[Federal Register Volume 67, Number 148 (Thursday, August 1, 2002)]
[Rules and Regulations]
[Pages 49982-50289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-19292]
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Part II
Department of Health and Human Services
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Centers for Medicare and Medicaid Services
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42 CFR Part 405, et al.
Medicare Program; Changes to the Hospital Inpatient Prospective Payment
Systems and Fiscal Year 2003 Rates; Final Rule
Federal Register / Vol. 67, No. 148 / Thursday, August 1, 2002 /
Rules and Regulations
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Parts 405, 412, 413, and 485
[CMS-1203-F]
RIN 0938-AL23
Medicare Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 2003 Rates
AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.
ACTION: Final rule.
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SUMMARY: We are revising the Medicare acute care hospital inpatient
prospective payment systems for operating and capital costs to
implement changes arising from our continuing experience with these
systems. In addition, in the Addendum to this final rule, we describe
the changes to the amounts and factors used to determine the rates for
Medicare hospital inpatient services for operating costs and capital-
related costs. These changes are applicable to discharges occurring on
or after October 1, 2002. We also are setting forth rate-of-increase
limits as well as policy changes for hospitals and hospital units
excluded from the acute care hospital inpatient prospective payment
systems.
In addition, we are setting forth changes to other hospital payment
policies, which include policies governing: Payments to hospitals for
the direct and indirect costs of graduate medical education; pass-
through payments for the services of nonphysician anesthetists in some
rural hospitals; clinical requirements for swing-bed services in
critical access hospitals (CAHs); and requirements and responsibilities
related to provider-based entities.
DATES: The provisions of this final rule are effective on October 1,
2002. This rule is a major rule as defined in 5 U.S.C. 804(2). Pursuant
to 5 U.S.C. 801(a)(1)(A), we are submitting a report to Congress on
this rule on August 1, 2002.
FOR FURTHER INFORMATION CONTACT:
Stephen Phillips, (410) 786-4548, Operating Prospective Payments,
Diagnosis-Related Groups (DRGs), Wage Index, New Medical Services and
Technology, Hospital Geographic Reclassifications, and Postacute
Transfer Issues.
Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded
Hospitals, Graduate Medical Education, Provider-Based Entities,
Critical Access Hospital (CAH).
Stephen Heffler, (410) 786-1211, Hospital Market Basket Rebasing.
Jeannie Miller, (410) 786-3164, Clinical Standards for CAHs.
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I. Background
A. Summary
1. Acute Care Hospital Inpatient Prospective Payment System
Section 1886(d) of the Social Security Act (the Act) sets forth a
system of payment for the operating costs of acute care hospital
inpatient stays under Medicare Part A (Hospital Insurance) based on
prospectively set rates. Section 1886(g) of the Act requires the
Secretary to pay for the capital-related costs of hospital inpatient
stays under a prospective payment system. Under these prospective
payment systems, Medicare payment for hospital inpatient operating and
capital-related costs is made at predetermined, specific rates for each
hospital discharge. Discharges are classified according to a list of
diagnosis-related groups (DRGs).
The base payment rate is comprised of an average standardized
amount that is divided into a labor-related share and a nonlabor-
related share. The labor-related share is adjusted by the wage index
applicable to the area where the hospital is located; and if the
hospital is located in Alaska or Hawaii, the nonlabor share is adjusted
by a cost-of-living adjustment factor. This base payment rate is
multiplied by the DRG relative weight.
If the hospital is recognized as serving a disproportionate share
of low-income patients, it receives a percentage add-on payment for
each case paid through the acute care hospital inpatient prospective
payment system. This percentage varies, depending on several factors
which include the percentage of low-income patients served. It is
applied to the DRG-adjusted base payment rate, plus any outlier
payments received.
If the hospital is an approved teaching hospital, it receives a
percentage add-on payment for each case paid through the acute care
hospital inpatient prospective payment system. This percentage varies,
depending on the ratio of residents to beds.
Additional payments may be made for cases that involve new
technologies that have been approved for special add-on payments. To
qualify, the technologies must be shown to be a substantial clinical
improvement over technologies otherwise available and that they would
be inadequately paid otherwise (absent the add-on payments) under the
regular DRG payment.
The costs incurred by the hospital for a case are evaluated to
determine whether the hospital is eligible for an additional payment as
an outlier case. This additional payment is designed to protect the
hospital from large financial losses due to unusually expensive cases.
Any outlier payment due is added to the DRG-adjusted base payment rate.
Although payments to most hospitals under the acute care hospital
inpatient prospective payment system are made on the basis of the
standardized amounts, some categories of hospitals are paid the higher
of a hospital-specific rate based on their costs in a base year (the
higher of Federal fiscal year (FY) 1982, FY 1987, or FY 1996) or the
prospective payment system rate based on the standardized amount. For
example, sole community hospitals (SCHs) are the sole source of care in
their areas, and Medicare-dependent, small rural hospitals (MDHs) are a
major
[[Page 49983]]
source of care for Medicare beneficiaries in their areas. Both of these
categories of hospitals are afforded this special payment protection in
order to maintain access to services for beneficiaries (although MDHs
receive only 50 percent of the difference between the prospective
payment system rate and their hospital-specific rates, if the hospital-
specific rate is higher than the prospective payment system rate).
The existing regulations governing payments to hospitals under the
acute care hospital inpatient prospective payment system are located in
42 CFR Part 412, Subparts A through M.
2. Hospitals and Hospital Units Excluded from the Acute Care Hospital
Inpatient Prospective Payment System
Under section 1886(d)(1)(B) of the Act, as amended, certain
specialty hospitals and hospital units are excluded from the acute care
hospital inpatient prospective payment system. These hospitals and
units are: psychiatric hospitals and units; rehabilitation hospitals
and units; long-term care hospitals; children's hospitals; and cancer
hospitals. Various sections of the Balanced Budget Act of 1997 (Pub. L.
105-33), the Medicare, Medicaid, and SCHIP [State Children's Health
Insurance Program] Balanced Budget Refinement Act of 1999 (Pub. L. 106-
113), and the Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act of 2000 (Pub. L. 106-554) provide for the implementation
of prospective payment systems for rehabilitation hospitals and units,
psychiatric hospitals and units, and long-term care hospitals, as
discussed below. Children's hospitals and cancer hospitals will
continue to be paid on a cost-based reimbursement basis.
The existing regulations governing payments to excluded hospitals
and hospital units are located in 42 CFR Parts 412 and 413.
Under section 1886(j) of the Act, as amended, rehabilitation
hospitals and units are being transitioned from a blend of reasonable
cost-based reimbursement subject to a hospital-specific annual limit
under section 1886(b) of the Act and Federal prospective payments for
cost reporting periods beginning January 1, 2002 through September 30,
2002, to payment on a fully Federal prospective rate effective for cost
reporting periods beginning on or after October 1, 2002 (66 FR 41316,
August 7, 2001). The statute also provides that, for cost reporting
periods beginning in FY 2003, inpatient rehabilitation facilities that
are subject to the blend methodology may elect to receive the full
prospective payment instead of a blended payment. The existing
regulations governing payment under the inpatient rehabilitation
facility prospective payment system (for rehabilitation hospitals and
units) are located in 42 CFR Part 412, Subpart P.
Under the broad authority conferred to the Secretary by section 123
of Public Law 106-113 and section 307(b) of Public Law 106-554, we are
proposing to transition long-term care hospitals from payments based on
reasonable cost-based reimbursement under section 1886(b) of the Act to
fully Federal prospective rates during a 5-year period. For cost
reporting periods beginning on or after October 1, 2006, we are
proposing to pay long-term care hospitals under the fully Federal
prospective payment rate. (See the proposed rule issued in the Federal
Register on March 22, 2002 (67 FR 13416).) Under the proposed rule,
during the transition, long-term care hospitals subject to the blend
methodology would also be permitted to elect to be paid based on full
Federal prospective rates. The final regulations governing payments
under the long-term care hospital prospective payment system are under
development and will be located in 42 CFR Part 412, Subpart O.
Sections 124(a) and (c) of Public Law 106-113 provide for the
development of a per diem prospective payment system for payment for
inpatient hospital services furnished by psychiatric hospitals and
units under the Medicare program, effective for cost reporting periods
beginning on or after October 1, 2002. This system must include an
adequate patient classification system that reflects the differences in
patient resource use and costs among these hospitals and must maintain
budget neutrality. We are in the process of developing a proposed rule,
to be followed by a final rule, to implement the prospective payment
system for psychiatric hospitals and units.
3. Critical Access Hospitals
Under sections 1814, 1820, and 1834(g) of the Act, payments are
made to critical access hospitals (CAHs) (that is, rural hospitals or
facilities that meet certain statutory requirements) for inpatient and
outpatient services on a reasonable cost basis. Reasonable cost is
determined under the provisions of section 1861(v)(1)(A) of the Act and
existing regulations under 42 CFR Parts 413 and 415.
4. Payments for Graduate Medical Education
Under section 1886(a)(4) of the Act, costs of approved educational
activities are excluded from the operating costs of inpatient hospital
services. Hospitals with approved graduate medical education (GME)
programs are paid for the direct costs of GME in accordance with
section 1886(h) of the Act; the amount of payment for direct GME costs
for a cost reporting period is based on the hospital's number of
residents in that period and the hospital's costs per resident in a
base year.
The existing regulations governing GME payments are located in 42
CFR Part 413.
B. Summary of the Provisions of the May 9, 2002 Proposed Rule
On May 9, 2002, we published a proposed rule in the Federal
Register (67 FR 31404) that set forth proposed changes to the Medicare
hospital inpatient prospective payment systems for operating costs and
for capital-related costs in FY 2003. We also set forth proposed
changes relating to payments for GME costs; payments to excluded
hospitals and units; policies implementing the Emergency Medical
Treatment and Active Labor Act (EMTALA); clinical requirements for
swing beds in CAHs; and other hospital payment policy changes. These
proposed changes would be effective for discharges occurring on or
after October 1, 2002.
The following is a summary of the major changes that we proposed
and the issues we addressed in the May 9, 2002 proposed rule:
1. Changes to the DRG Reclassifications and Recalibrations of Relative
Weights
As required by section 1886(d)(4)(C) of the Act, we proposed annual
adjustments to the DRG classifications and relative weights. Based on
analyses of Medicare claims data, we proposed to establish a number of
new DRGs and to make changes to the designation of diagnosis and
procedure codes under other existing DRGs.
Among the proposed changes discussed were:
Revisions of DRG 1 (Craniotomy Age >17 Except for Trauma)
and DRG 2 (Craniotomy for Trauma Age >17) to reflect the current
assignment of cases involving head trauma patients with other
significant injuries to major diagnostic category (MDC) 24.
Reconfiguration and retitling of existing DRG 14 (Specific
Cerebrovascular Disorders Except Transient Ischemic Attack) and DRG 15
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(Transient Ischemic Attack and Precerebral Occlusions) and creation of
a new DRG 524 (Transient Ischemia).
Creation of a new DRG 525 (Heart Assist System Implant)
for heart assist devices.
Reassignment of the diagnosis code for rheumatic heart
failure with cardiac catheterization.
Assignment of new, and reassignment of existing, cystic
fibrosis principal diagnosis codes.
Redesignation of a code for insertion of totally
implantable vascular access device (VAD) as an operating room
procedure.
Changes in the DRG assignment for the bladder
reconstruction procedure code.
Changes in DRG and MDC assignments for numerous newborn
and neonate diagnosis codes. (We note that, based on public comments
received on the proposed rule, we are not making these changes in this
final rule, as discussed in section II.B.6. of this preamble.)
Changes in DRG assignment for cases of tracheostomy and
continuous mechanical ventilation greater than 96 hours.
We also discussed other DRG classification issues for
which we did not propose changes. One of those was the new drug-eluting
stent technology. We received many public comments suggesting higher
payments would be needed in order to adequately compensate hospitals
for the higher costs of this technology. Therefore, in this final rule,
we are creating new DRG 525 (Percutaneous Cardiovascular Procedure
with, Drug-Eluting Stent with AMI) and new DRG 527 (Percutaneous
Cardioascular Procedure with Drug-Eluting Stent without AMI).
We also presented our analysis of applicants for add-on payments
for high-cost new medical technologies. We have approved one new
technology, the drug drotrecogin alfa (activated), trade name
XigrisTM, as a new technology eligible for add-on payments.
XigrisTM is used to treat patients with severe sepsis.
2. Changes to the Hospital Wage Index
We proposed revisions to the wage index and the annual update of
the wage data. Specific issues addressed in this section included the
following:
The FY 2003 wage index update, using FY 1999 wage data.
Exclusion from the wage index of Part A physician wage
costs that are teaching-related, as well as resident and Part A
certified registered nurse anesthetist (CRNA) costs.
Collection of data for contracted administrative and
general, housekeeping, and dietary services.
Revisions to the wage index based on hospital
redesignations and reclassifications by the Medicare Geographic
Classification Review Board (MGCRB).
Requests for wage data corrections, including
clarification of our policies on mid-year corrections.
3. Revision and Rebasing of the Hospital Market Basket
We proposed rebasing and revising the hospital market basket to be
used in developing the FY 2003 update factor for the operating
prospective payment rates and the excluded hospital rate-of-increase
limits. We also set forth the data sources used to determine the
revised market basket relative weights and choice of price proxies.
In the proposed rule, we also reestimated the labor-related share
of the average standardized amount that is adjusted by the wage index.
In response to public comments received recommending further evaluation
of the methodology used to estimate the labor-related share, we are not
proceeding with that reestimation in this final rule.
4. Other Decisions and Changes to the Prospective Payment System for
Inpatient Operating and Graduate Medical Education Costs
We discussed several provisions of the regulations in 42 CFR Parts
412 and 413 and set forth certain proposed changes concerning the
following:
Options for expanding the postacute care transfer policy.
Based on public comments received, we are not expanding the policy at
this time.
Clarification of the application of the statutory
provisions on the calculation of hospital-specific rates for SCHs.
Exclusion of certain limited-service specialty hospitals
from the like hospital definition for purposes of granting SCH status.
We proposed to set the threshold for determining a specialty hospital
is not a like hospital at 3 percent service overlap between the SCH and
the specialty hospital. In this final rule, in response to public
comments, we are establishing that threshold at 8 percent.
Technical change regarding additional payments for outlier
cases.
Proposed case-mix index values for FY 2003 for rural
referral centers.
Changes relating to the IME adjustment, including
resident-to-bed ratio caps and counting beds. (We note that because of
the need for a future comprehensive analysis on bed and patient day
counting policies, and our limited timeframe for preparing the FY 2003
final rule for the acute care hospital inpatient prospective payment
systems for publication by the statutory deadline of August 1, 2002, we
have decided to postpone finalizing the proposed changes and will
address the comments in a separate document.)
Clarification and codification of classification
requirements for MDHs and intermediary evaluations of cost reports for
these hospitals.
Changes to policies on pass-through payments for the costs
of nonphysician anesthetists in some rural hospitals.
Clarification of policies relating to implementing 3-year
reclassifications of hospitals and other policies related to hospital
reclassification decisions made by the MGCRB.
Changes relating to payment for the direct costs of GME.
Changes relating to emergency medical conditions in
hospital emergency departments under the EMTALA provisions. (We note
that because of the number and nature of the public comments we
received on these proposed changes and our limited timeframe for
preparing the FY 2003 final rule for the acute care hospital inpatient
prospective payment systems for publication by the statutory deadline
of August 1, we have decided to postpone finalizing the proposed
changes and will address the comments in a separate document.)
Criteria for, and responsibilities related to, payments
for provider-based entities.
CMS-directed reopening of intermediary determinations and
hearing decisions on provider reimbursements.
We proposed to revise our methodology used to determine the fixed-
loss cost threshold for outlier cases based on a 3-year average of the
rates of change in hospitals' costs. We received many public comments
opposing this change. In this proposed rule, we are using a 2-year
average of the rate of change in charges to establish the threshold.
5. Prospective Payment System for Capital-Related Costs
We proposed payment requirements for capital-related costs
effective October 1, 2002, which included:
Capital-related costs for new hospitals.
Additional payments for extraordinary circumstances.
Restoration of the 2.1 percent reduction to the standard
Federal capital prospective payment system rate.
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Clarification of the special exceptions payment policy.
6. Changes for Hospitals and Hospital Units Excluded From the
Prospective Payment Systems
We discussed the following proposals concerning excluded hospitals
and hospital units and CAHs:
Payments for existing excluded hospitals and hospital
units for FY 2003.
Updated caps for new excluded hospitals and hospital
units.
Revision of criteria for exclusion of satellite facilities
from the acute care hospital inpatient prospective payment system.
The prospective payment systems for inpatient
rehabilitation hospitals and units and long-term care hospitals.
Changes in the advance notification period for CAHs
electing the optional payment methodology.
Removal of the requirement on CAHs to use a State resident
assessment instrument (RAI) for patient assessments for swing-bed
patients.
7. Determining Prospective Payment Operating and Capital Rates and
Rate-of-Increase Limits
In the Addendum to the May 9, 2002 proposed rule, we set forth
proposed changes to the amounts and factors for determining the FY 2003
prospective payment rates for operating costs and capital-related
costs. We also proposed threshold amounts for outlier cases. In
addition, we proposed update factors for determining the rate-of-
increase limits for cost reporting periods beginning in FY 2003 for
hospitals and hospital units excluded from the acute care hospital
inpatient prospective payment system.
8. Impact Analysis
In Appendix A of the proposed rule, we set forth an analysis of the
impact that the proposed changes would have on affected entities.
9. Report to Congress on the Update Factor for Hospitals Under the
Prospective Payment System and Hospitals and Units Excluded From the
Prospective Payment System
In Appendix B of the proposed rule, as required by section
1886(e)(3) of the Act, we set forth our report to Congress on our
initial estimate of a recommended update factor for FY 2003 for
payments to hospitals included in the acute care hospital inpatient
prospective payment system, and hospitals excluded from this
prospective payment system.
10. Recommendation of Update Factor for Hospital Inpatient Operating
Costs
In Appendix C of the proposed rule, as required by sections
1886(e)(4) and (e)(5) of the Act, we included our recommendation of the
appropriate percentage change for FY 2003 for the following:
Large urban area and other area average standardized
amounts (and hospital-specific rates applicable to SCHs and MDHs) for
hospital inpatient services paid under the prospective payment system
for operating costs.
Target rate-of-increase limits to the allowable operating
costs of hospital inpatient services furnished by hospitals and
hospital units excluded from the acute care hospital inpatient
prospective payment system.
11. Discussion of Medicare Payment Advisory Commission Recommendations
Under section 1805(b) of the Act, the Medicare Payment Advisory
Commission (MedPAC) is required to submit a report to Congress, not
later than March 1 of each year, that reviews and makes recommendations
on Medicare payment policies. This annual report makes recommendations
concerning hospital inpatient payment policies. In the proposed rule,
we discussed the MedPAC recommendations concerning hospital inpatient
payment policies and presented our response to those recommendations.
For further information relating specifically to the MedPAC March 1
report or to obtain a copy of the report, contact MedPAC at (202) 653-
7220 or visit MedPAC's Web site at: www.medpac.gov.
C. Public Comments Received in Response to the May 9, 2002 Proposed
Rule
We received approximately 1,196 timely items of correspondence
containing multiple comments on the May 9, 2002 proposed rule.
Summaries of the public comments and our responses to those comments
are set forth below under the appropriate heading.
II. Changes to DRG Classifications and Relative Weights
A. Background
Under the acute care hospital inpatient prospective payment system,
we pay for inpatient hospital services on a rate per discharge basis
that varies according to the DRG to which a beneficiary's stay is
assigned. The formula used to calculate payment for a specific case
multiplies an individual hospital's payment rate per case by the weight
of the DRG to which the case is assigned. Each DRG weight represents
the average resources required to care for cases in that particular DRG
relative to the average resources used to treat cases in all DRGS.
Congress recognized that it would be necessary to recalculate the
DRG relative weights periodically to account for changes in resource
consumption. Accordingly, section 1886(d)(4)(C) of the Act requires
that the Secretary adjust the DRG classifications and relative weights
at least annually. These adjustments are made to reflect changes in
treatment patterns, technology, and any other factors that may change
the relative use of hospital resources. Changes to the DRG
classification system and the recalibration of the DRG weights for
discharges occurring on or after October 1, 2002 are discussed below.
