[Federal Register Volume 67, Number 56 (Friday, March 22, 2002)]
[Proposed Rules]
[Pages 13416-13494]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-6714]



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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Part 412 et al.



Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals: Proposed Implementation and FY 2003 Rates; Proposed Rule

  Federal Register / Vol. 67, No. 56 / Friday, March 22, 2002 / 
Proposed Rules  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 412, 413, and 476

[CMS-1177-P]
RIN 0938-AK69


Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals: Proposed Implementation and FY 2003 Rates

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would establish a prospective payment 
system for Medicare payment of inpatient hospital services furnished by 
long-term care hospitals (LTCHs) described in section 1886(d)(1)(B)(iv) 
of the Social Security Act (the Act). This proposed rule would 
implement section 123 of the Medicare, Medicaid, and SCHIP [State 
Children's Health Insurance Program] Balanced Budget Refinement Act 
(BBRA) of 1999 and section 307(b) of the Medicare, Medicaid, and SCHIP 
Benefits Improvement and Protection Act (BIPA) of 2000. Section 123 of 
the BBRA directs the Secretary to develop and implement a prospective 
payment system for LTCHs. The prospective payment system described in 
this proposed rule would replace the reasonable cost-based payment 
system under which the LTCHs are currently paid.

DATES: Comments will be considered if received at the appropriate 
address, as provided below, no later than 5 p.m. on May 21, 2002.

ADDRESSES: Mail written comments (an original and three copies) to the 
following address only: Centers for Medicare & Medicaid Services, 
Department of Health and Human Services, Attention: CMS-1177-P, P.O. 
Box 8013, Baltimore, MD 21244-8013.
    To ensure that mailed comments are received in time for us to 
consider them, please allow for possible delays in delivering them. If 
you prefer, you may deliver (by hand or courier) your written comments 
(an original and three copies) to one of the following addresses: Room 
443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201, or Room C5-16-03, Central Building, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.

(Because access to the interior building is not readily available to 
persons without Federal Government identification, commenters are 
encouraged to leave their comments in the CMS drop slots located in the 
main lobby of the building. A stamp-in clock is available for 
commenters wishing to retain proof of filing by stamping in and 
retaining an extra copy of the comments being filed.)

    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and could be considered late.
    Because of staff and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code CMS-1177-P. For information on viewing public comments, 
see the beginning of the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT:   

Tzvi Hefter, (410) 786-4487, or Judy Richter, (410) 786-2590 (General 
information, transition payments, payment adjustments)
Michele Hudson, (410) 786-5490 (Calculation of the payment rates, 
relative weights/case-mix index, update factors, payment adjustments)
Ann Fagan, (410) 786-5662 (Patient classification system)

SUPPLEMENTARY INFORMATION:

Inspection of Public Comment

    Comments received timely will be available for public inspection as 
they are received, generally beginning approximately 3 weeks after 
publication of a document, at 7500 Security Boulevard, Baltimore, MD 
21244, Monday through Friday of each week from 8:30 to 5 p.m. Please 
call (phone: (410) 786-7197) to make an appointment to view the public 
comments.

Availability of Copies and Electronic Access

    Copies: To order copies of the Federal Register containing this 
document, send your request to: New Orders, Superintendent of 
Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date 
of the issue requested and enclose a check or money order payable to 
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number and expiration date. Credit card orders can also be placed by 
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2250. The cost for each copy is $9. As an alternative, you can view and 
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Federal Depository Libraries and at many other public and academic 
libraries throughout the country that receive the Federal Register.
    This Federal Register document is also available from the Federal 
Register online database through GPO Access, a service of the U.S. 
Government Printing Office. The Web site address is: http://www.access.gpo.gov/nara/index.html.
    To assist readers in referencing sections contained in this 
preamble, we are providing the following table of contents.

Table of Contents

I. Background
    A. Overview of Current Payment System for LTCHs
    1. Exclusion of Certain Facilities from the Acute Care Hospital 
Inpatient Prospective Payment System
    2. Requirements for LTCHs to be Excluded from the Acute Care 
Hospital Inpatient Prospective Payment System
    3. Payment System Requirements Prior to the BBA
    4. Effect of the Current Payment System
    5. Research and Discussion of a Prospective Payment System for 
LTCHs Prior to the BBA
    B. Requirements of the BBA, BBRA, and BIPA for LTCHs
    1. Provisions of the Current Payment System
    2. Provisions for a LTCH Prospective Payment System
    C. Research Supporting the Establishment of the LTCH Prospective 
Payment System: Legislative Requirements
    D. Description of Sources of Research Data
    E. The Universe of LTCHs
    1. Background Issues
    2. General Medicare Policies
    3. Exclusion from the Acute Care Hospital Inpatient Prospective 
Payment System
    4. Geographic Distribution
    5. Characteristics by Date of Medicare Participation
    6. Hospitals-Within-Hospitals and Satellite Facilities
    7. Specialty Groups of LTCHs by Patient Mix
    8. Sources and Destinations of LTCH Patients
    9. LTCHs and Patterns Among Post-Acute Care Facilities
    F. Overview of System Analysis for the Proposed LTCH Prospective 
Payment System
    G. Evaluation of DRG-Based Patient Classification Systems
    H. Recommendations by MedPAC for a LTCH Prospective Payment 
System
    I. Evaluated Options for the Proposed Prospective Payment System 
for LTCHs
II. General Discussion of the Proposed LTCH Prospective Payment 
System
    A. Goals of the Proposed LTCH Prospective Payment System
    B. Applicability of the Proposed LTCH Prospective Payment System
    C. LTCHs Not Subject to the Proposed LTCH Prospective Payment 
System
    D. Summary Description of the Proposed LTCH Prospective Payment 
System
    1. Procedures

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    2. Patient Classification Provisions
    3. Payment Rates
    4. Limitation on Charges to Beneficiaries
    5. Medical Review Requirements
    6. Furnishing of Inpatient Hospital Services Directly or Under 
Arrangements
    7. Reporting and Recordkeeping Requirements
    8. Implementation of the Proposed Prospective Payment System
III. Long-Term Care Diagnosis-Related Group (LTC-DRG)
    Classifications
    A. Background
    B. Historical Exclusion of LTCHs
    C. Patient Classifications by DRGs
    1. Objectives of the Classification System
    2. DRGs and Medicare Payments
    D. Proposed LTC-DRG Classification System for LTCHs
    E. ICD-9-CM Coding System
    1. Historical Use of ICD-9-CM Codes
    2. Uniform Hospital Discharge Data Set (UHDDS) Definitions
    3. Maintenance of ICD-9-CM System
    4. Coding Rules and Use of ICD-9-CM in LTCHs
IV. Proposed Payment System for LTCHs
    A. Development of the Proposed LTC-DRG Relative Weights
    1. Overview of Development of the Proposed LTC-DRG Relative 
Weights
    2. Steps for Calculating the Proposed Relative Weights
    B. Special Cases
    1. Very Short-Stay Discharges
    2. Short-Stay Outliers
    3. Interrupted Stay
    4. Other Special Cases
    5. Onsite Discharges and Readmittances
    6. Additional Issues for Onsite Facilities
    7. Monitoring System
    C. Payment Adjustments
    1. Area Wage Adjustment
    2. Adjustment for Geographic Reclassification
    3. Adjustment for Disproportionate Share of Low-Income Patients
    4. Adjustment for Indirect Teaching Costs
    5. Cost-of-Living Adjustment (COLA) for Alaska and Hawaii
    6. Adjustment for High-Cost Outliers
    D. Calculation of the Proposed Standard Federal Payment Rate
    1. Overview of the Development of the Proposed Standard Payment 
Rate
    2. Development of the Proposed Standard Federal Payment Rate
    E. Development of the Proposed Federal Prospective Payments
    F. Computing the Proposed Adjusted Federal Prospective Payments
    G. Transition Period
    H. Payments to New LTCHs
    I. Method of Payment
V. Provisions of the Proposed Rule
VI. Regulatory Impact Analysis
    A. Introduction
    1. Executive Order 12866
    2. Regulatory Flexibility Act (RFA)
    3. Impact on Rural Hospitals
    4. Unfunded Mandate
    5. Federalism
    B. Anticipated Effects
    1. Budgetary Impact
    2. Impact on Providers
    3. Calculation of Current Payments
    4. Calculation of Proposed Prospective Payments
    5. Results
    6. Effect on the Medicare Program
    7. Effect on Medicare Beneficiaries
    8. Computer Hardware and Software
    C. Alternatives Considered
    D. Executive Order 12866
VII. Collection of Information Requirements
VIII. Response to Comments
Regulations Text
Appendix A--Proposed Market Basket for LTCHs
Appendix B--Proposed Update Framework

Acronyms

    Because of the many terms to which we refer by acronym in this 
proposed rule, we are listing the acronyms used and their corresponding 
terms in alphabetical order below:

APR-DRGs  All patient-defined, diagnosis-related groups.
BBA  Balanced Budget Act of 1997, Public Law 105-33.
BBRA  Medicare, Medicaid and SCHIP [State Children's Health Insurance 
Program] Balanced Budget Refinement Act of 1999, Public Law 106-113.
BIPA  Medicare, Medicaid, and SCHIP [State Children's Health Insurance 
Program] Benefits Improvement and Protection Act of 2000, Public Law 
106-554.
CMGs  Case-mix groups.
CMI  Case-mix index.
CMS  Centers for Medicare & Medicaid Services.
DRGs  Diagnosis-related groups.
FY  Federal fiscal year.
HCRIS  Hospital Cost Report Information System.
HHA  Home health agency.
HIPAA  Health Insurance Portability and Accountability Act, Public Law 
104-191.
IRF  Inpatient rehabilitation facility.
LTC-DRG  Long-term care diagnosis-related group.
LTCH  Long-term care hospital.
MDCN  Medicare Data Collection Network.
MedPAC  Medicare Payment Advisory Commission.
MedPAR  Medicare provider analysis and review file.
ProPAC  Prospective Payment Assessment Commission.
SNF  Skilled nursing facility.
TEFRA  Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-
248.

I. Background

    When the Medicare statute was originally enacted in 1965, Medicare 
payment for hospital inpatient services was based on the reasonable 
costs incurred in furnishing services to Medicare beneficiaries. 
Section 223 of the Social Security Act Amendments of 1972 (Pub. L. 92-
603) amended section 1861(v)(1) of the Social Security Act (the Act) to 
set forth limits on reasonable costs for hospital inpatient services. 
Section 101(a) of the Tax Equity and Fiscal Responsibility Act of 1982 
(TEFRA) (Pub. L. 97-248) amended the Medicare statute to limit payment 
by placing a cap on allowable costs per discharge. Section 601 of the 
Social Security Amendments of 1983 (Pub. L. 98-21) added section 
1886(d) to the Act that replaced the reasonable cost-based payment 
system for most hospital inpatient services. Section 1886(d) of the Act 
provides for a prospective payment system for the operating costs of 
acute care hospital inpatient stays, effective with hospital cost 
reporting periods beginning on or after October 1, 1983.
    Although most hospital inpatient services became subject to the 
prospective payment system, certain specialty hospitals are excluded 
from that system and continue to be paid their reasonable costs subject 
to the cap established under TEFRA. These hospitals included long-term 
care hospitals (LTCHs), rehabilitation and psychiatric hospitals, 
rehabilitation and psychiatric units of acute care hospitals, and 
children's hospitals. Cancer hospitals were added to the list of 
excluded hospitals by section 6004(a) of the Omnibus Budget 
Reconciliation Act of 1989 (Pub. L. 101-239).
    Subsequent to the implementation of the acute care hospital 
inpatient prospective payment system, both the number of excluded 
hospitals and Medicare payments to these hospitals grew rapidly.
    Congress enacted various provisions in the Balanced Budget Act 
(BBA) (Pub. L. 105-33), the Medicare, Medicaid, and SCHIP [State 
Children's Health Insurance Program] Balanced Budget Refinement Act 
(BBRA) (Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP 
Benefits Improvement and Protection Act (BIPA) (Pub. L. 106-554) to 
provide for the development and implementation of a prospective payment 
system for the following excluded hospitals:
      Rehabilitation hospitals (including units in acute care 
hospitals).
     Psychiatric hospitals (including units in acute care 
hospitals).
     LTCHs.
    Section 4422 of the BBA mandated that the Secretary develop a 
legislative proposal, for presentation to Congress by October 1, 1999, 
for a case-mix adjusted LTCH prospective payment

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system under the Medicare program. This system was to include an 
adequate patient classification system that reflects the differences in 
patient resource use and costs among LTCHs. Furthermore, in developing 
the legislative proposal for the prospective payment system, the 
Secretary was to consider several payment methodologies, including the 
feasibility of an expansion of the acute care inpatient hospital 
prospective payment system (diagnosis-related group (DRG) based system) 
established under section 1886(d) of the Act.
    In the interim, section 4414 of the BBA imposed national limits (or 
caps) on hospital-specific target amounts (that is, annual per 
discharge limit) for these hospitals until cost reporting periods 
beginning on or after October 1, 2002. At the same time that Congress 
modified the payment system based on limits on target amounts, it also 
included in the BBA a provision to require the Secretary to develop a 
legislative proposal for establishing a prospective payment system for 
LTCHs.
    With the passage of the BBRA in November 1999, in section 122, 
Congress refined some policies of the BBA prior to the implementation 
of prospective payment systems for LTCHs and psychiatric hospitals and 
units. Section 123 of the BBRA further requires that the Secretary 
develop a per discharge, DRG-based system for LTCHs and requires that 
this system be described in a report to the Congress by October 1, 
2001, and be in place by October 1, 2002. Section 307(b)(1) of BIPA 
modified the BBRA's requirements for the prospective payment system for 
LTCHs by mandating that the Secretary ``* * * shall examine the 
feasibility and the impact of basing payment under such a system on the 
use of existing (or refined) hospital diagnosis-related groups (DRGs) 
that have been modified to account for different resource use of long-
term care hospital patients as well as the use of the most recently 
available hospital discharge data.'' Furthermore, section 307(b)(1) of 
BIPA provided that the Secretary ``* * * shall examine and may provide 
for appropriate adjustments to the long-term hospital prospective 
payment system, including adjustments to DRG weights, area wage 
adjustments, geographic reclassification, outliers, updates, and a 
disproportionate share adjustment * * *.'' In the event that the 
Secretary is unable to implement the LTCH prospective payment system by 
October 1, 2002, section 307(b)(2) of BIPA requires the Secretary to 
implement a prospective payment system using the existing hospital 
DRGs, modified where feasible to account for resource use by LTCHs.
    In this proposed rule, we set forth the proposed Medicare 
prospective payment system for LTCHs as authorized under the BBRA and 
BIPA. Below, we discuss the development, proposed policies, and 
proposed implementation of the proposed LTCH prospective payment 
system. These discussions include the following:
     An overview of the current payment system for LTCHs.
     A discussion of the statutory requirements for developing 
and implementing a LTCH prospective payment system.
     A discussion of research findings on LTCHs.
     A detailed discussion of the proposed LTCH prospective 
payment system, including the patient classification system, relative 
weights, payment rates, additional payments, and the budget neutrality 
requirements mandated by section 123 of Public Law 106-113.
     An analysis of the estimated impact of the proposed LTCH 
prospective payment system on the Federal budget and LTCHs.
     Proposed changes to existing regulations and the 
establishment of proposed regulations in 42 CFR Chapter IV to implement 
the proposed LTCH prospective payment system.

A. Overview of Current Payment System for LTCHs

1. Exclusion of Certain Facilities From the Acute Care Hospital 
Inpatient Prospective Payment System
    Although payment for operating costs of most hospital inpatient 
services became subject to a prospective payment system under the 
Social Security Amendments of 1983 (Pub. L. 98-21) which added section 
1886(d) to the Act, certain types of hospitals and units were excluded 
from that payment system. Section 1886(d)(1)(B) of the Act lists the 
following classes of excluded hospitals:
     Psychiatric hospitals and units.
     Rehabilitation hospitals and units.
     LTCHs.
     Children's hospitals.
    Effective with cost reporting periods beginning on or after October 
1, 1989, cancer hospitals were added to this list by section 6004(a) of 
the Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239).
    The hospital inpatient prospective payment system is a system of 
average-based payments that assumes that some patient stays will 
consume more resources than the typical stay, while others will demand 
fewer resources. Therefore, an efficiently operated hospital should be 
able to deliver care to its Medicare patients for an overall cost that 
is at or below the amount paid under the hospital inpatient prospective 
payment system. In a report to the Congress, Hospital Prospective 
Payment for Medicare (1982), the Department of Health and Human 
Services stated that the ``467 DRGs were not designed to account for 
these types of treatment'' found in the four classes of excluded 
hospitals, and noted that ``including these hospitals will result in 
criticism and their application to these hospitals would be inaccurate 
and unfair.''
    The Congress excluded these hospitals from the hospital inpatient 
prospective payment system because they typically treated cases that 
involved stays that were, on average, longer or more costly than would 
be predicted by the DRG system. The legislative history of the 1983 
Social Security Amendments stated that the ``DRG system was developed 
for short-term acute care general hospitals and as currently 
constructed does not adequately take into account special circumstances 
of diagnoses requiring long stays.'' (Report of the Committee on Ways 
and Means, U.S. House of Representatives, to Accompany HR 1900, H.R. 
Rept. No. 98-25, at 141 (1983)). Therefore, these hospitals could be 
systemically underpaid if the same DRG system were applied to them.
    Following enactment in April 1983 of the Social Security Amendments 
of 1983, we implemented the hospital inpatient prospective payment 
system on October 1, 1983, including the initial publication in the 
Federal Register of the rules and regulations for the hospital 
inpatient prospective payment system--the September 1, 1983 interim 
final rule (48 FR 39752) and the January 3, 1984 final rule (49 FR 
234). Updates and modifications of the regulations have been published 
annually in the Federal Register. We also developed payment policy for 
hospitals that were seeking to be excluded from the hospital inpatient 
prospective payment system. The regulations concerning exclusion of 
LTCHs from the hospital inpatient prospective payment system are found 
in 42 CFR part 412, subpart B.
2. Requirements for LTCHs To Be Excluded From the Acute Care Hospital 
Inpatient Prospective Payment System
    Under section 1886(d)(1)(B) of the Act, the prospective payment 
system for hospital inpatient operating costs set forth in section 
1886(d) of the Act does not apply to several specified types of 
hospitals, including LTCHs defined in section 1886(d)(1)(B)(iv)(I) of 
the Act as ``* * * a hospital which has an average

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inpatient length of stay (as determined by the Secretary) of greater 
than 25 days.'' Public Law 105-33 added section 1886(d)(1)(B)(iv)(II) 
to the Act, which also provides another definition of LTCHs, 
specifically, a hospital that was first excluded in 1986 which has an 
average inpatient length of stay (as determined by the Secretary) of 
greater than 20 days and has 80 percent or more of its annual Medicare 
inpatient discharges with a principal diagnosis of neoplastic disease 
in the 12-month cost reporting period ending in FY 1997.
    Implementing regulations at Sec. 405.471(c)(5) (now Sec. 412.23(e)) 
require the facility to have a provider agreement with Medicare to 
participate as a hospital, and an average inpatient length of stay 
greater than 25 days as calculated under the following formula: The 
average length of stay is calculated by dividing the total number of 
inpatient days (excluding leave of absence or pass days) for all 
patients by the total number of discharges for the hospital's most 
recent complete cost reporting period. The determination of whether or 
not a hospital qualifies as an LTCH is based on the hospital's most 
recently filed cost report, or if a change in the hospital's average 
length of stay is indicated, by the same method for the immediately 
preceding 6-month period (Sec. 412.23(e)(3)). (Requirements for 
hospitals seeking classification as LTCHs that have undergone a change 
in ownership, as described in Sec. 489.18, are set forth in 
Sec. 412.23(e)(3)(iii).)
3. Payment System Requirements Prior to the BBA
    Hospitals that are excluded from the hospital inpatient prospective 
payment system under section 1886(d)(1)(B) of the Act are paid for 
inpatient operating costs under the provisions of Public Law 97-248 
(TEFRA) that are found in section 1886(b) of the Act and implemented in 
regulations at 42 CFR part 413. Public Law 97-248 established payments 
based on hospital-specific limits for inpatient operating costs. A 
ceiling on payments to hospitals excluded from the acute care hospital 
inpatient prospective payment system is determined by calculating the 
product of a facility's base year costs (the year on which its target 
reimbursement limit is based) per discharge, updated to the current 
year by a rate-of-increase percentage, and multiplied by the number of 
total current year discharges. (A detailed discussion of target amount 
payment limits under Public Law 97-248 can be found in the September 1, 
1983 final rule published in the Federal Register (48 FR 39746).)
    The base year for a facility varied, depending on when the facility 
was initially determined to be a prospective payment system-excluded 
provider. The base year for facilities that were established prior to 
the implementation of Public Law 97-248 was 1982, when Public Law 97-
248 was enacted. For facilities established after implementation of 
Public Law 97-248 (section 1886(b) of the Act), we originally provided 
in the regulations for payment to these facilities for their full 
``reasonable'' costs for their first 3 cost reporting years, and 
allowed the facilities to choose which of those years would be used in 
the future to determine their target limit. This ``new provider'' 
period was later shortened to 2 cost reporting years (Sec. 413.40(f)(1) 
(1992)), and we designated the second cost reporting year as the cost 
reporting year used to determine the hospital's per discharge target 
amount.
    Excluded facilities whose costs were below their target amounts 
received bonus payments equal to the lesser of half of the difference 
between costs and the target amount, up to a maximum of 5 percent of 
the target amount, or the hospital's costs. For excluded facilities 
whose costs exceeded their target amounts, Medicare provided relief 
payments equal to half of the amount by which the hospital's costs 
exceeded the target amount up to 10 percent of the target amount. 
Excluded facilities that experienced a more significant increase in 
patient acuity could also apply for an additional amount under the 
regulations for Medicare exception payments (Sec. 413.40(d)).
4. Effect of the Current Payment System
    Utilization of post-acute care services has grown rapidly in recent 
years since the implementation of the acute care hospital inpatient 
prospective payment system. Average length of stay in acute care 
hospitals has decreased, and patients are increasingly being discharged 
to post-acute care settings such as LTCHs, skilled nursing facilities 
(SNFs), home health agencies (HHAs), and inpatient rehabilitation 
facilities (IRFs) to complete their course of treatment. The increased 
utilization of post-acute care providers, including hospitals excluded 
from the prospective payment system, has resulted in the rapid growth 
in Medicare payments to these hospitals in recent years. In addition, 
there has been a significant increase in the number of LTCHs. In 1991, 
there were 91 LTCHs; in 1994, 155 LTCHs; in 1999, 225 LTCHs; in 
December 2000, 252 LTCHs; and in November 2001, 270 LTCHs. Payments to 
post-acute care providers were among the fastest growing providers 
under the Medicare program throughout the 1990s. (Prospective Payment 
Assessment Commission (ProPAC) June 1996 Report to Congress, p. 91.)
    LTCHs have experienced faster growth in the number of facilities 
and Medicare program payments than any other category of prospective 
payment system-excluded provider. In its June 1996 Report to Congress, 
ProPAC found that, from 1990 to 1993, payment to rehabilitation 
facilities rose about 25 percent per year, while payments to LTCHs 
increased 33 percent annually (p. 92). ProPAC also found that, from 
1991 to 1995, the number of rehabilitation facilities increased 21 
percent (from 852 in 1991 to 1,029 in 1995), while the number of LTCHs 
increased 93 percent (from 91 in 1991 to 176 in 1995) (p. 93). 
Furthermore, the best available Hospital Cost Report Information System 
(HCRIS) data indicate $398 million in payments for inpatient operating 
services to 105 LTCHs in FY 1993 and $1.05 billion in payments for 
inpatient operating services to 206 LTCHs in FY 1998. This is more than 
a 96 percent increase in the number of LTCHs and a 164 percent increase 
in payments to LTCHs in 5 years.
    In its March 1999 report to the Congress, the Medicare Payment 
Advisory Commission (MedPAC) (formerly ProPAC) stated that: ``[The] 
TEFRA system has remained in effect longer than expected partly because 
of difficulties in accounting for the variation in resource use across 
patients in exempted facilities. The unintended consequences of 
sustaining that system have been a steady growth in the number of 
prospective payment system-exempt facilities and a substantial payment 
inequity between older and newer facilities. In particular, the payment 
system encouraged new exempt facilities to maximize their costs in the 
base year to establish high cost limits. Once subject to its relatively 
high limit, a recent entrant could reduce its costs below its limit, 
resulting in reimbursement of its full costs plus bonus payment. By 
contrast, facilities that existed before they became subject to TEFRA 
could not influence their cost limits. Given the relatively low limits 
of older facilities, they are more likely to incur costs above their 
limits and thus receive payments less than their costs.'' (p. 72)
    To address concerns regarding the historical growth in payments and 
the disparity in payments to existing and newly excluded hospitals and 
units, the BBA mandated several changes to the existing payment system. 
These changes

[[Page 13420]]

are outlined in section I.B.1. of this preamble.
5. Research and Discussion of a Prospective Payment System for LTCHs 
Prior to the BBA
    Section 603(a)(2)(C)(ii) of Public Law 98-21 required the Secretary 
to include the results of research studies on whether and how excluded 
hospitals and units can be paid on a prospective basis, in the 1985 
Report to the Congress on the Impact of Prospective Payment 
Methodology. HCFA (now CMS) undertook and funded a wide range of 
research projects that resulted in 1987 in a report to the Congress 
entitled ``Developing a Prospective Payment System for Excluded 
Hospitals.'' In that report, the Secretary presented an examination of 
the then current state of the four classes of excluded hospitals and 
units and offered recommendations for the development of a prospective 
payment system. ``Long-term'' or ``chronic disease'' hospitals, the 
report noted, ``are the least understood of the excluded hospital 
types'' (p. 3-51).
    The following information was clear--there were a relatively small 
number of facilities (94 at that time); LTCHs were not dispersed 
throughout the country and, therefore, potential long-term care 
patients were receiving necessary care elsewhere; LTCHs, as defined by 
the greater than 25-day average length of stay, constituted a diverse 
set that closely resembled other hospitals, both included (acute care) 
and excluded (psychiatric, rehabilitation, and children's) under the 
prospective payment system (pp. 3-51 through 3-63). The Report 
concluded with the following discussion: ``Because this class of 
hospitals treats a very heterogeneous patient population and does not 
share a common set of facility characteristics, the development of a 
separate classification system for prospective payment purposes would 
appear to be both infeasible and undesirable. At the same time, as part 
of HCFA's [now CMS's] impact analysis, we were investigating the 
feasibility of including LTCHs under the current prospective payment 
system, where their cases would be expected to be paid predominantly 
under the prospective payment system outlier policy.'' (pp. 3-63 
through 3-64)
    The 1987 report further noted that present and future research on 
LTCHs would focus on acquiring a broader understanding of LTCHs, long-
term care patients, and other treatment settings and on the preliminary 
financial impact of a prospective payment system on both LTCHs and the 
Medicare system. An initial inquiry was also planned ``into the role of 
those hospitals as a component of the continuum of care between acute 
care hospitals and skilled nursing facilities, as a general first step 
in developing a classification system for patients in these facilities. 
* * *'' 
(p. 3-54)
    ProPAC's March 1996 Report to Congress endorsed the concept of 
prospective payment systems for all post-acute services, emphasizing 
consistent payment methods across all classes of facilities in order to 
encourage provider efficiency (p. 75). ProPAC's extensive analysis of 
``patients using post-acute care providers and in these providers' 
treatment patterns'' based on FY 1994 data discussed in the June 1996 
Report to Congress, concluded that ``[a]lthough there was significant 
overlap in the hospital assigned DRGs across settings, other patient 
characteristics, such as medical complexity or functional status, may 
influence which patients use a particular site.'' (p. 110)
    In ProPAC's March 1, 1997 report, ProPAC's Recommendation 33, 
entitled ``Coordinating Post-Acute Care Provider Payment Methods'' 
stated that ``the Commission urges the Congress and the Secretary to 
consider the overlap in services and beneficiaries across post-acute 
care providers as they modify Medicare payment policies.'' (p. 60)
    The passage of Public Law 105-33 (the BBA) provided for the 
establishment of separate and distinct prospective payment systems for 
post-acute care providers: SNFs (section 4432(a)), IRFs (section 4421), 
and HHAs (section 4603(b)). In addition, Congress directed the 
Secretary to develop a legislative proposal to pay LTCHs prospectively 
as well (section 4422).

B. Requirements of the BBA, BBRA, and BIPA for LTCHs

1. Provisions of the Current Payment System
    a. BBA. The BBA amendments to section 1886(b) of the Act 
significantly altered the payment provisions for excluded hospitals and 
units and also added other qualifying criteria for certain hospitals 
excluded from the hospital inpatient prospective payment system 
(sections 4411, 4412, 4413, 4414, 4415, 4416, 4417, 4418, and 4419). 
Provisions of these amendments that related to the current payment 
system were explained in detail and implemented in our final rule 
published in the Federal Register on August 29, 1997 (62 FR 45966).
    Section 4411 of the BBA amended section 1886(b)(3)(B) of the Act 
and restricted the rate-of-increase percentages that are applied to 
each provider's target amount so that excluded hospitals and units 
experiencing lower inpatient operating costs relative to their target 
amounts receive lower rates of increase.
    Section 4412 amended section 1886(g) of the Act to establish a 15-
percent reduction in capital payments for excluded psychiatric and 
rehabilitation hospitals and units and LTCHs, for portions of cost 
reporting periods occurring during the period of October 1, 1997, 
through September 30, 2002.
    Section 4413(b) of Public Law 105-33 amended section 1886(b)(3) of 
the Act to permit certain LTCHs to elect a rebasing of the target 
amount for the 12-month cost reporting period beginning during FY 1996.
    Section 4414 of the BBA amended section 1886(b)(3) of the Act to 
establish caps on the target amounts for excluded hospitals and units 
at the 75th percentile of target amounts for similar facilities for 
cost reporting periods beginning on or after October 1, 1997, through 
September 30, 2002. These caps on the target amounts apply only to 
psychiatric and rehabilitation hospitals and units and LTCHs. Payments 
for these excluded hospitals and units are based on the lesser of a 
provider's cost per discharge or its hospital-specific cost per 
discharge, subject to this cap.
    Section 4415 of the BBA amended section 1886(b)(1) of the Act by 
revising the percentage factors used to determine the amount of bonus 
and relief payments, and establishing continuous improvement bonus 
payments for cost reporting periods beginning on or after October 1, 
1997 for hospitals and units excluded from the prospective payment 
system that meet specified criteria. If a hospital is eligible for the 
continuous improvement bonus, the bonus payment is equal to the lesser 
of: (1) 50 percent of the amount by which operating cost are less than 
expected costs; or (2) 1 percent of the target amount.
    Sections 4416 and 4419 of the BBA amended section 1886(b) of the 
Act to establish a new framework for payments for new excluded 
providers. Section 4416 added a new section 1886(b)(7) to the Act that 
established a new statutory methodology for new psychiatric and 
rehabilitation hospitals and units and LTCHs. Prior to this change, new 
hospitals excluded from the acute care hospital inpatient prospective 
payment system were exempted from the target amount per discharge 
ceiling until the end of the first cost reporting period ending at 
least 2 years after they accepted their first patient. This new 
provider ``exemption'' was eliminated from all classes of excluded 
providers

[[Page 13421]]

except children's hospitals for cost reporting periods beginning on or 
after October 1, 1997, by section 4419(a) of the BBA. Under section 
4416, payment to these new excluded providers for their first two cost 
reporting periods is limited to the lesser of the operating costs per 
case, or 110 percent of the national median of target amounts, as 
adjusted for differences in wage levels, for the same class of hospital 
for cost reporting periods ending during FY 1996, updated to the 
applicable period.
    It is important to note that prior to enactment of the BBA, the 
payment provisions for excluded hospitals and units applied 
consistently to all classes of excluded providers (that is, 
psychiatric, rehabilitation, long-term care, children's, and cancer). 
However, effective for cost reporting periods beginning on or after 
October 1, 1997, there are specific payment provisions for certain 
classes of excluded providers, as well as modifications for all 
excluded providers.
    b. BBRA. With the enactment of the BBRA of 1999, Congress refined 
some of the policies mandated by the BBA for hospitals excluded from 
the acute care hospital inpatient prospective payment system. The 
provisions of the BBRA, which amended section 1886(b)(3)(H) of the Act 
relating to the current payment system for excluded hospitals, were 
explained in detail and implemented in our interim final rule published 
in the Federal Register on August 1, 2000 (65 FR 47026) and in our 
final rule also published on August 1, 2000 (65 FR 47054).
    Section 4414 of the BBA had provided for caps on target amounts for 
excluded hospitals and units for cost reporting periods beginning on or 
after October 1, 1997. Section 121 of the BBRA amended section 
1886(b)(3)(H) of the Act to provide for an appropriate wage adjustment 
to these caps on the target amounts for existing psychiatric and 
rehabilitation hospitals and units and LTCHs, effective for cost 
reporting periods beginning on or after October 1, 1999 through 
September 30, 2002.
    Section 122 of BBRA provided for an increase in the continuous 
improvement bonus for eligible LTCHs and psychiatric hospitals and 
units for cost reporting periods beginning on or after October 1, 2000 
and before September 30, 2002.
    c. BIPA. Two provisions of BIPA that amended section 1886(b)(3) of 
the Act were directed at LTCHs. Section 307(a) of BIPA provided for a 
2-percent increase to the wage-adjusted 75th percentile cap on the 
target amount for existing LTCHs, effective for cost reporting periods 
beginning during FY 2001. Section 307(a) also provided a 25-percent 
increase to the hospital-specific target amounts for existing LTCHs for 
cost reporting periods beginning in FY 2001, subject to the wage-
adjusted national cap.
2. Provisions for a LTCH Prospective Payment System
    a. BBA. In section 4422 of the BBA, the Congress mandated that the 
Secretary develop a legislative proposal for a case-mix adjusted 
prospective payment system under the Medicare program, for submission 
by October 1999 based on consideration of several payment 
methodologies, including the feasibility of expanding the current DRGs 
and the prospective payment system currently in place for acute care 
hospitals.
    b. BBRA. Section 123 of the BBRA specifically requires that the 
prospective payment system for LTCHs be designed as a per discharge 
system with a DRG-based patient classification system that reflects the 
differences in patient resources and costs in LTCHs while maintaining 
budget neutrality. Section 123 also requires that a report be submitted 
to the Congress describing the system design of the mandated LTCH 
prospective payment system no later than October 1, 2001, and that the 
system be implemented for cost reporting periods beginning on or after 
October 1, 2002.
    c. BIPA. The BIPA reiterated the dates of implementation of the 
LTCH prospective payment system set forth in the BBRA. This statute 
also directs the Secretary to examine the following specific payment 
adjustments: adjustments to DRG weights, area wage adjustments, 
geographic reclassification, outliers, updates, and a disproportionate 
share adjustment. Furthermore, if the Secretary is unable to implement 
the prospective payment system by October 1, 2002, the BIPA mandates 
that a default LTCH prospective payment system be implemented, based on 
existing DRGs, modified where feasible to account for the specific 
resource use of long-term care patients.

C. Research Supporting the Establishment of the LTCH Prospective 
Payment System: Legislative Requirements

    Section 4422 of the BBA required us to formulate a legislative 
proposal on the development of a prospective payment system for LTCHs 
for submission to the Congress by October 1, 1999. To prepare for this 
proposal, we awarded a contract to The Urban Institute (Urban) 
following the enactment of the BBA for a multifaceted analysis of 
LTCHs, including a description of facilities and patients, as well as 
exploration of a variety of classification and payment system options.
    In section 123(a) of the BBRA, Congress mandated a per-discharge, 
DRG-based model for the prospective payment system for LTCHs. Our basic 
objective remained unchanged--to arrive at a clearer understanding of 
the universe of LTCHs in relation to facility characteristics; 
beneficiary utilization; and beneficiary characteristics such as 
diagnoses, treatment, and discharge patterns.
    Under the terms of our original contract with Urban, 3M Health 
Information Systems (3M) was subcontracted to provide an analysis and 
assessment of alternative classification systems for use in LTCHs in 
keeping with variables such as treatment patterns, patient 
demographics, and diagnoses and procedure codes for patients at LTCHs 
and acute care hospitals.
    After the enactment of section 123 of the BBRA, we instructed 3M to 
limit its analyses to several DRG-driven classification systems, using 
the database constructed by Urban describing LTCHs, patients at LTCHs, 
and patients with the same diagnoses as LTCH patients treated in other 
facilities. We also contracted with 3M to develop and analyze the data 
necessary for us to design and develop the proposed Medicare LTCH 
prospective payment system based on DRGs.

D. Description of Sources of Research Data

    The records for all Medicare hospital inpatient discharges 
(including discharges for LTCHs) are contained in the Medicare provider 
analysis and review file (MedPAR), which includes patient demographics 
(age, gender, race, and residence zip code), clinical characteristics 
(diagnoses and procedures), and hospitalization characteristics. 
(Beneficiary data were encrypted to prevent the identification of 
specific Medicare beneficiaries.) The Medicare cost report data 
constitute the HCRIS, and includes information on facility 
characteristics, utilization data, and cost and charge data by cost 
center.
    The description of the universe of LTCHs in section I.E. of this 
proposed rule is based on calendar year (CY) 1997 MedPAR, the HCRIS 
file containing the best available cost data for cost reporting periods 
that began during FYs 1996 and 1997, and 1997 data from the Online 
Survey Certification and Reporting System (OSCAR).

[[Page 13422]]

    The 1997 OSCAR data provided information from the State survey and 
certification process to identify and characterize providers that 
participate in Medicare and Medicaid and includes a list of all 
hospitals that were designated as LTCHs by Medicare. OSCAR data 
included the number of employees of various types and the number of 
different types of beds and care units, as well as variables on 
certification date, type of control, geographic region, and hospital 
size.

E. The Universe of LTCHs

1. Background Issues
    LTCHs typically furnish extended medical and rehabilitative care 
for patients who are clinically complex and have multiple acute or 
chronic conditions. Generally, Medicare patients in LTCHs have been 
transferred from acute care hospitals and receive a range of ``post-
acute care'' services at LTCHs, including comprehensive rehabilitation, 
cancer treatment, head trauma treatment, and pain management. (MedPAC 
March 1999 Report to Congress, p. 95.) A LTCH must be certified as an 
acute care hospital that meets criteria set forth in section 1861(e) of 
the Act in order to participate as a hospital in the Medicare program. 
Generally, under Medicare, hospitals are paid as LTCHs if they have an 
inpatient average length of stay greater than 25 days.
    LTCHs are a heterogeneous group of facilities ranging from old 
tuberculosis and chronic disease hospitals to newer facilities designed 
primarily to care for ventilator-dependent patients. They are unevenly 
distributed across the United States, with one-third (72 of 203 in 
1997) located in Massachusetts, Texas, and Louisiana. As of 1997, 203 
facilities were determined by Medicare to be LTCHs; by early 2000, 239 
facilities were determined by Medicare to be LTCHs; and as of November 
2001, OSCAR had data on 270 LTCHs.
    LTCHs constitute a relatively small provider group in the Medicare 
program and have not been widely studied. Only limited information has 
been published about their characteristics in terms of types of 
patients served and resources used. As stated earlier in section I.C. 
of this preamble, the primary goal of the initial research contract 
with Urban was to increase our knowledge about LTCHs and their 
patients. In addition to describing the providers and patients, the 
study was expected to provide insight into the ways in which LTCHs 
differ from other Medicare post-acute care providers. In the following 
summary and tables, we provide a description of Urban's findings that 
formed the basis for the design of the proposed prospective payment 
system for LTCHs presented in this proposed rule.
2. General Medicare Policies
    Inpatient stays at LTCHs are covered under the Part A hospital 
benefit and include room and board, medical and nursing services, 
laboratory tests, X-rays, pharmaceuticals, supplies, and other 
diagnostic or therapeutic services (Secs. 409.10 and 412.50). LTCHs can 
offer specialized services (for example, physical rehabilitation or 
ventilator-dependent care) or can provide more generalized services 
(for example, chronic disease care).
    Hospital services are covered for up to 90 days during a Medicare-
defined ``benefit period,'' which is a period that begins with 
admission as an inpatient to an acute care or other hospital and ends 
when the beneficiary has spent 60 consecutive days outside of an 
inpatient facility (Sec. 409.60). There are 60 additional covered 
lifetime reserve days that may be used over a beneficiary's lifetime. 
One inpatient deductible payment ($792 in 2002) is required for each 
benefit period, so a beneficiary generally does not have to make a new 
deductible payment for a LTCH stay unless the LTCH stay is not preceded 
by another hospital stay. A patient with a long LTCH stay, however, is 
subject to a coinsurance payment ($198 in 2002) for days 61 through 90 
of hospital use during a benefit period. For the lifetime reserve days, 
the Medicare beneficiary is subject to a daily coinsurance amount ($396 
in 2002) (Sec. 409.61). LTCHs must meet State licensure requirements 
for acute care hospitals and must have a provider agreement with 
Medicare in order to receive Medicare payment. Intermediaries verify 
that LTCHs meet the required average length of stay of greater than 25 
days.
3. Exclusion From the Acute Care Hospital Inpatient Prospective Payment 
System
    As discussed more fully in section I.A.2 of this preamble, LTCHs 
were excluded from the FY 1984 implementation of the acute care 
hospital inpatient prospective payment system and continued to be paid 
based on their cost per discharge, subject to per discharge limits.
4. Geographic Distribution
    Overall, 203 LTCHs filed Medicare claims in 1997. This number 
translates into an average of approximately one facility per 200,000 
Medicare enrollees. As can be seen in Table 1, LTCHs are not 
distributed across all States in proportion to the number of Medicare 
enrollees in those States. They are unevenly distributed across the 
United States, with one-third (72 of 203) located in Massachusetts, 
Texas, and Louisiana. These three States together account for 36 
percent of the LTCHs, but only fewer than 10 percent of Medicare 
enrollees. Furthermore, 13 small States have no LTCHs, although they 
account for approximately 7 percent of Medicare enrollees. In contrast, 
the three largest Medicare States (California, Florida, and New York) 
account for 24.1 percent of Medicare enrollees together, but only 13.8 
percent of LTCHs.

    Table 1.--Percentage Distribution of Number of Long-Term Care Hospitals (LTCHs), Medicare Enrollees, and
                                         Certified Beds, by State, 1997
----------------------------------------------------------------------------------------------------------------
                                                              Number of     Percent of   Number of    Percent of
             State                Number of    Percent of     medicare       medicare    certified    certified
                                    LTCHs        LTCHs        enrollees     enrollees       beds         beds
----------------------------------------------------------------------------------------------------------------
Alabama........................            1          0.5         696,586          1.8          191          1.0
Alaska.........................            0          0.0          38,570          0.1            0          0.0
Arizona........................            4          2.0         667,226          1.7          187          1.0
Arkansas.......................            0          0.0         453,195          1.1            0          0.0
California.....................           12          5.9       3,920,674          9.9        1,304          7.1
Colorado.......................            4          2.0         464,299          1.2          277          1.5
Connecticut....................            4          2.0         531,805          1.3          716          3.9
Delaware.......................            0          0.0         111,171          0.3            0          0.0
District of Columbia...........            1          0.5          80,028          0.2           23          0.1
Florida........................           11          5.4       2,853,420          7.2          805          4.4

[[Page 13423]]

 
Georgia........................            6          3.0         915,577          2.3          557          3.0
Hawaii.........................            1          0.5         163,217          0.4           13          0.1
Idaho..........................            0          0.0         163,303          0.4            0          0.0
Illinois.......................            5          2.5       1,701,123          4.3          703          3.8
Indiana........................           11          5.4         877,656          2.2          434          2.4
Iowa...........................            0          0.0         498,288          1.3            0          0.0
Kansas.........................            3          1.5         406,752          1.0           74          0.4
Kentucky.......................            1          0.5         633,802          1.6          337          1.8
Louisiana......................           19          9.4         622,805          1.6        1,288          7.0
Maine..........................            0          0.0         218,265          0.6            0          0.0
Maryland.......................            4          2.0         651,710          1.7          465          2.5
Massachusetts..................           17          8.4         991,641          2.5        3,077         16.8
Michigan.......................            3          1.5       1,435,420          3.6          280          1.5
Minnesota......................            2          1.0         669,708          1.7          313          1.7
Mississippi....................            2          1.0         428,729          1.1           65          0.4
Missouri.......................            3          1.5         888,959          2.3          317          1.7
Montana........................            0          0.0         139,392          0.4            0          0.0
Nebraska.......................            1          0.5         263,287          0.7           25          0.1
Nevada.........................            3          1.5         225,152          0.6          106          0.6
New Hampshire..................            0          0.0         170,031          0.4            0          0.0
New Jersey.....................            3          1.5       1,239,890          3.1          212          1.2
New Mexico.....................            2          1.0         231,517          0.6           86          0.5
New York.......................            5          2.5       2,780,994          7.0        1,262          6.9
North Carolina.................            1          0.5       1,129,329          2.9           59          0.3
North Dakota...................            0          0.0         107,628          0.3            0          0.0
Ohio...........................            7          3.4       1,766,266          4.5          653          3.6
Oklahoma.......................            8          3.9         523,358          1.3          294          1.6
Oregon.........................            0          0.0         500,035          1.3            0          0.0
Pennsylvania...................            6          3.0       2,183,850          5.5          412          2.3
Rhode Island...................            1          0.5         177,247          0.4          700          3.8
South Carolina.................            2          1.0         562,732          1.4            0          0.0
South Dakota...................            0          0.0         123,401          0.3          211          1.2
Tennessee......................            6          3.0         838,357          2.1          210          1.1
Texas..........................           36         17.7       2,275,673          5.8        1,818          9.9
Utah...........................            1          0.5         204,525          0.5           39          0.2
Vermont........................            0          0.0          89,821          0.2            0          0.0
Virginia.......................            3          1.5         893,602          2.3          664          3.6
Washington.....................            2          1.0         742,589          1.9           97          0.5
West Virginia..................            0          0.0         349,684          0.9            0          0.0
Wisconsin......................            1          0.5         806,951          2.0           34          0.2
Wyoming........................            1          0.5          65,699          0.2            3          0.0
                                --------------------------------------------------------------------------------
    Total......................          195       100.00      36,322,068       100.00       18,311      100.00
----------------------------------------------------------------------------------------------------------------
Source: 1997 Online Survey and Certification Reporting System (OSCAR).

    Although the distribution of certified beds generally tracks the 
distribution of LTCHs across States, there is not always a direct 
relationship between the number of LTCHs and the bed capacity in a 
given State. For instance, Massachusetts has only 8.4 percent of LTCHs, 
but 16.8 percent of Medicare-certified beds. In contrast, Texas has 
17.7 percent of LTCHs, but only 9.9 percent of the certified beds.
5. Characteristics by Date of Medicare Participation
    The OSCAR program provided data captured by the State survey and 
certification process that can be used to identify and characterize 
providers participating in Medicare and Medicaid. The following 
analyses were based on LTCHs for which data were available. Eight 
facilities, which account for only 1 percent of all LTCH stays and 1.3 
percent of certified beds, were excluded from the analysis since 1997 
OSCAR records were not available for these facilities.
    Given the known payment variations for old and new facilities that 
were excluded facilities paid under the target amount methodology, we 
divided the LTCHs by age (the date of the LTCH's first Medicare 
participation, as reported by OSCAR) to gain a sense of the variation 
among the existing LTCHs in 1997. A strong correlation is found between 
the age of a LTCH and other key characteristics, such as location and 
ownership control, as well as operating costs and Medicare payments. 
For analytical purposes, therefore, the total sample of LTCHs was 
stratified based on age (``old,'' ``middle,'' or ``new''). Of the 195 
LTCHs in OSCAR in 1997, 20 percent were in existence before the 
hospital inpatient prospective payment system and hospital inpatient 
prospective payment system exclusions went into effect in October 1983 
(old LTCHs); 30 percent were determined to be LTCHs between October 
1983 and September 1993 (middle LTCHs); and 50 percent were determined 
to be LTCHs between October 1993 and September 1997 (new LTCHs). This 
pattern is consistent with reports of the large growth in the number of 
LTCHs in recent years. (As of November 2001, OSCAR had data on 270 
LTCHs, which indicate that the growth has continued.)

[[Page 13424]]

    Old LTCHs are generally located in the northeast region of the 
United States, while newer LTCHs are typically located in the southern 
region. Most notably, the ownership of the LTCHs that began Medicare 
participation before and after the implementation of the acute care 
hospital inpatient prospective payment system is quite different. Old 
LTCHs are either government controlled (about 63 percent) or nonprofit 
(about 37 percent). In contrast, one-half of the LTCHs that began 
participation in Medicare between 1983 and 1993, and two-thirds of 
those that began participation in Medicare in FY 1994 or later, are 
proprietary facilities. Virtually no new LTCHs are government 
controlled.
6. Hospitals-Within-Hospitals and Satellite Facilities
    The Medicare statute does not contemplate the recognition of ``LTCH 
units'' of prospective payment system acute care hospitals; the statute 
does reference rehabilitation and psychiatric units. Long-term care 
units of prospective payment system hospitals are not allowed in part 
because of the concern that transfers of acute care patients into the 
LTCH units could inappropriately maximize prospective payments under 
the hospital inpatient prospective payment system. The presence of a 
long-term care ``unit'', excluded from the hospital inpatient 
prospective payment system and co-located in an acute care hospital, 
could enable the acute care hospital to shift patients to the long-term 
care ``unit'' without completing the full course of treatment. These 
patient transfers could result in inappropriate payments under Medicare 
since the acute care hospital would make money in those cases where it 
received a full DRG payment without providing the full course of 
treatment to the beneficiary and could avoid losing any money for other 
more costly patients by prematurely discharging them to the LTCH. Since 
payments to hospitals under the hospital inpatient prospective payment 
system were based on hospital costs that included the costs of patients 
with longer lengths of stay, such a patient shift would result in an 
``overpayment'' to the acute care hospital and the LTCH would receive 
an additional payment for that same patient.
    Nonetheless, in the mid-1990s, of the roughly 150 LTCHs in 
existence at the time, about 12 recently established LTCHs were, in 
fact, LTCHs located in the buildings or on the campuses of acute care 
hospitals. In order to prevent the gaming of the Medicare system that 
would result from inappropriate transfers between the inpatient acute 
care hospital and the LTCH located within the acute care hospital, we 
have implemented additional qualifying criteria at Sec. 412.22(e) for 
these entities. These criteria require that in order to be excluded 
from the prospective payment system, a hospital located in or on the 
campus of an acute care hospital (referred to as a ``hospital-within-a-
hospital'') must have a separate governing body, chief executive 
officer, chief medical officer, and medical staff. In addition, the 
hospital must perform basic functions independently from the host 
hospital, incur no more than 15 percent of its total inpatient 
operating costs for items and services supplied by the hospital in 
which it is located, and have an inpatient load of which at least 75 
percent of patients are admitted from sources other than the host 
hospital. Originally, these regulations were effective as of October 
1994. However, section 4417(a) of the BBA amended section 1886(d)(1)(B) 
of the Act to provide that a hospital that was excluded from the 
prospective payment system on or before September 30, 1995, as an LTCH, 
shall continue to be so classified, notwithstanding that it is located 
in the same building or in one or more buildings located on the same 
campus as another hospital. (See Sec. 412.22(f).)
    In the late 1990s, we became aware of a newly developing entity 
that was physically similar, but legally unrelated, to a hospital-
within-a-hospital. These entities were hospital-within-hospital type 
facilities (in the buildings or on the campuses of acute care 
hospitals) owned by a separate existing LTCH. We identified these 
facilities as ``long-term care hospital satellites.''
    In the July 30, 1999 Federal Register (64 FR 41540), we revised 
Sec. 412.22(h) to require that in order to be excluded from the 
hospital inpatient prospective payment system, a satellite of a 
hospital: (1) Must maintain admission and discharge records that are 
separately identified from those of the hospital in which it is 
located; (2) cannot commingle beds with beds of the hospital in which 
it is located; (3) must be serviced by the same fiscal intermediary as 
the hospital of which it is a part; (4) Must be treated as a separate 
cost center of the hospital of which it is a part; (5) for cost 
reporting purposes, must use an accounting system that properly 
allocates costs and maintains adequate data to support the basis of 
allocation; and (6) must report costs in the cost report of the 
hospital of which it is a part, covering the same fiscal period and 
using the same method of apportionment as that hospital. In addition, 
the satellite facility must independently comply with the qualifying 
criteria for exclusion from the hospital inpatient prospective payment 
system. The total number of State-licensed and Medicare-certified beds 
(including those of the satellite facility) for a hospital that was 
excluded from the prospective payment system for the most recent cost 
reporting period beginning before October 1, 1997, may not exceed the 
hospital's number of beds on the last day of that cost reporting 
period.
7. Specialty Groups of LTCHs by Patient Mix
    There is a widely held view that the population of LTCHs is 
heterogeneous. We believe that understanding the composition of this 
population and identifying and classifying subgroups within it are 
fundamental to designing a prospective payment system for LTCHs.
    Broad categories of conditions as defined by major diagnostic 
categories (MDCs), the principal diagnostic categorization tool used 
under the hospital inpatient prospective payment system, were used to 
classify LTCHs according to the medical conditions of their patient 
caseloads. (MDCs were formed by dividing all possible principal 
diagnoses into 25 mutually exclusive categories. Most MDCs correspond 
to a major organ system, though a few correspond to etiology.)
    We also explored the possibility of grouping patients by DRGs or by 
selected individual diagnoses. These attempts resulted in creating 
groups too small for any effective characterization. However, the 
analysis did reveal that while some LTCHs treat a wide range of 
conditions, others specialize in one or two types of conditions. In 
order to analyze a grouping based on patient mix, under its contract 
with us, Urban first examined the proportion of facilities' caseloads 
in specific MDCs. There are five MDCs in which at least one LTCH has a 
majority (that is, more than 50 percent) of its cases. Patients with 
respiratory system problems are the most common caseload 
concentration--in 1997, 13 percent of LTCHs have a caseload 
concentration of 50 percent to 75 percent, and another 7 percent of 
LTCHs have more than 75 percent of their cases in this MDC.
    The other three MDCs that make up a majority of at least one LTCH's 
patient caseload (nervous system MDC, musculoskeletal and connective 
tissue disorders MDC, and factors influencing health status MDC) are 
all related to rehabilitation needs. (Because rehabilitation-related 
DRGs are common

[[Page 13425]]

to LTCHs and fall into the ``Factors Influencing Status'' MDC, we are 
proposing to classify all cases in this MDC as rehabilitation services 
for the purpose of this analysis.) Seven percent of LTCHs have a 
majority of their caseload in an MDC related to rehabilitation-related 
services. A significantly less common concentration is seen in the 2 
percent of LTCHs that have a majority of their patients in the mental 
diseases and disorders MDC. All but two LTCHs in our analysis have some 
share of patients with respiratory system problems. Similarly, all but 
five LTCHs have some patients with circulatory problems.
    Based on these findings, we developed a grouping that consists of 
four broad categories of LTCHs based on patient caseload. Facilities 
with greater than 50 percent of their cases in the respiratory MDC were 
assigned to a ``respiratory specialty'' group for the purpose of this 
analysis. Similarly, all facilities with over 50 percent of their 
caseload in the mental MDC were designated as ``mental specialty'' 
facilities. The three rehabilitation-related MDCs were combined into 
one ``rehabilitation-related MDC'' category and grouped into a 
``rehabilitation specialty'' group. All remaining facilities (that did 
not have high concentrations of patients in the respiratory MDC, the 
mental MDC, or the rehabilitation-related MDCs category) were placed 
into a ``multispecialty'' facility group. LTCHs in this category 
provide care to a wider range of patient types than LTCHs in the first 
three categories.
    To better understand the relatively large number of multispecialty 
LTCHs, we explored their MDC composition. Not unexpectedly, most of 
these facilities have high proportions of cases in the respiratory MDC 
and the rehabilitation-related MDCs category, although some LTCHs do 
not serve either of these populations in great numbers. Few LTCHs do 
not have a significant share of their caseload in either the 
respiratory MDC or the rehabilitation-related MDCs category. Only 2 
percent of multispecialty LTCHs have less than 25 percent of their 
caseload in either specialty group. Similarly, only 7 percent of 
multispecialty facilities have less than 35 percent of their caseload 
in either of the two groups. In contrast, about 60 percent of LTCHs 
have at least half of their caseload in either the respiratory MDC or 
the rehabilitation-related MDCs category. This high share demonstrates 
that, despite their assignment to the multispecialty category, most 
LTCHs serve a high percentage of patients with respiratory or 
rehabilitation problems, or both.
    Although respiratory and rehabilitation specialty facilities are 
prevalent in the LTCH population, there are also some ``niche'' LTCHs 
that have unique patient populations or provide uncommon services. 
These hospitals include, for example, a large hospital where most 
admitted individuals (90 percent) die in the facility.
    Several LTCHs provide services for special populations. One 
facility provides services for a prison population. A large share of 
this facility's funding is through Medicaid; cost report data show 
Medicaid covers two-thirds of its patient stays.
    Some other facilities work with similarly specialized populations 
and have very small Medicare caseloads. In particular, two facilities 
that focus on developmentally disabled children and younger adults had 
fewer than 10 Medicare stays in 1997. Cost reports show that one of 
these facilities, which provides rehabilitation for its Medicare 
patients, has few discharges (under 100) regardless of payer source. 
The other, which provides mostly psychiatric services, relies on public 
funding for only a small share of its discharge payments.
    Although there are a few niche facilities in the LTCH population, 
our analysis indicates that a preponderance of the LTCHs can be 
classified in distinct specialty groups that focus on adult 
rehabilitation and respiratory system care.
8. Sources and Destinations of LTCH Patients
    Another useful perspective on LTCHs is the pattern of sources from 
which patients are admitted to LTCHs and destinations to which LTCH 
patients are discharged. This information shows how such transition 
patterns differ among the specialty groups. In general, the findings 
are consistent with the notion that LTCHs as a group are heterogeneous 
in terms of the patients they serve.
    The vast majority (70 percent) of LTCH patients are admitted from 
acute care hospitals. Within this group, acute care patients whose 
stays are designated as ``outlier'' stays, as defined by section 
1886(d)(5)(A)(i) of the Act and implemented in Sec. 412.80, were 
identified separately. Sixteen percent of LTCH admissions were acute 
care hospital outlier patients, while 54 percent were admitted from 
acute care hospitals but did not have extraordinarily long acute care 
stays. After acute care hospitals, direct admission from the community 
is the next most common source of admissions (14 percent) to LTCHs.
    The admission patterns vary somewhat by LTCH specialty type. 
Notably, 85 percent of admissions to respiratory specialty LTCHs are 
from acute care hospitals, including 22 percent that are acute care 
hospital outlier cases. A very small percentage (7 percent) of 
admissions to respiratory specialty LTCHs are from the community. In 
contrast, the admission sources for the rehabilitation specialty LTCHs 
are more similar to that of the multispecialty LTCHs. Notably, a higher 
than average share of patients come from SNFs (8 percent) and HHAs (6 
percent) and a lower percentage of patients transition from acute care 
hospital outlier stays (12 percent). A relatively large share (11 
percent) of patients at rehabilitation specialty LTCHs are admitted 
directly from the community compared to patients at respiratory 
specialty LTCHs (7 percent). These findings suggest that patients 
admitted to rehabilitation specialty LTCHs might present a less 
medically intensive clinical picture than patients admitted to 
respiratory specialty LTCHs.
    The admission pattern of patients admitted to the mental specialty 
LTCHs is quite different from those of the other specialties. A 
relatively small percentage (31 percent) of patients are admitted from 
acute care hospitals and only 2 percent are admitted after being acute 
care hospital outliers. In contrast, large proportions are admitted 
directly from the community (40 percent) or from some other type of 
Medicare provider (27 percent).
    An analysis of the pattern of discharge destinations for LTCHs 
shows that, overall, 38 percent of LTCH stays are discharged to the 
community without additional Medicare services. Equal percentages (18 
percent) are discharged to SNFs and acute care hospitals, and 21 
percent of patients are discharged to HHAs.
    Some variations in discharge destination patterns exist among LTCHs 
by specialty. Relative to the overall sample, the respiratory specialty 
LTCHs have higher than average percentages of patients discharged to 
SNFs (24 percent versus 18 percent), and lower percentages discharged 
to HHAs (14 percent versus 21 percent). Rehabilitation specialty 
facilities, however, have a relatively high proportion of cases (34 
percent) discharged to HHAs, and a lower than average proportion 
discharged to the community without additional Medicare services (28 
percent versus 38 percent). Finally, mental specialty hospitals have an 
unusually high

[[Page 13426]]

percent of cases (71 percent) discharged to the community without 
additional Medicare services. These findings suggest that patients 
served by respiratory specialty LTCHs are more likely to require 
extended care in institutional settings (for example, SNFs), while 
patients discharged from rehabilitation specialty facilities also 
require extended care, but not necessarily in institutional settings.
9. LTCHs and Patterns Among Post-Acute Care Facilities
    Urban's research also produced data regarding a comparison of LTCHs 
with other post-acute care settings in order to provide us with the 
broadest possible understanding of the universe of LTCHs. The findings 
were only preliminary comparisons of patients among and across post-
acute settings because of the nature of each category of post-acute 
care providers. Even though data suggest substantial clinical 
differences among the providers with some areas of overlap, because of 
some similarities we found it useful to draw parallels and distinctions 
among post-acute care providers. Moreover, findings from this research 
supported conclusions published in several reports to the Congress 
produced by ProPAC and MedPAC over the past decade.
    Most patients in LTCHs have several diagnosis codes on their 
Medicare claims, indicating that they have multiple comorbidities and 
are probably less stable upon admission than patients admitted to other 
post-acute care settings. Relative to IRFs, LTCHs have a higher 
proportion of patient costs attributable to ancillary services (for 
example, pharmacy, laboratory, and radiology charges) (MedPAC March 
1999 Report to Congress, p. 95). LTCHs also provide care to a 
disproportionately large number of Medicare beneficiaries who are 
eligible because of disability. While individuals with disabilities 
make up about 10 percent of the Medicare population, they make up 17 
percent of LTCH patients.
    Urban's analysis also explored the demographic characteristics of 
LTCH patients compared to IRF patients. The proportion of LTCH patients 
who are under 65 years of age (18 percent) is twice that of IRF 
patients (9 percent). The share of LTCH patients over 85 years old is 
slightly higher (18 percent) compared to IRF patients (14 percent). 
LTCHs also have a higher proportion of male patients and a lower 
proportion of white patients than IRFs. LTCHs have long median lengths 
of stay: 21 days versus 16 days for IRFs. About one-third of the LTCH 
Medicare stays are by beneficiaries who are also eligible for Medicaid, 
compared to fewer Medicaid-eligible beneficiary stays at IRFs (17 
percent). It has been widely documented that dually eligible 
beneficiaries are generally much sicker than non-Medicaid eligible 
Medicare beneficiaries.
    Urban's analysis also included a description of the demographic 
characteristics of LTCH patient stays by admission sources--outlier 
acute care hospital, nonoutlier acute care hospital, and other. Those 
with prior outlier acute care hospital stays seem to be the most 
distinctive group in terms of length of stay, gender, race, and 
poverty: they have the highest mean and median length of stay in the 
LTCH, the highest proportion male, the highest proportion white, and 
the lowest proportion of Medicaid-eligible patients. However, in terms 
of age, those with prior hospital stays (whether outlier or nonoutlier) 
are quite different from those with other admission sources. Those 
without a prior acute care hospital stay are younger and about twice as 
many are under age 65, whose mean age is about 5 and 3 years lower than 
those with a prior outlier stay and those with a prior nonoutlier stay, 
respectively. Among those with an acute care hospital stay, the 
nonoutliers are slightly older on average, with higher percentages in 
the oldest groups (75 to 84 and 85 plus) and the highest median age of 
all three groups.
    The policies that we are proposing in this proposed rule were 
determined in part based on analysis of the above data and information 
gathered on LTCHs and their Medicare patients.

