[Federal Register Volume 66, Number 213 (Friday, November 2, 2001)]
[Rules and Regulations]
[Pages 55850-55857]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-27658]



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Part V





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Part 419



Medicare Program--Prospective Payment System for Hospital Outpatient 
Services; Final Rules

  Federal Register / Vol. 66, No. 213 / Friday, November 2, 2001 / 
Rules and Regulations  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 419

[CMS-1179-IFC]
RIN 0938-AK59


Medicare Program--Prospective Payment System for Hospital 
Outpatient Services: Criteria for Establishing Additional Pass-Through 
Categories for Medical Devices

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

ACTION: Interim final rule with comment period.

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SUMMARY: This interim final rule with comment period sets forth the 
criteria the Secretary will use to establish new categories of medical 
devices eligible for transitional pass-through payments under 
Medicare's hospital outpatient prospective payment system.

DATES: Effective date: These regulations are effective December 3, 
2001.
    Comment date: Comments will be considered if we receive them at the 
appropriate address, as provided below, no later than 5 p.m. on January 
2, 2002.

ADDRESSES: Mail an original and 3 copies of written comments to the 
following address only:

Centers for Medicare & Medicaid Services Department of Health and Human 
Services, Attention: CMS-1179-IFC, P.O. Box 8018, Baltimore, MD 21244-
8018
Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, D.C. 20201, or
Room C5-16-03, 7500 Security Boulevard, Baltimore, Maryland 21244-1850.

    To ensure that mailed comments are received in time for us to 
consider them, please allow for possible delays in delivering them.
    Comments mailed to the above addresses may be delayed and received 
too late for us to consider them.
    Because of staff and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code CMS-1179-IFC.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.
    For information on ordering copies of the Federal Register 
containing this document and electronic access, see the beginning of 
the SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: Nancy Edwards, (410) 786-0378 or Barry 
Levi, (410) 786-4529.

SUPPLEMENTARY INFORMATION

Inspection of Public Comments

    Comments received timely will be available for public inspection as 
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& Medicaid Services, 7500 Security Blvd., Baltimore, MD, on Monday 
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I. Background

    Section 1833(t) of the Social Security Act (the Act), as added by 
section 4523 of the Balanced Budget Act of 1997 (BBA), Pub. L. 105-133, 
provided for implementation of a prospective payment system (PPS) for 
hospital outpatient services furnished to Medicare beneficiaries. The 
Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 
(BBRA), Pub. L. 106-113, amended section 1833(t) of the Act to make 
major changes that affected the new PPS for hospital outpatient 
services. On April 7, 2000, we published in the Federal Register (65 FR 
18434), a final rule with comment period to implement the new PPS for 
hospital outpatient services. The new system establishes payment rates 
for each service paid under this system using ambulatory payment 
classification (APC) groups. On June 30, 2000, we published a notice in 
the Federal Register (65 FR 40535) announcing a delay in the effective 
date of the hospital outpatient PPS (OPPS) from July 1, 2000 (as set 
forth in the April 7, 2000 final rule) until August 1, 2000. Therefore, 
OPPS became effective on August 1, 2000. The regulations implementing 
the payment system appear at 42 CFR part 419.
    Among the provisions of the April 7, 2000 final rule with comment 
period are those implementing section 1833(t)(6) of the Act, which was 
added by section 201(b) of the BBRA. This section provided for 
temporary additional payments, referred to as ``transitional pass-
through payments,'' for certain drugs, biologicals, and devices. The 
provision required the Secretary to make additional payments to 
hospitals for at least 2, but no more than 3, years for specific items. 
The items designated by the BBRA are as follows:
     Current orphan drugs, as designated under section 526 of 
the Federal Food, Drug, and Cosmetic Act.
     Current drugs, biologicals, and brachytherapy devices used 
for the treatment of cancer.
     Current radiopharmaceutical drugs and biologicals.
     New medical devices, drugs, and biologicals in instances 
in which the item was not being paid as a hospital outpatient service 
as of December 31, 1996, and when the cost of the item is ``not 
insignificant'' in relation to the OPPS payment amount. For those 
drugs, biologicals, and devices referred to as ``current,'' the 
transitional payment begins on the first date the hospital OPPS is 
implemented, as required by section 1833(t)(6)(B)(i) of the Act (before 
enactment of the Medicare, Medicaid, and SCHIP Program Benefits 
Improvement and Protection Act (BIPA), Pub. L. 106-554, enacted 
December 21, 2000).
    Section 1833(t)(6)(B) of the Act requires payment to be made on a 
``pass-through'' basis for the designated items. Specifically, for 
devices, the payment is determined by taking the hospital's charge for 
the device on the individual claim submitted to Medicare, multiplying 
by the hospital's cost-to-charge ratio, and subtracting an amount 
identified by the Secretary as already included in the associated APC 
to reflect payment for similar devices.
    In the April 7, 2000 final rule with comment period, we discussed 
the