B. DRG Reclassification
1. General
Cases are classified into DRGs for payment under the acute care
hospital inpatient prospective payment system based on the principal
diagnosis, up to eight additional diagnoses, and up to six procedures
performed during the stay, as well as age, sex, and discharge status of
the patient. The diagnosis and procedure information is reported by the
hospital using codes from the International Classification of Diseases,
Ninth Revision, Clinical Modification (ICD-9-CM). \
For FY 2003, cases are assigned to one of 510 DRGs in 25 major
diagnostic categories (MDCs). Most MDCs are based on a particular organ
system of the body. For example, MDC 6 is Diseases and Disorders of the
Digestive System. However, some MDCs are not constructed on this basis
because they involve multiple organ systems (for example, MDC 22
(Burns)).
In general, cases are assigned to an MDC based on the patients'
principal diagnosis before assignment to a DRG. However, for FY 2003,
there are eight DRGs to which cases are directly assigned on the basis
of ICD-9-CM procedure codes. These are the DRGs for heart, liver, bone
marrow, lung transplants, simultaneous pancreas/kidney, and pancreas
transplants (DRGs 103, 480, 481, 495, 512, and 513, respectively) and
the two DRGs for tracheostomies (DRGs 482 and 483). Cases are assigned
to these DRGs before classification to an MDC.
Within most MDCs, cases are then divided into surgical DRGs and
medical DRGs. Surgical DRGs are based on a
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hierarchy that orders operating room (O.R.) procedures or groups of
O.R. procedures, by resource intensity. Medical DRGs generally are
differentiated on the basis of diagnosis and age. Some surgical and
medical DRGs are further differentiated based on the presence or
absence of complications or comorbidities (CC).
Generally, nonsurgical procedures and minor surgical procedures not
usually performed in an operating room are not treated as O.R.
procedures. However, there are a few non-O.R. procedures that do affect
DRG assignment for certain principal diagnoses, such as extracorporeal
shock wave lithotripsy for patients with a principal diagnosis of
urinary stones.
Patients' diagnosis, procedure, discharge status, and demographic
information is fed into the Medicare claims processing systems and
subjected to a series of automated screens called the Medicare Code
Editor (MCE). These screens are designed to identify cases that require
further review before classification into a DRG.
After screening through the MCE and any further development of the
claims, cases are classified into the appropriate DRG by the Medicare
GROUPER software program. The GROUPER program was developed as a means
of classifying each case into a DRG on the basis of the diagnosis and
procedure codes and, for a limited number of DRGs, demographic
information (that is, sex, age, and discharge status). The GROUPER is
used both to classify current cases for purposes of determining payment
and to classify past cases in order to measure relative hospital
resource consumption to establish the DRG weights.
The records for all Medicare hospital inpatient discharges are
maintained in the Medicare Provider Analysis and Review (MedPAR) file.
The data in this file are used to evaluate possible DRG classification
changes and to recalibrate the DRG weights. However, in the July 30,
1999 final rule (64 FR 41500), we discussed a process for considering
non-MedPAR data in the recalibration process. In order for the use of
particular data to be feasible, we must have sufficient time to
evaluate and test the data. The time necessary to do so depends upon
the nature and quality of the data submitted. Generally, however, a
significant sample of the data should be submitted by mid-October, so
that we can test the data and make a preliminary assessment as to the
feasibility of using the data. Subsequently, a complete database should
be submitted no later than December 1 for consideration in conjunction
with next year's proposed rule.
We proposed numerous changes to the DRG classification system for
FY 2003. The proposed changes, the public comments we received
concerning them, and the final DRG changes and the methodology used to
recalibrate the DRG weights are set forth below. Unless otherwise
noted, the changes we are implementing will be effective in the revised
GROUPER software (Version 20.0) to be implemented for discharges on or
after October 1, 2002. Also, unless otherwise noted, we are relying on
the DRG data analysis in the proposed rule for the changes discussed
below.
2. MDC 1 (Diseases and Disorders of the Nervous System)
a. Revisions of DRGs 1 and 2
Currently, adult craniotomy patients are assigned to either DRG 1
(Craniotomy Age >17 Except for Trauma) or DRG 2 (Craniotomy for Trauma
Age >17). The trauma distinction recognizes that head trauma patients
requiring a craniotomy often have multiple injuries affecting other
body parts. However, we note that the structure of these DRGs predates
the creation in FY 1991 of MDC 24 (Multiple Significant Trauma). The
creation of MDC 24 resulted in head trauma patients with other
significant injuries being assigned to MDC 24 and removed from DRG 2.
In FY 1990, there was a 16-percent difference in the DRG weights for
DRG 1 and DRG 2. In FY 1992, after the creation of MDC 24, the
percentage difference in the DRG weights for DRG 1 and DRG 2 had
declined to 1.2 percent. The FY 2002 payment weight for DRG 1 is 3.2713
and for DRG 2 is 3.3874, a 3.5 percent difference.
For FY 2003, we reevaluated the GROUPER logic for DRGs 1 and 2 by
combining the patients assigned to these DRGs and examining the impact
of other patient attributes on patient charges. The presence or absence
of a CC was found to have a substantial impact on patient charges.
------------------------------------------------------------------------
Number of Average
Cases in DRGs 1 and 2 patients charges
------------------------------------------------------------------------
With CC........................................... 19,012 $49,659
Without CC........................................ 9,618 26,824
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Thus, there is an 85.1 percent difference in average charges for
the groups with and without CC for the combined DRGs 1 and 2. On this
basis, we proposed to redefine and retitle DRGs 1 and 2 as follows: DRG
1 (Craniotomy Age >17 with CC); and DRG 2 (Craniotomy Age >17 without
CC).
Comment: Nine commenters addressed this proposal. Three of the
commenters supported the proposal. One commenter was concerned about
the significant redefinition of DRGs to the extent that longitudinal
DRG data analysis would be seriously comprised. This commenter
recommended that we consider creating new DRGs when significant changes
to the structure of existing DRGs are necessary in order to preserve
the core definition of the existing DRGs for data analysis purposes.
The commenter believed that this proposed revision would significantly
alter the definition of these DRGs.
Response: We appreciate the support of the commenters for our
position on this issue. In response to the commenter's concern that
this revision would significantly alter the definition of these DRGs,
thus affecting longitudinal DRG data analysis, our practice in the past
has been to alter current DRGs to account for better clinical coherence
as well as similar patterns of resource intensity. For example, last
year we removed defibrillator cases from DRGs 104 and 105 to make these
DRGs and the new DRGs 514 and 515 that were created for defibrillators,
more homogenous in terms of patient characteristics and resource
consumption.
Currently, the DRGs are generally ordered by MDC, which gives the
DRGs a logical structure. Adding new DRGs sequentially at the end of
the existing DRGs disturbs that order. However, because there is not a
perfect solution to this problem, we will take the commenter's concerns
into consideration as we proceed with future DRG revisions.
Longitudinal data analysis can be performed by mapping prior year's
data with the current Medicare GROUPER. A conversion table is available
for this purpose through the National Center for Health Statistics'
website: http://www.cdc.gov/nchs/icd9.htm or may be purchased from the
American Hospital Association (1-800-261-6246).
Comment: A commenter from a manufacturer of an implantable
intracranial neurostimulator device used in the treatment of
Parkinson's disease and essential tremor recommended that we revise the
proposed revisions to DRGs 1 and 2 so that all deep brain stimulation
procedures, such as intracranial neurostimulators for Parkinson's
disease, are paid under proposed DRG 1. The commenter stated that,
based on its review of FY 2000 MedPAR data,
[[Page 49987]]
approximately 75 percent of these cases would be assigned to proposed
DRG 2 (and subject to an approximate 40-percent payment reduction under
the proposed rule).
Response: Our proposed modification was based on FY 2001 MedPAR
data. DRGs 1 and 2 included many different procedures with a range of
costs associated with these procedures. Our analysis indicated a
substantial cost differential between patients with CCs and patients
without CCs, and the current DRGs 1 and 2 do not reflect this
difference. We believe that the revision we proposed will improve the
payment accuracy for cases in these DRGs. The prospective payment
system is an average-based payment methodology under which losses that
may be incurred for specific procedures or classes of patients are
offset by payment gains from other procedures or classes of patients.
In our analysis, we found 847 cases in which an implantation of
intracranial neurostimulator procedures was reported. The majority of
these cases were being assigned to DRG 2 with average standardized
charges of approximately $37,546. These charges are higher than the
overall average standardized charges for all cases within DRG 2.
However, this group of cases represents a small subset of all of the
cases that are assigned to DRG 2. As noted above, we believe our
proposed changes represent an overall improvement in payment accuracy
for the over 40,000 cases assigned to these two DRGs.
Comment: Three commenters expressed concern with the proposed
restructuring of DRGs 1 and 2 as it pertains to the open or
endovascular treatment of ruptured or nonruptured aneurysms and
arteriovenous malformation.
One commenter submitted data showing the average charges for
ruptured aneurysm cases at $34,794 (and in some cases, $52,568), which
are more than the average charges for DRG 1, and lengths of stay that
are significantly higher than those for the proposed DRG 1. Another
commenter assumed that treatment for ruptured aneurysms will remain in
the revised DRG 1, and stated that our proposal to reduce the cost
variance of these DRGs is a good beginning. However, according to the
commenter, this proposed change does not go far enough because it will
continue to underpay these extremely resource intensive cases. The
commenter recommended that these cases be assigned to a different DRG
(DRG 484 (Craniotomy for Multiple Significant Trauma) was suggested) or
that a new DRG be created for these cases.
With respect to the treatment of nonruptured aneurysms, the
commenters noted that we did not specify whether these cases would be
assigned to DRG 1 or 2 and urged that these cases be assigned to DRG 1.
The commenter noted that nonruptured interventional aneurysm cases are
complex, and patients spend an average of 4.2 days in intensive care.
Response: In these cases, the patients' principal diagnosis would
probably be the aneurysm. It is the secondary diagnosis or secondary
condition that may be classified as a CC. Under the proposed changes,
cases would be assigned to DRG 1 on the basis of a complication that
occurred during the hospital stay or a comorbidity that existed at the
time of admission or developed during the course of hospitalization. We
found in our analysis that the majority of ruptured aneurysm cases and
over half of craniotomy procedures in nonruptured aneurysm cases were
being assigned to DRG 1, where charges for these cases were similar to
the average for all cases in this DRG. The remaining nonruptured
aneurysm cases were assigned to DRG 2 ($33,144 compared to $52,254).
Our analysis did show the average standardized charges for the ruptured
aneurysm to be $109,698, which is higher than the overall average
charges of all cases within DRG 1. However, we point out, as noted by
the commenter, these cases actually do receive higher payments under
the changes we proposed.
Currently, DRG 484 includes complex, multiple significant trauma
cases; that is, patients with a principal diagnosis of trauma and at
least two significant trauma diagnosis codes (either as principal or
secondaries) from different body site categories. While the intensity
of treatment for aneurysms and arteriovenous malformations is
significant, we do not believe aneurysm and arteriovenous malformation
cases are clinically similar to other cases currently assigned to DRG
484.
Comment: One commenter stated that procedures involving
implantation of a chemotherapeutic agent into the brain will be
underpaid, causing hospitals to further limit use of this technology.
The commenter provided data based on 24 patients being treated with
this procedure and concluded that the hospital claims data did not
reflect the true hospital cost for this product. The commenter stated
that the average cost for this procedure is approximately $26,113. The
commenter believed that these cases would be assigned to DRG 2 with an
estimated payment of approximately $13,225.
Response: Procedure code 00.10 (Implantation of a chemotherapeutic
agent) will be effective October 1, 2002, that will enable specific
identification of these procedures. At this point, there are limited
data available to assess the payment implications of our proposed
change on this procedure. As noted above, cases that remain in DRG 1
would receive higher payments as a result of this change. Further, we
would expect hospitals to generally be able to offset payment losses
associated with a procedure that is used only rarely with payment gains
associated with the higher payments for higher volume cases in DRG 1.
Also, a low markup associated with one device or procedure is often
offset by relatively higher markups associated with another device or
procedure, leading to higher relative weights, and thus higher
payments, for the latter device or procedure.
We believe that our proposal is appropriate according to currently
available data. Therefore, we are adopting as final our proposal to
redefine and retitle DRGs 1 and 2 as follows: DRG 1 (Craniotomy Age >17
with CC); and DRG 2 (Craniotomy Age >17 without CC).
b. Revisions of DRGs 14 and 15
To assess the appropriate classification of patients with stroke
symptoms, we evaluated the assignment of cases to DRG 14 (Specific
Cerebrovascular Disorders Except Transient Ischemic Attack (TIA) and
DRG 15 (Transient Ischemic Attack and Precerebral Occlusions). Our data
review indicated that the cases in DRGs 14 and 15 fell into three
discrete groups. The first group included cases in which the patients
were very sick, with severe intracranial lesions or subarachnoid
hemorrhage and severe consequences. The second group included cases in
which patients had not suffered a debilitating stroke but instead may
have experienced a transient ischemic attack. The patients in the
second group had one half of the average length of stay in the hospital
as the first group. The third group of cases included patients who
appeared to suffer strokes with minor consequences, as well as those
having occluded vessels without having a full-blown stroke.
We found that patients who have intracranial hemorrhage and
patients who have infarction are similar in severity. We proposed to
continue to group patients with intracranial hemorrhage and infarction
together. These types of cases are different from patients with, for
example, an occlusive
[[Page 49988]]
carotid artery without infarction. In this latter group of cases,
patients are not as severely ill because they typically have lesser
degrees of functional status deficits.
Our analysis indicates that we can improve the clinical and
resource cohesiveness of DRGs 14 and 15 by reassigning several specific
ICD-9-CM codes. For example, code 436 (Acute, but ill-defined,
cerebrovascular disease) is a non-specific code and contains patients
with a wide range of deficits and anatomic problems. Our data show that
these cases consume fewer resources and have shorter lengths of stay
than other cases in DRG 14. Therefore, we proposed to remove code 436
from DRG 14 and reassign it to DRG 15. We also proposed to create a
third new DRG that would help further differentiate cases currently
assigned to DRGs 14 and 15. The proposed revised and new DRG titles
were as follows: DRG 14 (Intracranial Hemorrhage and Stroke with
Infarction); DRG 15 (Nonspecific Cerebrovascular Accident and
Precerebral Occlusion without Infarction) (a corrected title from the
one in the proposed rule); and DRG 524 (Transient Ischemia).
The following table represents a reconfiguration of DRGs 14 and 15
and the creation of a new DRG 524 reflecting these three
categorizations (based on more recent data than that used in the
proposed rule):
----------------------------------------------------------------------------------------------------------------
Average length
DRG and Title Number of cases of stay (days) Average charge
----------------------------------------------------------------------------------------------------------------
Revised DRG 14 (Intracranial Hemorrhage and Stroke with 236,067 6.1 $15,643
Infarction)..............................................
Revised DRG 15 (Nonspecific Cerebrovascular Accident and 101,726 4.9 11,595
Precerebral Occlusion without Infarction)................
New DRG 524 (Transient Ischemia).......................... 136,857 3.4 8,633
----------------------------------------------------------------------------------------------------------------
The reconfiguration of DRGs 14 and 15 results in the following
codes being designated as principal diagnosis codes in revised DRG 14:
430, Subarachnoid hemorrhage.
431, Intracerebral hemorrhage.
432.0, Nontraumatic extradural hemorrhage.
432.1, Subdural hemorrhage.
432.9, Unspecified intracranial hemorrhage.
433.01, Occlusion and stenosis of basilar artery, with
cerebral infarction.
433.11, Occlusion and stenosis of carotid artery, with
cerebral infarction.
433.21, Occlusion and stenosis of vertebral artery, with
cerebral infarction.
433.31, Occlusion and stenosis of multiple and bilateral
arteries, with cerebral infarction.
433.81, Occlusion and stenosis of other specified
precerebral artery, with cerebral infarction.
433.91, Occlusion and stenosis of unspecified precerebral
artery, with cerebral infarction.
434.01, Cerebral thrombosis with cerebral infarction.
434.11, Cerebral embolism with cerebral infarction.
434.91, Cerebral artery occlusion, unspecified, with
cerebral infarction.
We proposed that the following two codes be moved from DRG 14 to
DRG 34 (Other Disorders of Nervous System with CC) and DRG 35 (Other
Disorders of Nervous System without CC): Code 437.3 (Cerebral aneurysm,
nonruptured) and Code 784.3 (Aphasia). These codes do not represent
acute conditions. Aphasia, for example, could result from a cerebral
infarction, but if it does, the infarction should be correctly coded as
the principal diagnosis.
We proposed redefining DRG 15 so that it contains the following
principal diagnosis codes:
433.00, Occlusion and stenosis of basilar artery, without
mention of cerebral infarction.
433.10, Occlusion and stenosis of carotid artery, without
mention of cerebral infarction.
433.20, Occlusion and stenosis of vertebral artery,
without mention of cerebral infarction.
433.30, Occlusion and stenosis of multiple and bilateral
arteries, without mention of cerebral infarction.
433.80, Occlusion and stenosis of other specified
precerebral artery, without mention of cerebral infarction.
433.90, Occlusion and stenosis of unspecified precerebral
artery, without mention of cerebral infarction.
434.00, Cerebral thrombosis without mention of cerebral
infarction.
434.10, Cerebral embolism without mention of cerebral
infarction.
434.90, Cerebral artery occlusion, unspecified, without
mention of cerebral infarction.
436, Acute, but ill-defined, cerebrovascular disease.
We proposed to remove the following codes from the existing DRG 15
and place them in the proposed newly created DRG 524:
435.0, Basilar artery syndrome.
435.1, Vertebral artery syndrome.
435.2, Subclavian steal syndrome.
435.3, Vertebrobasilar artery syndrome.
435.8, Other specified transient cerebral ischemias.
435.9, Unspecified transient cerebral ischemia.
We proposed to move code 437.1 (Other generalized ischemic
cerebrovascular disease) from DRG 16 (Nonspecific Cerebrovascular
Disorders with CC) and DRG 17 (Nonspecific Cerebrovascular Disorders
without CC) and add it to the proposed new DRG 524. This proposed
change represented a modification to improve clinical coherence and
seems to be a logical change for the construction of the proposed new
DRG 524.
Comment: Several commenters opposed the movement of code 436 from
DRG 14 into DRG 15. One commenter stated that the change is not
supported in either the ICD-9-CM coding manual or the Coding Clinic for
ICD-9-CM. The commenter noted that an inclusion note under code 436
identified this code as a diagnosis code for a stroke patient with
cerebral infarctions. In addition, the commenter cited the Coding
Clinic, Fourth Quarter, 1993 (pages 38 and 39), as including the term
``cerebral infarction'' following the term ``stroke'', which indicated
to the commenter that these terms are synonymous. The commenter
recommended that, prior to making any changes, CMS work with the ICD-9-
CM Coordination and Maintenance Committee to revise the ICD-9-CM
tabular section to correct this inconsistency.
Response: We agree with the commenter that the ICD-9-CM code 436
does, in fact, describe a stroke. However, the code is nonspecific as
to the nature of a stroke. In addition, data on cases containing code
436 that were reported in our MedPAR file indicated that these types of
cases have a shorter length of stay and lower hospital charges
associated with them. Our revised title of DRG 15 reflects our
recognition of code 436 as describing a stroke; that is, we are
changing the title of DRG 15 to ``Nonspecific Cerebrovascular Accident
and Precerebral Occlusion without Infarction.'' With regard to the
revision
[[Page 49989]]
of the ICD-9-CM diagnosis tabular section describing code 436, we
understand that the National Center for Health Statistics (NCHS) plans
to address this issue at the December 4th and 5th, 2003 meeting of the
ICD-9-CM Coordination and Maintenance Committee. While we agree with
NCHS' plan to examine this issue, we are not delaying these DRG changes
while waiting for modifications to this section of the coding manual.
Comment: Two commenters opposed any changes in DRGs 14 and 15 until
better data become available. One of these commenters noted that moving
approximately 80,000 cases from a higher paying DRG to a lower paying
DRG will significantly impact many hospital's financial status.
