CMS should consider, to the extent feasible, 
reliable, validated data other than Medicare Provider Analysis and 
Review (MedPAR) data in annually recalibrating and reclassifying the 
DRGs'' (H.R. Conf. Rep. No. 105-217 at 734 (1997)).
    We are concerned, however, that the approach suggested by the 
commenters may not adequately fulfill Congress' intent in enacting 
section 533 of Public Law 106-554. Specifically, Congress already 
recognized that the Secretary could use non-MedPAR data to adjust the 
DRG weights, as evidenced by the Conference Report reference just 
quoted. Therefore, if incorporating new technology in the DRG weights 
sooner would be sufficient to fulfill Congress' intent in section 533, 
there would have been no need to enact section 533.
    We disagree with the commenter who suggested our proposed 
methodology equates to a fee schedule. The additional payments made 
under this provision recognize the additional costs incurred by 
hospitals above the normal DRG payment. They are not fees paid for the 
use of a new technology irrespective of the amount otherwise paid under 
the existing prospective payment system. Therefore, they are an add-on 
payment, consistent with the language of section 533.
    Comment: Other commenters representing medical technology 
manufacturers recommended that, rather than our proposed add-on payment 
methodology, we should create a limited number of new technology DRGs. 
They stated that the proposed methodology is flawed because it relies 
on charges, and charges for medical technology typically do not receive 
the same mark-up as other components of care.
    Response: We are concerned about creating specific new technology 
DRGs for two reasons. In particular, we anticipate the number of 
technologies eligible for special payment during any given year will be 
relatively few. Establishing specific new technology DRGs would result 
in most, if not all, of these new technology DRGs being comprised of 
one or two procedures, with the DRG weights based entirely on the 
projected average charges associated with those very limited and 
specific procedures. As a result, payment for the new technology could 
be significantly higher than the payment for predecessor technologies 
in existing DRGs. This approach would forfeit the incentives to balance 
the clinical benefits of new technology with the higher costs. In 
addition, section 1886(d)(5)(L)(ii)(I) of the Act prohibits 
establishing new technology groups based on the costs associated with a 
specific new medical service or technology.
    We are also concerned about the potential that a future technology 
may be so prevalent across so many DRGs that a disproportionate number 
of cases would be assigned to a new technology DRG rather than existing 
DRGs, resulting in distortions in DRG recalibration.
    Comment: We received a mixed response to our proposal to pay 50 
percent of excess costs up to a limit of 50 percent of the estimated 
average cost of the new technology. Several commenters objected to the 
proposal, arguing that the methodology does not comply with the 
statutory requirement to pay an amount that ``adequately reflects the 
estimated average costs'' of new technology. Generally, these 
commenters recommended that the add-on payment should be 100 percent of 
the costs of the new technology. Other commenters, including MedPAC, 
supported the payment mechanism as a way of maintaining the integrity 
of the DRG system and maintaining an incentive for hospitals and 
physicians to carefully weigh the clinical benefits of new technology 
against their costs.
    Response: For several reasons, we do not believe it would be 
appropriate to pay 100 percent of the costs of new technology through 
the add-on payment. First, as stated above, the prospective payment 
system is an average-based system, allowing hospitals to recover the 
``excess'' costs of high cost cases through ``excess'' payments for low 
cost cases. In deciding which treatment is most appropriate for any 
particular patient, physicians are expected to balance the clinical 
needs of patients with the efficacy and costliness of particular 
treatments. Paying an add-on amount equal to 100 percent of the costs 
of new technology would remove consideration of the costs of new 
technology from treatment decisions. We agree with MedPAC that it is 
important to maintain some incentive to weigh the costs of new 
technology in making clinical decisions.
    Second, we do not believe it is appropriate to pay an add-on amount 
equal to 100 percent of the costs of new technology because there is no 
similar methodology to reduce payments for cost-saving technology. For 
example, as new technologies permit the development of less-invasive 
surgical procedures, the total costs per case may begin to decline as 
patients recover and leave the hospital sooner. However, Medicare will 
continue to pay the full DRG payment for those cases, without benefit 
of the reduced costs being reflected in the DRG weights for 2 to 3 
years (as described above).
    Third, we are concerned that, because these payments are linked to 
charges submitted by hospitals, there is the potential that hospitals 
may adapt their charge structure to maximize payments for DRGs that 
include eligible new technologies. The higher the marginal cost factor, 
the greater the incentive hospitals face in this regard.
    In light of these concerns, we believe that an additional payment 
based on a 50-percent marginal cost factor is appropriate. In addition, 
we note that this final rule includes a target limit on total payments 
under this provision (see section III.D. of this preamble for a 
complete discussion of this issue). If, based on our projections of 
special

[[Page 46920]]

payments for the upcoming year, we estimate that the limit established 
by this target would be exceeded, we would prospectively revise 
downward the marginal cost factor so that the target is not exceeded, 
in order to limit the extent of the adjustment to the standardized 
amounts for budget neutrality.