[[Page 55851]]

criteria that we will use to determine which medical devices are 
eligible for transitional pass-through payments. These criteria were 
further discussed and several modifications were made in an interim 
final rule with comment period published in the Federal Register on 
August 3, 2000 (65 FR 47670). The modifications included changes in the 
test used to determine when the cost of the item is ``not 
insignificant.'' Effective August 1, 2000, we used these criteria in 
determining which devices were eligible for transitional pass-through 
payments.
    From the initial implementation of the new system on August 1, 2000 
through March 31, 2001, we determined eligibility for all medical 
devices (as well as drugs and biologicals) for transitional pass-
through payment on an item-specific basis, that is, distinguishing by 
individual trade names (and, in some instances, model numbers) of the 
eligible devices. Devices that we determined eligible were listed in 
one of a number of Program Memoranda we published on this subject. 
These lists were also posted on our Web site, www.hcfa.gov. Other 
devices, even if similar to those on the published lists, were not 
eligible in the absence of a specific eligibility decision published in 
a Program Memorandum. We established a quarterly process by which 
interested parties could submit applications to us for eligibility 
determinations for particular devices. Using this process, we 
determined that over 1,000 devices were eligible for transitional pass-
through payments.
    The most significant reason for adopting an item-specific approach 
rather than a category approach, which was also considered, was the 
requirement in section 1833(t)(6)(A)(iv)(I) of the Act that, for a 
device to be eligible for a transitional pass-through payment, 
``payment for the device * * * as an outpatient hospital service under 
this part was not being made as of December 31, 1996.'' We adopted an 
item-specific approach in order to distinguish which devices met this 
criterion. If we had adopted a categorical approach, any category that 
contained any device that Medicare had paid for before 1997 would not 
be eligible for transitional pass-through payments. No device included 
in that category, regardless of when Medicare started to pay for it, 
would be eligible. This approach would have severely limited the 
eligibility of devices for transitional pass-through payments, a result 
that we believed was contrary to the intent of the statute. Our reasons 
for adopting an item-specific approach to determining eligibility of 
transitional pass-through payments are further discussed in the 
November 13, 2000 interim final rule with comment period (65 FR 67806).
    Section 402 of BIPA, which amends section 1833(t)(6) of the Act, 
requires us to use categories in determining the eligibility of devices 
for transitional pass-through payments effective April 1, 2001. Section 
1833(t)(6)(B)(ii)(IV) of the Act, as added by section 402(a) of BIPA, 
requires us to establish a new category for a medical device when--
     The cost of the device is not insignificant in relation to 
the OPD fee schedule amount;
     No existing device category is appropriate for the device; 
and
     Payment was not being made for the device as an outpatient 
hospital service as of December 31, 1996. However, section 
1833(t)(6)(B)(iv) of the Act, also added by section 402(a) of BIPA, 
provides that a medical device may be treated as meeting these 
requirements if either--
     The device is described by one of the initial categories 
established; or
     The device is described by one of the additional 
categories established under this rule, and--
     An application under section 515 of the Federal Food, 
Drug, and Cosmetic Act has been approved; or
     The device has been cleared for market under section 
510(k) of the Federal Food, Drug, and Cosmetic Act; or
     The device is exempt from the requirements of section 
510(k) of the Federal Food, Drug, and Cosmetic Act under section 510(l) 
or section 510(m) of that Act.
    Thus, otherwise covered devices that are described by a category 
may be eligible for transitional pass-through payments even if they 
were paid as part of an outpatient service as of December 31, 1996. At 
the same time, no categories will be created on the basis of devices 
that were paid on or before December 31, 1996. Under section 
1833(t)(6)(B)(iv) of the Act, no further application or approval is 
required for a covered device that is described by a category to 
qualify for a transitional pass-through payment.
    Section 1833(t)(6)(B)(i)(I) of the Act, as amended by BIPA, 
required us to establish, by April 1, 2001, an initial set of 
categories based on device by type in such a way that devices eligible 
for transitional pass-through payments under sections 1833(t)(A)(ii) 
and (iv) as of January 1, 2001 would be included in a category. We 
developed this initial set of categories in consultation with groups 
representing hospitals, manufacturers of medical devices, and other 
affected parties, as required by section 1833(t)(6)(B)(i)(II) of the 
Act, as amended by BIPA. We issued the list of initial categories on 
March 22, 2001, in Program Memorandum (PM) No. A-01-41, which is 
available on our Web site, www.hcfa.gov.
    As required by section 1833(t)(6)(B)(iii) of the Act, the period 
during which a category of devices is eligible for transitional pass-
through payments is at least 2, but not more than 3, years. This period 
begins with the first date on which a transitional pass-through payment 
is made for any medical device that is described by the category.
    Section 1833(t)(6)(B)(ii)(III) of the Act, as amended by BIPA, 
requires us to establish criteria by July 1, 2001 that will be used to 
create additional categories. This provision requires that no medical 
device be described by more than one category. In addition, the 
criteria must include a test of whether the average cost of devices 
that would be included in a category is ``not insignificant'' in 
relation to the APC payment amount for the associated service.
    A conforming amendment made by section 402(b)(3) of BIPA revises 
section 1833(t)(12)(E) of the Act concerning the limitation on 
administrative or judicial review of the OPPS. As amended, that section 
now prohibits administrative or judicial review of the determination 
and deletion of initial and new categories. In addition to the 
requirement to use device categories for purposes of the transitional 
pass-through payments, BIPA made other changes to those payments. 
Section 406 of BIPA amends section 1833(t)(6)(A)(ii) of the Act to 
extend transitional pass-through payments to devices used for 
temperature monitored cryoablation, effective for devices furnished on 
or after April 1, 2001.
    Section 430 of BIPA amends section 1861(t)(1) of the Act to expand 
the definition of ``drugs'' to include contrast agents effective for 
items and services furnished on or after July 1, 2001. We implemented 
this provision by program memorandum (Transmittal A-01-73, June 1, 
2001). Thus, contrast agents have been eligible for transitional pass-
through payments since that date. The amount of the pass-through 
payment will be determined, as for other drugs, on the basis of 95 
percent of the average wholesale price less the amount determined to be 
already included in the payment for the associated APC.