Both commenters opposed moving code 436 from DRG 14 into DRG 15,
noting that code 436 is a common code for stroke or cerebrovascular
accident when the physician does not specify whether the stroke is an
intracranial hemorrhage or cerebral infarction. The commenters noted
that performance of diagnostic imaging may add specificity to determine
which artery was involved, thus allowing more specific coding to occur.
However, it may not change the course of treatment for the stroke. In
addition, the commenters stated that, in some cases, it is ill-advised
to subject the patient to further testing to make this determination.
Further, in some cases, the tests may be inconclusive but in most cases
the course of treatment would not be changed.
One commenter indicated that there is probably inconsistency among
coders in the use of the more specific 5-digit codes for ``with
cerebral infarction'' for categories 433 (Occlusion and stenosis of
precerebral arteries) and 434 (Occlusion of cerebral arteries) due to
variable interpretations of coding instructions. The commenter noted
that there are currently efforts to provide clarification regarding the
proper use of these 5-digit codes.
Response: We recognize that some of the diagnostic codes in section
430 through 437 of ICD-9-CM may be more specific than the diagnostic
documentation in the medical record, which may make it difficult to
precisely code cerebrovascular disease. We also recognize that code 436
may be a catchall code when more specific information on the patient's
condition is not available in the record. Further, it is possible that
other less severe cases are being labeled ``stroke,'' absent more
thorough testing or workup. However, our proposed changes to DRGs 14
and 15 were based on actual MedPAR data from FY 2001. As demonstrated
above, there is a clear demarcation between average charges and lengths
of stay across the two revised DRGs and one new DRG. Further, payment
for many cases is higher after these changes than it was previously.
For FY 2003, the DRG relative weights for DRGs 14 and 15 were 1.1655
and 0.7349, respectively. The proposed FY 2003 relative weights for
DRGs 14, 15 and 524 were 1.2742, 0.9844, and 0.7236. Therefore, cases
remaining in DRG 14 would receive higher payments as a result of moving
less expensive cases into DRG 15 or 524. Similarly, cases remaining in
DRG 15 would receive much higher payments than they had previously.
We believe these changes improve the clinical and resource
cohesiveness of the DRGs for these cases. We acknowledge the concerns
expressed by the commenters that code 436 may frequently be used in
lieu of more specific codes that require further tests even though the
cases are as severely ill as those with more specific diagnosis
indicated on the bill. However, this is not borne out by the data.
To the prospect of more available data in the future, we note that
changes to codes in the related section of the ICD-9-CM coding book
have been in place since 1993. We believe that 9 years is sufficient
time to clarify the coding issues and to adequately train both the
coding and medical staffs regarding documentation of cerebrovascular
disease.
Comment: One commenter opposed the movement of code 437.1 to new
DRG 524, noting that conditions classified to this code are generally
chronic or long term in nature, not transient.
Response: The titles of DRGs are not intended to uniquely identify
each case within the DRG, but to logically group cases that globally
have similar characteristics in terms of clinical requirements and
resources utilized. We proposed the movement of code 437.1 from DRGs 16
and 17 in order to improve the clinical coherence of DRGs 16 and 17,
and the new DRG 524; we believe this change accomplishes that.
Therefore, we are adopting the proposed change as final.
Comment: One commenter supported the movement of codes 437.3 and
784.3 from DRG 14 to DRGs 34 and 35.
Response: We appreciate the commenter's support. Accordingly, we
are adopting the proposed change to move codes 437.3 and 784.3 to DRGs
34 and 35, as final.
We are adopting as final the proposed changes to DRGs 14 and 15 and
the creation of new DRG 524 without modifications. We will continue to
monitor these DRGs for shifts in resource consumption and validity of
DRG assignment and will specifically monitor code 436 for appropriate
placement in DRG 15. We support the concept of clarification of the
coding guidelines in this section of ICD-9-CM and will also monitor
these DRGs when the guidelines are updated.
3. MDC 5 (Diseases and Disorders of the Circulatory System)
a. Heart Assist Systems
Heart failure is typically caused by persistent high blood pressure
(hypertension), heart attack, valve disease, other forms of heart
disease, or birth defects. It is a chronic condition in which the lower
chambers of the heart (ventricles) cannot pump sufficient amounts of
blood to the body. This causes the organs of the body to progressively
fail, resulting in numerous medical complications and frequently death.
DRG 127 (Heart Failure and Shock), to which heart failure cases are
assigned, is the single most common DRG in the Medicare population, and
represents the medical, not surgical, treatment options for this group
of patients.
In many cases, heart transplantation would be the treatment of
choice. However, the low number of donor hearts limits this treatment
option. Circulatory support devices, also known as heart assist systems
or left ventricular assist devices (LVADs), offer a surgical
alternative for end-stage heart failure patients. This type of device
is often implanted near a patient's native heart and assumes the
pumping function of the weakened heart's left ventricle. Studies are
currently underway to evaluate LVADs as permanent support for end-stage
heart failure patients.
We have reviewed the payment and DRG assignment of this type of
device in the past. Originally, these cases were assigned to DRG 110
(Major Cardiovascular Procedures with CC) and DRG 111 (Major
Cardiovascular Procedures without CC) in the September 1, 1994 final
rule (59 FR 45345). A more specific procedure code, 37.66 (Implant of
an implantable, pulsatile heart assist system) was made effective for
use with hospital discharges occurring on or after October 1, 1995. In
the August 29, 1997 final rule (62 FR 45973), we reassigned these cases
to DRG 108 (Other Cardiothoracic Procedures), because it was the most
clinically similar DRG with the best match in resource consumption
according to our data. In the July 31, 1998 final rule (63 FR 40956),
we again reviewed our data and discovered that
[[Page 49990]]
the charges for implantation of an LVAD were increasing at a greater
rate than the average charges for DRG 108. The length of stay for cases
with code 37.66 was approximately 32 days, or three times as long as
all other DRG 108 cases. Therefore, we decided to move LVAD cases from
DRG 108 to DRG 104 (Cardiac Valve and Other Major Cardiothoracic
Procedures with Cardiac Catheterization) and DRG 105 (Cardiac Valve and
Other Major Cardiothoracic Procedures without Cardiac Catheterization).
We continued to review our data and discuss this topic in the FY 1999
and FY 2000 annual final rules: July 30, 1999 (64 FR 41498) and August
1, 2000 (65 FR 47058).
In the August 1, 2001 final rule (66 FR 39838), we remodeled MDC 5
to add five new DRGs. We also added procedure codes 37.62 (Implant of
other heart assist system), 37.63 (Replacement and repair of heart
assist system), and 37.65 (Implant of an external, pulsatile heart
assist system) to DRGs 104 and 105. We removed defibrillator cases from
DRGs 104 and 105 and assigned them to DRG 514 (Cardiac Defibrillator
Implant with Cardiac Catheterization) and DRG 515 (Cardiac
Defibrillator Implant without Cardiac Catheterization) to make these
DRGs more clinically coherent. This also increased the relative weights
for DRGs 104 and 105, as the defibrillator cases had lower average
charges than other cases in those two DRGs.
In the FY 2001 MedPAR data file, we found 185 LVAD cases in DRG 104
and 90 cases in DRG 105, for a total of 275 cases. These cases
represent 1.3 percent of the total cases in DRG 104, and approximately
0.5 percent of the total cases in DRG 105. However, the average charges
for these cases are approximately $36,000 and $85,000 higher than the
average charges for cases in DRGs 104 and 105, respectively.
This situation presents a dilemma, in that the technology has been
available since 1995 and is gradually increasing in utilization, while
LVAD cases remain a small part of the total cases in these two DRGs. In
fact, removing LVAD cases from the calculation of the average charge
changes the average by only -0.4 percent and -0.5 percent for DRGs 104
and 105, respectively. Therefore, despite the dramatically higher
average charges for LVADs compared to the DRG averages, the relative
volume is insufficient to affect the DRG average charges to any great
degree.
Therefore, we proposed to create a new DRG 525 (Heart Assist System
Implant), which would contain these cases. The FY 2003 relative weight
for the new DRG 525 is 11.6479.
As discussed below, the comments we received supported this change.
Therefore, we are creating new DRG 525, which consists of any principal
diagnosis in MDC 5, plus one of the following surgical procedures:
37.62, Implant of other heart assist system
37.63, Replacement and repair of heart assist system
37.65, Implant of an external, pulsatile heart assist
system
37.66, Implant of an implantable, pulsatile heart assist
system
Cases in which a subsequent heart transplant occurs during the
hospitalization episode will continue to be assigned to DRG 103 (Heart
Transplant) because cases involving procedure codes 336 (Combined
heart/lung transplant) and 375 (Heart transplant) are assigned to DRG
103, regardless of other codes included on the bill.
We reiterate a discussion we included in the August 1, 2000 final
rule (65 FR 47058) regarding placement of code 37.66 in the MCE
screening software as a noncovered procedure. The default designation
for that code will continue to be ``noncovered'' because of the
stringent conditions that must be met by hospitals in order to receive
payment for implantation of the device.
Section 65-15 of the Medicare Coverage Issues Manual (Artificial
Hearts and Relative Devices) provides the national coverage
determination regarding Medicare coverage of these devices. This
section may be accessed online at www.hcfa.gov/pubforms/06_cim/ci00.htm.
Comment: Several commenters supported the proposed creation of a
new DRG 525 for patients receiving implanted heart assist systems. One
commenter stated that the creation of a new DRG 525 would be more
sensitive to the patient population, more accurate in statistical
analysis and data reports, and more responsive to changes in LVAD
charges and utilization patterns.
Other commenters suggested that the payment amount still
understates the reasonable cost of LVAD implantation. One commenter
provided analysis that purported to show that the net payment effect of
this change is insignificant due to the increase in the outlier
threshold as discussed in the proposed rule (and in the Addendum to
this final rule). Another commenter stated that this new DRG results in
payment that does not even compensate for the costs to the hospital of
the device itself. The commenter noted that current payment levels for
LVADs do not take into account the equipment required for discharge,
that is, both disposable and durable medical equipment.
Some of the commenters recommended that we consider allowing LVADs
to qualify for a new technology add-on payment in addition to
establishing a new DRG specific to this technology.
Response: Regarding the commenter's analysis of the net payment
effect of the proposed new DRG 525, the increase in the outlier
threshold is not related to the creation of the new DRG 525. As
discussed in detail in the Addendum, the FY 2002 outlier threshold was
set at a point that resulted in excessive outlier payments. The
commenter's analysis compared payments if these cases remained in DRGs
104 and 105 and received outlier payments in accordance with the lower
FY 2002 outlier threshold to payments under the new DRG 525 using the
proposed outlier threshold. Therefore, the commenter's analysis does
not accurately represent payments under the DRGs. The correct analysis
is to compare payments under DRGs 104 and 105 with payments under the
new DRG 525, absent outlier payments, which results in an increase in
payments of over 40 percent per case. Since cases qualify for outlier
payments on the basis of a constant fixed-dollar loss threshold and
receive payments equal to 80 percent of costs above the threshold, the
40-percent differential in payments is not affected by outlier
payments.
With regard to the commenters' indication that the payment under
the new DRG 525 is insufficient, we note that the DRG relative weights
are based on charge data for actual LVAD cases in the Medicare
discharge database, using the most recent information available (the FY
2001 MedPAR file). (Section II.C. of this final rule contains a
complete discussion of this methodology.)
With regard to the commenter's suggestion that LVADs be eligible
for add-on payments for new technology, we point out that our criteria
require that the mean charges of the cases involving a new technology
exceed a threshold of one standard deviation beyond the mean charge for
all cases in the DRG. Since DRG 525 is specific to heart assist
systems, the mean charge of the cases involving the new technology is
the same as the mean charge for all cases in the DRG. Also, this
technology does not meet our criteria to be considered new (see
discussion at section II.D. below).
Finally, with regard to the concept that the DRG payment for LVAD
should take into account disposable and
[[Page 49991]]
durable medical equipment after discharge, we point out that the
Medicare Part A inpatient hospital payment is distinct from the
Medicare Part B outpatient payments.
Comment: One commenter stated if LVAD implantation is approved for
patients who are not heart transplant patients, the payment is likely
to still be too low, as it is anticipated that these patients comprise
a generally sicker population. The commenter suggested that we direct
hospitals to bill uniformly for LVAD devices via the designated ICD-9-
CM procedure codes that will classify into DRG 525.
Response: As we noted in the proposed rule, we understand that
studies are currently underway to evaluate LVADs as permanent support
for end-stage heart failure patients. However, at this time, these
applications are only on a trial basis. Further, in the absence of
specific data demonstrating additional costs associated with expanded
uses of LVADs beyond bridge-to-transplant patients, we do not take
anticipated higher costs into account in the DRG relative weight
calculation. However, we will continue to monitor new DRG 525 as new
developments occur in the approved uses of LVAD technology to ensure
appropriate classification and payment of these cases.
With respect to the comment that we should provide further guidance
on the correct ICD-9-CM coding procedures for LVADs, as explained above
and in the proposed rule, cases with any principal diagnosis in MDC 5
reporting code 37.62, 37.63, 37.65, or 37.66 will be assigned to DRG
525 (in the absence of a transplant). Further information regarding the
use of these codes may be obtained by referring to a relevant article
from the Coding Clinic, Fourth Quarter, 1995 (pages 68 and 69).
Comment: One commenter, while approving the movement of codes
37.63, 37.65, and 37.66 to DRG 525, did not believe that cases with
code 37.62 belong in this DRG. The commenter stated that code 37.62
includes centrifugal pumps, heart assist systems that are not specified
as pulsatile, and the insertion of not otherwise specified heart assist
systems, and urged CMS to reconsider inclusion of this code in the new
DRG. The commenter stated that centrifugal pumps are more similar to
cardiac bypass procedures than to ventricular assist systems, and
inclusion of this code would likely reduce the relative weight of DRG
525 due to the lower cost of this type of technology. The commenter
recommended that code 37.62 remain in DRG 104 and 105. The commenter
was also concerned that the change would create a potential incentive
for these technologies to be used for purposes not yet approved by the
FDA.
Response: Our analysis indicates that these four codes represent
the most expensive cases in MDC 5, aside from heart transplantation in
DRG 103, which is the reason we moved them out of DRGs 104 and 105.
However, we will continue to evaluate the appropriate assignment of
cases into this new DRG, particularly if new uses for heart assist
systems are approved by the FDA, and will take the commenter's
recommendation into account when we conduct our annual MedPAR review
next year.
Comment: One commenter suggested that we develop a new heart
transplant DRG entitled ``Heart Transplant with LVAD,'' because the
costs of the LVADs have not been incorporated into the heart transplant
DRG. The commenter stated that, since a great number of LVAD cases
remain inpatients until heart transplant occurs, there is a disparity
in costs between heart transplant patients who receive LVADs during the
stay, and those who do not remain inpatients.
Response: As we pointed out above, cases in which a subsequent
heart transplant occurs during the hospitalization episodes are
currently assigned to DRG 103 (Heart Transplant) because cases
involving procedure codes 33.6 (Combined heart/lung transplant) and
37.5 (Heart transplant) are assigned to DRG 103, regardless of other
codes included on the bill. We believe these cases are appropriately
compensated in these DRGs, but we will continue to monitor this issue
in the future.
Comment: One commenter requested that we review our data to
determine if there is an incorrect mix of devices being included in the
calculation of the DRG weight. The commenter suggested that perhaps
that there is some inappropriate mixing of data, and that there are
temporary assist devices used in the intensive care unit (ICU) that are
quite distinct from those used for longer term bridge-to-transplant.
This commenter noted that these ICU devices are much less expensive.
Response: As noted in the proposed rule, average length of stay and
charge data were calculated for all cases including codes 37.62, 37.63,
37.65, and 37.66. These codes describe the implantation of heart assist
systems, which is the construct of the new DRG 525. Therefore, we
believe we have appropriately accounted for these cases in our
analysis.
Comment: One commenter expressed concern that we did not separate
payment for LVADs used in the acute care setting from LVADs used as
chronic care devices, and pointed out that the short-term indication
uses only a fraction of the resources required for a chronic or long-
term LVAD. The commenter asked us to consider two DRGs, one for acute
care devices and one for long-term care devices, that better reflect
the resource consumption of each indication.
Response: The LVAD is currently being studied as a device that
would support end-stage heart failure patients in the absence of a
heart transplant. This use is not out of the clinical trial phase and,
more importantly, has not been recognized as a Medicare covered
service. It would be premature to establish a DRG based on the
possibility that the LVAD may some day be approved for this indication
is premature.
b. Moving Diagnosis Code 398.91 (Rheumatic Heart Failure) From DRG 125
to DRG 124
DRG 124 (Circulatory Disorders Except Acute Myocardial Infarction
(AMI), with Cardiac Catheterization and Complex Diagnosis) and DRG 125
(Circulatory Disorders Except Acute Myocardial Infarction (AMI) with
Cardiac Catheterization without Complex Diagnosis) have a somewhat
complex DRG logic. In order to be assigned to DRG 124 or 125, the
patient must first have a circulatory disorder, which would be one of
the diagnoses included in MDC 5. However, these DRGs exclude acute
myocardial infarctions. Therefore, these DRGs are comprised of cases
with a diagnosis from MDC 5, excluding acute myocardial infarction, but
also with a cardiac catheterization during the stay.
DRGs 124 and 125 are then further defined by whether or not the
patient had a complex diagnosis. If the patient has a complex
diagnosis, the case is assigned to DRG 124. If the patient does not
have a complex diagnosis, the case is assigned to DRG 125. A list of
diagnoses that comprise complex diagnoses is identified within DRG 124.
These diagnoses can be listed as either a principal or secondary
diagnosis.
We have received correspondence regarding the current assignment of
diagnosis code 398.91 (Rheumatic heart failure). The correspondent
pointed out that, while other forms of heart failure are listed as
complex diagnoses under DRG 124, rheumatic heart failure is not
included as a complex diagnosis within that DRG. Currently, if a
patient with rheumatic heart failure receives a
[[Page 49992]]
cardiac catheterization, the case is assigned to DRG 125.
The correspondent had conducted a study and found that patients
with rheumatic heart failure who receive a cardiac catheterization have
lengths of stay that are significantly longer than patients with other
forms of heart failure who receive a cardiac catheterization and who
are assigned to DRG 125. The correspondent found that these patients
have lengths of stay more similar to those cases assigned to DRG 124
(which have other forms of heart failure), and recommended that
diagnosis code 398.91 be added to the list of complex diagnoses within
DRG 124.
Within our claims data, we found 439 cases of patients in DRG 125
with rheumatic heart failure that received a cardiac catheterization.
The average charges for these rheumatic heart failure cases were almost
twice as much as for other cardiac patients in DRG 125 who received a
cardiac catheterization and who did not have a diagnosis of rheumatic
heart failure. We also conferred with our medical consultants and they
agree that rheumatic heart failure with cardiac catheterization is a
complex diagnosis and should be assigned to DRG 124 along with the
other complex forms of heart failure cases involving cardiac
catheterization.
We proposed to add code 398.91 to DRG 124 as a complex diagnosis.
As a result, catheterization cases with rheumatic heart disease would
no longer be assigned to DRG 125.
Several commenters representing hospitals and medical coders
supported our proposal to classify code 398.91 as a complex diagnosis
within DRG 124, which moves these cases from DRG 125. Accordingly, we
are adopting as final the proposed change.
c. Radioactive Element Implant
In the August 1, 2001 final rule, we created DRG 517 (Percutaneous
Cardiovascular Procedure without Acute Myocardial Infarction (AMI) with
Coronary Artery Stent Implant) as a result of the overall DRG splits
based on the presence of AMI (66 FR 39839). We assigned code 92.27
(Implantation or insertion of radioactive elements) to DRG 517 because
we believed that code 92.27 would always accompany cases involving a
percutaneous cardiovascular procedure and intravascular radiation
treatment.
We have since determined that code 92.27 can also be present as a
stand-alone code in other types of cases. When cases with an MDC
principal diagnosis and code 92.27 do not meet the criteria for
assignment to DRG 517 because there is no indication of a percutaneous
cardiovascular procedure, they are currently assigned to DRG 468
(Extensive O.R. Procedure Unrelated to Principal Diagnosis). Because
DRG 468 is reserved for cases in which the O.R. procedure is unrelated
to the principal diagnosis, we proposed to assign cases with code 92.27
that do not meet the criteria for assignment to DRG 517, but that would
otherwise be assigned to MDC 5, to DRG 120 (Other Circulatory System
O.R. Procedures).