D. Budget Neutrality

    The report language accompanying section 533 of Public Law 106-554 
indicates Congressional intent that the Secretary implement the new 
mechanism on a budget neutral basis (H.R. Conf. Rep. No. 106-1033, 
106th Cong., 2d Sess. at 897 (2000)). Section 1886(d)(4)(C)(iii) of the 
Act requires that the adjustments to annual DRG classifications and 
relative weights must be made in a manner that ensures that aggregate 
payments to hospitals are not affected. Therefore, we proposed to 
simulate projected payments under this provision for new technology 
during the upcoming fiscal year at the same time we estimate the 
payment effect of changes to the DRG classifications and recalibration. 
The impact of additional payments under this provision would then be 
factored into the budget neutrality factor, which is applied to the 
standardized amounts.
    Because, under our proposal, any additional payments directed 
toward new technology under this provision would be offset to ensure 
budget neutrality, it would be important to carefully consider the 
extent of this provision and ensure that only technologies representing 
substantial advances are recognized for additional payments. In that 
regard, we proposed to discuss in the annual proposed and final 
regulations implementing changes to the inpatient hospital prospective 
payment system those technologies that were considered under this 
provision; our determination as to whether a particular new technology 
meets our criteria for a ``substantial improvement'' and for a new 
technology; whether it is determined further that cases involving the 
new technology would be inadequately paid under the existing DRG 
payment; and any assumptions that went into the budget neutrality 
calculations related to additional payments for that new technology, 
including the expected number, distribution, and costs of these cases.
    The payments made under our proposed approach to implement this 
provision would be redistributed from all other payments made under the 
inpatient prospective payment system. Our projections of the aggregate 
payments for new technology would involve not only estimates of the 
effect of the new technology on the entire cost per case but also 
estimates of the volume of cases expected to involve the new technology 
during the upcoming year.
    Comment: Two commenters representing hospitals expressed concerns 
regarding the amount of potential payments under this provision, and 
argued that the amount of the offset to the prospective payment system 
standardized amount should be set a prescribed limit. Specifically, the 
commenters were concerned that this provision would be financed by 
reducing payments for cases that do not involve new technology to pay 
for additional payments for cases that do involve new technology.
    These commenters suggested that we establish a target limit on the 
payments for new technology under this special provision. Estimated 
total payments under this provision would be limited to a predetermined 
target percentage of total payments, thereby limiting the size of the 
standardized amount offset to no greater than the target limit. One 
commenter recommended that the limit be set at 0.5 percent of 
prospective payment system payments, based on the commenter's 
assessment of the new technology components in the hospital inpatient 
market basket.
    Response: Because Congress intended section 533(b) to be 
implemented in a budget neutral manner (the Congressional Budget Office 
scored the budgetary impact of section 533 at zero dollars), requiring 
that special payments under this provision be financed by reducing 
payments for other cases, there is great potential for this provision 
to adversely impact certain hospitals. Although we believe that the 
criteria for qualifying new technology we proposed would appropriately 
limit the new technologies eligible for special payments to those with 
exceptionally high costs relative to their anticipated DRG payment, we 
are concerned that this provision should not result in inappropriately 
large redistributions of payments from hospitals that do not employ new 
technology to those that do. Therefore, after careful consideration of 
the comments received on this provision, we are establishing a target 
limit on the percentage of total payments under this provision.
    The report language accompanying section 533 of Public Law 106-544 
states that ``[t]he total amount of projected additional payments under 
the mechanism would be limited to an amount not greater that the 
Secretary's annual estimation of the costs attributable to the 
introduction of new technology in the hospital sector as a whole (as 
estimated for purposes of the annual hospital update calculation.'' 
(H.R. Conf. Rep. No. 106-1033, 106th Cong., 2d Sess. at 897 (2000).) 
Although the Secretary has not historically prepared such an estimate, 
MedPAC has historically prepared such an estimate.
    As part of its annual recommendation to Congress on the update to 
the standardized amounts, over the past several years, MedPAC has 
recommended an allowance for scientific and technological advances of 
0.5 and 1.0 percent (June 2000 Report to Congress, page 126; and March 
2001 Report to Congress, page 76). To appropriately balance Congress' 
intent to increase Medicare's payments for eligible new technologies 
with concern that the total size of those payments not result in 
significantly reduced payments for other cases, we are setting the 
target limit for special payments for new technology under the 
provisions of section 533(b) of Public Law 106-554 at 1.0 percent of 
total operating prospective payments.
    The target limit will be enforced based on an estimate of the total 
amount of payments projected to be made under this provision during the 
upcoming fiscal year, compared with total operating prospective payment 
system payments projected to be made during the same period (including 
adjustments for indirect medical education, disproportionate share of 
low-income patients, and outlier cases). Should the projected amount of 
new technology payments exceed the 1.0 percent target limit, we would 
make a prospective adjustment to lower the marginal payments for new 
technology cases (below the 50-percent level) so that the target is not 
exceeded.
    We considered alternative approaches to enforcing the target limit. 
For example, one could establish a priority ranking of the approved 
technologies, and work down the list paying for as many new 
technologies as possible until the limit is reached. Such a ranking 
could be based on the clinical merits of the technology, or the cost 
implications of the technology. However, we were concerned that such an 
approach would exclude some otherwise approved technologies from 
receiving extra payments.
    Another approach, the one we have selected, is to reduce the level 
of payments for approved technologies across the board, to ensure 
estimated payments do not exceed the limit. Using this approach, all 
cases involving approved new technologies that would otherwise receive 
additional payments would still receive special payments,

[[Page 46921]]

albeit at a reduced amount. Because, by definition, payments made under 
this provision would need to be at relatively high levels in order for 
the limit to come into play, and because new technology tends to be 
concentrated in particular categories of hospitals (for example, 
academic medical centers), we believe this is the most appropriate 
mechanism to enforce the target limit because substantial payment 
redistributions will have already likely occurred to these hospitals by 
the time the limit is reached. Although the marginal payment rate for 
individual technologies will be reduced, this should be offset by large 
overall payments for new technologies under this provision.