F. Overview of System Analysis for the Proposed LTCH Prospective 
Payment System

    For the systems analysis, 3M used the MedPAR (FY 1999 through FY 
2000), OSCAR (FY 2000), and HCRIS (FYs 1998 and early 1999) files. 
Specifically, for this proposed rule, 3M performed the following tasks:
     Construction of an updated data file, using the most 
recent data available from CMS.
     Analysis of issues, factors, or variables and presentation 
of options for possible use in the design and implementation of the 
proposed prospective payment system.
     Data simulation of various system features to analyze 
their impact on the design of the proposed prospective payment system.
    A data file was constructed to serve as the basis of our proposed 
patient classification system and the development of proposed payment 
weight rates and proposed payment adjustments. The analysis of this 
data file helped us regarding the structure of the proposed prospective 
payment system in this proposed rule. We relied upon patient charge 
data from FY 2000 MedPAR for setting proposed LTC-DRG weights and upon 
costs data from FY 1998 and FY 1999 cost reports for proposed payment 
rates. We expect that the availability of updated FY 2000 MedPAR data 
and updated FY 1999 HCRIS data, further analysis of the data file, and 
review of the comments that we receive in response to this proposed 
rule may result in refinements to our proposed policies, particularly 
in the areas of weights and rates.

G. Evaluation of DRG-Based Patient Classification Systems

    Section 307(b) of Public Law 106-554 modified the requirements of 
section 123 of Public Law 106-113 by specifically requiring that the 
Secretary examine ``the feasibility and the impact of basing payment 
under such a system [the LTCH prospective payment system] on the use of 
existing (or refined) hospital diagnosis-related groups (DRGs) that 
have been modified to account for different resource use of long-term 
care hospital patients as well as the use of the most recently 
available hospital discharge data.''
    In order to comply with statutory mandates, our evaluation of DRG-
based patient classification systems focused on two models--the LTC-all 
patient-refined DRGs (LTC-APR-DRGs Version, 1.0), a severity-based 
case-mix classification system developed specifically for LTCHs; and 
the LTC-CMS-DRGs, a modification of the DRG system used in the acute 
care hospital inpatient prospective payment system.
    The LTC-APR-DRGs, a condensed version of 3M's all-patient refined 
DRGs (APR-DRGs) for acute care hospitals, was developed by Dr. Norbert 
Goldfield, Clinical Director of 3M Health Information Systems for 
exclusive use in LTCHs. The LTC-APR-DRG system was designed to reflect 
the clinical characteristics of LTCH patients. This case-mix 
classification model contains 26 base LTC-APR-DRGs, subdivided by 4 
severity of illness levels to yield 104 classification levels. In this 
system, the patient's secondary diagnoses, their interaction, and their 
clinical impact on the primary diagnosis determine the severity level 
assigned to each of the 26 LTC-APR-DRGs.
    The LTC-CMS-DRGs are based on research done by The Lewin Group 
(Developing a Long-Term Hospital Prospective Payment System Using 
Currently Available Administrative Data for the National Association of 
Long-

[[Page 13427]]

Term Hospitals (NALTH), July 1999.) This model uses our existing 
hospital inpatient DRGs with weights that accounted for the difference 
in resource use by patients exhibiting the case complexity and multiple 
medical problems characteristic of LTCHs. In order to deal with the 
large number of low volume DRGs (all DRGs with fewer than 25 cases), 
the LTC-CMS-DRG model groups low volume DRGs into 5 quintiles based on 
average charge per discharge. The result was 184 classification groups 
(179 DRG-based and 5 charge-based payment groups) based on patient data 
from FYs 1994 and 1995. (CMS updated this analysis using patient data 
from FYs 1999 and 2000 for purposes of system evaluations.)
    Under either classification system, DRG weights would be based on 
data for the population of LTCH discharges, reflecting the fact that 
LTCH patients represent a different patient mix than patients in short-
term acute care hospitals. GROUPER software programs enabled us to 
examine the most recent LTCH and acute care hospital inpatient 
prospective payment system patient discharge data in light of the 
features of each system. Using regression analyses and simulations, the 
impact of each patient classification system on potential adjustment 
features for the prospective payment system was assessed. (Data files 
used in these analyses are specified in section I.C.2.) Our medical 
staff as well as physicians involved in treatment of patients at LTCHs 
provided additional input from the standpoint of clinical coherence and 
practical applicability.
    The system that we are proposing for the LTCH prospective payment 
system is the LTC-CMS-DRG GROUPER that is based on the Lewin model 
because we believe it accurately predicts costs without the problems 
that we believe could be inherent with the APR-DRG system. (In section 
III. of this proposed rule, which describes the functioning of the 
classification system as a component of the proposed LTCH prospective 
payment system, the LTC-CMS-DRGs are referred to as the proposed LTC-
DRGs.)
    It is important to note that we have analyzed both systems based on 
MedPAR files generated by LTCH patient data, using the best available 
data. Since the TEFRA payment system, under which LTCHs are currently 
paid, is not tied to patient diagnoses, the coding data from LTCHs have 
not been used for payment. Nevertheless, data analyses indicated that 
there was a minimal difference in both systems' abilities to predict 
costs. (The difference in the R2, a statistical measure of 
how much variation in resource use among cases is explained by the 
models, was only 0.0313.)
    We believe that either classification system would result in more 
equitable payments for LTCHs compared to current payment methods. The 
proposed LTCH prospective payment system would generally improve the 
accuracy of payments for more clinically complex patients. (See our 
discussion of the TEFRA payment system in section I.A. of this proposed 
rule.) As the Congress intended, the DRG weights under the proposed 
LTCH prospective payment system would reflect the ``* * * different 
resource use of long-term care hospital patients.'' Patients requiring 
more intensive complex services would be classified in LTC-DRGs with 
higher relative weights and hospitals would receive appropriately 
higher payments for these patients. We solicit comments on the impact 
one system may have over another as it applies to different kinds of 
LTCHs.
    Although either system would result in more equitable payments to 
LTCHs, we have several interrelated concerns about adopting the LTC-
APR-DRG system based upon its complexity, its clinical subjectivity, 
and its utility as it relates to other Medicare prospective payment 
systems. The LTC-APR-DRG model provides a clinical description of the 
population of LTCHs, patients exhibiting a range of severity of illness 
with multiple comorbidities as indicated by secondary diagnoses. The 
clinical interaction of the primary diagnosis with these comorbidities 
determines the severity level of the primary diagnoses, resulting in 
the final assignment to a LTC-APR-DRG by the GROUPER software designed 
for this system.
    One aspect of our examination of the LTC-APR-DRG system included 
clinical review of actual case studies provided by physicians at 
several LTCHs and evaluations of the LTC-APR-DRG assignments that would 
have resulted based on the clinical logic of the APR-DRG GROUPER. A 
review of a number of those cases by different medical professionals 
resulted in different possible classifications for the GROUPER program. 
Looking at the same case, different views were held as to which APR-DRG 
category or to which level of severity the case should be grouped. 
Given the array of specialization at different LTCHs reflecting a range 
of services and patient types, as described in section I.E.7. of this 
preamble, we believe that we lack sufficient data, at this point in 
time, to definitely determine the effect of particular comorbidities on 
patient resource needs in LTCHs. Furthermore, it appears that depending 
on how many of the diagnoses are coded, medical judgement suggests that 
it could be possible to classify the same patient in more than one 
group or level of severity. Because of these concerns, we believe that 
payments under such a policy could be insufficiently well-defined, 
given currently available data, to ensure consistently appropriate 
Medicare payments.
    We are aware that the forthcoming prospective payment system for 
IRFs is based on a patient classification system that includes a 
measure of comorbidities, the combination of the case-mix group (CMG) 
and comorbidity tier. In general, most IRF patients are treated for one 
primary rehabilitation condition (for example, a hip replacement) that 
is associated with functional measures and sometimes age. The CMGs 
constructed for IRF patients account for diagnostic, functional, and 
age variables. These variables are used to explain the variability in 
the cost among the various CMGs. Some of the remaining variability in 
cost could then be further explained by selected comorbidities which 
the inpatient rehabilitation data showed were statistically 
significant.
    In contrast, determining whether particular comorbidities increase 
the cost of a case for a LTCH patient is complicated by the nature of 
the clinical characteristics of these patients. More specifically, many 
LTCH patients have numerous conditions that may not all be relevant to 
the cost of care for a particular discharge. Although the patient 
actually has a specific condition, including this condition among 
secondary diagnoses coded under the LTC-APR-DRG system, may assign an 
inaccurate severity level to the primary diagnosis and result in 
inappropriate LTC-APR-DRG payment. We also believe that reliance on 
existing comorbidity information submitted on LTCH bills could result 
in significant variation in the assignment of the specific LTC-APR-
DRGs.
    The LTC-CMS-DRG system is a system that is familiar to hospitals 
because it is based on the current DRG system under the acute care 
hospital inpatient prospective payment system. We believe that the 
familiarity of the LTC-CMS-DRG model may best facilitate the transition 
from the cost-based system to the prospective payment system as well as 
providing continuity in payment methodology across related sites of 
care (for example,

[[Page 13428]]

an acute care hospitalization for a patient with a chronic condition.).
    We further wish to note that the adoption of severity-adjusted DRGs 
will be explored by CMS for use under the hospital inpatient 
prospective payment system. In its June 2000 Report to Congress, MedPAC 
recommended that the Secretary ``* * * improve the hospital inpatient 
prospective payment system by adopting, as soon as practicable, 
diagnosis related group refinements that more fully capture differences 
in severity of illness among patients.'' (Recommendation 3A, p. 63.) 
Although we are not proposing LTC-APR-DRGs in this proposed rule, we 
are interested in receiving comments on this issue. We also wish to 
note that in the event the LTCH prospective payment system is 
implemented using LTC-DRGs, we could have the opportunity to propose a 
severity-adjusted patient classification for LTCHs in the future, 
particularly if the acute care hospital inpatient prospective payment 
system moves in this direction.

H. Recommendations by MedPAC for a LTCH Prospective Payment System

    As we noted in the section I.A.5. of this proposed rule, since the 
establishment of the acute care hospital inpatient prospective payment 
system in 1983, the topic of post-acute care payments under Medicare 
has been addressed in reports to the Congress prepared by ProPAC and 
its successor, MedPAC. Recommendations in these reports encouraged 
modifications to Medicare payment policies, examined the differences 
among post-acute care providers and within each category of providers, 
and reiterated the goal of eventually implementing prospective payment 
systems for providers being paid under the target amount payment 
methodology.
    In its March 1, 1996 Report and Recommendations to the Congress, 
ProPAC recommended that ``prospective payment systems should be 
implemented for all post-acute services. The payment method for each 
service should be consistent across delivery sites. The Secretary 
should explore methods to control the volume of post-acute service use, 
such as bundling services for a single payment.'' (Recommendation 20, 
p. 75)
    The following year, in its March 1, 1997 Report and Recommendations 
to the Congress, ProPAC recommended ``* * * the Congress and the 
Secretary to consider the overlap in services and beneficiaries across 
post-acute care providers as they modify Medicare payment policies. 
Changes to one provider's payment method could shift utilization to 
other sites and thus fail to curb overall spending. To this end, ProPAC 
commends HCFA's (now CMS's) efforts to identify elements common to the 
various facility-specific patient classification systems to use in 
comparing beneficiaries across settings.'' Ultimately, Medicare should 
move towards more uniform payment policies across sites, the Report 
continued, and ``payment amounts should vary depending on the intensity 
and nature of the services beneficiaries require, rather than on the 
setting. Further, providers should have incentives to coordinate 
services or an episode * * *'' (p. 60)
    However, with enactment of the BBA, the Congress enacted 
legislation to provide for distinct prospective payment systems for 
HHAs (section 4603(b)), SNFs (section 4432(a)), and IRFs (section 
4421). The BBA further required the development of a legislative 
proposal for the case-mix adjusted LTCH prospective payment system. 
Section 123 of the BBRA requires the Secretary to develop a per 
discharge DRG-based system for LTCHs, and section 307(a) of BIPA 
mandates that the Secretary examine the feasibility and impact of 
basing payments to LTCHs using the existing DRGs, modified to account 
for the resource use of LTCH patients. Thus, Congress mandated systems 
that would result in different payments, depending on the site of 
service, and not a system that is uniform across sites.
    Notwithstanding the mandate to establish post-acute care 
prospective payment systems, MedPAC continued to articulate concern 
regarding the overlap of services among post-acute providers. In its 
June 1998 Report to Congress, MedPAC stated that ``all of these policy 
changes, in combination with the fact that similar services can be 
provided in multiple post-acute settings, indicate the need for 
continued monitoring and analysis of post-acute providers, policies, 
and service utilization.'' (p. 90)
    In its March 1999 Report to Congress, MedPAC encouraged the 
Secretary to ``* * * collect a core set of patient assessment 
information across all post-acute care settings.'' (Recommendation 5A, 
p. 82)
    Section 123 of BBRA specifically mandated a per discharge, DRG-
based prospective payment system for LTCHs and established a timetable 
for the presentation of the proposed system in a report to the Congress 
by October 1, 2001 and for implementation of the actual prospective 
payment system by October 1, 2002. Further direction for a distinct 
prospective payment system for LTCHs was indicated in section 307(b) of 
BIPA, which directed the Secretary to examine a number of payment 
adjustment factors and establishes a default system if the Secretary is 
unable to meet the implementation timetable.
    As we develop the prospective payment system for LTCHs described in 
this proposed rule, however, we wish to state that we do not believe 
that the establishment of distinct prospective payment systems for each 
post-acute care provider group eliminates the need to monitor payments 
and services across all service settings. We endorse MedPAC's 
Recommendation 3G, in its March 2000 Report to Congress, that 
encourages the Secretary to ``assess important aspects of the care 
uniquely provided in a particular setting, compare certain processes 
and outcomes of care provided in alternative settings, and evaluate the 
quality of care furnished in multiple-provider episodes of post-acute 
care.'' (p. 65). We intend to monitor the appropriateness of LTCH stays 
by tracking the number of LTCH patients and SNF patients and the 
frequency of subsequent admissions to an acute care hospital. We 
believe this data will be valuable in assessing the outcome of care 
provided in these settings.
    Furthermore, we strongly support the additional research that will 
be required to choose or to develop an assessment instrument that will 
evaluate the quality of services delivered to beneficiaries in post-
acute settings.

I. Evaluated Options for the Proposed Prospective Payment System for 
LTCHs

    Section 123 of BBRA and section 307(b) of BIPA establish the 
statutory authority for the development of the proposed prospective 
payment system for LTCHs that is discussed in this proposed rule. Under 
the BBRA, we are required to:
     Develop a per discharge prospective payment system for 
inpatient hospital services furnished by LTCHs described in section 
1886(d)(1)(B)(iv) of the Act.
     Include an adequate patient classification system that is 
based on DRGs that reflect the differences in patient resource use and 
costs.
     Maintain budget neutrality.
     Submit a report to the Congress describing this system by 
October 1, 2001.
     Implement this system for cost reporting periods beginning 
on or after October 1, 2002.
    Section 307(b) of BIPA modified the requirements of section 123 of 
the BBRA by requiring the Secretary to--
     Examine the feasibility and the impact of basing payment 
under the prospective payment system on the use

[[Page 13429]]

of existing (or refined) DRGs that have been modified to account for 
different resource use of LTCH patients, as well as the use of the most 
recently available hospital data.
     Examine appropriate adjustments to LTCH prospective 
payments, including adjustments to DRG weights, area wage adjustments, 
geographic reclassification, outliers, updates, and a disproportionate 
share adjustment.
    In the event that we are unable to meet the implementation deadline 
of October 1, 2002, a default system will be implemented in which the 
payment is based on existing hospital DRGs, modified where feasible to 
account for resource use of LTCH patients. This default system would be 
based on the most recently available hospital discharge data for such 
services furnished on or after that date.
    Although the statutory mandate for development of the LTCH 
prospective payment system established in the BBRA and the BIPA 
requires a per discharge, DRG-based system, generally the statute gives 
the Secretary broad discretion in designing the prospective payment 
system. The design of any prospective payment system requires decisions 
on the following issues:
     The categories used to classify services such as DRGs.
     The methodology for calculating the relative weights that 
are assigned to each patient category to reflect the relative 
difference in resource use across DRGs (these are relative values in 
economic terminology).
     The methodology for calculating the base rate, which is 
the basis for determining the DRG-based Federal payment rates. It is a 
standardized payment amount that is based on average costs from a base 
period and also reflects the combined aggregate effects of the payment 
weights and various facility and case level adjustments. Operating and 
capital-related costs may be combined in this base rate or may be 
treated separately.
     Adjustments to the base rate to reflect cost differences 
across providers, such as disproportionate share adjustments, indirect 
graduate medical education programs, and outliers.
     Finally, a procedure for the transition from the current 
system to the DRG-based prospective payment system must be established.
    We pursued a two-pronged strategy as we developed the proposed 
prospective payment system for LTCHs. First, we analyzed the data and 
empirical facts about LTCH patients and providers summarized in section 
I.E. of this proposed rule. Secondly, in light of this information, we 
analyzed each option based on regressions and simulations, using the 
data sets described in section I.D. of this preamble.
    Both technical and proposed policy considerations were important in 
these design proposals. We reviewed features of other recent 
prospective payment systems designed or implemented by CMS for other 
post-acute care providers to determine the feasibility of including 
features in the LTCH prospective payment system and to identify 
modifications that might enhance their application for this system. In 
addition, we considered factors that were important to the development 
of Medicare's acute care hospital inpatient prospective payment system, 
such as urban and rural location, and whether the hospital served a 
disproportionate share of low-income patients. We also analyzed 
clinical significance, administrative simplicity, availability of data, 
and consistency with other Medicare payment policies.
    In addition to satisfying statutory requirements, the design of the 
proposed prospective payment system for LTCHs presented in this 
proposed rule is the result of the following factors:
     Our empirical understanding of the ``universe'' of LTCHs 
and long-term care patients, as set forth in section I.E. of this 
preamble.
     Our experience with the acute care hospital inpatient 
prospective payment system.
     Consideration of recommendations in MedPAC's reports to 
Congress on post-acute care.
     Our monitoring of the establishment and continuing 
development and refinement of prospective payment systems for IRFs, 
SNFs, and HHAs.
    Additionally, as we deliberated on the choice of the specific model 
of DRG-based system we are proposing to use for the LTCH prospective 
payment system, we consulted with LTCH physicians and LTCH 
representatives.

II. General Discussion of the Proposed LTCH Prospective Payment 
System

A. Goals of the Proposed LTCH Prospective Payment System

    We have designed the proposed prospective payment system for LTCHs 
in this proposed rule with the following objectives:
     To base the prospective payment system on an analysis of 
the best information and data available.
     To establish a payment model using our experience in 
implementing other prospective payment systems.
     To provide incentives to control costs and to furnish 
services as efficiently as possible.
     To base payment on clinically coherent categories and to 
appropriately reflect average resource needs across different 
categories.
     To minimize opportunities and incentives for 
inappropriately maximizing Medicare payments.
     To establish a system that is beneficiary centered by 
formulating procedures for quality monitoring.
     To develop a system that is administratively feasible.

B. Applicability of the Proposed LTCH Prospective Payment System

    Our existing regulations at 42 CFR Part 482, Subparts A through D 
set forth the general conditions that hospitals must meet to qualify to 
participate in Medicare. There are no additional conditions for LTCHs 
as there are for psychiatric facilities.
    Criteria for classification as a LTCH for purposes of payment are 
set forth in existing Sec. 412.23(e), which provides that a LTCH must--
     Have a provider agreement to participate as a hospital and 
an average inpatient length of stay greater than 25 days or for cost 
reporting periods beginning on or after August 5, 1997, for a hospital 
that was first excluded from the prospective payment system in 1986, 
have an average inpatient length of stay of greater than 20 days and 
demonstrate that at least 80 percent of its annual Medicare inpatient 
discharges in the 12-month cost reporting period ending in FY 1997 have 
a principal diagnosis that reflects a finding of neoplastic disease, as 
defined in regulations. The calculation of the average inpatient length 
of stay is calculated by dividing the number of total inpatient days 
(less leave or pass days) by the number of total discharges for the 
hospital's most recent complete cost reporting period.
     Meet the additional criteria specified in Sec. 412.22(e) 
if it is to be classified as a hospital-within-a-hospital and to be 
excluded from the acute care hospital inpatient prospective payment 
system.
     Meet the additional criteria specified in Sec. 412.22(h) 
if it is to be classified as a satellite facility and to be excluded 
from the acute care hospital inpatient prospective payment system.
    Results of our research on LTCHs, as set forth in section I.D. of 
this preamble, have suggested the following particular issue that we 
have evaluated and are proposing to address concurrent with the 
proposed implementation of the proposed LTCH prospective payment 
system:


[[Page 13430]]


Proposed Change in the Average 25-Day Total Inpatient Stay Requirement. 
Section 1886(d)(1)(B)(iv)(I) of the Act describes a LTCH generally as 
``a hospital which has an average inpatient length of stay (as 
determined by the Secretary) of greater than 25 days.'' Thus, the 
statute gives the Secretary extremely broad discretion in determining 
the average inpatient length of stay for hospitals for purposes of 
determining whether a hospital warrants exclusion from the prospective 
payment system in section 1886(d) of the Act. Existing Medicare 
regulations at Sec. 412.23(e)(1) and (e)(2) include all hospital 
inpatients in this calculation of the average inpatient length of stay.
    Our data have revealed that approximately 52 percent of Medicare 
patients at LTCHs have lengths of stay of less than \2/3\ of the 
average length of stay for the proposed LTC-DRGs in this proposed rule, 
and 20 percent have a length of stay of even less than 8 days. This 
means that some hospitals, while currently qualifying as LTCH by 
averaging non-Medicare long stay patients to maintain a length of stay 
of over 25 days, do not furnish ``long-term care'' on average to their 
Medicare patients. In these situations, many of the hospitals' short 
stay Medicare patients could be receiving appropriate services as 
patients at acute care hospitals. Under the proposed LTCH prospective 
payment system, the proposed LTC-DRG weights and proposed standard 
Federal payment rate are based on the charges and costs of LTCH 
patients, which are typically more medically complex and more costly 
than acute care hospital patients.
    Since the proposed LTCH prospective payment system would result in 
higher per discharge payments for LTCHs than payments under the acute 
care hospital inpatient prospective payment system for patients that 
would group into identical DRGs under each system, we believe that 
under current policy, which factors in non-Medicare patients' lengths 
of stay in determining LTCH status, could result in inappropriately 
higher payments for those Medicare short-stay patients who happen to be 
treated in a LTCH instead of an acute care hospital. This is the case 
since if the average length of stay of patients at a hospital would not 
reach the mandatory 25-days threshold for designation as a LTCH unless 
non-Medicare patients are included in the calculation, the hospital 
would be paid for its Medicare patients under the acute care hospital 
inpatient prospective payment system. Therefore, if a hospital is not 
treating Medicare patients that, on average, require the more costly 
services offered at LTCHs that differentiate these hospitals from acute 
care hospitals, we believe that Medicare payments should be determined 
under the acute care hospital inpatient prospective payment system. 
Such payments would be lower for each DRG than would be paid for under 
the LTC-DRG system, reflecting the lower costs of acute care hospitals.
    Under the current TEFRA reasonable cost-based reimbursement system, 
Medicare payments to LTCHs are commensurate with the actual reasonable 
costs incurred by the hospital. Therefore, under that system, Medicare 
payments for shorter lengths of stay patients reflect the lower costs 
of those patients. However, under the proposed LTCH prospective payment 
system, which is based on average costs of treatment for particular 
diagnosis, the hospital would receive prospective payments based on 
such average costs for these much shorter length of stay patients. Even 
under our proposed short-stay outlier policy, as described in section 
IV.B.2. of this proposed rule, the hospital would have the opportunity 
to be paid 150 percent of its costs.
    Therefore, under our broad authority in the statute to determine 
the average inpatient length of stay, we are proposing to specify that 
we would include the hospital's Medicare patients, but not non-Medicare 
patients, in determining the average inpatient length of stay (proposed 
Sec. 412.23(e)(2)) for purposes of section 1886(d)(1)(B)(iv)(I) of the 
Act. In proposing this change in policy, we believe there would be a 
strong incentive for LTCHs not to admit many short-stay Medicare 
patients since doing so could jeopardize their status as a LTCH. 
Instead, those patients could receive appropriate care at an acute care 
hospital and the care would be paid under the hospital inpatient 
prospective payment system. Furthermore, changing the methodology for 
determining the average inpatient length of stay to be based only on 
Medicare patients is consistent with the intent of our proposed very 
short-stay discharge policy (described in section IV.B.1. of this 
proposed rule) and our proposed short-stay outlier policy (described in 
section IV.B.2. of this proposed rule), which are also intended to 
discourage LTCHs under the proposed prospective payment system from 
treating Medicare patients that do not require the more costly 
resources of LTCHs and who could reasonably be treated in acute care 
hospitals.
    We would monitor the types of hospitals that would qualify as LTCHs 
based on this proposed definition. It is possible that hospitals that 
currently qualify as either rehabilitation hospitals or psychiatric 
hospitals would also qualify as LTCHs under this proposed revised 
criteria, and could be paid as LTCHs in order to maximize Medicare 
payments. We also would monitor whether the proposed change in 
methodology for measuring the average length of stay in LTCHs would 
result in unanticipated shifts of patients to those settings. If a 
pattern of these behaviors is observed, we believe it may be 
appropriate that Congress address the issues raised through a 
legislative change.
    As indicated above, pursuant to our broad authority in the statute, 
we are proposing to change the methodology for determining the average 
inpatient length of stay for purposes of section 1886(d)(1)(B)(iv)(I) 
of the Act, but we are not proposing to change the methodology for 
purposes of section 1886(d)(1)(B)(iv)(II) of the Act (proposed 
Sec. 412.23(e)). For purposes of the latter provision (subclause (II)), 
we are proposing to retain the current methodology (which includes non-
Medicare as well as Medicare patients) because we believe that the 
considerations underlying the proposed change in methodology for 
subclause (I) are not present under subclause (II). As discussed above, 
we are proposing to revise the methodology for purposes of the general 
definition of LTCH under subclause (I) because it has come to our 
attention that some hospitals that might not warrant exclusion from the 
prospective payment system have nevertheless obtained status as 
excluded hospitals under the current methodology. We believe that 
excluding non-Medicare patients in determining the average inpatient 
length of stay for purposes of subclause (I) would be more appropriate 
in identifying the hospitals that warrant exclusion under the general 
definition of LTCH in subclause (I). However, in enacting subclause 
(II), Congress provided an exception to the general definition of LTCH 
under subclause (I), and we have no reason to believe that the proposed 
change in methodology for determining the average inpatient length of 
stay would better identify the hospitals that Congress intended to 
exclude under subclause (II). Therefore, at this time, we are proposing 
to retain the current methodology for purposes of subclause (II).

C. LTCHs Not Subject to the Proposed LTCH Prospective Payment System

    We are proposing that only hospitals qualifying as LTCHs under the 
proposed revised criteria described in section II.B.

[[Page 13431]]

of this proposed rule and in proposed revised Sec. 412.23(e) by October 
1, 2002, would be subject to the proposed LTCH prospective payment 
system. (This proposed system is summarized below in section II.D. and 
described in detail in section IV. of this proposed rule.) Our proposed 
treatment of hospitals first qualifying as LTCHs after October 1, 2002, 
is addressed in section IV.H. of this proposed rule.
    The following hospitals are paid under special payment provisions, 
as described in existing Sec. 412.22(c) and, therefore, would not be 
subject to the proposed LTCH prospective payment system rules:
     Veterans Administration hospitals.
     Hospitals that are reimbursed under State cost control 
systems approved under 42 CFR part 403.
     Hospitals that are reimbursed in accordance with 
demonstration projects authorized under section 402(a) of Public Law 
90-248 (42 U.S.C. 1395b-1) or section 222(a) of Public Law 92-603 (42 
U.S.C. 1395b-1 (note)).
     Nonparticipating hospitals furnishing emergency services 
to Medicare beneficiaries.

D. Summary Description of the Proposed LTCH Prospective Payment System

    In accordance with the requirements of section 123 of Public Law 
106-113, as modified by section 307(b) of Public Law 106-554, we are 
proposing to implement a prospective payment system for LTCHs that 
would replace the current reasonable cost-based payment system under 
TEFRA. The proposed prospective payment system would utilize 
information from LTCH patient records to classify patients into 
distinct DRGs based on clinical characteristics and expected resource 
needs. Separate payments would be calculated for each DRG with 
additional adjustments applied, as described below.
1. Procedures
    We are proposing that, upon the discharge of the patient from a 
LTCH, the LTCH would assign appropriate diagnosis and procedure codes 
from the International Classification of Diseases, Ninth Revision, 
Clinical Modification (ICD-9-CM). The LTCH would then enter these codes 
on the current Medicare claims form and submit the completed claims 
form to its Medicare fiscal intermediary. At present, the standard 
Medicare claims form is the UB-92. Under a requirement of the Health 
Insurance Portability and Accountability Act of 1996 (HIPAA), Public 
Law 104-191, electronic health care claims, including Medicare claims, 
will be required to be in the new national standard claims format and 
medical data code sets in accordance with regulations at 45 CFR Parts 
160 and 162. The Medicare fiscal intermediary would enter the 
information into its claims processing systems and subject it to a 
series of edits called the Medicare Code Editor (MCE). This editor is 
designed to identify cases that would require further review before 
classification into a proposed LTC-DRG (described in sections II.D.2. 
and III. of this proposed rule).
    After screening through the MCE, each claim would be classified 
into the appropriate LTC-DRG by the Medicare LTCH GROUPER. The LTCH 
GROUPER is specialized computer software based on the GROUPER utilized 
by the acute care hospital inpatient prospective payment system, which 
was developed as a means of classifying each case into a DRG on the 
basis of diagnosis and procedure codes and other demographic 
information (age, sex, and discharge status). Following the LTC-DRG 
assignment, the Medicare fiscal intermediary would determine the 
prospective payment by using the Medicare PRICER program, which 
accounts for hospital-specific adjustments.
    As provided for under the acute care hospital inpatient prospective 
payment system, we are proposing to provide opportunity for the LTCH to 
review the LTC-DRG assignments made by the fiscal intermediary 
(proposed Sec. 412.513(c)). A hospital would have 60 days after the 
date of the notice of the initial assignment of a discharge to a LTC-
DRG to request a review of that assignment. The hospital would be 
allowed to submit additional information as part of its request. The 
fiscal intermediary would review that hospital's request and any 
additional information and would decide whether a change in the LTC-DRG 
assignment is appropriate. If the intermediary decides that a different 
LTC-DRG should be assigned, the case would be reviewed by the 
appropriate Peer Review Organization (PRO) as specified in 
Sec. 476.71(c)(2). Following this 60-day period, the hospital would not 
be able to submit additional information with respect to the LTC-DRG 
assignment or otherwise revise its claim.
    The operational aspects and instructions for completing and 
submitting Medicare claims under the LTCH prospective payment system 
will be addressed in a Medicare Program Memorandum once the final 
system requirements are developed and implemented.
2. Patient Classification Provisions
    We are proposing a patient classification system called long-term 
care diagnosis-related groups (LTC-DRGs). The LTC-DRGs would classify 
patient discharges 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. We 
began the development of the proposed LTC-DRGs by using the CMS DRGs 
under the acute care hospital inpatient prospective payment system with 
the most recent data available. We address the issue of the use of 
proposed low volume LTC-DRGs (less than 25 LTCH cases) in determining 
the LTC-DRG weights. Further details of the proposed LTC-DRG 
classification system are discussed in section III. of this proposed 
rule.
3. Payment Rates
    In accordance with section 123(a)(1) of Public Law 106-113, we are 
proposing to use a discharge as the payment unit for the proposed LTCH 
prospective payment system for Medicare patients. We would update these 
per discharge payment amounts annually. The proposed payment rates 
would encompass both inpatient operating and capital-related costs of 
furnishing covered inpatient LTCH services, including routine and 
ancillary costs, but not the costs of bad debts, approved educational 
activities, blood clotting factors, anesthesia services furnished by 
hospital-employed nonphysician anesthetists or obtained under 
arrangement, or the costs of photocopying and mailing medical records 
requested by a PRO, which are costs paid outside the prospective 
payment system. Consistent with current policy, beneficiaries may be 
charged only for deductibles, coinsurance, and noncovered services (for 
example, telephone and television). They may not be charged for the 
differences between the hospital's cost of providing covered care and 
the proposed Medicare LTCH prospective payment amount.
    We are proposing to determine the LTCH prospective payment rates 
using relative weights to account for the variation in resource use 
among LTC-DRGs. During FY 2003, the LTCH prospective payment system 
would be ``budget neutral'' in accordance with section 123(a)(1) of 
Public Law 106-113. That is, total payments for LTCHs during FY 2003 
would be projected to equal payments that would have been paid for 
operating and capital-related costs of LTCHs had this proposed new

[[Page 13432]]

payment system not been enacted. Budget neutrality is discussed in 
detail in section IV. of this preamble.
    Based on our analysis of the data, we are proposing to make 
additional payments to LTCHs for discharges meeting specified criteria 
as ``outliers.'' For purposes of this proposed rule, outliers are cases 
that have unusually high costs, exceeding the LTC-DRG payment plus the 
fixed loss amount as discussed in section IV.D. of this proposed rule. 
In conjunction with a high cost outlier policy, we are proposing 
payment policies regarding very short-stay discharges, short-stay 
outliers, and interrupted stays. A detailed description of these 
proposed policies appears in section IV.B. of this preamble.
4. Limitation on Charges to Beneficiaries
    In accordance with existing regulations and for consistency with 
other established hospital prospective payment systems policies, we are 
proposing to specify that a LTCH may not charge a beneficiary for any 
services for which payment is made by Medicare, even if the hospital's 
costs of furnishing services to that beneficiary are greater than the 
amount the hospital would be paid under the proposed LTCH prospective 
payment system (proposed Sec. 412.507). We also are proposing to 
specify under proposed Sec. 412.507 that a LTCH receiving a prospective 
payment for a covered hospital stay (that is, a stay that includes at 
least one covered day) may charge the Medicare beneficiary or other 
person only for the applicable deductible and coinsurance amounts under 
Secs. 409.82, 409.83, and 409.87 of the existing regulations, and for 
items or services specified under Sec. 489.20(a) of the existing 
regulations.
5. Medical Review Requirements
    In accordance with existing regulations at Secs. 412.44, 412.46, 
and 412.48 and for consistency with other established hospital 
prospective payment systems policies, we are proposing to specify that 
a LTCH must have an agreement with a PRO to have the PRO review, on an 
ongoing basis, the medical necessity, reasonableness, and 
appropriateness of hospital admissions and discharges and of inpatient 
hospital care for which outlier payments are sought; the validity of 
the hospital's diagnostic and procedural information; the completeness, 
adequacy, and quality of the services furnished in the hospital; and 
other medical or other practices with respect to beneficiaries or 
billing for services furnished to beneficiaries (proposed 
Sec. 412.508(a)). In addition, we are proposing to require that, 
because payment under the proposed prospective payment system is based 
in part on each patient's principal and secondary diagnoses and major 
procedures performed, as evidenced by the physician's entries in the 
patient's medical record, physicians must complete an acknowledgement 
statement to that effect. We are proposing to apply the existing 
hospital requirements for the contents and filing of the physician 
acknowledgment statement (proposed Sec. 412.508(b)).
    Also, consistent with existing established hospital prospective 
payment system policies, we are proposing that if CMS determines, on 
the basis of information supplied by the PRO, that a hospital has 
misrepresented admissions, discharges, or billing information or has 
taken an action that results in the unnecessary admission or multiple 
admission of individuals entitled to Part A benefits or other 
inappropriate medical or other practices, CMS may deny payment (in 
whole or in part) for inpatient hospital services related to the 
unnecessary or subsequent readmission of an individual or require the 
hospital to take actions necessary to prevent or correct the 
inappropriate practice. Notice and appeal of a denial of payment would 
be provided under procedures established to implement section 1155 of 
the Act. In addition, a determination of a pattern of inappropriate 
admissions and billing practices that has the effect of circumventing 
the prospective payment system would be referred to the Department's 
Office of Inspector General, for handling in accordance with 42 CFR 
1001.301.
6. Furnishing of Inpatient Hospital Services Directly or Under 
Arrangements
    In accordance with existing regulations at Sec. 414.15(m) and for 
consistency with other established hospital prospective payment systems 
policies, we are proposing that a LTCH must furnish covered services to 
Medicare beneficiaries either directly or under arrangements. Under 
proposed Sec. 412.509, we are proposing that the LTCH prospective 
payment would be payment in full for all inpatient hospital services, 
as defined in Sec. 409.10 of the existing regulations. We also are 
proposing that we would not pay any provider or supplier other than the 
LTCH for services furnished to a Medicare beneficiary who is an 
inpatient of the LTCH, except for those services that are not included 
as inpatient hospital services that are listed under existing 
Sec. 412.50 (that is, physicians' services that meet the requirements 
of Sec. 415.102(a) for payment on a fee schedule basis; physician 
assistant services as defined in section 1861(s)(2)(K)(i) of the Act; 
nurse practitioners and clinical nurse specialist services, as defined 
in section 1861 (s)(2)(K)(ii) of the Act; certified nurse midwife 
services, as defined in section 1861(gg) of the Act; qualified 
psychologist services, as defined in section 1861(ii) of the Act; and 
services of an anesthetist, as defined in Sec. 410.69).
7. Reporting and Recordkeeping Requirements
    We are proposing to impose the same recordkeeping and cost 
reporting requirements of Secs. 413.20 and 413.24 of the existing 
regulations on all LTCHs that would participate in the proposed LTCH 
prospective payment system (proposed Sec. 412.511).
8. Implementation of the Proposed Prospective Payment System
    We are proposing a 5-year transition period from cost-based 
reimbursement to prospective payment for LTCHs as discussed in section 
IV.G. of this proposed rule. During this period, two payment 
percentages would be used to determine a LTCH's total payment under the 
prospective payment system. The proposed blend percentages are as 
follows:

------------------------------------------------------------------------
                                              Prospective
                                                payment      Cost-based
Cost reporting periods beginning on or after    federal    reimbursement
                                                  rate       percentage
                                               percentage
------------------------------------------------------------------------
October 1, 2002.............................           20            80
October 1, 2003.............................           40            60
October 1, 2004.............................           60            40
October 1, 2005.............................           80            20
October 1, 2006.............................          100             0
------------------------------------------------------------------------

    Therefore, for a cost reporting period beginning on or after 
October 1, 2002, and before October 1, 2003, the total prospective 
payment would consist of 80 percent of the amount based on the current 
cost-based reimbursement system and 20 percent of the proposed Federal 
prospective payment rate. The percentage of payment based on the LTCH 
prospective payment Federal rate would increase by 20 percent and the 
cost-based reimbursement rate percentage would decrease by 20 percent 
for each of the remaining 4 fiscal years in the transition period. For 
cost reporting periods beginning on or after October 1, 2006, Medicare 
payment to LTCHs would be determined entirely under the proposed 
Federal prospective payment system methodology. Furthermore, we are 
proposing that

[[Page 13433]]

LTCHs would have the option to elect to be paid 100 percent of the 
Federal rate and not be subject to the 5-year transition. (See section 
IV.G. of this proposed rule.)

III. Long-Term Care Diagnosis-Related Group (LTC-DRG) 
Classifications

    Section 307(b) of Public Law 106-554 requires that the Secretary 
examine ``the feasibility and the impact of basing payment under such a 
system (the LTCH prospective payment system) on the use of existing (or 
refined) hospital diagnosis-related groups (DRGs) that have been 
modified to account for different resource use of long-term care 
hospital patients as well as the use of the most recently available 
hospital discharge data.'' The DRG-based patient classification system 
described in this section for the proposed LTCH prospective payment 
system would be based on the existing CMS DRG system used in the acute 
care hospital inpatient prospective payment system, modified where 
feasible to reflect the fact that LTCH patients represent a different 
patient mix from patients in short-term acute care hospitals, as 
required by section 307(b) of Public Law 106-554. Therefore, an 
understanding of pertinent facts about the CMS DRG system is essential 
to an understanding of the proposed LTC-DRGs that would be employed in 
the proposed LTCH prospective payment system.

A. Background

    The design and development of DRGs began in the late 1960s at Yale 
University. The initial motivation for developing the DRGs was the 
creation of an effective framework for monitoring the quality of care 
and the utilization of services in a hospital setting. The first large-
scale application of the DRGs as a basis for payments was in the late 
1970s in New Jersey. New Jersey's State Department of Health used DRGs 
as the basis of a prospective payment system in which hospitals were 
reimbursed a fixed DRG-specific amount for each patient treated. In 
1972, section 223 of Public Law 92-603 originally authorized the 
Secretary to set limits on costs reimbursed under Medicare for 
inpatient hospital services. In 1982, section 101(b)(3) of Public Law 
97-248 required the Secretary to develop a legislative proposal for 
Medicare payments to hospitals, SNFs, and, to the extent feasible, 
other providers on a prospective basis. (See the September 1, 1983 
Federal Register (48 FR 39754).) In 1983, Title VI of Public Law 98-21 
added section 1886(d) to the Act, which established a national DRG-
based hospital prospective payment system for Medicare inpatient acute 
care services. (See the January 3, 1984 Federal Register (49 FR 234).)

B. Historical Exclusion of LTCHs

    Since the hospital inpatient DRG system had been developed from the 
cost and utilization experience of general acute care hospitals, it did 
not account for the resource costs for the types of patients treated in 
hospitals such as rehabilitation, psychiatric, and children's 
hospitals, as well as LTCHs and rehabilitation and psychiatric units of 
acute care hospitals. Therefore, the statute (section 1886(d)(1)(B) of 
the Act) excluded these classes of hospitals and units from the 
prospective payment system for general acute care hospitals. The 
excluded hospitals and units continued to receive payments based on 
costs subject to a cap on each facility's per discharge costs during a 
base year, with a yearly update as set forth in Public Law 97-248. 
(Cancer hospitals were added to the list of excluded hospitals by 
section 6004(a) of Pub. L. 101-239.)

C. Patient Classifications by DRGs

1. Objectives of the Classification System
    The DRGs are a patient classification system that provides a means 
of relating the type of patients treated by a hospital (that is, its 
case-mix) to the costs incurred by the hospital. In other words, DRGs 
relate a hospital's case-mix to the resource demands and associated 
costs experienced by the hospital. Therefore, a hospital that has a 
more complex case-mix treats patients who require more hospital 
resources.
    While each patient is unique, groups of patients have demographic, 
diagnostic, and therapeutic attributes in common that determine their 
level of resource intensity. Given that the purpose of DRGs is to 
relate a hospital's case-mix to its resource intensity, it was 
necessary to develop a way of determining the types of patients treated 
and to relate each patient type to the resources they consumed. In the 
development of the existing CMS DRGs, in order to aggregate patients 
into meaningful patient classes, it was essential to develop clinically 
similar groups of patients with similar resource intensity. The 
characteristics of a practical and meaningful DRG system were distilled 
into the following objectives:
     The patient characteristics should be limited to 
information routinely collected on hospital abstract systems.
     There should be a manageable number of DRGs encompassing 
all patients.
     Each DRG should contain patients with a similar pattern of 
resource intensity.
     DRGs should be clinically coherent, that is, containing 
patients who are similar from a clinical perspective.
    Under a DRG-based system, patient information routinely collected 
include the following six data items: principal diagnosis, secondary or 
additional diagnoses, procedures, age, gender, and discharge status. 
All hospitals routinely collect this information; therefore, a 
classification system based on these elements could be applied 
uniformly across hospitals.
    Limiting the number of DRGs to a manageable total (that is, 
hundreds of patient classes instead of thousands) ensures that, for 
most of the DRGs, hospital discharge data would allow for meaningful 
comparative analysis to be performed. If a hospital has a sufficient 
number of cases in particular DRGs, this will allow for evaluations and 
comparisons of resource consumption by patients grouped to those DRGs 
as compared to resources consumed by patients grouped to other DRGs. A 
large number of DRGs with only a few patients in each group would not 
provide useful patterns of case-mix complexity and cost performance.
    The resource intensity of the patients in each DRG must be similar 
in order to establish a relationship between the case-mix of a hospital 
and the resources it consumes. (Similar resource intensity means that 
the resources used are relatively consistent across the patients in 
each DRG.) In implementing the original DRGs for the acute care 
hospital inpatient prospective payment system, we recognized that some 
variation in resource intensity would be present among the patients in 
each DRG, but the level of variation would be identifiable and 
predictable.
    The last characteristic for an effective patient classification 
system is that the patients in a DRG are similar from a clinical 
perspective; that is, the definition of a DRG has to be clinically 
coherent. This objective requires that the patient characteristics 
included in the definition of each DRG be related to a common organ 
system or etiology, and that a specific medical specialty should 
typically provide care to the patients in a particular DRG.
2. DRGs and Medicare Payments
    The LTC-DRGs that we are proposing as the patient classification 
component of the proposed LTCH prospective payment system would 
correspond to

[[Page 13434]]

the DRGs in the acute care hospital inpatient prospective payment 
system. As discussed in section IV.A.2. of this proposed rule, we are 
proposing to modify the CMS DRGs for the proposed LTCH prospective 
payment system by developing LTCH-specific relative weights to account 
for the fact that LTCHs generally treat patients with multiple medical 
problems. Therefore, we are presenting a brief review of the DRG 
patient classification system in the acute care hospital inpatient 
prospective payment system.
    Generally, under the prospective payment system for short-term 
acute care hospital inpatient services, Medicare payment is made at a 
predetermined, specific rate for each discharge; that payment varies by 
the DRG to which a beneficiary's stay is assigned. Cases are classified 
into DRGs for payment based on the following six data elements:
    (1) Principal diagnosis.
    (2) Up to eight additional diagnoses.
    (3) Up to six procedures performed.
    (4) Age.
    (5) Sex.
    (6) Discharge status of the patient.
    The diagnostic and procedure information from the patient's 
hospital record is reported by the hospital using ICD-9-CM codes on the 
uniform billing form currently in use.
    Medicare fiscal intermediaries enter the clinical and demographic 
information into their claims processing systems and subject it to a 
front-end automated screening process called the Medicare Code Editor 
(MCE). These screens are designed to identify cases that require 
further review before assignment into a DRG can be made. During this 
process, cases such as the following are selected for further 
development:
     Cases that are improperly coded (for example, diagnoses 
are shown that are inappropriate, given the sex of the patient. Code 
68.6, Radical abdominal hysterectomy, would be an inappropriate code 
for a male.).
     Cases including surgical procedures not covered under 
Medicare (for example, organ transplant in a nonapproved transplant 
center).
     Cases requiring more information. (For example, ICD-9-CM 
codes are required to be entered at their highest level of specificity. 
There are valid 3-digit, 4-digit, and 5-digit codes. That is, code 
136.3, Pneumocystosis, contains all appropriate digits, but if it is 
reported with either fewer or more than 4 digits, it will be rejected 
by the MCE as invalid.)
     Cases with principal diagnoses that do not usually justify 
admission to the hospital. (For example, 437.9, Unspecified 
cerebrovascular disease. While this code is valid according to the ICD-
9-CM coding scheme, a more precise code should be used for the 
principal diagnosis.)
    After screening through the MCE and any further development of the 
claims, cases are classified into the appropriate DRG by a software 
program called the GROUPER using the six data elements noted above.
    The GROUPER is used both to classify past cases in order to measure 
relative hospital resource consumption to establish the DRG weights and 
to classify current cases for purposes of determining payment. The 
records for all Medicare hospital inpatient discharges are maintained 
in the MedPAR file. The data in this file are used to evaluate possible 
DRG classification changes and to recalibrate the DRG weights during 
our annual update.
    The DRGs are organized into 25 Major Diagnostic Categories (MDCs), 
most of which are based on a particular organ system of the body; the 
remainder involve multiple organ systems (such as MDC 22, Burns). 
Accordingly, the principal diagnosis determines MDC assignment. Within 
most MDCs, cases are then divided into surgical DRGs and medical DRGs. 
While we do not anticipate large numbers of surgical cases in LTCHs, 
surgical DRGs are assigned based on a surgical hierarchy that orders 
individual procedures or groups of procedures by resource intensity. 
Generally, the GROUPER does not recognize certain other procedures; 
that is, those procedures not surgical (for example, EKG), or minor 
surgical procedures generally not performed in an operating room and, 
therefore, not considered as surgical by the GROUPER (for example, 
86.11, Biopsy of skin and subcutaneous tissue).
    The medical DRGs are generally differentiated on the basis of 
diagnosis. Both medical and surgical DRGs may be further differentiated 
based on age, discharge status, and presence or absence of 
complications or comorbidities (CC). It should be noted that CCs are 
defined by certain secondary diagnoses not related to or inherently a 
part of the disease process identified by the principal diagnosis (for 
example, the GROUPER would not recognize a code from the 800.0x series, 
Skull fracture, as a comorbidity or complication when combined with 
principal diagnosis 850.4, Concussion with prolonged loss of 
consciousness, without return to pre-existing conscious level). 
Additionally, we would note that the presence of additional diagnoses 
does not automatically generate a CC, as not all DRGs recognize a 
comorbid or complicating condition in their definition. (For example, 
DRG 466, Aftercare without History of Malignancy as Secondary 
Diagnosis, is based solely on the principal diagnosis, without 
consideration of additional diagnoses for DRG determination.)

D. Proposed LTC-DRG Classification System for LTCHs

    Unless otherwise noted, our analysis of a per discharge DRG-based 
patient classification system is based on LTCH data from the FY 2000 
MedPAR file which contains hospital bills received through May 31, 
2001, for discharges in FY 2000.
    The proposed patient classification system for the proposed LTCH 
prospective payment system would be based on the hospital inpatient 
prospective payment system currently used for Medicare beneficiaries, 
as described in section III.C. of this proposed rule. Within the LTCH 
data set, as identified by provider number, we would classify all cases 
to the CMS DRGs. We identified individual LTCH cases with a length of 
stay equal to or less than 7 days (see section IV.B.1. of this preamble 
for a discussion of the proposed very short-stay discharge policy under 
Sec. 412.527) and grouped them into two proposed very short-stay LTC-
DRGs; one for psychiatric cases and one for all other cases. Therefore, 
the proposed patient classification system would consist of 501 DRGs 
that would form the basis of the proposed FY 2003 LTCH prospective 
payment system GROUPER. The 501 proposed LTC-DRGs include two DRGs for 
very short-stay discharges (see section IV.B.1.) and two error DRGs. 
The other 497 proposed LTC-DRGs are the same DRGs used in the hospital 
inpatient prospective payment system GROUPER for FY 2002 (version 18). 
Cases submitted to the fiscal intermediaries would be processed using 
the data elements, MCE, and the GROUPER system already in place for the 
acute care hospital inpatient prospective payment system as described 
above.
    There is one significant difference in this proposed system that 
sets it apart from the concept of DRG definition based on clinical 
coherence. As noted above, cases with a length of stay equal to or less 
than 7 days (referred to hereafter as ``very short-stay'') were 
identified and grouped together in two separate LTC-DRGs.
    We are proposing to group cases that stayed 7 days or fewer that 
would otherwise be grouped into DRGs 424 through 432 in MDC 19 (Mental

[[Page 13435]]

Diseases and Disorders) or DRGs 433 through 437 in MDC 20 (Alcohol/Drug 
Use and Alcohol/Drug-Induced Organic Mental Disorders) into a new 
proposed psychiatric very short-stay group. We are proposing to 
classify all other cases that stayed 7 days or fewer, that is, very 
short-stay cases not classified into MDC 19 or 20, into the second new 
proposed very short-stay, nonpsychiatric group. Additionally, as in the 
acute care hospital inpatient prospective payment system, we are 
proposing to include two ``error DRGs'' in the LTC-DRG system where 
cases that cannot be assigned to valid DRGs will be grouped. These are 
DRG 469 (Principal diagnosis invalid as a discharge diagnosis) and DRG 
470 (Ungroupable). (See 66 FR 40062, August 1, 2001.) Therefore, the 
LTC-DRG system that we are proposing would include 4 nonclinical 
categories into which LTCH patients can be grouped.

E. ICD-9-CM Coding System

1. Historical Use of ICD-9-CM Codes
    The Ninth Revision of the International Classification of Diseases, 
Clinical Modification, was adapted for use in the United States in 
1979. This coding system is the basis for the CMS DRGs, upon which the 
proposed LTC-DRGs would be based. Additionally, the Standards for 
Electronic Transactions (65 FR 50312) designates the ICD-9-CM volumes 1 
and 2 (including the official ICD-9-CM Guidelines for Coding and 
Reporting) as the standard medical data code set for capturing 
diseases, injuries, impairments, other health-related problems and 
their manifestations and causes. The ICD-9-CM volume 3 procedures 
(including the Official ICD-9-CM Guidelines for Coding and Reporting) 
have been adopted as the HIPAA standard code set for prevention, 
diagnosis, treatment, and management of actions taken for diseases, 
injuries, and impairments on hospital inpatients. These guidelines are 
available through a number of sources, including the following Web 
site: http://www.cdc.gov/nchs/data/icdguide.pdf.

    (We note that should the Secretary, in the future, adopt a 
different medical data code set for capturing diseases, injuries, or 
impairments, hospitals participating in the Medicare program would be 
required to use those codes.)
2. Uniform Hospital Discharge Data Set (UHDDS) Definitions
    Because the assignment of a case to a particular proposed LTC-DRG 
would determine the amount that would be paid for the case, it is 
important that the coding is accurate. We are proposing that 
classifications and terminology used in the proposed LTCH prospective 
payment system would be consistent with the ICD-9-CM and the UHDDS, as 
recommended to the Secretary by the National Committee on Vital and 
Health Statistics (Uniform Hospital Discharge Data: Minimum Data Set, 
National Center for Health Statistics, April 1980) and as revised in 
1984 by the Health Information Policy Council (HIPC) of the U.S. 
Department of Health and Human Services.
    We wish to point out that the ICD-9-CM coding terminology and the 
definitions of principal and other diagnoses of the UHDDS are 
consistent with the requirements of the HIPPA Administrative 
Simplification Act of 1996 (see 45 CFR part 162). Furthermore, the 
UHDDS has been used as a standard for the development of policies and 
programs related to hospital discharge statistics by both governmental 
and nongovernmental sectors for over 30 years. Additionally, the 
following definitions (as described in the 1984 Revision of the Uniform 
Hospital Discharge Data Set, approved by the Secretary of Health and 
Human Services for use starting January 1986) are requirements of the 
ICD-9-CM coding system, and have been used as a standard for the 
development of the CMS DRGs:
     Diagnoses include all diagnoses that affect the current 
hospital stay.
     Principal diagnosis is defined as the condition 
established after study to be chiefly responsible for occasioning the 
admission of the patient to the hospital for care.
     Other diagnoses (also called secondary diagnoses or 
additional diagnoses) are defined as all conditions that coexist at the 
time of admission, that develop subsequently, or that affect the 
treatment received or the length of stay or both. Diagnoses that relate 
to an earlier episode of care that have no bearing on the current 
hospital stay are excluded.
    All procedures performed would be reported. This includes those 
that are surgical in nature, carry a procedural risk, carry an 
anesthetic risk, or require specialized training.
    As discussed in section II.D.l. of this proposed rule and 
consistent with the procedures for review of CMS DRGs under the acute 
care hospital inpatient prospective payment system, we are proposing to 
provide LTCHs with a 60-day window after the date of the notice of the 
initial LTC-DRG assignment to request review of that assignment. 
Additional information may be provided by the LTCH to the fiscal 
intermediary as part of that review.
3. Maintenance of ICD-9-CM System
    In September 1985, the ICD-9-CM Coordination and Maintenance 
Committee was formed. This is a Federal interdepartmental committee, 
co-chaired by the National Center for Health Statistics (NCHS) and CMS, 
charged with maintaining and updating the ICD-9-CM system. The 
committee is jointly responsible for approving coding changes, and 
developing errata, addenda, and other modifications to the ICD-9-CM to 
reflect newly developed procedures and technologies and newly 
identified diseases. The committee is also responsible for promoting 
the use of Federal and non-Federal educational programs and other 
communication techniques with a view toward standardizing coding 
applications and upgrading the quality of the classification system.
    The NCHS has lead responsibility for the ICD-9-CM diagnosis codes 
included in the Tabular List and Alphabetic Index for Diseases, while 
CMS has lead responsibility for the ICD-9-CM procedure codes included 
in the Tabular List and Alphabetic Index for Procedures.
    The committee encourages participation in the above process by 
health-related organizations. In this regard, the committee holds 
public meetings for discussion of educational issues and proposed 
coding changes. These meetings provide an opportunity for 
representatives of recognized organizations in the coding field, such 
as the American Health Information Management Association (AHIMA) 
(formerly American Medical Record Association (AMRA)), the American 
Hospital Association (AHA), and various physician specialty groups, as 
well as physicians, medical record administrators, health information 
management professionals, and other members of the public to contribute 
ideas on coding matters. After considering the opinions expressed at 
the public meetings and in writing, the committee formulates 
recommendations, which then must be approved by the agencies.
    The committee presents proposals for coding changes at two public 
meetings per year held at the CMS Central Office located in Baltimore, 
Maryland. The agenda and date of the meeting can be accessed on the CMS 
Web site at: 
http://www.cms.gov/medicare/icd9cm.htm.
    After consideration of public comments received at both meetings, 
as well as in writing, coding changes are published by CMS in the 
annual proposed and final rules in the Federal

[[Page 13436]]

Register on Medicare program changes to the short-term acute care 
hospital inpatient prospective payment systems. For example, new codes 
effective for discharges on or after October 1, 2001, can be found in 
Tables 6A through 6F of the August 1, 2001 hospital inpatient 
prospective payment system and rates for FY 2002 final rule (66 FR 
40063 through 40066).
    All changes to the ICD-9-CM coding system that affect DRG 
assignment are addressed annually in the acute care hospital inpatient 
prospective payment system proposed and final rules. Since the proposed 
DRG-based patient classification system for the proposed LTCH 
prospective payments system is based on the acute care hospital 
inpatient prospective payment system DRGs, these changes would also 
affect the proposed LTCH prospective payment system DRG patient 
classification system. As coding changes may have an impact on DRG 
assignment, LTCHs would be encouraged to obtain and correctly use the 
most current edition of the ICD-9-CM codes. The official version of the 
ICD-9-CM is available on CD-ROM from the U.S. Government Printing 
Office. The FY 2002 version can be ordered by contacting the 
Superintendent of Documents, U.S. Government Printing Office, Dept. 50, 
Washington, DC 20402-9329, telephone: (202) 512-1800. The stock number 
is 017-022-01510-2, and the price is $22.00. In addition, private 
vendors also publish the ICD-9-CM.
    Copies of the Coordination and Maintenance Committee minutes can be 
obtained from the CMS Web site at: http://www.cms.gov/medicare/icd9cm.htm. We encourage commenters to address suggestions on coding 
issues involving diagnosis codes to: Donna Pickett, Co-Chairperson, 
ICD-9-CM Coordination and Maintenance Committee, NCHS Room 1100, 6525 
Belcrest Road, Hyattsville, MD 20782. Comments may be sent by e-mail 
to: [email protected].
    Questions and comments concerning the procedure codes should be 
addressed to: Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination 
and Maintenance Committee, CMS, Center for Medicare Management, 
Purchasing Policy Group, Division of Acute Care, Mail Stop C4-08-06, 
7500 Security Boulevard, Baltimore, MD 21244-1850. Comments may be sent 
by e-mail to: [email protected].
    As noted above, the ICD-9-CM code changes that have been approved 
would become effective at the beginning of the Federal fiscal year, 
October 1. Of particular note to LTCHs would be the invalid diagnosis 
codes (Table 6C) and the invalid procedure codes (Table 6D). Use of 
invalid codes would cause claims to fail the MCE screens.
4. Coding Rules and Use of ICD-9-CM in LTCHs
    The emphasis on the need for proper coding cannot be overstated. 
Inappropriate coding of cases can adversely affect the uniformity of 
cases in each LTC-DRG and produce inappropriate weighting factors at 
recalibration.
    Because of our concern with correct coding practice, we have been 
working with the AHA editorial advisory board for its publication 
``Coding Clinic for ICD-9-CM'' since 1984. Coding Clinic was developed 
to improve the accuracy and uniformity of medical record coding and is 
recognized in the industry as the definitive source of coding 
instruction. In 1987, the AHA created the cooperating parties, who have 
final approval of the coding advice provided in Coding Clinic. The 
cooperating parties consist of the AHA, the AHIMA (formerly the AMRA), 
CMS (formerly HCFA), and NCHS. As we participate on the editorial 
advisory board and are one of the cooperating parties, we support the 
use of Coding Clinic for coding advice for LTCHs. Information about 
Coding Clinic can be obtained from the American Hospital Association, 
Central Office on ICD-9-CM, One North Franklin, Chicago, IL 60606, or 
at its Web site at http://www.ahacentraloffice.org.
    Even though we recognize that the Federal Register may not be the 
most efficient vehicle for coding instruction, we believe it is 
important to briefly review some of the basic instructions for coding. 
Our compelling need is based on the review of the data submitted by 
LTCHs. We note that the logic of the care patterns or place of 
treatment should not be considered in reviewing the following 
scenarios. Rather, we are attempting to present simplistic examples to 
illustrate correct coding practice.
     Principal diagnosis--As noted above, the specific 
definition for principal diagnosis established by the 1984 Revision of 
the Uniform Hospital Discharge Data Set is ``the condition established 
after study to be chiefly responsible for occasioning the admission of 
the patient to the hospital for care.'' When a patient is discharged 
from an acute care facility and admitted to a LTCH, the appropriate 
principal diagnosis at the LTCH is not necessarily the same diagnosis 
for which the patient received care at the acute care hospital. For 
example, a patient who suffers a stroke (code 436, Acute, but ill-
defined, cerebrovascular disease) is admitted to an acute hospital for 
diagnosis and treatment. The patient is then transferred to a LTCH for 
further treatment of left-sided hemiparesis and dysphasia. The 
appropriate principal diagnosis at the LTCH would be a code from 
section 438 (Late effects of cerebrovascular disease), such as 438.20 
(Late effects of cerebrovascular disease, Hemiplegia affecting 
unspecified side) or 438.12 (Late effects of cerebrovascular disease, 
Dysphasia).
    Coding guidelines state that the residual condition is sequenced 
first followed by the cause of the late effect. In the case of 
cerebrovascular disease, the combination code describes both the 
residual of the stroke (for example, speech or language deficits or 
paralysis), and the cause of the residual (the stroke)). Code 436 would 
only be used for the first (initial) episode of care for the stroke 
that was in the acute care setting.
     Other diagnoses--Secondary diagnoses that have no bearing 
on the LTCH stay would not be coded. For example, a patient who has 
recovered from pneumonia during a previous episode of care would not 
have a diagnosis code for pneumonia included in his or her list of 
discharge diagnoses. The pneumonia was not treated during this LTCH 
admission and, therefore, has no bearing on this case.
     Procedures--Codes reflecting procedures provided during a 
previous acute care hospital stay would not be included because the 
procedure was not performed during this LTCH admission. For example, a 
patient with several chronic illnesses is admitted to an acute care 
hospital with a diagnosis of appendicitis for which he or she receives 
an appendectomy. The patient subsequently is transferred to a LTCH for 
medical treatment following surgery, and as a result of the multiple 
secondary conditions, the patient needs a higher level of care than he 
or she could receive at a SNF or at home with an HHA. In this 
situation, appendicitis would not be coded because this condition was 
resolved with the removal of the appendix. The procedure code for 
appendectomy would not be used on the LTCH record, as the procedure was 
performed in the acute care setting, not during the LTCH admission.
    We would train fiscal intermediaries and providers on the new 
system prior to its implementation. We also would issue manuals 
containing procedures as well as coding instructions to LTCHs and 
fiscal intermediaries following the publication of the final rule.