Comment: One commenter supported the proposal. Another commenter
was unclear why code 92.27 is designated as an operating room procedure
and would be assigned to DRG 120 (Other Circulatory System O.R.
Procedures) if reported as a stand-alone procedure. This commenter
stated that it is not aware of instances when it is appropriate to
report this code without a concomitant cardiovascular procedure, and
believed that another procedure, such as angioplasty, is needed in
order to insert the radioactive implants. The commenter believed that
cases in which code 92.27 was reported by itself for treatment of a
cardiovascular disorder may represent incorrect coding.
Response: We proposed this modification to MDC 5 (Diseases and
Disorders of the Circulatory System), concerning the assignment of code
92.27 (when reported as the only procedure) to DRG 120 in part, as a
result of a telephone call from a member of the general public. The
inquirer questioned the assignment of code 92.27 without angioplasty
and with a principal diagnosis in MDC 5 to DRG 468 (Extensive O.R.
Procedure Unrelated to Principal Diagnosis). When we created DRG 517 in
the FY 2002 final rule, we also did not consider that a radioactive
implant would be inserted without angioplasty as a delivery technique.
We were advised by our medical advisors that it could occur, but it was
unlikely. Code 92.27 has not yet been reported in our MedPAR data in
MDC 5 as a stand-alone procedure. However, to address the possibility
that it might be reported alone, we are taking this opportunity to
assign code 92.27 to DRG 120 in MDC 5, consistent with the principal
diagnosis, instead of a (higher-weighted) DRG in which the principal
diagnosis and the procedure do not match (DRG 468).
With regard to the commenter's question about the designation of
code 92.27 as an operating room procedure, we note that code 92.27 has
always been considered by the Medicare GROUPER to be a procedure code
affecting DRG assignment. It can be found in 12 MDCs and 20 DRGs in
GROUPER version 19.0.
Comment: One commenter commended us for responding to its
previously submitted comments concerning inadequate DRG payment for GP
IIb-IIIa platelet inhibitors, but noted that its request from last year
was not mentioned in our proposed rule in our review of several
cardiovascular DRGs for both interventional and medical cases that
receive GP IIb-IIIa inhibitors. The commenter stated that without a
review of the presence of code 99.20 (Injection or infusion of platelet
inhibitor) in DRGs 124 (Circulatory Disorders Except AMI, with Cardiac
Catheterization and Complex Diagnosis) and 140 (Angina Pectoris), CMS
cannot be certain that a significant number of cases are not
significantly underpaid.
Response: We regret this omission in the proposed rule. We did, in
fact review both DRGs 124 and 140 for the presence of code 99.20. In
DRG 124, there were a total of 95,452 cases without code 99.20. These
cases had an average length of stay of 4.4 days and average charges of
$17,594. There were 1,120 cases in DRG 124 with code 99.20.
These cases had an average length of stay of 3.5 days, and average
charges of $17,256. In DRG 140, there were a total of 45,886 cases
without code 99.20, with an average length of stay of 2.5 days and
average charges of $6,204. There were 126 cases in DRG 140 with code
99.20, with an average length of stay of 2.3 days, and average charges
of $8,675.
The data do not demonstrate a level of disparity in days and
charges that would warrant an adjustment to these DRGs based on the
presence of code 99.20. Therefore, we are not making any changes
concerning the status of code 99.20 in these DRGs for FY 2003.
4. MDC 10 (Endocrine, Nutritional, and Metabolic Diseases and
Disorders)
Currently, when ICD-9-CM code 277.00 (Cystic Fibrosis without
mention of meconium ileus) is reported as the principal diagnosis, it
is assigned to the following DRG series in MDC 10: DRG 296 (Nutritional
and Metabolic Disease, Age >17 with CC); DRG 297 (Nutritional and
Metabolic Disease, Age >17 without CC); and DRG 298 (Nutritional and
Metabolic Disease, Age 0-17).
As part of our annual review of DRG assignments and based on
correspondence that we have received, we examined cases involving code
277.00 as a principal diagnosis in DRGs 296, 297, and 298. Our analysis
of the average charges for these cases indicates that resource
utilization for these cases is quite different from resource
utilization for other cases in these three DRGs. We believe that this
difference in resource utilization is due to the fact it
[[Page 49993]]
is not uncommon for cystic fibrosis patients to be admitted with
pulmonary complications. Our findings on the number of cases and the
average charges in the three DRGs when code 277.00 is assigned as the
principal diagnosis, and our findings for all cases in the three DRGs,
are indicated in the charts below.
Cases in DRG, 296, 297, and 298 With Code 277.00 as the Principal
Diagnosis
------------------------------------------------------------------------
Number of Average
DRG and description cases charges
------------------------------------------------------------------------
DRG 296 (Nutritional & Metabolic Disease Age >17 271 $34,111
with CC).........................................
DRG 297 (Nutritional & Metabolic Disease Age >17 133 21,998
without CC)......................................
DRG 298 (Nutritional & Metabolic Disease Age 0-17) 0 .........
------------------------------------------------------------------------
All Cases in DRG 296, 297, 298
------------------------------------------------------------------------
Number of Average
DRG 298 description cases charges
------------------------------------------------------------------------
DRG 296 (Nutritional & Metabolic Disease Age >17 169,768 $10,480
with CC).........................................
DRG 297 (Nutritional & Metabolic Disease Age >17 31,560 6,190
without CC)......................................
DRG 298 (Nutritional & Metabolic Disease Age 0- 17 8,603
;17).............................................
------------------------------------------------------------------------
Based on the results of our analysis, we proposed that three new
cystic fibrosis principal diagnosis codes be assigned to specific DRGs
and MDCs, and that other changes be made to DRG and MDC assignments of
existing cystic fibrosis codes, as discussed below.
We proposed to use the following three new principal diagnosis
codes to further inform DRG assignment of these patients:
277.02 (Cystic fibrosis with pulmonary manifestations)
277.03 (Cystic fibrosis with gastrointestinal
manifestations)
277.09 (Cystic fibrosis with other manifestations)
We proposed that existing code 277.01 (Cystic fibrosis with mention
of meconium ileus) would continue to be assigned to DRG 387
(Prematurity with Major Problems) and DRG 389 (Full Term Neonate with
Major Problems) in MDC 15 (Newborns and Other Neonates with Conditions
Originating in the Perinatal Period), since it is a newborn diagnosis
code.
Because the new code 277.02 would identify those patients with
cystic fibrosis who have pulmonary manifestations, we proposed to
assign cases in which this is the principal diagnosis to DRG 79
(Respiratory Infection and Inflammations Age >17 with CC), DRG 80
(Respiratory Infections and Inflammations Age >17 without CC), or DRG
81 (Respiratory Infections and Inflammations Age 0-17) in MDC 4
(Diseases and Disorders of the Respiratory System).
We proposed that the new code 277.03 would be assigned to DRG 188
(Other Digestive System Diagnoses Age >17 with CC), DRG 189 (Other
Digestive System Diagnoses Age >17 without CC), and DRG 190 (Other
Digestive System Diagnoses Age 0-17) in MDC 6 (Diseases and Disorders
of the Digestive System), because of its specific relationship to the
digestive system.
Since the new code 277.09 could involve a number of manifestations
(excluding pulmonary and gastrointestinal), we proposed to assign this
new code to DRGs 296, 297, and 298 in MDC 10, where we are retaining
the current assignment of existing code 277.00.
The following chart summarizes our proposed DRG and MDC assignments
for new and existing cystic fibrosis principal diagnosis codes:
------------------------------------------------------------------------
MDC DRG
Principal diagnosis code and description assignment assignments
------------------------------------------------------------------------
Existing 277.00 (Cystic fibrosis without 10 296, 297,
mention of meconium ileus)................... 298
Existing 277.01 (Cystic fibrosis with mention 15 387, 389
of meconium ileus)...........................
New 277.02 (Cystic fibrosis with pulmonary 4 79, 80, 81
manifestations)..............................
New 277.03 (Cystic fibrosis with 6 188, 189,
gastrointestinal manifestations)............. 190
New 277.09 (Cystic fibrosis with other 10 296, 297,
manifestations).............................. 298
------------------------------------------------------------------------
Several commenters representing hospitals, medical coders, and
specialty groups supported the proposed DRG assignments relating to
cystic fibrosis discussed above. Therefore, we are adopting the
proposed DRG assignments as final, effective for discharges occurring
on or after October 1, 2002.
5. MDC 11 (Diseases and Disorders of the Kidney and Urinary Tract)
a. Insertion of Totally Implantable Vascular Access Device (VAD)
In the August 1, 2001 final rule (66 FR 39844), we discussed our
review of the DRG assignment of code 86.07 (Insertion of totally
implantable vascular access device (VAD)). Code 86.07 is considered a
nonoperative procedure when it occurs in MDC 11. In other words, the
Medicare GROUPER software program does not recognize code 86.07 as a
procedure code when reported with any principal diagnosis in this MDC.
Therefore, patients in renal (kidney) failure requiring implantation of
this device for dialysis are grouped to medical DRG 316 (Renal
Failure). We examined whether implantation of this device should be
removed from DRG 316 and placed into surgical DRG 315 (Other Kidney and
Urinary Tract O.R. Procedures).
Implantation of a VAD into the chest wall and blood vessels of a
patient's upper body allows access to a patient's vessels via an
implanted valve and cannula. Two devices are implanted during one
operative session. One system is implanted arterially (the ``draw''),
while the other is implanted venous (the ``return''). Typically, the
VAD allows access to the patient's blood for hemodialysis purposes when
other sites in the body have been exhausted. The device is usually
inserted in the outpatient setting. Operative time is approximately 1
to 1.5 hours.
In the FY 2002 final rule (66 FR 39844-39845), we pointed out that
cases where the VAD was inserted as an inpatient procedure often
involved complications, leading to higher average charges and longer
lengths of stay for those cases. Therefore, we indicated that we would
not assign code 86.07 to DRG 315 at that time, but we would consider
other alternative adjustments to DRGs 315 and 316.
For FY 2003, we explored whether DRG 315 should be divided based on
the presence or absence of CCs. However, during our consideration of
this alternative, we discovered that DRG 315 does not lend itself to a
CC split due to the high occurrence of cases in this DRG that already
have complications identified on the CC list. Therefore, we
[[Page 49994]]
reexamined cases in DRGs 315 and 316 in the FY 2001 MedPAR file. The
results are reflected in the chart below:
------------------------------------------------------------------------
Without code
With code 86.07 86.07
------------------------------------------------------------------------
DRG 315 (Surgical):
Number of Cases.................. 354.............. 21,089
Average Length of Stay........... 12.6 days........ 6.7 days
Average Charges.................. $47,251.......... $25,622
DRG 316 (Medical):
Number of Cases.................. 887.............. 76,676
Average Length of Stay........... 10.3............. 6.6 days
Average Charges.................. $31,904.......... $16,934
------------------------------------------------------------------------
These results are similar to the findings included in the FY 2002
final rule that were based on data from the FY 2000 MedPAR file (66 FR
39845).
We found that the average length of stay in DRG 315 for patients
not receiving the VAD is 6.7 days, while those patients who received
the VAD had an average length of stay of 12.6 days. We found the
average charges in DRG 315 for patients not receiving the VAD were
approximately $25,622, while the average charges for those patients who
received the VAD were $47,251.
We found that the cases receiving the VAD as an inpatient procedure
are significantly more costly than other cases in DRG 316. Therefore,
we proposed to designate code 86.07 as an O.R. procedure under MDC 11.
Specifically, code 86.07 will be recognized as an O.R. procedure
code in MDC 11 and assigned to DRG 315 when combined with the following
principal diagnosis codes from DRG 316:
403.01, Malignant hypertensive renal disease with renal
failure
403.11, Benign hypertensive renal disease with renal
failure
403.91, Unspecified hypertensive renal disease with renal
failure
404.02, Malignant hypertensive heart and renal disease
with renal failure
404.12, Malignant hypertensive heart and renal disease
with renal failure
404.92, Unspecified hypertensive heart and renal disease
with renal failure
584.5, Acute renal failure with lesion of tubular necrosis
584.6, Acute renal failure with lesion of renal cortical
necrosis
584.7, Acute renal failure with lesion of renal medullary
(papillary) necrosis
584.8, Acute renal failure with other specified
pathological lesion in kidney
584.9, Acute renal failure, unspecified
585, Chronic renal failure
586, Renal failure, unspecified
788.5, Oliguria and anuria
958.5, Traumatic anuria
We received two comments in support of this proposal. Therefore, we
are adopting as final the proposed redesignation of code 87.06 as an
O.R. procedure under MDC 11 and its assignment to DRG 315 when combined
with the principal diagnosis codes from DRG 316 listed above.
b. Bladder Reconstruction
We received correspondence regarding the current classification of
procedure code 57.87 (Reconstruction of urinary bladder) as a minor
bladder procedure and the assignment of the code under DRG 308 (Minor
Bladder Procedures with CC) and DRG 309 (Minor Bladder Procedures
without CC). The correspondent believed that bladder reconstruction is
not a minor procedure, submitted individual hospital charges to support
this contention, and recommended that the code be classified as a major
procedure and assigned to a higher weighted DRG.
Our clinical advisors indicated that reconstruction of the bladder
is a more extensive procedure than the other minor bladder procedures
in DRGs 308 and 309. They agree that the bladder reconstruction
procedure is as complex as the procedures under code 57.79 (Total
cystectomy) and the other major bladder procedures in DRGs 303 through
305.
As indicated in the chart below, we found that the average charges
for bladder reconstruction are significantly higher than the average
charges for other minor procedures within DRGs 308 and 309:
------------------------------------------------------------------------
Without
With code code
57.87 57.87
------------------------------------------------------------------------
DRG 308 (Minor Bladder Procedure with CC):
Number of Cases................................. 64 5,066
Average Charges................................. $36,560 $19,923
DRG 309 (Minor Bladder Procedures without CC):
Number of Cases................................. 25 3,021
Average Charges................................. $23,390 $11,200
------------------------------------------------------------------------
We found that procedure code 57.87 may be more appropriately placed
in DRG 303 (Kidney, Ureter and Major Bladder Procedures for Neoplasm),
304 (Kidney, Ureter and Major Bladder Procedures for Nonneoplasm with
CC), and DRG 305 (Kidney, Ureter and Major Bladder Procedures for
Nonneoplasm without CC), based on average charges for procedures in
these three DRGS as indicated in the following chart:
------------------------------------------------------------------------
Number of Average
DRG cases charges
------------------------------------------------------------------------
303 (Kidney, Ureter and Major Bladder Procedures 14,116 $30,691
for Neoplasm)....................................
304 (Kidney, Ureter and Major Bladder Procedures 8,060 30,577
for Nonneoplasm with CC).........................
305 (Kidney, Ureter and Major Bladder Procedures 2,029 15,492
for Nonneoplasm without CC)......................
------------------------------------------------------------------------
Based on the results of our analysis and the advice of our medical
consultants discussed above, we proposed to classify code 57.87 as a
major bladder procedure and to assign it to DRGs 303, 304, and 305.
We received several comments from associations representing
hospitals and medical coders in support of the proposed
reclassification of bladder reconstruction surgery from a minor bladder
to a major bladder procedure. Accordingly, we are adopting as final the
proposed reclassification, effective for discharges occurring on or
after October 1, 2002.
6. MDC 15 (Newborns and Other Neonates With Conditions Originating in
the Perinatal Period)
The primary focus of updates to the Medicare DRG classification
system is for changes relating to the Medicare patient population, not
the pediatric or neonatal patient populations. However, the Medicare
DRGs are sometimes used to classify other patient populations. Over the
years, we have received comments about aspects of the Medicare newborn
DRGs that appear problematic, and we have responded to these on an
individual basis. Some correspondents have requested that we take a
closer overall look at the DRGs within MDC 15.
Because of our limited data and experience with newborn cases under
Medicare, we contacted the National Association of Children's Hospitals
and Related Institutions (NACHRI), along with our own medical advisors,
to obtain proposals for possible revisions of the existing DRG
categories in MDC 15. The focus of the requested proposals was to
refine category definitions within the framework of the existing seven
broadly defined neonatal DRGs. The proposals also were to take
advantage of the new, more specific neonatal
[[Page 49995]]
diagnosis codes to be adopted, effective October 1, 2002, to assist
with refinements to the existing DRG category definitions.
In the May 9, 2002 proposed rule, we proposed to make extensive
changes to multiple DRG categories in MDC 15. A complete description of
these proposed changes appears in the May 9, 2002 Federal Register at
67 FR 31412 through 31414. In summary, the proposed changes involved
removing a number of congenital anomalies from MDC 15 and assigning
them to other MDCs. NACHRI advised us that these congenital anomalies
would be better classified in the MDC for the body system affected. We
also proposed revising DRG 386 (Extreme Immaturity or Respiratory
Distress Syndrome, Neonate), to refine the assignment of newborn cases
diagnosed with extreme immaturity. We proposed major revisions for DRG
387 (Prematurity With Major Problems) to redefine the codes for
prematurity and the codes that define a ``major problem''. We proposed
modifications of DRG 388 (Prematurity Without Problems), which involved
changes in the classification of prematurity for newborns. We proposed
revising the definition of a ``major problem'' for DRG 389 (Full Term
Neonate With Major Problem) as well. By changing the definition of
``major problem'' in the other DRGs, our proposal would have increased
the number of cases being assigned to DRG 390. Finally, we proposed to
expand the number of minor problem newborn diagnoses included in DRG
391 (Normal Newborn). All of these extensive changes would have greatly
shifted the DRG assignments for newborns, involving hundreds of ICD-9-
CM codes.
Comment: One commenter, a national hospital association, opposed at
this time the reassignment of a large number of diagnosis codes from
the ``major problems'' list in DRGs 387 and 389 to DRG 391. The
commenter agreed that refinements to MDC 15 would be beneficial to
allow more accurate grouping of neonatal admissions but recommended
that, prior to making extensive changes, CMS work with NACHRI, the
commenter, and other interested parties to develop a separate DRG that
would group neonates with minor problems that are not otherwise
recognized currently or under the proposed changes.
Other commenters, representing hospitals, medical groups, and
medical coders, offered a similar comment. One commenter stated that
since NACHRI represents specialty hospitals, NACHRI's data may not
fully represent the entire newborn population. Other commenters
recommended that the proposed revisions to DRGs 387 through 391 not be
implemented until input is obtained from representatives of general
community hospitals that treat newborns. The commenters stated that
newborn DRG data from general community hospitals may vary
significantly from NACHRI's data and should be taken into consideration
prior to implementing the proposed revisions to DRGs 387 through 391.
One commenter also stated that, while it supported the proposed
removal of the listed codes for congenital anomalies, periventricular
leukomalacia, and nonspecific abnormal findings on chromosomal analysis
from MDC 15, the commenter was confused as to the rationale for the
proposed DRG assignments for the codes for congenital anomalies. (We
proposed that code 759.4, Conjoined twins, be classified to DRGs 188,
189, and 190.) In addition, several commenters stated that these DRGs
are for digestive system diagnoses and conjoined twins may or may not
have medical conditions involving the digestive system. The commenters
stated that the rationale for the selection of these DRGs was not
described in the proposed rule.
One commenter stated that additional study of newborn DRG
classifications was needed. This commenter recommended that when
cardiac surgery procedures are performed on neonates born in the
hospital, the case be assigned to the applicable cardiac surgery DRG
instead of one of the neonatal DRGs. The commenter pointed out that
when a baby is born in a hospital and surgery is performed on a
congenital heart condition during the same stay, the newborn is
assigned to DRG 389 where the relative weight is approximately one-half
the weight of the applicable cardiac surgery DRG. When the newborn is
delivered at another facility and then transferred for surgery, the
newborn is assigned to the appropriate cardiac surgery DRG. The
commenter recommended that this issue be considered when MDC 15 is
revised.
Response: The commenters raised a number of important issues. We
solicited the assistance of NACHRI to develop refinements to MDC 15
because, while MDC 15 is part of the Medicare DRG system, the types of
patients in classified to DRGs in MDC 15 are not a significant part of
the Medicare program. It was our goal to develop refinements that could
be useful for non-Medicare purposes. Given the extensive nature of the
proposed revisions, we concur that additional study is necessary.