V. Provisions of the Final Rule

    We are adopting the provisions of the May 4, 2001 proposed rule as 
final with the modifications that are discussed throughout this 
preamble. Specifically, this final rule specifies that a target for new 
technology payments under section 1886(d)(5)(K) of the Act will be set 
at 1.0 percent of total operating payments. Cases in which new 
technologies are used will qualify for payment under the new technology 
provision if their charges exceed one standard deviation from the mean 
charge (based on a logarithmic distribution) for all cases in that DRG. 
Payment will be limited to 50 percent of the amount by which the cost 
of the case exceeds the DRG payment for the case, up to 50 percent of 
the cost of the new technology. Should projected payments for the 
technology exceed the target amount in a given year, the marginal 
payment factor will be reduced prospectively from 50 percent as 
necessary to meet the target. This provision must be implemented in a 
budget neutral manner.

VI. Effective Date of the Final Rule

    This final rule has been determined not to be a major rule as 
defined in Title 5, United State Code, section 804(2); that is, due to 
the budget neutrality aspect of the implemented provisions of section 
533 of Public Law 106-554, the anticipated annual effect on the economy 
will not exceed $100 million or more. Therefore, 5 U.S.C. 801, as added 
by section 251 of Public Law 104-121, which provides that a major rule 
shall take effect 60 days after the later of (1) the date a report on 
the rule is submitted to Congress or (2) the date the rule is published 
in the Federal Register, does not apply.

VII. Regulatory Impact Analysis

A. General

    We have examined the impacts of this rule as required by Executive 
Order 12866. We have 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 final rule is not 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. Based on 1997 Census Bureau 
data, there are 4,700 general short-term acute care hospitals (tax 
exempt; government or nonprofit). Of the 792 proprietary hospitals, 658 
are proprietary hospitals with greater than $10 million in annual 
receipts. Individuals and States are not included in the definition of 
a small entity.
    Also, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis for any final rule that may have a 
significant impact on the operations of a substantial number of small 
rural hospitals. Such an analysis must conform to the provisions of 
section 603 of the RFA. For purposes of section 1102(b) of the Act, we 
define a small rural hospital as a hospital with fewer than 100 beds 
that is located outside of a Metropolitan Statistical Area (MSA) or New 
England County Metropolitan Area (NECMA). Section 601(g) of the Social 
Security Amendments of 1983 (Public Law 98-21) designated hospitals in 
certain New England counties as belonging to the adjacent NECMA. Thus, 
for purposes of the hospital inpatient prospective payment systems, we 
classify these hospitals as urban hospitals.
    Because we are not making payments under this provision for FY 
2002, there are no estimated impacts. Future impacts of this provision 
on hospitals, which may include small entities and would not include 
unfunded mandates, will be discussed in the annual proposed and final 
rules implementing the updates and other changes to the inpatient 
prospective payment system.

B. Anticipated Effects

    As noted above, there is no impact on payments to hospitals during 
FY 2002. Future impacts of this provision will be included as part of 
the annual proposed and final rules updating the acute care hospital 
inpatient prospective payment system.

C. 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.
    We have reviewed this final rule under the threshold criteria of 
Executive Order 13132, Federalism, and have determined that the final 
rule will not have any negative impact on the rights, roles, and 
responsibilities of State, local, or tribal governments.

D. Unfunded Mandate

    Section 202 of the Unfunded Mandate Reform Act of 1995 (Pub. L. 
104-4) also requires that agencies assess anticipated costs and 
benefits before issuing any final rule that has been preceded by a 
final rule that may result in an expenditure in any one year by State, 
local, or tribal governments, in the aggregate, or by the private 
sector, of $110 million. This final rule would not mandate any 
requirements for State, local, or tribal governments.

E. Executive Order 12866

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

VIII. Information Collection Requirements

    This document does not contain any new information collection 
requirements that are subject to review and approval by the Office of 
Management and Budget (OMB) as provided for under the Paperwork 
Reduction Act of 1995. In particular, the requirements referenced in 
these

[[Page 46922]]

regulations are conducted on an individual case-by-case basis, and, 
therefore, are exempt for the PRA, as stipulated under 5 CFR 
1320.3(h)(6).