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II. Provisions of This Interim Final Rule with Comment Period

    This interim final rule sets forth the criteria for establishing 
new categories of medical devices eligible for transitional pass-
through payments under the hospital outpatient PPS as required by 
section 1833(t)(6)(B)(ii) of the Act, as amended by BIPA. The 
provisions relating to transitional pass-through payments for eligible 
drugs and biologicals remain unchanged and are not addressed in this 
rule (except for the change relating to contrast agents as provided in 
section 430 of BIPA). Similarly, the provisions relating to new 
technology ambulatory payment classification (APC) groups remain the 
same, as set forth in our April 7, 2000 final rule (66 FR 18476). We 
note, however, that in the proposed rule to update the hospital OPPS 
for CY 2002, published on the August 24, 2001 (66 FR 44702), we 
proposed certain changes to the criteria for eligibility for payment in 
a new technology APC.

A. Changes to the Criteria for Eligibility for Pass-Through Payment of 
a Medical Device

    As noted above, in our April 7, 2000 final rule with comment period 
(65 FR 18480), we defined new or innovative devices using eight 
criteria, three of which were revised in our August 3, 2000 interim 
final rule with comment period (65 FR 47673-74). These criteria were 
set forth in regulations at Sec. 419.43(e)(4). For the most part, these 
criteria will remain applicable when defining a new category for 
devices. That is, devices to be included in a category must meet all 
previously established applicable criteria for a device eligible for 
transitional pass-through payments. The definition of an eligible 
device, however, must change to conform to the requirements of the 
amended section 1833(t)(6)(B)(ii) of the Act.
    In addition, we are clarifying our criterion that states that a 
device must be approved or cleared by the FDA. The approval or 
clearance criterion applies only if FDA approval or clearance is 
required for the device as specified at new Sec. 419.66(b)(1). For 
example, a device that has received an FDA investigational device 
exemption (IDE) and has been classified as a Category B device by the 
FDA in accordance with Sec. 405.203 through Sec. 405.207 and 
Secs. 405.211 through 405.215 is exempt from this requirement. A device 
that has received an FDA IDE and is classified by the FDA as a Category 
B device is eligible for a transitional pass-through payment if all 
other requirements are met.

B. Criteria for Establishing Device Categories

    As described above in section I of this preamble, in determining 
the criteria for establishing additional categories, section 
1833(t)(6)(B)(ii) of the Act mandates that new categories must be 
established for devices that were not being paid for as an outpatient 
hospital service as of December 31, 1996, in such a way that no device 
is described by more than one category and the average cost of devices 
to be included in a category is not insignificant in relation to the 
APC payment amount for the associated service. Based on these 
requirements, we will use the following criteria to establish a 
category of devices:
     Substantial clinical improvement. The category describes 
devices that demonstrate a substantial improvement in medical benefits 
for Medicare beneficiaries compared to the benefits obtained by devices 
in previously established categories or other available treatments, as 
described in regulations at new Sec. 419.66(c)(1).
    This criterion ensures that no existing or previously existing 
category contains devices that are substantially similar to the devices 
to be included in the new category. This is consistent with the 
statutory mandate that no device is described by more than one 
category.
    In addition, this criterion limits the number of new categories, 
and consequently transitional pass-through payments, to those 
categories containing devices that offer the prospect of substantial 
clinical improvement in the care of Medicare beneficiaries. Section 
1833(t)(6)(E)(iii) of the Act, as redesignated by BIPA, requires that, 
if the Secretary estimates before the beginning of the year that the 
total amount of pass-through payments would exceed a specified 
percentage of total program payments (2.5 percent before 2004 and no 
more than 2 percent thereafter), we must uniformly reduce 
(prospectively) each pass-through payment in that year by an amount 
adequate to ensure that the limit is not exceeded.
    We believe it is important for hospitals to receive pass-through 
payments for devices that offer substantial clinical improvement in the 
treatment of Medicare beneficiaries to facilitate access by 
beneficiaries to the advantages of the new technology. Conversely, the 
need for additional payments for devices that offer little or no 
clinical improvement over a previously existing device is less 
apparent. These devices can still be used by hospitals, and hospitals 
will be paid for them through the appropriate APC payment. To the 
extent these devices are used, the hospitals' charges for the 
associated procedures will reflect their use. We will use data on 
hospital charges to update the APC payment rates as part of the annual 
update cycle. Thus, the payment process will provide an avenue to 
reflect appropriate payments for devices that are not substantial 
improvements.
    We will be evaluating a request for a new category of devices 
against the following criteria in order to determine if it meets the 
substantial clinical 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 
treated because of the use of the device.
     Decreased pain, bleeding, or other quantifiable symptom.
     Reduced recovery time.
    As part of the application process (described below in section 
II.C.), we will require the requester to submit evidence that the 
category of devices meets one or more of these criteria. We note that 
the requirements set forth above will be used only for determining 
whether a device is eligible for a new category under section 
1833(t)(6)(B) of the Act, which authorizes transitional pass through 
payments for categories of devices. These criteria are not intended for 
use in making coverage decisions