Therefore, we are not implementing as final any of the proposed
revisions to MDC 15. We are maintaining the existing structure of DRGs
385 through 390 within MDC 15 (Version 19.0) for FY 2003. Nonetheless
we believe that changes in this area may be worthwhile, and we would be
interested in considering a set of appropriate changes that might be
broadly acceptable to the affected community. If we receive such
suggested changes by December 1, 2002, we would consider it as part of
our annual review and updates to the DRG system for FY 2004. Any
proposals could be included in the notice of proposed rulemaking for FY
2004, which is scheduled to be published in early Spring 2003. In the
meantime, as stated earlier, we are not making any of the proposed
changes to MDC 15 for FY 2003.
Comment: One commenter supported the creation of the new ICD-9-CM
codes that differentiate between extreme immaturity or gestational age,
or both.
Response: As explained in the proposed rule, we are adding the new
ICD-9-CM codes for newborns that were approved in 2002 for use by acute
care hospitals in FY 2003. These codes are listed in Table 6A of this
final rule. The codes are assigned to the existing DRGs as indicated in
Table 6A under the column ``DRG'' (codes 747.83 through 779.89). Tables
6A through 6F in this final rule also reflect the assignment of these
new codes.
Comment: One commenter pointed out several typographical errors and
omissions in the proposed changes for MDC 15 in the proposed rule.
Response: The commenter is correct that there were typographical
errors in the proposed rule. However, since we are not finalizing the
proposed changes, we are not addressing the errors specifically in this
final rule. We will provide clarifications of these errors to those
interested parties who participating in future efforts to refine MDC
15.
7. MDC 23 (Factors Influencing Health Status and Other Contacts With
Health Services)
In the August 1, 2001 final rule, we included in Table 6A-New
Diagnosis Codes (66 FR 40064) code V10.53 (History of malignancy, renal
pelvis), which was approved by the ICD-9-CM Coordination and
Maintenance Committee as a new code effective October 1, 2001. We
assigned the code to DRG 411 (History of Malignancy without Endoscopy)
and DRG 412 (History of Malignancy with Endoscopy).
We received correspondence that suggested that we should have also
[[Page 49996]]
assigned code V10.53 to DRG 465 (Aftercare with History of Malignancy
as Secondary Diagnosis). The correspondent pointed out that all other
codes for a history of malignancy are included in DRG 465.
We agree that code V10.53 should be included in the list of the
history of malignancy codes within DRG 465.
We received several comments in support of this change.
Accordingly, in this final rule we are adding code V10.53 to the list
of secondary diagnosis in DRG 465, effective for discharges occurring
on or after October 1, 2002.
8. Pre-MDC: Tracheostomy
DRG 483 (Tracheostomy Except for Face, Mouth and Neck Diagnoses) is
used to classify patients who require long-term mechanical ventilation.
Mechanical ventilation can be administered through an endotracheal tube
for a limited period of time. When an endotracheal tube is used for an
extended period of time (beyond 7 to 10 days), the patient runs a high
risk of permanent damage to the trachea. In order to maintain a patient
on mechanical ventilation for a longer period of time, the endotracheal
tube is removed and a tracheostomy is performed. The mechanical
ventilation is then administered through the tracheostomy.
A tracheostomy also may be performed on patients for therapeutic
purposes unrelated to the administration of mechanical ventilation.
Patients with certain face, mouth, and neck disease may have a
tracheostomy performed as part of the treatment for the face, mouth, or
neck disease. These patients are assigned to DRG 482 (Tracheostomy for
Face, Mouth and Neck Diagnoses).
Therefore, patients assigned to DRGs 482 and 483 are differentiated
based on the principal diagnosis of the patient. At certain times,
selecting the appropriate principal diagnosis for the patients
receiving tracheostomies for assignment to a DRG can be difficult. The
overall number of tracheostomy patients increased by 13 percent between
1994 and 1999. During the same period, the percent of tracheostomy
patients in DRG 483 (patients without certain face, mouth, or neck
diseases) versus DRG 482 increased from 83.6 percent to 87.6 percent.
The payment weight for DRG 483 is more than four times greater than
the DRG 482 payment weight, and this has led to concerns about coding
compliance. Specifically, the fact that cases are assigned to DRG 483
based on the absence of a code indicating face, mouth, or neck
diagnosis creates an incentive to omit codes indicating these
diagnoses.
To address issues of possible coding noncompliance, we proposed to
modify DRGs 482 and 483 to differentiate the assignment to either DRG
based on the presence or absence of continuous mechanical ventilation
that lasts more than 96 hours (code 96.72). This modification would
ensure that the patients assigned to DRG 483 are patients who had the
tracheostomy for long-term mechanical ventilation. Based on an
examination of claims data from the FY 2001 MedPAR file, we found that
many patients assigned to DRG 483 do not have the code 96.72 for
continuous mechanical ventilation for 96 consecutive hours or more
recorded. In part, this is the result of the limited number of
procedure codes (six) that can be submitted on the current uniform
hospital claim form, and the fact that code 96.72 does not currently
affect the DRG assignment.
We proposed to change the definition of DRG 483 so that patients
who have a tracheostomy and continuous mechanical ventilation greater
than 96 hours (code 96.72) would be assigned to DRG 483. We would
continue to assign to DRG 483 those patients who have a principal
diagnosis unrelated to disease of the face, mouth, or neck and a
tracheostomy. We proposed to retitle DRG 483 ``Tracheostomy/Mechanical
Ventilation 96+ Hours Except Face, Mouth, and Neck Diagnosis.''
In the proposed rule, we indicated that we would give future
consideration to modifying DRGs 482 and DRG 483 based on the presence
of code 96.72, and specifically invited comments on this area.
Comment: Several commenters representing hospital associations and
medical groups supported the proposed modification to DRG 483. Some
commenters strongly supported using code 96.72 as a determining factor
for assigning ventilator patients to DRG 483. Another commenter
indicated that the proposal was a more accurate means of identifying
high-cost ventilator patients.
One commenter representing medical coders opposed the proposed
modification. The commenter expressed concern that there were no
supporting data to justify the revision. The commenter pointed out that
it was not clear to which DRG tracheostomy patients with mechanical
ventilation of less than 96 hours and with out a face, neck, or mouth
diagnosis would be classified, since no modification to DRG 482 was
proposed. The commenter did note that CMS was encouraging the reporting
of code 96.72, but believed that this might be a problem when a number
of other significant operative procedures are performed, given the
limited spaces available on the claim form to report ICD-9-CM procedure
codes.
Response: The proposed change was a first attempt to refine DRGs
482 and 483 so that those patients who receive long-term (> 96 hours)
mechanical ventilation are separated from those patients who receive
mechanical ventilation of less than 96 hours. The proposed change to
DRG 483 was partially in response to concern that hospitals could omit
diagnosis codes indicating face, mouth, or neck diagnosis in order to
have cases assigned to DRG 483 rather than the much lower paying DRG
482. It also was an attempt to improve the classification of patients
on mechanical ventilation by identifying those who receive long-term
use of a ventilator. By making the GROUPER recognize long-term
mechanical ventilation and assigning those patients to the higher
weighted DRG 483, we hoped that hospitals would be more aware of the
importance of reporting code 96.72 when, in fact, patients had been on
the ventilator for greater than 96 hours. Therefore, hospitals would
appropriately increase the reporting of this code. This reporting would
allow us to continue to refine DRGs 482 and 483 to better reflect the
resource utilization of these cases.
We agree with the commenter that hospitals frequently are faced
with cases where more than six procedures are performed during the
inpatient stay and that there are limited spaces available on the
claims form for reporting procedure codes. The proposed change
encourages hospitals to begin to report code 96.72, since it will
effect DRG assignment.
The commenter was correct; we were not completely clear in the
proposed rule about the effect that the addition of code 96.72 would
have on DRG 482. The change will have an impact on DRG 482. All cases
involving a tracheostomy and a diagnosis of face, mouth, and neck
diagnosis that also have been on continuous mechanical ventilation for
greater than 96 hours (code 96.72) will be moved out of DRG 482 and
into DRG 483. The effect is that the expensive, long-term mechanical
ventilation cases will be moved out of DRG 482 and into the higher-
weighted DRG 483. As mentioned earlier, we did not propose any DRG
modification involving patients who receive a tracheostomy, have
mechanical ventilation of less than 96 hours, and do not have a face,
neck, or mouth diagnosis. These cases will continue to be assigned to
DRG 483.
[[Page 49997]]
Should future data indicate a need for further refinement of DRGs 482
and 483, we would propose these changes at that time. The public would
be given an opportunity to comment on these proposals through the
normal notice-and-comment rulemaking process.
In this final rule, we are adopting as final the proposed change in
the definition of DRG 483 and the proposed change to add code 96.72 to
DRG 483. To further clarify this change, we are changing the title of
DRG 483 to ``Tracheostomy with Mechanical Ventilation 96 + Hours or
Principal Diagnosis Except Face, Mouth, and Neck.''
9. Medicare Code Editor (MCE) Change
As explained under section II.B.1. of this preamble, the MCE is a
software program that detects and reports errors in the coding of
Medicare claims data.
The MCE includes an edit for ``nonspecific principal diagnosis''
that identifies a group of codes that are valid according to the ICD-9-
CM coding scheme, but are not as specific as the coding scheme permits.
The fiscal intermediaries use cases identified in this edit for
educational purposes for hospitals only. That is, when a hospital
reaches a specific threshold of cases (usually 25) in this edit, the
fiscal intermediary will contact the hospital and educate it on how to
code diagnoses using more specific codes in the ICD-9-CM coding scheme.
Code 436 (Acute, but ill-defined, cerebrovascular disease) is one
of the codes included in the groups of codes identified in the
nonspecific principal diagnosis edit, and is widely used in smaller
hospitals where testing mechanisms are not available or have not been
utilized to more specifically identify the location and condition of
cerebral and precerebral vessels. Because of the frequent use of code
436 among smaller hospitals, we proposed to remove the code from the
nonspecific principal diagnosis edit in the MCE. We address the use of
code 436 in section II.B.3. of this final rule under the discussion of
MDC 5 changes with regard to the remodeling of DRGs 14 and 15.
We received two comments in support of this proposal. However, one
of the commenters noted that code 436 is not just limited to use in
smaller hospitals, as we stated in the proposed rule. We acknowledge
the commenters remarks that code 436 is widely used in hospitals of all
sizes and is not exclusively used in smaller hospitals. However, our
rationale for removing code 436 from the MCE because it is frequently
used, still holds. Accordingly, we are adopting as final the proposed
removal of code 436 from the MCE ``nonspecific principal diagnisis''
edit, effective with discharges occurring on or after October 1, 2002.
10. Surgical Hierarchies
Some inpatient stays entail multiple surgical procedures, each one
of which, occurring by itself, could result in assignment of the case
to a different DRG within the MDC to which the principal diagnosis is
assigned. Therefore, it is necessary to have a decision rule within the
GROUPER by which these cases are assigned to a single DRG. The surgical
hierarchy, an ordering of surgical classes from most resource-intensive
to least resource-intensive, performs that function. Its application
ensures that cases involving multiple surgical procedures are assigned
to the DRG associated with the most resource-intensive surgical class.
Because the relative resource intensity of surgical classes can
shift as a function of DRG reclassification and recalibrations, we
reviewed the surgical hierarchy of each MDC, as we have for previous
reclassifications and recalibrations, to determine if the ordering of
classes coincides with the intensity of resource utilization.
A surgical class can be composed of one or more DRGs. For example,
in MDC 11, the surgical class ``kidney transplant'' consists of a
single DRG (DRG 302) and the class ``kidney, ureter and major bladder
procedures'' consists of three DRGs (DRGs 303, 304, and 305).
Consequently, in many cases, the surgical hierarchy has an impact on
more than one DRG. The methodology for determining the most resource-
intensive surgical class involves weighting the average resources for
each DRG by frequency to determine the weighted average resources for
each surgical class. For example, assume surgical class A includes DRGs
1 and 2 and surgical class B includes DRGs 3, 4, and 5. Assume also
that the average charge of DRG 1 is higher than that of DRG 3, but the
average charges of DRGs 4 and 5 are higher than the average charge of
DRG 2. To determine whether surgical class A should be higher or lower
than surgical class B in the surgical hierarchy, we would weight the
average charge of each DRG in the class by frequency (that is, by the
number of cases in the DRG) to determine average resource consumption
for the surgical class. The surgical classes would then be ordered from
the class with the highest average resource utilization to that with
the lowest, with the exception of ``other O.R. procedures'' as
discussed below.
This methodology may occasionally result in assignment of a case
involving multiple procedures to the lower-weighted DRG (in the
highest, most resource-intensive surgical class) of the available
alternatives. However, given that the logic underlying the surgical
hierarchy provides that the GROUPER searches for the procedure in the
most resource-intensive surgical class, this result is unavoidable.
We note that, notwithstanding the foregoing discussion, there are a
few instances when a surgical class with a lower average charge is
ordered above a surgical class with a higher average charge. For
example, the ``other O.R. procedures'' surgical class is uniformly
ordered last in the surgical hierarchy of each MDC in which it occurs,
regardless of the fact that the average charge for the DRG or DRGs in
that surgical class may be higher than that for other surgical classes
in the MDC. The ``other O.R. procedures'' class is a group of
procedures that are only infrequently related to the diagnoses in the
MDC but are still occasionally performed on patients in the MDC with
these diagnoses. Therefore, these procedures should only be considered
if no other procedure more closely related to the diagnoses in the MDC
has been performed.
A second example occurs when the difference between the average
charges for two surgical classes is very small. We have found that
small differences generally do not warrant reordering of the hierarchy
since, as a result of the hierarchy change, the average charges are
likely to shift such that the higher-ordered surgical class has a lower
average charge than the class ordered below it.
In the May 9, 2002, we proposed to revise the surgical hierarchy
for the pre-MDC DRGs and for MDC 5 (Diseases and Disorders of the
Circulatory System) as follows:
In the pre-MDC DRGs, we proposed to reorder DRG 495 (Lung
Transplant) above DRG 512 (Simultaneous Pancreas/Kidney Transplant).
In MDC 5, we proposed to reorder DRG 525 (Heart Assist
System Implant) above DRGs 104 and 105 (Cardiac Valve and Other Major
Cardiothoracic Procedures with and without Cardiac Catheterization,
respectively).
In the proposed rule, we were unable to test the effects of the
proposed revisions to the surgical hierarchy and to reflect these
changes in the proposed relative weights because the revised GROUPER
software was unavailable at the time the proposed rule was completed.
Rather, we simulated most major classification changes to
[[Page 49998]]
approximate the placement of cases under the proposed reclassification,
and then determined the average charge for each DRG. These average
charges served as our best estimate of relative resources used for each
surgical class. We have now tested the proposed surgical hierarchy
changes after the revised GROUPER was received and are reflecting the
final changes in the DRG relative weights in this final rule. Further,
as discussed in section II.C. of this preamble, the final recalibrated
weights are somewhat different from the proposed weights because they
were based on more complete data.
Based on a test of the proposed revisions using the April 2002
update of the FY 2001 MedPAR file and the revised GROUPER software, we
have found that the revisions are still supported by the data, and no
additional changes are indicated except those discussed below
pertaining to the implementation of two new cardiac drug-eluting stent
DRGs. (For a complete description of this change, see the discussion
under ``Other Issues'' in section II.B.14. of this preamble.) Due to
the implementation of two new DRGs pertaining to cardiac drug-eluting
stents, DRGs 526 (Percutaneous Cardiovascular Procedure with Drug-
Eluting Stent with AMI) and 527 (Percutaneous Cardiovascular Procedure
with Drug-Eluting Stent without AMI), we also are reordering the
following DRGs in MDC 5: DRGs 115 (Permanent Cardiac Pacemaker Implant
with AMI, Heart Failure or Stroke, or AICD Lead or and Generator
Procedure) and 116 (Other Permanent Cardiac Pacemaker Implant) above
DRG 526; DRG 526 above DRG 516 (Percutaneous Cardiovascular Procedures
with Acute Myocardial Infarction (AMI)); DRG 516 above DRG 527; DRG 527
above DRG 517 (Percutaneous Cardiovascular Procedure without AMI, with
Coronary Artery Stent Implant); DRG 517 above DRG 518 (Percutaneous
Cardiovascular Procedures without AMI, without Coronary Artery Stent
Implant); and DRG 518 above DRGs 478 (Other Vascular Procedures with
CC) and 479 (Other Vascular Procedures without CC).
11. Refinement of Complications and Comorbidities (CC) List
In the September 1, 1987 final notice (52 FR 33143) concerning
changes to the DRG classification system, we modified the GROUPER logic
so that certain diagnoses included on the standard list of CCs would
not be considered valid CCs in combination with a particular principal
diagnosis. Thus, we created the CC Exclusions List. We made these
changes for the following reasons: (1) To preclude coding of CCs for
closely related conditions; (2) to preclude duplicative coding or
inconsistent coding from being treated as CCs; and (3) to ensure that
cases are appropriately classified between the complicated and
uncomplicated DRGs in a pair. We developed this standard list of
diagnoses using physician panels to include those diagnoses that, when
present as a secondary condition, would be considered a substantial
complication or comorbidity. In previous years, we have made changes to
the standard list of CCs, either by adding new CCs or deleting CCs
already on the list. In the May 9, 2002 proposed rule, we did not
propose to delete any of the diagnosis codes on the CC list.
In the May 19, 1987 proposed notice (52 FR 18877) concerning
changes to the DRG classification system, we explained that the
excluded secondary diagnoses were established using the following five
principles:
Chronic and acute manifestations of the same condition
should not be considered CCs for one another (as subsequently corrected
in the September 1, 1987 final notice (52 FR 33154)).
Specific and nonspecific (that is, not otherwise specified
(NOS)) diagnosis codes for the same condition should not be considered
CCs for one another.
Codes for the same condition that cannot coexist, such as
partial/total, unilateral/bilateral, obstructed/ unobstructed, and
benign/malignant, should not be considered CCs for one another.
Codes for the same condition in anatomically proximal
sites should not be considered CCs for one another.
Closely related conditions should not be considered CCs
for one another.
The creation of the CC Exclusions List was a major project
involving hundreds of codes. The FY 1988 revisions were intended only
as a first step toward refinement of the CC list in that the criteria
used for eliminating certain diagnoses from consideration as CCs were
intended to identify only the most obvious diagnoses that should not be
considered CCs of another diagnosis. For that reason, and in light of
comments and questions on the CC list, we have continued to review the
remaining CCs to identify additional exclusions and to remove diagnoses
from the master list that have been shown not to meet the definition of
a CC. (See the September 30, 1988 final rule (53 FR 38485) for the
revision made for the discharges occurring in FY 1989; the September 1,
1989 final rule (54 FR 36552) for the FY 1990 revision; the September
4, 1990 final rule (55 FR 36126) for the FY 1991 revision; the August
30, 1991 final rule (56 FR 43209) for the FY 1992 revision; the
September 1, 1992 final rule (57 FR 39753) for the FY 1993 revision;
the September 1, 1993 final rule (58 FR 46278) for the FY 1994
revisions; the September 1, 1994 final rule (59 FR 45334) for the FY
1995 revisions; the September 1, 1995 final rule (60 FR 45782) for the
FY 1996 revisions; the August 30, 1996 final rule (61 FR 46171) for the
FY 1997 revisions; the August 29, 1997 final rule (62 FR 45966) for the
FY 1998 revisions; the July 31, 1998 final rule (63 FR 40954) for the
FY 1999 revisions, the August 1, 2000 final rule (65 FR 47064) for the
FY 2001 revisions; and the August 1, 2001 final rule (66 FR 39851) for
the FY 2002 revisions. In the July 30, 1999 final rule (64 FR 41490),
we did not modify the CC Exclusions List for FY 2000 because we did not
make any changes to the ICD-9-CM codes for FY 2000.
In this final rule, we are making limited revisions of the CC
Exclusions List to take into account the changes that will be made in
the ICD-9-CM diagnosis coding system effective October 1, 2002. (See
section II.B.13. of this preamble for a discussion of ICD-9-CM
changes.) These changes are being made in accordance with the
principles established when we created the CC Exclusions List in 1987.