[[Page 13437]]

IV. Proposed Payment System for LTCHs

    The LTCH prospective payment system proposed in this rule would use 
Federal prospective payment rates across 501 proposed distinct LTC-
DRGs. We are proposing to establish a standard Federal payment rate 
based on the best available LTCH cost data. LTC-DRG relative weights 
would be applied to the standard Federal rate to account for the 
relative differences in resource use across the LTC-DRGs. The proposed 
system would also include an adjustment for very short-stay discharges, 
short-stay outliers, and high-cost outlier cases, as described in 
section IV.B. of this preamble.
    The proposed standard Federal prospective payment rate, which is 
the basis for determining proposed Federal payment rates for each 
proposed LTC-DRG, would be determined based on average costs from a 
base period, and also would reflect the combined aggregate effects of 
the proposed payment weights and other proposed policies discussed in 
this section. In discussing the proposed methodology, we begin by 
describing the various adjustments and factors that would serve as the 
input used in establishing the proposed standard Federal prospective 
payment rate. Accordingly, we are proposing to develop prospective 
payments for LTCHs using the following major steps:
     Develop the LTC-DRG relative weights.
     Determine appropriate payment system adjustments.
     Calculate the budget neutral standard Federal prospective 
payment rate.
     Calculate the Federal LTC-DRG prospective payments.
    A detailed description of each step and a discussion of our 
proposed policies for special cases, phase-in implementation, and other 
policies follows.

A. Development of the Proposed LTC-DRG Relative Weights

1. Overview of Development of the Proposed LTC-DRG Relative Weights
    As previously stated, one of the primary goals for the 
implementation of the proposed LTCH prospective payment system would be 
to pay each LTCH an appropriate amount for the efficient delivery of 
care to Medicare patients. The system must be able to account 
adequately for each LTCH's case-mix in order to ensure both fair 
distribution of Medicare payments and access to adequate care for 
beneficiaries whose care is more costly. To accomplish these goals, we 
are proposing to adjust the standard Federal prospective payment system 
rate by the LTC-DRG relative weights in determining payment to LTCHs 
for each case.
    In this proposed payment system, relative weights for each LTC-DRG 
would be a primary element used to account for the variations in cost 
per discharge and resource utilization among the payment groups 
(proposed Sec. 412.515). To ensure that Medicare patients classified to 
each proposed LTC-DRG would have access to an appropriate level of 
services and to encourage efficiency, we are proposing to calculate a 
relative weight for each LTC-DRG that represents the resources needed 
by an average inpatient LTCH case in that LTC-DRG. For example, cases 
in a LTC-DRG with a relative weight of 2 would, on average, cost twice 
as much as cases in a LTC-DRG with a weight of 1.
    To calculate the proposed relative weights, we obtained charges 
from FY 2000 Medicare bill data in the June 2001 update of the MedPAR 
and we used version 18.0 of the CMS GROUPER (used under the hospital 
inpatient prospective payment system for FY 2001). In the final rule, 
we would recalculate the relative weights based on the most recent 
MedPAR data and version 19.0 of the CMS GROUPER (used under the 
hospital inpatient prospective payment system for FY 2002). By nature 
LTCHs often specialize in certain areas, such as ventilator-dependent 
patients and rehabilitation and wound care. Some case types (DRGs) may 
be treated, to a large extent, in hospitals that have, from a 
perspective of charges, relatively high (or low) charges. Such 
nonarbitrary distribution of cases with relatively high (or low) 
charges in specific LTC-DRGs has the potential to inappropriately 
distort the measure of average charges. To account for the fact that 
cases may not be randomly distributed across LTCHs, we are proposing to 
use a hospital-specific relative value method to calculate relative 
weights. We believe this method would remove this hospital-specific 
source of bias in measuring average charges. Specifically, we would 
reduce the impact of the variation in charges across providers on any 
particular LTC-DRG relative weight by converting each LTCH's charge for 
a case to a relative value based on that LTCH's average charge. As 
MedPAC noted in its June 2000 Report to Congress, the hospital-specific 
relative value method eliminates distortion in the weights due to 
systematic differences among hospitals in the level of charge markups 
or costs (p. 58). The case-mix index is the average case weight 
(adjusted to eliminate the effect of short-stay outliers that are 
described in section IV.B.2. of this preamble) for cases at each LTCH.
    Under the hospital-specific relative value method, we would 
standardize charges for each LTCH by converting its charges for each 
case to hospital-specific relative charge values and then adjusting 
those values for the LTCH's case-mix. The adjustment for case-mix is 
needed to rescale the hospital-specific relative charge values (which 
average 1.0 for each LTCH by definition). The average relative weight 
for a LTCH is its case-mix, so it is reasonable to scale each LTCH's 
average relative charge value by its case-mix. In this way, each LTCH's 
relative charge values will be adjusted by its case-mix to an average 
that reflects the complexity of the cases it treats relative to the 
complexity of the cases treated by all other LTCHs (the average case-
mix of all LTCHs).
    We would standardize charges for each case by first dividing the 
adjusted charge for the case (adjusted for short-stay outliers as 
described in section IV.B.2. of this proposed rule) by the average 
adjusted charge for all cases at the LTCH in which the case was 
treated. The average adjusted charge would reflect the average 
intensity of the health care services delivered by a particular LTCH 
and the average cost level of that LTCH. The resulting ratio would be 
multiplied by that LTCH's case-mix index to determine the standardized 
charge for the case.
    Multiplying by the LTCH's case-mix index accounts for the fact that 
the same relative charges are given greater weight in a hospital with 
higher average costs than they would at a LTCH with low average costs 
in order to adjust each LTCH's relative charge value to reflect its 
case-mix relative to the average case-mix for all LTCHs. Because we are 
proposing to standardize charges in this manner, we would count charges 
for a Medicare patient at a LTCH with high average charges as less 
resource intensive than they would be at a LTCH with low average 
charges. For example, a $10,000 charge for a case in a LTCH with an 
average adjusted charge of $17,500 reflects a higher level of relative 
resource use than a $10,000 charge for a case in a LTCH with the same 
case-mix, but an average adjusted charge of $35,000. We believe that 
the adjusted charge of an individual case would more accurately reflect 
actual resource use for an individual LTCH because the variation in 
charges due to systematic differences in the markup of charges among 
LTCHs is taken into account.

[[Page 13438]]

    As explained in section III. of this proposed rule, we would group 
cases with a 7-day or fewer length of stay (very short-stay discharges 
under proposed Sec. 412.527 described in section IV.B.1. of this 
preamble) into one of two proposed groups. We are proposing that 
discharges with a 7-day or fewer length of stay that would otherwise be 
grouped into DRGs 424 through 432 in MDC 19 (Mental Diseases and 
Disorders) or DRGs 433 through 437 in MDC 20 (Alcohol/Drug Use and 
Alcohol/Drug Induced Organic Mental Disorders) would be grouped into a 
proposed psychiatric very short-stay discharge group. All other very 
short-stay discharges would be grouped into the second very short-stay 
discharge, nonpsychiatric group. Each of these very short-stay 
discharge groups would have its own relative weight and an average 
length of stay computed using the same methodology used to determine 
the relative weights for the ``regular'' (length of stay greater than 7 
days) LTC-DRGs.
    In addition, in order to account for LTC-DRGs with low volume (that 
is, with fewer than 25 LTCH cases), we would group those low volume 
LTC-DRGs into one of five categories (quintiles) based on average 
charges, for the purposes of determining relative weights. Using LTCH 
cases from the June 2001 update of the FY 2000 MedPAR, we identified 
188 LTC-DRGs that contained between 1 and 24 cases. This list of LTC-
DRGs was then divided into one of the five low volume quintiles, each 
containing a minimum of 37 LTC-DRGs (188/5 = 37 with 3 LTC-DRGs as a 
remainder). We made an assignment to a specific quintile by sorting the 
188 low volume DRGs in ascending order by average charge. Since the 
number of LTC-DRGs with less than 25 LTCH cases is not evenly divisible 
by five, the average charge of the low volume LTC-DRG was used to 
determine which quintiles received an additional LTC-DRG. After sorting 
the 188 volume LTC-DRGs in ascending order, the first fifth of low 
volume (37) LTC-DRGs with the lowest average charge are grouped into 
Quintile 1. Since the average charge of the next LTC-DRG (38th in the 
sorted list) is closer to the previous LTC-DRG's average charge 
(assigned to Quintile 1) than to the average charge of the 39th LTC-DRG 
on the sorted list (to be assigned to Quintile 2), it is placed into 
Quintile 1. This process was repeated through the remaining low volume 
LTC-DRGs so that 3 quintiles contained 38 LTC-DRGs and 2 quintiles 
contained 37 LTC-DRGs. The highest average charge cases would be 
grouped into Quintile 5. In order to determine the proposed relative 
weights for the 188 LTC-DRGs with low volume, we used the five low 
volume quintiles described above. The composition of each of the five 
low volume quintiles shown below in Table 2 would be used in 
determining the proposed LTC-DRG relative weights. We would determine a 
proposed relative weight and average length of stay for each of the 
proposed five low volume quintiles using the formula applied to the 
regular LTC-DRGs (25 or more cases), as described in section IV.A.2 of 
this proposed rule. We would assign the same relative weight and 
average length of stay to each of the proposed LTC-DRGs that make up 
that proposed low volume quintile. We note that as this proposed system 
is dynamic, it is entirely possible that the number and specific type 
of LTC-DRGs with a low volume of LTCH cases would vary in the future. 
We would use the best available claims data in the MedPAR to identify 
low volume LTC-DRGs and to calculate the relative weights based on our 
proposed methodology.

         Table 2.--Composition of Proposed Low Volume Quintiles
------------------------------------------------------------------------
               LTC-DRG                            Description
------------------------------------------------------------------------
                           Proposed Quintile 1
------------------------------------------------------------------------
45..................................  NEUROLOGICAL EYE DISORDERS
47..................................  OTHER DISORDERS OF THE EYE AGE >17
                                       W/O CC
53..................................  SINUS & MASTOID PROCEDURES AGE >17
55..................................  MISCELLANEOUS EAR, NOSE, MOUTH &
                                       THROAT PROCEDURES
69..................................  OTITIS MEDIA & URI AGE >17 W/O CC
149.................................  MAJOR SMALL & LARGE BOWEL
                                       PROCEDURES W/O CC
158.................................  ANAL & STOMAL PROCEDURES W/O CC
160.................................  HERNIA PROCEDURES EXCEPT INGUINAL
                                       & FEMORAL AGE >17 W/O CC
161.................................  INGUINAL & FEMORAL HERNIA
                                       PROCEDURES AGE >17 W CC
171.................................  OTHER DIGESTIVE SYSTEM O.R.
                                       PROCEDURES W/O CC
178.................................  UNCOMPLICATED PEPTIC ULCER W/O CC
219.................................  LOWER EXTREM & HUMER PROC EXCEPT
                                       HIP, FOOT, FEMUR AGE >17 W/O CC
252.................................  FX, SPRN, STRN & DISL OF FOREARM,
                                       HAND, FOOT AGE 0-17
257.................................  TOTAL MASTECTOMY FOR MALIGNANCY W
                                       CC
258.................................  TOTAL MASTECTOMY FOR MALIGNANCY W/
                                       O CC
282.................................  TRAUMA TO THE SKIN, SUBCUT TISS &
                                       BREAST AGE 0-17
290.................................  THYROID PROCEDURES
295.................................  DIABETES AGE 0-35
299.................................  INBORN ERRORS OF METABOLISM
305.................................  KIDNEY, URETER & MAJOR BLADDER
                                       PROC FOR NON-NEOPL W/O CC
307.................................  PROSTATECTOMY W/O CC
326.................................  KIDNEY & URINARY TRACT SIGNS &
                                       SYMPTOMS AGE >17 W/O CC
336.................................  TRANSURETHRAL PROSTATECTOMY W CC
337.................................  TRANSURETHRAL PROSTATECTOMY W/O CC
344.................................  OTHER MALE REPRODUCTIVE SYSTEM
                                       O.R. PROCEDURES FOR MALIGNANCY
353.................................  PELVIC EVISCERATION, RADICAL
                                       HYSTERECTOMY & RADICAL VULVECTOMY
355.................................  UTERINE, ADNEXA PROC FOR NON-
                                       OVARIAN/ADNEXAL MALIG W/O CC
356.................................  FEMALE REPRODUCTIVE SYSTEM
                                       RECONSTRUCTIVE PROCEDURES
358.................................  UTERINE & ADNEXA PROC FOR NON-
                                       MALIGNANCY W CC
359.................................  UTERINE & ADNEXA PROC FOR NON-
                                       MALIGNANCY W/O CC
396.................................  RED BLOOD CELL DISORDERS AGE 0-17
419**...............................  FEVER OF UNKNOWN ORIGIN AGE >17 W
                                       CC
436.................................  ALC/DRUG DEPENDENCE W
                                       REHABILITATION THERAPY

[[Page 13439]]

 
437.................................  ALC/DRUG DEPENDENCE, COMBINED
                                       REHAB & DETOX THERAPY
447.................................  ALLERGIC REACTIONS AGE >17
450.................................  POISONING & TOXIC EFFECTS OF DRUGS
                                       AGE >17 W/O CC
467.................................  OTHER FACTORS INFLUENCING HEALTH
                                       STATUS
494.................................  LAPAROSCOPIC CHOLECYSTECTOMY W/O
                                       C.D.E. W/O CC
------------------------------------------------------------------------
                           Proposed Quintile 2
------------------------------------------------------------------------
21..................................  VIRAL MENINGITIS
46..................................  OTHER DISORDERS OF THE EYE AGE >17
                                       W CC
74..................................  OTHER EAR, NOSE, MOUTH & THROAT
                                       DIAGNOSES AGE 0-17
95..................................  PNEUMOTHORAX W/O CC
117.................................  CARDIAC PACEMAKER REVISION EXCEPT
                                       DEVICE REPLACEMENT
124**...............................  CIRCULATORY DISORDERS EXCEPT AMI,
                                       W CARD CATH & COMPLEX DIAG
128.................................  DEEP VEIN THROMBOPHLEBITIS
129.................................  CARDIAC ARREST, UNEXPLAINED
206.................................  DISORDERS OF LIVER EXCEPT MALIG,
                                       CIRR, ALC HEPA W/O CC
208.................................  DISORDERS OF THE BILIARY TRACT W/O
                                       CC
211.................................  HIP & FEMUR PROCEDURES EXCEPT
                                       MAJOR JOINT AGE >17 W/O CC
224.................................  SHOULDER, ELBOW OR FOREARM PROC,
                                       EXC MAJOR JOINT PROC, W/O CC
232.................................  ARTHROSCOPY
273.................................  MAJOR SKIN DISORDERS W/O CC
276.................................  NON-MALIGANT BREAST DISORDERS
284.................................  MINOR SKIN DISORDERS W/O CC
288.................................  O.R. PROCEDURES FOR OBESITY
301.................................  ENDOCRINE DISORDERS W/O CC
306.................................  PROSTATECTOMY W CC
309.................................  MINOR BLADDER PROCEDURES W/O CC
311.................................  TRANSURETHRAL PROCEDURES W/O CC
324.................................  URINARY STONES W/O CC
328.................................  URETHRAL STRICTURE AGE >17 W CC
338.................................  TESTES PROCEDURES, FOR MALIGNANCY
347.................................  MALIGNANCY, MALE REPRODUCTIVE
                                       SYSTEM, W/O CC
348.................................  BENIGN PROSTATIC HYPERTROPHY W CC
349*................................  BENIGN PROSTATIC HYPERTROPHY W/O
                                       CC
360.................................  VAGINA, CERVIX & VULVA PROCEDURES
369.................................  MENSTRUAL & OTHER FEMALE
                                       REPRODUCTIVE SYSTEM DISORDERS
399.................................  RETICULOENDOTHELIAL & IMMUNITY
                                       DISORDERS W/O CC
408.................................  MYELOPROLIF DISORD OR POORLY DIFF
                                       NEOPL W OTHER O.R. PROC
419*................................  FEVER OF UNKNOWN ORIGIN AGE >17 W
                                       CC
420.................................  FEVER OF UNKNOWN ORIGIN AGE >17 W/
                                       O CC
449.................................  POISONING & TOXIC EFFECTS OF DRUGS
                                       AGE >17 W CC
454.................................  OTHER INJURY, POISONING & TOXIC
                                       EFFECT DIAG W CC
455.................................  OTHER INJURY, POISONING & TOXIC
                                       EFFECT DIAG W/O CC
465.................................  AFTERCARE W HISTORY OF MALIGNANCY
                                       AS SECONDARY DIAGNOSIS
507.................................  FULL THICKNESS BURN W SKIN GRFT OR
                                       INHAL INJ W/O CC OR SIG TRAUMA
509.................................  FULL THICKNESS BURN W/O SKIN GRFT
                                       OR INH INJ W/O CC OR SIG TRAUMA
511.................................  NON-EXTENSIVE BURNS W/O CC OR
                                       SIGNIFICANT TRAUMA
------------------------------------------------------------------------
                           Proposed Quintile 3
------------------------------------------------------------------------
4...................................  SPINAL PROCEDURES
8...................................  PERIPH & CRANIAL NERVE & OTHER
                                       NERV SYST PROC W/O CC
22..................................  HYPERTENSIVE ENCEPHALOPATHY
32..................................  CONCUSSION AGE >17 W/O CC
66..................................  EPISTAXIS
81..................................  RESPIRATORY INFECTIONS &
                                       INFLAMMATIONS AGE 0-17
84..................................  MAJOR CHEST TRAUMA W/O CC
157.................................  ANAL & STOMAL PROCEDURES W CC
177.................................  UNCOMPLICATED PEPTIC ULCER W CC
197.................................  CHOLECYSTECTOMY EXCEPT BY
                                       LAPAROSCOPE W/O C.D.E. W CC
216.................................  BIOPSIES OF MUSCULOSKELETAL SYSTEM
                                       & CONNECTIVE TISSUE
225.................................  FOOT PROCEDURES
228.................................  MAJOR THUMB OR JOINT PROC, OR OTH
                                       HAND OR WRIST PROC W CC
229.................................  HAND OR WRIST PROC, EXCEPT MAJOR
                                       JOINT PROC, W/O CC
255.................................  FX, SPRN, STRN & DISL OF UPARM,
                                       LOWLEG EX FOOT AGE 0-17
261.................................  BREAST PROC FOR NON-MALIGNANCY
                                       EXCEPT BIOPSY & LOCAL EXCISION
279.................................  CELLULITIS AGE 0-17
298.................................  NUTRITIONAL & MISC METABOLIC
                                       DISORDERS AGE 0-17
304.................................  KIDNEY, URETER & MAJOR BLADDER
                                       PROC FOR NON-NEOPL W CC
308.................................  MINOR BLADDER PROCEDURES W CC
319.................................  KIDNEY & URINARY TRACT NEOPLASMS W/
                                       O CC

[[Page 13440]]

 
322.................................  KIDNEY & URINARY TRACT INFECTIONS
                                       AGE 0-17
323.................................  URINARY STONES W CC, &/OR ESW
                                       LITHOTRIPSY
341.................................  PENIS PROCEDURES
349**...............................  BENIGN PROSTATIC HYPERTROPHY W/O
                                       CC
368.................................  INFECTIONS, FEMALE REPRODUCTIVE
                                       SYSTEM
385.................................  NEONATES, DIED OR TRANSFERRED TO
                                       ANOTHER ACUTE CARE FACILITY
390.................................  NEONATE W OTHER SIGNIFICANT
                                       PROBLEMS
401.................................  LYMPHOMA & NON-ACUTE LEUKEMIA W
                                       OTHER O.R. PROC W CC
409.................................  RADIOTHERAPY
421.................................  VIRAL ILLNESS AGE >17
427.................................  NEUROSES EXCEPT DEPRESSIVE
432.................................  OTHER MENTAL DISORDER DIAGNOSES
493.................................  LAPAROSCOPIC CHOLECYSTECTOMY W/O
                                       C.D.E. W CC
497.................................  SPINAL FUSION W CC
508.................................  FULL THICKNESS BURN W/O SKIN GRFT
                                       OR INHAL INJ W CC OR SIG TRAUMA
510.................................  NON-EXTENSIVE BURNS W CC OR
                                       SIGNIFICANT TRAUMA
------------------------------------------------------------------------
                           Proposed Quintile 4
------------------------------------------------------------------------
1...................................  CRANIOTOMY AGE >17 EXCEPT FOR
                                       TRAUMA
5...................................  EXTRACRANIAL VASCULAR PROCEDURES
91..................................  SIMPLE PNEUMONIA & PLEURISY AGE 0-
                                       17
104.................................  CARDIAC VALVE & OTHER MAJOR
                                       CARDIOTHORACIC PROC W CARDIAC
                                       CATH
105.................................  CARDIAC VALVE & OTHER MAJOR
                                       CARDIOTHORACIC PROC W/O CARDIAC
                                       CATH
110.................................  MAJOR CARDIOVASCULAR PROCEDURES W
                                       CC
115.................................  PRM CARD PACEM IMPL W AMI, HRT
                                       FAIL OR SHK, OR AICD LEAD OR
                                       GNRTR P
118.................................  CARDIAC PACEMAKER DEVICE
                                       REPLACEMENT
124*................................  CIRCULATORY DISORDERS EXCEPT AMI,
                                       W CARD CATH & COMPLEX DIAG
125*................................  CIRCULATORY DISORDERS EXCEPT AMI,
                                       W CARD CATH W/O COMPLEX DIAG
148.................................  MAJOR SMALL & LARGE BOWEL
                                       PROCEDURES W CC
150.................................  PERITONEAL ADHESIOLYSIS W CC
159.................................  HERNIA PROCEDURES EXCEPT INGUINAL
                                       & FEMORAL AGE >17 W CC
184.................................  ESOPHAGITIS, GASTROENT & MISC
                                       DIGEST DISORDERS AGE 0-17
185.................................  DENTAL & ORAL DIS EXCEPT
                                       EXTRACTIONS & RESTORATIONS, AGE
                                       >17
191.................................  PANCREAS, LIVER & SHUNT PROCEDURES
                                       W CC
210.................................  HIP & FEMUR PROCEDURES EXCEPT
                                       MAJOR JOINT AGE >17 W CC
218.................................  LOWER EXTREM & HUMER PROC EXCEPT
                                       HIP, FOOT, FEMUR AGE >17 W CC
223.................................  MAJOR SHOULDER/ELBOW PROC, OR
                                       OTHER UPPER EXTREMITY PROC W CC
231.................................  LOCAL EXCISION & REMOVAL OF INT
                                       FIX DEVICES EXCEPT HIP & FEMUR
285.................................  AMPUTAT OF LOWER LIMB FOR
                                       ENDOCRINE, NUTRIT, & METABOL
                                       DISORDERS
292.................................  OTHER ENDOCRINE, NUTRIT & METAB
                                       O.R. PROC W CC
293*................................  OTHER ENDOCRINE, NUTRIT & METAB
                                       O.R. PROC W/O CC
310.................................  TRANSURETHRAL PROCEDURES W CC
312.................................  URETHRAL PROCEDURES, AGE >17 W CC
350.................................  INFLAMMATION OF THE MALE
                                       REPRODUCTIVE SYSTEM
352.................................  OTHER MALE REPRODUCTIVE SYSTEM
                                       DIAGNOSES
363.................................  D&C, CONIZATION & RADIO-IMPLANT,
                                       FOR MALIGNANCY
400.................................  LYMPHOMA & LEUKEMIA W MAJOR O.R.
                                       PROCEDURE
410.................................  CHEMOTHERAPY W/O ACUTE LEUKEMIA AS
                                       SECONDARY DIAGNOSIS
424.................................  O.R. PROCEDURE W PRINCIPAL
                                       DIAGNOSES OF MENTAL ILLNESS
439.................................  SKIN GRAFTS FOR INJURIES
443.................................  OTHER O.R. PROCEDURES FOR INJURIES
                                       W/O CC
482.................................  TRACHEOSTOMY FOR FACE, MOUTH &
                                       NECK DIAGNOSES
492.................................  CHEMOTHERAPY W ACUTE LEUKEMIA AS
                                       SECONDARY DIAGNOSIS
500.................................  BACK & NECK PROCEDURES EXCEPT
                                       SPINAL FUSION W/O CC
503.................................  KNEE PROCEDURES W/O PDX OF
                                       INFECTION
504.................................  EXTENSIVE 3RD DEGREE BURNS W SKIN
                                       GRAFT
505.................................  EXTENSIVE 3RD DEGREE BURNS W/O
                                       SKIN GRAFT
506.................................  FULL THICKNESS BURN W SKIN GRAFT
                                       OR INHAL INJ W CC OR SIG TRAUMA
------------------------------------------------------------------------
                           Proposed Quintile 5
------------------------------------------------------------------------
2...................................  CRANIOTOMY FOR TRAUMA AGE >17
31..................................  CONCUSSION AGE >17 W CC
44..................................  ACUTE MAJOR EYE INFECTIONS
63..................................  OTHER EAR, NOSE, MOUTH & THROAT
                                       O.R. PROCEDURES
75..................................  MAJOR CHEST PROCEDURES
77..................................  OTHER RESP SYSTEM O.R. PROCEDURES
                                       W/O CC
112.................................  PERCUTANEOUS CARDIOVASCULAR
                                       PROCEDURES
116.................................  OTH PERM CARD PACEMAK IMPL OR PTCA
                                       W CORONARY ARTERY STENT IMPLNT
125**...............................  CIRCULATORY DISORDERS EXCEPT AMI,
                                       W CARD CATH W/O COMPLEX DIAG
152.................................  MINOR SMALL & LARGE BOWEL
                                       PROCEDURES W CC

[[Page 13441]]

 
154.................................  STOMACH, ESOPHAGEAL & DUODENAL
                                       PROCEDURES AGE >17 W CC
155.................................  STOMACH, ESOPHAGEAL & DUODENAL
                                       PROCEDURES AGE >17 W/O CC
193.................................  BILIARY TRACT PROC EXCEPT ONLY
                                       CHOLECYST W OR W/O C.D.E. W CC
199.................................  HEPATOBILIARY DIAGNOSTIC PROCEDURE
                                       FOR MALIGNANCY
201.................................  OTHER HEPATOBILIARY OR PANCREAS
                                       O.R. PROCEDURES
209.................................  MAJOR JOINT & LIMB REATTACHMENT
                                       PROCEDURES OF LOWER EXTREMITY
226.................................  SOFT TISSUE PROCEDURES W CC
227.................................  SOFT TISSUE PROCEDURES W/O CC
230.................................  LOCAL EXCISION & REMOVAL OF INT
                                       FIX DEVICES OF HIP & FEMUR
233.................................  OTHER MUSCULOSKELET SYS & CONN
                                       TISS O.R. PROC W CC
265.................................  SKIN GRAFT &/OR DEBRID EXCEPT FOR
                                       SKIN ULCER OR CELLULITIS W CC
266.................................  SKIN GRAFT &/OR DEBRID EXCEPT FOR
                                       SKIN ULCER OR CELLULITIS W/O CC
267.................................  PERIANAL & PILONIDAL PROCEDURES
268.................................  SKIN, SUBCUTANEOUS TISSUE & BREAST
                                       PLASTIC PROCEDURES
293**...............................  OTHER ENDOCRINE, NUTRIT & METAB
                                       O.R. PROC W/O CC
303.................................  KIDNEY, URETER & MAJOR BLADDER
                                       PROCEDURES FOR NEOPLASM
333.................................  OTHER KIDNEY & URINARY TRACT
                                       DIAGNOSES AGE 0-17
339.................................  TESTES PROCEDURES, NON-MALIGNANCY
                                       AGE >17
345.................................  OTHER MALE REPRODUCTIVE SYSTEM
                                       O.R. PROC EXCEPT FOR MALIGNANCY
365.................................  OTHER FEMALE REPRODUCTIVE SYSTEM
                                       O.R. PROCEDURES
394.................................  OTHER O.R. PROCEDURES OF THE BLOOD
                                       AND BLOOD FORMING ORGANS
406.................................  MYELOPROLIF DISORD OR POORLY DIFF
                                       NEOPL W MAJ O.R. PROC W CC
417.................................  SEPTICEMIA AGE 0-17
479***..............................  OTHER VASCULAR PROCEDURES W/O CC
486.................................  OTHER O.R. PROCEDURES FOR MULTIPLE
                                       SIGNIFICANT TRAUMA
488.................................  HIV W EXTENSIVE O.R. PROCEDURE
499.................................  BACK & NECK PROCEDURES EXCEPT
                                       SPINAL FUSION W CC
501.................................  KNEE PROCEDURES W PDX OF INFECTION
                                       W CC
------------------------------------------------------------------------
*One of the original 188 low volume LTC-DRGs initially assigned to a
  different low volume quintile; reassigned to this low volume quintile
  in addressing nonmonotonicity (see step 4 below).
**One of the original 188 low volume LTC-DRGs initially assigned to this
  low volume quintile; reassigned to a different low volume quintile in
  addressing nonmonotonicity (see step 4 below).
***One of the original 188 low volume LTC-DRGs initially assigned to
  this low volume quintile; removed from the low volume quintiles in
  addressing nonmonotonicity (see step 4 below).

    After grouping the cases in the appropriate proposed LTC-DRG, we 
calculate the proposed relative weights in this proposed rule by first 
adjusting the number of cases in each LTC-DRG for the effect of short-
stay outlier cases under proposed Sec. 412.529. The short-stay adjusted 
discharges and corresponding charges would be used to calculate 
proposed ``relative adjusted weights'' in each LTC-DRG using the 
hospital-specific relative value method described above. We describe 
each of these steps in greater detail below.
2. Steps for Calculating the Proposed Relative Weights
    Step 1--Adjust charges for the effects of short-stay outliers. The 
first step in the calculation of the relative weights is to adjust each 
LTCH's charges per discharge for short-stay outlier cases (that is, a 
patient with a length of stay in excess of 7 days, but below two-thirds 
the average length of stay of the LTC-DRG as described in section 
IV.B.2. of this proposed rule).
    We would make this adjustment by counting a short-stay outlier as a 
fraction of a discharge based on the ratio of the length of stay of the 
case to the average length of stay for the LTC-DRG for nonshort-stay 
outlier cases. This would have the effect of proportionately reducing 
the impact of the lower charges for the short-stay outlier cases in 
calculating the average charge for the LTC-DRG. This process produces 
the same result as if the actual charges per discharge of a short-stay 
outlier case would be adjusted to what they would have been had the 
patient's length of stay been equal to the average length of stay of 
the LTC-DRG.
    Counting short-stay outlier cases as full discharges with no 
adjustment in determining the relative weights would lower the relative 
weight for affected LTC-DRGs because the relatively lower charges of 
the short-stay outlier cases bring down the average charge for all 
cases within a LTC-DRG. This would result in an ``underpayment'' to 
nonshort-stay outlier cases and an ``overpayment'' to short-stay 
outlier cases. Therefore, adjusting for short-stay outlier cases in 
this manner would result in more appropriate payments for all LTCH 
cases. The result of step 1 is that each LTCH's average cost per 
discharge is adjusted for short-stay outliers (as described above) 
before removing statistical outliers (step 2) and calculating the LTC-
DRG relative weights on an iterative basis (step 3) using the hospital-
specific relative value method.
    Step 2--Remove statistical outliers. We are proposing to define 
statistical outliers as cases that are outside of 3.0 standard 
deviations from the mean of the log distribution of both charges per 
case and the charges per day for each proposed LTC-DRG. After adjusting 
each LTCH's discharges for short-stay outlier cases (see step 1), these 
statistical outliers would be removed prior to calculating the proposed 
relative weights. We believe that they may represent aberrations in the 
data that would distort the measure of average resource use. Including 
those cases in the calculation of the relative weights could result in 
an inaccurate weight that does not truly reflect relative resource use 
among the proposed LTC-DRGs. Thus, removing statistical outliers would 
result in more appropriate payments. These adjusted charges per 
discharge for each proposed LTC-DRG are then used to calculate the 
average adjusted charge of all cases at the LTCH in determining the 
proposed relative weight for the proposed LTC-DRGs.

[[Page 13442]]

    Step 3--Calculate the LTC-DRG relative weights on an iterative 
basis. The process of calculating the LTC-DRG relative weights would be 
iterative. First, for each case, we would calculate a hospital-specific 
relative charge value by dividing the short-stay outlier adjusted 
charge per discharge (see step 1) of the case (after removing the 
statistical outlier (see step 2)) by the average charge per discharge 
for the LTCH in which the case occurred. The resulting ratio is then 
multiplied by the LTCH's case-mix index to produce an adjusted 
hospital-specific relative charge value for the case. An initial case-
mix index value of 1.0 is used for each LTCH.
    For each LTC-DRG, the proposed LTC-DRG relative weight would then 
be calculated by dividing the average of the adjusted hospital-specific 
relative charge values (from above) for the LTC-DRG by the overall 
average hospital-specific relative charge value across all cases for 
all LTCHs. Using these recalculated LTC-DRG relative weights, each 
LTCH's average relative weight for all of its cases (case-mix) would be 
calculated by dividing the sum of all the LTCH's LTC-DRG relative 
weights by its total number of cases. The LTCHs' hospital-specific 
relative charge values above would be multiplied by these hospital 
specific case-mix indexes. These hospital-specific case-mix adjusted 
relative charge values are then used to calculate a new set of LTC-DRG 
relative weights across all LTCHs. This iterative process would be 
continued until there is convergence between the weights produced at 
adjacent steps, for example, when the maximum difference is less than 
0.0001.
    Step 4--Adjust the LTC-DRG relative weights to account for 
nonmonotonically increasing relative weights. As explained in section 
III.C. of this proposed rule, the proposed LTC-DRGs would contain 
``pairs'' that are differentiated based on the presence or absence of 
CCs. Proposed LTC-DRGs with CCs are defined by certain secondary 
diagnoses not related to or inherently a part of the disease process 
identified by the principal diagnosis, but the presence of additional 
diagnoses does not automatically generate a CC. The value of 
monotonically increasing relative weights rises as the resource use 
increases (for example, from uncomplicated to more complicated). The 
presence of CCs in a LTC-DRG means that cases classified into a 
``without CC'' LTC-DRG are expected to have lower resource use (and 
lower costs). In other words, resource use (and costs) are expected to 
decrease across ``with CC''/``without CC'' pairs of LTC-DRGs. For a 
case to be assigned to a proposed LTC-DRG with CCs, more coded 
information is called for (that is, at least one relevant secondary 
diagnosis), than for a case to be assigned to a proposed LTC-DRG 
without CCs (which is based on only one primary diagnosis and no 
relevant secondary diagnoses). Currently, the database includes both 
accurately coded cases without complications and cases that have 
complications (and cost more) but were not coded completely. Both types 
of cases would be grouped to a proposed LTC-DRG ``without CCs'' since 
only one primary diagnosis was coded. Since LTCHs are currently paid 
under cost-based reimbursement, which is not based on patient 
diagnoses, LTCHs' coding for these cases may not have been as detailed 
as possible.
    Thus, in developing the proposed relative weights for the LTCH 
prospective payment system, we found on occasion that the data 
suggested that cases classified to the proposed LTC-DRG ``with CCs'' of 
a ``with CC''/``without CC'' pair had a lower average charge than the 
corresponding proposed LTC-DRG ``without CCs.'' We believe this anomaly 
may be due to coding that may not have fully reflected all 
comorbidities that were present. Specifically, LTCHs may have failed to 
code relevant secondary diagnoses, which resulted in cases that 
actually had complications and comorbidities being classified into a 
``without CC'' LTC-DRG. It would not make sense to pay a lower amount 
for the ``with CC'' LTC-DRG, so we are proposing to group both the 
cases ``with CCs'' and ``without CCs'' together for the purpose of 
calculating the proposed relative weights for the proposed LTC-DRGs 
until we have adequate data to calculate appropriate separate weights 
for these anomalous DRG pairs. We expect that, as was the case when we 
first implemented the acute care hospital inpatient prospective payment 
system, this problem will be self-correcting, as LTCHs submit more 
completely coded data in the future.
    Using the LTCH cases in the June 2001 update of the FY 2000 MedPAR, 
we identified three types of ``with CC'' and ``without CC'' pairs of 
proposed LTC-DRGs that are nonmonotonic, that is, where the ``without 
CC'' LTC-DRG would have a higher average charge than the ``with CC'' 
LTC-DRG.
    The first category of nonmonotonically increasing relative weights 
for LTC-DRG pairs ``with and without CCs'' contains 5 pairs of LTC-DRGs 
in which both the LTC-DRG ``with CCs'' and the LTC-DRG ``without CCs'' 
had 25 or more LTCH cases and, therefore, did not fall into one of the 
5 quintiles. For each pair of LTC-DRGs, we would combine the cases and 
compute a new relative weight based on the case-weighted average of the 
combined cases of the LTC-DRGs. The case-weighted average charge would 
be determined by dividing the total charges for all cases by the total 
number of cases for the combined LTC-DRG. This new relative weight 
would be assigned to both of the LTC-DRGs in the pair. For the proposed 
FY 2003 implementation of the LTCH prospective payment system, the 
following proposed LTC-DRGs would be in this category: LTC-DRGs 10 and 
11, 89 and 90, 138 and 139, 141 and 142, and 274 and 275.
    The second category of nonmonotonically increasing relative weights 
for proposed LTC-DRG pairs with and without CCs consists of 4 pairs of 
LTC-DRGs that have fewer than 25 cases and are both grouped to 
different quintiles in which the ``without CC'' LTC-DRG would be in a 
higher-weighted quintile than the ``with CC'' LTC-DRG. For each pair, 
we would combine the cases and determine the case-weighted average 
charge for all cases. The case-weighted average charge would be 
determined by dividing the total charges for all cases by the total 
number of cases for the combined LTC-DRG. Based on the case-weighted 
average charge, we determined which quintile the ``combined LTC-DRG'' 
would be grouped. Both LTC-DRGs in the pair would then be grouped into 
the same quintile, and thus have the same proposed relative weight. For 
the proposed FY 2003 implementation of the LTCH prospective payment 
system, the following proposed LTC-DRGs would be in this category: 124 
and 125 (low volume quintile 4), 292 and 293 (low volume quintile 4), 
348 and 349 (low volume quintile 2), and 419 and 420 (low volume 
quintile 2).
    The third category of nonmonotonically increasing relative weights 
for proposed LTC-DRG pairs with and without CCs has one pair of LTC-
DRGs where one of the LTC-DRGs has fewer than 25 LTCH cases and is 
grouped to a quintile and the other LTC-DRG has 25 or more LTCH cases 
and would have its own LTC-DRG weight, and the LTC-DRG ``without CCs'' 
would have the higher weight. We would remove the low volume pair LTC-
DRG from the quintile and combine it with the other pair LTC-DRG for 
the computation of a new relative weight for each of these LTC-DRGs. 
This proposed new relative weight would be assigned to both LTC-DRGs, 
so they would each have the same relative weight. For the proposed FY

[[Page 13443]]

2003 implementation of the LTCH prospective payment system, proposed 
LTC-DRGs 478 and 479 would be in this category.
    In addition, for the FY 2003 implementation of the LTCH prospective 
payment system, we are proposing to determine the relative weight for 
each LTC-DRG using charges reported on the June 2001 update of the FY 
2000 MedPAR. Of the proposed 501 LTC-DRGs in the proposed CMS LTCH 
prospective payment system, we identified 111 LTC-DRGs for which there 
were no LTCH cases in the database. That is, based on the FY 2000 
MedPAR, no patients who would have been classified to those DRGs were 
treated in LTCHs during FY 2000 and, therefore, no charge data were 
reported for those DRGs. Thus, in the process of determining the 
relative weights of proposed LTC-DRGs, we were unable to determine 
weights for these 111 LTC-DRGs using the method described above. 
However, since patients with a number of the diagnoses under these LTC-
DRGs may be treated at LTCHs beginning in FY 2003 when the LTCH 
prospective payment system would be implemented, we are proposing to 
assign relative weights to each of the 111 ``no volume'' LTC-DRGs based 
on clinical similarity and relative costliness to one of the remaining 
390 (501 - 111 = 390) LTC-DRGs for which we are able to determine 
relative weights, based on FY 2000 charge data.
    As there are currently no LTCH cases in these ``no volume'' LTC-
DRGs, we are proposing to establish relative weights for the 111 LTC-
DRGs with no LTCH cases in the FY 2000 MedPAR by grouping them to the 
appropriate low volume quintile. This methodology would be consistent 
with our methodology used in determining relative weights to account 
for low volume LTC-DRGs described above.
    Our proposed methodology for determining relative weights for the 
``no volume'' LTC-DRGs is as follows: First, we would cross-walk the no 
volume LTC-DRGs by matching them to other similar LTC-DRGs for which 
there were LTCH cases in the FY 2000 MedPAR based on clinical 
similarity and intensity of use of resources as determined by care 
provided during the period of time surrounding surgery, surgical 
approach (if applicable), length of time of surgical procedure, post-
operative care, and length of stay. We would assign the weight for the 
applicable quintile to the no volume LTC-DRG if the LTC-DRG to which it 
would be cross-walked was grouped to one of the low volume quintiles. 
If the LTC-DRG to which the no volume LTC-DRG would be cross-walked was 
not one of the LTC-DRGs grouped to one of the low volume quintiles, we 
would compare the weight of the LTC-DRG to which the no volume LTC-DRG 
would be cross-walked to the weights of each of the five quintiles and 
assign the no volume LTC-DRG the relative weight of the quintile with 
the closest weight. A list of the proposed no volume LTC-DRGs and the 
LTC-DRG to which it would be crosswalked in order to determine the 
appropriate low volume quintile for the assignment of a relative weight 
is shown below in Table 3.

  Table 3.--Proposed No Volume LTC-DRG Crosswalk and Proposed Quintile
                             Assignment \1\
------------------------------------------------------------------------
                                            Cross-
      LTC-DRG            Description     walked LTC-      Low volume
                                             DRG       quintile assigned
------------------------------------------------------------------------
3..................  CRANIOTOMY AGE 0-             1  Quintile 4.
                      17.
6..................  CARPAL TUNNEL                 8  Quintile 3.
                      RELEASE.
26.................  SEIZURE & HEADACHE           25  Quintile 2.
                      AGE 0-17.
30.................  TRAUMATIC STUPOR &           29  Quintile 3.
                      COMA, COMA 1 HR
                      AGE 0-17.
33.................  CONCUSSION AGE 0-            32  Quintile 3.
                      17.
36.................  RETINAL PROCEDURES           47  Quintile 1.
37.................  ORBITAL PROCEDURES           47  Quintile 1.
38.................  PRIMARY IRIS                 47  Quintile 1.
                      PROCEDURES.
39.................  LENS PROCEDURES              47  Quintile 1.
                      WITH OR WITHOUT
                      VITRECTOMY.
40.................  EXTRAOCULAR                  47  Quintile 1.
                      PROCEDURES EXCEPT
                      ORBIT AGE >17.
41.................  EXTRAOCULAR                  47  Quintile 1.
                      PROCEDURES EXCEPT
                      ORBIT AGE 0-17.
42.................  INTRAOCULAR                  47  Quintile 1.
                      PROCEDURES EXCEPT
                      RETINA, IRIS &
                      LENS.
43.................  HYPHEMA...........           47  Quintile 1.
48.................  OTHER DISORDERS OF           47  Quintile 1.
                      THE EYE AGE 0-17.
49.................  MAJOR HEAD & NECK            73  Quintile 3.
                      PROCEDURES.
50.................  SIALOADENECTOMY...           73  Quintile 3.
51.................  SALIVARY GLAND               73  Quintile 3.
                      PROCEDURES EXCEPT
                      SIALOADENECTOMY.
52.................  CLEFT LIP & PALATE           53  Quintile 1.
                      REPAIR.
56.................  RHINOPLASTY.......           55  Quintile 1.
57.................  T&A PROC, EXCEPT             55  Quintile 1.
                      TONSILLECTOMY &/
                      OR ADENOIDECTOMY
                      ONLY, AGE >17.
58.................  T&A PROC, EXCEPT             55  Quintile 1.
                      TONSILLECTOMY &/
                      OR ADENOIDECTOMY
                      ONLY, AGE 0-17.
59.................  TONSILLECTOMY &/OR           55  Quintile 1.
                      ADENOIDECTOMY
                      ONLY, AGE >17.
60.................  TONSILLECTOMY &/OR           55  Quintile 1.
                      ADENOIDECTOMY
                      ONLY, AGE 0-17.
61.................  MYRINGOTOMY W TUBE           55  Quintile 1.
                      INSERTION AGE >17.
62.................  MYRINGOTOMY W TUBE           55  Quintile 1.
                      INSERTION AGE 0-
                      17.
67.................  EPIGLOTTITIS......           73  Quintile 3.
70.................  OTITIS MEDIA & URI           69  Quintile 1.
                      AGE 0-17.
71.................  LARYNGOTRACHEITIS.           69  Quintile 1.
72.................  NASAL TRAUMA &               69  Quintile 1.
                      DEFORMITY.
98.................  BRONCHITIS &                 97  Quintile 1.
                      ASTHMA AGE 0-17.
106................  CORONARY BYPASS W           104  Quintile 4.
                      PTCA.
107................  CORONARY BYPASS W           104  Quintile 4.
                      CARDIAC CATH.
108................  OTHER                       104  Quintile 4.
                      CARDIOTHORACIC
                      PROCEDURES.
109................  CORONARY BYPASS W/          104  Quintile 4.
                      O PTCA OR CARDIAC
                      CATH.
119................  VEIN LIGATION &             131  Quintile 2.
                      STRIPPING.
137................  CARDIAC CONGENITAL          136  Quintile 2.
                      & VALVULAR
                      DISORDERS AGE 0-
                      17.
146................  RECTAL RESECTION W          148  Quintile 4.
                      CC.
147................  RECTAL RESECTION W/         148  Quintile 4.
                      O CC.

[[Page 13444]]

 
156................  STOMACH,                    155  Quintile 5.
                      ESOPHAGEAL &
                      DUODENAL
                      PROCEDURES AGE 0-
                      17.
163................  HERNIA PROCEDURES           160  Quintile 1.
                      AGE 0-17.
164................  APPENDECTOMY W              157  Quintile 3.
                      COMPLICATED
                      PRINCIPAL DIAG W
                      CC.
165................  APPENDECTOMY W              158  Quintile 1.
                      COMPLICATED
                      PRINCIPAL DIAG W/
                      O CC.
166................  APPENDECTOMY W/O            158  Quintile 1.
                      COMPLICATED
                      PRINCIPAL DIAG W
                      CC.
167................  APPENDECTOMY W/O            158  Quintile 1.
                      COMPLICATED
                      PRINCIPAL DIAG W/
                      O CC.
168................  MOUTH PROCEDURES W          185  Quintile 4.
                      CC.
169................  MOUTH PROCEDURES W/         185  Quintile 4.
                      O CC.
187................  DENTAL EXTRACTIONS          185  Quintile 4.
                      & RESTORATIONS.
190................  OTHER DIGESTIVE             189  Quintile 3.
                      SYSTEM DIAGNOSES
                      AGE 0-17.
195................  CHOLECYSTECTOMY W           191  Quintile 4.
                      C.D.E. W CC.
196................  CHOLECYSTECTOMY W           197  Quintile 3.
                      C.D.E. W/O CC.
200................  HEPATOBILIARY               199  Quintile 5.
                      DIAGNOSTIC
                      PROCEDURE FOR NON-
                      MALIGNANCY.
212................  HIP & FEMUR                 211  Quintile 2.
                      PROCEDURES EXCEPT
                      MAJOR JOINT AGE 0-
                      17.
220................  LOWER EXTREM &              219  Quintile 1.
                      HUMER PROC EXCEPT
                      HIP, FOOT, FEMUR
                      AGE 0-17.
259................  SUBTOTAL                    257  Quintile 1.
                      MASTECTOMY FOR
                      MALIGNANCY W CC.
260................  SUBTOTAL                    258  Quintile 1.
                      MASTECTOMY FOR
                      MALIGNANCY W/O CC.
262................  BREAST BIOPSY &             258  Quintile 1.
                      LOCAL EXCISION
                      FOR NON-
                      MALIGNANCY.
286................  ADRENAL &                   292  Quintile 4.
                      PITUITARY
                      PROCEDURES.
289................  PARATHYROID                 290  Quintile 1.
                      PROCEDURES.
291................  THYROGLOSSAL                290  Quintile 1.
                      PROCEDURES.
317................  ADMIT FOR RENAL             316  Quintile 3.
                      DIALYSIS.
327................  KIDNEY & URINARY            326  Quintile 1.
                      TRACT SIGNS &
                      SYMPTOMS AGE 0-17.
334................  MAJOR MALE PELVIC           354  Quintile 5.
                      PROCEDURES W CC.
335................  MAJOR MALE PELVIC           354  Quintile 5.
                      PROCEDURES W/O CC.
340................  TESTES PROCEDURES,          347  Quintile 2.
                      NON-MALIGNANCY
                      AGE 0-17.
342................  CIRCUMCISION AGE            344  Quintile 1.
                      >17.
343................  CIRCUMCISION AGE 0-         344  Quintile 1.
                      17.
351................  STERILIZATION,              344  Quintile 1.
                      MALE.
357................  UTERINE & ADNEXA            346  Quintile 3.
                      PROC FOR OVARIAN
                      OR ADNEXAL
                      MALIGNANCY.
361................  LAPAROSCOPY &               367  Quintile 3.
                      INCISIONAL TUBAL
                      INTERRUPTION.
362................  ENDOSCOPIC TUBAL            367  Quintile 3.
                      INTERRUPTION.
364................  D&C, CONIZATION             360  Quintile 2.
                      EXCEPT FOR
                      MALIGNANCY.
370................  CESAREAN SECTION W          365  Quintile 5.
                      CC.
371................  CESAREAN SECTION W/         365  Quintile 5.
                      O CC.
372................  VAGINAL DELIVERY W          359  Quintile 1.
                      COMPLICATING
                      DIAGNOSES.
373................  VAGINAL DELIVERY W/         359  Quintile 1.
                      O COMPLICATING
                      DIAGNOSES.
374................  VAGINAL DELIVERY W          359  Quintile 1.
                      STERILIZATION &/
                      OR D&C.
375................  VAGINAL DELIVERY W          359  Quintile 1.
                      O.R. PROC EXCEPT
                      STERIL &/OR D&C.
376................  POSTPARTUM & POST           359  Quintile 1.
                      ABORTION
                      DIAGNOSES W/O
                      O.R. PROCEDURE.
377................  POSTPARTUM & POST           359  Quintile 1.
                      ABORTION
                      DIAGNOSES W O.R.
                      PROCEDURE.
378................  ECTOPIC PREGNANCY.          359  Quintile 1.
379................  THREATENED                  359  Quintile 1.
                      ABORTION.
380................  ABORTION W/O D&C..          359  Quintile 1.
381................  ABORTION W D&C,             359  Quintile 1.
                      ASPIRATION
                      CURETTAGE OR
                      HYSTEROTOMY.
382................  FALSE LABOR.......          359  Quintile 1.
383................  OTHER ANTEPARTUM            359  Quintile 1.
                      DIAGNOSES W
                      MEDICAL
                      COMPLICATIONS.
384................  OTHER ANTEPARTUM            359  Quintile 1.
                      DIAGNOSES W/O
                      MEDICAL
                      COMPLICATIONS.
386................  EXTREME IMMATURITY          385  Quintile 3.
                      OR RESPIRATORY
                      DISTRESS
                      SYNDROME, NEONATE.
387................  PREMATURITY W               385  Quintile 3.
                      MAJOR PROBLEMS.
388................  PREMATURITY W/O             385  Quintile 3.
                      MAJOR PROBLEMS.
389................  FULL TERM NEONATE           385  Quintile 3.
                      W MAJOR PROBLEMS.
391................  NORMAL NEWBORN....          390  Quintile 3.
392................  SPLENECTOMY AGE             197  Quintile 3.
                      >17.
393................  SPLENECTOMY AGE 0-          197  Quintile 3.
                      17.
405................  ACUTE LEUKEMIA W/O          416  Quintile 3.
                      MAJOR O.R.
                      PROCEDURE AGE 0-
                      17.
411................  HISTORY OF                  171  Quintile 1.
                      MALIGNANCY W/O
                      ENDOSCOPY.
412................  HISTORY OF                  171  Quintile 1.
                      MALIGNANCY W
                      ENDOSCOPY.
422................  VIRAL ILLNESS &             421  Quintile 3.
                      FEVER OF UNKNOWN
                      ORIGIN AGE 0-17.
441................  HAND PROCEDURES             229  Quintile 3.
                      FOR INJURIES.
446................  TRAUMATIC INJURY            445  Quintile 3.
                      AGE 0-17.
448................  ALLERGIC REACTIONS          447  Quintile 1.
                      AGE 0-17.
451................  POISONING & TOXIC           450  Quintile 1.
                      EFFECTS OF DRUGS
                      AGE 0-17.
471................  BILATERAL OR                209  Quintile 5.
                      MULTIPLE MAJOR
                      JOINT PROCS OF
                      LOWER EXTREMITY.
481................  BONE MARROW                 394  Quintile 5.
                      TRANSPLANT.
484................  CRANIOTOMY FOR                2  Quintile 5.
                      MULTIPLE
                      SIGNIFICANT
                      TRAUMA.
485................  LIMB REATTACHMENT,          486  Quintile 5.
                      HIP AND FEMUR
                      PROC FOR MULTIPLE
                      SIGNIFICANT TR.
491................  MAJOR JOINT & LIMB          486  Quintile 5.
                      REATTACHMENT
                      PROCEDURES OF
                      UPPER EXTREMITY.
496................  COMBINED ANTERIOR/          497  Quintile 3.
                      POSTERIOR SPINAL
                      FUSION.
------------------------------------------------------------------------
\1\ This table does not reflect the four transplant LTC-DRGs, for which
  we propose to assign a relative weight of 0.0000.


[[Page 13445]]

    To illustrate the methodology we are proposing for determining 
relative weights for the 111 LTC-DRGs with no LTCH cases, we are 
providing the following examples, which refer to the no volume LTC-DRGs 
crosswalk information provided above in Table 3:

    Example 1: There were no cases in the FY 2000 MedPAR file for 
LTC-DRG 3 (Craniotomy Age 0-17). Since the period of time 
surrounding the surgery and the post-operative care are similar in 
resource use and the length and complexity of the surgical 
procedures and the length of stay are similar, we determined that 
LTC-DRG 1 (Craniotomy Age > 17 Except for Trauma), which is assigned 
to low volume quintile 4 for the purpose of determining the proposed 
relative weights, displayed similar clinical and resource use. 
Therefore, we are proposing to assign the same relative weight of 
LTC-DRG 1 of 1.3735 (quintile 4) (see Table 4 below) to LTC-DRG 3.
    Example 2: There were no LTCH cases in the FY 2000 MedPAR file 
for LTC-DRG 98 (Bronchitis & Asthma Age 0-17). Since the severity of 
illness in patients with bronchitis and asthma are similar in 
patients regardless of age, we determined that LTC-DRG 97 
(Bronchitis & Asthma Age>17 W/O CC) displayed similar clinical and 
resource use characteristics and have a similar length of stay to 
LTC-DRG 98. There were over 25 cases in LTC-DRG 97. Therefore, it is 
not assigned to a low volume quintile for the purpose of determining 
the relative weights. However, under our proposed methodology, LTC-
DRG 98, with no LTCH cases, needs to be grouped to a low volume 
quintile. We identified that the quintile with the closest weight to 
LTC-DRG 97 (0.5239; see Table 4 below) was quintile 3 (0.5268; see 
Table 4 below). Therefore, we are proposing to assign LTC-DRG 98 a 
relative weight of 0.5268.

    Furthermore, we are proposing to establish LTC-DRG relative weights 
of 0.0000 for heart, kidney, liver, and lung transplants (proposed LTC-
DRGs 103, 302, 480, and 495, respectively) because Medicare will only 
cover these procedures if they are performed at a hospital that has 
been certified for the specific procedures by Medicare. We are only 
proposing to include these four transplant LTC-DRGs in the GROUPER 
program for administrative purposes. Since we are proposing to use the 
same GROUPER program for LTCHs as is used under the acute care hospital 
inpatient prospective payment system, removing these DRGs would be 
administratively burdensome. For further discussion of the Medicare 
coverage of heart, kidney, liver, and lung transplants, see the 
following Federal Register documents: February 2, 1995 final rule (60 
FR 6537); April 12, 1991 final rule (56 FR 15006); and April 6, 1987 
final rule (52 FR 10935). Based on our research, we found that most 
LTCHs only perform minor surgeries, such as minor small and large bowel 
procedures, if any surgeries at all. Given the extensive criteria that 
must be met to become certified as a transplant center for Medicare, we 
do not believe that any LTCHs would become certified as a transplant 
center. In fact, in the nearly 20 years since the implementation of the 
hospital inpatient prospective payment system, there has never been a 
LTCH that even expressed an interest in becoming a transplant center. 
We specifically solicit comments on whether there is a need for CMS to 
address determining relative weights (other than zero) for transplant 
LTC-DRGs. We are proposing to assign proposed LTC-DRGs 103, 302, 480, 
and 495 a relative weight of zero, as shown in Table 4 below.
    Again, we note that as this proposed system is dynamic, it is 
entirely possible that the number of LTC-DRGs with a zero volume of 
LTCH cases based on the system we are proposing would vary in the 
future. We would use the best available claims data in the MedPAR to 
identify zero volume LTC-DRGs and to determine the relative weights in 
the final rule.
    Table 4 lists the proposed LTC-DRGs and their proposed respective 
relative weights and arithmetic mean length of stay.