           Table 1.--Mean and Standard Deviations, by DRG \1\
------------------------------------------------------------------------
                                                                Standard
                  DRG                      Cases       Mean    deviation
------------------------------------------------------------------------
1......................................     33,680    $34,221    $17,102
2......................................      6,750    $35,700    $17,893
3......................................          2   $114,502    $11,624
4......................................      6,003    $25,072    $13,170
5......................................     92,462    $14,018     $6,792
6......................................        364     $7,554     $3,946
7......................................     12,412    $28,146    $14,441
8......................................      4,137    $14,771     $8,602
9......................................      1,600    $13,968     $7,449
10.....................................     17,473    $13,211     $6,878
11.....................................      3,108     $8,957     $4,907
12.....................................     46,381     $9,146     $4,608
13.....................................      6,376     $8,376     $4,319
14.....................................    317,412    $12,074     $6,357
15.....................................    144,440     $7,682     $3,797
16.....................................     11,084    $12,117     $5,995
17.....................................      3,496     $7,027     $3,563
18.....................................     25,812    $10,098     $5,247
19.....................................      8,590     $7,117     $3,829
20.....................................      5,603    $29,649    $16,261
21.....................................      1,305    $15,564     $8,129
22.....................................      2,527    $10,617     $5,666
23.....................................      9,396     $8,291     $4,353
24.....................................     52,442    $10,390     $5,414
25.....................................     25,247     $6,251     $3,342
26.....................................         31     $6,266     $3,909
27.....................................      3,425    $13,687     $7,317
28.....................................     11,272    $14,148     $7,368
29.....................................      4,469     $7,332     $3,923
31.....................................      3,467     $9,138     $4,690
32.....................................      1,729     $5,439     $2,885
34.....................................     20,124    $10,318     $5,334
35.....................................      5,686     $6,178     $3,226
36.....................................      3,154     $6,906     $3,026
37.....................................      1,441    $11,546     $5,753
38.....................................        101     $5,070     $3,040
39.....................................        906     $6,068     $3,462
40.....................................      1,524     $8,638     $4,331
42.....................................      2,199     $6,530     $3,535
43.....................................         85     $4,899     $2,913
44.....................................      1,230     $6,604     $3,577
45.....................................      2,418     $7,040     $3,578
46.....................................      3,036     $8,286     $4,388
47.....................................      1,278     $5,328     $3,073
49.....................................      2,223    $18,135     $8,896
50.....................................      2,461     $8,531     $4,134
51.....................................        201     $8,198     $4,422
52.....................................        217     $7,601     $3,828
53.....................................      2,459    $12,031     $6,317
54.....................................          2     $6,447     $1,733
55.....................................      1,491     $8,455     $4,508
56.....................................        494     $8,644     $4,304
57.....................................        703    $10,954     $6,215
59.....................................        105     $7,209     $3,911
60.....................................          2     $7,221     $2,545
61.....................................        229    $13,913     $6,554
62.....................................          3     $4,633     $2,084
63.....................................      2,989    $14,388     $7,788
64.....................................      3,021    $12,715     $6,891
65.....................................     34,317     $5,607     $2,930
66.....................................      6,940     $5,657     $3,089
67.....................................        494     $8,111     $4,574
68.....................................     16,632     $6,949     $3,454
69.....................................      5,406     $5,236     $2,545
70.....................................         24     $4,884     $3,203
71.....................................         82     $7,197     $3,640
72.....................................        877     $6,982     $3,692
73.....................................      6,591     $8,215     $4,366
75.....................................     38,768    $33,224    $15,468
76.....................................     38,787    $30,628    $14,878
77.....................................      2,333    $12,849     $6,282
78.....................................     31,837    $14,053     $6,514
79.....................................    169,072    $18,018     $9,147
80.....................................      8,971     $9,880     $4,948
81.....................................          4    $25,053    $14,517
82.....................................     61,618    $15,155     $8,215
83.....................................      6,419    $10,237     $5,258
84.....................................      1,500     $5,708     $2,978
85.....................................     20,492    $13,187     $6,844
86.....................................      2,109     $7,046     $3,797
87.....................................     59,825    $15,002     $7,866
88.....................................    387,633     $9,555     $4,709
89.....................................    523,306    $11,160     $5,497
90.....................................     53,588     $6,744     $3,159
91.....................................         54     $8,727     $5,111
92.....................................     13,717    $12,968     $6,607
93.....................................      1,663     $7,679     $3,878
94.....................................     11,989    $12,637     $6,571
95.....................................      1,588     $6,204     $3,082
96.....................................     61,673     $8,021     $3,937
97.....................................     31,319     $6,004     $2,955
98.....................................         18     $7,582     $4,869
99.....................................     18,898     $7,292     $3,873
100....................................      7,580     $5,486     $2,971
101....................................     19,910     $8,974     $4,681
102....................................      5,122     $5,531     $2,994
103....................................        471   $201,472    $88,012
104....................................     19,527    $81,506    $33,051
105....................................     25,736    $58,962    $24,215
106....................................      3,385    $79,188    $31,820