[[Page 55853]]

under section 1862(a)(1)(A) of the Act. We note that adoption of these 
criteria is consistent with the recommendation of the Medicare Payment 
Advisory Commission, in its March 2001 Report to Congress, that pass-
through payments for specific technologies be made only when a 
technology is new or substantially improved.
    We expect to determine which devices represent a substantial 
clinical improvement over existing devices by using a panel of Federal 
clinical and other experts, supplemented if appropriate by individual 
consultation with outside experts. These decisions will, in general, be 
based on information submitted by the requester about the clinical 
benefit of the devices as described in the above criteria, including, 
where available, evidence from clinical trials or other clinical 
investigations.
    We believe that almost all substantial clinical improvements in 
technology that are appropriately paid for under the transitional pass-
through provisions result in measurable improvements in care from the 
perspective of the beneficiary. Nevertheless, there may be some 
improvements in the medical technology itself that are so significant 
that we may wish to recognize them for separate payment even though 
they do not directly result in substantial clinical improvements. For 
example, improvements in such factors as the strength of materials, 
increased battery life, miniaturization, might so improve convenience, 
durability, ease of operation, etc., that such an improvement in 
medical technology might be considered as a separate factor from 
``substantial clinical improvement'' in beneficiary care. We invite 
public comment on this issue and are particularly interested in 
learning of examples of medical technologies for which pass through 
payments might be appropriate even though they would not also pass a 
test based on substantial improvement in beneficiary outcomes.
    We note that we welcome comments on all aspects of these criteria 
for substantial clinical improvement, and we will consider timely 
comments in developing a final rule. (Comments on all parts of this 
interim final rule with comment will be considered if they are received 
within 30 days after the publication of this rule.) We will continue to 
evaluate these criteria as we gain experience in applying them, and we 
will consider revisions and refinements to them over time as 
appropriate.
     Cost. We determine that the estimated cost to hospitals of 
the devices in a new category (including any candidate devices and the 
other devices that we believe will be included in the category) is 
``not insignificant'' relative to the payment rate for the applicable 
procedures. The estimated cost of devices in a category will be 
considered ``not insignificant'' if they meet the following criteria 
found in regulations at new Sec. 419.66(d):
     The estimated average reasonable cost of devices in the 
category exceeds 25 percent of the applicable APC payment amount for 
the service associated with the category of devices.
     The estimated average reasonable cost of devices in the 
category exceeds the cost of the device-related portion of the APC 
payment amount for the service associated with the category of devices 
by at least 25 percent.
     The difference between the estimated average reasonable 
cost of the devices in the category and the portion of the APC payment 
amount determined to be associated with the device in the associated 
APC exceeds 10 percent of the total APC payment.
    Of these three cost criteria, the latter two are unchanged from our 
current thresholds for individual devices (however, as discussed below, 
their effective date is revised). The first criterion, however, 
represents a change from the current threshold.
    In the April 7, 2000 final rule, we provided that a device's 
expected reasonable cost must exceed 25 percent of the applicable APC 
payment for the associated service as the criterion for determining 
when the cost of a specific device is ``not insignificant'' in relation 
to the APC payment (65 FR 18480). In the August 3, 2000 interim final 
rule, we lowered the threshold to 10 percent because we believed the 25 
percent limit was too restrictive based on the brand specific approach 
at the time (65 FR 47673; Sec. 419.43(e)(1)(iv)(C)). However, given our 
payment experience over the past year using the 10 percent threshold, 
including our current information on the likely amount of pass-through 
payments in CY 2002, we believe a higher threshold is warranted. We 
believe that setting a higher cost threshold will ensure that new 
categories are created only in those instances where they are most 
valuable to beneficiaries and hospitals, given the overall limits on 
pass-through payments. That is, pass-through payments will be targeted 
only to those devices where cost considerations might be most likely to 
interfere with patient access.
    We found that once we lowered the threshold to 10 percent, a very 
small minority (less than 10 percent) of devices that met all other 
criteria for the pass-through payment were rejected on the basis of 
this criterion. Partly as a result, the list of devices qualified for 
pass-through payments increased to well over 1000 devices by the end of 
2000. Although the extensive number of qualified devices allowed 
hospitals to receive additional payment for many devices, we have 
estimated that the overall pass-through payment amount for calendar 
year 2002 exceeds the 2.5 percent cap. Therefore, for that year, a 
substantial reduction in the amount of each pass-through payment as 
required by section 1833(t)(6)(E)(iii) of the Act, will be necessary. 
Thus, allowing a large number of marginally costly devices to qualify 
for the pass-through payment would reduce the amount of additional 
payment a hospital would receive for any one device. We believe raising 
the threshold for this criterion will benefit hospitals by focusing the 
pass-through payments on those devices that represent a substantial 
loss to the hospital. We believe this change will also preserve 
beneficiary access to especially expensive devices.
    In addition, once a category is established, devices included in 
the category will be eligible for pass-through payments regardless of 
the cost of the device. Therefore, we believe that it is reasonable to 
set a higher threshold than 10 percent to establish the category. While 
the cost of most devices described by a category may equal or exceed 
the threshold we use in establishing a category, the cost of individual 
devices could easily fall below the threshold. Therefore, we believe 
that it is reasonable to use a higher threshold in establishing a 
category than in qualifying individual devices.
    The latter two criteria for determining that the estimated cost of 
a category of devices is not insignificant are unchanged from those 
currently included in Sec. 419.66 (as related to individual devices). 
As we provided in the August 3, 2000 interim final rule, we intended to 
apply these criteria to devices for which a pass-through payment is 
first made on or after January 1, 2003 (65 FR 47673). We stated that 
the delay would allow us sufficient time to gather and analyze data 
needed to determine the current portion of the APC payment associated 
with the devices.
    Based on the outpatient claims data we are currently using for 
analysis, we believe that we are able, in many cases, to begin using 
these criteria at this time. Although the 1996 data did not provide a 
level of information that allowed us to determine the portion of the 
APC payment that was related to the device