 Table 4.--Proposed LTC-DRG Relative Weights and Arithmetic Mean Length
                                 of Stay
------------------------------------------------------------------------
                                     Proposed    Arithmetic
     LTC-DRG        Description      relative   mean length    FY 2000
                                      weight      of stay     LTCH cases
------------------------------------------------------------------------
1...............  CRANIOTOMY AGE        1.3735         36.5           13
                   >17 EXCEPT FOR
                   TRAUMA \4\.
2...............  CRANIOTOMY FOR        2.1422         48.3            1
                   TRAUMA AGE >17
                   \5\.
3...............  CRANIOTOMY AGE        1.3735         36.5            0
                   0-17 \4\*.
4...............  SPINAL                0.9568         30.0           10
                   PROCEDURES \3\.
5...............  EXTRACRANIAL          1.3735         36.5            2
                   VASCULAR
                   PROCEDURES \4\.
6...............  CARPAL TUNNEL         0.9568         30.0            0
                   RELEASE \3\*.
7...............  PERIPH &              1.8690         46.3           60
                   CRANIAL NERVE
                   & OTHER NERV
                   SYST PROC W CC.
8...............  PERIPH &              0.9568         30.0            2
                   CRANIAL NERVE
                   & OTHER NERV
                   SYST PROC W/O
                   CC \3\.
9...............  SPINAL                1.5321         41.1          180
                   DISORDERS &
                   INJURIES.
10..............  NERVOUS SYSTEM        1.0668         31.8          162
                   NEOPLASMS W CC.
11..............  NERVOUS SYSTEM        1.0668         31.8           69
                   NEOPLASMS W/O
                   CC.
12..............  DEGENERATIVE          0.9289         32.6        1,955
                   NERVOUS SYSTEM
                   DISORDERS.
13..............  MULTIPLE              0.7511         25.4          126
                   SCLEROSIS &
                   CEREBELLAR
                   ATAXIA.
14..............  SPECIFIC              1.0143         30.9        2,678
                   CEREBROVASCULA
                   R DISORDERS
                   EXCEPT TIA.
15..............  TRANSIENT             0.8800         27.6          182
                   ISCHEMIC
                   ATTACK &
                   PRECEREBRAL
                   OCCLUSIONS.
16..............  NONSPECIFIC           1.1461         29.8          114
                   CEREBROVASCULA
                   R DISORDERS W
                   CC.
17..............  NONSPECIFIC           0.8295         25.9           28
                   CEREBROVASCULA
                   R DISORDERS W/
                   O CC.
18..............  CRANIAL &             0.9063         28.9          138
                   PERIPHERAL
                   NERVE
                   DISORDERS W CC.
19..............  CRANIAL &             0.8609         30.5           72
                   PERIPHERAL
                   NERVE
                   DISORDERS W/O
                   CC.
20..............  NERVOUS SYSTEM        1.5115         36.4          189
                   INFECTION
                   EXCEPT VIRAL
                   MENINGITIS.
21..............  VIRAL                 0.7107         24.5            2
                   MENINGITIS \2\.
22..............  HYPERTENSIVE          0.9568         30.0            8
                   ENCEPHALOPATHY
                    \3\.
23..............  NONTRAUMATIC          1.2866         36.1           71
                   STUPOR & COMA.
24..............  SEIZURE &             0.9144         29.2          141
                   HEADACHE AGE
                   >17 W CC.
25..............  SEIZURE &             0.6727         25.1           74
                   HEADACHE AGE
                   >17 W/O CC.
26..............  SEIZURE &             0.7107         24.5            0
                   HEADACHE AGE 0-
                   17 \2\.
27..............  TRAUMATIC             1.5525         38.6           54
                   STUPOR & COMA,
                   COMA >1 HR.
28..............  TRAUMATIC             1.0679         29.7          134
                   STUPOR & COMA,
                   COMA 1 HR AGE
                   >17 W CC.
29..............  TRAUMATIC             0.8326         27.2           95
                   STUPOR & COMA,
                   COMA 1 HR AGE
                   >17 W/O CC.
30..............  TRAUMATIC             0.9568         30.0            0
                   STUPOR & COMA,
                   COMA 1 HR AGE
                   0-17 \3\.
31..............  CONCUSSION AGE        2.1422         48.3            2
                   >17 W CC \5\.
32..............  CONCUSSION AGE        0.9568         30.0            2
                   >17 W/O CC \3\.

[[Page 13446]]

 
33..............  CONCUSSION AGE        0.9568         30.0            0
                   0-17 \3\.
34..............  OTHER DISORDERS       1.1042         30.8          518
                   OF NERVOUS
                   SYSTEM W CC.
35..............  OTHER DISORDERS       0.9505         30.3          190
                   OF NERVOUS
                   SYSTEM W/O CC.
36..............  RETINAL               0.5239         18.2            0
                   PROCEDURES \1\
                   *.
37..............  ORBITAL               0.5239         18.2            0
                   PROCEDURES \1\
                   *.
38..............  PRIMARY IRIS          0.5239         18.2            0
                   PROCEDURES \1\
                   *.
39..............  LENS PROCEDURES       0.5239         18.2            0
                   WITH OR
                   WITHOUT
                   VITRECTOMY \1\
                   *.
40..............  EXTRAOCULAR           0.5239         18.2            0
                   PROCEDURES
                   EXCEPT ORBIT
                   AGE >17 \1\*.
41..............  EXTRAOCULAR           0.5239         18.2            0
                   PROCEDURES
                   EXCEPT ORBIT
                   AGE 0-17 \1\*.
42..............  INTRAOCULAR           0.5239         18.2            0
                   PROCEDURES
                   EXCEPT RETINA,
                   IRIS & LENS
                   \1\*.
43..............  HYPHEMA \1\*...       0.5239         18.2            0
44..............  ACUTE MAJOR EYE       2.1422         48.3            3
                   INFECTIONS \5\.
45..............  NEUROLOGICAL          0.5239         18.2            6
                   EYE DISORDERS
                   \1\.
46..............  OTHER DISORDERS       0.7107         24.5            9
                   OF THE EYE AGE
                   >17 W CC \2\.
47..............  OTHER DISORDERS       0.5239         18.2            3
                   OF THE EYE AGE
                   >17 W/O CC \1\.
48..............  OTHER DISORDERS       0.5239         18.2            0
                   OF THE EYE AGE
                   0-17 \1\*.
49..............  MAJOR HEAD &          0.9568         30.0            0
                   NECK
                   PROCEDURES \3\
                   *.
50..............  SIALOADENECTOMY       0.9568         30.0            0
                    \3\*.
51..............  SALIVARY GLAND        0.9568         30.0            0
                   PROCEDURES
                   EXCEPT
                   SIALOADENECTOM
                   Y \3\*.
52..............  CLEFT LIP &           0.5239         18.2            0
                   PALATE REPAIR
                   \1\*.
53..............  SINUS & MASTOID       0.5239         18.2            1
                   PROCEDURES AGE
                   >17 \1\.
54..............  SINUS & MASTOID       0.5239         18.2            0
                   PROCEDURES AGE
                   0-17 \1\.
55..............  MISCELLANEOUS         0.5239         18.2            1
                   EAR, NOSE,
                   MOUTH & THROAT
                   PROCEDURES \1\.
56..............  RHINOPLASTY \1\       0.5239         18.2            0
                   *.
57..............  T&A PROC,             0.5239         18.2            0
                   EXCEPT
                   TONSILLECTOMY
                   &/OR
                   ADENOIDECTOMY
                   ONLY, AGE >17
                   \1\*.
58..............  T&A PROC,             0.5239         18.2            0
                   EXCEPT
                   TONSILLECTOMY
                   &/OR
                   ADENOIDECTOMY
                   ONLY, AGE 0-17
                   \1\*.
59..............  TONSILLECTOMY &/      0.5239         18.2            0
                   OR
                   ADENOIDECTOMY
                   ONLY, AGE >17
                   \1\*.
60..............  TONSILLECTOMY &/      0.5239         18.2            0
                   OR
                   ADENOIDECTOMY
                   ONLY, AGE 0-17
                   \1\*.
61..............  MYRINGOTOMY W         0.5239         18.2            0
                   TUBE INSERTION
                   AGE >17 \1\*.
62..............  MYRINGOTOMY W         0.5239         18.2            0
                   TUBE INSERTION
                   AGE 0-17 \1\*.
63..............  OTHER EAR,            2.1422         48.3            5
                   NOSE, MOUTH &
                   THROAT O.R.
                   PROCEDURES \5\.
64..............  EAR, NOSE,            1.4108         35.1          144
                   MOUTH & THROAT
                   MALIGNANCY.
65..............  DYSEQUILIBRIUM.       0.7130         27.0           25
66..............  EPISTAXIS \3\..       0.9568         30.0            3
67..............  EPIGLOTTITIS \3       0.9568         30.0            0
                   \.
68..............  OTITIS MEDIA &        0.8959         23.7           25
                   URI AGE >17 W
                   CC.
69..............  OTITIS MEDIA &        0.5239         18.2            7
                   URI AGE >17 W/
                   O CC \1\.
70..............  OTITIS MEDIA &        0.5239         18.2            0
                   URI AGE 0-17
                   \1\*.
71..............  LARYNGOTRACHEIT       0.5239         18.2            0
                   IS \1\*.
72..............  NASAL TRAUMA &        0.5239         18.2            0
                   DEFORMITY \1\*.
73..............  OTHER EAR,            1.0917         33.3           31
                   NOSE, MOUTH &
                   THROAT
                   DIAGNOSES AGE
                   >17.
74..............  OTHER EAR,            0.7107         24.5            1
                   NOSE, MOUTH &
                   THROAT
                   DIAGNOSES AGE
                   0-17 \2\.
75..............  MAJOR CHEST           2.1422         48.3           19
                   PROCEDURES \5\.
76..............  OTHER RESP            2.7153         50.7          327
                   SYSTEM O.R.
                   PROCEDURES W
                   CC.
77..............  OTHER RESP            2.1422         48.3           13
                   SYSTEM O.R.
                   PROCEDURES W/O
                   CC \5\.
78..............  PULMONARY             0.8294         24.8          122
                   EMBOLISM.
79..............  RESPIRATORY           1.2588         31.5        2,047
                   INFECTIONS &
                   INFLAMMATIONS
                   AGE >17 W CC.
80..............  RESPIRATORY           1.0733         30.0          204
                   INFECTIONS &
                   INFLAMMATIONS
                   AGE >17 W/O CC.
81..............  RESPIRATORY           0.9568         30.0           10
                   INFECTIONS &
                   INFLAMMATIONS
                   AGE 0-17 \3\.
82..............  RESPIRATORY           0.9690         26.9          755
                   NEOPLASMS.
83..............  MAJOR CHEST           0.9797         24.8           33
                   TRAUMA W CC.
84..............  MAJOR CHEST           0.9568         30.0           10
                   TRAUMA W/O CC
                   \3\.
85..............  PLEURAL               1.2406         30.1          132
                   EFFUSION W CC.
86..............  PLEURAL               0.7529         25.0           30
                   EFFUSION W/O
                   CC.
87..............  PULMONARY EDEMA       2.4202         44.1        5,741
                   & RESPIRATORY
                   FAILURE.
88..............  CHRONIC               0.9390         25.3        4,229
                   OBSTRUCTIVE
                   PULMONARY
                   DISEASE.
89..............  SIMPLE                0.9740         27.2        2,387
                   PNEUMONIA &
                   PLEURISY AGE
                   >17 W CC.
90..............  SIMPLE                0.9740         27.2          554
                   PNEUMONIA &
                   PLEURISY AGE
                   >17 W/O CC.
91..............  SIMPLE                1.3735         36.5           21
                   PNEUMONIA &
                   PLEURISY AGE 0-
                   17 \4\.
92..............  INTERSTITIAL          0.8885         24.8          181
                   LUNG DISEASE W
                   CC.
93..............  INTERSTITIAL          0.7284         23.8           38
                   LUNG DISEASE W/
                   O CC.
94..............  PNEUMOTHORAX W        0.9341         28.3           43
                   CC.
95..............  PNEUMOTHORAX W/       0.7107         24.5            5
                   O CC \2\.
96..............  BRONCHITIS &          0.8855         24.4          139
                   ASTHMA AGE >17
                   W CC.
97..............  BRONCHITIS &          0.5268         17.8           67
                   ASTHMA AGE >17
                   W/O CC.
98..............  BRONCHITIS &          0.5239         18.2            0
                   ASTHMA AGE 0-
                   17 \1\*.
99..............  RESPIRATORY           1.4609         32.1          384
                   SIGNS &
                   SYMPTOMS W CC.
100.............  RESPIRATORY           1.0387         27.9          156
                   SIGNS &
                   SYMPTOMS W/O
                   CC.

[[Page 13447]]

 
101.............  OTHER                 1.3776         30.9          164
                   RESPIRATORY
                   SYSTEM
                   DIAGNOSES W CC.
102.............  OTHER                 0.6568         22.0           34
                   RESPIRATORY
                   SYSTEM
                   DIAGNOSES W/O
                   CC.
103.............  HEART                 0.0000          0.0            0
                   TRANSPLANT \6\.
104.............  CARDIAC VALVE &       1.3735         36.5            2
                   OTHER MAJOR
                   CARDIOTHORACIC
                   PROC W CARDIAC
                   CATH \4\.
105.............  CARDIAC VALVE &       1.3735         36.5            2
                   OTHER MAJOR
                   CARDIOTHORACIC
                   PROC W/O
                   CARDIAC CATH
                   \4\.
106.............  CORONARY BYPASS       1.3735         36.5            0
                   W PTCA \4\*.
107.............  CORONARY BYPASS       1.3735         36.5            0
                   W CARDIAC CATH
                   \4\*.
108.............  OTHER                 1.3735         36.5            0
                   CARDIOTHORACIC
                   PROCEDURES \4\
                   *.
109.............  CORONARY BYPASS       1.3735         36.5            0
                   W/O PTCA OR
                   CARDIAC CATH
                   \4\*.
110.............  MAJOR                 1.3735         36.5            1
                   CARDIOVASCULAR
                   PROCEDURES W
                   CC \4\.
111.............  MAJOR                 1.3735         36.5            0
                   CARDIOVASCULAR
                   PROCEDURES W/O
                   CC.
112.............  PERCUTANEOUS          2.1422         48.3            3
                   CARDIOVASCULAR
                   PROCEDURES \5\.
113.............  AMPUTATION FOR        1.5915         43.7          109
                   CIRC SYSTEM
                   DISORDERS
                   EXCEPT UPPER
                   LIMB & TOE.
114.............  UPPER LIMB &          1.7160         46.5           31
                   TOE AMPUTATION
                   FOR CIRC
                   SYSTEM
                   DISORDERS.
115.............  PRM CARD PACEM        1.3735         36.5            3
                   IMPL W AMI,
                   HRT FAIL OR
                   SHK, OR AICD
                   LEAD OR GNRTR
                   P \4\.
116.............  OTH PERM CARD         2.1422         48.3            4
                   PACEMAK IMPL
                   OR PTCA W
                   CORONARY
                   ARTERY STENT
                   IMPLNT \5\.
117.............  CARDIAC               0.7107         24.5            1
                   PACEMAKER
                   REVISION
                   EXCEPT DEVICE
                   REPLACEMENT \2
                   \.
118.............  CARDIAC               1.3735         36.5           11
                   PACEMAKER
                   DEVICE
                   REPLACEMENT \4
                   \.
119.............  VEIN LIGATION &       0.7107         24.5            0
                   STRIPPING \2\*.
120.............  OTHER                 1.3748         41.6          167
                   CIRCULATORY
                   SYSTEM O.R.
                   PROCEDURES.
121.............  CIRCULATORY           0.8843         24.1          191
                   DISORDERS W
                   AMI & MAJOR
                   COMP,
                   DISCHARGED
                   ALIVE.
122.............  CIRCULATORY           0.6762         22.4           64
                   DISORDERS W
                   AMI W/O MAJOR
                   COMP,
                   DISCHARGED
                   ALIVE.
123.............  CIRCULATORY           1.1855         23.7           58
                   DISORDERS W
                   AMI, EXPIRED.
124.............  CIRCULATORY           1.3735         36.5            7
                   DISORDERS
                   EXCEPT AMI, W
                   CARD CATH &
                   COMPLEX DIAG
                   \4\.
125.............  CIRCULATORY           1.3735         36.5            4
                   DISORDERS
                   EXCEPT AMI, W
                   CARD CATH W/O
                   COMPLEX DIAG
                   \4\.
126.............  ACUTE &               1.0442         31.2          193
                   SUBACUTE
                   ENDOCARDITIS.
127.............  HEART FAILURE &       0.8658         25.8        2,434
                   SHOCK.
128.............  DEEP VEIN             0.7107         24.5           16
                   THROMBOPHLEBIT
                   IS \2\.
129.............  CARDIAC ARREST,       0.7107         24.5           22
                   UNEXPLAINED \2
                   \.
130.............  PERIPHERAL            0.9391         29.3        1,139
                   VASCULAR
                   DISORDERS W CC.
131.............  PERIPHERAL            0.7878         27.4          279
                   VASCULAR
                   DISORDERS W/O
                   CC.
132.............  ATHEROSCLEROSIS       0.8672         23.6          641
                   W CC.
133.............  ATHEROSCLEROSIS       0.8388         25.3          195
                   W/O CC.
134.............  HYPERTENSION...       0.8482         28.8          136
135.............  CARDIAC               0.9344         24.7          152
                   CONGENITAL &
                   VALVULAR
                   DISORDERS AGE
                   >17 W CC.
136.............  CARDIAC               0.7211         24.2           42
                   CONGENITAL &
                   VALVULAR
                   DISORDERS AGE
                   >17 W/O CC.
137.............  CARDIAC               0.7107         24.5            0
                   CONGENITAL &
                   VALVULAR
                   DISORDERS AGE
                   0-17 \2\*.
138.............  CARDIAC               0.8712         28.1          273
                   ARRHYTHMIA &
                   CONDUCTION
                   DISORDERS W CC.
139.............  CARDIAC               0.8712         28.1          104
                   ARRHYTHMIA &
                   CONDUCTION
                   DISORDERS W/O
                   CC.
140.............  ANGINA PECTORIS       0.6919         23.5           85
141.............  SYNCOPE &             0.6732         24.4           84
                   COLLAPSE W CC.
142.............  SYNCOPE &             0.6732         24.4           71
                   COLLAPSE W/O
                   CC.
143.............  CHEST PAIN.....       0.6017         20.4           50
144.............  OTHER                 0.9035         25.2          579
                   CIRCULATORY
                   SYSTEM
                   DIAGNOSES W CC.
145.............  OTHER                 0.6545         20.6           97
                   CIRCULATORY
                   SYSTEM
                   DIAGNOSES W/O
                   CC.
146.............  RECTAL                1.3735         36.5            0
                   RESECTION W CC
                   \4\*.
147.............  RECTAL                1.3735         36.5            0
                   RESECTION W/O
                   CC \4\*.
148.............  MAJOR SMALL &         1.3735         36.5           12
                   LARGE BOWEL
                   PROCEDURES W
                   CC \4\.
149.............  MAJOR SMALL &         0.5239         18.2            3
                   LARGE BOWEL
                   PROCEDURES W/O
                   CC \1\.
150.............  PERITONEAL            1.3735         36.5            2
                   ADHESIOLYSIS W
                   CC \4\.
151.............  PERITONEAL            1.3735         36.5            0
                   ADHESIOLYSIS W/
                   O CC \4\.
152.............  MINOR SMALL &         2.1422         48.3            4
                   LARGE BOWEL
                   PROCEDURES W
                   CC \5\.
153.............  MINOR SMALL &         2.1422         48.3            0
                   LARGE BOWEL
                   PROCEDURES W/O
                   CC \5\.
154.............  STOMACH,              2.1422         48.3            1
                   ESOPHAGEAL &
                   DUODENAL
                   PROCEDURES AGE
                   >17 W CC \5\.
155.............  STOMACH,              2.1422         48.3            1
                   ESOPHAGEAL &
                   DUODENAL
                   PROCEDURES AGE
                   >17 W/O CC \5\.
156.............  STOMACH,              2.1422         48.3            0
                   ESOPHAGEAL &
                   DUODENAL
                   PROCEDURES AGE
                   0-17 \5\*.
157.............  ANAL & STOMAL         0.9568         30.0            3
                   PROCEDURES W
                   CC \3\.
158.............  ANAL & STOMAL         0.5239         18.2            1
                   PROCEDURES W/O
                   CC \1\.
159.............  HERNIA                1.3735         36.5            1
                   PROCEDURES
                   EXCEPT
                   INGUINAL &
                   FEMORAL AGE
                   >17 W CC \4\.
160.............  HERNIA                0.5239         18.2            1
                   PROCEDURES
                   EXCEPT
                   INGUINAL &
                   FEMORAL AGE
                   >17 W/O CC \1\.
161.............  INGUINAL &            0.5239         18.2            2
                   FEMORAL HERNIA
                   PROCEDURES AGE
                   >17 W CC \1\.
162.............  INGUINAL &            0.5239         18.2            0
                   FEMORAL HERNIA
                   PROCEDURES AGE
                   >17 W/O CC \1\.
163.............  HERNIA                0.5239         18.2            0
                   PROCEDURES AGE
                   0-17 \1\*.
164.............  APPENDECTOMY W        0.9568         30.0            0
                   COMPLICATED
                   PRINCIPAL DIAG
                   W CC \3\*.
165.............  APPENDECTOMY W        0.5239         18.2            0
                   COMPLICATED
                   PRINCIPAL DIAG
                   W/O CC \1\*.

[[Page 13448]]

 
166.............  APPENDECTOMY W/       0.5239         18.2            0
                   O COMPLICATED
                   PRINCIPAL DIAG
                   W CC \1\*.
167.............  APPENDECTOMY W/       0.5239         18.2            0
                   O COMPLICATED
                   PRINCIPAL DIAG
                   W/O CC \1\*.
168.............  MOUTH                 1.3735         36.5            0
                   PROCEDURES W
                   CC \4\*.
169.............  MOUTH                 1.3735         36.5            0
                   PROCEDURES W/O
                   CC.
170.............  OTHER DIGESTIVE       1.8984         42.4           25
                   SYSTEM O.R.
                   PROCEDURES W
                   CC.
171.............  OTHER DIGESTIVE       0.5239         18.2            1
                   SYSTEM O.R.
                   PROCEDURES W/O
                   CC \1\.
172.............  DIGESTIVE             1.0289         27.9          520
                   MALIGNANCY W
                   CC.
173.............  DIGESTIVE             1.0177         28.9          140
                   MALIGNANCY W/O
                   CC.
174.............  G.I. HEMORRHAGE       0.9592         26.9          270
                   W CC.
175.............  G.I. HEMORRHAGE       0.9181         28.3           62
                   W/O CC.
176.............  COMPLICATED           0.9934         24.3           48
                   PEPTIC ULCER.
177.............  UNCOMPLICATED         0.9568         30.0           16
                   PEPTIC ULCER W
                   CC \3\.
178.............  UNCOMPLICATED         0.5239         18.2            7
                   PEPTIC ULCER W/
                   O CC \1\.
179.............  INFLAMMATORY          1.0571         24.0           40
                   BOWEL DISEASE.
180.............  G.I.                  1.0191         27.8          212
                   OBSTRUCTION W
                   CC.
181.............  G.I.                  0.9831         24.8           49
                   OBSTRUCTION W/
                   O CC.
182.............  ESOPHAGITIS,          0.9781         28.3          375
                   GASTROENT &
                   MISC DIGEST
                   DISORDERS AGE
                   > 17 W CC.
183.............  ESOPHAGITIS,          0.7925         24.4          149
                   GASTROENT &
                   MISC DIGEST
                   DISORDERS AGE
                   > 17 W/O CC.
184.............  ESOPHAGITIS,          1.3735         36.5            2
                   GASTROENT &
                   MISC DIGEST
                   DISORDERS AGE
                   0-17 \4\.
185.............  DENTAL & ORAL         1.3735         36.5           16
                   DIS EXCEPT
                   EXTRACTIONS &
                   RESTORATIONS,
                   AGE > 17 \4\.
186.............  DENTAL & ORAL         1.3735         36.5            0
                   DIS EXCEPT
                   EXTRACTIONS &
                   RESTORATIONS,
                   AGE 0-17 \4\.
187.............  DENTAL                1.3735         36.5            0
                   EXTRACTIONS &
                   RESTORATIONS \
                   4\*.
188.............  OTHER DIGESTIVE       1.1863         29.5          476
                   SYSTEM
                   DIAGNOSES AGE
                   > 17 W CC.
189.............  OTHER DIGESTIVE       1.0223         25.1           74
                   SYSTEM
                   DIAGNOSES AGE
                   > 17 W/O CC.
190.............  OTHER DIGESTIVE       0.9568         30.0            0
                   SYSTEM
                   DIAGNOSES AGE
                   0-17 \3\*.
191.............  PANCREAS, LIVER       1.3735         36.5            1
                   & SHUNT
                   PROCEDURES W
                   CC \4\.
192.............  PANCREAS, LIVER       1.3735         36.5            0
                   & SHUNT
                   PROCEDURES W/O
                   CC \4\.
193.............  BILIARY TRACT         2.1422         48.3            2
                   PROC EXCEPT
                   ONLY CHOLECYST
                   W OR W/O
                   C.D.E. W CC
                   \5\.
194.............  BILIARY TRACT         2.1422         48.3            0
                   PROC EXCEPT
                   ONLY CHOLECYST
                   W OR W/O
                   C.D.E. W/O CC
                   \5\.
195.............  CHOLECYSTECTOMY       1.3735         36.5            0
                   W C.D.E. W CC
                   \4\*.
196.............  CHOLECYSTECTOMY       0.9568         30.0            0
                   W C.D.E. W/O
                   CC \3\*.
197.............  CHOLECYSTECTOMY       0.9568         30.0            2
                   EXCEPT BY
                   LAPAROSCOPE W/
                   O C.D.E. W CC
                   \3\.
198.............  CHOLECYSTECTOMY       0.9568         30.0            0
                   EXCEPT BY
                   LAPAROSCOPE W/
                   O C.D.E. W/O
                   CC \3\.
199.............  HEPATOBILIARY         2.1422         48.3            1
                   DIAGNOSTIC
                   PROCEDURE FOR
                   MALIGNANCY \5\.
200.............  HEPATOBILIARY         2.1422         48.3            0
                   DIAGNOSTIC
                   PROCEDURE FOR
                   NON-MALIGNANCY
                   \5\*.
201.............  OTHER                 2.1422         48.3            4
                   HEPATOBILIARY
                   OR PANCREAS
                   O.R.
                   PROCEDURES \5\.
202.............  CIRRHOSIS &           0.8110         26.6          128
                   ALCOHOLIC
                   HEPATITIS.
203.............  MALIGNANCY OF         0.8782         25.5          247
                   HEPATOBILIARY
                   SYSTEM OR
                   PANCREAS.
204.............  DISORDERS OF          1.0512         26.0          205
                   PANCREAS
                   EXCEPT
                   MALIGNANCY.
205.............  DISORDERS OF          0.9764         26.5           99
                   LIVER EXCEPT
                   MALIG,CIRR,ALC
                   HEPA W CC.
206.............  DISORDERS OF          0.7107         24.5           24
                   LIVER EXCEPT
                   MALIG, CIRR,
                   ALC HEPA W/O
                   CC \2\.
207.............  DISORDERS OF          0.7691         25.8           62
                   THE BILIARY
                   TRACT W CC.
208.............  DISORDERS OF          0.7107         24.5           16
                   THE BILIARY
                   TRACT W/O CC
                   \2\.
209.............  MAJOR JOINT &         2.1422         48.3           10
                   LIMB
                   REATTACHMENT
                   PROCEDURES OF
                   LOWER
                   EXTREMITY \5\.
210.............  HIP & FEMUR           1.3735         36.5            9
                   PROCEDURES
                   EXCEPT MAJOR
                   JOINT AGE >17
                   W CC \4\.
211.............  HIP & FEMUR           0.7107         24.5            2
                   PROCEDURES
                   EXCEPT MAJOR
                   JOINT AGE >17
                   W/O CC \2\.
212.............  HIP & FEMUR           0.7107         24.5            0
                   PROCEDURES
                   EXCEPT MAJOR
                   JOINT AGE 0-
                   17\2\*.
213.............  AMPUTATION FOR        1.4379         41.5           35
                   MUSCULOSKELETA
                   L SYSTEM &
                   CONN TISSUE
                   DISORDERS.
216.............  BIOPSIES OF           0.9568         30.0            9
                   MUSCULOSKELETA
                   L SYSTEM &
                   CONNECTIVE
                   TISSUE \3\.
217.............  WND DEBRID &          1.5497         43.6          185
                   SKN GRFT
                   EXCEPT HAND,
                   FOR MUSCSKELET
                   & CONN TISS
                   DIS.
218.............  LOWER EXTREM &        1.3735         36.5            1
                   HUMER PROC
                   EXCEPT HIP,
                   FOOT, FEMUR
                   AGE >17 W CC
                   \4\.
219.............  LOWER EXTREM &        0.5239         18.2            1
                   HUMER PROC
                   EXCEPT HIP,
                   FOOT, FEMUR
                   AGE >17 W/O CC
                   \1\.
220.............  LOWER EXTREM &        0.5239         18.2            0
                   HUMER PROC
                   EXCEPT HIP,
                   FOOT, FEMUR
                   AGE 0-17\1\*.
223.............  MAJOR SHOULDER/       1.3735         36.5            1
                   ELBOW PROC, OR
                   OTHER UPPER
                   EXTREMITY PROC
                   W CC \4\.
224.............  SHOULDER, ELBOW       0.7107         24.5            1
                   OR FOREARM
                   PROC, EXC
                   MAJOR JOINT
                   PROC, W/O CC
                   \2\.
225.............  FOOT PROCEDURES       0.9568         30.0           17
                   \3\.
226.............  SOFT TISSUE           2.1422         48.3            7
                   PROCEDURES W
                   CC \5\.
227.............  SOFT TISSUE           2.1422         48.3            1
                   PROCEDURES W/O
                   CC \5\.
228.............  MAJOR THUMB OR        0.9568         30.0            2
                   JOINT PROC, OR
                   OTH HAND OR
                   WRIST PROC W
                   CC \3\.
229.............  HAND OR WRIST         0.9568         30.0            1
                   PROC, EXCEPT
                   MAJOR JOINT
                   PROC, W/O CC
                   \3\.
230.............  LOCAL EXCISION        2.1422         48.3            1
                   & REMOVAL OF
                   INT FIX
                   DEVICES OF HIP
                   & FEMUR \5\.
231.............  LOCAL EXCISION        1.3735         36.5           13
                   & REMOVAL OF
                   INT FIX
                   DEVICES EXCEPT
                   HIP & FEMUR
                   \4\.
232.............  ARTHROSCOPY \2\       0.7107         24.5            1

[[Page 13449]]

 
233.............  OTHER                 2.1422         48.3           10
                   MUSCULOSKELET
                   SYS & CONN
                   TISS O.R. PROC
                   W CC \5\.
234.............  OTHER                 2.1422         48.3            0
                   MUSCULOSKELET
                   SYS & CONN
                   TISS O.R. PROC
                   W/O CC \5\.
235.............  FRACTURES OF          0.9608         34.9          157
                   FEMUR.
236.............  FRACTURES OF          0.8221         28.8        1,638
                   HIP & PELVIS.
237.............  SPRAINS,              0.6749         24.3           26
                   STRAINS, &
                   DISLOCATIONS
                   OF HIP, PELVIS
                   & THIGH.
238.............  OSTEOMYELITIS..       1.0920         34.5          962
239.............  PATHOLOGICAL          0.8876         29.2          259
                   FRACTURES &
                   MUSCULOSKELETA
                   L & CONN TISS
                   MALIGNANCY.
240.............  CONNECTIVE            1.0327         28.8           93
                   TISSUE
                   DISORDERS W CC.
241.............  CONNECTIVE            0.8174         28.3           39
                   TISSUE
                   DISORDERS W/O
                   CC.
242.............  SEPTIC                0.8899         30.8          140
                   ARTHRITIS.
243.............  MEDICAL BACK          0.7222         25.4          860
                   PROBLEMS.
244.............  BONE DISEASES &       0.6953         25.5          232
                   SPECIFIC
                   ARTHROPATHIES
                   W CC.
245.............  BONE DISEASES &       0.4845         19.3          396
                   SPECIFIC
                   ARTHROPATHIES
                   W/O CC.
246.............  NON-SPECIFIC          0.7693         27.5           35
                   ARTHROPATHIES.
247.............  SIGNS &               0.7016         24.9          343
                   SYMPTOMS OF
                   MUSCULOSKELETA
                   L SYSTEM &
                   CONN TISSUE.
248.............  TENDONITIS,           0.7110         24.6          449
                   MYOSITIS &
                   BURSITIS.
249.............  AFTERCARE,            0.9154         30.4          333
                   MUSCULOSKELETA
                   L SYSTEM &
                   CONNECTIVE
                   TISSUE.
250.............  FX, SPRN, STRN        0.8878         30.6           34
                   & DISL OF
                   FOREARM, HAND,
                   FOOT AGE >17 W
                   CC.
251.............  FX, SPRN, STRN        0.8341         29.2           41
                   & DISL OF
                   FOREARM, HAND,
                   FOOT AGE >17 W/
                   O CC.
252.............  FX, SPRN, STRN        0.5239         18.2            1
                   & DISL OF
                   FOREARM, HAND,
                   FOOT AGE 0-17
                   \1\.
253.............  FX, SPRN, STRN        0.9364         31.9          245
                   & DISL OF
                   UPARM, LOWLEG
                   EX FOOT AGE
                   >17 W CC.
254.............  FX, SPRN, STRN        0.7816         28.7          160
                   & DISL OF
                   UPARM, LOWLEG
                   EX FOOT AGE
                   >17 W/O CC.
255.............  FX, SPRN, STRN        0.9568         30.0            2
                   & DISL OF
                   UPARM, LOWLEG
                   EX FOOT AGE 0-
                   17 \3\.
256.............  OTHER                 0.9541         30.3          310
                   MUSCULOSKELETA
                   L SYSTEM &
                   CONNECTIVE
                   TISSUE
                   DIAGNOSES.
257.............  TOTAL                 0.5239         18.2            1
                   MASTECTOMY FOR
                   MALIGNANCY W
                   CC \1\.
258.............  TOTAL                 0.5239         18.2            1
                   MASTECTOMY FOR
                   MALIGNANCY W/O
                   CC \1\.
259.............  SUBTOTAL              0.5239         18.2            0
                   MASTECTOMY FOR
                   MALIGNANCY W
                   CC \1\*.
260.............  SUBTOTAL              0.5239         18.2            0
                   MASTECTOMY FOR
                   MALIGNANCY W/O
                   CC \1\*.
261.............  BREAST PROC FOR       0.9568         30.0            1
                   NON-MALIGNANCY
                   EXCEPT BIOPSY
                   & LOCAL
                   EXCISION \3\.
262.............  BREAST BIOPSY &       0.5239         18.2            0
                   LOCAL EXCISION
                   FOR NON-
                   MALIGNANCY \1\
                   *.
263.............  SKIN GRAFT &/OR       1.6894         51.6          657
                   DEBRID FOR SKN
                   ULCER OR
                   CELLULITIS W
                   CC.
264.............  SKIN GRAFT &/OR       1.4650         49.2          110
                   DEBRID FOR SKN
                   ULCER OR
                   CELLULITIS W/O
                   CC.
265.............  SKIN GRAFT &/OR       2.1422         48.3           11
                   DEBRID EXCEPT
                   FOR SKIN ULCER
                   OR CELLULITIS
                   W CC \5\.
266.............  SKIN GRAFT &/OR       2.1422         48.3            1
                   DEBRID EXCEPT
                   FOR SKIN ULCER
                   OR CELLULITIS
                   W/O CC \5\.
267.............  PERIANAL &            2.1422         48.3            3
                   PILONIDAL
                   PROCEDURES \5\.
268.............  SKIN,                 2.1422         48.3            4
                   SUBCUTANEOUS
                   TISSUE &
                   BREAST PLASTIC
                   PROCEDURES \5\.
269.............  OTHER SKIN,           1.5586         45.1          143
                   SUBCUT TISS &
                   BREAST PROC W
                   CC.
270.............  OTHER SKIN,           1.2594         40.1           26
                   SUBCUT TISS &
                   BREAST PROC W/
                   O CC.
271.............  SKIN ULCERS....       1.2354         39.1        4,021
272.............  MAJOR SKIN            0.9667         29.9           50
                   DISORDERS W CC.
273.............  MAJOR SKIN            0.7107         24.5           11
                   DISORDERS W/O
                   CC \2\.
274.............  MALIGNANT             1.2025         32.9          118
                   BREAST
                   DISORDERS W CC.
275.............  MALIGNANT             1.2025         32.9           32
                   BREAST
                   DISORDERS W/O
                   CC.
276.............  NON-MALIGANT          0.7107         24.5            7
                   BREAST
                   DISORDERS \2\.
277.............  CELLULITIS AGE        0.8857         28.3          816
                   >17 W CC.
278.............  CELLULITIS AGE        0.7680         26.0          359
                   >17 W/O CC.
279.............  CELLULITIS AGE        0.9568         30.0            8
                   0-17 \3\.
280.............  TRAUMA TO THE         0.9550         30.7          132
                   SKIN, SUBCUT
                   TISS & BREAST
                   AGE >17 W CC.
281.............  TRAUMA TO THE         0.7586         25.2           74
                   SKIN, SUBCUT
                   TISS & BREAST
                   AGE >17 W/O CC.
282.............  TRAUMA TO THE         0.5239         18.2            0
                   SKIN, SUBCUT
                   TISS & BREAST
                   AGE 0-17 \1\.
283.............  MINOR SKIN            0.9649         29.9           53
                   DISORDERS W CC.
284.............  MINOR SKIN            0.7107         24.5           17
                   DISORDERS W/O
                   CC \2\.
285.............  AMPUTAT OF            1.3735         36.5           18
                   LOWER LIMB FOR
                   ENDOCRINE,
                   NUTRIT, &
                   METABOL
                   DISORDERS \4\.
286.............  ADRENAL &             1.3735         36.5            0
                   PITUITARY
                   PROCEDURES \4\
                   *.
287.............  SKIN GRAFTS &         1.5168         42.1           32
                   WOUND DEBRID
                   FOR ENDOC,
                   NUTRIT & METAB
                   DISORDERS.
288.............  O.R. PROCEDURES       0.7107         24.5            1
                   FOR OBESITY
                   \2\.
289.............  PARATHYROID           0.5239         18.2            0
                   PROCEDURES \1\
                   *.
290.............  THYROID               0.5239         18.2            1
                   PROCEDURES \1\.
291.............  THYROGLOSSAL          0.5239         18.2            0
                   PROCEDURES \1\
                   *.
292.............  OTHER                 1.3735         36.5           14
                   ENDOCRINE,
                   NUTRIT & METAB
                   O.R. PROC W CC
                   \4\.
293.............  OTHER                 1.3735         36.5            1
                   ENDOCRINE,
                   NUTRIT & METAB
                   O.R. PROC W/O
                   CC \4\.
294.............  DIABETES AGE          0.8786         28.2          443
                   >35.
295.............  DIABETES AGE 0-       0.5239         18.2            4
                   35 \1\.
296.............  NUTRITIONAL &         0.9448         28.2          665
                   MISC METABOLIC
                   DISORDERS AGE
                   >17 W CC.
297.............  NUTRITIONAL &         0.7716         24.5          206
                   MISC METABOLIC
                   DISORDERS AGE
                   >17 W/O CC.
298.............  NUTRITIONAL &         0.9568         30.0            5
                   MISC METABOLIC
                   DISORDERS AGE
                   0-17 \3\.
299.............  INBORN ERRORS         0.5239         18.2            4
                   OF METABOLISM
                   \1\.

[[Page 13450]]

 
300.............  ENDOCRINE             0.8315         27.4           66
                   DISORDERS W CC.
301.............  ENDOCRINE             0.7107         24.5           12
                   DISORDERS W/O
                   CC \2\.
302.............  KIDNEY                0.0000           na            0
                   TRANSPLANT \6\.
303.............  KIDNEY, URETER        2.1422         48.3            2
                   & MAJOR
                   BLADDER
                   PROCEDURES FOR
                   NEOPLASM \5\.
304.............  KIDNEY, URETER        0.9568         30.0            2
                   & MAJOR
                   BLADDER PROC
                   FOR NON-NEOPL
                   W CC \3\.
305.............  KIDNEY, URETER        0.5239         18.2            2
                   & MAJOR
                   BLADDER PROC
                   FOR NON-NEOPL
                   W/O CC \1\.
306.............  PROSTATECTOMY W       0.7107         24.5            1
                   CC \2\.
307.............  PROSTATECTOMY W/      0.5239         18.2            2
                   O CC \1\.
308.............  MINOR BLADDER         0.9568         30.0            4
                   PROCEDURES W
                   CC \3\.
309.............  MINOR BLADDER         0.7107         24.5            1
                   PROCEDURES W/O
                   CC \2\.
310.............  TRANSURETHRAL         1.3735         36.5            7
                   PROCEDURES W
                   CC \4\.
311.............  TRANSURETHRAL         0.7107         24.5            5
                   PROCEDURES W/O
                   CC \2\.
312.............  URETHRAL              1.3735         36.5            2
                   PROCEDURES,
                   AGE >17 W CC
                   \4\.
313.............  URETHRAL              1.3735         36.5            0
                   PROCEDURES,
                   AGE >17 W/O CC
                   \4\.
314.............  URETHRAL              1.3735         36.5            0
                   PROCEDURES,
                   AGE 0-17.
315.............  OTHER KIDNEY &        1.8305         40.6           99
                   URINARY TRACT
                   O.R.
                   PROCEDURES.
316.............  RENAL FAILURE..       1.1553         29.1        1,721
317.............  ADMIT FOR RENAL       0.9568         30.0            0
                   DIALYSIS \3\*.
318.............  KIDNEY &              1.1129         33.0          118
                   URINARY TRACT
                   NEOPLASMS W CC.
319.............  KIDNEY &              0.9568         30.0           24
                   URINARY TRACT
                   NEOPLASMS W/O
                   CC \3\.
320.............  KIDNEY &              0.8814         28.7          730
                   URINARY TRACT
                   INFECTIONS AGE
                   >17 W CC.
321.............  KIDNEY &              0.7213         25.6          202
                   URINARY TRACT
                   INFECTIONS AGE
                   >17 W/O CC.
322.............  KIDNEY &              0.9568         30.0            7
                   URINARY TRACT
                   INFECTIONS AGE
                   0-17 \3\.
323.............  URINARY STONES        0.9568         30.0           14
                   W CC, &/OR ESW
                   LITHOTRIPSY \3
                   \.
324.............  URINARY STONES        0.7107         24.5            4
                   W/O CC \2\.
325.............  KIDNEY &              0.5862         21.2           25
                   URINARY TRACT
                   SIGNS &
                   SYMPTOMS AGE
                   >17 W CC.
326.............  KIDNEY &              0.5239         18.2           18
                   URINARY TRACT
                   SIGNS &
                   SYMPTOMS AGE
                   >17 W/O CC \1\.
327.............  KIDNEY &              0.5239         18.2            0
                   URINARY TRACT
                   SIGNS &
                   SYMPTOMS AGE 0-
                   17 \1\*.
328.............  URETHRAL              0.7107         24.5            1
                   STRICTURE AGE
                   >17 W CC \2\.
329.............  URETHRAL              0.7107         24.5            0
                   STRICTURE AGE
                   >17 W/O CC \2\.
330.............  URETHRAL              0.7107         24.5            0
                   STRICTURE AGE
                   0-17 \2\.
331.............  OTHER KIDNEY &        0.9193         26.7          293
                   URINARY TRACT
                   DIAGNOSES AGE
                   >17 W CC.
332.............  OTHER KIDNEY &        0.8284         24.8           69
                   URINARY TRACT
                   DIAGNOSES AGE
                   >17 W/O CC.
333.............  OTHER KIDNEY &        2.1422         48.3            1
                   URINARY TRACT
                   DIAGNOSES AGE
                   0-17 \5\.
334.............  MAJOR MALE            2.1422         48.3            0
                   PELVIC
                   PROCEDURES W
                   CC \5\*.
335.............  MAJOR MALE            2.1422         48.3            0
                   PELVIC
                   PROCEDURES W/O
                   CC \5\.
336.............  TRANSURETHRAL         0.5239         18.2            1
                   PROSTATECTOMY
                   W CC \1\.
337.............  TRANSURETHRAL         0.5239         18.2            3
                   PROSTATECTOMY
                   W/O CC \1\.
338.............  TESTES                0.7107         24.5            1
                   PROCEDURES,
                   FOR MALIGNANCY
                   \2\.
339.............  TESTES                2.1422         48.3            1
                   PROCEDURES,
                   NON-MALIGNANCY
                   AGE >17 \5\.
340.............  TESTES                0.7107         24.5            0
                   PROCEDURES,
                   NON-MALIGNANCY
                   AGE 0-17 \2\*.
341.............  PENIS                 0.9568         30.0            2
                   PROCEDURES \3\.
342.............  CIRCUMCISION          0.5239         18.2            0
                   AGE >17 \1\*.
343.............  CIRCUMCISION          0.5239         18.2            0
                   AGE 0-17 \1\*.
344.............  OTHER MALE            0.5239         18.2            1
                   REPRODUCTIVE
                   SYSTEM O.R.
                   PROCEDURES FOR
                   MALIGNANCY \1\
                   .
345.............  OTHER MALE            2.1422         48.3            3
                   REPRODUCTIVE
                   SYSTEM O.R.
                   PROC EXCEPT
                   FOR MALIGNANCY
                   \5\.
346.............  MALIGNANCY,           0.9607         29.7          154
                   MALE
                   REPRODUCTIVE
                   SYSTEM, W CC.
347.............  MALIGNANCY,           0.7107         24.5           21
                   MALE
                   REPRODUCTIVE
                   SYSTEM, W/O CC
                   \2\.
348.............  BENIGN                0.7107         24.5            5
                   PROSTATIC
                   HYPERTROPHY W
                   CC \2\.
349.............  BENIGN                0.7107         24.5            1
                   PROSTATIC
                   HYPERTROPHY W/
                   O CC \2\.
350.............  INFLAMMATION OF       1.3735         36.5           24
                   THE MALE
                   REPRODUCTIVE
                   SYSTEM \4\.
351.............  STERILIZATION,        0.5239         18.2            0
                   MALE \1\*.
352.............  OTHER MALE            1.3735         36.5           15
                   REPRODUCTIVE
                   SYSTEM
                   DIAGNOSES \4\.
353.............  PELVIC                0.5239         18.2            1
                   EVISCERATION,
                   RADICAL
                   HYSTERECTOMY &
                   RADICAL
                   VULVECTOMY \1\.
354.............  UTERINE, ADNEXA       0.5239         18.2            0
                   PROC FOR NON-
                   OVARIAN/
                   ADNEXAL MALIG
                   W CC \1\.
355.............  UTERINE, ADNEXA       0.5239         18.2            1
                   PROC FOR NON-
                   OVARIAN/
                   ADNEXAL MALIG
                   W/O CC \1\.
356.............  FEMALE                0.5239         18.2            5
                   REPRODUCTIVE
                   SYSTEM
                   RECONSTRUCTIVE
                   PROCEDURES \1\.
357.............  UTERINE &             0.9568         30.0            0
                   ADNEXA PROC
                   FOR OVARIAN OR
                   ADNEXAL
                   MALIGNANCY \3\.
358.............  UTERINE &             0.5239         18.2            1
                   ADNEXA PROC
                   FOR NON-
                   MALIGNANCY W
                   CC \1\.
359.............  UTERINE &             0.5239         18.2            4
                   ADNEXA PROC
                   FOR NON-
                   MALIGNANCY W/O
                   CC \1\.
360.............  VAGINA, CERVIX        0.7107         24.5            1
                   & VULVA
                   PROCEDURES \2\.
361.............  LAPAROSCOPY &         0.9568         30.0            0
                   INCISIONAL
                   TUBAL
                   INTERRUPTION \
                   3\*.
362.............  ENDOSCOPIC            0.9568         30.0            0
                   TUBAL
                   INTERRUPTION \
                   3\*.
363.............  D&C, CONIZATION       1.3735         36.5            1
                   & RADIO-
                   IMPLANT, FOR
                   MALIGNANCY \4\.
364.............  D&C, CONIZATION       0.7107         24.5            0
                   EXCEPT FOR
                   MALIGNANCY \2\
                   *.
365.............  OTHER FEMALE          2.1422         48.3            5
                   REPRODUCTIVE
                   SYSTEM O.R.
                   PROCEDURES \5\.
366.............  MALIGNANCY,           0.9694         29.5          134
                   FEMALE
                   REPRODUCTIVE
                   SYSTEM W CC.

[[Page 13451]]

 
367.............  MALIGNANCY,           0.8881         30.4           43
                   FEMALE
                   REPRODUCTIVE
                   SYSTEM W/O CC.
368.............  INFECTIONS,           0.9568         30.0           22
                   FEMALE
                   REPRODUCTIVE
                   SYSTEM \3\.
369.............  MENSTRUAL &           0.7107         24.5           14
                   OTHER FEMALE
                   REPRODUCTIVE
                   SYSTEM
                   DISORDERS \2\.
370.............  *CESAREAN             2.1422         48.3            0
                   SECTION W CC
                   \5\*.
371.............  CESAREAN              2.1422         48.3            0
                   SECTION W/O CC
                   \5\*.
372.............  VAGINAL               0.5239         18.2            0
                   DELIVERY W
                   COMPLICATING
                   DIAGNOSES \1\*.
373.............  VAGINAL               0.5239         18.2            0
                   DELIVERY W/O
                   COMPLICATING
                   DIAGNOSES \1\*.
374.............  VAGINAL               0.5239         18.2            0
                   DELIVERY W
                   STERILIZATION
                   &/OR D&C \1\*.
375.............  VAGINAL               0.5239         18.2            0
                   DELIVERY W
                   O.R. PROC
                   EXCEPT STERIL
                   &/OR D&C \1\*.
376.............  POSTPARTUM &          0.5239         18.2            0
                   POST ABORTION
                   DIAGNOSES W/O
                   O.R. PROCEDURE
                   \1\*.
377.............  POSTPARTUM &          0.5239         18.2            0
                   POST ABORTION
                   DIAGNOSES W
                   O.R. PROCEDURE
                   \1\*.
378.............  ECTOPIC               0.5239         18.2            0
                   PREGNANCY \1\*.
379.............  THREATENED            0.5239         18.2            0
                   ABORTION \1\*.
380.............  ABORTION W/O          0.5239         18.2            0
                   D&C \1\*.
381.............  ABORTION W D&C,       0.5239         18.2            0
                   ASPIRATION
                   CURETTAGE OR
                   HYSTEROTOMY \1
                   \*.
382.............  FALSE LABOR           0.5239         18.2            0
                   \1\*.
383.............  OTHER                 0.5239         18.2            0
                   ANTEPARTUM
                   DIAGNOSES W
                   MEDICAL
                   COMPLICATIONS
                   \1\*.
384.............  OTHER                 0.5239         18.2            0
                   ANTEPARTUM
                   DIAGNOSES W/O
                   MEDICAL
                   COMPLICATIONS
                   \1\*.
385.............  NEONATES, DIED        0.9568         30.0            2
                   OR TRANSFERRED
                   TO ANOTHER
                   ACUTE CARE
                   FACILITY \3\*.
386.............  EXTREME               0.9568         30.0            0
                   IMMATURITY OR
                   RESPIRATORY
                   DISTRESS
                   SYNDROME,
                   NEONATE \3\*.
387.............  PREMATURITY W         0.9568         30.0            0
                   MAJOR PROBLEMS
                   \3\*.
388.............  PREMATURITY W/O       0.9568         30.0            0
                   MAJOR PROBLEMS
                   \3\*.
389.............  FULL TERM             0.9568         30.0            0
                   NEONATE W
                   MAJOR PROBLEMS
                   \3\*.
390.............  NEONATE W OTHER       0.9568         30.0            2
                   SIGNIFICANT
                   PROBLEMS \3\.
391.............  NORMAL NEWBORN        0.9568         30.0            0
                   \3\*.
392.............  SPLENECTOMY AGE       0.9568         30.0            0
                   >17 \3\*.
393.............  SPLENECTOMY AGE       0.9568         30.0            0
                   0-17 \3\*.
394.............  OTHER O.R.            2.1422         48.3            1
                   PROCEDURES OF
                   THE BLOOD AND
                   BLOOD FORMING
                   ORGANS \5\.
395.............  RED BLOOD CELL        0.8709         25.8          144
                   DISORDERS AGE
                   >17.
396.............  RED BLOOD CELL        0.5239         18.2            2
                   DISORDERS AGE
                   0-17 \1\.
397.............  COAGULATION           1.3069         29.5           43
                   DISORDERS.
398.............  RETICULOENDOTHE       0.8361         25.4           36
                   LIAL &
                   IMMUNITY
                   DISORDERS W CC.
399.............  RETICULOENDOTHE       0.7107         24.5           10
                   LIAL &
                   IMMUNITY
                   DISORDERS W/O
                   CC \2\.
400.............  LYMPHOMA &            1.3735         36.5            2
                   LEUKEMIA W
                   MAJOR O.R.
                   PROCEDURE \4\.
401.............  LYMPHOMA & NON-       0.9568         30.0            3
                   ACUTE LEUKEMIA
                   W OTHER O.R.
                   PROC W CC \3\.
402.............  LYMPHOMA & NON-       0.9568         30.0            0
                   ACUTE LEUKEMIA
                   W OTHER O.R.
                   PROC W/O CC
                   \3\.
403.............  LYMPHOMA & NON-       1.1242         29.4          280
                   ACUTE LEUKEMIA
                   W CC.
404.............  LYMPHOMA & NON-       0.8288         24.7           88
                   ACUTE LEUKEMIA
                   W/O CC.
405.............  ACUTE LEUKEMIA        0.9568         30.0            0
                   W/O MAJOR O.R.
                   PROCEDURE AGE
                   0-17 \3\*.
406.............  MYELOPROLIF           2.1422         48.3            1
                   DISORD OR
                   POORLY DIFF
                   NEOPL W MAJ
                   O.R.PROC W CC
                   \5\.
407.............  MYELOPROLIF           2.1422         48.3            0
                   DISORD OR
                   POORLY DIFF
                   NEOPL W MAJ
                   O.R.PROC W/O
                   CC \5\.
408.............  MYELOPROLIF           0.7107         24.5            3
                   DISORD OR
                   POORLY DIFF
                   NEOPL W OTHER
                   O.R.PROC \2\.
409.............  RADIOTHERAPY \3       0.9568         30.0           24
                   \.
410.............  CHEMOTHERAPY W/       1.3735         36.5           14
                   O ACUTE
                   LEUKEMIA AS
                   SECONDARY
                   DIAGNOSIS \4\.
411.............  HISTORY OF            0.5239         18.2            0
                   MALIGNANCY W/O
                   ENDOSCOPY \1\*.
412.............  HISTORY OF            0.5239         18.2            0
                   MALIGNANCY W
                   ENDOSCOPY \1\*.
413.............  OTHER                 0.9832         26.7           49
                   MYELOPROLIF
                   DIS OR POORLY
                   DIFF NEOPL
                   DIAG W CC.
414.............  OTHER                 0.8681         29.7           30
                   MYELOPROLIF
                   DIS OR POORLY
                   DIFF NEOPL
                   DIAG W/O CC.
415.............  O.R. PROCEDURE        1.9075         44.1          227
                   FOR INFECTIOUS
                   & PARASITIC
                   DISEASES.
416.............  SEPTICEMIA AGE        1.1222         29.4        1,695
                   >17.
417.............  SEPTICEMIA AGE        2.1422         48.3            5
                   0-17 \5\.
418.............  POSTOPERATIVE &       1.0078         28.4          522
                   POST-TRAUMATIC
                   INFECTIONS.
419.............  FEVER OF              0.7107         24.5           17
                   UNKNOWN ORIGIN
                   AGE >17 W CC
                   \2\.
420.............  FEVER OF              0.7107         24.5           11
                   UNKNOWN ORIGIN
                   AGE >17 W/O CC
                   \2\.
421.............  VIRAL ILLNESS         0.9568         30.0           14
                   AGE >17 \3\.
422.............  VIRAL ILLNESS &       0.9568         30.0            0
                   FEVER OF
                   UNKNOWN ORIGIN
                   AGE 0-17 \3\*.
423.............  OTHER                 1.0906         31.9          272
                   INFECTIOUS &
                   PARASITIC
                   DISEASES
                   DIAGNOSES.
424.............  O.R. PROCEDURE        1.3735         36.5           15
                   W PRINCIPAL
                   DIAGNOSES OF
                   MENTAL ILLNESS
                   \4\.
425.............  ACUTE                 0.7912         30.5           63
                   ADJUSTMENT
                   REACTION &
                   PSYCHOLOGICAL
                   DYSFUNCTION.
426.............  DEPRESSIVE            0.6290         25.5           92
                   NEUROSES.
427.............  NEUROSES EXCEPT       0.9568         30.0           20
                   DEPRESSIVE \3\.
428.............  DISORDERS OF          0.7423         31.6           31
                   PERSONALITY &
                   IMPULSE
                   CONTROL.
429.............  ORGANIC               0.6401         27.9          957
                   DISTURBANCES &
                   MENTAL
                   RETARDATION.
430.............  PSYCHOSES......       0.5602         26.4        2,396
431.............  CHILDHOOD             0.5023         23.0           50
                   MENTAL
                   DISORDERS.
432.............  OTHER MENTAL          0.9568         30.0            7
                   DISORDER
                   DIAGNOSES \3\.
433.............  ALCOHOL/DRUG          0.2778         12.6           59
                   ABUSE OR
                   DEPENDENCE,
                   LEFT AMA.
434.............  ALC/DRUG ABUSE        0.5051         22.2          145
                   OR DEPEND,
                   DETOX OR OTH
                   SYMPT TREAT W
                   CC.
435.............  ALC/DRUG ABUSE        0.4378         20.2          179
                   OR DEPEND,
                   DETOX OR OTH
                   SYMPT TREAT W/
                   O CC.