107....................................     87,178    $55,413    $21,398
108....................................      5,998    $58,620    $26,620
109....................................     59,671    $40,351    $16,091
110....................................     52,195    $43,587    $20,444
111....................................      8,459    $24,521    $11,025
113....................................     42,092    $27,689    $14,908
114....................................      8,659    $17,115     $8,391
115....................................     14,139    $35,743    $14,537
116....................................     90,458    $23,428     $9,246
117....................................      3,694    $13,386     $7,342
118....................................      7,529    $15,361     $7,697
119....................................      1,298    $13,855     $7,253
120....................................     37,300    $24,039    $11,815
121....................................    161,319    $16,520     $8,201
122....................................     78,646    $10,933     $5,624
123....................................     40,546    $16,620     $9,332
124....................................    131,648    $14,598     $6,634
125....................................     79,518    $11,040     $5,161
126....................................      5,130    $28,436    $14,368
127....................................    675,000    $10,417     $5,270
128....................................      9,362     $7,652     $3,640
129....................................      4,121    $10,564     $6,345
130....................................     85,502     $9,755     $4,906
131....................................     28,033     $6,094     $2,922
132....................................    146,801     $6,749     $3,415
133....................................      8,243     $5,761     $3,153
134....................................     35,952     $6,081     $3,270
135....................................      7,207     $9,244     $4,732
136....................................      1,214     $5,991     $3,354
138....................................    193,004     $8,485     $4,419
139....................................     82,257     $5,256     $2,783
140....................................     69,373     $5,641     $2,826
141....................................     89,931     $7,531     $3,850
142....................................     45,586     $5,698     $2,972
143....................................    203,055     $5,496     $2,840
144....................................     81,220    $12,430     $6,670
145....................................      7,183     $6,234     $3,543
146....................................     10,602    $28,843    $13,084
147....................................      2,604    $17,162     $7,124
148....................................    128,536    $36,602    $17,385
149....................................     18,314    $15,988     $6,363
150....................................     19,681    $30,856    $14,557
151....................................      4,781    $14,262     $6,152
152....................................      4,345    $20,114     $9,492
153....................................      2,070    $12,419     $5,334
154....................................     28,558    $45,582    $22,620
155....................................      6,534    $13,951     $6,030
156....................................          4    $24,515    $15,028
157....................................      7,848    $12,849     $6,386
158....................................      4,593     $6,554     $3,240
159....................................     16,163    $13,919     $6,659
160....................................     11,549     $8,172     $3,745
161....................................     11,021    $11,565     $5,625
162....................................      7,131     $6,561     $3,189
163....................................          5     $9,247     $5,009
164....................................      4,797    $25,031    $11,606
165....................................      2,053    $13,954     $5,974
166....................................      3,503    $15,270     $6,996
167....................................      3,248     $9,334     $3,949
168....................................      1,318    $13,342     $6,733
169....................................        830     $7,320     $3,923
170....................................     10,920    $31,661    $15,545
171....................................      1,274    $12,356     $5,789
172....................................     30,262    $14,527     $7,677
173....................................      2,666     $7,411     $4,273
174....................................    238,934    $10,265     $5,186
175....................................     32,223     $5,742     $2,920
176....................................     14,986    $11,102     $5,506
177....................................      9,143     $9,368     $4,574
178....................................      3,584     $6,861     $3,386
179....................................     12,227    $11,171     $5,759
180....................................     85,143     $9,809     $5,057
181....................................     26,209     $5,548     $2,829
182....................................    242,227     $8,187     $4,273
183....................................     83,676     $5,926     $3,122
184....................................         79     $4,419     $2,409
185....................................      4,742     $9,056     $4,830
186....................................          3    $18,405    $20,674
187....................................        641     $8,336     $4,371
188....................................     75,191    $11,554     $6,075
189....................................     11,923     $6,099     $3,389
190....................................         49    $12,761     $5,926
191....................................      8,818    $47,924    $23,462
192....................................      1,088    $19,337     $9,024
193....................................      5,231    $36,682    $17,597
194....................................        713    $18,351     $8,617
195....................................      4,292    $31,452    $13,969
196....................................      1,157    $17,300     $7,001
197....................................     18,613    $26,434    $12,496
198....................................      5,707    $12,973     $5,941
199....................................      1,699    $26,123    $13,033
200....................................      1,058    $33,952    $16,409
201....................................      1,424    $40,293    $19,691
202....................................     25,853    $13,752     $7,269
203....................................     28,853    $14,338     $7,733
204....................................     56,928    $12,186     $6,210
205....................................     22,786    $12,582     $6,592
206....................................      1,934     $7,756     $4,175
207....................................     30,650    $11,634     $6,092
208....................................     10,017     $6,824     $3,696
209....................................    339,625    $20,928     $7,567
210....................................    119,568    $17,986     $7,417
211....................................     31,401    $13,043     $4,799
212....................................          6    $57,573    $33,539