Tables 6G and 6H in the Addendum to this final rule contain the
revisions to the CC Exclusions List that will be effective for
discharges occurring on or after October 1, 2002. Each table shows the
principal diagnoses with changes to the excluded CCs. Each of these
principal diagnoses is shown with an asterisk, and the additions or
deletions to the CC Exclusions List are provided in an indented column
immediately following the affected principal diagnosis.
CCs that are added to the list are in Table 6G--Additions to the CC
Exclusions List. Beginning with discharges on or after October 1, 2002,
the indented diagnoses will not be recognized by the GROUPER as valid
CCs for the asterisked principal diagnosis.
CCs that are deleted from the list are in Table 6H--Deletions from
the CC Exclusions List. Beginning with discharges on or after October
1, 2002, the indented diagnoses will be recognized by the GROUPER as
valid CCs for the asterisked principal diagnosis.
Copies of the original CC Exclusions List applicable to FY 1988 can
be obtained from the National Technical
[[Page 49999]]
Information Service (NTIS) of the Department of Commerce. It is
available in hard copy for $133.00 plus shipping and handling. A
request for the FY 1988 CC Exclusions List (which should include the
identification accession number (PB) 88-133970) should be made to the
following address: National Technical Information Service, United
States Department of Commerce, 5285 Port Royal Road, Springfield, VA
22161; or by calling (800) 553-6847.
Users should be aware of the fact that all revisions to the CC
Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996,
1997, 1998, 1999, 2000, and 2002) and those in Tables 6F and 6G of this
FY 2003 final rule must be incorporated into the list purchased from
NTIS in order to obtain the CC Exclusions List applicable for
discharges occurring on or after October 1, 2002. (Note: There was no
CC Exclusions List in FY 2001 because we did not make changes to the
ICD-9-CM codes for FY 2001.)
Alternatively, the complete documentation of the GROUPER logic,
including the current CC Exclusions List, is available from 3M/Health
Information Systems (HIS), which, under contract with CMS, is
responsible for updating and maintaining the GROUPER program. The
current DRG Definitions Manual, Version 19.0, is available for $225.00,
which includes $15.00 for shipping and handling. Version 20.0 of this
manual, which includes the final FY 2002 DRG changes, is available for
$225.00. These manuals may be obtained by writing 3M/HIS at the
following address: 100 Barnes Road, Wallingford, CT 06492; or by
calling (203) 949-0303. Please specify the revision or revisions
requested.
We received no comments on our proposed changes to the CC list, and
we are adopting the changes as final.
12. Review of Procedure Codes in DRGs 468, 476, and 477
Each year, we review cases assigned to DRG 468 (Extensive O.R.
Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic O.R.
Procedure Unrelated to Principal Diagnosis), and DRG 477 (Nonextensive
O.R. Procedure Unrelated to Principal Diagnosis) to determine whether
it would be appropriate to change the procedures assigned among these
DRGs.
DRGs 468, 476, and 477 are reserved for those cases in which none
of the O.R. procedures performed are related to the principal
diagnosis. These DRGs are intended to capture atypical cases, that is,
those cases not occurring with sufficient frequency to represent a
distinct, recognizable clinical group. DRG 476 is assigned to those
discharges in which one or more of the following prostatic procedures
are performed and are unrelated to the principal diagnosis:
60.0 Incision of prostate
60.12 Open biopsy of prostate
60.15 Biopsy of periprostatic tissue
60.18 Other diagnostic procedures on prostate and periprostatic tissue
60.21 Transurethral prostatectomy
60.29 Other transurethral prostatectomy
60.61 Local excision of lesion of prostate
60.69 Prostatectomy NEC
60.81 Incision of periprostatic tissue
60.82 Excision of periprostatic tissue
60.93 Repair of prostate
60.94 Control of (postoperative) hemorrhage of prostate
60.95 Transurethral balloon dilation of the prostatic urethra
60.99 Other operations on prostate
All remaining O.R. procedures are assigned to DRGs 468 and 477,
with DRG 477 assigned to those discharges in which the only procedures
performed are nonextensive procedures that are unrelated to the
principal diagnosis. The original list of the ICD-9-CM procedure codes
for the procedures we consider nonextensive procedures, if performed
with an unrelated principal diagnosis, was published in Table 6C in
section IV of the Addendum to the September 30, 1988 final rule (53 FR
38591). As part of the final rules published on September 4, 1990 (55
FR 36135), August 30, 1991 (56 FR 43212), September 1, 1992 (57 FR
23625), September 1, 1993 (58 FR 46279), September 1, 1994 (59 FR
45336), September 1, 1995 (60 FR 45783), August 30, 1996 (61 FR 46173),
and August 29, 1997 (62 FR 45981), we moved several other procedures
from DRG 468 to 477, and some procedures from DRG 477 to 468. No
procedures were moved in FY 1999, as noted in the July 31, 1998 final
rule (63 FR 40962); in FY 2000, as noted in the July 30, 1999 final
rule (64 FR 41496); in FY 2001, as noted in the August 1, 2000 final
rule (65 FR 47064); or in FY 2002, as noted in the August 1, 2001 final
rule (66 FR 39852).
a. Moving Procedure Codes From DRGs 468 or 477 to MDCs
We annually conduct a review of procedures producing assignment to
DRG 468 or DRG 477 on the basis of volume, by procedure, to see if it
would be appropriate to move procedure codes out of these DRGs into one
of the surgical DRGs for the MDC into which the principal diagnosis
falls. The data are arrayed two ways for comparison purposes. We look
at a frequency count of each major operative procedure code. We also
compare procedures across MDCs by volume of procedure codes within each
MDC.
We identify those procedures occurring in conjunction with certain
principal diagnoses with sufficient frequency to justify adding them to
one of the surgical DRGs for the MDC in which the diagnosis falls.
Based on this year's review, we did not identify any necessary changes
in procedures under DRG 477. Therefore, we did not propose to move any
procedures from DRG 477 to one of the surgical DRGs. However, we have
identified a number of procedure codes that should be removed from DRG
468 and put into more clinically coherent DRGs. The assignments of
these codes are specified in the charts below.
Movement of Procedure Codes From DRG 468
------------------------------------------------------------------------
Included in
Procedure code Description DRG Description
------------------------------------------------------------------------
MDC 6.--Diseases and Disorders of the Digestive System
------------------------------------------------------------------------
387.............. Interruption vena 170 Other Digestive
cava. System O.R.
Procedures with
CC.
387.............. Interruption vena 171 Other Digestive
cava. System O.R.
Procedures without
CC.
3950............. Angioplasty or 170 Other Digestive
atherectomy of System O.R.
noncoronary vessel. Procedures with
CC.
3950............. Angioplasty or 171 Other Digestive
atherectomy of System O.R.
noncoronary vessel. Procedures without
CC.
------------------------------------------------------------------------
MDC 7--Diseases and Disorders of the Hepatobiliary System and Pancreas
------------------------------------------------------------------------
387.............. Interruption vena 201 Other Hepatobiliary
cava. & Pancreas
Procedures.
[[Page 50000]]
3949............. Other revision of 201 Other Hepatobiliary
vascular procedure. & Pancreas
Procedures.
3950............. Angioplasty or 201 Other Hepatobiliary
atherectomy of & Pancreas
noncoronary vessel. Procedures.
------------------------------------------------------------------------
MDC 8--Diseases and Disorders of the Musculoskeletal System and
Connective Tissue
------------------------------------------------------------------------
387.............. Interruption vena 233 Other
cava. Musculoskeletal
System &
Connective Tissue
O.R. Procedures
with CC.
387.............. Interruption vena 234 Other
cava. Musculoskeletal
System &
Connective Tissue
O.R. Procedures
without CC.
3950............. Angioplasty or 233 Other
atherectomy of Musculoskeletal
noncoronary vessel. System &
Connective Tissue
O.R. Procedures
with CC.
3950............. Angioplasty or 234 Other
atherectomy of Musculoskeletal
noncoronary vessel. System &
Connective Tissue
O.R. Procedures
without CC.
------------------------------------------------------------------------
MDC 9--Diseases and Disorders of the Skin, Subcutaneous Tissue and
Breast
------------------------------------------------------------------------
8344............. Other fasciectomy.. 269 Other Skin,
Subcutaneous
Tissue & Breast
Procedures with
CC.
8344............. Other fasciectomy.. 270 Other Skin,
Subcutaneous
Tissue & Breast
Procedures without
CC.
8345............. Other myectomy..... 269 Other Skin,
Subcutaneous
Tissue & Breast
Procedures with
CC.
8345............. Other myectomy..... 270 Other Skin,
Subcutaneous
Tissue & Breast
Procedures without
CC.
8382............. Muscle or fascia 269 Other Skin,
graft. Subcutaneous
Tissue & Breast
Procedures with
CC.
8382............. Muscle or fascia 270 Other Skin,
graft. Subcutaneous
Tissue & Breast
Procedures without
CC.
------------------------------------------------------------------------
MDC 10--Endocrine, Nutritional and Metabolic Diseases and Disorders
------------------------------------------------------------------------
387.............. Interruption vena 292 Other Endocrine,
cava. Nutritional, &
Metabolic O.R.
Procedures with
CC.
387.............. Interruption vena 293 Other Endocrine,
cava. Nutritional, &
Metabolic O.R.
Procedures without
CC.
5459............. Other Lysis of 292 Other Endocrine,
Peritoneal Nutritional, &
adhesions. Metabolic O.R.
Procedures with
CC.
5459............. Other Lysis of 293 Other Endocrine,
Peritoneal Nutritional, &
adhesions. Metabolic O.R.
Procedures without
CC.
------------------------------------------------------------------------
MDC 11--Diseases and Disorders of the Kidney and Urinary Tract
------------------------------------------------------------------------
0492............. Implantation or 315 Other Kidney &
replacement of Urinary Tract O.R.
peripheral neuro- Procedures.
stimulator.
3821............. Blood vessel biopsy 315 Other Kidney &
Urinary Tract O.R.
Procedures.
387.............. Interruption vena 315 Other Kidney &
cava. Urinary Tract O.R.
Procedures.
3949............. Other revision of 315 Other Kidney &
vascular procedure. Urinary Tract O.R.
Procedures.
------------------------------------------------------------------------
MDC 12--Diseases and Disorders Male Reproductive System
------------------------------------------------------------------------
387.............. Interruption vena 344 Other Male
cava. Reproductive
System O.R.
Procedures for
Malignancy.
387.............. Interruption vena 345 Other Male
cava. Reproductive
System O.R.
Procedures Except
for Malignancy.
8622............. Excisional 344 Other Male
debridement of Reproductive
wound, infection, System O.R.
or burn. Procedures for
Malignancy.
8622............. Excisional 345 Other Male
debridement of Reproductive
wound, infection, System O.R.
or burn. Procedures Except
for Malignancy.
------------------------------------------------------------------------
MDC 13--Diseases and Disorders of the Female Reproductive System
------------------------------------------------------------------------
387.............. Interruption vena 365 Other Female
cava. Reproductive
System O.R.
Procedures.
------------------------------------------------------------------------
MDC 16--Diseases and Disorders of the Blood, Blood Forming Organs,
Immunological Disorders
------------------------------------------------------------------------
387.............. Interruption vena 394 Other O.R.
cava. Procedures of the
Blood & Blood
Forming Organs.
------------------------------------------------------------------------
[[Page 50001]]
We did not receive any comments on the proposed movement of
procedures codes from DRG 468. Accordingly, we are adopting, as final,
the movement of the codes as outlined above.
b. Reassignment of Procedures Among DRGs 468, 476, and 477
We also annually review the list of ICD-9-CM procedures that, when
in combination with their principal diagnosis code, result in
assignment to DRGs 468, 476, and 477, to ascertain if any of those
procedures should be reassigned from one of these DRGs to another of
these DRGs based on average charges and length of stay. We look at the
data for trends such as shifts in treatment practice or reporting
practice that would make the resulting DRG assignment illogical. If we
find these shifts, we would move cases to keep the DRGs clinically
similar or to provide payment for the cases in a similar manner.
Generally, we move only those procedures for which we have an adequate
number of discharges to analyze the data. Based on our review this
year, we are not moving any procedures from DRG 468 to DRGs 476 or 477,
from DRG 476 to DRGs 468 or 477, or from DRG 477 to DRGs 468 or 476.
c. Adding Diagnosis Codes to MDCs
Based on our review this year, we are not adding any diagnosis
codes to MDCs.
13. Changes to the ICD-9-CM Coding System
As described in section II.B.1. of this preamble, the ICD-9-CM is a
coding system that is used for the reporting of diagnoses and
procedures performed on a patient. 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 ICD-9-CM Manual contains the list of valid diagnosis and
procedure codes. (The ICD-9-CM Manual is available from the Government
Printing Office on CD-ROM for $22.00 by calling (202) 512-1800.) 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 of the Manual.
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 presented proposals for coding changes for
implementation in FY 2003 at public meetings held on May 17 and 18,
2001, and November 1 and 2, 2001, and finalized the coding changes
after consideration of comments received at the meetings and in writing
by January 8, 2002.
We described our plans to expedite the implementation of coding
changes in the September 7, 2001 Federal Register, including moving the
dates of the ICD-9-CM Coordination and Maintenance Committee to
December and April of each year. We also established the possibility of
implementing procedure codes discussed in the April meeting as part of
the October update in the same year. This reduces the time for
activating a new code from a minimum of 11 months to a minimum of 6
months.
Because the changes would not be included in the proposed rule
published in the spring, the public would be given less opportunity to
consider the merits of the proposals. Decisions from the spring meeting
must be finalized by early June in order to be included in changes in
the GROUPER software and be effective October 1. The addenda must also
be published on the homepage and distributed to publishers so that both
paper versions of the ICD-9-CM code book and software applications can
be ready in time for use by health care providers. Only those issues
from the April meeting that could be quickly resolved and that received
support from the public would be able to be included in the October
addendum. Those that could not be quickly resolved would continue to be
addressed as part of the addendum for October 1 of the next year.
The ICD-9-CM Coordination and Maintenance Committee met on April 18
and 19, 2002. Two code title issues discussed during that meeting were
approved in time to be included in the Addendum of this final rule, to
be effective October 1, 2002. These codes are new code 89.60
(Continuous intra-arterial blood gas monitoring) which is shown in
Table 6B in the Addendum of this final rule, and revised code title
02.41 (Irrigation and exploration of ventricular shunt) which is shown
in Table 6F in the Addendum of this final rule.
For a report of procedure topics discussed at the April 2002
meeting, see the Summary Report at: http://www.cms.hhs.gov/medicare/icd9cm.asp. This site also includes the Final Addendum for ICD-9-CM
Procedures, which will be effective October 1, 2002.
Copies of the Coordination and Maintenance Committee minutes of the
2001 meetings can be obtained from the CMS home page at: http://www.cms.gov/medicare/icd9cm.asp. Paper copies of these minutes are no
longer available and the mailing list has been discontinued. 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; C4-08-06; 7500
Security Boulevard; Baltimore, MD 21244-1850. Comments may be sent by
E-mail to: [email protected].
The ICD-9-CM code changes that have been approved will become
effective October 1, 2002. The new ICD-9-CM codes are listed, along
with their DRG classifications, in Tables 6A and 6B (New Diagnosis
Codes and New Procedure Codes, respectively) in the
[[Page 50002]]
Addendum to this final rule. As we stated above, the code numbers and
their titles were presented for public comment at the ICD-9-CM
Coordination and Maintenance Committee meetings. Both oral and written
comments were considered before the codes were approved. In the
proposed rule, we only solicited comments on the proposed DRG
classification of these new codes.
For codes that have been replaced by new or expanded codes, the
corresponding new or expanded diagnosis codes are included in Table 6A
(New Diagnosis Codes) in the Addendum of this final rule. New procedure
codes are shown in Table 6B. Diagnosis codes that have been replaced by
expanded codes or other codes or have been deleted are in Table 6C
(Invalid Diagnosis Codes). These invalid diagnosis codes will not be
recognized by the GROUPER beginning with discharges occurring on or
after October 1, 2002. Table 6C contains invalid diagnosis codes. There
are no invalid procedure codes for FY 2002 (Table 6D). Revisions to
diagnosis code titles are in Table 6E (Revised Diagnosis Code Titles),
which also includes the DRG assignments for these revised codes.
Revisions to procedure code titles are in Table 6F (Revised Procedure
Codes Titles).
Comment: One commenter expressed concern about making procedure
code changes discussed at the April ICD-9-CM Coordination and
Maintenance Committee effective the following October. The commenter
had concerns with the fact that these coding changes would not be
discussed in the proposed rule, but would appear in the final rule. The
commenter indicated that hospitals need time to comment on all proposed
changes to the DRGS and to analyze changes for budgeting, train staff
on coding changes, and implement software changes. The commenter also
endorsed movements toward replacing ICD-9-CM with ICD-10-PCS and
believed this would improve coded data. In addition, the commenter
suggested that consideration be given to using Alpha-numeric HCPCS
codes to report the use of drugs, supplies, and devices used for
inpatients, instead of trying to make ICD-9-CM serve this purpose.
Response: We discussed the issue of consideration of coding changes
at the April meeting of the Committee in the final rule on Payment for
New Medical Services and New Technologies Under the Acute Care Hospital
Inpatient Prospective Payment System published in the Federal Register
on September 7, 2001 (66 FR 46902). We were responding to section 533
of Public Law 106-554, which provided for expediting the incorporation
of new services into the coding system. While we recognize the
commenter's concern, we also are responding to repeated requests to
expedite our process of updating codes. We will carefully evaluate
requests for new codes that are discussed at the April ICD-9-CM
Coordination and Maintenance Committee to determine which codes can and
should be included in the addendum on ICD-9-CM effective October of
each year. We encourage the commenter to continue to participate in the
process by attending these public meetings and offering its opinions.
On the issue of the movement to ICD-10-PCS and the possibility of
using HCPCS codes for inpatient reporting, we note this issue is
currently under review by the National Committee on Vital and Health
Statistics (NCVHS). This committee advises the Secretary on coding
standards issues under the Health Insurance Portability and
Accountability Act of 1996 (HIPAA). The committee is currently
conducting public meetings on the issues raised by this commenter. We
will defer issues involving changes to the HIPAA standards to the
NCVHS. For more information on this committee, please see its web site
at: http://www.ncvhs.hhs.gov/.
14. Other Issues
In addition to the specific topics discussed in section II.B.1.
through 13. of this final rule, we addressed a number of other DRG-
related issues in the May 9, 2002 proposed rule. In the proposed rule,
we did not propose any changes to the DRGs relating to the issues.
Below is a summary of the issues that were addressed, any public
comments we received, and our responses to those comments.
a. Intestinal Transplantation
We examined our data to determine whether it is appropriate to add
a new intestinal transplant DRG. Our data revealed that nine intestinal
transplantation cases were reported by two facilities. Of the nine
cases, two cases involved a liver transplant during the same admission
and, therefore, would be assigned to DRG 480 (Liver Transplant). As we
stated in the proposed rule, we do not believe that the remaining seven
cases provide a sufficient number to warrant the creation of a new
intestinal transplant DRG.
Comment: Commenters supported the proposal not to create a separate
new DRG for intestinal transplants and pointed out that this procedure
is not being widely performed.
Response: We will continue to monitor intestinal transplantation
cases to determine whether it may be appropriate in the future to
establish a new DRG for the intestinal transplant procedure.
b. Myasthenia Gravis
Myasthenia Gravis is an autoimmune disease manifested by a syndrome
of fatigue and exhaustion of the muscles that is aggravated by activity
and relieved by rest. The weakness of the muscles can range from very
mild to life-threatening.
This disease is classified to ICD-9-CM diagnosis code 358.0 and is
assigned to DRG 12 (Degenerative Nervous System Disorders). Myasthenia
Gravis in crisis patients is being treated with extensive
plasmapheresis. We received a request to analyze the charges associated
with Myasthenia Gravis in crisis patients receiving plasmapheresis to
determine whether DRG 12 is an equitable DRG assignment for these
cases. We are currently unable to differentiate between the mild and
severe forms of this disease because all types are classified to code
358.0. Therefore, we requested the NCHS to create a new diagnosis code
for Myasthenia Gravis in crisis so that we can uniquely identify these
cases to ensure the DRG assignment is appropriate.