[[Page 13452]]

 
436.............  ALC/DRUG              0.5239         18.2            4
                   DEPENDENCE W
                   REHABILITATION
                   THERAPY \1\.
437.............  ALC/DRUG              0.5239         18.2            2
                   DEPENDENCE,
                   COMBINED REHAB
                   & DETOX
                   THERAPY \1\.
439.............  SKIN GRAFTS FOR       1.3735         36.5           13
                   INJURIES \4\.
440.............  WOUND                 1.2503         39.8           40
                   DEBRIDEMENTS
                   FOR INJURIES.
441.............  HAND PROCEDURES       0.9568         30.0            0
                   FOR INJURIES
                   \3\*.
442.............  OTHER O.R.            1.3777         38.6           28
                   PROCEDURES FOR
                   INJURIES W CC.
443.............  OTHER O.R.            1.3735         36.5            3
                   PROCEDURES FOR
                   INJURIES W/O
                   CC \4\.
444.............  TRAUMATIC             1.2206         34.5          169
                   INJURY AGE >17
                   W CC.
445.............  TRAUMATIC             0.9130         28.0           86
                   INJURY AGE >17
                   W/O CC.
446.............  TRAUMATIC             0.9568         30.0            0
                   INJURY AGE 0-
                   17 \3\*.
447.............  ALLERGIC              0.5239         18.2            2
                   REACTIONS AGE
                   >17 \1\.
448.............  ALLERGIC              0.5239         18.2            0
                   REACTIONS AGE
                   0-17 \1\*.
449.............  POISONING &           0.7107         24.5           19
                   TOXIC EFFECTS
                   OF DRUGS AGE
                   >17 W CC \2\.
450.............  POISONING &           0.5239         18.2           11
                   TOXIC EFFECTS
                   OF DRUGS AGE
                   >17 W/O CC \1\.
451.............  POISONING &           0.5239         18.2            0
                   TOXIC EFFECTS
                   OF DRUGS AGE 0-
                   17 \1\*.
452.............  COMPLICATIONS         1.3070         33.1          311
                   OF TREATMENT W
                   CC.
453.............  COMPLICATIONS         0.7486         23.6           61
                   OF TREATMENT W/
                   O CC.
454.............  OTHER INJURY,         0.7107         24.5           11
                   POISONING &
                   TOXIC EFFECT
                   DIAG W CC \2\.
455.............  OTHER INJURY,         0.7107         24.5            5
                   POISONING &
                   TOXIC EFFECT
                   DIAG W/O CC
                   \2\.
461.............  O.R. PROC W           1.5801         43.2          197
                   DIAGNOSES OF
                   OTHER CONTACT
                   W HEALTH
                   SERVICES.
462.............  REHABILITATION.       0.7802         28.3        7,505
463.............  SIGNS &               0.8474         29.7          859
                   SYMPTOMS W CC.
464.............  SIGNS &               0.7091         28.1          478
                   SYMPTOMS W/O
                   CC.
465.............  AFTERCARE W           0.7107         24.5           20
                   HISTORY OF
                   MALIGNANCY AS
                   SECONDARY
                   DIAGNOSIS \2\.
466.............  AFTERCARE W/O         1.2446         32.0          273
                   HISTORY OF
                   MALIGNANCY AS
                   SECONDARY
                   DIAGNOSIS.
467.............  OTHER FACTORS         0.5239         18.2            7
                   INFLUENCING
                   HEALTH STATUS
                   \1\.
468.............  EXTENSIVE O.R.        2.3052         49.6          429
                   PROCEDURE
                   UNRELATED TO
                   PRINCIPAL
                   DIAGNOSIS.
469.............  PRINCIPAL             0.0000           na            0
                   DIAGNOSIS
                   INVALID AS
                   DISCHARGE
                   DIAGNOSIS.
470.............  UNGROUPABLE....       0.0000           na            0
471.............  BILATERAL OR          2.1422         48.3            0
                   MULTIPLE MAJOR
                   JOINT PROCS OF
                   LOWER
                   EXTREMITY \5\*.
473.............  ACUTE LEUKEMIA        1.2549         25.3           39
                   W/O MAJOR O.R.
                   PROCEDURE AGE
                   >17.
475.............  RESPIRATORY           2.3043         38.9        4,182
                   SYSTEM
                   DIAGNOSIS WITH
                   VENTILATOR
                   SUPPORT.
476.............  PROSTATIC O.R.        1.5835         41.1           26
                   PROCEDURE
                   UNRELATED TO
                   PRINCIPAL
                   DIAGNOSIS.
477.............  NON-EXTENSIVE         1.9253         46.5          162
                   O.R. PROCEDURE
                   UNRELATED TO
                   PRINCIPAL
                   DIAGNOSIS.
478.............  OTHER VASCULAR        1.8876         42.6           42
                   PROCEDURES W
                   CC.
479.............  OTHER VASCULAR        1.8876         42.6            4
                   PROCEDURES W/O
                   CC.
480.............  LIVER                 0.0000           na            0
                   TRANSPLANT \6\.
481.............  BONE MARROW           2.1422         48.3            0
                   TRANSPLANT \5\
                   *.
482.............  TRACHEOSTOMY          1.3735         36.5            2
                   FOR FACE,
                   MOUTH & NECK
                   DIAGNOSES \4\.
483.............  TRACHEOSTOMY          3.2118         51.4          326
                   EXCEPT FOR
                   FACE, MOUTH &
                   NECK DIAGNOSES.
484.............  CRANIOTOMY FOR        2.1422         48.3            0
                   MULTIPLE
                   SIGNIFICANT
                   TRAUMA \5\*.
485.............  LIMB                  2.1422         48.3            0
                   REATTACHMENT,
                   HIP AND FEMUR
                   PROC FOR
                   MULTIPLE
                   SIGNIFICANT TR
                   \5\*.
486.............  OTHER O.R.            2.1422         48.3            2
                   PROCEDURES FOR
                   MULTIPLE
                   SIGNIFICANT
                   TRAUMA \5\.
487.............  OTHER MULTIPLE        1.3111         35.9           77
                   SIGNIFICANT
                   TRAUMA.
488.............  HIV W EXTENSIVE       2.1422         48.3            2
                   O.R. PROCEDURE
                   \5\.
489.............  HIV W MAJOR           1.5141         38.5          106
                   RELATED
                   CONDITION.
490.............  HIV W OR W/O          1.4702         36.4           48
                   OTHER RELATED
                   CONDITION.
491.............  MAJOR JOINT &         2.1422         48.3            0
                   LIMB
                   REATTACHMENT
                   PROCEDURES OF
                   UPPER
                   EXTREMITY \5\*
                   .
492.............  CHEMOTHERAPY W        1.3735         36.5            1
                   ACUTE LEUKEMIA
                   AS SECONDARY
                   DIAGNOSIS \4\.
493.............  LAPAROSCOPIC          0.9568         30.0            6
                   CHOLECYSTECTOM
                   Y W/O C.D.E. W
                   CC \3\.
494.............  LAPAROSCOPIC          0.5239         18.2            1
                   CHOLECYSTECTOM
                   Y W/O C.D.E. W/
                   O CC \1\.
495.............  LUNG TRANSPLANT       0.0000           na            0
                   \6\.
496.............  COMBINED              0.9568         30.0            0
                   ANTERIOR/
                   POSTERIOR
                   SPINAL FUSION
                   \3\*.
497.............  SPINAL FUSION W       0.9568         30.0            4
                   CC \3\.
498.............  SPINAL FUSION W/      0.9568         30.0            0
                   O CC \3\.
499.............  BACK & NECK           2.1422         48.3            4
                   PROCEDURES
                   EXCEPT SPINAL
                   FUSION W CC
                   \5\.
500.............  BACK & NECK           1.3735         36.5            1
                   PROCEDURES
                   EXCEPT SPINAL
                   FUSION W/O CC
                   \4\.
501.............  KNEE PROCEDURES       2.1422         48.3            2
                   W PDX OF
                   INFECTION W CC
                   \5\.
502.............  KNEE PROCEDURES       2.1422         48.3            0
                   W PDX OF
                   INFECTION W/O
                   CC \5\.
503.............  KNEE PROCEDURES       1.3735         36.5            3
                   W/O PDX OF
                   INFECTION \4\.
504.............  EXTENSIVE 3RD         1.3735         36.5            2
                   DEGREE BURNS W
                   SKIN GRAFT \4\.
505.............  EXTENSIVE 3RD         1.3735         36.5            4
                   DEGREE BURNS W/
                   O SKIN GRAFT
                   \4\.
506.............  FULL THICKNESS        1.3735         36.5            9
                   BURN W SKIN
                   GRAFT OR INHAL
                   INJ W CC OR
                   SIG TRAUMA
                   \4\.
507.............  FULL THICKNESS        0.7107         24.5            2
                   BURN W SKIN
                   GRFT OR INHAL
                   INJ W/O CC OR
                   SIG TRAUMA
                   \2\.
508.............  FULL THICKNESS        0.9568         30.0           24
                   BURN W/O SKIN
                   GRFT OR INHAL
                   INJ W CC OR
                   SIG TRAUMA
                   \3\.

[[Page 13453]]

 
509.............  FULL THICKNESS        0.7107         24.5            9
                   BURN W/O SKIN
                   GRFT OR INH
                   INJ W/O CC OR
                   SIG TRAUMA
                   \2\.
510.............  NON-EXTENSIVE         0.9568         30.0           23
                   BURNS W CC OR
                   SIGNIFICANT
                   TRAUMA \3\.
511.............  NON-EXTENSIVE         0.7107         24.5           10
                   BURNS W/O CC
                   OR SIGNIFICANT
                   TRAUMA \2\.
601.............  VERY SHORT-STAY       0.1546          4.3          543
                   ADMISSION NON-
                   PSYCHIATRIC
                   DIAGNOSES \7\.
602.............  VERY SHORT-STAY       0.0827          4.5      10,361
                   ADMISSION
                   PSYCHIATRIC
                   DIAGNOSES \8\.
------------------------------------------------------------------------
* Proposed relative weights for these LTC-DRGs were determined by
  assigning these cases to the appropriate low volume quintile because
  they had no LTCH cases in the FY 2000 MedPAR.
\1\ Proposed relative weights for these LTC-DRGs were determined by
  assigning these cases to low volume quintile 1.
\2\ Proposed relative weights for these LTC-DRGs were determined by
  assigning these cases to low volume quintile 2.
\3\ Proposed relative weights for these LTC-DRGs were determined by
  assigning these cases to low volume quintile 3.
\4\ Proposed relative weights for these LTC-DRGs were determined by
  assigning these cases to low volume quintile 4.
\5\ Proposed relative weights for these LTC-DRGs were determined by
  assigning these cases to low volume quintile 5.
\6\ Proposed relative weights for these LTC-DRGs were assigned a value
  of 0.0.
\7\ Proposed relative weights for these LTC-DRGs were determined by
  combining LTCH cases in MDC 19 or 20 with a length of stay 7 days or
  fewer.
\8\ Proposed relative weights for these LTC-DRGs were determined by
  combining LTCH cases in MDCs other than 19 or 20 with a length of stay
  7 days or fewer.

B. Special Cases

    Under section 123 of Public Law 106-113, the Secretary generally 
has broad authority in developing the prospective payment system for 
LTCHs. Thus, the Secretary generally has broad authority in determining 
whether (and how) to make adjustments to prospective payment system 
payments. Section 307 of Public Law 106-554 directs the Secretary to 
``examine'' appropriate adjustments to the prospective payment system, 
including certain specific adjustments, but under that section the 
Secretary continues to have discretion as to whether to provide for 
adjustments to reflect variations in the necessary costs of treatment 
among LTCHs.
    Generally, LTCHs, as described in section 1886(d)(1)(B)(iv) of the 
Act, are distinguished from other inpatient hospital settings by an 
average length of stay greater than 25 days. Certain ``special'' cases 
that have stays of considerably less than the average length of stay 
and that receive significantly less than the full course of treatment 
for a specific LTC-DRG would be paid inappropriately if the hospital 
were to receive the full LTC-DRG payment. Further, because of the 
budget neutrality requirement of section 123(a)(1) of Public Law 106-
113, ``overpayment'' for these cases would reduce payments for all 
other cases that warrant full payment based on the LTCH services 
delivered. We discuss the special cases below in terms of proposed 
definitions, policy rationale, and proposed payment methodology. The 
three proposed subsets are very short-stay discharges, short-stay 
outliers, and interrupted stays.
1. Very Short-Stay Discharges
    We are proposing, under Sec. 412.527, to define a very short-stay 
discharge as a discharge that has a length of stay of 7 days or fewer 
(regardless of the LTC-DRG assignment), irrespective of the discharge 
designation (including cases where the patient expires). A very short-
stay discharge often occurs when it is determined, following admission 
to a LTCH, that the beneficiary would receive more appropriate care in 
another setting, such as a patient who experiences an acute episode or 
requires more intensive rehabilitation therapy than is available at the 
LTCH. These patients may be discharged to another site of care and then 
subsequently readmitted to the LTCH following that stay if they require 
LTCH treatment (see the interrupted stay policy in section IV.B.3 of 
this preamble for further clarification regarding length of stay 
criteria), or they may be discharged and not subsequently readmitted 
because they no longer require LTCH treatment. Other circumstances that 
would warrant classification as a very short-stay discharge would 
involve patients who are either discharged to their home or who expire 
within the first 7 days of being admitted to a LTCH.
    Since LTCHs are defined by statute as generally having an average 
length of stay greater than 25 days, we are proposing to make an 
adjustment for very short-stay discharges in order to make appropriate 
payment to cases that may not necessarily require the type of services 
intended to be provided at a LTCH. Further, we believe that providing a 
special payment for very short-stay discharges neither encourages 
hospitals to admit patients for whom they knowingly are unable to 
provide complete treatment in order to maximize payment, nor severely 
penalizes providers that, in good faith, admit a patient and provide 
some services before realizing that the beneficiary would receive more 
appropriate treatment at another site of care.
    In considering the appropriate upper day threshold for identifying 
very short-stay discharges, we found in our analysis that, from a 
clinical perspective, it takes about 3 days to evaluate the 
appropriateness of the admission and typically an additional 3 to 4 
days for any treatment to begin to have any impact on the patient's 
health status. Therefore, we believe that patient cases with 7 days or 
less treatment in a LTCH are different than the typical LTCH patient 
cases and generally the patients are not in the hospital long enough to 
clinically receive full LTCH treatment. We believe that establishing a 
special payment for these types of cases addresses the problem of an 
extremely short length of stay that is inherent in a discharge-based 
prospective payment system. Furthermore, because the rates are set to 
be budget neutral, if we did not propose to make this adjustment, 
providing a full prospective payment system payment for very short-stay 
cases would reduce payments for nonshort-stay LTCH cases.
    We are proposing to pay a very short-stay discharge case under a 
LTC-DRG-specific per diem methodology. Analysis of payment-to-cost 
ratios indicates that the accuracy of the payments could be improved if 
we categorize very short-stay discharge cases into two categories based 
on the primary diagnosis--one for psychiatric

[[Page 13454]]

cases and one for all other types of cases. We believe it would be 
appropriate to separate very short-stay discharge cases into 
psychiatric and nonpsychiatric categories because our analysis shows 
that the resources used to treat these two types of patients during the 
first 7 days differ significantly. In our simulations, combining 
psychiatric very short-stay discharge cases with all other very short-
stay discharge cases resulted in a considerable ``overpayment'' of the 
very short-stay discharge psychiatric cases and a substantial 
``underpayment'' of all other (nonpsychiatric) very short-stay 
discharge cases. As shown in Table 4 above, the proposed relative 
weight of LTC-DRG 602 for very short-stay discharge psychiatric cases 
(0.0827) is almost half the proposed relative weight of LTC-DRG 601 
(0.1546) for very short-stay discharge nonpsychiatric cases. This means 
that the average charge for cases with a stay of 7 days or less in 
nonpsychiatric LTC-DRGs is almost twice the average charge for cases 
with a stay of 7 days or less in psychiatric LTC-DRGs. Therefore, for 
payment of very short-stay discharge cases, we are proposing under 
Sec. 412.527(c)(1), to categorize a discharge into either a very short-
stay discharge psychiatric LTC-DRG or a very short-stay discharge 
nonpsychiatric LTC-DRG. Additional analysis of nonpsychiatric cases 
with a length of stay of 7 days or fewer indicates that there is not a 
significant difference in the resource use across other ``categories'' 
of LTCH very short-stay discharge cases and the equity of the payment 
system would not be improved. Thus, we do not believe further 
distinctions among very short-stay discharge nonpsychiatric cases would 
be necessary or appropriate.
    The relative weight for each of these two very short-stay discharge 
LTC-DRGs would be based on the average charge for all very short-stay 
discharge psychiatric cases and all nonpsychiatric cases, respectively, 
relative to all other LTC-DRGs (excluding all very short-stay discharge 
cases). We computed the proposed relative weights for the very short-
stay discharge psychiatric LTC-DRG and very short-stay discharge 
nonpsychiatric LTC-DRG by identifying all cases in which the length of 
stay is 7 days or fewer and categorizing those cases as either 
psychiatric or nonpsychiatric based on the primary diagnosis of the 
discharge. Very short-stay discharge psychiatric cases were identified 
based on the primary ICD-9-CM diagnosis code that would otherwise be 
classified in LTC-DRGs 424 through 432 in MDC 19 (Mental Diseases and 
Disorders) or LTC-DRGs 433 through 437 in MDC 20 (Alcohol/Drug Use and 
Alcohol/Drug-Induced Organic Mental Disorders) in the absence of a very 
short stay discharge policy. The proposed relative weights for these 
two very short-stay discharge LTC-DRGs would be calculated in the same 
manner discussed previously, using the hospital-specific relative value 
methodology. Each very short-stay discharge LTC-DRG per diem amount 
would be determined by dividing the applicable Federal payment rate 
(Federal payment rate x LTC-DRG weight) by 7 days (proposed 
Sec. 412.527(c)(2)).
2. Short-Stay Outliers
    We believe that considerations similar to those underlying the 
proposed very short-stay discharge policy also apply to short-stay 
cases with a length of stay greater than 7 days. More specifically, we 
note that some Medicare patients may have slightly longer lengths of 
stay, but are still well below the average length of stay of greater 
than the 25-day threshold specified in the statute, reflecting the fact 
that these beneficiaries may not require the type of care generally 
provided in a LTCH or may require urgent treatment at another site of 
care. Therefore, we also are proposing a short-stay outlier policy that 
would encompass cases with a length of stay beyond the 7 days that are 
addressed by the proposed very short-stay discharge policy.
    A short-stay outlier case may occur when a beneficiary receives 
less than the full course of treatment at the LTCH before being 
discharged. These patients may be discharged to another site of care 
and be readmitted to the LTCH if they require subsequent LTCH treatment 
(see the interrupted stay policy in section IV.B.3. of this preamble 
for further clarification regarding length of stay criteria), or they 
may be discharged and not readmitted because they no longer require 
LTCH treatment.
    Furthermore, patients may expire early in their LTCH stay. As noted 
above, generally LTCHs are defined by statute as having an average 
length of stay of greater than 25 days. Therefore, we believe that a 
payment adjustment for short-stay outlier cases would result in more 
appropriate payments since these cases most likely would not receive a 
full course of treatment in such a short period of time and a full LTC-
DRG payment may not always be appropriate. Payment-to-cost ratios for 
the cases described above show that if LTCHs receive a full LTC-DRG 
payment for those cases, they would be significantly ``overpaid'' for 
the resources they have actually expended.
    We also believe that providing a reduced payment for short-stay 
outlier cases neither encourages hospitals to admit patients for whom 
they knowingly are unable to provide complete treatment in order to 
maximize payment, nor severely penalizes providers that, in good faith, 
admit a patient and provide some services before realizing that the 
beneficiary would receive more appropriate treatment at another site of 
care or before the beneficiary is discharged to go home. Establishing a 
short-stay outlier payment for these types of cases addresses the 
incentives inherent in a discharge-based prospective payment system for 
treating patients with a short length of stay. One of the primary 
objectives of a prospective payment system is to provide incentives for 
hospitals to become more efficient and, in doing so, to ensure that 
they can still receive adequate and appropriate payments. Because the 
rates are set to be budget neutral, providing a full prospective 
payment system payment for those cases that do not actually require the 
full course of treatment would reduce payments for cases that warrant 
full payment based on the LTCH services furnished. Therefore, we 
believe that a short-stay outlier policy would permit more equitable 
payment.
    In considering possible short-stay outlier policies, we sought to 
balance appropriate payments to shorter stay cases, which are generally 
less expensive than the average case in each LTC-DRG, and payments to 
inlier cases in each LTC-DRG. In the absence of a short-stay outlier 
policy, based on analysis of payment-to-cost ratios, the full LTC-DRG 
payment would ``overpay'' the short-stay cases and ``underpay'' the 
inlier cases. A short-stay outlier policy that results in payment-to-
cost ratios that are at (or close to) 1.0 would ensure appropriate 
payments to both short-stay and inlier cases within a LTC-DRG because, 
on average, payments would closely match costs for these cases under 
this proposed prospective payment system.
    With no short-stay outlier policy, we estimate that payment-to-cost 
ratios would be greater than 2.0 for cases with lengths of stays below 
the average length of stay for the LTC-DRG. We considered three 
alternative short-stay outlier policies in which payment would be 
based:
     The least of 100 percent of the cost of the case, 100 
percent of the LTC-DRG specific per diem amount multiplied by the 
length of stay, or the full LTC-DRG

[[Page 13455]]

payment for cases with a length of stay between 8 days and the average 
length of stay of the LTC-DRG;
     The least of 150 percent of the cost of the case, 150 
percent of the LTC-DRG specific per diem amount multiplied by the 
length of stay, or the full LTC-DRG payment for cases with a length of 
stay between 8 days and two-thirds of the average length of stay of the 
LTC-DRG; or
     The least of 200 percent of the cost of the case, 200 
percent of the LTC-DRG specific per diem amount multiplied by the 
length of stay, or the full LTC-DRG payment for cases with a length of 
stay between 8 days and half of the average length of stay of the LTC-
DRG.
    In each of the three alternatives examined, the short-stay outlier 
day threshold corresponds to the day where the full LTC-DRG payment 
would be reached by paying the specified percentage of the per diem 
amount for the LTC-DRG. This would result in a gradual increase in 
payment as the length of stay increases without producing a ``payment 
cliff'', which would provide an incentive to discharge a patient one 
day later because there would be a significant increase in the payment. 
For example, in a LTC-DRG with an average length of stay of 24 days and 
a full LTC-DRG payment of $24,000, the per diem amount would be $1,000 
per day ($24,000/24 days). At 150 percent of the per diem amount (1.5 
x  $1,000 = $1,500 per day), the full LTC-DRG payment ($24,000) would 
be reached on day 16 (16 days  x  $1,500 per day = $24,000), which is 
equal to two-thirds of the average length of stay for the LTC-DRG (2/3 
x  24 days = 16 days). Thus, under the second alternative, the upper 
day threshold is two-thirds of the average length of stay and a case 
with a length of stay between 8 and 16 would be paid as a short-stay 
outlier in this example.
    Our analysis of the three alternative short-stay outlier policies 
described above showed that a short-stay outlier policy that would pay 
the least of 100 percent of cost, 100 percent of the LTC-DRG per diem 
amount, or the full LTC-DRG payment with a length of stay between 8 
days and the average length of stay for the LTC-DRG would result in an 
average payment-to-cost ratio of slightly less than 1.0 for cases 
identified as short-stay outliers and a payment-to-cost ratio of just 
over 1.0 for cases that exceeded the average length of stay. Such a 
short-stay outlier policy would slightly ``underpay'' most inlier cases 
while ``overpaying'', and thus reducing the incentives for efficiency 
in the delivery of care of, longer stay cases.
    Our analysis also showed that a short-stay outlier policy that 
would pay the least of 200 percent of cost, 200 percent of the LTC-DRG 
per diem amount, or the full LTC-DRG payment for cases that stayed 
between 8 days and half of the average length of stay for the LTC-DRG 
would result in an average payment-to-cost ratio of greater than 1.5 
for those cases identified as short-stay outliers. Such a short-stay 
outlier policy would result in significant overpayment to those cases 
identified as short-stay outliers.
    Our analysis of a short-stay outlier policy that would pay the 
least of 150 percent of cost, 150 percent of the LTC-DRG per diem 
amount, or the full LTC-DRG payment for cases that stayed between 8 
days and two-thirds of the average length of stay for the LTC-DRG 
showed that payment-to-cost ratios for both cases that would be 
identified as short-stay outliers and inlier cases (that are below the 
high-cost outlier threshold) would be at or slightly above 1.0. We 
believe that this alternative would most appropriately pay cases 
identified as short-stay outliers, inlier cases, and longer stay cases 
without an incentive to provide inefficient care.
    Payment simulations showed that, of the LTCH cases in the FY 2000 
MedPAR with a length of stay between 8 days and two-thirds of the 
average length of stay of the LTC-DRG under the proposed system, 
payment to 60.8 percent of those cases would be capped at 150 percent 
of cost. While we acknowledge that under any prospective payment 
system, hospitals have the opportunity to make a profit on discharges, 
particularly to help cover the expenses of their extraordinarily costly 
Medicare patients, we believe that a payment limited to 150 percent of 
costs or 150 percent of the LTC-DRG per diem payment amount would allow 
LTCHs to make a reasonable, but not excessive, profit for these short-
stay patients.
    Based on the analysis described above, we are proposing, under 
Sec. 412.529, to define a short-stay outlier as a case that has a 
length of stay between 8 days and two-thirds of the arithmetic average 
length of stay for each LTC-DRG. We also are proposing to pay a short-
stay outlier case defined in proposed Sec. 412.529(a) the least of--(1) 
150 percent of the LTC-DRG specific per diem based payment; (2) 150 
percent of the cost of the case; or (3) the full LTC-DRG payment 
(proposed Sec. 412.529(c)(1)).
    The LTC-DRG specific per diem based payment would be determined 
using the proposed standard Federal payment rate (Federal payment rate 
x  LTC-DRG weight) and the arithmetic mean length of stay of the 
specific LTC-DRG (proposed Sec. 412.529(c)(2)). The cost of a case 
would be determined using the hospital-specific cost-to-charge ratio 
and the Medicare allowable charges for the case (proposed 
Sec. 412.529(c)(3)).
3. Interrupted Stay
    We are proposing, under Sec. 412.531, to define interrupted stay 
cases as those cases in which a LTCH patient is discharged to an 
inpatient acute care hospital, an IRF, or a SNF for treatment or 
services not available at the LTCH for a period that is within (less 
than or equal to) one standard deviation from the arithmetic average 
length of stay for the DRG assigned for the inpatient acute care 
hospital stay, one standard deviation from the arithmetic average 
length of stay for the CMG and the comorbidity tier assigned for the 
IRF stay, or within 45 days in a SNF (that is, one standard deviation 
from the average length of stay for all Medicare SNF cases), followed 
by readmittance to the same LTCH. In considering an appropriate 
interrupted stay threshold, we attempted to balance the payment 
incentives of both the LTCH and the acute care hospital, IRF, or SNF to 
which the LTCH patient is discharged before being readmitted to the 
LTCH. In order to assure that discharges from LTCHs are based on 
clinical considerations and not financial incentives, we are proposing 
that the proposed interrupted stay day threshold would only pay the 
LTCH for more than one discharge if the patient's length of stay at the 
acute care hospital, IRF, or SNF exceeds one standard deviation from 
the average length of stay for the DRG, the combination of the CMG and 
the comorbidity tier, or for all Medicare SNF cases, respectively. This 
would, therefore, make it more difficult for a LTCH to find a 
prospectively paid acute care hospital, IRF, or SNF that would admit a 
LTCH patient just to allow the LTCH to receive two separate LTC-DRG 
payments.
    We believe that an interrupted stay day threshold of one standard 
deviation from the average length of stay for either the acute care 
hospital DRG, the IRF combination of the CMG and the comorbidity tier, 
or for all Medicare SNF cases provides the appropriate disincentive 
since cases that stay significantly longer than the average length of 
stay are more costly than the average case. Since the SNF prospective 
payment system is a per diem system, not a per discharge system, we are 
proposing the same threshold for all SNF cases regardless of the 
resource utilization group (RUG) classification.

[[Page 13456]]

We believe that the proposed interrupted stay threshold is appropriate 
because, in general, the average length of stay plus one standard 
deviation would capture the majority of the discharges that are similar 
to the average length of stay for the respective DRG, combination CMG 
and comorbidity tier, or for all Medicare SNF cases. In addition, this 
is consistent with the basis for our payment policy for new 
technologies under the hospital inpatient prospective payment system 
where the cost of a new technology must exceed one standard deviation 
beyond the mean standardized charge for all cases in the DRG to which 
the new technology is assigned in order to receive additional payments 
(see the September 7, 2001 final rule, 66 FR 46914). The counting of 
the days for the interruption of the stay would begin on the day of 
discharge from the proposed LTCH and would end on the day the patient 
is readmitted to the LTCH. For the purposes of payment under the 
proposed LTCH prospective payment system, a case that meets the 
proposed definition of an interrupted stay would be considered a single 
discharge from the LTCH, and, therefore, would receive only one LTC-DRG 
payment. Since the two LTCH stays would be considered as a single case 
for the purposes of payment under the LTCH prospective payment system, 
the second discharge from the LTCH would be covered under the single 
LTC-DRG payment. The acute care hospital, the IRF, or the SNF stay 
would be paid in accordance with the applicable payment policies for 
those providers.
    We are proposing to make one discharge payment under the LTCH 
prospective payment system for an interrupted stay case as defined 
under proposed Sec. 412.531(a), to reduce the incentives inherent in a 
discharged-based prospective payment system of ``shifting'' patients 
between Medicare-covered sites of care in order to maximize Medicare 
payments. This proposed policy is particularly appropriate for LTCHs 
since, as a group, these hospitals are considerably diverse and offer a 
broad range of services such that where some LTCHs may be able to 
handle certain acute conditions, others would need to transfer their 
patients to acute care hospitals. (See section I.E. of this preamble 
for a description of the universe of LTCHs.)
    For instance, some LTCHs are equipped with operating rooms and 
intensive care units and are capable of performing minor surgeries. 
However, other LTCHs are unable to provide those services and would 
need to transfer the beneficiary to an acute care hospital. Similarly, 
a patient who no longer requires hospital-level care, but is not ready 
to return to the community, could be transferred to a SNF. This 
incentive to ``shift'' patients between Medicare-covered sites of care 
in order to maximize Medicare payments is of a particular concern when 
the LTCH is physically located within the walls of another hospital. 
Often, the LTCH patient may not even be aware of a transfer to the 
other hospital or SNF because he or she will have only been moved down 
the hall or to another wing of the building. Moreover, our research 
reveals that hospitals-within-hospitals are the fastest growing type of 
LTCH. We also believe that the same incentives for inappropriate 
discharges and readmittance exist for satellite LTCHs that are located 
within acute care hospitals, described in Sec. 412.22(h), as well as 
for distinct part SNFs located in acute care hospitals or co-located 
with LTCHs. (We address the particular issues of onsite discharges and 
readmittances in section IV.B.5. (proposed Sec. 412.532(d)) in this 
proposed rule.)
    Whether or not a LTCH patient who is discharged to an inpatient 
acute care hospital, an IRF, or a SNF and then returns to the same LTCH 
is treated as an interrupted stay (with one LTC-DRG payment) or as a 
new admission (with two separate LTC-DRG payments) would depend on the 
patient's length of stay compared to the arithmetic average length of 
stay and the standard deviation for the hospital inpatient prospective 
payment system DRG, the IRF combination of the CMG and the comorbidity 
tier, or 45 days for all Medicare SNF cases. The arithmetic average 
length of stay and one standard deviation for each acute care hospital 
DRG and each IRF combination of the CMG and the comorbidity tier are 
shown below in Tables 5 and 6, respectively.

 Table 5.--Arithmetic Average Length of Stay and One Standard Deviation
                      for Acute Care Hospital DRGs
------------------------------------------------------------------------
                                                       Average length of
                                                         stay plus one
  Hospital inpatient prospective payment system DRG         standard
                                                           deviation
------------------------------------------------------------------------
1....................................................                 18
2....................................................                 19
3....................................................                 56
4....................................................                 16
5....................................................                  7
6....................................................                  7
7....................................................                 22
8....................................................                  6
9....................................................                 13
10...................................................                 14
11...................................................                  8
12...................................................                 13
13...................................................                 11
14...................................................                 11
15...................................................                  7
16...................................................                 12
17...................................................                  6
18...................................................                 10
19...................................................                  7
20...................................................                 20
21...................................................                 12
22...................................................                 10
23...................................................                  8
24...................................................                 11
25...................................................                  6
26...................................................                  5
27...................................................                 11
28...................................................                 12
29...................................................                  7
31...................................................                 13
32...................................................                  5
34...................................................                 10
35...................................................                 10
36...................................................                  3
37...................................................                  9
38...................................................                  5
39...................................................                  4
40...................................................                  7
42...................................................                  5
43...................................................                  5
44...................................................                  9
45...................................................                  6
46...................................................                  9
47...................................................                  6
49...................................................                 10
50...................................................                  4
51...................................................                  7
52...................................................                  4
53...................................................                  8
54...................................................                  2
55...................................................                  7
56...................................................                  6
57...................................................                 10
59...................................................                  6
60...................................................                  6
61...................................................                 12
62...................................................                  2
63...................................................                 10
64...................................................                 13
65...................................................                  5
66...................................................                  6
67...................................................                  7
68...................................................                  7
69...................................................                  6
70...................................................                  5
71...................................................                  7
72...................................................                  7
73...................................................                  9
75...................................................                 19
76...................................................                 24
77...................................................                 10
78...................................................                 11
79...................................................                 16
80...................................................                 10
81...................................................                 48
82...................................................                 13
83...................................................                 10

[[Page 13457]]

 
84...................................................                  6
85...................................................                 12
86...................................................                  7
87...................................................                 12
88...................................................                  9
89...................................................                 10
90...................................................                  7
91...................................................                  8
92...................................................                 12
93...................................................                  7
94...................................................                 12
95...................................................                  7
96...................................................                  8
97...................................................                  6
98...................................................                  9
99...................................................                  6
100..................................................                  4
101..................................................                  8
102..................................................                  5
103..................................................                112
104..................................................                 25
105..................................................                 18
106..................................................                 19
107..................................................                 17
108..................................................                 19
109..................................................                 13
110..................................................                 18
111..................................................                  8
113..................................................                 24
114..................................................                 17
115..................................................                 16
116..................................................                  9
117..................................................                 10
118..................................................                  6
119..................................................                 11
120..................................................                 20
121..................................................                 12
122..................................................                  6
123..................................................                 10
124..................................................                  9
125..................................................                  5
126..................................................                 22
127..................................................                 10
128..................................................                  9
129..................................................                  8
130..................................................                 10
131..................................................                  7
132..................................................                  6
133..................................................                  4
134..................................................                  6
135..................................................                  9
136..................................................                  5
138..................................................                  8
139..................................................                  4
140..................................................                  5
141..................................................                  7
142..................................................                  5
143..................................................                  4
144..................................................                 11
145..................................................                  5
146..................................................                 18
147..................................................                  9
148..................................................                 22
149..................................................                  9
150..................................................                 20
151..................................................                 10
152..................................................                 14
153..................................................                  8
154..................................................                 25
155..................................................                  8
156..................................................                 15
157..................................................                 11
158..................................................                  5
159..................................................                 10
160..................................................                  5
161..................................................                  9
162..................................................                  4
163..................................................                  8
164..................................................                 14
165..................................................                  7
166..................................................                 10
167..................................................                  4
168..................................................                 10
169..................................................                  5
170..................................................                 24
171..................................................                  9
172..................................................                 14
173..................................................                  7
174..................................................                  9
175..................................................                  5
176..................................................                 10
177..................................................                  8
178..................................................                  5
179..................................................                 11
180..................................................                 10
181..................................................                  6
182..................................................                  8
183..................................................                  5
184..................................................                  5
185..................................................                  9
186..................................................                 18
187..................................................                  7
188..................................................                 11
189..................................................                  6
190..................................................                 23
191..................................................                 28
192..................................................                 11
193..................................................                 22
194..................................................                 11
195..................................................                 18
196..................................................                  9
197..................................................                 16
198..................................................                  7
199..................................................                 19
200..................................................                 22
201..................................................                 26
202..................................................                 13
203..................................................                 13
204..................................................                 11
205..................................................                 12
206..................................................                  7
207..................................................                 10
208..................................................                  5
209..................................................                  8
210..................................................                 12
211..................................................                  8
212..................................................                 25
213..................................................                 18
216..................................................                 19
217..................................................                 29
218..................................................                 10
219..................................................                  5
220..................................................                  7
223..................................................                  6
224..................................................                  3
225..................................................                 10
226..................................................                 14
227..................................................                  5
228..................................................                  8
229..................................................                  5
230..................................................                 12
231..................................................                 11
232..................................................                  7
233..................................................                 15
234..................................................                  7
235..................................................                 16
236..................................................                  9
237..................................................                  6
238..................................................                 17
239..................................................                 12
240..................................................                 13
241..................................................                  7
242..................................................                 13
243..................................................                  9
244..................................................                 10
245..................................................                  8
246..................................................                  8
247..................................................                  7
248..................................................                  9
249..................................................                  8
250..................................................                  8
251..................................................                  5
253..................................................                 10
254..................................................                  6
256..................................................                 10
257..................................................                  6
258..................................................                  3
259..................................................                  7
260..................................................                  2
261..................................................                  5
262..................................................                  8
263..................................................                 24
264..................................................                 13
265..................................................                 16
266..................................................                  7
267..................................................                  8
268..................................................                  8
269..................................................                 17
270..................................................                  8
271..................................................                 14
272..................................................                 12
273..................................................                  8
274..................................................                 13
275..................................................                 10
276..................................................                 10
277..................................................                 11
278..................................................                  7
279..................................................                  4
280..................................................                  8
281..................................................                  6
282..................................................                  2
283..................................................                  9
284..................................................                  6
285..................................................                 20
286..................................................                 13
287..................................................                 22
288..................................................                 12
289..................................................                  7
290..................................................                  5
291..................................................                  3
292..................................................                 21

[[Page 13458]]

 
293..................................................                 12
294..................................................                  9
295..................................................                  7
296..................................................                 10
297..................................................                  6
298..................................................                  6
299..................................................                 11
300..................................................                 12
301..................................................                  7
302..................................................                 16
303..................................................                 15
304..................................................                 18
305..................................................                  6
306..................................................                 12
307..................................................                  4
308..................................................                 14
309..................................................                  4
310..................................................                 10
311..................................................                  3
312..................................................                 10
313..................................................                  5
315..................................................                 19
316..................................................                 13
317..................................................                  6
318..................................................                 12
319..................................................                  5
320..................................................                 10
321..................................................                  7
322..................................................                  7
323..................................................                  6
324..................................................                  3
325..................................................                  7
326..................................................                  5
327..................................................                  5
328..................................................                  7
329..................................................                  4
331..................................................                 11
332..................................................                  6
333..................................................                 10
334..................................................                  9
335..................................................                  5
336..................................................                  7
337..................................................                  3
338..................................................                 11
339..................................................                 10
341..................................................                  8
342..................................................                  7
344..................................................                  6
345..................................................                  8
346..................................................                 12
347..................................................                  6
348..................................................                  8
349..................................................                  5
350..................................................                  8
352..................................................                  9
353..................................................                 13
354..................................................                 11
355..................................................                  5
356..................................................                  4
357..................................................                 16
358..................................................                  9
359..................................................                  4
360..................................................                  6
361..................................................                  7
363..................................................                  8
364..................................................                  9
365..................................................                 15
366..................................................                 14
367..................................................                  6
368..................................................                 12
369..................................................                  7
370..................................................                 13
371..................................................                  7
372..................................................                  7
373..................................................                  4
374..................................................                  6
375..................................................                  3
376..................................................                  6
377..................................................                 10
378..................................................                  4
379..................................................                  8
380..................................................                  4
381..................................................                  6
382..................................................                  2
383..................................................                  8
384..................................................                  4
389..................................................                 34
390..................................................                  7
392..................................................                 19
394..................................................                 18
395..................................................                  9
396..................................................                  9
397..................................................                 10
398..................................................                 12
399..................................................                  6
400..................................................                 20
401..................................................                 22
402..................................................                  8
403..................................................                 16
404..................................................                  9
406..................................................                 20
407..................................................                  8
408..................................................                 19
409..................................................                 12
410..................................................                  8
411..................................................                  4
412..................................................                  4
413..................................................                 14
414..................................................                  8
415..................................................                 30
416..................................................                 14
417..................................................                  8
418..................................................                 12
419..................................................                  9
420..................................................                  6
421..................................................                  7
422..................................................                  5
423..................................................                 17
424..................................................                 36
425..................................................                  8
426..................................................                  9
427..................................................                 10
428..................................................                 19
429..................................................                 15
430..................................................                 17
431..................................................                 15
432..................................................                 12
433..................................................                  7
439..................................................                 18
440..................................................                 20
441..................................................                  7
442..................................................                 19
443..................................................                  7
444..................................................                  8
445..................................................                  5
447..................................................                  5
449..................................................                  8
450..................................................                  4
451..................................................                  2
452..................................................                 10
453..................................................                  5
454..................................................                 11
455..................................................                  6
461..................................................                 12
462..................................................                 20
463..................................................                  8
464..................................................                  6
465..................................................                  6
466..................................................                  9
467..................................................                  7
468..................................................                 26
470..................................................                 88
471..................................................                 10
473..................................................                 28
475..................................................                 22
476..................................................                 20
477..................................................                 18
478..................................................                 15
479..................................................                  7
480..................................................                 44
481..................................................                 37
482..................................................                 26
483..................................................                 69
484..................................................                 25
485..................................................                 19
486..................................................                 24
487..................................................                 14
488..................................................                 34
489..................................................                 18
490..................................................                 11
491..................................................                  6
492..................................................                 32
493..................................................                 11
494..................................................                  4
495..................................................                 28
496..................................................                 18
497..................................................                 12
498..................................................                  6
499..................................................                  9
500..................................................                  5
501..................................................                 20
502..................................................                 12
503..................................................                  8
504..................................................                 56
505..................................................                  9
506..................................................                 33
507..................................................                 16
508..................................................                 16
509..................................................                  9
510..................................................                 15
511..................................................                 11
512..................................................                 24
513..................................................                 18
514..................................................                 16
515..................................................                 14
516..................................................                  9
517..................................................                  6
518..................................................                  8
519..................................................                 11
520..................................................                  4
521..................................................                 12

[[Page 13459]]

 
522..................................................                 17
523..................................................                 8
------------------------------------------------------------------------
* Arithmetic average length of stay and standard deviation based on data
  used to develop the hospital inpatient prospective payment system FY
  2002 DRG relative weights (see the August 1, 2001 final rule, 66 FR
  40054).


 Table 6.--Arithmetic Average Length of Stay and One Standard Deviation
            for IRF Combination of CMG and Comorbidity Tiers
------------------------------------------------------------------------
                                                          Average length
                                            Comorbidity    of stay plus
   IRF prospective payment system CMG          tier        one standard
                                                            deviation**
------------------------------------------------------------------------
0101**..................................               1              11
0101**..................................               2              10
0101....................................               3               8
0101....................................            None              13
0102**..................................               1              17
0102....................................               2              18
0102....................................               3              16
0102....................................               9              15
0103**..................................               1              19
0103**..................................               2              18
0103....................................               3              17
0103....................................            None              18
0104....................................               1              25
0104....................................               2              18
0104....................................               3              18
0104....................................            None              19
0105....................................               1              24
0105....................................               2              25
0105....................................               3              22
0105....................................            None              23
0106....................................               1              26
0106....................................               2              26
0106....................................               3              27
0106....................................            None              27
0107....................................               1              25
0107....................................               2              30
0107....................................               3              30
0107....................................            None              30
0108**..................................               1              35
0108....................................               2              44
0108....................................               3              33
0108....................................            None              33
0109....................................               1              36
0109....................................               2              35
0109....................................               3              31
0109....................................            None              35
0110**..................................               1              39
0110....................................               2              35
0110....................................               3              40
0110....................................            None              39
0111**..................................               1              40
0111....................................               2              38
0111....................................               3              35
0111....................................            None              39
0112....................................               1              66
0112....................................               2              52
0112....................................               3              45
0112....................................            None              44
0113....................................               1              46
0113....................................               2              41
0113....................................               3              38
0113....................................            None              40
0114....................................               1              56
0114....................................               2              51
0114....................................               3              48
0114....................................            None              48
0201**..................................               1              19
0201....................................               2              22
0201....................................               3              21
0201....................................            None              17
0202**..................................               1              27
0202....................................               2              24
0202....................................               3              26
0202....................................            None              25
0203....................................               1              27
0203....................................               2              27
0203....................................               3              30
0203....................................            None              27
0204**..................................               1              35
0204....................................               2              34
0204....................................               3              33
0204....................................            None              33
0205....................................               1              65
0205....................................               2              56
0205....................................               3              52
0205....................................            None              48
0301**..................................               1              21
0301....................................               2              22
0301....................................               3              19
0301....................................            None              20
0302**..................................               1              27
0302....................................               2              25
0302....................................               3              27
0302....................................            None              25
0303....................................               1              33
0303....................................               2              35
0303....................................               3              33
0303....................................            None              32
0304....................................               1              63
0304....................................               2              50
0304....................................               3              53
0304....................................            None              47
0401**..................................               1              22
0401....................................               2              22
0401....................................               3              30
0401....................................            None              30
0402**..................................               1              30
0402....................................               2              27
0402....................................               3              33
0402....................................            None              31
0403**..................................               1              51
0403....................................               2              55
0403....................................               3              50
0403....................................            None              52
0404....................................               1              87
0404....................................               2              64
0404....................................               3             101
0404....................................            None              66
0501**..................................               1              18
0501....................................               2              21
0501....................................               3              15
0501....................................            None              16
0502**..................................               1              18
0502....................................               2              26
0502....................................               3              13
0502....................................            None              18
0503**..................................               1              25
0503....................................               2              26
0503....................................               3              23
0503....................................            None              22
0504**..................................               1              33
0504....................................               2              31
0504....................................               3              37
0504....................................            None              29
0505....................................               1              46
0505....................................               2              48
0505....................................               3              44
0505....................................            None              45
0601**..................................               1              20
0601....................................               2              21
0601....................................               3              17
0601....................................            None              19
0602....................................               1              19
0602....................................               2              22
0602....................................               3              21
0602....................................            None              23
0603....................................               1              33
0603....................................               2              27
0603....................................               3              27
0603....................................            None              27
0604....................................               1              49
0604....................................               2              36
0604....................................               3              40
0604....................................            None              36
0701**..................................               1              18
0701....................................               2              18
0701....................................               3              19
0701....................................            None              17
0702**..................................               1              22
0702....................................               2              22
0702....................................               3              23
0702....................................            None              20
0703**..................................               1              25
0703....................................               2              26
0703....................................               3              25
0703....................................            None              24
0704....................................               1              19
0704....................................               2              29
0704....................................               3              26
0704....................................            None              26
0705....................................               1              29
0705....................................               2              32
0705....................................               3              32
0705....................................            None              31
0801**..................................               1              13
0801....................................               2              13
0801....................................               3              12
0801....................................            None              12
0802**..................................               1              14
0802....................................               2              15
0802....................................               3              13
0802....................................            None              13
0803....................................               1              13

[[Page 13460]]

 
0803....................................               2              16
0803....................................               3              19
0803....................................            None              15
0804....................................               1              21
0804....................................               2              20
0804....................................               3              21
0804....................................            None              18
0805**..................................               1              22
0805....................................               2              24
0805....................................               3              21
0805....................................            None              20
0806**..................................               1              30
0806....................................               2              30
0806....................................               3              28
0806....................................            None              27
0901**..................................               1              17
0901....................................               2              17
0901....................................               3              17
0901....................................            None              16
0902**..................................               1              21
0902....................................               2              22
0902....................................               3              20
0902....................................            None              20
0903**..................................               1              26
0903....................................               2              27
0903....................................               3              27
0903....................................            None              24
0904**..................................               1              35
0904....................................               2              36
0904....................................               3              35
0904....................................            None              33
1001**..................................               1              19
1001....................................               2              23
1001....................................               3              18
1001....................................            None              21
1002**..................................               1              22
1002....................................               2              22
1002....................................               3              21
1002....................................            None              23
1003**..................................               1              26
1003....................................               2              27
1003....................................               3              25
1003....................................            None              27
1004**..................................               1              29
1004....................................               2              30
1004....................................               3              28
1004....................................            None              28
1005....................................               1              30
1005....................................               2              37
1005....................................               3              38
1005....................................            None              35
1101**..................................               1              24
1101....................................               2              17
1101....................................               3              19
1101....................................            None              18
1102**..................................               1              33
1102....................................               2              26
1102....................................               3              26
1102....................................            None              28
1103**..................................               1              43
1103....................................               2              33
1103....................................               3              33
1103....................................            None              39
1201**..................................               1              16
1201....................................               2              14
1201....................................               3              16
1201....................................            None              14
1202**..................................               1              22
1202....................................               2              16
1202....................................               3              20
1202....................................            None              20
1203**..................................               1              23
1203....................................               2              20
1203....................................               3              20
1203....................................            None              20
1204**..................................               1              29
1204....................................               2              26
1204....................................               3              24
1204....................................            None              25
1205**..................................               1              36
1205....................................               2              32
1205....................................               3              31
1205....................................            None              30
1301**..................................               1              19
1301....................................               2              21
1301....................................               3              21
1301....................................            None              17
1302**..................................               1              22
1302....................................               2              21
1302....................................               3              21
1302....................................            None              20
1303**..................................               1              27
1303....................................               2              25
1303....................................               3              24
1303....................................            None              26
1304**..................................               1              39
1304....................................               2              39
1304....................................               3              46
1304....................................            None              36
1401....................................               1              25
1401....................................               2              17
1401....................................               3              15
1401....................................            None              16
1402....................................               1              19
1402....................................               2              21
1402....................................               3              20
1402....................................            None              20
1403....................................               1              31
1403....................................               2              28
1403....................................               3              23
1403....................................            None              24
1404....................................               1              44
1404....................................               2              36
1404....................................               3              32
1404....................................            None              31
1501**..................................               1              20
1501....................................               2              18
1501....................................               3              20
1501....................................            None              20
1502**..................................               1              23
1502....................................               2              26
1502....................................               3              19
1502....................................            None              23
1503**..................................               1              28
1503....................................               2              29
1503....................................               3              25
1503....................................            None              27
1504**..................................               1              46
1504....................................               2              44
1504....................................               3              49
1504....................................            None              42
1601**..................................               1              22
1601....................................               2              21
1601....................................               3              20
1601....................................            None              20
1602**..................................               1              31
1602....................................               2              30
1602....................................               3              31
1602....................................            None              27
1701**..................................               1              20
1701....................................               2              19
1701....................................               3              15
1701....................................            None              21
1702**..................................               1              29
1702....................................               2              29
1702....................................               3              30
1702....................................            None              26
1703....................................               1              48
1703....................................               2              45
1703....................................               3              41
1703....................................            None              37
1801**..................................               1              17
1801**..................................               2              17
1801**..................................               3              17
1801....................................            None              15
1802**..................................               1              26
1802**..................................               2              26
1802**..................................               3              26
1802....................................            None              26
1803**..................................               1              33
1803....................................               2              37
1803....................................               3              31
1803....................................            None              33
1804**..................................               1              58
1804....................................               2              45
1804**..................................               3              56
1804....................................            None              56
1901**..................................               1              22
1901**..................................               2              22
1901....................................               3              25
1901....................................            None              22
1902**..................................               1              39
1902....................................               2              39
1902....................................               3              39
1902....................................            None              36
1903**..................................               1              54
1903....................................               2              47
1903....................................               3              42
1903....................................            None              59
2001....................................               1              20
2001....................................               2              20
2001....................................               3              18
2001....................................            None              18
2002....................................               1              21
2002....................................               2              23
2002....................................               3              21
2002....................................            None              22
2003....................................               1              29
2003....................................               2              27
2003....................................               3              27
2003....................................            None              27
2004....................................               1              47

[[Page 13461]]

 
2004....................................               2              33
2004....................................               3              32
2004....................................            None              34
2005....................................               1              50
2005....................................               2              39
2005....................................               3              38
2005....................................            None              37
2101**..................................               1              26
2101**..................................               2              25
2101**..................................               3              22
2101....................................            None              24
2102**..................................               1              44
2102....................................               2              41
2102....................................               3              39
2102....................................            None              48
5001....................................            None               3
5101....................................            None              11
5102....................................            None              31
5103....................................            None              12
5104....................................            None             43
------------------------------------------------------------------------
* Arithmetic average length of stay and standard deviation based on data
  used to develop the IRF PPS relative weights for the combination CMG
  and comorbidity tiers in the August 7, 2001 final rule (66 FR 41394).
** Standard deviation for this combination CMG comorbidity tiers is
  unavailable; the lowest standard deviation for the CMG was used to
  determine the average length of stay plus one standard deviation.

    If the LTCH patient who was discharged to an acute care hospital or 
an IRF has a length of stay in the acute care hospital or the IRF that 
exceeds one standard deviation from the average length of stay of the 
hospital inpatient DRG or the combination of the CMG and the 
comorbidity tier, respectively, then the subsequent admission to the 
same LTCH would be treated as a new LTCH stay rather than being 
considered as an interrupted stay, even if the second discharge is 
determined to fall into the same LTC-DRG as the original stay in the 
LTCH. Similarly, a patient returning to the LTCH following a stay in a 
SNF of longer than 45 days (more than one standard deviation from the 
average length of stay for all Medicare SNF cases) would be paid as a 
new stay for the LTCH. Thus, under this circumstance, the beneficiary 
would be deemed to have had two separate stays at the LTCH, resulting 
in two separate payments under the LTCH prospective payment system.
    An interrupted stay could occur during a regular inlier case 
(length of stay greater than two-thirds the average length of stay for 
the LTC-DRG). A very short-stay discharge or a short-stay outlier (as 
explained in sections IV.B.1 and IV.B.2., respectively, of this 
proposed rule) could also become an interrupted stay if the beneficiary 
is discharged to an acute care hospital, an IRF, or a SNF. Whether or 
not the beneficiary's stay would remain in either of these categories 
would depend upon the total length of stay in the LTCH. Upon the 
initial discharge to the acute care hospital, the IRF, or the SNF, the 
LTCH ``day count'' would stop. For an interrupted stay case, this count 
would be resumed upon readmission to the LTCH until the beneficiary's 
final discharge (home, another site of care, or death). Thus, the 
period of absence (number of days) that the beneficiary is a patient in 
the acute care hospital, the IRF, or the SNF during a LTCH interrupted 
stay would not be included in determining the length of stay of the 
LTCH stay.
    If the total number of days at the LTCH, from the initial admission 
to the final discharge, still falls into either the very short-stay 
discharge or short-stay outlier payment category, the LTCH would 
receive payment according to the proposed very short-stay discharge 
policy described in section IV.B.1. of this preamble or the proposed 
short-stay outlier policy described in section IV.B.2. of this 
preamble, respectively. If, on the other hand, the total number of days 
in the LTCH exceeds two-thirds of the average length of stay of the 
LTC-DRG (the proposed short-stay outlier criteria), one full LTC-DRG 
payment would be made for the case. Moreover, all applicable payment 
policies, including outliers and transfers for the acute care hospital 
inpatient prospective payment system and the IRF prospective payment 
system would still apply under this proposed policy.
    The following are examples of possible ways in which these proposed 
policies would interact:

    Example 1: A beneficiary stays in the LTCH for 5 days and is 
discharged to an inpatient acute care hospital and the length of 
stay at the acute care hospital is more than the sum of the average 
length of stay of the DRG under the hospital inpatient prospective 
payment system and one standard deviation before being discharged 
back to the LTCH. Medicare hospital payments for this beneficiary 
would be as follows:
     One very short-stay discharge LTCH prospective payment 
system payment to the LTCH for the first (5-day length of stay) LTCH 
discharge.
     Payment to the acute care hospital under the hospital 
inpatient prospective payment system for the acute care stay.
     A separate LTCH prospective payment system payment 
either as a very short-stay discharge (see proposed Sec. 412.527), a 
short-stay outlier (see proposed Sec. 412.529) or regular stay, 
depending on the second LTCH length of stay. This case would not be 
an interrupted stay because the acute care hospital stay was for 
more days than one standard deviation from the average length of 
stay of the DRG under the acute care hospital inpatient prospective 
payment system.
    Example 2: A beneficiary stays in the LTCH for 5 days and is 
discharged to an inpatient acute care hospital and the length of 
stay at the acute care hospital is a number of days that is less 
than or equal to the sum of the average length of stay of the acute 
care hospital inpatient DRG and one standard deviation before being 
discharged back to the LTCH. The beneficiary remains in the LTCH for 
an additional 9 days after readmission to the LTCH following the 
acute care hospital stay. This case would be treated as an 
interrupted stay and Medicare hospital payments for this beneficiary 
would be as follows:
     Payment to the acute care hospital under the hospital 
inpatient prospective payment system for the DRG for the acute care 
hospital stay.
     The stay was interrupted because the acute care 
hospital stay was within one standard deviation from the average 
length of stay of the acute care hospital inpatient DRG. Therefore, 
a single payment would be made to the LTCH under the proposed LTCH 
prospective payment system. This payment would be a short-stay 
outlier payment (under proposed Sec. 412.529) if the total LTCH 
length of stay (14 days) is less than two-thirds the average length 
of stay of the LTC-DRG.
    Example 3: A beneficiary stays in the LTCH for 5 days and is 
discharged to an IRF and the length of stay at the IRF is less than 
or equal to the sum of the average length of stay of the IRF 
combination of the CMG and the comorbidity tier and one standard 
deviation before being discharged back to the LTCH. The beneficiary 
remained in the LTCH for an additional 12 days, so that the combined 
17 days is greater than two-thirds of the average length of stay for 
the LTC-DRG after readmission to the LTCH following the IRF stay. 
This case would be an interrupted stay and Medicare hospital 
payments for this beneficiary would be as follows:
     Payment to the IRF under the IRF prospective payment 
system for the combination of the CMG and the comorbidity tier for 
the IRF stay; and
     Since the stay was interrupted because the IRF stay was 
within one standard deviation from the average length of stay of the 
IRF combination of the CMG and the comorbidity tier, a single 
payment would be made under LTCH prospective payment system. This 
payment would be a full LTC-DRG payment because the total LTCH 
length of stay is greater than two-thirds of the average length of 
stay of the LTC-DRG.