[[Page 46923]]

 
213....................................      9,090    $19,794     $9,448
216....................................      5,917    $24,182    $11,536
217....................................     16,277    $33,068    $16,354
218....................................     21,104    $15,896     $7,086
219....................................     19,357    $10,596     $4,412
220....................................          6    $13,926     $6,350
223....................................     13,119    $10,043     $4,772
224....................................     10,983     $8,270     $3,609
225....................................      5,688    $11,467     $5,400
226....................................      5,114    $16,123     $7,698
227....................................      4,647     $8,329     $3,762
228....................................      2,319    $11,244     $5,538
229....................................      1,089     $7,551     $3,649
230....................................      2,346    $13,595     $6,666
231....................................     11,253    $14,623     $7,174
232....................................        797     $9,873     $4,737
233....................................      5,030    $21,696    $10,843
234....................................      3,144    $12,956     $7,125
235....................................      4,996     $7,557     $3,909
236....................................     38,004     $7,028     $3,697
237....................................      1,675     $5,509     $2,682
238....................................      7,875    $14,517     $7,359
239....................................     48,837    $10,383     $5,292
240....................................     11,259    $13,777     $7,033
241....................................      3,157     $6,653     $3,599
242....................................      2,429    $11,575     $6,019
243....................................     86,835     $7,582     $3,847
244....................................     12,079     $7,371     $3,781
245....................................      5,101     $4,922     $2,658
246....................................      1,377     $5,950     $3,193
247....................................     16,745     $5,841     $3,056
248....................................     10,464     $8,369     $4,331
249....................................     11,271     $6,910     $3,691
250....................................      3,438     $7,061     $3,603
251....................................      2,395     $4,839     $2,541
253....................................     19,553     $7,575     $3,837
254....................................     10,395     $4,527     $2,252
256....................................      6,026     $8,410     $4,480
257....................................     16,174     $9,112     $4,025
258....................................     15,852     $7,402     $3,036
259....................................      3,731     $8,869     $4,250
260....................................      4,849     $6,909     $2,982
261....................................      1,826     $9,722     $4,969
262....................................        606     $8,773     $4,213
263....................................     18,078    $22,473    $12,380
264....................................      3,592    $12,368     $6,593
265....................................      3,654    $17,016     $8,218
266....................................      2,683     $8,939     $4,427
267....................................        233    $10,099     $5,245
268....................................        868    $12,455     $6,679
269....................................      7,352    $18,569     $9,303
270....................................      2,601     $8,408     $4,226
271....................................      9,563    $11,955     $6,102
272....................................      5,424    $10,430     $5,406
273....................................      1,279     $5,949     $3,210
274....................................      2,321    $12,576     $6,967
275....................................        246     $7,068     $4,484
276....................................      1,172     $7,242     $3,830
277....................................     84,730     $8,937     $4,492
278....................................     33,239     $5,927     $2,921
279....................................          3     $2,550     $1,458
280....................................     15,468     $7,111     $3,566
281....................................      7,089     $4,838     $2,486
282....................................          3     $2,776       $646
283....................................      5,596     $7,337     $3,849
284....................................      1,861     $4,435     $2,410
285....................................      6,167    $22,178    $10,857
286....................................      2,048    $22,448    $10,632
287....................................      5,653    $20,363    $10,040
288....................................      2,609    $21,408     $9,984
289....................................      4,711     $9,475     $4,696
290....................................      8,639     $8,890     $4,252
291....................................         64     $6,421     $2,912
292....................................      4,632    $28,760    $14,261
293....................................        619    $13,457     $6,625
294....................................     87,396     $7,796     $4,126
295....................................      3,263     $7,665     $4,171
296....................................    233,776     $8,887     $4,580
297....................................     43,365     $5,313     $2,709
298....................................         86     $4,227     $2,343
299....................................      1,173     $9,354     $5,053
300....................................     15,908    $11,597     $6,055
301....................................      3,186     $6,404     $3,554
302....................................      7,642    $33,433    $15,262
303....................................     19,313    $25,451    $11,944
304....................................     11,690    $25,200    $12,299
305....................................      2,962    $12,174     $5,779
306....................................      7,274    $13,464     $6,515
307....................................      2,065     $6,404     $2,638
308....................................      7,413    $17,032     $8,420
309....................................      4,070     $9,562     $4,995
310....................................     23,711    $11,599     $5,752
311....................................      7,918     $6,344     $3,030
312....................................      1,479    $10,838     $5,460
313....................................        586     $6,918     $3,749
315....................................     29,885    $21,700    $10,594
316....................................    104,168    $14,316     $7,562
317....................................      1,504     $6,355     $4,181
318....................................      5,549    $12,235     $6,592
319....................................        422     $6,344     $4,153
320....................................    185,584     $8,903     $4,369
321....................................     30,258     $5,887     $2,803
322....................................         61     $5,610     $2,749
323....................................     17,186     $8,429     $4,735
324....................................      7,460     $4,756     $2,640
325....................................      8,134     $6,626     $3,620
326....................................      2,666     $4,301     $2,463
327....................................         11     $4,011     $2,006
328....................................        658     $7,522     $4,114
329....................................         76     $4,760     $2,733
331....................................     45,848    $11,037     $5,883
332....................................      4,907     $6,392     $3,626
333....................................        280     $8,311     $4,255
334....................................      8,579    $15,279     $6,397
335....................................     10,649    $11,836     $4,640
336....................................      9,465     $9,208     $4,241
337....................................      3,012     $6,171     $2,467
338....................................      1,216    $12,580     $6,334
339....................................      1,337    $12,595     $6,238
341....................................      2,704    $13,097     $7,597
342....................................        297     $8,432     $4,109
344....................................      3,468    $12,517     $7,111
345....................................        408    $12,158     $5,737
346....................................      4,425    $10,873     $5,923
347....................................        365     $6,111     $4,094
350....................................      6,229     $7,381     $3,762
352....................................        749     $6,828     $3,920
353....................................      2,511    $18,468     $8,772
354....................................      7,480    $15,397     $6,967
355....................................      5,456     $9,559     $3,707
356....................................     24,916     $7,864     $3,397
357....................................      5,517    $25,319    $12,074
358....................................     20,083    $12,100     $5,313
359....................................     29,672     $8,726     $3,458
360....................................     15,788     $8,826     $3,997
361....................................        374    $11,030     $5,326
363....................................      2,838     $8,262     $4,621
364....................................      1,630     $8,158     $4,241
365....................................      1,712    $20,830    $10,330
366....................................      4,393    $13,272     $7,187
367....................................        581     $5,804     $3,619
368....................................      3,097    $11,964     $6,156
369....................................      3,121     $5,836     $3,537
370....................................      1,078     $9,721     $4,374
371....................................      1,296     $7,095     $2,780
372....................................        917     $5,484     $2,633
373....................................      3,703     $3,956     $1,708
374....................................        118     $7,009     $3,183
375....................................         10     $6,519     $2,880
376....................................        247     $5,310     $3,009
377....................................         48    $17,649     $8,033
378....................................        153     $8,352     $4,083
379....................................        337     $4,826     $2,768
380....................................         58     $4,498     $2,471
381....................................        149     $6,220     $3,465
382....................................         44     $1,723       $967
383....................................      1,700     $4,987     $2,853
384....................................        114     $3,658     $2,099
389....................................         15    $22,357    $13,168
390....................................         14    $12,153     $9,490
392....................................      2,311    $34,949    $17,050
394....................................      1,859    $18,654     $8,770
395....................................     86,456     $8,418     $4,521
396....................................         15    $11,234     $7,337
397....................................     17,475    $13,060     $7,124
398....................................     17,426    $13,436     $6,962
399....................................      1,715     $7,119     $3,892
400....................................      6,418    $30,559    $15,016
401....................................      5,550    $30,943    $15,124
402....................................      1,490    $12,369     $6,278
403....................................     31,624    $19,437    $10,245
404....................................      4,625     $9,221     $5,463
406....................................      2,497    $30,406    $14,779
407....................................        711    $13,029     $5,948
408....................................      2,168    $23,053    $11,140
409....................................      2,799    $11,704     $6,368
410....................................     33,080    $10,149     $5,353
411....................................         13     $4,717     $2,623
412....................................         29     $6,510     $3,640
413....................................      6,392    $14,553     $7,717
414....................................        765     $7,832     $4,651
415....................................     38,554    $40,839    $20,733
416....................................    182,689    $16,737     $8,522
417....................................         16     $9,109     $5,531
418....................................     22,714    $10,799     $5,728
419....................................     15,220     $8,970     $4,675
420....................................      3,098     $6,391     $3,306
421....................................     11,387     $6,726     $3,463
422....................................         79     $4,491     $2,525
423....................................      7,417    $18,731     $9,501
424....................................      1,264    $24,550    $12,072
425....................................     15,626     $7,073     $3,762
426....................................      4,423     $5,455     $2,947
427....................................      1,624     $5,506     $3,008
428....................................        831     $7,318     $3,753
429....................................     25,769     $8,557     $4,250
430....................................     58,439     $8,037     $4,037
431....................................        312     $6,586     $3,306
432....................................        465     $7,118     $3,892
433....................................      5,404     $2,945     $1,677
439....................................      1,331    $19,257     $8,994
440....................................      5,095    $20,402     $9,799
441....................................        595     $9,392     $5,040
442....................................     15,277    $25,949    $12,950
443....................................      3,705    $10,482     $5,464
444....................................      5,156     $7,489     $3,871
445....................................      2,414     $4,946     $2,580
447....................................      5,419     $4,874     $2,761
449....................................     27,866     $8,337     $4,444
450....................................      6,827     $4,359     $2,287