[[Page 55854]]

(except in a very few cases such as pacemakers), the newer data often 
does provide this level of detail. Therefore we will begin using the 
second and third criteria for the purpose of creating categories, as 
described in regulations at Secs. 419.66(d)(2) and 419.66(d)(3), as 
soon after the implementation of this final rule as we have data to do 
so rather than on January 1, 2003. Although in some instances the lack 
of specific data will prevent the application of these criteria, we do 
not believe that should delay our use of these criteria in those 
situations in which the data are available.

C. Application Process for Creation of a New Device Category

    Device manufacturers, hospitals, or other interested parties may 
apply for a new device category for transitional pass-through payments. 
The application process is very similar to the process that was 
previously used for item-specific review of devices and that is 
currently used for drugs and biologicals. Details regarding deadlines 
and other aspects of the application process will be available on our 
web site, www.hcfa.gov.
    We will accept applications at any time. However, we will establish 
new categories only at the beginning of a calendar quarter, in 
deference to our computer systems needs and those of our contractors 
and hospitals. We must receive applications in sufficient time before 
the beginning of the calendar quarter in which a category would be 
established to allow for decision-making and programming. For now, we 
will require that applications be received at least 4 months before the 
beginning of the quarter.
    We may change the details of this application process in the future 
to reflect experience and programmatic needs. If we revise these 
instructions in any way, we will submit the revisions to the Office of 
Management and Budget pursuant to the Paperwork Reduction Act. We will 
also post the revisions on our web site.

D. Announcing a New Device Category

    If we determine a new category is warranted, we will issue a 
Program Memorandum specifying a new Healthcare Common Procedure Coding 
System (HCPCS, formerly known as HCFA Common Procedure Coding System) 
code and short and long descriptors for the category. We may also 
include additional clarifying or definitional information to help 
distinguish the new category from other existing or previously existing 
categories. It may be necessary to redefine, or make other changes to, 
existing categories to accommodate a new category and ensure that no 
medical device is described by more than one category, though we will 
attempt to keep these changes to a minimum. We will post these Program 
Memoranda on our web site.
    We may find it necessary occasionally to correct or amend the list 
of (and clarifying information associated with) new categories or 
initial categories. We do not expect this step will be needed often, 
but if it is necessary, we will issue any changes in a Program 
Memorandum.

E. Temperature-Monitored Cryoablation Devices

    Section 406 of BIPA amends section 1833(t)(6)(A)(ii) of the Act to 
extend transitional pass-through payments to a device of temperature-
monitored cryoablation. We have implemented this provision through PM 
No. A-01-40, which included categories for these devices. In our 
regulations at new Sec. 419.66(e)(2), we have extended the transitional 
pass-through payments to a device of temperature-monitored cryoablation 
and specify that this medical device is not subject to the cost 
criteria described in Sec. 419.66(d).

F. Contrast Agents as a Drug

    Section 430 of BIPA revises the definition of drugs at section 
1861(t)(1) of the Act to include contrast agents, therefore making them 
eligible for a transitional pass-through payment. We have implemented 
this provision effective July 1, 2001, through PM No. A-01-73, issued 
on June 1, 2001. This provision does not require any changes in our 
regulations as we are simply including contrast agents within the 
definition of drugs that were not paid as hospital outpatient services 
before 1997.

G. Redesignations

    We are redesignating and revising our regulations at Sec. 419.43(e) 
relating to transitional pass-through payments for drugs, biologicals, 
and devices to incorporate the changes in our policy that result from 
this interim final rule. Paragraph (e) has been removed and 
redesignated as a new subpart G. (Current subpart G is redesignated as 
subpart H.) The new subpart G consists of the following sections:


Sec. 419.62  Transitional pass-through payments: General rules.


Sec. 419.64  Transitional pass-through payments: Drugs and biologicals.


Sec. 419.66  Transitional pass-through payments: Medical devices.