    In Example 2 and Example 3, upon return to the LTCH following the 
discharge from the acute care hospital or the IRF, the day count would 
be resumed at day 6 of the LTCH stay. If the beneficiary was then 
discharged on day 6 or 7, the stay would be paid as a very short-stay 
discharge (see

[[Page 13462]]

proposed Sec. 412.527); if the beneficiary was discharged within two-
thirds of the average length of stay for the LTC-DRG, the stay would be 
paid as a short-stay outlier (see proposed Sec. 412.529); and if the 
beneficiary was discharged beyond the short-stay threshold (two-thirds 
of the average length of stay for the LTC-DRG), the case would be paid 
for the full LTC-DRG.
    While the interrupted stay policy proposed under Sec. 412.531 is 
based in part on clinical considerations, we realize that it may be 
somewhat administratively burdensome for the LTCH to determine the DRG 
for the acute care hospital stay or the combination of the CMG and the 
comorbidity tier for the IRF stay in order to determine whether or not 
a beneficiary that is discharged to an acute care hospital, an IRF, or 
a SNF and then returns to the LTCH would be an interrupted stay (with a 
single LTCH prospective payment system payment) or a new admission 
(with two separate LTCH prospective payment system payments). 
Therefore, we are considering treating all patients who are discharged 
to either an acute care hospital or an IRF and admitted back to the 
LTCH within a fixed period of time (as we have proposed for SNFs), 
regardless of the DRG of the patient in the acute care hospital or the 
combination of the CMG and the comorbidity tier of the patient in the 
IRF, as an interrupted stay. We believe that 9 days for acute care 
hospitals and 27 days for IRFs would be an appropriate threshold to 
identify interrupted stay cases because, in both cases, the proposed 
thresholds are one standard deviation from the average length of stay 
of all patients in those respective settings. We are aware that, under 
such a policy, less clinically complex brief acute care hospital and 
IRF stays would be included and would become an interrupted stay if the 
beneficiary returns to a LTCH. However, those types of cases would be 
offset by stays that require more intense and lengthy care. We are in 
the process of further analyzing Medicare claims data for LTCH 
beneficiaries who are discharged to an acute care hospital or an IRF 
and return to the LTCH following that stay to determine if an 
interrupted stay threshold of a fixed number of days is the more 
appropriate policy. We specifically solicit comments on the appropriate 
period of absence for such an interrupted stay threshold. We also are 
interested in receiving comments regarding the inclusion of discharges 
to psychiatric hospitals or units in our proposed interrupted stay 
policy.
4. Other Special Cases
    Under other Medicare prospective payment systems, specifically for 
inpatient acute care hospitals and for IRFs, there are separate 
policies for other types of special cases such as transfer cases and 
patients who expire. We believe the proposed very short-stay discharge 
policy (under proposed Sec. 412.527), the proposed short-stay outlier 
policy (under proposed Sec. 412.529), and the proposed interrupted stay 
policy (under proposed Sec. 412.531) would adequately address these 
circumstances. For instance, a case with a stay that is less than two-
thirds the average length of stay of the LTC-DRG would be paid under 
the proposed short-stay outlier policy (or the very short-stay 
discharge policy if the length of stay is 7 days or fewer) regardless 
of whether or not the patient is transferred upon discharge to his or 
her home or to another setting where Medicare would make additional 
payments, or whether the patient expired. Moreover, if a beneficiary's 
stay at the LTCH is at least two-thirds the average length of stay of 
the LTC-DRG, a full LTC-DRG payment would be made regardless of the 
destination following discharge. Therefore, we are not proposing a 
separate policy for cases that are transferred (except for those that 
are encompassed by the proposed interrupted stay policy) or for 
patients who expire.
    Currently, under the hospital inpatient prospective payment system, 
discharges in 10 DRGs are considered to be transfers if the patients 
are discharged to another Medicare post-acute site of care, such as a 
LTCH, under section 1886(d)(5)(J)(ii) of the Act, implemented in 
regulations at Sec. 412.4. The rationale behind this amendment was 
Congressional concern that Medicare may, in some cases, be ``overpaying 
hospitals for patients who are transferred to a post-acute care setting 
after a very short acute care hospital stay.'' (Conference Agreement, 
H.R. Conf. Rept. No. 105-217, 105th Cong., 1st Sess., at 740 (1997).) 
In such a scenario, Medicare would also have to pay the post-acute care 
provider for care that theoretically could have been provided at the 
acute care hospital. Section 1886(d)(5)(J)(iv) of the Act authorizes 
the Secretary to expand the post-acute care transfer policy to 
additional DRGs. From the standpoint of LTCHs, the impact of expanding 
the hospital inpatient prospective payment system post-acute care 
transfer policy could be significant for the LTCH prospective payment 
system since this policy could affect behavior at acute care hospitals. 
If additional discharges would be paid as transfers, these patients may 
be kept longer at acute care hospitals in order to avoid a reduced 
payment for the transfer and then have a shorter length of stay during 
the subsequent stay at the LTCH. Presently, approximately 70 percent of 
LTCH Medicare patients are admitted following discharge from an acute 
care hospital. We are presently exploring whether to propose an 
expansion of the 10-DRG policy in the FY 2003 hospital inpatient 
prospective payment system proposed rule.
5. Onsite Discharges and Readmittances
    As we explained above, we do not believe that a separate policy 
governing transfers of Medicare patients between LTCHs and acute care 
hospitals is necessary at this time. However, we are proposing a policy 
that would address transfers between LTCHs and distinct-part SNFs, 
acute care hospitals, rehabilitation facilities, or psychiatric 
facilities when the LTCH and any of these other providers are co-
located because of the potential for inappropriate shifting of patients 
among these providers without clinical justification to maximize 
Medicare payment. This situation may occur when a distinct-part SNF is 
part of a LTCH or when the LTCH is located within an acute care 
hospital or an IRF as either a ``hospital-within-a-hospital (as defined 
in Sec. 412.22(e)) or a ``satellite facility'' (as defined in 
Sec. 412.22(h)) and a distinct-part SNF (as defined in section 1819(a) 
of the Act) is also part of the same acute care hospital or IRF. 
(Section I.E.9. of this proposed rule describes findings from Urban's 
research on the admission and discharge patterns between LTCHs and 
SNFs.)
    Similarly, a long-term care ``hospital-within-a-hospital'' or 
satellite facility may be co-located with a psychiatric or 
rehabilitation hospital that is also a hospital within the same acute 
care hospital or is a satellite facility situated in the same acute 
care hospital (Secs. 412.25 and 412.27), or may be co-located in an 
acute care hospital with a psychiatric unit (Sec. 412.27) or a 
satellite psychiatric or rehabilitation unit (Sec. 412.25(e)).
    We believe that a per discharge system, such as the prospective 
payment system for LTCHs, could provide inappropriate incentives to 
prematurely discharge patients to one of these other onsite providers 
once their lengths of stay at the LTCH exceeded the thresholds 
established by the short-stay discharge and outlier policies described 
in section IV.B. of this proposed rule. These discharges would

[[Page 13463]]

be based on payment considerations rather than on a clinical basis as 
an extension of the normal progression of appropriate patient care. If 
the long-term care hospital-within-a-hospital inappropriately 
discharges Medicare patients to the distinct-part SNF, or the onsite 
IRF, psychiatric facility, or acute care hospital without providing a 
complete episode of hospital-level care, Medicare would make 
inappropriate payments to the long-term care hospital-within-a-
hospital, since payments under the proposed prospective payment system 
would have been calculated based on a complete episode of such care. 
This type of a case could then be followed by a readmission to the LTCH 
from the onsite provider for an additional LTC-DRG payment. (In the 
case of a discharge from a LTCH to an offsite acute care hospital, an 
IRF, or a SNF with a subsequent return to the LTCH, payments would also 
be considered under the interrupted stay policy set forth at section 
IV.B.3. of this proposed rule and at proposed Sec. 412.531.)
    In determining an appropriate response to onsite discharges and 
readmittances, we are proposing a policy consistent with our policy 
described in the July 30, 1999 Federal Register (64 FR 41535) that 
addresses inappropriate discharges of patients between an acute care 
hospital inpatient prospective payment system excluded hospital-within-
a-hospital (such as a LTCH) to the host acute care hospital, that 
culminated in a readmission to the hospital-within-a-hospital. In that 
context, we expressed the same concern noted above--that these types of 
moves were occurring for financial rather than clinical reasons. In 
order to discourage these practices, we implemented regulations at 
Sec. 413.40(a)(3) to specify how to calculate the cost per discharge 
under the excluded hospital payment provisions. Under those 
regulations, during a cost reporting period, if the hospital-within-a-
hospital discharges more than 5 percent of its inpatients to the acute 
care hospital where it is located, and those patients are readmitted to 
the excluded hospital, Medicare considers each patient's entire stay as 
one discharge for purposes of calculating the cost per discharge of the 
excluded hospital. In determining whether a patient has previously been 
discharged and then readmitted, we consider all prior discharges, even 
if the discharge occurs late in one cost reporting period and the 
readmission occurs in the next cost reporting period. Only when the 
excluded hospital's number of these cases in a particular cost 
reporting year exceeds 5 percent of the total number of its discharges 
are the first discharges not counted for payment purposes. (If the 5-
percent threshold is not triggered, all discharges are counted 
separately.)
    With the implementation of the per discharge prospective payment 
system for LTCHs, we are proposing to adopt a similar policy to address 
inappropriate discharges and readmittances between LTCHs and other 
onsite providers by establishing a threshold beyond which the original 
patient stay and the readmission would be paid as one discharge 
(proposed Sec. 412.532). By paying only one discharge, we would 
discourage those transfers that would be based on payment 
considerations instead of on a clinical basis. Generally, if a LTCH 
readmits more than 5 percent of its Medicare patients who are 
discharged to an onsite SNF, IRF, or psychiatric facility, or to an 
onsite acute care hospital, only one LTC-DRG payment would be made to 
the LTCH for each discharge and readmittance during the LTCH's cost 
reporting period. Therefore, payment for the entire stay would be paid 
either as one full LTC-DRG payment, a very short-stay discharge, or a 
short-stay outlier, depending on the duration of the entire LTCH stay.
    In applying the 5-percent threshold, we are proposing to apply one 
threshold for discharges and readmittances with a co-located acute care 
hospital, consistent with the policy that has been in place under 
Sec. 413.40(a)(3) for acute care hospitals and excluded hospitals 
described above. We also are proposing a separate 5-percent threshold 
for all discharges and readmittances with co-located SNFs, IRFs, and 
psychiatric facilities. In the case of a LTCH that is co-located with 
an acute care hospital, an IRF, or a SNF, the onsite discharge and 
readmittance policies that we are proposing would apply in addition to 
the proposed interrupted stay policy that we are proposing in section 
IV.B.3 of this proposed rule and at proposed Sec. 412.531. This means 
that even if a discharged LTCH patient who was readmitted to the LTCH 
following a stay in an acute care hospital of greater than one standard 
deviation from the average length of stay of the specific hospital 
inpatient prospective payment system DRG, if the facilities share a 
common location and the 5-percent threshold were exceeded, the 
subsequent discharges from the LTCH would not represent a separate 
hospitalization for payment purposes. Similarly, if the LTCH has 
exceeded its 5-percent threshold for all discharges to an onsite IRF, 
SNF, or psychiatric hospital or unit with readmittances to the LTCH, 
the subsequent discharges would not be treated as a separate discharge 
for Medicare payment purposes, notwithstanding provisions of the 
proposed interrupted stay policy with regard to lengths of stay at an 
IRF or a SNF (see proposed Secs. 412.531(b)(5)(ii) and (b)(5)(iii)). 
(As under the proposed interrupted stay policy, payment to an acute 
care hospital under the hospital inpatient prospective payment system, 
to an IRF under the IRF prospective payment system, and to a SNF under 
the SNF prospective payment system, would not be affected. Payments to 
the psychiatric facility also would not be affected.)
    We are aware that situations could arise where, under sound 
clinical judgement, a patient who no longer required LTCH-level of care 
could be discharged to a SNF and then experience a setback 
necessitating rehospitalization. However, it is likely that, in such a 
scenario, in most cases the patient would be subsequently admitted to 
an acute care hospital rather than readmitted to the LTCH located 
within the acute care hospital. In addition, if the patient is being 
treated by a LTCH that also specializes in treating psychiatric or 
rehabilitation patients, it is unlikely that the patient who, for some 
medical reason, needed to be transferred to an onsite psychiatric or 
rehabilitation hospital or unit, would need to be readmitted to the 
LTCH. We believe that the 5-percent thresholds for discharges to onsite 
acute care hospitals and for discharges to onsite IRFs, SNFs, and 
psychiatric facilities followed by readmission to the LTCH provide 
adequate flexibility for those rare circumstances where such actions 
would be clinically preferable.
    We believe that the combination of a discharge-based payment system 
that inherently contains financial incentives for shifting patients to 
another site of care and the close proximity of other sites of care 
such as other onsite hospitals-within-hospitals, satellites, and 
distinct-part SNFs, necessitates this type of policy. If we implement 
this policy in the final rule, we would monitor such discharges and 
analyze data and compare practice patterns before and after the 
implementation of the prospective payment system and, if warranted, may 
consider extending it to offsite providers.
6. Additional Issues for Onsite Facilities
    As we prepare to implement a proposed prospective payment system 
for LTCHs, we are reevaluating certain existing policies for hospitals-
within-hospitals and satellite facilities that

[[Page 13464]]

were established under the TEFRA payment system for excluded hospitals.
    Existing regulations at Sec. 412.22(e) specify exclusion criteria 
based on ownership and control for hospitals-within-hospitals and their 
host hospitals (59 FR 45330, September 1, 1994). We were concerned 
about possible manipulation of Medicare payments by a single entity 
that owns or controls an acute care hospital and a co-located LTCH. We 
believed that such a situation could lead to premature patient 
discharges from the acute care hospital to the co-located LTCH, 
resulting in two Medicare payments to the controlling entity for one 
episode of care. Under this circumstance, the LTCH would, in fact, 
function as an excluded unit of an acute care hospital, a situation 
inconsistent with section 1886(d)(1)(B) of the Act, which allows 
excluded rehabilitation and psychiatric units in acute care hospitals 
but not long-term care units. Through the proposed interrupted stay and 
proposed onsite discharge and readmittance policies set forth in 
sections IV.B.3. and IV.B.5., respectively, of this proposed rule, 
which limit potential inappropriate Medicare payments, we believe that 
we have addressed some of the concerns that originally led us to 
establish the rules in Sec. 412.22(e). Accordingly, we are soliciting 
comments on any possible changes to CMS payment policy regarding 
ownership and control for hospitals-within-hospitals.
    The second area that we are soliciting comments, in light of the 
forthcoming proposed LTCH prospective payment system, is our policy 
regarding LTCHs that have established satellite facilities. In 
Sec. 412.22(h)(1), we define a satellite as ``a part of a hospital that 
provides inpatient services in a building also used by another 
hospital, or in one or more entire buildings located on the same campus 
as buildings used by another hospital.'' Satellite arrangements exist 
when an existing hospital that is excluded from the hospital inpatient 
prospective payment system and that is either a freestanding hospital 
or a hospital-within-a-hospital under Sec. 412.22(e), shares space in a 
building or on a campus occupied by another hospital in order to 
establish an additional location for the excluded hospital. The July 
30, 1999 Federal Register (64 FR 41532 through 41534) includes a 
detailed discussion of our policies regarding Medicare payments for 
satellite facilities of hospitals excluded from the hospital inpatient 
prospective payment system. We will consider the possibility of 
revisiting the policies we established for these satellites. In 
accordance with section 1886(b) of the Act, as amended by sections 4414 
and 4416 of Public Law 105-33, we established two different target 
limits on payments to excluded hospitals, depending upon when the 
facilities were established. The target amount limit for excluded 
hospitals or units established before October 1, 1997 was set at the 
75th percentile of the target amounts of similarly classified 
hospitals, as specified in Sec. 413.40(c)(4)(iii), for cost reporting 
periods ending during FY 1996 as updated to the applicable cost 
reporting period. For excluded hospitals and units established on or 
after October 1, 1997, under section 4416 of Public Law 105-33, the 
payment amount for the hospital's first two 12-month cost reporting 
periods, as specified at Sec. 413.40(f)(2)(ii), may not exceed 110 
percent of the national median of target amounts of similarly 
classified hospitals for cost reporting periods ending during FY 1996, 
updated to the first cost reporting period in which the hospital 
receives payment.
    Because we were concerned that a number of pre-1997 excluded 
hospitals, governed by Sec. 413.40(c)(4)(iii), would seek to create 
satellite arrangements in order to avoid the effect of the lower 
payment caps that would apply to new hospitals, under 
Sec. 413.40(f)(2)(ii), we established rules regarding the exclusion of 
and payments to satellites of existing facilities. If the number of 
beds in the hospital or unit (including both the base hospital or unit 
and the satellite location) exceeds the number of State-licensed and 
Medicare-certified beds in the hospital or unit on the last day of the 
hospital's or unit's last cost reporting period beginning before 
October 1, 1997, then the facility would be paid under the inpatient 
DRG system. Therefore, while an excluded hospital or unit could 
``transfer'' bed capacity from a base facility to a satellite, if it 
increased total bed capacity beyond the level it had in the most recent 
cost reporting period before October 1, 1997 (64 FR 41532-4153, July 
30, 1999), then the hospital would not be paid as a hospital excluded 
from the hospital inpatient prospective payment system. No similar 
limitation, however, was imposed with respect to the number of total 
beds in excluded hospitals and units and satellites of these facilities 
established after October 1, 1997, since these facilities were already 
subject to the lower payment limits of section 4416 of Public Law 105-
33, and would, therefore, not benefit from the higher cap by creating a 
satellite.
    Section 123 of Public Law 106-113 confers broad authority on the 
Secretary regarding the implementation of the proposed prospective 
payment system for LTCHs, and as described in section IV.G. of this 
proposed rule, we are proposing to transition this proposed prospective 
payment system over 5 years. During this time, payments to LTCHs would 
gradually change from hospital-specific cost-based payments to a per-
discharge LTC-DRG-based prospective payment system. In addition, IRFs 
also will be transitioned to 100 percent payment starting with cost 
reporting periods beginning during FY 2003. We would consider whether 
to propose elimination of the bed-number criteria in 
Sec. 412.22(h)(2)(i) for pre-1997 hospitals, once the applicable 
prospective payment system is fully phased-in, since all LTCHs would be 
paid based on 100 percent of the proposed LTCH prospective payment 
system by FY 2007 and the payment provisions under the TEFRA system at 
that time would no longer exist for this class of hospitals or for IRFs 
for cost reporting periods beginning during FY 2003. (This policy 
change, lifting of bed-number criteria for hospitals under prospective 
payment systems, that we are considering to propose, would not apply to 
hospitals that continue to be paid under the TEFRA system. Accordingly, 
during the 5-year phase-in, the policies in Sec. 412.22(h)(2)(i) would 
continue to apply to LTCH satellites.
7. Monitoring System
    In this proposed rule, we are proposing various policies that we 
believe would provide equitable payment for stays that reflect less 
than the full course of treatment and reduce the incentives for 
inappropriate admissions, transfers, or premature discharges of 
patients that are present in a discharge-based prospective payment 
system. We also would be collecting and interpreting data on changes in 
average lengths of stay under the proposed prospective payment system 
for specific LTC-DRGs and the impact of these changes on the Medicare 
program.
    We propose to develop a monitoring system that would assist us in 
evaluating the LTCH prospective payment system. If our data indicate 
that changes might be warranted, we may revisit these issues and 
consider revising these proposed policies in the future.

C. Payment Adjustments

    As indicated earlier, the Secretary generally has broad authority 
under section 123 of Public Law 106-113 in developing the prospective 
payment system for LTCHs. Thus, the Secretary generally has broad 
authority in determining whether (and how) to make

[[Page 13465]]

adjustments to the prospective payments to LTCHs. Section 307 of Public 
Law 106-554 directs the Secretary to ``examine'' appropriate 
adjustments to the prospective payments to LTCHs, including certain 
specific adjustments, but under that section the Secretary continues to 
have discretion as to whether to provide for adjustments.
    In determining whether to propose specific payment adjustments 
under the prospective payment system for LTCHs, we conducted extensive 
regression analyses of the relationship between LTCH costs (including 
both operating and capital-related costs per case) and several factors 
that may affect costs such as the percent of Medicaid patients treated, 
the percent of Supplemental Security Income (SSI) patients treated, 
geographic location, and medical education programs. The 
appropriateness of potential payment adjustments is based on both cost 
effects estimated by regression analysis and other factors, including 
simulated payments that we discuss in section IV.E. of this proposed 
rule.
    Our analyses are based on data from 222 LTCHs for which cost and 
case-mix data were available. We estimated costs for each case by 
multiplying hospital-specific cost-to-charge ratios by the LTCH's 
charges for that case. Cost-to-charge ratios were obtained from FY 1998 
or FY 1999 cost report data, or both, available in the HCRIS minimum 
data set and Medicare claims data (charges) available in the MedPAR 
file. Because the universe of LTCHs has grown relatively rapidly over 
the last several years, in order to maximize the number of LTCHs in the 
database, we used the most recent cost report data available for each 
LTCH. If we had both FY 1998 and FY 1999 cost report data, we used the 
most complete cost reporting period (that is, the cost reporting period 
with the greater number of months). If we used FY 1998 cost report data 
because FY 1999 data were either unavailable (due to the time lag in 
cost report settlement) or incomplete, we updated the FY 1998 data for 
inflation using the FY 1999 excluded hospital market basket increase 
(2.4 percent) as published in the July 31, 1998 hospital inpatient 
prospective payment system FY 1999 final rule (63 FR 40954). As 
indicated in Appendix A of this proposed rule, we are proposing to use 
the excluded hospital market basket with a capital component to update 
payment rates. The excluded hospital market basket is currently used to 
update LTCHs' target amounts for inflation under the TEFRA system. We 
believe that proposing to continue use of the excluded hospital market 
basket to update LTCHs' costs for inflation is appropriate because the 
excluded hospital market basket measures price increases of the 
services furnished by excluded hospitals, including LTCHs. We believe 
that there is insufficient data to develop a proposed market basket 
based only on LTCH costs at this time.
    In computing hospital-specific cost-to-charge ratios, we matched 
the costs for which we had the most recent and complete cost reporting 
period data to the claims in the MedPAR file for each month in that 
cost reporting period. For example, for a LTCH with a 12-month FY 1999 
cost reporting period beginning on July 1, we used MedPAR data from 
July 1999 through June 2000 to compute a FY 1999 cost-to-charge ratio. 
The cost per case for each hospital is calculated by summing all costs 
and dividing by the number of corresponding cases.
    Multivariate regression analysis is the standard statistical 
technique for examining cost variation that was used to analyze 
potential payment adjustments for LTCHs. We looked at two standard 
models--(1) a double log regression explanatory model to examine the 
impact of all relevant factors that might potentially affect a LTCH's 
cost per case; and (2) a payment model that examines the impacts of 
those factors that were determined to affect costs and, therefore, were 
used to determine payment rates. In multivariate regression, the 
estimated average cost per case (the dependent variable) at the LTCH 
can be explained or predicted by several independent variables, 
including the case-mix index, the wage index for the LTCH, and a vector 
of additional explanatory variables that may affect a LTCH's cost per 
case, such as a teaching program or the proportion of low-income 
patients. The case-mix index is the average of the LTC-DRG weights, 
derived by the hospital-specific relative value method, for each LTCH. 
Short-stay outlier cases are weighted based on the ratio of the length 
of stay for the short-stay case to the average length of stay for 
nonshort-stay cases in that LTC-DRG. We simulated payments using an 
estimated budget neutral payment rate and the regression coefficients 
as proxies for proposed payment system adjustments. Then we calculated 
payment-to-cost ratios for different classes of hospitals for specific 
combinations of payment policies.
    We examined payment variables applicable to the hospital inpatient 
and IRF prospective payment systems, including the disproportionate 
share patient percentage, both the resident-to-average daily census 
ratio and the resident-to-bed ratio teaching variables, and variables 
that account for location in a rural or large urban area. A discussion 
of the major payment variables and our findings appears below.
1. Area Wage Adjustment
    Section 307(b) of Public Law 106-554 requires that we examine the 
appropriateness of an area wage adjustment. Such an adjustment would 
account for area differences in hospital wage levels and would be made 
by adjusting the LTCH prospective payment system payment rate by a 
factor that would reflect the relative hospital wage level in the 
geographic area of the hospital as compared to the national average 
hospital wage level. At this time, we are not proposing an area wage 
adjustment for payments to LTCHs because the regression analysis 
indicated that a wage adjustment would not increase accuracy of 
payments. While we are not proposing to make an area wage adjustment in 
this proposed rule, we are specifically soliciting comments on whether 
an area wage adjustment is appropriate.
    Under the acute care hospital inpatient prospective payment system, 
a wage index is applied to the labor-related share of the operating 
standardized amount to adjust for local cost variation. The hospital 
inpatient prospective payment system wage index is used also to make an 
area wage adjustment under the IRF prospective payment system, the SNF 
prospective payment system, the home health prospective payment system, 
and the outpatient hospital prospective payment system.
    We began our analysis of the appropriateness of an area wage 
adjustment for LTCHs by evaluating the labor-related share from the 
excluded hospital with capital market basket. (This is the same market 
basket that is used in the IRF prospective payment system.) Currently, 
under the TEFRA cost-based reimbursement system, the excluded hospital 
market basket is used to update LTCHs' target amounts, which are used 
to determine payments to LTCHs for inpatient operating costs. Since we 
are proposing a single standard Federal rate under the proposed LTCH 
prospective payment system (see section IV.D. of this proposed rule), 
we are proposing to use a market basket with a capital component. A 
further explanation of the excluded hospital with capital market basket 
can be found in Appendix A of this proposed rule.

[[Page 13466]]

    The labor-related share is the relative importance of wages, fringe 
benefits, professional fees, postal services, labor-intensive services, 
and a portion of the capital share for FY 2003. We determine a labor-
related share of the excluded hospital with capital market basket by 
first estimating the portion related to operating costs. The excluded 
hospital with capital market basket is based on available cost data for 
facilities excluded from the acute care hospital inpatient prospective 
payment system, including long-term care, rehabilitation, psychiatric, 
cancer, and children's hospitals.
    Using the excluded hospital with capital market basket, we 
determined that the labor-related share of operating costs would be 
69.428 percent for FY 2003, which is calculated as the sum of the 
relative importance for wages and salaries (50.381 percent), employee 
benefits (11.525), professional fees (2.059), postal services (0.244), 
and all other labor intensive services (5.219).
    The labor-related share of capital costs in the market basket needs 
to be considered as well. We are proposing to use the portion of 
capital attributed to labor, which is estimated to be 46 percent by 
CMS' Office of the Actuary. This is the same percentage used for both 
the hospital inpatient capital prospective payment system and the IRF 
prospective payment system. For FY 2003, we estimate the relative 
importance for capital to be 7.552 percent of the excluded hospital 
with capital market basket. We multiply 46 percent by 7.552 percent to 
determine that the labor-related share for capital costs for FY 2003 
would be 3.474 percent.
    We then add the 3.474 percent for capital costs to the 69.428 
percent for operating costs to determine the total labor-related share 
based on the excluded hospital with capital market basket. Thus, when 
we examined an adjustment to account for area differences in hospital 
wage levels, we used a labor-related share of 72.902 percent for the 
proposed LTCH prospective payment system. Specifically, we examined the 
appropriateness of accounting for differences in area wage levels by 
multiplying the labor-related portion of the unadjusted Federal payment 
by the FY 2002 inpatient acute care hospital wage index, without taking 
into account geographic reclassification under sections 1886(d)(8) and 
(d)(10) of the Act. (This methodology is the methodology used under the 
IRF prospective payment system and the SNF prospective payment system.) 
Wage data to compute LTCH-specific wage indices are currently not 
available. However, LTCHs and other post-acute care facilities (for 
example, IRFs, SNFs, and HHAs) generally compete in the same local 
labor market for the same types of employees as inpatient acute care 
hospitals.
    To validate the labor-related share calculated from the market 
basket, we analyzed the results of the wage index coefficient derived 
from regression analysis. In the regression, we standardized each 
LTCH's cost per case by the various factors, such as case-mix, bed 
size, number of cases, length of stay, and occupancy. The wage index 
coefficient allows us to approximate the labor-related portion of cost 
per case. Since the labor-related share derived from the market basket 
is the proportion of costs that have been identified as being 
influenced by the local labor amount, we would expect this coefficient 
to be statistically significant and near our market basket measure. The 
double-log regression analysis generated a wage index coefficient, 
which approximates the labor-related portion of cost per case, that is 
not statistically significant and is not near the market basket measure 
(72.902 percent) since it is only 19.91 percent. This suggests that the 
wage adjustment we examined would be only a small and unreliable 
predictor of LTCHs' costs.
    Since the statistical analysis did not show a significant 
relationship between LTCHs' costs and their geographic location, we do 
not believe that at this point it would be appropriate to include a 
proposed adjustment for area wages. Furthermore, without applying the 
wage adjustment to the proposed standard Federal rate for LTCHs to 
account for the difference in area wage levels, the r-squared value (a 
statistical measure of how much variation in resource use among cases 
is explained by the system) of the proposed system taken as a whole is 
0.82086. However, by applying the wage adjustment to the labor-related 
share of the proposed standard Federal rate for LTCHs to account for 
area differences in hospital wage levels, the r-squared value is 
reduced to 0.8017 for the proposed system as a whole (that is, 
including case-mix index and outlier policies). This means that not 
making a wage index adjustment would provide a 2.3 percent increase in 
the ability of the proposed payment system to predict costs. 
Furthermore, our regression analysis indicates that including a wage 
index adjustment would inappropriately redistribute payments to LTCHs 
by shifting money to LTCHs that are located in an area within a higher 
wage index but in fact have lower costs. Therefore, at this time we are 
not proposing an adjustment to account for area differences in LTCH 
wage levels. However, we will revisit the appropriateness of an 
adjustment to account for area differences in LTCH wage levels in 
developing the final rule.
2. Adjustment for Geographic Reclassification
    In accordance with section 307(b) of Public Law 106-554, we also 
examined the appropriateness of applying an adjustment for geographic 
reclassification to payments under the LTCH prospective payment system, 
where hospitals could request reclassification from one geographic 
location to another for the purpose of using the other area's wage 
index value, Federal payment rates, or both. Such an adjustment is made 
under the acute care hospital inpatient prospective payment system in 
accordance with section 1886(d)(10) of the Act. The adjustment would 
treat a hospital located in one geographic area as being located in 
another geographic area, if certain conditions are met, because its 
costs and wages are more similar to those hospitals located in the 
other geographic area. As explained below, at this time, we are not 
proposing an adjustment for geographic reclassification in the 
prospective payment system for LTCHs.
    Our data identified 14 rural LTCHs, but our analysis supported 
neither a proposed adjustment to account for differences in area wage 
levels nor a proposed adjustment for LTCHs located in rural areas or 
large urban areas because the regression analysis indicated that a wage 
adjustment would not increase the accuracy of payments. Therefore, 
under the proposed LTCH prospective payment system, all LTCHs would be 
treated the same for the purposes of payment, regardless of location. 
Since there would be no purpose for LTCHs to reclassify to another 
area, at this time we are not proposing an adjustment for geographic 
reclassification in the proposed prospective payment system for LTCHs.
    We plan to review the above proposed policy determinations in 
developing the final rule based on the most recent available data. At 
that time, we also would revisit the appropriateness of an adjustment 
for geographic reclassification. It is important to note, however, that 
the Medicare Geographic Classification Review Board (MGCRB) currently 
has authority only over acute care (section 1886(d) of the Act) 
hospitals and there is presently no analogous determination process for 
hospitals that have been excluded from the acute care hospital 
inpatient prospective payment system. Under the

[[Page 13467]]

TEFRA system, prospective payment system-excluded hospitals and units, 
including LTCHs, are not required to fill out information related to 
wage-related costs on the Medicare cost report (that is, Worksheet S-
3). Therefore, if a wage adjustment is ultimately implemented as part 
of the LTCH prospective payment system and it is determined that it is 
appropriate to make geographic reclassification adjustments, we would 
need to establish instructions for data collection on LTCH wage-related 
costs in order to determine an appropriate geographic reclassification 
adjustment for LTCHs. It would also be necessary to develop an 
application process and determination procedures.
3. Adjustment for Disproportionate Share of Low-Income Patients
    Section 307(b) of Public Law 106-554 requires us to examine the 
appropriateness of an adjustment for hospitals serving a 
disproportionate share (DSH) of low-income patients, consistent with 
section 1886(d)(5)(F) of the Act, which establishes this adjustment for 
inpatient acute care hospitals. In assessing the appropriateness of a 
similar adjustment for LTCHs serving low-income patients, as specified 
in section 1886(d)(5)(F) of the Act, we focused our analysis on the 
relationship between serving low-income patients and LTCHs' cost per 
case. Based on the results of our analysis described below, at this 
time we are not proposing an adjustment for the treatment of a 
disproportionate share of low-income patients.
    Under section 1886(d)(5)(F) of the Act, in calculating Medicare 
payments for inpatient services at acute care hospitals, the 
disproportionate share patient percentage takes into account both the 
percentage of Medicare patients who receive SSI and the percentage of 
Medicaid patients who are not entitled to Medicare. The DSH patient 
percentage is defined as:
[GRAPHIC] [TIFF OMITTED] TP22MR02.000

    Based on this formula, an inpatient acute care hospital qualifies 
for a DSH adjustment under section 1886(d)(5)(F)(v) of the Act (as 
amended by section 211(a) of Public Law 106-554) if the hospital has a 
DSH patient percentage greater than or equal to 15 percent. The 
calculation of the DSH payment adjustments under that section is as 
follows:
     Hospitals (urban and rural) with fewer than 100 beds and 
whose DSH patient percentage is equal to or greater than 15 percent and 
less than 19.3 percent receive the DSH payment adjustment determined 
using the following formula:

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

     Hospitals (urban or rural) with fewer than 100 beds and 
whose DSH patient percentage is equal to or greater than 19.3 percent 
receive a flat add-on of 5.25 percent.
     Rural hospitals with greater than 500 beds and whose DSH 
patient percentage is equal to or greater than 15 percent and less than 
20.2 percent receive the DSH payment adjustment using the following 
formula:

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

     Rural hospitals with greater than 500 beds and whose DSH 
patient percentage is equal to or greater than 20.2 percent receive the 
DSH payment adjustment using the following formula:

(DSH patient percentage -20.2) (.825) + 5.88.

    We analyzed the results of applying a DSH adjustment, in accordance 
with the criteria at section 1886(d)(5)(F) of the Act described above, 
on LTCHs. In modeling payments, because the proposed LTCH prospective 
payment system must be budget neutral in accordance with section 123(a) 
of Public Law 106-113, the proposed inclusion of such a DSH policy 
would result in a 3.31 percent decrease to the base payment rate. 
Furthermore, the inclusion of such a DSH policy would result in a 3.79 
percent decrease in the r-squared value (a statistical measure of how 
much variation in resource use among cases is explained by the system). 
Accordingly, we found that including a DSH adjustment that is 
consistent with section 1886(d)(5)(F) of the Act would reduce the 
explanatory power of the proposed LTCH prospective payment system, or 
the ability of the proposed payment system model to predict cost per 
case, while lowering the base payment rate. Thus, at this time we are 
not proposing a DSH adjustment consistent with section 1886(d)(5)(F) of 
the Act.
    We also evaluated an alternative adjustment, using regression 
analysis, that takes into account both the percentage of Medicare 
patients who are receiving SSI (SSI percent) and the percentage of 
Medicaid patients who are not entitled to Medicare (Medicare percent) 
without the other criteria specified in section 1886(d)(5)(F) of the 
Act. This analysis was made to determine if there is any relationship 
between these two variables and cost per case. The results of this 
analysis showed that the regression coefficients for both the 
percentage of Medicare patients who are receiving SSI and the 
percentage of Medicaid patients who are not entitled to Medicare would 
be statistically significant at the 99-percent level. However, the 
positive relationship between cost per case and the percentage of LTCH 
Medicare patients who are receiving SSI would be offset by a negative 
relationship between cost per case and the percentage of LTCH Medicaid 
patients who are not entitled to Medicare. This implies that while 
costs per discharge would appear to increase (slightly) as the 
percentage of LTCH Medicare SSI patients increases, costs per discharge 
would decline (slightly) as the percentage of LTCH Medicaid, non-
Medicare patients increased. Therefore, at this time we are not 
proposing an adjustment for the treatment of a disproportionate share 
of low-income patients based on a LTCH's combined SSI percentage and 
Medicaid percentage.
    Finally, we examined an adjustment for the treatment of low-income 
patients based solely on a LTCH's SSI ratio (the percentage of Medicare 
patients who are receiving SSI). The SSI ratio is calculated by 
dividing Medicare SSI days by total patient days. While the regression 
coefficient would be positive, it was not very large (0.04), which 
means that for every 1-percent increase in the SSI percent, a 0.04-
percent increase in cost per case would be observed. Thus, at best, an 
empirically based adjustment based on the SSI percent would be very 
small. The positive regression coefficient for the SSI percentage is 
significantly influenced by the large SSI percentages of only a few 
LTCHs. Accordingly, we do not believe it is appropriate to propose an 
adjustment based on a LTCH's SSI percentage. Because section 123(a) of 
Public Law 106-113 requires that the LTCH prospective payment

[[Page 13468]]

system be budget neutral, applying such an adjustment would result in a 
2.98-percent reduction in the proposed base payment rate for all LTCHs 
that is based on a small positive regression coefficient that is due 
mostly to a relatively small number of LTCHs with a large SSI 
percentage.
    Because the analyses above do not indicate an increase in the 
accuracy of payments based on the adjustments examined for the 
treatment of a disproportionate share of low-income patients, we are 
not proposing an adjustment at this time. We will revisit the 
appropriateness of a DSH adjustment in developing the final rule based 
on the most recent data available.
4. Adjustment for Indirect Teaching Costs
    In accordance with the directive of section 307(b) of Public Law 
106-554 to examine ``appropriate adjustments'' to payments under the 
LTCH prospective payment system, we also examined the appropriateness 
of applying an adjustment for indirect teaching costs to payments under 
the proposed LTCH prospective payment system. Based on the analysis 
described below, at this time we are not proposing an adjustment for 
indirect teaching costs.
    There are presently 14 LTCHs with teaching programs. LTCHs with 
major teaching programs tend to be older, larger (greater than 125 
beds) hospitals, located in large urban areas, and have a higher 
proportion of low-income patients but with a lower case-mix index. 
Based on a double log regression, we found that the indirect teaching 
cost variable would be negative and not significant. We looked at 
different specifications for the teaching variable. We used a resident-
to-bed ratio as the coefficient for the teaching variable in the 
regression that is currently used to measure teaching intensity under 
the acute care hospital inpatient prospective payment system for 
operating costs. We also used a ratio of resident to average daily 
census (defined as total inpatient days divided by the number of days 
in the cost reporting period) that is currently used under the acute 
care hospital inpatient prospective payment system for capital-related 
costs, as a measure of teaching intensity. We based this analysis on 
the estimated number of full-time equivalent (FTE) residents assigned 
to the inpatient area of the LTCH. In all our payment regressions, we 
determined that the teaching variable would not be significant. This 
means that there is no empirical evidence to show that LTCHs' cost per 
case would vary with teaching costs. Therefore, at this time we are not 
proposing an adjustment for indirect teaching costs. We will revisit 
the appropriateness of an adjustment for the costs of indirect medical 
education in developing the final rule based on the most recent 
available data.
5. Cost-of-Living Adjustment (COLA) for Alaska and Hawaii
    In accordance with the directive of section 307(b) of Public Law 
106-554 to examine ``appropriate adjustments'' to payments under the 
LTCH prospective payment system, we also examined the appropriateness 
of applying a cost-of-living adjustment (COLA) under the proposed LTCH 
prospective payment system for LTCHs located in Alaska and Hawaii.
    There is currently one LTCH in Hawaii and no LTCHs in Alaska. In 
the absence of a COLA, we performed simulations, which indicate that 
the facility in Hawaii might experience a payment to cost ratio of 0.89 
percent. Therefore, we are proposing a COLA for LTCHs in Hawaii and 
Alaska to account for the higher costs incurred in those states. The 
IRF proposed rule (November 3, 2000, 65 FR 66357) indicated that based 
on payment simulations, without a COLA, the one IRF located in Alaska 
may have a loss and the one IRF for which data were available, would 
have a gain. Due to the small number of cases, analysis of the 
simulation results were inconclusive regarding whether a cost-of-living 
adjustment would improve payment equity for these facilities. 
Accordingly, we did not include a COLA adjustment for those hospitals 
in the prospective payment system for IRFs. (65 FR 66357, November 3, 
2000). We believe it appropriate, however, to propose a COLA for LTCHs 
based on the higher costs found in Hawaii. In general, the COLA would 
account for the higher costs in the LTCH and would eliminate the 
projected loss that the LTCH in Hawaii would experience absent the 
COLA. Furthermore this policy is consistent with the COLA made to 
account for the higher costs in acute care hospitals in Alaska and 
Hawaii under both the operating prospective payment system and the 
capital prospective payment system. We are proposing to make a COLA, 
under proposed Sec. 412.525(b), to payments for LTCHs located in Alaska 
and Hawaii by multiplying the standard Federal payment rate by the 
appropriate factor listed in the table below. These factors are 
obtained from the U.S. Office of Personnel Management.

    Cost-Of-Living Adjustment Factors for Alaska and Hawaii Hospitals
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Alaska:
    All areas...........................................          1.25
Hawaii:
    Honolulu County.....................................          1.25
    Hawaii County.......................................          1.165
    Kauai County........................................          1.2325
    Maui County.........................................          1.2375
    Kalawao County......................................          1.2375
------------------------------------------------------------------------

6. Adjustment for High-Cost Outliers
    In accordance with the directive of section 307(b) of Public Law 
106-554, we also examined the appropriateness of an adjustment for 
additional payments for outlier cases. These are cases that have 
extraordinarily high costs relative to the costs of most discharges 
classified in the same LTC-DRG. Providing additional payments for 
outliers could strongly improve the accuracy of the LTCH prospective 
payment system in determining resource costs at the patient and 
hospital level. These additional payments would reduce the financial 
losses that would otherwise be caused by treating patients who require 
more costly care and, therefore, would reduce the incentives to 
underserve these patients.
    We considered various outlier policy options. Specifically, we 
examined outlier policies under which outlier payments would be 
projected to be 5 percent, 8 percent, or 10 percent of total 
prospective system payments. We examined the impact of setting the 
outlier target percentage at 5 percent because that percentage is 
consistent with the range of targets provided under section 
1886(d)(5)(A)(iv) of the Act for the hospital inpatient prospective 
payment system. We also considered an outlier target of 10 percent 
because that percentage was recommended in an industry study 
commissioned by NALTH. In addition, we considered an outlier target of 
8 percent to analyze the impact of setting the outlier target at some 
percentage between 5 and 10 percent.
    We also examined marginal cost factors, or the change in total cost 
with one unit of change in output, of 55 and 80 percent. We examined an 
80-percent marginal cost factor for outlier payments because it is the 
same as the factor used under both the hospital inpatient prospective 
payment system and the IRF prospective payment system. We examined a 
55-percent marginal cost factor in order to analyze the impact that a 
lower marginal cost factor would have on outlier payments and payments 
for all other cases.

[[Page 13469]]

    As discussed in further detail in the June 4, 1992 hospital 
inpatient prospective payment system proposed rule (57 FR 23640), a 
study performed by RAND Corporation indicated that the marginal cost of 
care is usually less than the average cost because later days of a stay 
have considerably lower costs than the earlier days of the stay.
    In order to determine the most appropriate outlier policy, we 
analyzed the extent to which the various options would reduce financial 
risk, reduce incentives to underserve costly beneficiaries, and improve 
the overall fairness of the system. We believe an outlier target of 8 
percent would allow us to achieve a balance of the above stated goals. 
Our regression analysis showed that additional increments of outlier 
payments over 8 percent would reduce financial risk, but by 
successively smaller amounts. Since outlier payments are included in 
budget neutrality calculations, outlier payments would be funded by 
prospectively reducing the nonoutlier prospective payment system 
payment rates by the proportion of projected outlier payments to 
projected total prospective payment system payments in the absence of 
outlier payments; the higher the outlier target, the greater the 
(prospective) reduction to the base payment rate. We are proposing to 
provide outlier payments and to set outlier numerical criteria 
prospectively before the beginning of each Federal fiscal year so that 
outlier payments are projected to equal 8 percent of total payments 
under the proposed LTCH prospective payment system. Based on regression 
analysis and payment simulations, we believe this option optimizes the 
extent to which we would be able to protect vulnerable hospitals, while 
still providing adequate payment for all other cases that are not 
outlier cases.
    We are proposing, under proposed Sec. 412.525(a), to make an 
outlier payment for any discharges where the estimated cost would 
exceed the proposed adjusted LTCH prospective payment system payment 
for the proposed LTC-DRG plus a fixed-loss amount. The fixed-loss 
amount is the amount used to limit the loss that a hospital would incur 
under an outlier policy. This results in Medicare and the LTCH sharing 
financial risk in the treatment of extraordinarily costly cases. The 
LTCH's loss is limited to the fixed-loss amount and the percentage of 
costs above the marginal cost factor. The estimated cost of a case 
would be calculated by multiplying the overall hospital cost-to-charge 
ratio by the Medicare allowable covered charge.
    Our analysis of payment-to-cost ratios for outlier cases showed 
that a marginal cost factor of 80 percent appropriately addresses 
outlier cases that are significantly more expensive than nonoutlier 
cases. This factor would ensure that there is a balance between the 
need to protect LTCHs financially while encouraging them to treat 
expensive patients and maintaining the incentives of a prospective 
payment system to improve the efficient delivery of care. Based on this 
analysis and consistent with the marginal cost factor used under the 
IRF prospective payment system and under section 1886(d) of the Act for 
inpatient acute care hospitals, we are proposing to pay outlier cases 
80 percent of the difference between the estimated cost of the case and 
the outlier threshold (the sum of the adjusted Federal prospective 
payment for the LTC-DRG and the fixed-loss amount). The proposed fixed-
loss amount would be calculated by simulating aggregate payments with 
and without an outlier policy, using FY 2000 MedPAR claims data and the 
best available cost report data in an iterative process to determine a 
fixed-loss threshold that would result in outlier payments being equal 
to 8 percent of total payments. As discussed in section IV.D. of this 
proposed rule, for FY 2003 we proposing a fixed-loss amount of $29,852. 
Therefore, for FY 2003, we are proposing to pay an outlier case 80 
percent of the difference between the estimated cost of the case and 
the outlier threshold (the sum of the adjusted Federal prospective 
payment for the LTC-DRG prospective payment system payment plus 
$29,852).

D. Calculation of the Proposed Standard Federal Payment Rate

1. Overview of the Development of the Proposed Standard Payment Rate
    Section 123(a)(1) of Public Law 106-113 requires that the 
prospective payment system for LTCHs maintain budget neutrality. 
Therefore, we are proposing to calculate the standard Federal rate by 
setting total estimated prospective payment system payments equal to 
estimated payments that would have been made under the TEFRA 
methodology if the proposed prospective payment system for LTCH were 
not implemented as described in this proposed rule. In accordance with 
section 307(a)(2) of the BIPA, the increases to the hospital-specific 
target amounts and cap on the target amounts for LTCHs for FY 2002 
provided for by section 307(a)(1) of the BIPA and the enhanced bonus 
payments for LTCHs for FY 2001 and FY 2002 provided for by section 122 
of the BBRA were not taken into account in the development of the 
proposed prospective payment system for LTCHs.
    The proposed methodology for determining the standard Federal 
payment rate under the proposed LTCH prospective payment system is 
described in further detail below.
2. Development of the Proposed Standard Federal Payment Rate
a. Data Sources
    The data sources that we used to calculate the proposed standard 
Federal payment rate include cost report data from FYs 1996 through 
1999 and FY 2000 Medicare claims data from the June 2001 update of the 
MedPAR since these data were the most recently available complete data 
for LTCHs. We used data from 222 LTCHs to calculate the proposed 
standard Federal payment rate. We updated the cost report data for each 
LTCH to the midpoint of FY 2003 using an inflation factor based on the 
historical relationship of each hospital's costs and their target 
amounts as described in section IV.D.2.b. of this proposed rule. The FY 
1996 cost report data were used to determine each LTCH's update for FY 
1999, and the FY 1997 cost report data were used to determine the 
update for FY 2000. The FY 1998 cost report data were used to determine 
the update for FY 2001, and the FY 1999 cost report data were used to 
determine the update for FY 2002. We were unable to calculate a 
proposed payment under the current payment system for some LTCHs 
because cost report data were unavailable. We will attempt to obtain 
the most recent payment amounts for these hospitals through their 
Medicare fiscal intermediary and we will consider using these data to 
construct the standard Federal payment rates for the final rule. We 
will also examine the extent that certain LTCHs (new LTCHs, for 
example) are not included in the data used to determine the proposed 
standard Federal payment rate and consider the appropriateness of an 
adjustment to better reflect total estimated payments for LTCHs.
    In determining the proposed prospective payment rates for LTCHs, we 
had significant concerns about the integrity of some of the cost report 
data in HCRIS. Specifically, we were concerned about data from cost 
reports submitted by a hospital chain that is the owner of 
approximately 20 percent of LTCHs nationwide that arose from a ``qui 
tam'' action filed by the U.S. Department of Justice (DOJ) in July 
1999. This action alleged, among other

[[Page 13470]]

claims, that the hospitals inflated both cost and charge data on 
Medicare hospital cost reports filed from 1994 through 1999. On March 
16, 2001, the hospital chain agreed to pay approximately $339 million 
to settle claims arising from 11 separate actions. Based upon audits 
and projections performed by Medicare's fiscal intermediary under the 
direction of our Office of Financial Management, the Medicare LTCH 
action was allocated $178 million of this settlement.
    Under the terms of the agreement, Medicare cost reports from the 
years in question were not reopened and audited. However, the fiscal 
intermediary was able to estimate the effect on the Medicare cost 
reports for 1995, 1996, and 1997. Then a random sample of Medicare cost 
reports from 1998 and 1999 were reviewed to verify the projected impact 
for those years and a settlement figure was determined for FY 1995 
through FY 1999. Therefore, in order to avoid the negative impact those 
providers' data may otherwise have on the integrity of the data, we are 
basing our proposed standard Federal rate on a factor determined by 
CMS' Office of the Actuary to adjust the costs reported in those 
affected FY 1998 and FY 1999 cost reports. This factor was derived by 
determining the ratio of the portion of the settlement amount described 
above attributable to each LTCH to the Medicare payments received by 
each affected LTCH during the period covered by the settlement.
b. Update the Latest Cost Report Data to the Midpoint of FY 2003
    Consistent with the methodology used under the IRF prospective 
payment system (at Sec. 412.624(c)), we are proposing, at 
Sec. 412.523(c)(2), to update each LTCH's cost per discharge to the 
midpoint of FY 2003, using the weighted average of the applicable 
percentage increases to the TEFRA target amounts for FYs 1999 through 
2002 (in accordance with Sec. 413.40(c)(3)(vii)) and the full market 
basket percentage increase for FY 2003. For FYs 1999 through 2002, we 
would determine the appropriate update factor for each hospital by 
using the methodology described below:
     For hospitals with costs that equal or exceed their target 
amounts by 10 percent or more for the most recent cost reporting period 
for which information is available, the update factor would be the 
market basket percentage increase.
     For hospitals that exceed their target amounts by less 
than 10 percent, the update factor would be equal to the market basket 
minus 0.25 percentage points for each percentage point by which 
operating costs are less than 10 percent over the target (but in no 
case less than 0).
     For hospitals that are at or below their target amounts, 
but exceed two-thirds of the target amounts, the update factor would be 
the market basket minus 2.5 percentage points (but in no case less than 
0).
     For hospitals that do not exceed two-thirds of their 
target amounts, the update factor would be 0 percent.
    For FY 2003, we propose to use the most recent estimate of the 
percentage increase projected by the excluded hospital market basket 
index.
c. Estimate Total Payments Under the Current (TEFRA) Payment System
    We would estimate payments for inpatient operating services under 
the TEFRA system using the following methodology:
    Step 1: Determine each LTCH's hospital-specific target amount. The 
hospital-specific target amount for a LTCH is calculated based on the 
hospital's allowable inpatient operating cost per discharge for the 
hospital's base period, excluding capital-related, nonphysician 
anesthetist, and medical education costs. This target amount would then 
be updated using a rate-of-increase percentage as described in 
Sec. 413.40(b)(3). For FYs 1998 through 2002, there are two national 
caps on the payment amounts for LTCHs. Under Sec. 413.40(c)(4)(iii), a 
LTCH's hospital-specific target is the lower of its net allowable base 
year costs per discharge increased by the applicable update factors or 
the cap for the applicable cost reporting period. In determining each 
LTCH's hospital-specific target amount, we would use the FY 2002 cap 
amounts published in the August 1, 2001 Federal Register (66 FR 39915-
39916), adjusted in accordance with section 307(a)(2) of Public Law 
106-554 by removing the 2-percent increase in the cap for existing 
LTCHs required by section 307(a)(1) of Public Law 106-554. For existing 
hospitals (that is, LTCHs paid as an excluded hospital before October 
1, 1997), the applicable cap amount for FY 2002 is $30,783 for the 
labor-related share adjusted by the applicable geographic wage index 
and added to $12,238 for the nonlabor-related share. For ``new'' 
hospitals (that is, LTCHs first paid as an excluded hospital on or 
after October 1, 1997), the cap amount applicable for FY 2002 is 
$16,701 for the labor-related share adjusted by the applicable 
geographic wage index and added to $6,640 for the nonlabor-related 
share. These capped amounts would then be inflated to the midpoint of 
FY 2003 by applying the excluded hospital operating market basket.
    As explained above, we note that, in accordance with section 
307(a)(2) of the BIPA, in estimating total payments to LTCHs under the 
current payment system, the increase to the hospital target amounts and 
caps on the target amounts for LTCHs effective from October 1, 2001 
through September 30, 2002, provided for under section 307(a)(1) of the 
BIPA were not to be taken into account.
    Step 2: Determine each LTCH's payment amount for inpatient 
operating services. Under the TEFRA system, a LTCH's payment amount for 
inpatient operating services is the lower of--
     The hospital-specific target amount (subject to the 
application of the cap as determined in Step 1) times the number of 
Medicare discharges (the ceiling); or
     The hospital average inpatient operating cost per case 
times the number of Medicare discharges.
    In addition, under the TEFRA system, payments may include a bonus 
or relief payment, as follows:
     For LTCHs whose net inpatient operating costs are lower 
than or equal to the ceiling, payment would be determined based on the 
lower of either the net inpatient operating costs plus 15 percent of 
the difference between the inpatient operating costs and the ceiling or 
the net inpatient operating costs plus 2 percent of the ceiling.
     For LTCHs whose net inpatient operating costs are greater 
than the ceiling but less than 110 percent of the ceiling, payment 
would be the ceiling.
     For LTCHs whose net inpatient operating costs are greater 
than 110 percent of the ceiling, payment would be the ceiling plus the 
lower of 50 percent of the difference between the 110 percent of the 
ceiling and the net inpatient operating costs or 10 percent of the 
ceiling.
    Further, under the TEFRA system, excluded hospitals and units, 
including LTCHs, may be eligible for continuous improvement bonus 
payments as described under Sec. 413.40(d)(4). As explained above, in 
accordance with section 307(a)(2) of Public Law 106-554, the 
enhancement of continuous improvement bonus payments for LTCHs, 
effective for cost reporting periods beginning on or after October 1, 
2000 and before September 30, 2002, and provided for under section 122 
of Public Law 106-113, were not to be taken into account in estimating 
total payments to LTCHs under the current TEFRA system.
    Step 3: Determine each LTCH's payment for capital-related costs. 
Under the TEFRA system, in accordance with

[[Page 13471]]

section 1886(g) of the Act, Medicare allowable capital costs are paid 
on a reasonable cost basis. Thus, each LTCH's payment for capital-
related costs would be taken directly from the cost report and updated 
for inflation using the excluded hospital market basket, consistent 
with the methodology used under the IRF prospective payment system.
    Step 4: Determine each LTCH's average total (operating and capital) 
payment per case under the current (TEFRA) payment system. Once 
estimated payments for inpatient operating costs are determined 
(including bonus and relief payments, as appropriate), we would add the 
operating payments and capital payments together to determine each 
LTCH's estimated total payments under the current (TEFRA) payment 
system. We would then divide each LTCH's estimated total TEFRA payments 
by the corresponding number of Medicare discharges from the cost report 
to determine what each LTCH's average total payment per case would be 
under the current (TEFRA) payment system.
    Step 5: Determine a case weighted average payment under the current 
(TEFRA) payment system. We would determine each LTCH's average payment 
under the current (TEFRA) system weighted for its number of cases in 
the June 2001 update of the FY 2000 MedPAR by multiplying its average 
total payment per case from step 4 by its number of cases in the FY 
2000 MedPAR.
    Step 6: Estimate total (MedPAR) weighted payments under the current 
(TEFRA) payment system. We would estimate total weighted payments under 
the current (TEFRA) payment system by summing each LTCH's (MedPAR) 
weighted payments under the current (TEFRA) payment system (from step 
5). In addition, we adjusted the estimated total weighted payments to 
reflect the estimated portion of additional outlier payments under 
proposed Sec. 412.525(a). (This is consistent with not including 
outlier payments in estimating payments under the proposed prospective 
payment system in Step e. below.) This total would be the numerator in 
the calculation of a budget neutrality adjustment.
d. Calculate the Average Weighted Payment per Discharge Amount
    Once estimated total payments under the current payment system are 
calculated, we would calculate an average per discharge payment amount 
weighted by the number of Medicare discharges under the current payment 
system. This would be done by first determining the average payment per 
discharge amount under the current payment system for each LTCH. Cost 
report data would be used to calculate each LTCH's average payment per 
discharge by dividing the number of discharges into the total payments. 
As explained above in section IV.D.2.a. of this proposed rule, the 
LTCH's payment per discharge would be adjusted consistent with the 
terms of the DOJ settlement agreement.
    Next, we would determine the weighted average per discharge payment 
amount by multiplying each LTCH's average payment per discharge amount 
from the cost report by the number of discharges from the Medicare 
claims data in the FY 2000 MedPAR file. Then we would add the amounts 
for all LTCHs and divide by the total number of discharges from the 
Medicare claims in MedPAR to derive a weighted average payment per 
discharge.
e. Estimate Payments Under the Proposed Prospective Payment System 
Without a Budget Neutrality Adjustment
    Payments under the proposed payment system would then be estimated 
without a budget neutrality adjustment. To do this, we would multiply 
each LTCH's case-mix index adjusted for short-stay outliers (see 
section IV.B.2. of this proposed rule), the number of discharges from 
the Medicare claims in MedPAR adjusted for short-stay outliers (see 
section IV.B.2. of this proposed rule) and the weighted average per 
discharge payment amount computed above. For purposes of this 
calculation, we would estimate payments for each LTCH as if it were 
paid based on 100 percent of the proposed standard Federal rate in FY 
2003 rather than the proposed transition blend methodology described in 
section IV.G. of this proposed rule. Total payments for each LTCH would 
then be summed for all LTCHs. This total would be the denominator in 
the calculation of the budget neutral adjustment.
f. Determine the Budget Neutrality Adjustment
    The budget neutrality adjustment would be calculated by dividing 
total adjusted payments under the current payment system (the total 
amount calculated in section IV.D.2.c. of this preamble) by estimated 
payments under the proposed prospective payment system, without a 
budget neutrality adjustment (the total amount calculated in section 
IV.D.2.e. of this preamble).
g. Determine the Standard Federal Payment Rate
    The resulting budget neutrality adjustment (determined in section 
IV.D.2.f. of this preamble) would then be multiplied by the average 
weighted per discharge payment amount under the current payment system 
and we would adjust the result further to include a behavioral offset. 
As previously stated, to calculate the proposed standard Federal 
payment rate, we estimated what would have been paid under the current 
payment system. However, we expect that as a result of the 
implementation of the new prospective payment system, LTCHs may 
experience usage patterns that are significantly different from their 
current usage patterns. Since there is a fixed payment based on 
diagnosis in a per discharge prospective payment system regardless of 
the length of stay (except for additional outlier payments), there 
would be an incentive to discharge a patient (to home or to another 
site of care) as early in the stay as possible in order to minimize 
cost and maximize profit). As a result, discharges may occur earlier in 
the LTCH stay. This would result in lower payments under the current 
payment system for this care which must be taken into account when 
computing the budget neutral payment rate. Furthermore, as explained in 
sections IV.A.2. and G. of this proposed rule, we expect the LTCH's 
coding practice of LTCHs to improve once the proposed prospective 
payment system is implemented, which has a significant potential of 
resulting in a case-mix that would be higher than what would be used to 
determine the budget neutral standard Federal rate.
    As was the case when the hospital inpatient prospective payment 
system was implemented, improved coding could result in a higher case-
mix because hospitals would code secondary diagnoses more completely 
and accurately, now that these diagnoses would factor into the LTC-DRG 
assignment and, ultimately, their payment. The inclusion of appropriate 
secondary diagnoses could result in the case being grouped into a 
higher weighted LTC-DRG. This is especially true for LTCHs since they 
generally treat more medically complex patients who are more likely to 
have many secondary diagnoses. Thus, if the same cases that were used 
to develop the proposed standard Federal rate are grouped into higher 
weighted LTC-DRGs as a result of improved coding, this higher case-mix 
would result in higher payments under the proposed payment system for 
this care. This effect must also be taken

[[Page 13472]]

into account when computing the budget neutral standard Federal rate. 
Accounting for these effects through an adjustment is commonly known as 
a behavioral offset.
    The proposed standard Federal payment rate with a behavioral offset 
is $27,649.02. This proposed dollar amount includes a 0.27 percent 
(that is, twenty-seven hundredths of one percent) reduction for the 
behavioral offset in the proposed standard Federal payment rate 
otherwise calculated under the methodology described above. Consistent 
with the assumptions made under the IRF prospective payment system, in 
determining this proposed behavioral offset adjustment, we assumed that 
the LTCHs would regain 15 percent of potential losses and augment 
payment increases by 5 percent through transfers occurring at or beyond 
the mean length of stay associated with the LTC-DRG at any point.
    For FY 2003, we are proposing to establish a fixed-loss outlier 
threshold (as described previously in section IV.C.6. of this proposed 
rule) equal to the proposed standard Federal prospective payment rate 
for the LTC-DRG plus $29,852. In setting this proposed fixed-loss 
amount of $29,852, we project that FY 2003 outlier payments would equal 
8 percent of LTC-DRG payments under the proposed LTCH prospective 
payment system in accordance with proposed Sec. 412.523.
h. Determine a Budget Neutrality Offset To Account for the Proposed 
Transition Methodology
    Section 123(a)(1) of the BBRA requires that the LTCH prospective 
payment system maintain budget neutrality. As discussed in further 
detail in section IV.G. of this proposed rule, we are proposing a 5-
year transition period from cost-based TEFRA reimbursement to 
prospective payment, during which a LTCH would be paid an increasing 
percentage of the proposed LTCH prospective payment system rate and a 
decreasing percentage of its TEFRA rate for each discharge. 
Furthermore, we are proposing to allow a LTCH to elect to be paid based 
on 100 percent of the proposed standard Federal rate in lieu of the 
blend methodology. Based on a comparison of the estimated FY 2003 
payments to each LTCH based on 100 percent of the proposed standard 
Federal rate and the proposed transition blend methodology, we project 
that approximately 58 percent of LTCHs would elect to be paid based on 
100 percent of the proposed standard Federal rate since they would 
receive higher payments than under the proposed transition blend 
methodology. We project that the remaining 42 percent of LTCHs will 
choose to be paid based on the transition blend methodology (80 percent 
of TEFRA; and 20 percent of the prospective payment system) in FY 2003 
since they would receive higher payments than if they were paid based 
on 100 percent of the Federal rate.
    Since the proposed standard Federal rate ($27,649.02) determined 
under section IV.D.2.g. of this proposed rule was calculated as if all 
LTCHs would be paid based on 100 percent of the proposed standard 
Federal rate in FY 2003, in order to maintain budget neutrality, we are 
proposing to reduce all LTCH Medicare payments during the transition 
period by a factor that is equal to 1 minus the ratio of the estimated 
TEFRA reasonable cost-based payments that would have been made if the 
LTCH prospective payment system had not been implemented, to the 
projected total Medicare program payments that would be made under the 
proposed transition methodology and the option to elect payment based 
on 100 percent of the Federal rate.
    We project that the full effect of the proposed 5-year transition 
period and the election option would result in a cost to the Medicare 
program of $230 million as follows:

------------------------------------------------------------------------
                                                              Estimated
                        Fiscal year                            cost (in
                                                              millions)
------------------------------------------------------------------------
2003.......................................................          $50
2004.......................................................           80
2005.......................................................           60
2006.......................................................           30
2007.......................................................           10
------------------------------------------------------------------------

    Thus, in order to maintain budget neutrality, we propose to apply a 
5.1 percent reduction (0.949) to all LTCHs payments in FY 2003 to 
account for the estimated cost of $50 million for FY 2003. Furthermore, 
in order to maintain budget neutrality, we would propose a budget 
neutrality offset for each of the remaining years of the transition 
period in a notice of proposed rulemaking to account for the estimated 
costs for the respective fiscal year.
    Based on the data available at this time, we would propose the 
following offsets to LTCH payments during the transition period: 3.9 
percent (0.961) in FY 2004; 2.6 percent (0.974) in FY 2005; and 1.3 
percent (0.987) in FY 2006. No budget neutrality offset would be 
necessary in the 5th year of the transition period (FY 2007) because 
under the proposed transition methodology, all LTCHs would be paid 
based on 100 percent of the standard Federal rate and zero percent of 
payments under TEFRA. These estimates are based on the inflation 
factors and projected Medicare spending for LTCHs discussed in section 
VI.B.6. of this proposed rule, and that an estimated 58 percent of 
LTCHs will elect to be paid based on 100 percent of the standard 
Federal rate rather than the transition blend.
    Consistent with the statutory requirement for budget neutrality, we 
intend for estimated aggregate payments under the LTCH prospective 
payment system to equal the estimated aggregate payments that would be 
made if LTCH prospective payment system were not implemented. Our 
methodology for estimating payments for purposes of the budget 
neutrality calculations uses the best available data and necessarily 
reflects assumptions. When the LTCH prospective payment system is 
implemented, we would monitor payment data and evaluate the ultimate 
accuracy of the assumptions used to calculate the budget neutrality 
calculations (for example, inflation factors, intensity of services 
provided, or behavioral response to the implementation of the LTCH 
prospective payment system, as discussed in section IV.D of this 
proposed rule). To the extent these assumptions significantly differ 
from actual experience, the aggregate amount of actual payments may 
turn out to be significantly higher or lower than the estimates on 
which the budget neutrality calculations are based. Section 123 of 
Public Law 106-113 and section 307 of Public Law 106-554 provide the 
Secretary extremely broad authority in developing the LTCH prospective 
payment system, including the authority for appropriate adjustments. 
Pursuant to this broad authority, under Sec. 412.523(d)(3), we are 
proposing a possible one-time prospective adjustment to the LTCH 
prospective payment system rates by October 1, 2006, so that the effect 
of any significant difference between actual payments and estimated 
payments for the first year of the LTCH prospective payment system is 
not perpetuated in the prospective payment system rates for future 
years. (We note that in other contexts (for example, outlier payments 
under the hospital inpatient prospective payment system) differences 
between estimated payments and actual payments for a given year are not 
built into the prospective payment system rates for subsequent years. 
Moreover, the statutory ratesetting scheme under the LTCH prospective 
payment system is very different than in other contexts.)