[[Page 46924]]

 
451....................................          3     $3,661     $1,689
452....................................     22,558    $10,348     $5,628
453....................................      5,047     $5,217     $3,083
454....................................      3,908     $8,634     $4,546
455....................................        926     $4,771     $2,719
461....................................      3,461    $12,229     $6,684
462....................................     12,886    $12,794     $6,412
463....................................     21,658     $7,038     $3,634
464....................................      6,394     $5,002     $2,798
465....................................        154     $6,501     $3,829
466....................................      1,460     $6,123     $3,744
467....................................        524     $6,207     $3,956
468....................................     56,634    $40,436    $20,195
470....................................     91,129     $8,750     $4,248
471....................................     11,452    $31,327    $10,631
473....................................      7,597    $41,853    $21,410
475....................................    106,641    $41,657    $21,697
476....................................      4,110    $24,265    $11,524
477....................................     24,655    $20,084     $9,803
478....................................    106,268    $25,438    $12,600
479....................................     24,705    $14,976     $6,929
480....................................        536   $106,339    $47,738
481....................................        371    $84,770    $38,759
482....................................      5,661    $39,848    $19,532
483....................................     41,640   $163,741    $91,302
484....................................        310    $53,719    $25,103
485....................................      2,865    $32,195    $15,089
486....................................      1,849    $54,905    $28,043
487....................................      3,333    $20,448    $10,772
488....................................        769    $55,206    $27,898
489....................................     13,936    $19,397     $9,910
490....................................      5,360    $10,850     $5,902
491....................................     12,053    $17,259     $6,454
492....................................      2,669    $52,027    $29,545
493....................................     54,438    $19,103     $8,585
494....................................     29,646    $10,474     $4,767
495....................................        152    $91,522    $43,233
496....................................      1,462    $60,541    $27,811
497....................................     17,089    $33,800    $15,718
498....................................     12,653    $24,583    $11,561
499....................................     30,042    $14,842     $6,792
500....................................     43,667     $9,947     $4,368
501....................................      2,165    $28,367    $13,126
502....................................        580    $16,063     $6,974
503....................................      5,499    $12,650     $6,099
504....................................        112   $136,018    $72,135
505....................................        145    $15,964     $9,765
506....................................        914    $52,706    $27,278
507....................................        289    $18,465     $9,271
508....................................        654    $13,178     $6,914
509....................................        175     $7,521     $4,121
510....................................      1,613    $13,629     $6,439
511....................................        598     $7,074     $3,875
512....................................        322    $62,401    $26,643
513....................................        111    $64,167    $22,861
514....................................     16,717    $68,327    $25,311
515....................................      3,705    $53,939    $21,310
516....................................     74,959    $28,839    $11,990
517....................................    168,815    $22,998    $10,791
518....................................     47,230    $17,756     $8,980
519....................................      5,385    $23,034    $10,757
520....................................     10,402    $16,420     $7,565
521....................................     22,607     $7,527     $4,035
522....................................     11,542     $7,088     $3,155
523....................................     14,748     $4,154    $2,098
------------------------------------------------------------------------
\1\ Cases are taken from the FY 2000 MedPAR file; DRGs are from GROUPER
  V.19.

List of Subjects in 42 CFR Part 412

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

    42 CFR part 412 is amended as set forth below:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

    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. In Sec. 412.2, the introductory text of paragraph (f) is 
republished, and a new paragraph (f)(9) is added to read as follows:


Sec. 412.2  Basis of payment.