    We are redesignating Sec. 419.43(f), Budget neutrality, as 
Sec. 419.43(e) and revising that paragraph to limit its application 
only to outlier adjustments. The budget neutrality provision relating 
to pass-through payments is now found at Sec. 419.62(b). We are also 
revising Sec. 419.60(e), Limitations on administrative or judicial 
review, to conform to the changes made to section 1833(t)(12)(E) of the 
Act by section 402(b)(3) of BIPA.
    In recodifying paragraph (e), we have made additional editorial 
changes to existing regulations text.

III. Response to Comments

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

IV. Waiver of Proposed Rulemaking

    We ordinarily publish a proposed rule in the Federal Register and 
invite public comment on the proposed rule. The proposed rule includes 
a reference to the legal authority under which the rule is proposed, 
and the terms and substances of the proposed rule or a description of 
the subjects and issues involved. This procedure can be waived, 
however, if an agency finds good cause that a notice-and-comment 
procedure is impracticable, unnecessary, or contrary to the public 
interest and incorporates a statement of the finding and its reasons in 
the rule issued. We believe that, in this case, prior notice and 
comment procedures would be impracticable because the statute requires 
we issue the criteria by July 1, only slightly more than 6 months after 
passage of the underlying statute. This deadline does not permit 
completion of the full cycle of notice and comment rulemaking before 
the criteria are published. Furthermore, section 1833(t)(6)(B)(ii)(I) 
of the Act, as amended by section 402(a) of BIPA, gives explicit 
authority to use an interim final rule with comment period. Therefore, 
we find good cause to waive

[[Page 55855]]

the notice of proposed rulemaking and to issue this final rule on an 
interim basis.

V. Collection of Information Requirements

    Under the Paperwork Reduction Act (PRA) of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval.
    In order to fairly evaluate whether an information collection 
should be approved by OMB, section 3506(c)(2)(A) of the PRA of 1995 
requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    Therefore, we are soliciting public comments on each of the issues 
for the information collection requirement discussed below.

Process and Information Required To Apply for Additional Device 
Categories For Transitional Pass-Through Payment Status Under the 
Hospital Outpatient Prospective Payment System

    The application itself for additional device categories may be 
found at www.hcfa.gov. The application process is very similar to the 
process that was previously used for item-specific review of devices 
and that is currently used for drugs and biologicals. Details regarding 
deadlines and other aspects of the application process will be 
available on the above web site. (See also section II. Above.)
    We estimate that approximately 100 entities will file an 
application yearly. We believe it will take each of these entities 
around 16 hours to gather the necessary information and fill out the 
application.
    We have submitted a copy of this interim final rule with comment to 
OMB for its review of the information collection requirement described 
above. The requirement is not effective until it has been approved by 
OMB.
    If you comment on these information collection requirements, please 
mail copies directly to the following:

Centers for Medicare & Medicaid Services, Office of Information 
Services, DHES, SSG, Attn: John Burke, CMS-1179-IFC, Room N2-14-26, 
7500 Security Boulevard, Baltimore, MD 21244-1850;

    and

Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, DC 20503 
Attn: Allsion Eydt, Desk Officer.

VI. Regulatory Impact Statement

A. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review) and the 
Regulatory Flexibility Act (RFA) (September 19, 1980 Public Law 96-
354). Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). A regulatory impact 
analysis (RIA) must be prepared for major rules with economically 
significant effects ($100 million or more annually). This interim final 
rule is not a major rule because we have determined that the economic 
impact will be negligible for the revisions related to the transitional 
pass-through payments for new or innovative medical devices. In 
addition, the budget impact related to the transitional pass-through 
provision has already been addressed in the outpatient prospective 
payment system implementing rule published on April 7, 2000 (65 FR 
18530). As stated in that rule, the pass-through provision is 
implemented in a budget-neutral manner as required by section 
1833(t)(2)(E) of the Act. Section 1833(t)(6)(E) of the Act, as amended 
by BBRA and redesignated by BIPA, caps the projected additional 
payments annually at 2.5 percent of the total projected payments for 
hospital outpatient services each year before calendar year 2004 and no 
more than 2.0 percent in year 2004 and subsequent years.
    The RFA requires agencies to determine whether a rule will have a 
significant economic impact on a substantial number of small entities. 
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 ranging between $5 million and 
$25 million or less annually, depending on the particular health care 
industry (for details see the Small Business Administration's final 
rule size standards for health care at 65 FR 69432). Individuals and 
States are not included in the definition of a small entity.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis for any final rule that may have a 
significant impact on the operations of a substantial number of small 
rural hospitals. This analysis must conform to the provisions of 
section 604 of the RFA. With the exception of hospitals located in 
certain New England counties, for purposes of section 1102(b) of the 
Act, we define a small rural hospital as a hospital with not more 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 (Pub. L. 98-21) designated 
hospitals in certain New England counties as belonging to the adjacent 
NECMA. Thus, for purposes of the prospective payment system, we 
classify these hospitals as urban hospitals.
    We are not preparing analyses for either the RFA or section 1102(b) 
of the Act because we have determined, and we certify, that this rule 
will not have a significant economic impact on a substantial number of 
small entities or a significant impact on the operations of a 
substantial number of small rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in an expenditure in any one year by 
State, local, or tribal governments, in the aggregate, or by the 
private sector, of $110 million. This interim final rule will not have 
a significant economic effect on these governments or the private 
sector.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a final rule that imposes 
substantial direct compliance costs on State and local governments, 
preempts State law, or otherwise has Federalism implications. This 
interim final rule will not have a substantial effect on States or 
local governments.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 419

    Health facilities, Hospitals, Medicare.