[[Page 13473]]

    We estimate that total Medicare program payments for LTCH services 
over the next 5 years would be:

------------------------------------------------------------------------
                                                              Estimated
                                                             payments ($
                        Fiscal year                               in
                                                              billions)
------------------------------------------------------------------------
2003.......................................................        $1.80
2004.......................................................         1.91
2005.......................................................         2.02
2006.......................................................         2.14
2007.......................................................         2.26
------------------------------------------------------------------------

    These estimates are based on the assumption that the proposed LTCH 
inflation factor (the excluded hospital market basket) would be 3.6 
percent for FYs 2003 through 2005, 3.5 percent for FY 2006, and 3.4 
percent for FY 2007, that 58 percent of LTCHs would elect to be paid 
based on 100 percent of the proposed standard Federal rate rather than 
the proposed transition blend, and that there would be an increase in 
Medicare beneficiary enrollment of 2.2 percent in FY 2003, 2.3 percent 
in FYs 2004 and 2005, 2.4 percent in FY 2006, and 2.3 percent in FY 
2007.

E. Development of the Proposed Federal Prospective Payments

    Once the proposed relative weights for each LTC-DRG and the 
proposed standard Federal payment rate are calculated, the proposed 
Federal prospective payments can be determined. Under proposed 
Sec. 412.523(c)(4), a LTC-DRG payment would be calculated by 
multiplying the proposed standard Federal payment rate by the 
appropriate proposed LTC-DRG relative weight. The equation would be as 
follows:
    Federal Prospective Payment = LTC-DRG Relative Weight * Standard 
Federal Payment Rate

F. Computing the Proposed Adjusted Federal Prospective Payments

    The proposed Federal prospective payments described in section 
IV.E. of this preamble would be adjusted to account for the higher 
costs of hospitals in Alaska and Hawaii by multiplying the proposed 
Federal prospective payment rate by the appropriate proposed adjustment 
factor shown in the table in section IV.C.5. of this proposed rule.

G. Transition Period

    Under the broad authority conferred to the Secretary by section 123 
of Public Law 106-113 for development of a prospective payment system 
for LTCHs, we are proposing, under Sec. 412.533, a 5-year transition 
period from reasonable cost-based reimbursement under the TEFRA system 
to a prospective payment based on industry-wide average operating and 
capital-related costs. Under the average pricing system being proposed, 
payment would not be based on the experience of an individual hospital. 
We believe that a 5-year phase-in would provide LTCHs time to adjust 
their operations and capital financing to the new payment system, which 
would be based on prospectively determined Federal payment rates.
    Moreover, capital renovation and expansion plans of certain LTCHs 
may not be amenable to short-term adjustment due to the commitment of 
capital funds involved. We believe that a 5-year transition period with 
an increasing percentage of prospective payments should afford LTCHs an 
opportunity to increase their efficiency in the delivery of operating 
services and reserve additional payments to finance their capital 
expenditures.
    We further believe that the 5-year phase-in of the proposed LTCH 
prospective payment system would allow LTCH personnel to develop 
proficiency with the LTC-DRG coding system, resulting in improvement in 
the quality of the data used for generating our annual determination of 
relative weights and payment rates. Our analysis conducted during the 
development of the proposed LTCH prospective payment system revealed 
that most patients in LTCHs have several diagnosis codes on their 
Medicare claims indicating multiple CCs, although further review of 
individual case studies indicated that in some instances all of the 
diagnoses were not reported. Since payments to LTCHs under the current 
TEFRA system are based on reasonable costs, not diagnosis codes, past 
coding by LTCHs may not have accurately reflected the patient's 
diagnoses. Further evidence of incomplete coding is shown by the pairs 
of LTC-DRGs where the ``without CC'' LTC-DRG had a higher average 
charge than the corresponding with CC LTC-DRG. As described in more 
detail in section III. of this proposed rule, since the LTC-DRGs ``with 
CCs'' require more coded information, we believe this phenomenon 
indicates incomplete coding and that over the 5-year phase-in of the 
LTC-DRG-based LTCH prospective payment system, this problem would be 
resolved.
    The proposed 5-year transition period would enable us to collect 
Medicare claims and cost data that would be produced based on new 
program instructions to providers and fiscal intermediaries, and 
subject to program integrity monitoring. This gradual phase-in would 
provide a stable fiscal base for LTCHs, as we analyze data that may 
lead to our revisiting and perhaps revising specific policy decisions 
for the proposed LTCH prospective payment system.
    We are proposing that the transition period for all hospitals 
subject to the proposed LTCH prospective payment system would begin 
with the hospital's first cost reporting period beginning on or after 
October 1, 2002 and extend through the hospital's last cost reporting 
period beginning before October 1, 2007. During the 5-year transition 
period, we are proposing that a LTCH's total payment under the 
prospective payment system would be based on two payment percentages--
one based on reasonable cost-based (TEFRA) payments, and the other 
based on the standard Federal prospective payment rate. The proposed 
blend percentages are as follows:

------------------------------------------------------------------------
                                                  Federal
 Cost reporting periods beginning on or after       rate      TEFRA rate
                                                 percentage   percentage
------------------------------------------------------------------------
October 1, 2002...............................           20           80
October 1, 2003...............................           40           60
October 1, 2004...............................           60           40
October 1, 2005...............................           80           20
October 1, 2006...............................          100            0
------------------------------------------------------------------------

    For a cost reporting period beginning on or after October 1, 2002, 
and before October 1, 2003, the total payment for a LTCH would consist 
of 80 percent of the amount calculated under the current (TEFRA) 
payment system for that specific LTCH and 20 percent of the proposed 
Federal prospective rate. The percentage of payment based on the 
proposed LTCH prospective payment system Federal rate would increase by 
20 percentage points each year, while the TEFRA rate percentage would 
decrease by 20 percentage points each year, for the next 4 fiscal 
years. For cost reporting periods beginning on or after October 1, 
2006, Medicare payment to LTCHs would be determined entirely under the 
proposed Federal prospective payment system methodology. The TEFRA rate 
percentage is a LTCH specific amount that is based on the amount that 
the LTCH would have been paid (under TEFRA) if the prospective payment 
system were not implemented.
    Medicare fiscal intermediaries would continue to compute the LTCH 
TEFRA payment amount according to Sec. 412.22(b) of the regulations and 
sections 1886(d) and (g) of the Act. We note that several TEFRA 
provisions that currently are in effect would no longer be effective 
for cost reporting periods beginning in FY 2003. For instance, the caps 
on the target amounts for ``existing'' LTCHs provided for under

[[Page 13474]]

section 4414 of the BBA (see Sec. 413.40(c)(4)(iii)) for FYs 1998 
through 2002 would no longer be applicable for cost reporting periods 
beginning in FY 2003. For purposes of the LTCH prospective payment 
system, a LTCH's target amount for FY 2003 would be determined by 
updating its FY 2002 target amount (subject to the cap). In addition, 
the 15-percent reduction to payments to LTCHs for capital-related costs 
provided for under section 4412 of the BBA (Sec. 413.40(j)) is 
applicable for portions of cost reporting periods occurring in FYs 1998 
through FY 2002. This reduction would no longer be applicable for cost 
reporting periods beginning in FY 2003. Therefore, the TEFRA portion of 
a LTCH's payment for capital-related costs during the LTCH prospective 
payment system transition period would be based on 100 percent of its 
Medicare allowable capital costs.
    In implementing the proposed prospective payment system for LTCHs, 
one of our goals is to transition hospitals to full prospective 
payments as soon as appropriate. Therefore, we are proposing, under 
Sec. 412.533(b), to allow a LTCH to elect payment based on 100 percent 
of the Federal rate at the start of any of its cost reporting periods 
during the 5-year transition period rather than incrementally shifting 
from cost-based payments to prospective payments. However, once a LTCH 
elects to be paid based on 100 percent of the Federal rate, it would 
not be able to revert to the proposed transition blend.
    The purpose of the transition period is to allow for a smooth 
transition from cost-based reimbursement to prospective payment. We 
believe that it is appropriate not to allow a LTCH to revert back to 
the blended transition methodology once it elects payment based on 100 
percent of the Federal rate, because allowing LTCHs to switch back to a 
payment based on the transition blend from a payment based on 100 
percent of the Federal rate would be administratively burdensome to our 
fiscal intermediaries.
    Consistent with transition methodology policies under the IRF 
prospective payment system, we are proposing that, in order to elect 
payment based on 100 percent of the Federal rate, a LTCH must notify 
the fiscal intermediary of the election no later than 30 days before 
the beginning of the cost reporting period in the applicable fiscal 
year beginning on or after October 1, 2003 and before October 1, 2007 
(proposed Sec. 412.533(b)). The request by the LTCH to make the 
election would be made in writing to the Medicare fiscal intermediary. 
The intermediary would have to receive the request on or before the 
30th day before the applicable cost reporting period begins, regardless 
of any postmarks or anticipated delivery dates. Requests received, 
postmarked, or delivered by other means after the 30th day before the 
cost reporting period begins would not be approved. If the 30th day 
before the cost reporting begins falls on a day that the postal service 
or other delivery sources are not open for business, the LTCH would be 
responsible for allowing sufficient time for the delivery of the 
request before the deadline. If a LTCH's request is not received or not 
approved, payment would be based on the transition period rates.

H. Payments to New LTCHs

    For the purposes of the proposed LTCH prospective payment system, 
we are proposing under Sec. 412.23(e)(4) to define a new LTCH as a 
provider of inpatient hospital services that (1) meets the proposed 
revised qualifying criteria (described in section II.B.1. and in 
proposed Sec. 412.23(e)(1) of this proposed rule); and (2) under 
present or previous ownership (or both), has not received payment as a 
LTCH for discharges prior to October 1, 2002 (the effective date of the 
proposed prospective payment system for LTCHs).
    We are proposing, under Sec. 412.533(c), that new LTCHs would be 
paid based on 100 percent of the Federal rate starting with their first 
cost reporting period beginning on or after October 1, 2002. Thus, 
these new LTCHs would not participate in the 5-year transition from 
cost-based reimbursement to prospective payment (see section IV.G. of 
this proposed rule), as would other LTCHs.
    The proposed transition period described in section IV.G. of this 
proposed rule is intended to provide existing LTCHs time to adjust to 
payment under the new proposed system. Since these new LTCHs would not 
have received payment for the delivery of LTCH services prior to the 
effective date of the LTCH prospective payment system, we do not 
believe that new LTCHs require a transition period in order to make 
adjustments to their operations and capital financing, as would 
existing LTCHs.
    These new LTCHs should not be confused with those LTCHs first paid 
under the TEFRA payment system for discharges occurring on or after 
October 1, 1997, described in section 1886(b)(7)(A) of the Act, added 
by section 4416 of Public Law 105-33. In accordance with 
Sec. 413.40(f)(2)(ii), for cost reporting periods beginning on or after 
October 1, 2001, the payment amount for a ``new'' (post-FY 1998) LTCH 
is the lower of the hospital's net inpatient operating cost per case or 
110 percent of the national median target amount payment limit for 
hospitals in the same class for cost reporting periods ending during FY 
1996, updated to the applicable cost reporting period (see 62 FR 46019, 
August 29, 1997). A LTCH's second cost reporting period is subject to 
the same payment limit as the first cost reporting period. The target 
amount for the LTCH beginning with its third 12-month cost reporting 
period, as set forth in Sec. 413.40(c)(4)(v), is its payment amount for 
the preceding cost reporting period updated to the third cost reporting 
period. Under the proposed prospective payment system for LTCHs, those 
``new'' LTCHs would be paid under the proposed transition methodology 
described in section IV.G. of this proposed rule.
    For example, a new LTCH that first began receiving payment as a 
LTCH on October 1, 2001, would be subject to the 110 percent of the 
median target amount payment limit for LTCHs (in accordance with 
Sec. 413.40(f)(2)(ii)) for both its FY 2002 and FY 2003 cost reporting 
periods. For its cost reporting period beginning on October 1, 2002 
(the first cost reporting period under which the LTCH would be subject 
to the proposed prospective payment system), under the proposed 
transition methodology the LTCH's TEFRA portion of its payment for 
operating costs (80 percent) would be limited by the 110 percent of the 
median target amount payment limit for LTCHs under 
Sec. 413.40(f)(2)(ii). For its cost reporting period beginning on 
October 1, 2003, under the proposed transition methodology that LTCH's 
TEFRA portion of its payment for operating costs (60 percent) would be 
limited by its target amount as determined under Sec. 413.40(c)(4)(v). 
However, where a new LTCH first begins to receive payment as a LTCH on 
or after October 1, 2002, the LTCH would not be subject to the 5-year 
transition period under proposed Sec. 412.533. The LTCH would be paid 
based on 100 percent of the proposed LTCH prospective payment system 
Federal rate beginning with its first cost reporting period.

I. Method of Payment

    As discussed earlier, we are proposing that a beneficiary would be 
classified into a proposed LTC-DRG based on the principal diagnosis, up 
to eight additional (secondary) diagnoses, and up to six procedures 
performed during the stay, as well as age, sex, and discharge status of 
the patient. The LTC-DRG would be used to determine the Federal 
prospective payment that

[[Page 13475]]

the LTCH would receive for the Medicare-covered Part A services the 
LTCH furnished during the Medicare beneficiary's stay. We are 
proposing, under Sec. 412.541(a), that the payment would be based on 
the submission of the discharge bill since section 123(a) of Public Law 
106-113 requires that the LTCH prospective payment system be a per 
discharge based system. The discharge bill would provide data to allow 
for reclassifying the stay from payment at the full LTC-DRG rate into 
one of the proposed very short-stay discharge LTC-DRGs (under proposed 
Sec. 412.527), or to determine the payment for a case as a proposed 
short-stay outlier (under proposed Sec. 412.529) or as a proposed 
interrupted stay (under proposed Sec. 412.531), or to determine if the 
case would qualify for an outlier payment (under proposed 
Sec. 412.525(a)).
    Accordingly, the ICD-9-CM codes and other information proposed to 
be used to determine if an adjustment to the full LTC-DRG payment is 
necessary (for example, length of stay or interrupted stay status) 
would be recorded by the LTCH on the beneficiary's discharge bill and 
submitted to the Medicare fiscal intermediary for processing. The 
payment made would represent payment in full, under proposed 
Sec. 412.521(b), for inpatient operating and capital-related costs, but 
not the costs of an approved medical education program, bad debts, 
blood clotting factors, anesthesia services by hospital-employed 
nonphysician anesthetists or obtained under arrangement, or the costs 
of photocopying and mailing medical records requested by a PRO, which 
are costs paid outside the proposed LTCH prospective payment system.
    Under the current payment system, a LTCH may elect to be paid using 
the periodic interim payment (PIP) method described in Sec. 413.64(h), 
and may be eligible to receive accelerated payments as described in 
Sec. 413.64(g). With the implementation of a prospective payment system 
for LTCHs, at this time (under proposed Sec. 412.541) we are proposing 
to continue this existing administrative policy of allowing PIP under 
Sec. 413.64(h) and accelerated payments under Sec. 413.64(g) for 
qualified LTCHs. For those LTCHs that will be paid during the 5-year 
transition based on the blended transition methodology in Sec. 412.533 
for cost reporting periods beginning on or after October 1, 2002 and 
before October 1, 2006, the PIP amount would be based on the transition 
formula. For those LTCHs that are paid based on 100 percent of the 
standard Federal rate, the PIP amount would be based on the estimated 
prospective payment for the year rather than on the estimated cost 
reimbursement. Excluded from the PIP amounts would be outlier payments 
that are paid upon submission of a discharge bill. In addition, Part A 
costs that are not paid for under the proposed LTCH prospective payment 
system, including Medicare costs of an approved medical education 
program, bad debts, blood clotting factors, anesthesia services by 
hospital-employed nonphysician anesthetists or obtained under 
arrangement, and the costs of photocopying and mailing medical records 
requested by a PRO would be subject to the interim payment provisions 
at Sec. 413.64.

V. Provisions of the Proposed Rule

    We are proposing to establish a new subpart O under 42 CFR part 
412, to implement the provisions of the proposed prospective payment 
system for LTCHs as discussed in detail throughout the preamble to this 
proposed rule.
    In addition, we are proposing to make additional policy changes and 
conforming changes to the following sections of the regulations under 
42 CFR parts 412, 413, and 476 as discussed throughout this preamble: 
Secs. 412.1, 412.20, 412.22, 412.23, 412.116, 431.1, 413.40, 413.64, 
and 476.71.

VI. Regulatory Impact Analysis

A. Introduction

    We have examined the impact of this proposed rule as required by 
Executive Order 12866. We also have examined the impacts of this rule 
under the criteria of the Regulatory Flexibility Act (RFA) (Pub. L. 96-
354), section 1102(b) of the Act, the Unfunded Mandate Reform Act of 
1995 (UMRA) (Pub. L. 104-4), and Executive Order 13132 (Federalism).
1. Executive Order 12866
    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 
proposed rule would not be a major rule within the meaning of Executive 
Order 12866 because the redistributive effects do not constitute a 
shift of $100 million in any one year. Because the proposed LTCH 
prospective payment system must be budget neutral in accordance with 
section 123(a)(1) of Public Law 106-113, we estimate that there will be 
no budgetary impact for the Medicare program.
2. Regulatory Flexibility Act (RFA)
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses in issuing a proposed rule. For purposes of the 
RFA, small entities include small businesses, nonprofit organizations, 
and government agencies. Most hospitals and most other providers and 
suppliers are small entities, either by nonprofit status or by having 
revenues of $25 million or less annually. For purposes of the RFA, all 
hospitals are considered small entities. Medicare fiscal intermediaries 
are not considered to be small entities. Individuals and States are not 
included in the definition of a small entity.
3. Impact on Rural Hospitals
    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis if a proposed rule may have a significant impact on the 
operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of an MSA and has fewer 
than 100 beds. Section VI.B. of this proposed rule contains our 
estimated impact of this proposed rule on the hospitals classified as 
located in rural areas that have fewer than 100 beds for which we had 
cost report data available.
4. Unfunded Mandate
    Section 202 of the UMRA requires that agencies assess anticipated 
costs and benefits before issuing any proposed rule or any final rule 
preceded by a proposed rule that may result in expenditures in any one 
year by State, local, or tribal governments, in the aggregate, or by 
the private sector, of $110 million or more. This proposed rule would 
not mandate any requirements for State, local, or tribal governments 
nor would it affect private sector costs.
5. 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

[[Page 13476]]

governments, preempts State law, or otherwise has Federalism 
implications.
    We have examined this proposed rule under the criteria set forth in 
Executive Order 13132 and have determined that this proposed rule would 
not have any negative impact on the rights, rules, and responsibilities 
of State, local, or tribal governments.

B. Anticipated Effects

    We discuss the impact of this proposed rule below in terms of its 
fiscal impact on the Federal Medicare budget and on LTCHs.
1. Budgetary Impact
    Section 123(a)(1) of Public Law 106-113 requires us to set the 
payment rates contained in this proposed rule such that total payments 
under the LTCH prospective payment system are projected to equal the 
amount that would have been paid if this prospective payment system had 
not been implemented. However, the proposed standard Federal rate 
($27,649.02) was calculated as if all LTCHs would be paid based on 100 
percent of the standard Federal rate in FY 2003. As discussed in 
section IV.D.2.h. of the preamble, we are proposing a budget neutrality 
offset to payments (in addition to the budget neutrality adjustment 
reflected in the proposed standard Federal rate) to account for the 
monetary effect of the proposed 5-year transition period and the 
proposed policy to permit LTCHs to elect to be paid based on 100 
percent of the standard Federal rate rather than a blend of Federal 
rate payments and reasonable-cost based payments during the transition. 
The amount of the offset is equal to 1 minus the ratio of the estimated 
TEFRA reasonable cost-based payments that would have been made if the 
LTCH prospective payment system had not been implemented, to the 
projected total Medicare program payments that would be made under the 
proposed transition methodology and the option to elect payment based 
on 100 percent of the Federal rate. Thus, in accordance with section 
123(a)(1) Public Law 106-113, there would be no budgetary impact to the 
Medicare program by implementation of the proposed LTCH prospective 
payment system.
2. Impacts on Providers
    In order to understand the impact of the proposed new prospective 
payment system on different categories of LTCHs, it is necessary to 
estimate payments that would be made under the current (TEFRA) payment 
methodology (current payments) and payments under the proposed 
prospective payment system (proposed prospective payments). We also 
evaluated the ratio of estimated prospective payments to estimated 
costs for each category of LTCHs.
    Hospital groups were based on characteristics provided in OSCAR 
data and 1999 cost report data from HCRIS. Hospitals with incomplete 
characteristics were grouped into the ``unknown'' category. Hospital 
groups include:

--Location: Large Urban/Other Urban/Rural
--Participation Date
--Ownership Control
--Census Region
--Bed Size

    To estimate the impacts among the various categories of providers, 
it is imperative that current payments and proposed prospective 
payments contain similar inputs. More specifically, we estimated 
proposed prospective payments only for those providers that we are able 
to calculate current payment. For example, if we did not have FYs 1996 
through 1999 cost data for a LTCH, we were unable to determine an 
update to the LTCH's target amount as described in section IV.D.2.b. of 
this proposed rule to estimate payment under the TEFRA system.
    As previously stated in section IV.C. of this preamble, we have 
both case-mix and cost data for 222 LTCHs. All 222 providers that had 
covered Medicare claims in FY 2000 were used to analyze the 
appropriateness of various adjustments to the proposed standard Federal 
unadjusted payment rate. However, for the impact analyses shown in the 
following tables, we simulate payments for 211 LTCHs. The methodology 
used to update payment data to the midpoint of FY 2003 was based on the 
use of historical cost report data to determine the relationship 
between the LTCH's costs and target amount. Thus, the number of 
providers reflects only those providers for which we had cost report 
data available from FYs 1996, 1997, 1998, and 1999 (see discussion in 
section IV.D.2. of this proposed rule).
    These impacts reflect the estimated losses/gains among the various 
classifications of providers for FY 2003. Proposed prospective payments 
were based on the proposed standard Federal rate of $27,649.02 and the 
hospital's estimated case-mix based on FY 2000 claims data. These 
hospital payments were compared to the hospital's payments based on its 
cost from the cost report inflated to FY 2003 and subject to the 
updated per discharge target amount.
3. Calculation of Current Payments
    To calculate current costs, cost report data are trended forward 
from the midpoint of the cost reporting period to the midpoint of FY 
2003 using the methodology set forth in section IV.D.2.b. of this 
preamble. To estimate current payments, we determined payments for 
operating costs for each LTCH in accordance with the methodology in 
section 1886(b) of the Act. Further, we compute payments for capital-
related costs consistent with section 1886(g)(4) of the Act. To 
determine each LTCH's average per discharge payment amount under the 
current payment system, operating and capital-related payments are 
added together, and then the total payment is divided by the number of 
Medicare discharges from the cost reports. Total payments for each LTCH 
are then computed by multiplying the number of discharges from the FY 
2000 MedPAR claims by the average per discharge payment amount.
4. Calculation of Proposed Prospective Payments
    To estimate payments under the proposed prospective payment system, 
we multiply each LTCH's case-mix index by the LTCH's number of Medicare 
discharges and the proposed standard Federal rate. As noted in section 
IV.C. of this proposed rule, we are proposing to not make adjustments 
for area wage differences (wage index), geographic reclassification, 
indirect medical education costs, or a disproportionate share of low-
income patients.
    Next, we calculated payments using the proposed transition blend 
percentages for FY 2003 (80 percent of current cost-based (TEFRA) 
payments and 20 percent of payments under the proposed LTCH prospective 
payment system) and compared that estimated blended payment to the 
LTCH's estimated payment if it would elect payment based on 100 percent 
of the Federal rate (see section IV.G. of this proposed rule). If a 
LTCH would be paid more based on 100 percent of the Federal rate, we 
assumed that it would elect to bypass the proposed transition 
methodology and transition immediately to prospective payments.
    Then we applied the proposed 5.1 percent reduction to payment to 
account for the effect of the proposed 5-year transition methodology 
and election of payment based on 100 percent of the Federal rate on 
Medicare program payments to each LTCH's estimated payments under the 
proposed prospective payment system (see section

[[Page 13477]]

IV.D.2.h. of this proposed rule). The impact based on our projection of 
whether a LTCH would be paid based on the proposed transition blend 
methodology or would elect payment based on 100 percent of the Federal 
rate for cost reporting periods beginning during FY 2003 is shown below 
in Table 1. We also show in Table 2 below the impact if the LTCH 
prospective payment system were fully implemented in FY 2003, that is, 
as if there were an immediate transition to fully Federal prospective 
payments under the LTCH prospective payment system for FY 2003. 
Accordingly, the proposed 5.1 percent reduction to account for the 
proposed 5-year transition methodology on LTCHs' Medicare program 
payments was not applied to LTCHs' estimated payments under the 
proposed prospective payment system. Furthermore, beginning with cost 
reporting periods beginning during FY 2007, the proposed 5-year 
transition period would have ended, and all LTCHs would be paid based 
on 100 percent of the proposed standard Federal rate. All payment 
simulations reflect data trended to the midpoint FY 2003.
    Tables 1 and 2 below illustrate the aggregate impact of the 
proposed payment system among various classifications of LTCHs. The 
first column, LTCH Classification, identifies the type of LTCH. The 
second column lists the number of LTCHs of each classification type; 
the third column identifies the number of long-term care cases; and the 
fourth column is the ratio of proposed prospective payments to current 
payments.

   Table 1.--Projected Impact Reflecting 20 Percent of Proposed Prospective Payments and 80 Percent of Current
              (TEFRA) Payments and Option to Elect Payment Based on 100 Percent of the Federal Rate
----------------------------------------------------------------------------------------------------------------
                                                                                  Number of long- New payment to
                       LTCH classification                           Number of       term care        current
                                                                       LTCHs           cases       payment ratio
----------------------------------------------------------------------------------------------------------------
All Providers \1\...............................................             211          70,732          1.0010
BY LOCATION:
    Rural.......................................................              10           2,112          1.1826
    Urban.......................................................             201          68,620          0.9972
        Large Urban.............................................             128          50,486          0.9977
        Other Urban.............................................              73          18,134          0.9955
BY PARTICIPATION DATE:
    After Oct 1993..............................................             125          39,171          0.9819
    Before Oct 1983.............................................              31          10,980          1.0498
    Oct 1983-Sept 1993..........................................              51          20,103          1.0209
    Unknown.....................................................               4             478          1.0208
BY OWNERSHIP CONTROL:
    Voluntary...................................................              54          19,920          0.9874
    Proprietary.................................................             131          46,739          1.0010
    Government..................................................              26           4,073          1.0837
BY CENSUS REGION:
    New England.................................................              18           9,587          1.0283
    Middle Atlantic.............................................              13           5,777          1.0209
    South Atlantic..............................................              25           6,215          1.0294
    East North Central..........................................              33           8,070          1.0489
    East South Central..........................................              11           2,826          1.0330
    West North Central..........................................              12           3,266          1.0808
    West South Central..........................................              71          27,345          0.9543
    Mountain....................................................              15           2,423          1.0277
    Pacific.....................................................              13           5,223          1.0024
By Bed Size:
    0-24 Beds...................................................              25           3,571          0.9886
    25-49 Beds..................................................              84          19,426          1.0172
    50-74 Beds..................................................              20           6,324          0.9688
    75-124 Beds.................................................              29          12,362          0.9994
    125-199 Beds................................................              23          13,191          0.9869
    200+ Beds...................................................              30          15,858         1.0100
----------------------------------------------------------------------------------------------------------------
\1\ These estimated impacts of the proposed budget neutral LTCH prospective payment system are subject to
  rounding. Therefore, the impact on all providers is not exactly equal to 1.0000.


             Table 2.--Projected Impact Reflecting the Fully Phased-In Proposed Prospective Payments
----------------------------------------------------------------------------------------------------------------
                                                                                  Number of long- New payment to
                       LTCH classification                           Number of       term care        current
                                                                       LTCHs           cases       payment ratio
----------------------------------------------------------------------------------------------------------------
All Providers \1\...............................................             211          70,732          0.9977
BY LOCATION:
    Rural.......................................................              10           2,112          1.2327
    Urban.......................................................             201          68,620          0.9927
        Large Urban.............................................             128          50,486          0.9918
        Other Urban.............................................              73          18,134          0.9955
BY PARTICIPATION DATE:
    After Oct 1993..............................................             125          39,171          0.9675
    Before Oct 1983.............................................              31          10,980          1.0763
    Oct 1983-Sept 1993..........................................              51          20,103          1.0286

[[Page 13478]]

 
    Unknown.....................................................               4             478          1.0403
BY OWNERSHIP CONTROL:
    Voluntary...................................................              54          19,920          0.9846
    Proprietary.................................................             131          46,739          0.9956
    Government..................................................              26           4,073          1.1130
BY CENSUS REGION:
    New England.................................................              18           9,587          1.0593
    Middle Atlantic.............................................              13           5,777          1.0247
    South Atlantic..............................................              25           6,215          1.0497
    East North Central..........................................              33           8,070          1.0732
    East South Central..........................................              11           2,826          1.0614
    West North Central..........................................              12           3,266          1.1076
    West South Central..........................................              71          27,345          0.9234
    Mountain....................................................              15           2,423          1.0178
    Pacific.....................................................              13           5,223          0.9902
BY BED SIZE:                                                                  25           3,571          0.9845
    25-49 Beds..................................................              84          19,426          1.0317
    50-74 Beds..................................................              20           6,324          0.9170
    75-124 Beds.................................................              29          12,362          0.9886
    125-199 Beds................................................              23          13,191          0.9842
    200+ Beds...................................................              30          15,858         1.0116
----------------------------------------------------------------------------------------------------------------
\1\ These estimated impacts of the proposed budget neutral LTCH prospective payment system are subject to
  rounding. Therefore, the impact on all providers is not exactly equal to 1.0000.

5. Results
    We have prepared the following summary of the impact (as shown in 
Table 1) of the LTCH prospective payment system set forth in this 
proposed rule.
a. Location
    The majority of LTCHs are in urban areas. Only 4.7 percent of the 
LTCHs are identified as being located in a rural area, and 
approximately less than 3 percent of all long-term care cases are 
treated in these rural hospitals. Impact analysis shows that the new 
payment to current payment ratio is estimated to be 1.1826 for rural 
LTCHs, and 0.9972 for urban LTCHs. There is only a small difference in 
payment between large urban LTCHs and other urban LTCHs. About 71.4 
percent of the LTCH cases are in LTCHs located in large urban areas. 
Large urban LTCHs have a new payment to current payment ratio of 
0.9977, while other urban LTCHs have a new payment to current payment 
ratio of 0.9955.
b. Participation Date
    LTCHs are grouped by participation date into three categories: (1) 
Before October 1983; (2) between October 1983 and September 1993; and 
(3) after October 1993. We did not have sufficient OSCAR data on four 
LTCHs, which we labeled as an ``Unknown'' category. The majority, 
approximately 55 percent, of the long-term care cases are in hospitals 
that began participating after October 1993 and have a new payment to 
current payment ratio of 0.9816 (see Table 1) and approximately 15 
percent of the cases are in LTCHs that began participating in Medicare 
before October 1983 with a new payment to current payment ratio of 
1.0498.
c. Ownership Control
    LTCHs are grouped into three categories based on ownership control 
type: (1) Voluntary; (2) proprietary; and (3) government. We expect 
that government LTCHs would gain the most from the proposed payment 
system with an estimated new payment to current payment ratio of 
1.0837, although only approximately 11.5 percent of LTCHs are 
government run. Voluntary and proprietary LTCHs have a new payment to 
current payment ratio of 0.9874 and 1.0010, respectively.
d. Census Region
    Of the nine census regions, we expect that LTCHs in the West North 
Central Region will have the highest new payment to current payment 
ratio (1.0808). We expect only LTCHs in the West South Central will 
have a new payment to current payment ratio of less than 1.0 (0.9543).
e. Bed Size
    LTCHs were grouped into six categories based on bed size: 0-24 
beds, 25-49 beds, 50-74 beds, 75-124 beds, 125-199 beds, and 200+ beds. 
The majority of LTCHs were in bed size categories where the new payment 
to current payment ratio is estimated to be greater than 0.98. LTCHs 
with beds between 25-49 or over 200 beds have a new payment to current 
payment ratio greater than 1.0 (1.0172 and 1.0100, respectively). LTCHs 
with between 50-74 beds have the lowest estimated new payment to 
current payment ratio (0.9688).
6. Effect on the Medicare Program
    Based on actuarial projections resulting from our experience with 
other prospective payment systems, we estimate that Medicare spending 
(total Medicare program payments) for LTCH services over the next 5 
years would be:

------------------------------------------------------------------------
                                                            Estimated
                      Fiscal year                        payments  ($ in
                                                             million)
------------------------------------------------------------------------
2003...................................................          $1,800
2004...................................................           1,910
2005...................................................           2,020
2006...................................................           2,140
2007...................................................           2,260
------------------------------------------------------------------------

    These estimates are based on the current estimate of increase in 
the excluded hospital with capital market basket of 3.6 percent for FYs 
2003 through 2005, 3.5 percent for FY 2006, and 3.4 percent for FY 
2007. We estimate that there would be an increase in Medicare 
beneficiary enrollment of 2.2 percent in FY 2003, 2.3 percent in FYs 
2004, 2005, and 2007, and 2.4 percent in FY 2006, and an estimated 
increase in the total number of LTCHs.

[[Page 13479]]

    Consistent with the statutory requirement for budget neutrality, we 
intend for estimated aggregate payments under the LTCH prospective 
payment system to equal the estimated aggregate payments that would be 
made if LTCH prospective payment system were not implemented. Our 
methodology for estimating payments for purposes of the budget 
neutrality calculations uses the best available data and necessarily 
reflects assumptions. When the LTCH prospective payment system is 
implemented, we would monitor payment data and evaluate the ultimate 
accuracy of the assumptions used to calculate the budget neutrality 
calculations (for example, inflation factors, intensity of services 
provided, or behavioral response to the implementation of the LTCH 
prospective payment system, as discussed in section IV.D of this 
proposed rule). To the extent these assumptions significantly differ 
from actual experience, the aggregate amount of actual payments may 
turn out to be significantly higher or lower than the estimates on 
which the budget neutrality calculations are based. Section 123 of 
Public Law 106-113 and section 307 of Public Law 106-554 provide the 
Secretary extremely broad authority in developing the LTCH prospective 
payment system, including the authority for appropriate adjustments. In 
accordance with this broad authority, we plan to discuss in a future 
proposed rule a possible one-time prospective adjustment to the LTCH 
prospective payment system rates so that the effect of the difference 
between actual payments and estimated payments for the first year of 
LTCH prospective payment system is not perpetuated in the prospective 
payment system rates for future years. (We note that in other contexts 
(for example, outlier payments under the hospital inpatient prospective 
payment system) differences between estimated payments and actual 
payments for a given year are not built into the prospective payment 
system rates for subsequent years. Moreover, the statutory ratesetting 
scheme under the LTCH prospective payment system is very different than 
in other contexts.)
7. Effect on Medicare Beneficiaries
    Under the proposed LTCH prospective payment system, hospitals would 
receive payment based on the average resources consumed by patients for 
each diagnosis. We do not expect any changes in the quality of care or 
access to services for Medicare beneficiaries under the proposed LTCH 
prospective payment system, but we expect that paying prospectively for 
LTCH services would enhance the efficiency of the Medicare program.
8. Computer Hardware and Software
    We do not anticipate that hospitals would incur additional systems 
operating costs in order to effectively participate in the prospective 
payment system for LTCHs. We believe that LTCHs possess the computer 
hardware capability to handle the LTC-DRGs, computerization, data 
transmission, and GROUPER software requirements. Our belief is based 
upon indications that approximately 99 percent of hospital inpatient 
claims currently are submitted electronically. Moreover, LTCHs have the 
option of purchasing data collection software that can be used to 
support other clinical or operational needs (for example, care 
planning, quality assurance, or billing) or other regulatory 
requirements for reporting patient information.

C. Alternatives Considered

    Section 123 of Public Law 106-113 specifies that the case-mix 
adjusted prospective payment system must be a per discharge system 
based on DRGs, and section 307(b) of Public Law 106-554 directs the 
Secretary to examine the ``feasibility and the impact of basing payment 
under such a system on the use of existing (or refined) hospital 
diagnosis-related groups (DRGs) that have been modified to account for 
different resource use of LTCH patients as well as the use of the most 
recently available hospital discharge data.'' Section 307(b) further 
requires the Secretary to ``examine'' appropriate adjustments to the 
system such as adjustments to DRG weights, area wage adjustments, 
geographic reclassification, outliers, updates, and a disproportionate 
share adjustment consistent with section 1886(d)(5)(F) of the Act. 
Generally, the statute confers broad authority on the Secretary in 
designing the key elements of the system. Our considerations of the 
patient classification systems in detail in section I.G. of this 
proposed rule. Our evaluation of alternative features and adjustment 
factors for the LTCH prospective payment system are set forth in 
section IV. We are soliciting public comments regarding our proposed 
policies and system design and will consider them as we formulate our 
final rule for the prospective payment system for LTCHs.

D. Executive Order 12866

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

VII. Collection of Information Requirements

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

Proposed Secs. 412.116(a)(4) and 412.541(b) and (e) Method of Payment: 
Periodic Interim Payments and Accelerated Payments

    Under proposed Sec. 412.116(a)(4), for cost reporting periods 
beginning on or after October 1, 2002, payments to a LTCH for inpatient 
hospital services under the prospective payment system would be made as 
described in proposed Sec. 412.541. Proposed Sec. 412.541(b) provides 
that a LTCH may receive periodic interim payments for Part A services, 
subject to the provisions of Sec. 413.64(h). Section 413.64(h) 
specifies that the request for periodic interim payments must be made 
to the fiscal intermediary. Proposed Sec. 412.541(e) states that, upon 
request, an accelerated payment may be made to a LTCH that is not 
receiving a periodic interim payment if the LTCH is experiencing 
financial difficulties.
    We estimate that the burden associated with this provision is the 
time it takes a LTCH to prepare and submit its request for periodic 
interim payments or accelerated payments. We estimate that 
approximately three LTCHs would request periodic interim payments under 
the prospective payment system and that it would take each hospital 1 
hour to prepare and make the request. We estimate that approximately 
two LTCHs would

[[Page 13480]]

request accelerated payments and that it would take them approximately 
30 minutes each to prepare and submit their written request, for a 
total estimated annual burden of 1 hour.
    Both of these proposed sections of the regulations are exempt from 
the PRA since the two requirements would affect less than 10 LTCHs per 
year (see 5 CFR Part 1320.3(c)(4)).

Proposed Sec. 412.508(b)(1) and (b)(2):  Content of Physician 
Acknowledgement Statement and Completion of Acknowledgement

    Proposed Sec. 412.508(b) provides that a physician must complete an 
acknowledgement statement that each patient's principal and secondary 
diagnoses and major procedures performed are documented by the 
physician's entries in the patient's medical record. Proposed 
Sec. 412.508(b)(1) specifies that when a claim is submitted, the 
hospital must have a signed and dated acknowledgement from the 
attending physician that the physician has received notice of the 
required acknowledgement of entries in the patient's medical record and 
that anyone who misrepresents, falsifies, or conceals essential 
information required for payment of Federal funds may be subject to 
fine, imprisonment, or civil penalty under applicable laws. Proposed 
Sec. 412.508(b)(2) specifies that the acknowledgement must be completed 
by the physician at the time the physician is granted admitting 
privileges at the hospital or before or at the time the physician 
admits his or her first patient.
    The burden associated with these information collection 
requirements is the time required for the physician to complete the 
acknowledgement statements.
    These information collection requirements are currently approved 
under OMB approval number 0938-0359 through February 28, 2002. (We note 
that these requirements are currently in the reapproval process with 
OMB.)

Proposed Sec. 412.511  Reporting and Recordkeeping Requirements

    Under proposed Sec. 412.511, a LTCH subject to the proposed 
prospective payment system described in this proposed rule must meet 
the recordkeeping and cost reporting requirements of Secs. 413.20 and 
413.24. While Secs. 413.20 and 413.24 are subject to the PRA, the 
burden associated with these requirements is currently captured in 
approved collection 0938-0758, with a current expiration date of 3/31/
2002. This collection is currently at OMB awaiting re-approval.

Proposed Sec. 412.533(b)  Transition Payments: Election Not To Be Paid 
Under the Transitional Period Methodology

    Under proposed Sec. 412.533(b), a LTCH may elect to be paid based 
on 100 percent of the Federal prospective payment rate at the start of 
any of its cost reporting periods during a 5-year transition period 
beginning on or after October 1, 2002, and before October 1, 2007, 
without regard to the transitional percentages. Proposed 
Sec. 412.533(b)(1) specifies that the request to make the election must 
be made in writing to the Medicare intermediary by the LTCH and 
received no later than 30 days before the beginning of the cost 
reporting period for each applicable fiscal year beginning on or after 
October 1, 2003 and before October 1, 2007.
    We estimate that 135 LTCHs would make a request under this section 
to elect to receive the full Federal rate and that it would take each 
LTCH approximately 15 minutes each to prepare and submit their written 
request, for a total estimated annual burden of 34 hours.
    If you comment on these information collection requirements, please 
mail copies directly to the following addresses:

Centers for Medicare & Medicaid Services, Office of Information 
Services, Security and Standards Group, Division of CMS Enterprise 
Standards, Room N2-14-26, 7500 Security Boulevard, Baltimore, Maryland 
21244-1850. Attn: Dawn Willinghan CMS-1177-P; and
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 3001, New Executive Office Building, Washington, DC 20503, 
Attn: Allison Herron Eydt, CMS Desk Officer.

    We have submitted the information collection requirements under 
Secs. 412.508(b), 412.116, 412.533, and 412.541 to the Office of 
Management and Budget (OMB) for review under the authority of PRA. We 
also have submitted a copy of this proposed rule to OMB for its review 
of the information collection requirements. These requirements would 
not be effective until approved by OMB.

VIII. Response to Comments

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

List of Subjects

42 CFR Part 412

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

42 CFR Part 413

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

42 CFR Part 476

    Health care, Health professional, Health record, Peer Review 
Organizations (PRO), Penalties, Privacy, Reporting and recordkeeping 
requirements.

    42 CFR Chapter IV would be amended as set forth below:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

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

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

Subpart A--General Provisions

    2. Section Sec. 412.1 is amended by:
    a. Adding a new paragraph (a)(3);
    b. Redesignating paragraph (b)(12) as paragraph (b)(13); and
    c. Adding a new paragraph (b)(12).


Sec. 412.1  Scope of part.

    (a) Purpose. * * *
    (3) This part implements section 123 of Public Law 106-113, which 
provides for the establishment of a prospective payment system for the 
costs of inpatient hospital services furnished to Medicare 
beneficiaries by long-term care hospitals described in section 
1886(d)(1)(B)(iv) of the Act, for cost reporting periods beginning on 
or after October 1, 2002. This part also reflects the provisions of 
section 307 of Public Law 106-554, which state that the Secretary shall 
examine and may provide for appropriate adjustments to the long-term 
care hospital prospective payment system, including adjustments to 
diagnosis-related group (DRG) weights, area wage adjustments, 
geographic reclassification, outlier adjustments, updates, and 
disproportionate share adjustments

[[Page 13481]]

consistent with section 1886(d)(5)(F) of the Act.
    (b) Summary of content. * * *
    (12) Subpart O of this part describes the prospective payment 
system specified in paragraph (a)(3) of this section for long-term care 
hospitals and sets forth the general methodology for paying for the 
operating and capital-related costs of inpatient hospital services 
furnished by long-term care hospitals, effective with cost reporting 
periods beginning on or after October 1, 2002.
* * * * *

Subpart B--Hospital Services Subject to and Excluded from the 
Prospective Payment Systems for Inpatient Operating Costs and 
Inpatient Capital-Related Costs

    3. Section 412.20 is amended by:
    a. Revising paragraph (a).
    b. Redesignating paragraph (c) as paragraph (d).
    c. Adding a new paragraph (c).


Sec. 412.20  Hospital services subject to the prospective payment 
systems.

    (a) Except for services described in paragraphs (b), (c), and (d) 
of this section, all covered inpatient hospital services furnished to 
beneficiaries during subject cost reporting periods are paid under the 
prospective payment systems specified in Sec. 412.1(a)(1).
* * * * *
    (c) Effective for cost reporting periods beginning on or after 
October 1, 2002, covered inpatient hospital services furnished to 
Medicare beneficiaries by a long-term care hospital that meets the 
conditions for payment of Secs. 412.505 through 412.511 are paid under 
the prospective payment system described in subpart O of this part.
* * * * *
    4. Section 412.22 is amended by revising paragraph (b) to read as 
follows:


Sec. 412.22  Excluded hospitals and hospital units: General rules.

* * * * *
    (b) Cost reimbursement. Except for those hospitals specified in 
paragraph (c) of this section and Secs. 412.20(b) and (c), all excluded 
hospitals (and excluded hospital units, as described in Secs. 412.23 
through 412.29) are reimbursed under the cost reimbursement rules set 
forth in part 413 of this subchapter, and are subject to the ceiling on 
the rate of hospital cost increases described in Sec. 413.40 of this 
subchapter.
* * * * *
    5. Section 412.23 is amended by revising paragraph (e) to read as 
follows:


Sec. 412.23  Excluded hospitals: Classifications.

* * * * *
    (e) Long-term care hospitals. A long-term care hospital must meet 
the requirements of paragraph (e)(1) and (e)(2) of this section and, 
where applicable, the additional requirements of Sec. 412.22(e), to be 
excluded from the prospective payment systems specified in 
Sec. 412.1(a)(1) and to be paid under the prospective payment system 
specified in Sec. 412.1(a)(3) and in Subpart O of this part.
    (1) Provider agreements. The hospital must have a provider 
agreement under Part 489 of this chapter to participate as a hospital; 
and
    (2) Average length of stay. (i) The hospital must have an average 
Medicare inpatient length of stay of greater than 25 days as calculated 
under paragraph (e)(3) of this section; or
    (ii) For cost reporting periods beginning on or after August 5, 
1997, a hospital that was first excluded from the prospective payment 
system under this section in 1986 meets the length of stay criterion if 
it has an average inpatient length of stay for all patients, including 
both Medicare and non-Medicare inpatients, of greater than 20 days and 
demonstrates that at least 80 percent of its annual Medicare inpatient 
discharges in the 12-month cost reporting period ending in fiscal year 
1997 have a principal diagnosis that reflects a finding of neoplastic 
disease as defined in paragraph (f)(1)(iv) of this section.
    (3) Calculation of average length of stay. The average Medicare 
inpatient length of stay is calculated--
    (i) By dividing the number of total Medicare inpatient days (less 
leave or pass days) by the number of total Medicare discharges for the 
hospital's most recent complete cost reporting period;
    (ii) If a change in the hospital's Medicare average length of stay 
is indicated, by the same method for the immediately preceding 6-month 
period; or
    (iii) If a hospital has undergone a change of ownership (as 
described in Sec. 489.18 of this chapter) at the start of a cost 
reporting period or at any time within the preceding 6 months, the 
hospital may be excluded from the prospective payment system as a long-
term care hospital for a cost reporting period if, for the 6 months 
immediately preceding the start of the period (including time before 
the change of ownership), the hospital has the required Medicare 
average length of stay, continuously operated as a hospital, and 
continuously participated as a hospital in Medicare.
    (4) Definition of new long-term care hospital. For purposes of 
payment under the long-term care hospital prospective payment system 
under Subpart O of this part, a new long-term care hospital is a 
provider of inpatient hospital services that meets the qualifying 
criteria in paragraphs (e)(1) and (e)(2) of this section and, under 
present or previous ownership (or both), has not received payment as a 
long-term care hospital for discharges occurring prior to October 1, 
2002.
* * * * *

Subpart H--Payments to Hospitals Under the Prospective Payment 
Systems

    6. In Sec. 412.116, the heading of paragraph (a) is revised and a 
new paragraph (a)(4) is added to read as follows:


Sec. 412.116  Method of payment.

    (a) General rules. * * *
    (4) For cost reporting periods beginning on or after October 1, 
2002, payments for inpatient hospital services furnished by a long-term 
care hospital that meets the conditions for payment of Secs. 412.505 
through 412.511 are made as described in Sec. 412.521.
* * * * *
    7. A new subpart O is added to read as follows:
Subpart O--Prospective Payment System for Long-Term Care Hospitals
Sec.
412.500   Basis and scope of subpart.
412.503   Definitions.
412.505   Conditions for payment under the prospective payment 
system for long-term care hospitals.
412.507   Limitation on charges to beneficiaries.
412.508   Medical review requirements.
412.509   Furnishing of inpatient hospital services directly or 
under arrangement.
412.511   Reporting and recordkeeping requirements.
412.513   Patient classification system.
412.515   LTC-DRG weighting factors.
412.517   Revision of LTC-DRG group classifications and weighting 
factors.
412.521   Basis of payment.
412.523   Methodology for calculating the Federal prospective 
payment rates.
412.525   Adjustments to the Federal prospective payment.
412.527   Special payment provisions for very short-stay discharges.
412.529   Special payment provisions for short-stay outliers.
412.531   Special payment provisions when an interruption of a stay 
occurs in a long-term care hospital.
412.532   Special payment provisions for patients who are 
transferred to onsite providers and readmitted to a long-term care 
hospital.
412.533   Transition payments.

[[Page 13482]]

412.535   Publication of the Federal prospective payment rates.
412.541   Method of payment under the long-term care hospital 
prospective payment system.

Subpart O--Prospective Payment System for Long-Term Care Hospitals


Sec. 412.500  Basis and scope of subpart.

    (a) Basis. This subpart implements section 123 of Public Law 106-
113, which provides for the implementation of a prospective payment 
system for long-term care hospitals described in section 
1886(d)(1)(B)(iv) of the Act. This subpart also reflects the provisions 
of section 307 of Public Law 106-554, which state that the Secretary 
shall examine and may provide for appropriate adjustments to that 
system, including adjustments to DRG weights, area wage adjustments, 
geographic reclassification, outliers, updates, and disproportionate 
share adjustments consistent with section 1886(d)(5)(F) of the Act.
    (b) Scope. This subpart sets forth the framework for the 
prospective payment system for long-term care hospitals, including the 
methodology used for the development of payment rates and associated 
adjustments and related rules. Under this system, for cost reporting 
periods beginning on or after October 1, 2002, payment for the 
operating and capital-related costs of inpatient hospital services 
furnished by long-term care hospitals is made on the basis of 
prospectively determined rates and applied on a per discharge basis.


Sec. 412.503  Definitions.

    As used in this subpart--
    CMS stands for the Centers for Medicare & Medicaid Services.
    Discharge. A Medicare patient in a long-term care hospital is 
considered discharged when--
    (1) The patient is formally released;
    (2) The patient stops receiving Medicare-covered long-term care 
services; or
    (3) The patient dies in the long-term care facility.
    LTC-DRG stands for the diagnosis-related group used to classify 
patient discharges from a long-term care hospital based on clinical 
characteristics and average resource use, for prospective payment 
purposes.
    Outlier payment means an additional payment beyond the standard 
Federal prospective payment for cases with unusually high costs.
    PRO stands for the Utilization and Quality Control Peer Review 
Organization.


Sec. 412.505  Conditions for payment under the prospective payment 
system for long-term care hospitals.

    (a) Long-term care hospitals subject to the prospective payment 
system. To be eligible to receive payment under the prospective payment 
system specified in this subpart, a long-term care hospital must meet 
the criteria to be classified as a long-term care hospital set forth in 
Sec. 412.23(e) for exclusion from the inpatient hospital prospective 
payment systems specified in Sec. 412.1(a)(1). This condition is 
subject to the special payment provisions of Sec. 412.22(c), the 
provisions on change in hospital status of Sec. 412.22(d), the 
provisions related to hospitals-within-hospitals under Sec. 412.22(e), 
and the provisions related to satellite facilities under 
Sec. 412.22(h).
    (b) General requirements. (1) Effective for cost reporting periods 
beginning on or after October 1, 2002, a long-term care hospital must 
meet the conditions for payment of this section and Secs. 412.507 
through 412.511 to receive payment under the prospective payment system 
described in this subpart for inpatient hospital services furnished to 
Medicare beneficiaries.
    (2) If a long-term care hospital fails to comply fully with these 
conditions for payment with respect to inpatient hospital services 
furnished to one or more Medicare beneficiaries, CMS may withhold (in 
full or in part) or reduce Medicare payment to the hospital.


Sec. 412.507  Limitation on charges to beneficiaries.

    (a) Prohibited charges. Except as provided in paragraph (b) of this 
section, a long-term care hospital may not charge a beneficiary for any 
services for which payment is made by Medicare, even if the hospital's 
costs of furnishing services to that beneficiary are greater than the 
amount the hospital is paid under the prospective payment system.
    (b) Permitted charges. A long-term care hospital that receives 
payment under this subpart for a covered hospital stay (that is, a stay 
that includes at least one covered day) may charge the Medicare 
beneficiary or other person only for the applicable deductible and 
coinsurance amounts under Secs. 409.82, 409.83, and 409.87 of this 
subchapter, and for items and services as specified under 
Sec. 489.20(a) of this chapter.


Sec. 412.508  Medical review requirements.

    (a) Admission and quality review. A long-term care hospital must 
have an agreement with a PRO to have the PRO review, on an ongoing 
basis, the following:
    (1) The medical necessity, reasonableness, and appropriateness of 
hospital admissions and discharges.
    (2) The medical necessity, reasonableness, and appropriateness of 
inpatient hospital care for which additional payment is sought under 
the outlier provisions of Secs. 412.523(d)(1) and 412.525(a).
    (3) The validity of the hospital's diagnostic and procedural 
information.
    (4) The completeness, adequacy, and quality of the services 
furnished in the hospital.
    (5) Other medical or other practices with respect to beneficiaries 
or billing for services furnished to beneficiaries.
    (b) Physician acknowledgement. Because payment under the long-term 
care hospital prospective payment system is based in part on each 
patient's principal and secondary diagnoses and major procedures 
performed, as evidenced by the physician's entries in the patient's 
medical record, physicians must complete an acknowledgement statement 
to this effect.
    (1) Content of physician acknowledgement statement. When a claim is 
submitted, the hospital must have on file a signed and dated 
acknowledgement from the attending physician that the physician has 
received the following notice:

    Notice to Physicians: Medicare payment to hospitals is based in 
part on each patient's principal and secondary diagnoses and the 
major procedures performed on the patient, as attested to by the 
patient's attending physician by virtue of his or her signature in 
the medical record. Anyone who misrepresents, falsifies, or conceals 
essential information required for payment of Federal funds, may be 
subject to fine, imprisonment, or civil penalty under applicable 
Federal laws.

    (2) Completion of acknowledgement. The acknowledgement must be 
completed by the physician at the time that the physician is granted 
admitting privileges at the hospital, or before or at the time the 
physician admits his or her first patient. Existing acknowledgements 
signed by physicians already on staff remain in effect as long as the 
physician has admitting privileges at the hospital.
    (c) Denial of payment as a result of admissions and quality review. 
(1) If CMS determines, on the basis of information supplied by a PRO 
that a hospital has misrepresented admissions, discharges, or billing 
information, or has taken an action that results in the unnecessary 
admission of an individual entitled to benefits under Part A, 
unnecessary multiple admissions of an individual, or other 
inappropriate medical or other practices with respect to beneficiaries 
or billing for services

[[Page 13483]]

furnished to beneficiaries, CMS may, as appropriate--
    (i) Deny payment (in whole or in part) under Part A with respect to 
inpatient hospital services provided for an unnecessary admission or 
subsequent readmission of an individual; or
    (ii) Require the hospital to take other corrective action necessary 
to prevent or correct the inappropriate practice.
    (2) When payment with respect to admission of an individual patient 
is denied by a PRO under paragraph (c)(1) of this section, and 
liability is not waived in accordance with Secs. 411.400 through 
411.402 of this chapter, notice and appeals are provided under 
procedures established by CMS to implement the provisions of section 
1155 of the Act, Right to Hearing and Judicial Review.
    (3) A determination under paragraph (c)(1) of this section, if it 
is related to a pattern of inappropriate admissions and billing 
practices that has the effect of circumventing the prospective payment 
system, is referred to the Department's Office of Inspector General for 
handling in accordance with Sec. 1001.301 of this title.


Sec. 412.509  Furnishing of inpatient hospital services directly or 
under arrangement.

    (a) Subject to the provisions of Sec. 412.521(b), the applicable 
payments made under this subpart are payment in full for all inpatient 
hospital services, as defined in Sec. 409.10 of this chapter. Inpatient 
hospital services do not include the following:
    (1) Physicians' services that meet the requirements of 
Sec. 415.102(a) of this subchapter for payment on a fee schedule basis.
    (2) Physician assistant services, as defined in section 
1861(s)(2)(K)(i) of the Act.
    (3) Nurse practitioners and clinical nurse specialist services, as 
defined in section 1861(s)(2)(K)(ii) of the Act.
    (4) Certified nurse midwife services, as defined in section 
1861(gg) of the Act.
    (5) Qualified psychologist services, as defined in section 1861(ii) 
of the Act.
    (6) Services of an anesthetist, as defined in Sec. 410.69 of this 
subchapter.
    (b) Medicare does not pay any provider or supplier other than the 
long-term care hospital for services furnished to a Medicare 
beneficiary who is an inpatient of the hospital except for services 
described in paragraphs (a)(1) through (a)(6) of this section.
    (c) The long-term care hospital must furnish all necessary covered 
services to the Medicare beneficiary who is an inpatient of the 
hospital either directly or under arrangements (as defined in 
Sec. 409.3 of this subchapter).


Sec. 412.511  Reporting and recordkeeping requirements.

    A long-term care hospital participating in the prospective payment 
system under this subpart must meet the recordkeeping and cost 
reporting requirements of Secs. 413.20 and 413.24 of this subchapter.


Sec. 412.513  Patient classification system.

    (a) Classification methodology. CMS classifies specific inpatient 
hospital discharges from long-term care hospitals by long-term care 
diagnosis-related groups (LTC-DRGs) to ensure that each hospital 
discharge is appropriately assigned based on essential data abstracted 
from the inpatient bill for that discharge.
    (b) Assignment of discharges to LTC-DRGs. (1) The classification of 
a particular discharge is based, as appropriate, on the patient's age, 
sex, principal diagnosis (that is, the diagnosis established after 
study to be chiefly responsible for causing the patient's admission to 
the hospital), secondary diagnoses, procedures performed, and the 
patient's discharge status.
    (2) Each discharge from a long-term care hospital is assigned to 
only one LTC-DRG (related, except as provided in paragraph (b)(3) of 
this section, to the patient's principal diagnosis), regardless of the 
number of conditions treated or services furnished during the patient's 
stay.
    (3) When the discharge data submitted by a hospital show a surgical 
procedure unrelated to a patient's principal diagnosis, the bill is 
returned to the hospital for validation and reverification. The LTC-DRG 
classification system provides a LTC-DRG, and an appropriate weighting 
factor, for those cases for which none of the surgical procedures 
performed are related to the principal diagnosis.
    (c) Review of LTC-DRG assignment. (1) A hospital has 60 days after 
the date of the notice of the initial assignment of a discharge to a 
LTC-DRG to request a review of that assignment. The hospital may submit 
additional information as a part of its request.
    (2) The intermediary reviews that hospital's request and any 
additional information and decides whether a change in the LTC-DRG 
assignment is appropriate. If the intermediary decides that a different 
LTC-DRG should be assigned, the case will be reviewed by the 
appropriate PRO as specified in Sec. 476.71(c)(2) of this chapter.
    (3) Following the 60-day period described in paragraph (c)(1) of 
this section, the hospital may not submit additional information with 
respect to the DRG assignment or otherwise revise its claim.


Sec. 412.515  LTC-DRG weighting factors.

    (a) General. For each LTC-DRG, CMS assigns an appropriate weight 
that reflects the estimated relative cost of hospital resources used 
within that group compared to discharges classified within other 
groups.
    (b) Very short-stay discharges. CMS determines a weighting factor 
or factors for discharges of Medicare patients from a long-term care 
hospital after a very short stay in accordance with Sec. 412.527.


Sec. 412.517  Revision of LTC-DRG group classifications and weighting 
factors.

    CMS adjusts the classifications and weighting factors annually to 
reflect changes in--
    (a) Treatment patterns;
    (b) Technology;
    (c) Number of discharges; and
    (d) Other factors affecting the relative use of hospital resources.


Sec. 412.521  Basis of payment.

    (a) Method of payment. (1) Under the prospective payment system, 
long-term care hospitals receive a predetermined payment amount per 
discharge for inpatient services furnished to Medicare beneficiaries.
    (2) The amount of payment under the prospective payment system is 
based on the Federal payment rate established in accordance with 
Sec. 412.523, including adjustments described in Sec. 412.525, and, if 
applicable during a transition period, on a blend of the Federal 
payment rate and the cost-based reimbursement rate described in 
Sec. 412.533.
    (b) Payment in full. (1) The payment made under this subpart 
represents payment in full (subject to applicable deductibles and 
coinsurance described in subpart G of part 409 of this subchapter) for 
inpatient operating costs as described in Sec. 412.2(c) and capital-
related costs described in subpart G of part 413 of this subchapter 
associated with furnishing Medicare covered services in long-term care 
hospitals.
    (2) In addition to payment based on prospective payment rates, 
long-term care hospitals may receive payments separate from payments 
under the prospective payment system for the following:
    (i) The costs of approved medical education programs described in 
Secs. 413.85 and 413.86 of this subchapter.
    (ii) Bad debts of Medicare beneficiaries, as provided in 
Sec. 413.80 of this subchapter.
    (iii) A payment amount per unit for blood clotting factor provided 
to Medicare inpatients who have hemophilia.