Comment: Commenters supported the creation of a new diagnosis code
so that Myasthenia Gravis in crisis patients can be uniquely identified
and the mild and severe forms of the disease is distinguished.
Response: This topic was addressed at the April 18, 2002 ICM-9-CM
Coordination and Maintenance Committee meeting. NCHS proposed two new
codes to capture Myasthenia Gravis not in crisis and Myasthenia Gravis
in crisis. If the Committee approves these two codes, they would not
become effective until October 1, 2003. At that point, we would be able
to assess the charges associated with Myasthenia Gravis in crisis
patients receiving plasmapheresis.
c. Cardiac Mapping and Ablation
In the August 1, 2001 final rule (66 FR 39840), in response to a
comment received, we agreed to continue to evaluate DRGs 516
(Percutaneous Cardiovascular Procedure with Acute Myocardial Infarction
(AMI)), 517 (Percutaneous Cardiovascular Procedure with Coronary Artery
Stent without AMI), and 518 (Percutaneous Cardiovascular Procedure
without
[[Page 50003]]
Coronary Artery Stent or AMI) in MDC 5. For the proposed rule, we
reviewed code 37.26 (Cardiac electrophysiologic stimulation and
recording studies), code 37.27 (Cardiac mapping), and code 37.34
(Catheter ablation of lesion or tissues of heart). The commenter had
recommended that CMS either create a separate DRG for cardiac mapping
and ablation procedures, or assign codes 37.27 and 37.34 to DRG 516
after retitling the DRG. We have reviewed FY 2001 MedPAR data on these
specific codes. Over 97 percent of cases with these codes were assigned
to DRG 518 and had average charges of $1,741 below the average for all
cases in the DRG. Therefore, the data do not support making any DRG
changes for these procedure codes.
We received one comment in support of our proposal not to make DRG
changes to the cardiac mapping and ablation codes. Accordingly, in this
final rule, we will not make any changes relating to the DRG assignment
of codes 37.20, 37.26, and 37.34
d. Aortic Endograft
In the August 1, 2001 final rule (66 FR 39841), we responded to a
comment concerning the placement of aortic endografts in DRG 110 (Major
Cardiovascular Procedures with CC) and DRG 111 (Major Cardiovascular
Procedures without CC). The commenter noted that the cost of the device
alone is greater than the entire payment for DRG 111 and recommended
that these cases be assigned specifically to DRG 110. Our response at
that time was that DRGs 110 and 111 are paired DRGs, differing only in
the presence or absence of a CC.
We reviewed the MedPAR data again for FY 2001 using the following
criteria: All cases were either in DRG 110 or 111, had a principal
diagnosis of 441.4 (Abdominal aneurysm without mention of rupture), and
included procedure code 39.71 (Endovascular implantation of graft in
abdominal aorta). Our conclusion is that the majority of aneurysm cases
are already grouped to DRG 110, where they are appropriately
compensated. Therefore, we did not propose to assign cases without CCs
from DRG 111 to DRG 110. We reiterate that hospitals are responsible
for coding their records completely and for recording and submitting
all relevant diagnosis and procedure codes that have a bearing on the
current admission (in particular, any secondary or additional diagnosis
codes that may be recognized by the GROUPER software as codes
describing complications or comorbidities associated with a case).
Comment: One commenter recommended a new DRG due to the significant
costs associated with the device.
Response: The commenter submitted no data that would cause us to
question our findings described above. Therefore, in this final rule,
we are not changing the current DRG assignment of procedure code 39.71.
e. Platelet Inhibitors.
In the August 1, 2001 final rule (66 FR 39840), we addressed a
commenter's concern that modifications to MDC 5 involving percutaneous
cardiovascular procedures would fail to account for the use of GP IIB-
IIIA platelet inhibiting drugs for cases with acute coronary syndromes.
GROUPER does not recognize procedure code 99.20 (Injection or infusion
of platelet inhibitor) as a procedure. Therefore, its presence on a
claim does not affect DRG assignment. We agreed to continue to evaluate
this issue.
For the May 9, 2002 proposed rule, we reviewed cases in the FY 2001
MedPAR file for DRG 121 (Circulatory Disorders with AMI and Major
Complication, Discharged Alive), DRG 122 (Circulatory Disorders with
AMI without Major Complication, Discharged Alive) and DRGs 516, 517,
and 518. We looked at all cases in these DRGs containing procedure code
99.20 by total number of procedures and by average charges. There were
a total of 73,480 cases where platelet inhibitors were administered,
with 70,216 of these cases in DRGs 516, 517, and 518. The average
charges for platelet inhibitor cases in these three DRGs are actually
slightly below the average for all cases in the respective DRGs.
Therefore, we believe these cases are appropriately placed in the
current DRGs, and we did not propose any changes to the assignment of
the procedure code 99.20.
We received one comment in support of maintaining the current DRG
assignments of code 99.20. Therefore, in this final rule, we are not
making any changes to the DRG assignments of code 99.20.
f. Drug-Eluting Stents
The drug-eluting stent technology has been developed to combat the
problem of restenosis of blood vessels previously treated for stenosis.
The drug is coated on a stent with a special polymer, and after the
stent is placed in the vessel, the drug is slowly released into the
vessel wall tissue over a period of 30 to 45 days. The drug coating on
the stent is intended to prevent the build-up of scar tissue that can
narrow the reopened artery.
In Table 6B of the Addendum to this final rule, we list a new
procedure code 36.07 (Insertion of drug-eluting coronary artery
stents(s)) that will be effective for use October 1, 2002. We also are
adding code 00.55 (Insertion of drug-eluting noncoronary artery stent).
A manufacturer of this technology asserted that this technology is
significantly more costly than other technologies currently assigned to
DRG 517 (Percutaneous Cardiovascular Procedure with Coronary Artery
Stent without AMI) (average charges of $29,189 compared to average
charges of $22,998). The manufacturer requested that code 36.07 be
assigned to DRG 516 (Percutaneous Cardiovascular Procedure with Acute
Myocardial Infarction (AMI)) even without the presence of AMI.
In addition, the manufacturer argued that this technology should be
given preferential treatment because it will fundamentally change the
treatment of multivessel disease. Specifically, the manufacturer stated
that due to the absence of restenosis in patients treated with the
drug-eluting stents based on the preliminary trial results, bypass
surgery may no longer be the preferred treatment for many patients.\1\
The manufacturer believes lower payments due to the decline in Medicare
bypass surgeries will offset the higher payments associated with
assigning all cases receiving the drug-eluting stent to DRG 516.
---------------------------------------------------------------------------
\1\ ``Comparison of Coronary-Artery Bypass Surgery and Stenting
for the Treatment of Multivessel Disease,'' Serruys, P.W., Unger,
F., et al., The New England Journal of Medicine, April 12, 2001,
Vol. 344, No. 15, p. 1117.
---------------------------------------------------------------------------
The FDA has not yet approved this technology for use. In the May 9,
2002 proposed rule, we specifically solicited comments on our proposal
to treat the new codes cited above consistent with the current DRG
assignment for coronary artery stents. We also stated that if the
technology is approved by the FDA and further evidence is presented to
us regarding the clinical efficacy and the impact that this technology
has on the treatment of multivessel disease, we may reassign this code
to another DRG or reassess the construct of all affected DRGs.
Comment: Several commenters supported the development of new ICD-9-
CM codes 36.07 and 00.55 for drug-eluting stents, citing the need for
identification of this new technology. Several commenters supported the
creation of new ICD-9-CM codes in order to ensure this technology would
receive payment under Medicare.
Response: We created two new ICD-9-CM codes for use with cases
[[Page 50004]]
involving discharges occurring on or after October 1, 2002. These codes
can be found in Table 6B. ``New Procedure Codes'' in the Addendum of
this final rule. However, we emphasize that it is not necessary to
assign new technologies a new ICD-9-CM code in order for Medicare
payment to commence. In the absence of a new code, technologies are
assigned to the nearest similar existing code and, consequently, to the
relevant DRG for payment.
Comment: Numerous comments opposed our proposed DRG assignment of
code 36.07 to DRG 517. One commenter noted that, while this technology
is not yet approved, it has shown promise to significantly advance the
treatment of coronary artery disease, and encouraged CMS to consider
the available data to determine the most appropriate paying DRG. This
commenter supported the reassignment of code 36.07 to another DRG or,
if necessary, the modification of all affected DRGs, once verifiable
data on the costs associated with drug-eluting stents become available.
Many of the commenters who supported higher payment for this
technology were clinical practitioners and hospitals who expressed
great anticipation for the potential benefits of this technology. In
addition, commenters referred to the likelihood that, once these new
drug-eluting stents are approved, patients would demand to have them
inserted. This demand would put tremendous financial strain on
hospitals.
Commenters also argued there should be long-term cost savings to
the Medicare program and the health system generally from this
technology after approval by the FDA. Specifically, if dramatically
fewer patients require restenting, savings will result from fewer
repeat angioplasty procedures. Also, to the extent bypass surgeries are
also reduced (as suggested by the article footnoted above), savings
will result from that outcome as well.
Response: We note that, at this point, the FDA has not approved
this technology for general use. However, we also note that public
presentation of the results from recent clinical trials have found
virtually no in-stent restenosis in patients treated with the drug-
eluting stent. Therefore, we recognize the potentially significant
impact this technology may conceivably have on the treatment of
coronary artery blockages.
As we have previously stated, new technology is generally assigned
to the same DRG as the predecessor technologies. In this way, hospitals
can receive payment immediately for the new technology. As use of the
new technology diffuses among hospitals, we have gradually and largely
automatically recalibrated DRG payment rates based on hospital claims
data to reflect increasing or decreasing costs of cases assigned to the
DRG. Generally, it takes 2 years for claims data to be reflected in the
DRG weights.
Section 533 of Public Law 106-554 added sections 1886(d)(5)(K) and
(d)(5)(L) to the Act (as implemented by Secs. 412.87 and 412.88) to
reduce the time needed for the DRG system to recognize the higher costs
of new technologies that meet certain criteria (see section II.D. of
this final rule). However, drug-eluting stents did not meet the cost
threshold criterion. Therefore, we proposed to assign cases involving
code 36.07 to DRG 517. Although this DRG assignment would be consistent
with our prior practice of assigning new technology to the same DRGs to
which its predecessor technologies were assigned, further consideration
of this issue persuades us that a different approach is needed, given
the extraordinary circumstances in this particular instance.
We are concerned that, if the FDA does approve this technology and
the predictions of its rapid, widespread use are accurate, this action
will result in a significant strain on hospital financial resources. In
particular, we are concerned that the higher costs of this technology
would create undue financial hardships for hospitals due to the high
volume of stent cases and the fact that a large proportion of these
cases could involve the new technology soon after FDA approval.
Therefore, in this final rule we are creating two new DRGs that
parallel existing DRGs 516 and 517, to reflect cases involving the
insertion of a drug-eluting coronary artery stent as signified by the
presence of code 36.07: DRG 526 (Percutaneous Cardiovascular Procedure
with Drug-Eluting Stent with AMI); and DRG 527 (Percutaneous
Cardiovascular Procedure with Drug-Eluting Stent without AMI). We
understand the earliest date that a decision from the FDA is
anticipated is late 2002. To further ensure that payments for the new
DRGs 526 and 527 will not be made prior to FDA approval, we will
activate these DRGs effective for discharges occurring on or after
April 1, 2003. If the FDA approves the use of drug-eluting stents prior
to April 1, 2003, cases coded with procedure code 36.07 will be paid
using the DRG relative weights for DRG 517. New DRGs 526 and 527 will
be temporary DRGs. By creating separate new DRGs, we are able to ensure
that higher payments will only be made after a positive decision by the
FDA. We expect that when claims data are available that reflect the use
of these stents, we will combine drug-eluting stent cases with other
cases in DRGs 516 and 517.
Although one manufacturer of this technology submitted data to us
that included charges, hospital provider numbers, and admission and
discharge dates on the Medicare patients for whom hospital bills were
collected under the trial in order to demonstrate the higher average
charges of cases included in the trial, much of the data submitted to
us included only estimated charges for the new technology. Therefore,
it was necessary to undertake several calculations to establish the DRG
relative weights for these two new DRGs. First, based on prices in
countries where drug-eluting stents are currently being used, and the
average price of currently available stents, we calculated a price
differential of approximately $1,200. Assuming average hospital charge
markups for this technology (based on weighted average cost-to-charge
ratios), the anticipated charge differential between old and new stents
would be approximately $2,664 per stent. However, we recognize that
some cases involve more than one stent. Using an average of 1.5 stents
per procedure, the net estimated incremental charge for cases that
would receive a drug-eluting stents is $3,996.
In order to accurately determine the DRG relative weights for these
two new DRGs relative to all other DRGs, we must also estimate the
volume of cases likely to occur in them among discharges occurring on
or after April 1, 2003 and by September 30, 2003. To approximate the
number of cases that would likely receive the drug-eluting stent
between April 1, 2003 and September 30, 2003 (and thus would be
assigned to new DRGs 526 and 527), we first identified cases in DRGs
516 and 517 with procedure code 36.06 (Insertion of non-drug-eluting
coronary artery stent). Of these cases, we estimated what percentage
would be likely to receive the drug-eluting stent after April 1, 2003.
The manufacturer estimated that as many as 43 percent of current stent
patients will receive drug-eluting stents during FY 2003. However, this
estimate assumes 9 months of sales of the new stents during FY 2003,
from January to September. Because these two new DRGs will only be
valid for 6 months during FY 2003, from April through September, we
estimated that 21.5 percent of all stent cases will be assigned to new
DRGs 526 and 527 (43 percent of stent cases for 6 months instead of 9
months).
[[Page 50005]]
In determining the DRG relative weights, we assumed that 21.5
percent of coronary stent cases (those with code 36.06) from DRGs 516
and 517 would be reassigned to new DRGs 526 and 527 (with code 36.07),
and the charges of these cases would be increased $3,996 per case, to
approximate the higher charges associated with the drug-eluting stents
in DRGs 526 and 527. The relative weights for DRGs 516 and 517 are
calculated based on the charges of the cases estimated to remain in
these two DRGs.
We note that this unprecedented approach is in response to the
unique circumstances surrounding the potential breakthrough nature of
this technology. We anticipate that the vast majority of new
technologies in the future will continue to be routinely incorporated
into the existing DRGs.
New DRG 526 (Percutaneous Cardiovascular Procedure With Drug-
Eluting Stent With AMI) will have the following principal diagnoses:
410.01, Acute myocardial infarction, anterolateral wall,
initial episode of care.
410.11, Acute myocardial infarction, other anterior wall,
initial episode of care.
410.21, Acute myocardial infarction, inferolateral wall,
initial episode of care.
410.31, Acute myocardial infarction, inferoposterior wall,
initial episode of care.
410.41, Acute myocardial infarction, inferior wall,
initial episode of care.
410.51, Acute myocardial infarction, other lateral wall,
initial episode of care.
410.61, True posterior wall infarction, initial episode of
care.
410.71, Subendocardial infarction, initial episode of
care.
410.81, Acute myocardial infarction of other specified
sites, initial episode of care.
410.91, Acute myocardial infarction, unspecified site,
initial episode of care.
And operating room procedures:
35.96, Percutaneous valvuloplasty.
36.01, Single vessel percutaneous transluminal coronary
angioplasty [PTCA] or coronary atherectomy without mention of
thrombolytic agent.
36.02, Single vessel percutaneous transluminal coronary
angioplasty [PTCA] or coronary atherectomy with mention of thrombolytic
agent.
36.05, Multiple vessel percutaneous transluminal coronary
angioplasty [PTCA] or coronary atherectomy performed during the same
operation, with or without mention of thrombolytic agent.
36.09, Other removal of coronary artery obstruction.
37.34, Catheter ablation of lesion or tissues of heart.
Or nonoperating room procedures:
37.26, Cardiac electrophysiologic stimulation and
recording studies.
37.27, Cardiac mapping.
And nonoperating room procedure:
36.07, Insertion of drug-eluting coronary artery stent(s).
The principal diagnosis will consist of any principal diagnosis in
MDC 5 except AMI:
410.01, Acute myocardial infarction, anterolateral wall,
initial episode of care.
410.11, Acute myocardial infarction, other anterior wall,
initial episode of care.
410.21, Acute myocardial infarction, inferolateral wall,
initial episode of care.
410.31, Acute myocardial infarction, inferoposterior wall,
initial episode of care.
410.41, Acute myocardial infarction, inferior wall,
initial episode of care.
410.51, Acute myocardial infarction, other lateral wall,
initial episode of care.
410.61, True posterior wall infarction, initial episode of
care.
410.71, Subendocardial infarction, initial episode of
care.
410.81, Acute myocardial infarction of other specified
sites, initial episode of care.
410.91, Acute myocardial infarction, unspecified site,
initial episode of care.
And operating room procedures:
35.96, Percutaneous valvuloplasty.
36.01, Single vessel percutaneous transluminal coronary
angioplasty [PTCA] or coronary atherectomy without mention of
thrombolytic agent.
36.02, Single vessel percutaneous transluminal coronary
angioplasty [PTCA] or coronary atherectomy with mention of thrombolytic
agent
36.05, Multiple vessel percutaneous transluminal coronary
angioplasty [PTCA] or coronary atherectomy performed during the same
operation, with or without mention of thrombolytic agent
36.09, Other removal of coronary artery obstruction
37.34, Catheter ablation of lesion or tissues of heart
Or nonoperating room procedures:
37.26, Cardiac electrophysiologic stimulation and
recording studies
37.27, Cardiac mapping
And nonoperating room procedure:
36.07, Insertion of drug-eluting coronary artery stent(s).
Comment: One commenter expressed concern that this technology will
be used to treat lesions that are not clinically indicated. This
commenter suggested that there should be clear language stating that
drug-eluting stents should only be used in patients who are symptomatic
from coronary artery disease as documented by noninvasive stress tests
and imaging to locate the ischemia.
Response: We appreciate the commenter's concern that this new
technology be used only where it is clinically indicated. We note that
our treatment of this technology should in no way be construed to
circumvent the ongoing FDA review. We expect that the technology, if
approved, would be used in accordance with any labeling guidelines
issued by the FDA, and we reserve the right to evaluate the need for
Medicare coverage limitations or restrictions in the future.
Comment: One commenter applauded our recognition of the potential
advance in peripheral vascular care by creating a code for noncoronary
artery stents, code 00.55 (Insertion of drug-eluting noncoronary artery
stent(s)). However, the commenter indicated it could not discern from
Table 6B (67 FR 31630) the DRG to which code 00.55 was assigned.
Response: Our usual practice is to assign a new code to the DRG to
which the predecessor code had been assigned. For example, in 1995,
when we added additional fourth digits to 60.2 (Transurethral
prostatectomy) and created 60.21 (Transurethral (ultrasound) guided
laser induced prostatectomy (TULIP)) and 60.29 (Other Transurethral
prostatectomy), we assigned the two new codes to the DRGs in which 60.2
had been located. (In version 12.0 of the GROUPER, those DRGs were 306
and 307 and DRG 336 and 337; the two newer codes continue to be
assigned to the same DRGs today.) We have followed this precedent with
code 00.55, which is patterned after code 39.90 (Insertion of non-
coronary artery stent or stents). Code 39.90 is not a code recognized
by the GROUPER software as a procedure code that causes DRG assignment,
and therefore it is not assigned to a DRG or DRGs by itself. The
GROUPER will recognize the main procedure in which a stent is inserted
in order to make the DRG assignment for that case. We recognize that
insertion of stents in noncoronary vessels has the potential to occur
in many MDCs and DRGs. We will monitor the new stent code in
noncoronary vessels in our MedPAR data to determine if the DRG
placement in which it is reported is appropriate.
[[Page 50006]]
g. Cardiac Resynchronization Therapy
Cardiac resynchronization therapy for heart failure provides
strategic electrical stimulation to the right atrium, right ventricle,
and left ventricle, in order to coordinate ventricular contractions and
improve cardiac output. This therapy includes cardiac resynchronization
therapy pacemakers (CRT-P) and cardiac resynchronization therapy
defibrillators (CRT-D). While similar to conventional pacemakers and
internal cardioverter-defibrillators, cardiac resynchronization therapy
is different because it requires the implantation of a special
electrode within the coronary vein, so that it can be attached to the
exterior wall of the left ventricle.