[[Page 55856]]


    For the reasons set forth in the preamble, 42 CFR part 419 is 
amended as follows:

PART 419--PROSPECTIVE PAYMENT SYSTEM FOR HOSPITAL OUTPATIENT 
DEPARTMENT SERVICES

    1. The authority citation continues to read as follows:

    Authority: Secs. 1102, 1833(t), and 1871 of the Social Security 
Act (42 U.S.C. 1302, 1395l(t), and 1395hh).

    2. Section 419.43 is amended by--
    A. Removing paragraph (e).
    B. Redesignating paragraph (f) as paragraph (e) and revising it to 
read as follows.


Sec. 419.43  Adjustments to national program payment and beneficiary 
coinsurance amounts.

* * * * *
    (e) Budget neutrality. CMS establishes payment under paragraph (d) 
of this section in a budget-neutral manner.

    3. Section 419.60(e) is revised to read as follows:


Sec. 419.60  Limitations on administrative and judicial review.

* * * * *
    (e) The determination of the fixed multiple, or a fixed dollar 
cutoff amount, the marginal cost of care, or applicable percentage 
under Sec. 419.43(d) or the determination of insignificance of cost, 
the duration of the additional payments (consistent with subpart G of 
this part), the determination of initial and new categories under 
Sec. 419.66, the portion of the Medicare hospital outpatient fee 
schedule amount associated with particular devices, drugs, or 
biologicals, and the application of any pro rata reduction under 
Sec. 419.62(c).

    4. Redesignate Subpart G as Subpart H.

    5. New Subpart G is added to read as follows:

Subpart G Transitional Pass-through Payments

Sec.
Sec. 419.62  Transitional pass-through payments: general rules.
Sec. 419.64  Transitional pass-through payments: Drugs and 
biologicals.
Sec. 419.66  Transitional pass-through payments: Medical devices.


Sec. 419.62  Transitional pass-through payments: General rules.

    (a) General. CMS provides for additional payments under 
Secs. 419.64 and 419.66 for certain innovative medical devices, drugs, 
and biologicals.
    (b) Budget neutrality. CMS establishes the additional payments 
under Secs. 419.64 and 419.66 in a budget neutral manner.
    (c) Uniform prospective reduction of pass-through payments. (1) If 
CMS estimates before the beginning of a calendar year that the total 
amount of pass-through payments under Secs. 419.64 and 419.66 for the 
year would exceed the applicable percentage (as described in paragraph 
(c)(2) of this section) of the total amount of Medicare payments under 
the outpatient prospective payment system. CMS will reduce, pro rata, 
the amount of each of the additional payments under Secs. 419.64 and 
419.66 for that year to ensure that the applicable percentage is not 
exceeded.
    (2) The applicable percentages are as follows:
    (i) For a year before CY 2004, the applicable percentage is 2.5 
percent.
    (ii) For 2004 and subsequent years, the applicable percentage is a 
percentage specified by CMS up to (but not to exceed) 2.0 percent.


Sec. 419.64  Transitional pass-through payments: drugs and biologicals.

    (a) Eligibility for pass-through payment. CMS makes a transitional 
pass-through payment for the following drugs and biologicals that are 
furnished as part of an outpatient hospital service:
    (1) Orphan drugs. A drug or biological that is used for a rare 
disease or condition and has been designated as an orphan drug under 
section 526 of the Federal Food, Drug and Cosmetic Act if payment for 
the drug or biological as an outpatient hospital service was being made 
on August 1, 2000.
    (2) Cancer therapy drugs and biologicals. A drug or biological that 
is used in cancer therapy, including, but not limited to, a 
chemotherapeutic agent, an antiemetic, a hematopoietic growth factor, a 
colony stimulating factor, a biological response modifier, and a 
bisphosphonate if payment for the drug or biological as an outpatient 
hospital service was being made on August 1, 2000.
    (3) Radiopharmaceutical drugs and biological products. A 
radiopharmaceutical drug or biological product used in diagnostic, 
monitoring, and therapeutic nuclear medicine services if payment for 
the drug or biological as an outpatient hospital service was being made 
on August 1, 2000.
    (4) Other drugs and biologicals. A drug or biological that meets 
the following conditions:
    (i) It was first payable as an outpatient hospital service after 
December 31, 1996.
    (ii) CMS has determined the cost of the drug or biological is not 
insignificant in relation to the amount payable for the applicable APC 
(as calculated under Sec. 419.32(c)) as defined in paragraph (b) of 
this section.
    (b) Cost. CMS determines the cost of a drug or biological to be not 
insignificant if it meets the following requirements:
    (1) Services furnished before January 1, 2003. The expected 
reasonable cost of a drug or biological must exceed 10 percent of the 
applicable APC payment amount for the service related to the drug or 
biological.
    (2) Services furnished after December 31, 2002. CMS considers the 
average cost of a new drug or biological to be not insignificant if it 
meets the following conditions:
    (i) The estimated average reasonable cost of the drug or biological 
in the category exceeds 10 percent of the applicable APC payment amount 
for the service related to the drug or biological.
    (ii) The estimated average reasonable cost of the drug or 
biological exceeds the cost of the drug or biological portion of the 
APC payment amount for the related service by at least 25 percent.
    (iii) The difference between the estimated reasonable cost of the 
drug or biological and the estimated portion of the APC payment amount 
for the drug or biological exceeds 10 percent of the APC payment amount 
for the related service.
    (c) Limited period of payment. CMS limits the eligibility for a 
pass-through payment under this section to a period of at least 2 
years, but not more than 3 years, that begins as follows:
    (1) For a drug or biological described in paragraphs (a)(1) through 
(a)(3) of this section--August 1, 2000.
    (2) For a drug or biological described in paragraph (a)(4) of this 
section--the date that CMS makes its first pass-through payment for the 
drug or biological.
    (d) Amount of pass-through payment. Subject to any reduction 
determined under Sec. 419.62(b), the pass-through payment for a drug or 
biological is 95 percent of the average wholesale price of the drug or 
biological minus the portion of the APC payment amount CMS determines 
is associated with the drug or biological.