[[Page 13484]]

    (iv) Anesthesia services furnished by hospital employed 
nonphysician anesthetists or obtained under arrangements, as specified 
in Sec. 412.113(c)(2).
    (v) The costs of photocopying and mailing medical records requested 
by a PRO, in accordance with Sec. 476.78(c) of this chapter.
    (c) Payment by workers' compensation, automobile medical, no-fault 
or liability insurance or an employer group health plan primary to 
Medicare. If workers' compensation, automobile medical, no-fault, or 
liability insurance or an employer group health plan that is primary to 
Medicare pays in full or in part, payment is determined in accordance 
with the guidelines specified in Sec. 412.120(b).
    (d) Effect of change of ownership on payments under the prospective 
payment system. When a hospital's ownership changes, as described in 
Sec. 489.18 of this chapter, the following rules apply:
    (1) Payment for the operating and capital-related costs of 
inpatient hospital services for each patient, including outlier 
payments as provided in Sec. 412.525 and payments for hemophilia 
clotting factor costs as provided in paragraph (b)(2)(iii) of this 
section, are made to the entity that is the legal owner on the date of 
discharge. Payments are not prorated between the buyer and seller.
    (i) The owner on the date of discharge is entitled to submit a bill 
for all inpatient hospital services furnished to a beneficiary 
regardless of when the beneficiary's coverage began or ended during a 
stay, or of how long the stay lasted.
    (ii) Each bill submitted must include all information necessary for 
the intermediary to compute the payment amount, whether or not some of 
that information is attributable to a period during which a different 
party legally owned the hospital.
    (2) Other payments for approved medical education programs, bad 
debts, anesthesia services furnished by hospital employed nonphysician 
anesthestists, and costs of photocopying and mailing medical records to 
the PRO as provided for under paragraphs (b)(2)(i), (ii), (iv), and (v) 
of this section are made to each owner or operator of the hospital 
(buyer and seller) in accordance with the principles of reasonable cost 
reimbursement.


Sec. 412.523  Methodology for calculating the Federal prospective 
payment rates.

    (a) Data used. To calculate the initial prospective payment rates 
for inpatient hospital services furnished by long-term care hospitals, 
CMS uses--
    (1) The best Medicare data available; and
    (2) A rate of increase factor to adjust for the most recent 
estimate of increases in the prices of an appropriate market basket of 
goods and services included in covered inpatient long-term care 
hospital services.
    (b) Determining the average costs per discharge for FY 2003. CMS 
determines the average inpatient operating and capital-related costs 
per discharge for which payment is made to each inpatient long-term 
care hospital using the available data under paragraph (a)(1) of this 
section. The cost per discharge is adjusted to FY 2003 by a rate of 
increase factor, described in paragraph (a)(2) of this section, under 
the update methodology described in section 1886(b)(3)(B)(ii) of the 
Act for each year.
    (c) Determining the Federal prospective payment rates.
    (1) General. The Federal prospective payment rates will be 
established using a standard payment amount referred to as the standard 
Federal rate. The standard Federal rate is a standardized payment 
amount based on average costs from a base year that reflects the 
combined aggregate effects of the weighting factors and other 
adjustments.
    (2) Update the cost per discharge. CMS applies the increase factor 
described in paragraph (a)(2) of this section to each hospital's cost 
per discharge determined under paragraph (b) of this section to compute 
the cost per discharge for FY 2003. Based on the updated cost per 
discharge, CMS estimates the payments that would have been made to each 
hospital for FY 2003 under Part 413 of this chapter without regard to 
the prospective payment system implemented under this subpart.
    (3) Computation of the standard Federal rate. The standard Federal 
rate is computed as follows:
    (i) For FY 2003. Based on the updated costs per discharge and 
estimated payments for FY 2003 determined in paragraph (c)(2) of this 
section, CMS computes a standard Federal rate for FY 2003 that 
reflects, as appropriate, the adjustments described in paragraph (d) of 
this section.
    (ii) For fiscal years after FY 2003. The standard Federal rate for 
fiscal years after FY 2003 will be the standard Federal rate for the 
previous fiscal year, updated by the increase factor described in 
paragraph (a)(2) of this section, and adjusted as appropriate as 
described in paragraph (d) of this section.
    (4) Determining the Federal prospective payment rate for each LTC-
DRG. The Federal prospective payment rate for each LTC-DRG is the 
product of the weighting factors described in Sec. 412.515 and the 
standard Federal rate described in paragraph (c)(3) of this section.
    (d) Adjustments to the standard Federal rate. The standard Federal 
rate described in paragraph (c)(3) of this section will be adjusted 
for--
    (1) Outlier payments. CMS adjusts the standard Federal rate by a 
reduction factor of 8 percent, the estimated proportion of outlier 
payments under the long-term care hospital prospective payment system, 
as described in Sec. 412.525(a).
    (2) Budget neutrality. CMS adjusts the Federal prospective payment 
rates for FY 2003 so that aggregate payments under the prospective 
payment system are estimated to equal the amount that would have been 
made to long-term care hospitals under Part 413 of this subchapter 
without regard to the prospective payment system implemented under this 
subpart.
    (3) The Secretary will review payments under this prospective 
payment system and will make a one-time prospective adjustment to the 
LTCH prospective payment system rates by October 1, 2006 so that the 
effect of any significant difference between actual payments and 
estimated payments for the first year of the LTCH prospective payment 
system is not perpetuated in the prospective payment rates for future 
years.
    (e) Calculation of the adjusted Federal prospective payment. For 
each discharge, a long-term care hospital's Federal prospective payment 
is computed on the basis of the Federal prospective payment rate 
multiplied by the relative weight of the LTC-DRG assigned for that 
discharge. A hospital's Federal prospective payment rate will be 
adjusted, as appropriate, to account for outliers and other factors as 
specified in Sec. 412.525.


Sec. 412.525  Adjustments to the Federal prospective payment.

    (a) Adjustments for high-cost outliers. CMS provides for an 
additional payment to a long-term care hospital if its estimated costs 
for a patient exceeds the adjusted LTC-DRG plus a fixed-loss amount. 
For each fiscal year, CMS determines a fix-loss amount that is the 
maximum loss that a hospital can incur under the prospective payment 
system for a case with unusually high costs before the hospital will 
receive any additional payments. The additional payment equals 80 
percent of the difference between the estimated cost of the patient 
case and the sum of the adjusted Federal prospective payment

[[Page 13485]]

for the LTC-DRG and the fixed-loss amount.
    (b) Adjustments for Alaska and Hawaii. CMS adjusts the Federal 
prospective payment for the effects of a higher cost of living for 
hospitals located in Alaska and Hawaii.
    (c) Special payment provisions. CMS adjusts the Federal prospective 
payment to account for--
    (1) Very short-stay discharges, as provided for in Sec. 412.527;
    (2) Short-stay outliers, as provided for in Sec. 412.529; and
    (3) Interruption of a stay, as provided for in Sec. 412.531.


Sec. 412.527  Special payment provision for very short-stay discharges.

    (a) Very short-stay discharge defined. A ``very short-stay 
discharge'' means a case that has a length of stay in a long-term care 
hospital of 7 days or fewer.
    (b) Adjustment to payment. CMS adjusts the Federal prospective 
payment for very short-stay discharges, as defined in paragraph (a) of 
this section.
    (c) Method for determining payment.
    (1) Payment for a very short-stay discharge will be made on a per 
diem methodology according to the primary diagnosis of the discharge 
under either--
    (i) A LTC-DRG psychiatric category; or
    (ii) A LTC-DRG nonpsychiatric category.
    (2) Each per diem amount is determined by dividing the Federal 
payment rate of the applicable LTC-DRG category specified in paragraph 
(c)(1)(i) or (c)(1)(ii) of this section (that is, Federal payment rate 
x the LTC-DRG weight) by seven.


Sec. 412.529  Special payment provision for short-stay outliers.

    (a) Short-stay outlier defined. ``Short-stay outlier'' means a 
discharge with a length of stay in a long-term care hospital that is 
between 8 days and two-thirds of the arithmetic average length of stay 
for each LTC-DRG.
    (b) Adjustment to payment. CMS adjusts the hospital's Federal 
prospective payment to account for any case that is determined to be a 
short-stay outlier, as defined in paragraph (a) of this section, under 
the methodology specified in paragraph (c) of this section.
    (c) Method for determining the payment amount. (1) The payment 
amount for a short-stay outlier is the least of the following amounts:
    (i) 150 percent of the LTC-DRG specific per diem amount determined 
under paragraph (c)(2) of this section multiplied by the length of stay 
of the discharge;
    (ii) 150 percent of the cost of the case determined under paragraph 
(c)(3) of this section; or
    (iii) The full Federal prospective payment for the LTC-DRG (the 
Federal payment rate x LTC-DRG weight).
    (2) CMS calculates a per diem amount for short-stay outliers for 
each LTC-DRG by dividing the standard Federal payment rate (the Federal 
payment rate x LTC-DRG weight) by the arithmetic mean length of stay of 
the specific LTC-DRG.
    (3) To determine the cost of a case, CMS uses the hospital-specific 
cost-to-charge ratio and the Medicare allowable charges for the case.


Sec. 412.531  Special payment provisions when an interruption of a stay 
occurs in a long-term care hospital.

    (a) Interruption of a stay defined. ``Interruption of a stay'' 
means a stay at a long-term care hospital during which a Medicare 
inpatient is transferred upon discharge to an acute care hospital, an 
IRF, or a SNF for treatment or services that are not available in the 
long-term care hospital and returns to the same long-term care hospital 
within the applicable period specified in paragraphs (a)(1) through 
(a)(3) of this section.
    (1) For a discharge to an acute care hospital, the applicable 
period is the number of days that is equal to one standard deviation 
beyond the average length of stay for the DRG assigned for the acute 
care inpatient hospital stay. The counting of those days begins on the 
day of discharge from the long-term care hospital and ends on the day 
the patient is readmitted to the long-term care hospital.
    (2) For a discharge to an IRF, the applicable period is the number 
of days that is equal to one standard deviation beyond the average 
length of stay for the combination of the CMG and comorbidity tier for 
the IRF stay. The counting of those days begins on the day of discharge 
from the long-term care hospital and ends on the day that the patient 
is readmitted to the long-term care hospital.
    (3) For a discharge to a SNF, the applicable period is 45 days, 
that is, the number of days that is equal to one standard deviation 
beyond the average length of stay for all Medicare SNF patients. The 
counting of those days begins on the day of discharge from the long-
term care hospital and ends with the 45th day after the discharge.
    (b) Methods of determining payments. (1) For purposes of 
determining a Federal prospective payment, any stay in a long-term care 
hospital that involves an interruption of the stay will be paid as a 
single discharge from the long-term care hospital. The number of days 
that a beneficiary spends in an acute care hospital, an IRF, or a SNF 
during an interruption of stay at a long-term care hospital is not 
included in determining the length of stay of the patient at the long-
term care hospital. CMS will make only one LTC-DRG payment for all 
portions of a long-term care stay that involves an interruption of a 
stay. In accordance with Sec. 412.513(b), payment will be based on the 
patient's LTC-DRG which would be determined by the principal diagnosis 
which is the condition established after study to be chiefly 
responsible for occasioning the first admission of the patient to the 
hospital for care.
    (2) If the total number of days of a patient's length of stay in a 
long-term care hospital prior to and following an interruption of a 
stay is 7 days or less, CMS will make a Federal prospective payment for 
a very short stay discharge in accordance with Sec. 412.527(c).
    (3) If the total number of days of a patient's length of stay in a 
long-term care hospital prior to and following an interruption of a 
stay is between 8 days and two-thirds the average length of stay of the 
LTC-DRG, CMS will make a Federal prospective payment for a short-stay 
outlier in accordance with Sec. 412.529(c).
    (4) If the total number of days of a patient's length of stay in a 
long-term care hospital prior to and following an interruption of a 
stay exceeds two-thirds of the average length of stay for the LTC-DRG, 
CMS will make one full Federal LTC-DRG prospective payment for the 
case. An additional payment will be made if the patient's stay 
qualifies as a high-cost outlier, as set forth in Sec. 412.525(a).
    (5) Notwithstanding the provisions of paragraph (a) of this 
section, if a patient who has been discharged from a long-term care 
hospital to another facility and is readmitted to the long-term care 
hospital for additional treatment or services in the long-term care 
hospital following the stay at the other facility, the subsequent 
admission to the long-term care hospital is considered a new stay, even 
if the case is determined to fall into the same LTC-DRG, and the long-
term care hospital will receive two separate Federal prospective 
payments if one of the following conditions are met:
    (i) The patient has a length of stay in the acute care hospital 
that exceeds one standard deviation from the average length of stay for 
the inpatient hospital DRG;
    (ii) The patient has a length of stay in the IRF that exceeds one 
standard

[[Page 13486]]

deviation from the average length of stay for the combination of CMG 
and the comorbidity tier; or
    (iii) The patient has a length of stay in the SNF that exceeds 45 
days (one standard deviation from the average length of stay for all 
Medicare SNF patients).
    (c) Payments to an acute care hospital, an IRF, or a SNF during an 
interruption of stay. (1) Payment to the acute care hospital for the 
acute care hospital stay following discharge from the long-term care 
hospital will be paid in accordance with the acute care hospital 
inpatient prospective payment systems specified in Sec. 412.1(a)(1).
    (2) Payment to an IRF for the IRF stay following a discharge from 
the long-term care hospital will be paid in accordance with the IRF 
prospective payment system specified in Sec. 412.624 of Subpart P of 
this part.
    (3) Payment to a SNF for the SNF stay following a discharge from 
the long-term care hospital will be paid in accordance with the SNF 
prospective payment system specified in subpart J of Part 413 of this 
subchapter.


Sec. 412.532  Special payment provisions for patients who are 
transferred to onsite providers and readmitted to a long-term care 
hospital.

    (a) The policies set forth in this section apply in the following 
situations:
    (1) A long-term care hospital (including a satellite facility) that 
is co-located within an onsite acute care hospital, an onsite IRF, or 
an onsite psychiatric facility or unit that meets the definition of a 
hospital-within-a-hospital under Sec. 412.22(e).
    (2) A satellite facility, as defined in Sec. 412.22(e), that is co-
located with the long-term care hospital.
    (3) A SNF, as defined in section 1819(a) of the Act, that is co-
located with the long-term care hospital.
    (b) If, during a cost reporting period, a long-term care hospital 
(including a satellite facility) discharges patients to an acute care 
hospital co-located with the long-term care hospital, as described in 
paragraph (a) of this section, and subsequently directly readmits more 
than 5 percent (that is, in excess of 5.0 percent) of the total number 
of its Medicare inpatients discharged from that acute care hospital, 
the discharge to the co-located acute care hospital and the readmission 
to the long-term care hospital will be treated as one discharge and one 
LTC-DRG payment will be made on the basis of the patient's initial 
principal diagnosis.
    (c) If, during a cost reporting period, a long-term care hospital 
(including a satellite facility) discharges patients to an onsite IRF, 
an onsite psychiatric hospital or unit, or an onsite SNF, as described 
in paragraph (a) of this section, and subsequently directly readmits 
more than 5 percent (that is, in excess of 5.0 percent) of the total 
number of its Medicare inpatients discharged from the onsite IRF, the 
onsite psychiatric hospital or unit, or the onsite SNF, a discharge to 
any of these providers and a readmission to the LTCH will be treated as 
one discharge and one LTC-DRG payment will be made on the basis of the 
patient's initial principal diagnosis.
    (d) For purposes of calculating the payment per discharge, payment 
for the entire stay at the long-term care hospital will be paid as a 
full LTC-DRG payment under Sec. 412.523, a very short-stay discharge 
under Sec. 412.527, or a short-stay outlier under Sec. 412.529, 
depending on the duration of the entire stay.
    (e) If the long-term care hospital does not meet the 5-percent 
thresholds specified under paragraph (b) or (c) of this section for 
discharges to the specified onsite providers and readmissions to the 
long-term care hospital during a cost reporting period, payment under 
the long-term care prospective payment system will be made, where 
applicable, under the policies on interruption of a stay as specified 
in Sec. 412.531.
    (f) Payment to the onsite acute care hospital, the onsite IRF, the 
onsite psychiatric hospital or unit, and the onsite SNF for a 
beneficiary's stay in the specified onsite providers is subject to the 
applicable payment policies, including outliers and transfers, under 
the acute care hospital inpatient prospective payment system, the IRF 
prospective payment system, the SNF prospective payment system, or the 
excluded psychiatric hospital or unit cost-based reimbursement payment 
system, as appropriate.
    (g) In determining whether a patient has previously been discharged 
and then admitted, all prior discharges are considered, even if the 
discharge occurs late in one cost reporting period and the readmission 
occurs late in next cost reporting period.


Sec. 412.533  Transition payments.

    (a) Duration of transition periods. Except for a long-term care 
hospital that makes an election under paragraph (b) of this section or 
for a long-term care hospital that is defined as new under 
Sec. 412.23(e)(4), for cost reporting periods beginning on or after 
October 1, 2002, and before October 1, 2006, a long-term care hospital 
receives a payment comprised of a blend of the adjusted Federal 
prospective payment as determined under Sec. 412.523, and the payment 
determined under the cost-based reimbursement rules under Part 413 of 
this subchapter.
    (1) For cost reporting periods beginning on or after October 1, 
2002 and before October 1, 2003, payment is based on 20 percent of the 
Federal prospective payment rate and 80 percent of the cost-based 
reimbursement rate.
    (2) For cost reporting periods beginning on or after October 1, 
2003 and before October 1, 2004, payment is based on 40 percent of the 
Federal prospective payment rate and 60 percent of the cost-based 
reimbursement rate.
    (3) For cost reporting periods beginning on or after October 1, 
2004 and before October 1, 2005, payment is based on 60 percent of the 
Federal prospective payment rate and 40 percent of the cost-based 
reimbursement rate.
    (4) For cost reporting periods beginning on or after October 1, 
2005 and before October 1, 2006, payment is based on 80 percent of the 
Federal prospective payment rate and 20 percent of the cost-based 
reimbursement rate.
    (5) For cost reporting periods beginning on or after October 1, 
2006, payment is based entirely on the adjusted Federal prospective 
payment rate.
    (b) Election not to be paid under the transition period 
methodology. A long-term care hospital may elect to be paid based on 
100 percent of the Federal prospective rate at the start of any of its 
cost reporting periods during the 5-year transition periods specified 
in paragraph (a) of this section. Once a long-term care hospital elects 
to be paid based on 100 percent of the Federal prospective payment 
rate, it may not revert to the transition blend.
    (1) General requirement. A long-term care hospital must request the 
election under this paragraph (b) no later than 30 days before the 
beginning of the hospital's cost reporting period in each applicable 
fiscal year beginning on or after October 1, 2003 and before October 1, 
2006.
    (2) Notification requirement to make election. The request by the 
long-term care hospital to make the election under this paragraph (b) 
must be made in writing to the Medicare fiscal intermediary. The 
intermediary must receive the request on or before the 30th day before 
the applicable cost reporting period begins, regardless of any 
postmarks or anticipated delivery dates. Requests received, postmarked, 
or

[[Page 13487]]

delivered by other means after the 30th day before the cost reporting 
period begins will not be approved. If the 30th day before the cost 
reporting begins falls on a day that the postal service or other 
delivery sources are not open for business, the long-term care hospital 
is responsible for allowing sufficient time for the delivery of the 
request before the deadline. If a long-term care hospital's request is 
not received or not approved, payment will be based on the transition 
period rates specified in paragraphs (a)(1) through (a)(5) of this 
section.
    (c) Payments to new long-term care hospitals. A new long-term care 
hospital, as defined in Sec. 412.23(e)(4), will be paid based on 100 
percent of the standard Federal rate, as described in Sec. 412.523, 
with no transition payments, as described in Sec. 412.533.


Sec. 412.535  Publication of the Federal prospective payment rates.

    CMS publishes information pertaining to the long-term care hospital 
prospective payment system effective for each fiscal year in the 
Federal Register. This information includes the unadjusted Federal 
payment rates, the LTC-DRG classification system and associated 
weighting factors, and a description of the methodology and data used 
to calculate the payment rates. This information is published on or 
before August 1 prior to the beginning of each fiscal year.


Sec. 412.541  Method of payment under the long-term care hospital 
prospective payment system.

    (a) General rule. Subject to the exceptions in paragraphs (b) and 
(c) of this section, long-term care hospitals receive payment under 
this subpart for inpatient operating costs and capital-related costs 
for each discharge only following submission of a discharge bill.
    (b) Periodic interim payments--(1) Criteria for receiving periodic 
interim payments. (i) A long-term care hospital receiving payment under 
this subpart may receive periodic interim payments (PIP) for Part A 
services under the PIP method subject to the provisions of 
Sec. 413.64(h) of this subchapter.
    (ii) To be approved for PIP, the long-term care hospital must meet 
the qualifying requirements in Sec. 413.64(h)(3) of this subchapter.
    (iii) As provided in Sec. 413.64(h)(5) of this subchapter, 
intermediary approval is conditioned upon the intermediary's best 
judgment as to whether payment can be made under the PIP method without 
undue risk of its resulting in an overpayment to the provider.
    (2) Frequency of payment. (i) For long-term care hospitals approved 
for PIP and paid solely under Federal prospective payment system rates 
under Sec. 412.533(b), the intermediary estimates the long-term care 
hospital's Federal prospective payments net after estimated beneficiary 
deductibles and coinsurance and makes biweekly payments equal to \1/26\ 
of the total estimated amount of payment for the year.
    (ii) For long-term care hospitals approved for PIP and paid using 
the blended payment schedule specified in Sec. 412.533(a) for cost 
reporting periods beginning on or after October 1, 2002, and before 
October 1, 2006, the intermediary estimates the hospital's portion of 
the Federal prospective payments net and the hospital's portion of the 
reasonable cost-based reimbursement payments net, after beneficiary 
deductibles and coinsurance, in accordance with the blended transition 
percentages specified in Sec. 412.533(a), and makes biweekly payments 
equal to \1/26\ of the total estimated amount of both portions of 
payments for the year.
    (iii) If the long-term care hospital has payment experience under 
the prospective payment system, the intermediary estimates PIP based on 
that payment experience, adjusted for projected changes supported by 
substantiated information for the current year.
    (iv) Each payment is made 2 weeks after the end of a biweekly 
period of service as described in Sec. 413.64(h)(6) of this subchapter.
    (v) The interim payments are reviewed at least twice during the 
reporting period and adjusted if necessary. Fewer reviews may be 
necessary if a hospital receives interim payments for less than a full 
reporting period. These payments are subject to final settlement.
    (3) Termination of PIP--(i) Request by the hospital. Subject to 
paragraph (b)(1)(iii) of this section, a long-term care hospital 
receiving PIP may convert to receiving prospective payments on a non-
PIP basis at any time.
    (ii) Removal by the intermediary. An intermediary terminates PIP if 
the long-term care hospital no longer meets the requirements of 
Sec. 413.64(h) of this subchapter.
    (c) Interim payments for Medicare bad debts and for Part A costs 
not paid under the prospective payment system. For Medicare bad debts 
and for the costs of an approved education program, blood clotting 
factors, anesthesia services furnished by hospital-employed 
nonphysician anesthetists or obtained under arrangement, and 
photocopying and mailing medical records to a PRO, which are costs paid 
outside the prospective payment system, the intermediary determines the 
interim payments by estimating the reimbursable amount for the year 
based on the previous year's experience, adjusted for projected changes 
supported by substantiated information for the current year, and makes 
biweekly payments equal to \1/26\ of the total estimated amount. Each 
payment is made 2 weeks after the end of the biweekly period of service 
as described in Sec. 413.64(h)(6) of this subchapter. The interim 
payments are reviewed at least twice during the reporting period and 
adjusted if necessary. Fewer reviews may be necessary if a long-term 
care hospital receives interim payments for less than a full reporting 
period. These payments are subject to final cost settlement.
    (d) Outlier payments. Additional payments for outliers are not made 
on an interim basis. The outlier payments are made based on the 
submission of a discharge bill and represent final payment.
    (e) Accelerated payments--(1) General rule. Upon request, an 
accelerated payment may be made to a long-term care hospital that is 
receiving payment under this subpart and is not receiving PIP under 
paragraph (b) of this section if the hospital is experiencing financial 
difficulties because of the following:
    (i) There is a delay by the intermediary in making payment to the 
long-term care hospital.
    (ii) Due to an exceptional situation, there is a temporary delay in 
the hospital's preparation and submittal of bills to the intermediary 
beyond its normal billing cycle.
    (2) Approval of payment. A request by a long-term care hospital for 
an accelerated payment must be approved by the intermediary and by CMS.
    (3) Amount of payment. The amount of the accelerated payment is 
computed as a percentage of the net payment for unbilled or unpaid 
covered services.
    (4) Recovery of payment. Recovery of the accelerated payment is 
made by recoupment as long-term care hospital bills are processed or by 
direct payment by the long-term care hospital.
    B. Part 413 is amended as set forth below:

[[Page 13488]]

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

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

    Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i) and 
(n), 1861(v), 1871, 1881, 1883, and 1886 of the Social Security Act 
(42 U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 13951(a), (i), and (n), 
1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww).

Subpart A--Introduction and General Rules

    2. Section 413.1 is amended by:
    a. Revising paragraph (d)(2)(ii).
    b. Adding paragraphs (d)(2)(vi) and (d)(2)(vii).


Sec. 413.1  Introduction.

* * * * *
    (d) * * *
    (2) * * *
    (ii) Payment to children's and psychiatric hospitals (as well as 
separate psychiatric units (distinct parts) of short-term general 
hospitals) that are excluded from the prospective payment systems under 
subpart B of part 412 of this subchapter and hospitals outside the 50 
states and the District of Columbia is on a reasonable cost basis, 
subject to the provisions of Sec. 413.40.
* * * * *
    (vi) For cost reporting periods beginning before October 1, 2002, 
payment to long-term care hospitals that are excluded under subpart B 
of part 412 of this subchapter from the prospective payment systems is 
on a reasonable cost basis, subject to the provisions of Sec. 413.40.
    (vii) For cost reporting periods beginning on or after October 1, 
2002, payment to the long-term hospitals that meet the condition for 
payment of Secs. 412.505 through 412.511 of this subchapter is based on 
prospectively determined rates under subpart O of part 412 of this 
subchapter.
* * * * *

Subpart C--Limits on Cost Reimbursement

    3. Section 413.40 is amended by:
    a. Republishing the introductory text of paragraph (a)(2)(i).
    b. Adding a new paragraph (a)(2)(i)(D).
    c. Amending paragraph (a)(2)(ii) by republishing the introductory 
text, removing ``and'' at the end of paragraph (a)(2)(ii)(A), adding 
``and'' at the end of paragraph (a)(2)(ii)(B), and adding a new 
paragraph (a)(2)(ii)(C).
    d. Adding a new paragraph (a)(2)(iv).


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

    (a) Introduction. * * *
    (2) Applicability. (i) This section is not applicable to--
* * * * *
    (D) Long-term care hospitals, as defined in section 
1886(d)(1)(B)(iv) of the Act, that are paid based on 100 percent of the 
Federal prospective payment rate for inpatient hospital services in 
accordance with section 123 of Public Law 106-113 and section 307 of 
Public Law 106-554 and Sec. 412.533 (b) and (c) of subpart O of part 
412 of this subchapter for cost reporting periods beginning on or after 
October 1, 2002.
    (ii) For cost reporting periods beginning on or after October 1, 
1983, this section applies to--
* * * * *
    (C) Long-term care hospitals excluded from the prospective payment 
systems described in Sec. 412.1(a)(1) of this subchapter and in 
accordance with Sec. 412.23 of this subchapter, except as limited by 
paragraph (a)(2)(iv) of this section with respect to long-term care 
hospitals specified in Sec. 412.23(e) of this subchapter.
* * * * *
    (iv) For cost reporting periods beginning on or after October 1, 
1983 and before October 1, 2002, this section applies to long-term care 
hospitals that are excluded from the prospective payment systems 
described in Sec. 412.1(a)(1) of this subchapter. For cost reporting 
periods beginning on or after October 1, 2002, and before October 1, 
2006, this section also applies to long-term care hospitals, subject to 
paragraph (a)(2)(i)(D) of this section.
* * * * *

Subpart E--Payments to Providers

    4. In Sec. 413.64, paragraph (h)(2)(i) is revised to read as 
follows:


Sec. 413.64  Payment to providers: Specific rules.

* * * * *
    (h) Periodic interim payment method of reimbursement-- * * *
    (2) * * *
    (i) Part A inpatient services furnished in hospitals that are 
excluded from the prospective payment systems, described in 
Sec. 412.1(a)(1) of this chapter, under subpart B of part 412 of this 
subchapter or are paid under the prospective payment systems described 
in subparts O and P part 412 of this subchapter.
* * * * *
    C. Part 476 is amended as set forth below:

PART 476--UTILIZATION AND QUALITY CONTROL REVIEW

    1. The authority citation for part 476 continues to read as 
follows:

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

    2. Section 476.71 is amended by revising paragraph (c)(2) to read 
as follows:


Sec. 476.71  PRO review requirements.

* * * * *
    (c) Other duties and functions. * * *
    (2) As directed by CMS, the PRO must review changes in DRG and LTC-
DRG assignments made by the intermediary under the provisions of 
Secs. 412.60(d) and 412.513(c) of this chapter that result in the 
assignment of a higher-weighted DRG or a different LTC-DRG. The PRO's 
review must verify that the diagnostic and procedural information 
supplied by the hospital is substantiated by the information in the 
medical record.
* * * * *

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

    Dated: December 12, 2001.
Thomas A. Scully,
Administrator, Health Care Financing Administration.

    Dated: February 22, 2002.
Tommy G. Thompson,
Secretary.

    Editorial Note: The following appendices will not appear in the 
Code of Federal Regulations.

Appendix A--Proposed Market Basket for LTCHs

    A market basket has historically been used under the Medicare 
program to account for price increases of the services furnished by 
providers. The proposed market basket for LTCHs would include both 
operating and capital-related costs of LTCHs because we are 
proposing a single payment rate for both operating and capital-
related costs (see section IV.D. of this proposed rule). Under the 
reasonable cost-based reimbursement system, the excluded hospital 
market basket is used to update limits on payment for operating 
costs for LTCHs. The excluded hospital market basket is based on 
operating costs from 1992 cost report data and includes Medicare-
participating long-term care, rehabilitation, psychiatric, cancer, 
and children's hospitals. Since LTCH costs are reflected as a 
component of the excluded hospital market basket, this index in part 
reflects the cost shares of LTCHs. In order to capture total costs 
(operating and capital), we are proposing to add a capital component 
to

[[Page 13489]]

the excluded hospital market basket for use under the proposed LTCH 
prospective payment system. We are referring to this proposed index 
as the excluded hospital with capital market basket.
    At this time, we are not proposing a separate market basket for 
LTCHs because, currently, we believe that we do not have sufficient 
LTCH data to develop an accurate market basket based only on the 
costs of LTCHs. As the excluded hospital market basket is currently 
used under the reasonable cost-based (TEFRA) payment system for 
LTCHs, we believe it is appropriate to propose to use that market 
basket (including a component for capital costs) for LTCHs under the 
proposed prospective payment system. The same excluded hospital with 
capital market basket is used under the IRF prospective payment 
system.
    In the following discussion, we describe the methodology used to 
determine the proposed operating portion of the market basket, the 
methodology used to determine the proposed capital portion of the 
market basket, and additional analyses explaining the extent to 
which long-term care cost shares are reflected in the proposed 
excluded hospital with capital market basket for LTCHs.
    The operating portion of the excluded hospital with capital 
market basket consists of major cost categories and their respective 
weights. The major cost categories include wages and salaries, 
employee benefits, professional fees, pharmaceuticals, and a 
residual. The weights for the major cost categories are developed 
from the Medicare cost reports for FY 1992. The cost report data 
used include those hospitals excluded from the hospital inpatient 
prospective payment system where the Medicare average length of stay 
is within 15 percent (higher or lower) of the total facility average 
length of stay. Using the 15-percent threshold resulted in a subset 
of hospitals that had a significant amount of Medicare days and 
costs compared to using no adjustment or using a different 
threshold. Limiting the sample in this way provides a more accurate 
reflection of the structure of costs for Medicare. We chose to 
compare the average length of stay for all patients to that of 
Medicare beneficiaries as the test of the similarity of the practice 
patterns for non-Medicare patients versus Medicare patients. Our 
goal was to measure cost shares that were reflective of case-mix and 
practice patterns associated with providing services to Medicare 
beneficiaries (61 FR 46196, August 30, 1996). We chose to limit the 
data in the database because we use facility-wide data to calculate 
the cost shares and including facilities report costs that are 
significantly reflective of the non-Medicare case-mix would 
inappropriately skew the data and would not be reflective of the 
case-mix and practice patterns associated with Medicare patients. We 
accomplished our goal by limiting the reports we used to those with 
similar length of stays for the Medicare and total facility 
populations. The detailed cost categories under the residual are 
derived from the Asset and Expenditure Survey, 1992 Census of 
Service Industries, by the Bureau of the Census, Economics and 
Statistics Administration, U.S. Department of Commerce. This survey 
is used in conjunction with the 1992 Input-Output Tables published 
by the Bureau of Economic Analysis, U.S. Department of Commerce. A 
more detailed description of the development of the operating 
portion of this index can be found in the final rule, ``Medicare 
Program; Changes to the Hospital Inpatient Prospective Payment 
Systems and Fiscal Year 1998 Rates,'' published in the Federal 
Register on August 29, 1997 (62 FR 45993 through 45997).
    As previously stated, the proposed market basket for the 
proposed LTCH prospective payment system reflects both operating and 
capital-related costs. Capital-related costs include depreciation, 
interest, and other associated capital-related costs. The cost 
categories for the capital portion of the excluded hospital with 
capital market basket that we are proposing are developed in a 
similar manner as those for the hospital inpatient prospective 
payment system capital input price index, which is explained in the 
August 30, 1996 Federal Register (61 FR 46196-46197). We calculated 
weights for capital costs using the same set of Medicare cost 
reports used to develop the operating share. The resulting capital 
weight for the FY 1992 base year is 9.080 percent.
    Because capital is consumed over time, depreciation and interest 
costs in the current year reflect both current and previous capital 
purchases. We use vintage weighting to capture this effect. Vintage 
weighting, which is explained in the August 30, 1996 Federal 
Register (61 FR 46197 through 46203), is the process of weighting 
price changes for individual years in proportion to that year's 
share of total purchases still being consumed.
    In order to vintage weight the capital portion of the index as 
described above, the average useful life of both assets and debt 
instruments (for example, a loan, bond, or promissory note) needs to 
be developed. For depreciation expenses, the useful life of fixed 
and movable assets is calculated from the Medicare cost reports for 
excluded hospitals, including LTCHs. The average useful life for 
fixed assets is 21 years and the average useful life for movable 
assets is 13 years. For interest expenses, we use the same useful 
life of debt instruments used in the hospital inpatient prospective 
payment system capital input price index. We believe that this 
useful life is appropriate because it reflects the average useful 
life of hospital issuances of commercial and municipal bonds from 
all hospitals, including LTCHs. The average useful life of interest 
expense is determined to be 22 years (61 FR 46199). After the useful 
life is determined, a set of weights is calculated by determining 
the average proportion of depreciation and interest expense incurred 
in any given year during the useful life. This information is 
developed using the Medicare cost reports. These calculations are 
the same as those described for the hospital inpatient prospective 
payment system capital input price index in the August 30, 1996 
Federal Register (61 FR 46196 through 46198). The price proxies for 
each of the capital cost categories are the same as those used for 
the hospital inpatient prospective payment system capital input 
price index. The cost categories, price proxies, and base-year FY 
1992 weights for the excluded hospital with capital market basket 
that would be used under the proposed LTCH prospective payment 
system are presented in Table 1 below. The vintage weights for the 
index are presented in Table 2 below.

  Table 1.--Excluded Hospital With Capital Input Price Index (FY 1992)
                          Structure and Weights
------------------------------------------------------------------------
                                                            Weights (%)
         Cost category             Price/wage variable      base-year:
                                                               1992
------------------------------------------------------------------------
Total..........................  .......................         100.000
Compensation...................  .......................          57.935
    Wages and Salaries.........  CMS Occupational Wage            47.417
                                  Proxy.
    Employee Benefits..........  CMS Occupational                 10.519
                                  Benefit Proxy.
Professional fees: Non-Medical.  ECI--Compensation:                1.908
                                  Prof. & Technical.
Utilities:                                                         1.524
    Electricity................  WPI--Commercial                   0.916
                                  Electric Power.
    Fuel Oil, Coal, etc........  WPI--Commercial Natural           0.365
                                  Gas.
    Water and Sewerage.........  CPI-U--Water & Sewage..           0.243
Professional Liability           CMS--Professional                 0.983
 Insurance.                       Liability Premiums.
All Other Products and Services  .......................          28.571
    All Other Products.........  .......................          22.027
    Pharmaceuticals............  WPI--Prescription Drugs           2.791
    Food: Direct Purchase......  WPI--Processed Foods...           2.155
    Food: Contract Service.....  CPI-U--Food Away from             0.998
                                  Home.
    Chemicals..................  WPI--Industrial                   3.413
                                  Chemicals.

[[Page 13490]]

 
    Medical Instruments........  WPI--Med. Inst. &                 2.868
                                  Equipment.
    Photographic Supplies......  WPI--Photo Supplies....           0.364
    Rubber and Plastics........  WPI--Rubber & Plastic             4.423
                                  Products.
    Paper Products.............  WPI--Convert. Paper and           1.984
                                  Paperboard.
    Apparel....................  WPI--Apparel...........           0.809
    Machinery and Equipment....  WPI--Machinery &                  0.193
                                  Equipment.
    Miscellaneous Products.....  WPI--Finished Goods....           2.029
All Other Services:                                                6.544
    Telephone..................  CPI-U--Telephone                  0.574
                                  Services.
    Postage....................  CPI-U--Postage.........           0.268
    All Other: Labor...........  ECI--Compensation:                4.945
                                  Service Workers.
    All Other: Non-Labor         CPI-U--All Items                  0.757
     Intensive.                   (Urban).
Capital-Related Costs:                                             9.080
    Depreciation...............  .......................           5.611
    Fixed Assets...............  Boeckh-Institutional              3.570
                                  Construction: 21 Year
                                  Useful Life.
    Movable Equipment..........  WPI--Machinery &                  2.041
                                  Equipment: 13 Year
                                  Useful Life.
Interest Costs:                                                    3.212
    Non-profit.................  Avg. Yield Municipal              2.730
                                  Bonds: 22 Year Useful
                                  Life.
    For-profit.................  Avg. Yield AAA Bonds:             0.482
                                  22 Year Useful Life.
    Other Capital-Related Costs  CPI-U--Residential Rent          0.257
------------------------------------------------------------------------
* The wage and benefit proxies are a blend of 10 employment cost indices
  (ECI). A detailed discussion of the price proxies can be found in the
  August 30, 1996 and August 29, 1997 Federal Register final rules (61
  FR 46197 and 62 FR 45993). The operating cost categories in the
  excluded market basket described in August 29, 1997 Federal Register
  (62 FR 45993 through 45996) had weights that added to 100.0. When we
  add an additional set of cost category weights (capital weight = 9.08
  percent) to this original group, the sum of the weights in the new
  index must still add to 100.0. If capital cost category weights sum to
  9.08, then operating cost category weights must add to 90.92 percent.
  Each weight in the excluded hospital market basket from the August 29,
  1997 Federal Register (62 FR 45996 through 45997) was multiplied by
  0.9092 to determine its weight in the excluded hospital with capital
  market basket.


              Table 2.--Excluded Hospital With Capital Input Price Index (FY 1992) Vintage Weights
----------------------------------------------------------------------------------------------------------------
                                                                                               Interest: capital-
                          Year                           Fixed assets (21-    Movable assets    related (22-year
                                                           year weights)    (13-year weights)       weights)
----------------------------------------------------------------------------------------------------------------
1......................................................             0.0201             0.0454             0.0071
2......................................................             0.0225             0.0505             0.0082
3......................................................             0.0225             0.0562             0.0100
4......................................................             0.0285             0.0620             0.0119
5......................................................             0.0301             0.0660             0.0139
6......................................................             0.0321             0.0710             0.0161
7......................................................             0.0336             0.0764             0.0185
8......................................................             0.0353             0.0804             0.0207
9......................................................             0.0391             0.0860             0.0244
10.....................................................             0.0431             0.0923             0.0291
11.....................................................             0.0474             0.0987             0.0350
12.....................................................             0.0513             0.1047             0.0409
13.....................................................             0.0538             0.1104             0.0474
14.....................................................             0.0561  .................             0.0525
15.....................................................             0.0600  .................             0.0590
16.....................................................             0.0628  .................             0.0670
17.....................................................             0.0658  .................             0.0742
18.....................................................             0.0695  .................             0.0809
19.....................................................             0.0720  .................             0.0875
20.....................................................             0.0748  .................             0.0931
21.....................................................             0.0769  .................             0.0993
22.....................................................  .................  .................             0.1034
                                                        --------------------------------------------------------
      Total............................................             1.0000             1.0000             1.0000
----------------------------------------------------------------------------------------------------------------

    We further analyzed the extent to which the weights in the 
excluded hospital with capital market basket that we are proposing 
reflect the cost weights in LTCHs, particularly since more than 50 
percent of excluded hospitals are psychiatric hospitals. For this 
purpose, we conducted an analysis comparing the major cost weights 
for LTCHs to the same set of cost weights for excluded hospitals. We 
analyzed the variations of wages, drugs, and capital. This analysis 
showed that these weights differed only slightly between the 
different types of hospitals. When the LTCH weights were substituted 
into the market basket structure for sensitivity analysis, the 
effect was less than 0.2 percentage points in any given year. This 
difference is less than the 0.25 percentage point criterion that 
determines whether a forecast error adjustment under the hospital 
inpatient prospective payment system is warranted. In addition, many 
LTCHs specialize in rehabilitation or psychiatric services. Thus, it 
would be anticipated that the cost shares would not differ 
drastically from these other types of prospective payment system-
excluded

[[Page 13491]]

hospitals. Based on this analysis, we believe that using the 
excluded hospital with capital market basket for the proposed LTCH 
prospective payment system would provide a reasonable measure of the 
price changes facing LTCHs. We request comments on any other data 
sources that may be available to provide detailed cost category 
information on LTCHs.

Appendix B--Proposed Update Framework

    Section 307(b) of Public Law 106-554 requires that the Secretary 
examine the appropriateness of certain adjustments to the LTCH 
prospective payment, including updates. Updates are necessary to 
appropriately account for changes in the prices of goods and 
services used by a provider in furnishing care to patients. A market 
basket has historically been used under the Medicare program in 
setting update factors for services furnished by providers. We are 
proposing that, beginning in FY 2004, the annual update to the 
standard Federal rate (described in section IV.D. of this proposed 
rule) would be equal to the percentage change in the excluded 
hospital with capital market basket index described in Appendix A of 
this proposed rule. However, in the future we would develop an 
update framework to update payments to LTCHs that would account for 
other appropriate factors that affect the efficient delivery of 
services and care provided to Medicare patients. The update 
framework would be proposed in the appropriate annual proposed rule 
in accordance with the notice and comment rulemaking process. While 
we are not proposing a specific update framework for the LTCH 
prospective payment system at this time in this proposed rule, we 
are providing a conceptual basis for developing such an update 
framework.

A. Need for an Update Framework

    Under the proposed LTCH prospective payment system, Medicare 
payments to LTCHs would be based on a predetermined national payment 
amount per discharge. Under section 123 of BBRA and section 307(b) 
of BIPA, the Secretary has broad authority to make appropriate 
adjustments to the LTCH payment system, including updates to payment 
rates. Our goal is to develop a method for analyzing and comparing 
expected trends in the underlying cost per discharge to use in 
establishing these updates. However, as stated earlier, we are 
proposing that until an update framework is developed, future 
updates would be based only on the increase in the excluded hospital 
with capital market basket.
    A market basket for the proposed LTCH prospective payment system 
(the excluded hospital with capital market basket), developed by 
CMS's Office of the Actuary (OACT), represents just one component in 
the measure of growth in LTCHs' costs per discharge. It captures 
only the pure price change of inputs (labor, materials, and capital) 
used by the hospital to produce a constant quantity and quality of 
care. However, other factors also contribute to the change in costs 
per discharge, including changes in case-mix, intensity, and 
productivity.
    Under the hospital inpatient prospective payment system, CMS and 
MedPAC use an update framework to account for these other factors 
and to make annual recommendations to the Congress concerning the 
magnitude of the update. We are currently examining these factors 
and exploring ways that they could be incorporated into an update 
framework for the LTCH prospective payment system. We are also 
examining some additional conceptual and data issues that must be 
considered when the framework is constructed and applied.
    At this time, we are proposing that future annual updates would 
be equal to the proposed market basket for the LTCH prospective 
payment system described in Appendix A of this proposed rule (the 
excluded hospital with capital market basket). We believe an annual 
update based on the proposed market basket for the LTCH prospective 
payment system would provide for a reasonable update until a more 
comprehensive update framework can be developed. Currently, under 
the TEFRA system, the excluded hospital market basket is used as the 
basis for updates to LTCHs' target amounts for inpatient operating 
costs. While our experience in developing other update frameworks, 
such as the hospital inpatient (operating and capital) and SNF 
prospective payment systems, could provide us with the conceptual 
framework, we are not proposing to apply an update framework at this 
time since we believe that it is important to develop successively 
more refined models of an update framework based on our evaluation 
of public comments and recommendations submitted to us on this 
issue. We would then further study the potential adjustments and the 
best available data. We are actively pursuing developing an 
analytical framework that would support the continued 
appropriateness and relevance of the payment rates for services 
provided to beneficiaries in LTCHs. To this end, we are requesting 
comments concerning the use and feasibility of the conceptual 
approach outlined below in this proposed rule. We are specifically 
interested in comments concerning which factors are appropriate and 
should be accounted for in the framework, and suggestions concerning 
potential data sources and analysis to support the model. As with 
the existing methodology used under the hospital inpatient 
prospective payment system, the features of a LTCH-specific update 
framework would need to be based on sound policy and methodology.

B. Factors Inherent in LTCH Payments Per Discharge

    In order to understand the factors that determine LTCH costs per 
discharge, it is first necessary to understand the factors that 
determine LTCH payments per discharge. Payments per discharge under 
the LTCH prospective payment system are based on the cost and an 
implicit normal profit margin to the LTCH in providing an efficient 
level of care. We have developed a methodology to identify a 
mutually exclusive and exhaustive set of factors included in LTCH 
payments per discharge. The discussion here details a set of 
equations to identify these factors.
    In its simplest form, the average payment per discharge to a 
LTCH can be separated into a cost term and a profit term as shown in 
equation (1):
[GRAPHIC] [TIFF OMITTED] TP22MR02.001

    This equation can be made multiplicative by converting profit 
per discharge into a profit rate as shown in equation (2):
[GRAPHIC] [TIFF OMITTED] TP22MR02.002

    An output price term can be introduced into the equation by 
multiplying and dividing through by input prices and productivity. 
As shown in equation (3), the term inside the brackets represents 
the output price, since an output price reflects the input price and 
profit margin adjusted for productivity:
[GRAPHIC] [TIFF OMITTED] TP22MR02.003


[[Page 13492]]


    The cost per discharge term can be further separated by 
accounting for real case-mix. Under the proposed LTCH prospective 
payment system, LTC-DRGs are used to classify patients. Based on 
accurate DRG classification data, average real case-mix per 
discharge can be incorporated, as shown in equation (4):
[GRAPHIC] [TIFF OMITTED] TP22MR02.004

    The term ``real'' is imperative here because only true case-mix 
should be measured, not case-mix caused by improper coding behavior. 
By rearranging the terms in equation (4), a set of mutually 
exclusive and exhaustive factors such as those shown in equation (5) 
can be identified:
[GRAPHIC] [TIFF OMITTED] TP22MR02.005

    The term in brackets can be analyzed in two steps. First, 
excluding the productivity term results in case-mix adjusted real 
cost per discharge, which is input intensity per discharge. Second, 
multiplying input intensity by productivity results in case-mix 
adjusted real payment per discharge, or output intensity per 
discharge. The rationale behind this step is explained in detail in 
section C below.
    The result of this exercise is that LTCH payment per discharge 
can be determined from the following factors:
[GRAPHIC] [TIFF OMITTED] TP22MR02.006

    Thus, it holds that the change in LTCH payment per discharge is 
a function of the change in these factors shown above. In order to 
determine an annual update that most accurately reflects the 
underlying cost to the LTCH of efficiently providing care, the four 
factors related to cost must be accounted for when an update 
framework is developed. A brief discussion of each factor, including 
specific conceptual and data issues, is provided in section C below.

C. Defining Each Factor Inherent in LTCH Costs Per Discharge

    Each cost factor from equation (6) in section B is discussed 
here in detail. Because this is a basic conceptual discussion, it is 
likely that more detailed issues may be relevant that are not 
explored here.

1. Input Prices

    Input prices are the pure prices of inputs used by the LTCH in 
providing services. When we refer to inputs, we are referring to 
costs, which have both a price and a quantity component. The price 
is an input price, and the quantity component reflects real inputs 
or real costs. Similarly, when we refer to outputs, we are referring 
to payments, which also have both a price and a quantity component. 
The price component is the transaction output price, and the 
quantity component is the real output or real payment. The real 
inputs include labor, capital, and materials such as drugs. By 
definition, an input price reflects prices that LTCHs encounter in 
purchasing these inputs, whereas an output price reflects the prices 
that buyers encounter in purchasing LTCH services. We currently 
measure input prices using the excluded hospital with capital market 
basket. While not specific to LTCHs, we believe this index 
adequately reflects the input prices faced by LTCHs as we describe 
in Appendix A.

2. Productivity

    Productivity measures the efficiency of the LTCH in producing 
outputs. It is the amount of real outputs, or real payments, that 
can be produced from a given amount of real inputs or real costs. 
For LTCHs, these inputs are in the form of both labor and capital; 
thus, they represent multifactor productivity, as not just labor 
productivity is reflected. The following set of equations shows how 
multifactor productivity can be measured in terms of available data, 
such as payments, costs, and input prices:
[GRAPHIC] [TIFF OMITTED] TP22MR02.007

    Rearranging the terms, this multifactor productivity equation 
was used as the basis for incorporating an output price term in 
equation (3) above. This equation is the basis for understanding the 
relationship between input prices, output prices, profit margins, 
and productivity.
    Equation (6) shows that productivity is divided through the 
equation, offsetting other factors. The theory behind this offset is 
that if an efficient LTCH in a competitive market can produce more 
output with the same amount of inputs, the full increase in input 
costs does not have to be passed on by the provider to maintain a 
normal profit margin.

3. Real Case Mix Per Discharge

    Real case mix per discharge is the average overall mix of care 
provided by the LTCH, as measured using the proposed LTC-DRG 
classification system. Over time, a measure of real case mix will 
change as care is given in more or less complex LTC-DRGs. Changes in 
the level of care within a LTC-DRG classification group would not be 
reflected in a case-mix measure based on LTC-DRGs, but instead 
should be captured in the intensity factor of equation (6). The 
important distinction here is the difference between real and 
nominal case mix. Under the proposed LTCH prospective payment 
system, LTCHs would submit claims using the proposed LTC-DRG 
classification system. The case-mix reflected by the claims is

[[Page 13493]]

considered ``nominal''. However, the reported classification can 
reflect the true level of care provided or improper coding behavior. 
An example of improper coding behavior would be the upcoding, or 
case-mix ``creep,'' that took place when the hospital inpatient 
prospective payment system was implemented. Any change in case-mix 
that is not associated with the actual level of care or a true 
change in the level of care provided must be excluded in order to 
determine real case-mix.

4. Case-Mix Constant Real Output Intensity Per Discharge

    Intensity is the true underlying nature of the product or 
service and can take the form of output or input intensity, or both. 
In the case of LTCHs, output intensity per discharge is associated 
with real payment per discharge, while input intensity per discharge 
is associated with real cost per discharge. For example, input 
intensity would be associated with a nurse's hours when providing 
treatment, whereas output intensity would be associated with the 
type and number of treatments a nurse provides. The underlying 
nature of LTCH services is determined by such factors as 
technological capabilities, increased utilization of inputs (such as 
labor or drugs), site of care, and practice patterns. Because these 
factors can be difficult to measure, intensity per discharge is 
usually calculated as a residual after the other factors from 
equation (6) have been accounted for.
    Accounting for output intensity associated with an efficient 
LTCH can be more accurately analyzed using a LTCH's costs rather 
than its payments. This analysis would also provide an alternative 
to developing or using a transaction output price index. The 
following series of equations shows how to use the definition of an 
output price as defined earlier to convert the equation for output 
intensity per discharge to reflect costs instead of payments, as 
used in equation (6):

Case-Mix Constant Real Output Intensity per Discharge 
[GRAPHIC] [TIFF OMITTED] TP22MR02.008

    The last equation is identical to the term in brackets in 
equation (5), case-mix constant real input intensity per discharge 
multiplied by productivity. Thus, output intensity per discharge can 
be defined in such a way that cost data from the LTCH are utilized. 
This equation can be broken down even further to account for 
different types of input intensity per discharge. We discuss this 
matter more fully in section D below.

D. Applying the Factors That Affect LTCH Costs Per Discharge in an 
Update Framework

    As discussed earlier, payments per discharge under the LTCH 
prospective payment system must be updated each year. Under this 
proposed rule, updates would be equal to the percent change in the 
excluded hospital with capital market basket beginning in FY 2004. 
The development of an update framework with a sound conceptual basis 
would provide the capability to understand the underlying trends in 
LTCH costs per discharge for an efficient provider.
    Earlier, factors inherent in LTCH costs per discharge were 
identified. Changes in these factors determine the change in LTCH 
costs per discharge. Accounting for each of these factors from 
equation (6) under the proposed LTCH prospective payment system is 
discussed below:
     Change in case-mix constant real output intensity per 
discharge would be accounted for in the update framework, reflecting 
the factors that affect not only case-mix constant real input 
intensity per discharge, but also productivity, which is determined 
separately. Factors that can cause changes in case-mix constant real 
input intensity per discharge include, but are not limited to, 
changes in site of service, changes in within-LTC-DRG case-mix, 
changes in practice patterns, changes in the use of inputs, and 
changes in technology available.
     As discussed earlier, changes in nominal case-mix are 
automatically included in the payment to the LTCH. Therefore, the 
update framework should include an adjustment to convert changes in 
nominal case-mix per discharge to changes in real case-mix per 
discharge.
     Change in multifactor productivity would be accounted 
for in the update framework. The availability of historical data on 
input prices, payments, and costs are useful in the analysis of this 
factor. MedPAC sets this factor as a target under hospital inpatient 
prospective payment system.
     Changes in input prices for labor, material, and 
capital would be accounted for in the update framework. Our Office 
of the Actuary currently has an input price index, or market basket, 
to assist in updating payments for LTCH services; this is the 
excluded hospital with capital market basket.
     In an update framework, a forecast error adjustment 
would be included to reflect that the updates are set prospectively 
and a forecast error for a given year should not be perpetuated in 
payments for future years. In the case of the hospital inpatient 
prospective payment system, this prospective adjustment is made on a 
2-year lag and only if the error exceeds a defined threshold (0.25 
percentage points).

E. Current Hospital Inpatient Prospective Payment System and 
Illustrative LTCH Prospective Payment System Update Frameworks

    Table I shows the payment update framework for the current 
hospital inpatient prospective payment system and an illustrative 
update framework for the LTCH prospective payment system. Some of 
the factors in the hospital inpatient prospective payment system 
framework are computed using Medicare cost report data, while others

[[Page 13494]]

are determined based on policy considerations. The details of 
calculating each factor for the hospital inpatient prospective 
payment system framework can be found in the May 4, 2001 proposed 
rule (66 FR 22891) that set forth proposed updates to the payment 
rates used under the hospital inpatient prospective payment system 
for FY 2002. This design for a LTCH update framework is for 
illustrative purposes only, as much more work needs to be done to 
determine the appropriate level of detail for each factor. The 
numbers provided for the hospital update are only intended to serve 
as examples of prior updates recommended for the hospital inpatient 
prospective payment system.
    MedPAC supports the use of this type of framework for updating 
payments and applies a similar framework when it proposes updates to 
hospital payments in its annual recommendation to Congress. The 
appropriateness of this framework for updating inpatient hospital 
payments was discussed in the Health Care Financing Review, Winter 
1992, in an article entitled, ``Are PPS Payments Adequate? Issues 
for Updating and Assessing Rates.'' A similar framework would be 
useful for analyzing updates to LTCH payments.

 Table I.--Current CMS Hospital Inpatient Prospective Payment System and
     Illustrative LTCH Prospective Payment System Update Frameworks
------------------------------------------------------------------------
                                     FY 2002         Illustrative LTCH
    CMS hospital inpatient          calculated      prospective payment
  prospective payment system     hospital update   system update percent
   update percent change in:      percent change         change in:
------------------------------------------------------------------------
CMS Prospective Payment System  3.3..............  CMS Excluded Hospital
 Hospital Market Basket.                            with Capital Market
                                                    Basket.
    Forecast Error............  0.7..............  Forecast Error.
Productivity..................  -0.6 to -0.5.....  Productivity.
Output Intensity:.............  0.2 to 0.3.......  Output Intensity:
    Science and Technology....  .................  Science and
                                                    Technology.
    Practice Patterns.........  .................  Real Within-DRG
                                                    Change.
    Real Within-DRG Change....  .................  Utilization of
                                                    Inputs.
    Site of Service...........  .................  Site of Service.
Case-mix Adjustment Factors:                       Case-mix Adjustment
                                                    Factors:
    Projected Case Mix........  &-1.0............  Nominal Across-DRG
                                                    Case-Mix.
    Real Across-DRG Change....  1.0..............  Real Across-DRG
                                                    Change.
Total Cost Per Discharge......  0.3 to 0.5.......  Total Cost Per
                                                    Discharge.
Other Policy Factors:                              Other Policy Factors:
    Reclassification and        0.0..............  None.
     Recalibration.
      Total Calculated Update.  3.6 to 3.8.......  Total Calculated
                                                    Update.
------------------------------------------------------------------------
\1\ Table data derived from the May 4, 2001 Federal Register, Medicare
  Program; Changes to the Hospital Inpatient Prospective Payment System
  and Fiscal Year 2002 Rates; Proposed Rule (66 FR 22890).

F. Additional Conceptual and Data Issues

    Additional conceptual issues specific to the proposed LTCH 
prospective payment system include the relevance of a site-of-
service substitution adjustment, the necessity of an adjustment for 
LTC-DRG reclassification, the handling of one-time factors, and 
consistency with other types of hospital updates since LTCHs are 
similar in structure to these other types of hospitals.
    Under the hospital inpatient prospective payment system, a site-
of-service substitution factor (captured as part of intensity) was 
necessary because of the incentive to shift care from inpatient 
hospital to other settings such as hospital outpatient departments, 
SNFs, or HHAs. For the proposed LTCH prospective payment system, it 
is not clear without additional research whether there is an 
incentive to shift care either into or out of the LTCH because of 
the changes in behavior created by the different Medicare payment 
systems.
    A reclassification and recalibration adjustment under the 
hospital inpatient prospective payment system is necessary to 
account for changes in the case-mix or the types of patients treated 
by LTCHs resulting from the annual reclassification and 
recalibration of the proposed LTC-DRGs. This adjustment for case-mix 
is applied to the current fiscal year update, but reflects the 
effect of revisions in the fiscal year 2 years prior. MedPAC does 
not make this adjustment in its update framework. Whether a LTC-DRG 
reclassification adjustment would be necessary in the update 
framework would depend on the data availability and the likelihood 
of revisions to LTC-DRG classifications on a periodic basis.
    There is also a question about how to handle one-time factors 
(an example of these could be those increased costs of converting 
computer systems to Year 2000 compliance). An update framework might 
be an appropriate mechanism to account for these items, but because 
of uncertainty surrounding their impact on costs, determining an 
appropriate adjustment amount may be difficult. MedPAC has discussed 
this issue in prior sessions, but was unable to agree on the exact 
methodology for these types of factors.
    LTCHs are heterogeneous and are designated as a separate payment 
category only because their patients have longer average lengths of 
stay. This raises the question of whether certain factors in an 
update framework for LTCHs should be consistent with the factors in 
an update framework for other types of hospitals since they face 
similar cost pressures. Additional research in this area would need 
to be conducted to determine the reasonableness of having consistent 
updates.
    The purpose of this conceptual discussion is not to determine 
how the identified factors of the update framework would be 
measured. We recognize that there are significant measurement issues 
in accurately determining the factors that would account for growth 
in costs per discharge for efficiently providing care. This is 
driven, in part, by the shift from a cost-based payment system with 
an upper payment limit to a prospective payment system. Significant 
research and data collection will be necessary to accurately measure 
these factors over the historical period. One example of this would 
be to measure the distinction between real and nominal case-mix 
change. However, many of these same concerns were also encountered 
and successfully addressed in the hospital inpatient prospective 
payment system update framework.
    The discussion here provides the conceptual basis for developing 
an update framework for the LTCH prospective payment system that 
reflects changes in the underlying costs of efficiently providing 
services. It is important to note that the framework would not 
handle distribution issues such as geographic wage variations. Due 
to some variations in technical methodologies for measuring the 
factors of an update framework, and because of some of the data 
concerns mentioned earlier, implementing an update framework for the 
LTCH prospective payment system would involve making significant 
policy decisions on issues similar to those made for the hospital 
inpatient prospective payment system update framework. We invite 
comments on the type of data sources to use, what other factors (if 
any) we should consider in an update framework, and any additional 
comments concerning the issues discussed in this proposed rule 
regarding the update framework.

[FR Doc. 02-6714 Filed 3-21-02; 8:45 am]
BILLING CODE 4120-01-P