* * * * *
    (f) Additional payments to hospitals. In addition to payments based 
on the prospective payment system rates for inpatient operating and 
inpatient capital-related costs, hospitals receive payments for the 
following:
* * * * *
    (9) Special additional payment for certain new technology as 
specified in Secs. 412.87 and 412.88 of Subpart F.

    3. The title of Subpart F is revised to read as follows:

Subpart F--Payment for Outlier Cases and Special Treatment Payment 
for New Technology

    4. A new undesignated center heading is added after the Subpart F 
heading and before Sec. 412.80; the section heading of Sec. 412.80 is 
revised; and a new paragraph (a)(3) is added to read as follows:

Payment for Outlier Cases


Sec. 412.80  Outlier cases: General provisions.

    (a) Basic rule.
* * * * *
    (3) Discharges occurring on or after October 1, 2001. For 
discharges occurring on or after October 1, 2001, except as provided in 
paragraph (b) of this section concerning transfers, CMS provides for 
additional payment, beyond standard DRG payments and beyond additional 
payments for new medical services or technology specified in 
Secs. 412.87 and 412.88, to a hospital for covered inpatient hospital 
services furnished to a Medicare beneficiary if the hospital's charges 
for covered services, adjusted to operating costs and capital costs by 
applying cost-to-charge ratios as described in Sec. 412.84(h), exceed 
the DRG payment for the case (plus payments for indirect costs of 
graduate medical education (Sec. 412.105), payments for serving a 
disproportionate share of low-income patients (Sec. 412.106), and 
additional payments for new medical services or technologies) plus a 
fixed dollar amount (adjusted for geographic variation in costs) as 
specified by CMS.
* * * * *
    5. A new undesignated center heading and Secs. 412.87 and 412.88 
are added immediately following Sec. 412.86, to read as follows:

Additional Special Payment for Certain New Technology


Sec. 412.87  Additional payment for new medical services and 
technologies: General provisions.

    (a) Basis. Sections 412.87 and 412.88 implement sections 
1886(d)(5)(K) and 1886(d)(5)(L) of the Act, which authorize the 
Secretary to establish a mechanism to recognize the costs of new 
medical services and technologies under the hospital inpatient 
prospective payment system.
    (b) Eligibility criteria. For discharges occurring on or after 
October 1, 2001, CMS provides for additional payments (as specified in 
Sec. 412.88) beyond the standard DRG payments and outlier payments to a 
hospital for discharges involving covered inpatient hospital services 
that are new medical services and technologies, if the following 
conditions are met:
    (1) A new medical service or technology represents an advance that 
substantially improves, relative to technologies previously available, 
the diagnosis or treatment of Medicare beneficiaries. CMS will 
determine whether a new medical service or technology meets this 
requirement and announce the results of its determinations in the 
Federal Register as a part of its annual updates and changes to the 
hospital inpatient prospective payment system.
    (2) A medical service or technology may be considered new within 2 
or 3 years after the point at which data begin to become available 
reflecting the ICD-9-CM code assigned to the new service or technology 
(depending on when a new code is assigned and data on the new service 
or technology become available for DRG recalibration). After CMS has 
recalibrated the DRGs, based on available data, to reflect the costs of 
an otherwise new medical service or technology, the medical service or 
technology will no longer be considered ``new'' under the criterion of 
this section.
    (3) The DRG prospective payment rate otherwise applicable to 
discharges

[[Page 46925]]

involving the medical service or technology is determined to be 
inadequate, based on application of a threshold amount to estimated 
charges incurred with respect to such discharges. To determine whether 
the payment would be adequate, CMS will determine whether the charges 
of the cases involving a new medical service or technology will exceed 
a threshold amount set at one standard deviation beyond the geometric 
mean standardized charge for all cases in the DRG to which the new 
medical service or technology is assigned (or the case-weighted average 
of all relevant DRGs if the new medical service or technology occurs in 
many different DRGs). Standardized charges reflect the actual charges 
of a case adjusted by the prospective payment system payment factors 
applicable to an individual hospital, such as the wage index, the 
indirect medical education adjustment factor, and the disproportionate 
share adjustment factor.


Sec. 412.88  Additional payment for new medical service or technology.

    (a) For discharges involving new medical services or technologies 
that meet the criteria specified in Sec. 412.87, Medicare payment will 
be:
    (1) The full DRG payment (including adjustments for indirect 
medical education and disproportionate share but excluding outlier 
payments); plus
    (2) If the costs of the discharge (determined by applying cost-to-
charge ratios as described in Sec. 412.84(h)) exceed the full DRG 
payment, an additional amount equal to the lesser of--
    (i) 50 percent of the costs of the new medical service or 
technology; or
    (ii) 50 percent of the amount by which the costs of the case exceed 
the standard DRG payment.
    (b) Unless a discharge case qualifies for outlier payment under 
Sec. 412.84, Medicare will not pay any additional amount beyond the DRG 
payment plus 50 percent of the estimated costs of the new medical 
service or technology.
    (c) If CMS estimates before the beginning of a Federal fiscal year 
that the additional payments under this section would exceed 1.0 
percent of total operating payments under the hospital inpatient 
prospective payment system, the additional payment amounts under 
paragraph (a) of this section will be reduced prospectively to a 
percentage estimated to result in payments not to exceed 1.0 percent of 
total operating payments under the hospital inpatient prospective 
payment system.

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


    Dated: August 17, 2001.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: August 28, 2001.
Tommy G. Thompson,
Secretary.
[FR Doc. 01-22475 Filed 9-4-01; 11:03 am]
BILLING CODE 4120-01-P