Sec. 419.66  Transitional pass-through payments: medical devices.

    (a) General rule. CMS makes a pass-through payment for a medical 
device that meets the requirements in paragraph (b) of this section and 
that is described by a category of devices

[[Page 55857]]

established by CMS under the criteria in paragraph (c) of this section.
    (b) Eligibility. A medical device must meet the following 
requirements:
    (1) If required by the FDA, the device must have received FDA 
approval or clearance (except for a device that has received an FDA 
investigational device exemption (IDE) and has been classified as a 
Category B device by the FDA in accordance with Secs. 405.203 through 
405.207 and 405.211 through 405.215 of this chapter) or another 
appropriate FDA exemption.
    (2) The device is determined to be reasonable and necessary for the 
diagnosis or treatment of an illness or injury or to improve the 
functioning of a malformed body part (as required by section 
1862(a)(1)(A) of the Act).
    (3) The device is an integral and subordinate part of the service 
furnished, is used for one patient only, comes in contact with human 
tissue, and is surgically implanted or inserted whether or not it 
remains with the patient when the patient is released from the 
hospital.
    (4) The device is not any of the following:
    (i) Equipment, an instrument, apparatus, implement, or item of this 
type for which depreciation and financing expenses are recovered as 
depreciable assets as defined in Chapter 1 of the Medicare Provider 
Reimbursement Manual (CMS Pub. 15-1).
    (ii) A material or supply furnished incident to a service (for 
example, a suture, customized surgical kit, or clip, other than 
radiological site marker).
    (iii) A material that may be used to replace human skin (for 
example, a biological or synthetic material).
    (c) Criteria for establishing device categories. CMS uses the 
following criteria to establish a category of devices under this 
section:
    (1) CMS determines that a device to be included in the category is 
not described by any of the existing categories, and was not being paid 
for as an outpatient service as of December 31, 1996.
    (2) CMS determines that a device to be included in the category has 
demonstrated that it will substantially improve the diagnosis or 
treatment of an illness or injury or improve the functioning of a 
malformed body part compared to the benefits of a device or devices in 
a previously established category or other available treatment.
    (3) Except for medical devices identified in paragraph (e) of this 
section, CMS determines the cost of the device is not insignificant as 
described in paragraph (d) of this section.
    (d) Cost criteria. CMS considers the average cost of a category of 
devices to be not insignificant if it meets the following conditions:
    (1) The estimated average reasonable cost of devices in the 
category exceeds 25 percent of the applicable APC payment amount for 
the service related to the category of devices.
    (2) The estimated average reasonable cost of the devices in the 
category exceeds the cost of the device-related portion of the APC 
payment amount for the related service by at least 25 percent.
    (3) The difference between the estimated average reasonable cost of 
the devices in the category and the portion of the APC payment amount 
for the device exceeds 10 percent of the APC payment amount for the 
related service.
    (e) Devices exempt from cost criteria. The following medical 
devices are not subject to the cost requirements described in paragraph 
(d) of this section, if payment for the device was being made as an 
outpatient service on August 1, 2000:
    (1) A device of brachytherapy.
    (2) A device of temperature-monitored cryoablation.
    (f) Identifying a category for a device. A device is described by a 
category, if it meets the following conditions:
    (1) Matches the long descriptor of the category code established by 
CMS.
    (2) Conforms to guidance issued by CMS relating to the definition 
of terms and other information in conjunction with the category 
descriptors and codes.
    (g) Limited period of payment for devices. CMS limits the 
eligibility for a pass-through payment established under this section 
to a period of at least 2 years, but not more than 3 years beginning on 
the date that CMS establishes a category of devices.
    (h) Amount of pass-through payment. Subject to any reduction 
determined under Sec. 419.62(b), the pass-through payment for a device 
is the hospital's charge for the device, adjusted to the actual cost 
for the device, minus the amount included in the APC payment amount for 
the device.

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

    Dated: August 2, 2001.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: October 19, 2001.
Tommy G. Thompson,
Secretary.
[FR Doc. 01-27658 Filed 10-31-01; 9:17 am]
BILLING CODE 4120-01-P