We received a recommendation that we assign implantation of CRT-D
(code 00.51, effective October 1, 2002) to either DRG 104 (Cardiac
Valve and Other Major Cardiothoracic Procedure with Cardiac
Catheterization) or DRG 514 (Cardiac Defibrillator Implant With Cardiac
Catheterization). Currently, defibrillator cases are assigned to either
DRG 514 (Cardiac Defibrillator Implant With Cardiac Catheterization) or
DRG 515 (Cardiac Defibrillator Implant Without Cardiac
Catheterization). DRG 514 has a higher relative weight than DRG 515.
The manufacturer argued that the change should be made because the
current DRG structure for cardioverter-defibrillator implants does not
recognize the significant amount of additional surgical resources
required for cases involving patients with heart failure.
The recommendation also supported assigning new code 00.50
(Implantation of cardiac resynchronization pacemaker without mention of
defibrillation, total system [CRT-P]) to DRG 115 (Permanent Cardiac
Pacemaker Implantation With AMI, Heart Failure, or Shock, or AICD Lead
or Generator Procedure). Currently, pacemaker implantation procedures
are assigned to either DRG 115 or DRG 116 (Other Permanent Cardiac
Pacemaker Implant). DRG 115 has the higher relative weight. Because DRG
115 recognizes patients with heart failure, the manufacturer believed
CRT-P cases would be appropriately classified to DRG 115.
We proposed to assign code 00.51 to DRG 514 or 515 and to assign
code 00.50 to DRG 115 and 116. However, we solicited comments on these
proposed DRG assignments and indicated that we would carefully consider
any relevant evidence about the clinical efficacy and costs of this
technology.
Comment: Numerous commenters responded to our statement that we
would further consider evidence on the costs and clinical efficacy of
the cardiac resynchronization technology. Commenters noted that, on
average, patients with moderate to severe heart failure (New York Heart
Class III/IV), for whom the CRT is indicated, are more physically
compromised and need the support of additional personnel such as
physical assistants and clinical heart failure coordinators. Data were
submitted showing that heart failure cases have significantly longer
average lengths of stay than average stays for other cases. These cases
also have higher average charges (approximately $11,000 to $13,000
higher, according to one commenter). The commenters acknowledged that
DRG 115 does specifically account for heart failure cases, but noted
that DRGs 514 and 515 do not.
Commenters also argued there are additional costs associated with
the additional surgical supplies required to perform these procedures
(as well as the price differential of the new technology itself).
Examples of supplies include a special left ventricular coronary sinus
lead, a special pulse generator device, and a special electrical lead.
One manufacturer estimated the incremental difference in the charges of
the device and the additional surgical supplies to be $23,500.
Commenters further noted the additional surgical procedure time
associated with CRTs. They noted that the implant procedure itself is
much more complex than a conventional pacemaker or implanted
cardioverter defibrillator, and generally requires additional staff,
anesthesia, and other specialized services and supplies. The insertion
of the left ventricular lead is estimated to require an additional 2
hours beyond a conventional procedure. Commenters pointed out that
typically a venogram is required to navigate the coronary venous
system. The additional time and resources were estimated to increase
costs to the hospitals by $7,500.
Finally, commenters also cited data and anecdotal evidence to
demonstrate the clinical benefits of this technology. The commenters
noted that FDA approved CRT-D on May 2, 2002, which provides further
evidence of the clinical efficacy of this technology. One commenter
provided information to show that CRT-D improves peak oxygen uptake,
translating to an increased ability to perform activities of daily
living. Another commenter noted that pacing therapy offers the
potential to increase blood pressure and heart rate.
On the basis of these higher costs and clinical improvements, these
commenters generally recommended that CRT-Ds should be assigned to DRG
104. This DRG has a higher relative payment weight than either DRGs 514
or 515 (7.9615, compared to 6.3288 and 5.0380, respectively, based on
the FY 2003 proposed DRG weights). One commenter suggested that if CRT-
D cases are not assigned to DRG 104, they should only be assigned to
DRG 514, not DRG 515. Several commenters suggested that CRT-Ps be
assigned only to DRG 115, and not to DRG 116, since DRG 115 is the
higher paying DRG. Other commenters suggested that all DRT-Ps be
assigned to DRG 515 since DRG 515 pays more.
One commenter suggested that CRT-Ds are more clinically coherent to
cases now assigned to DRG 104 based on: (1) The similarity of the
diagnosis (for example, congestive heart failure); and (2) the
similarities in clinical procedures used to implant a left ventricular
lead and other cardiac catheterizations included in DRG 104. The
commenter also suggested that the operating room preparation and
procedure time for CRT-D cases was similar to that for other major
cardiovascular procedures included in DRG 104, which supports the
commenter's contention that CRT-Ds are more clinically consistent with
DRG 104 than DRG 514 and 515.
Several commenters, including a national and a State hospital
association, supported the assignment of new code 00.51 to DRG 514 or
515. Some commenters also supported the assignment of new code 00.50 to
DRG 115 and DRG 116. The commenters added that cardiac
resynchronization therapy is a new technology that recently received
FDA approval and is still not widely used in hospitals in the United
States. The commenters indicated that even though there is limited
information at this time with regard to the clinical efficacy and costs
of these devices, the technology seems to be similar to pacemakers and
defibrillators, so the proposed DRG grouping is logical.
Response: We have carefully evaluated the information provided to
us by the commenters. With respect to the cost data provided, we note
that it is our previously stated preference to review actual data
reflecting the total costs per case from patients treated with a
particular new technology. Because the DRG payment is intended to cover
all of the care provided during the course of an inpatient
hospitalization, it is necessary to evaluate the impact a new
technology may have on other aspects of patients' hospitalization. For
example, many new technologies allow patients to be discharged sooner,
actually reducing the total costs of the stay. While there is no
indication that
[[Page 50007]]
this is the case with the CRT-D technology, we are unable to make an
assessment based on the segregated data that were provided.
With respect to the suggestion that CRT-D cases should be assigned
to DRG 104, we note that the DRG system groups cases that are similar
clinically and in terms of costs. DRG 104 includes procedures performed
on cardiac valves such as valve replacement and repair. Our clinical
advisors disagree with the suggestion that the implantation of a CRT
with or without defibrillation is clinically related or similar to
procedures such as valve repair or replacement, which are assigned to
DRG 104. We believe that, based on the nature and function of the
devices, they are more appropriately classified as either pacemakers
for the CRT-P or implantable cardioverter-defibrillators (ICDs) for the
CRT-D devices. The additional lead is not, in our view, sufficient
justification for classifying the CRT-Ds differently from all other
debibrillators.
Furthermore, although chronic heart failure, for which these CRTs
are used, is a common diagnosis, the etiology of the heart failure may
vary significantly. Heart failure due to a faulty valve may be treated
with valvuloplasty or valve replacement, and would be classified to DRG
104. On the other hand, heart failure due to ischemic events, such as a
myocardial infarction, usually requires a completely different
therapeutic approach involving other DRG assignments. Therefore, we do
not believe it would be appropriate to classify cases receiving CRT-Ds
to DRG 104.
With respect to the fall-back recommendation of the commenter that,
if CRT-D cases are not assigned to DRG 104, they should all be assigned
to DRG 514, we considered and rejected this suggestion. We note that a
fundamental assumption underlying the DRGs is that the hospital has the
responsibility for deciding what technology and process to employ in
treating a particular type of patient. As hospitals in the aggregate
make treatment decisions, these decisions are reflected in the DRG
payment weights. This allows the payment rates to evolve in response to
changing practice patterns.
The decision to treat CRT-D technology similarly to existing
defibrillator technology is affected by our opinion that substantial
improvement in health outcome benefits of adding the cardioverter-
defibrillator component have not been fully established through
clinical research. There are no published articles that have shown an
improvement in survival from CRT. Although we appreciate the
information provided by the commenters in this regard, we note there is
not a significant body of evidence that CRT-D technology will supplant
existing treatments for large numbers of patients. Because the DRG
payment system is an average-based system wherein hospitals are
expected to offset the higher costs of some cases with below-average
costs in others, we anticipate that hospitals will be able to
adequately finance this new technology as it is utilized. To the extent
hospitals move to adopt this technology more widely over time,
appropriate adjustments will be reflected in the DRG weights.
With respect to the recommendation that all CRT-P cases be assigned
to DRG 115, CRT-Ps are inserted into patients with congestive heart
failure. Therefore, when the code for CRT-P is reported in a patient
with congestive heart failure, the case will be assigned to DRG 115.
Only if the CRT-P were inserted in a patient who does not have
congestive heart failure would the case be assigned to DRG 116. Since
all the commenters agree that only patients with congestive heart
failure would be candidates for the CRT-P, the end result will be that
all of these cases would be assigned to DRG 115 as the commenters
recommended. With respect to the recommendation that all CRT-Ps be
assigned to DRG 515, our response is the same as for rejecting the
assignment of DRT-Ds to DRG 515. Assignment of CRT-Ps to DRG 515 is not
clinically appropriate.
Accordingly, we are adopting as final our proposed classification
of code 00.50 to DRGs 115 and 116, and code 00.51 to DRGs 514 and 515.
These changes will be effective for discharges occurring on or after
October 1, 2002.
Comment: Many commenters mentioned that when the CRT-Ds are
inserted, a coronary sinus venogram is often performed. The commenters
stated that a venogram is a procedure that is similar to an
arteriogram, which is classified as a non-O.R. procedure that affects
the DRG assignment in some cases. The commenters stated that the
additional time and resources of the venogram for a CRT-D should be
accounted for by assignment of these cases to DRG 104.
Response: Coronary arteriograms and angiocardiograms do effect the
DRG assignment in some cases. Arteriograms and angiograms of other
sites that are not of the heart do not affect the DRG assignment.
Venograms are not currently on the list of non-O.R. procedures that
affect the DRG assignment. While the commenters are not suggesting that
we add venograms to the list of non-O.R. procedures that affect the DRG
assignment, they are recommending that the comparison of venograms to
angiocardiograms be used as a justification for assigning CRT-Ds to DRG
104. Our medical consultants advise us that venograms are not as
difficult to perform as are the coronary arterigrams and
angiocardiograms. Venograms also have fewer associated risks than
coronary arterigrams and angiocardiograms. Therefore, we would not
reclassify venograms and make them affect the DRG assignment. In short,
we do not believe that the performance of a venogram is justification
for moving CRT-Ds to DRG 104.
h. Hip and Knee Revisions
We received a request to consider assigning hip and knee revisions
(codes 81.53 and 81.55) out of DRG 209 (Major Joint and Limb
Reattachment Procedures of Lower Extremity) because these revisions are
significantly more resource intensive and costly than initial
insertions of these joints.
We examined claims data and concluded that, while the charges for
the hip and knee revision cases were somewhat higher than other cases
within DRG 209, they do not support the establishment of a separate
DRG.
Comment: Two commenters addressed this issue. One commenter stated
that additional data review was needed to determine the variation in
charges and length of stay to determine if this recommendation should
be pursued. Another commenter stated that using charge data is
incorrect. Hospitals are under increased pressure and scrutiny to keep
their charges low and would not increase the charges of the revision
prosthetic because it does not influence the amount of payment
received. The commenter suggested that revisions of the hip and knee
procedures should have their own DRG.
Response: Hospital charges have been the basis for recalibration of
the DRG weights since FY 1986. Therefore, it is in the hospitals' best
interest to submit accurate billing data. We utilize charge data in our
analysis of the DRGs to ensure that each DRG contains patients with a
similar pattern of resource intensity. To the extent that the markup of
charges over cost varies from one particular device or procedure to
another, the relative weights will be impacted. However, due to the
relativity of the DRG weights, a low markup associated with one device
or procedure will be offset by relatively higher markups associated
with another device or procedure, leading to higher relative weights,
and thus higher payments, for the latter device or procedure.
[[Page 50008]]
i. Multiple Level Spinal Fusions
We received correspondence suggesting that we create new spinal
fusion DRGs that differentiate by the number of discs that are fused in
a spinal fusion. The correspondents indicated that the existing ICD-9-
CM codes do not identify the number of discs that are fused. Codes were
modified for FY 2002 to clearly differentiate between fusions and
refusions, and new codes were created for the insertion of interbody
spinal fusion device (84.51), 360 degree spinal fusion, single incision
approach (81.61), and the insertion of recombinant bone morphogenetic
protein (84.52) (66 FR 39841 through 39844).
ICD-9-CM codes have not historically been used to differentiate
among cases by the number of repairs or manipulations performed in the
course of a single procedure. However, we explored the possibility of
creating codes to differentiate cases by the number of discs fused
during a spinal fusion procedure at the April 18 and 19, 2002 meetings
of the ICD-9-CM Coordination and Maintenance Committee. Because the
topic proved to be quite challenging and will require additional
discussion, the Committee will consider it further at its scheduled
December 5 and 6, 2002 meeting.
We also note that DRGs generally do not segregate cases based on
the number of repairs or devices that occur in the course of a single
procedure. For instance, DRGs are not split based on the number of
vessels bypassed in cardiac surgery, nor are they split based on the
number of cardiac valves repaired. Therefore, we did not propose DRG
changes for multiple level spinal fusions in the May 9, 2002 proposed
rule.
Comment: Commenters representing national and state hospital
associations supported the proposal to not make DRG changes for
multiple level spinal fusions at this time. The commenters agreed that
ICD-9-CM historically has not been used to differentiate among cases by
the number of repairs or manipulations performed during a single
procedure. Also, the commenters wrote that developing a coding
methodology for multiple level spinal fusions will require careful
consideration because it will be introducing a new concept into ICD-9-
CM coding. The commenters offered to work with CMS to examine whether
such a methodology could be developed in the future.
One commenter urged CMS to carefully examine the issue of providing
separate codes and payment for multiple level spinal procedures. The
commenter stated that increased costs were incurred in this type of
surgery and may warrant recognition within the DRGs.
Response: We appreciate the comments on what has evolved as a
challenging coding issue. We look forward to working with the commenter
and other groups as we attempt to develop an efficient way to capture
multilevel spinal fusions. The topic will be discussed at the next
meeting of the ICD-9-CM Coordination and Maintenance Committee, which
will be held on December 5 and 6, 2002. The agenda for this meeting
will be posted in November 2002 at: www.cms.hhs.gov/medicare/icd9cm.asp. Once new codes are developed, we will evaluate the DRG
assignments.
j. Open Wound of the Hand
We received a recommendation that we move code 882.0 (Open Wound of
Hand Except Finger(s) Alone Without Mention of Complication) from its
current location in MDC 9 (Diseases and Disorders of the Skin,
Subcutaneous Tissue and Breast) under DRGs 280 through 282 (Trauma to
the Skin, Subcutaneous Tissue and Breast Age >17 with CC, Age >17
without CC, and Age 0-17, respectively) into MDC 21 (Injuries,
Poisonings and Toxic Effects of Drugs) under DRGs 444 through 446
(Traumatic Injury Age >17 with CC, Age >17 without CC, and Age 0-17,
respectively).
In examining our data, we found relatively few cases with code
882.0. These cases had charges that were less than the average charges
for DRGs to which they are currently assigned. The data do not support
a DRG change. Our medical consultants also believe that the cases are
appropriately assigned to DRGs 280 through 282.
We received comments in support on our proposed decision that the
current DRG assignments for code 882.0 are appropriate. Accordingly, in
this final rule we are not making any modifications of the DRG
assignments for cases with code 882.0 at this time.
k. Cavernous Nerve Stimulation
As discussed in the August 1, 2001 final rule (66 FR 39845), we
reviewed data in MDC 12 (Diseases and Disorders of the Male
Reproductive System) to look specifically for code 89.58
(Plethysmogram) in DRG 334 (Major Male Pelvic Procedures with CC) and
DRG 335 (Major Male Pelvic Procedures without CC).
Our data show that very few (six) of these procedures were reported
on FY 2001 claims. It is not clear whether the small number reflects
the fact that the procedure is not being performed, the ICD-9-CM code
is not recorded, or the code is recorded but it is not in the top six
procedures being performed. However, in all six cases where this
procedure was performed, it occurred in conjunction with radical
prostatectomy, so we are confident that these cases are consistent with
the DRGs to which they have been assigned. Therefore, we did not
propose any DRG assignment changes to procedures code 89.58 or any
changes to DRGs 334 and 335.
We received one comment in support of our proposal not to change
the DRG assignment of code 89.58 or DRGs 334 and 335. Accordingly, in
the final rule we are making no changes to DRGs 334 and 335 with regard
to procedure code 88.58. We anticipate that procedure code 89.58 will
be performed in conjunction with radical prostastectomy, which is an
operative code(s) describing the major surgical procedure.
1. Additional Issues Raised by Comments
We received a number of comments on additional specific DRG
assignment issues that were not raised in the proposed rule. We are not
responding to them individually here because they were not raised in
the proposed rule. We will be considering each issue raised for
consideration in the FY 2004 DRG reclassifications. We also note that
we previously described a process for submission of non-MedPAR data for
consideration in evaluating the DRG assignment issue (64 FR 41499).
C. Recalibration of DRG Weights
We are using the same basic methodology for the FY 2003
recalibration as we did for FY 2002 (August 1, 2001 final rule (66 FR
39828)). That is, we recalibrate the weights based on charge data for
Medicare discharges. For the proposed rule, we used the most current
charge information available, the FY 2001 MedPAR file. (For the FY 2002
recalibration, we used the FY 2000 MedPAR file.) The MedPAR file is
based on fully coded diagnostic and procedure data for all Medicare
inpatient hospital bills.
The final recalibrated DRG relative weights are constructed from
the FY 2001 MedPAR data, which include discharges occurring between
October 1, 2000 and September 30, 2001, based on bills received by CMS
through March 31, 2002, from all hospitals subject to the acute care
hospital inpatient prospective payment system and short-term acute care
hospitals in waiver
[[Page 50009]]
States. The FY 2001 MedPAR file includes data for approximately
11,483,663 Medicare discharges. The data include hospitals that
subsequently became CAHs, although no data are included for hospitals
after the point they are certified as CAHs.
The methodology used to calculate the DRG relative weights from the
FY 2001 MedPAR file is as follows:
To the extent possible, all the claims were regrouped
using the DRG classification revisions discussed in section II.B. of
this preamble.
Charges were standardized to remove the effects of
differences in area wage levels, indirect medical education and
disproportionate share payments, and, for hospitals in Alaska and
Hawaii, the applicable cost-of-living adjustment.
The average standardized charge per DRG was calculated by
summing the standardized charges for all cases in the DRG and dividing
that amount by the number of cases classified in the DRG. A transfer
case is counted as a fraction of a case based on the ratio of its
transfer payment under the per diem payment methodology to the full DRG
payment for nontransfer cases. That is, transfer cases paid under the
transfer methodology equal to half of what the case would receive as a
nontransfer would be counted as 0.5 of a total case.
We then eliminated statistical outliers, using the same
criteria used in computing the current weights. That is, all cases that
are outside of 3.0 standard deviations from the mean of the log
distribution of both the charges per case and the charges per day for
each DRG are eliminated.
The average charge for each DRG was then recomputed
(excluding the statistical outliers) and divided by the national
average standardized charge per case to determine the relative weight.
(See section II.B.14.f. of this preamble for a discussion of the
special adjustment used in calculating the FY 2003 DRG relative weights
for DRGs 526 and 527.)
We established the relative weight for heart and heart-
lung, liver, and lung transplants (DRGs 103, 480, and 495) in a manner
consistent with the methodology for all other DRGs except that the
transplant cases that were used to establish the weights were limited
to those Medicare-approved heart, heart-lung, liver, and lung
transplant centers that have cases in the FY 1999 MedPAR file.
(Medicare coverage for heart, heart-lung, liver, and lung transplants
is limited to those facilities that have received approval from CMS as
transplant centers.)
Acquisition costs for kidney, heart, heart-lung, liver,
lung, and pancreas transplants continue to be paid on a reasonable cost
basis. Unlike other excluded costs, the acquisition costs are
concentrated in specific DRGs: DRG 302 (Kidney Transplant); DRG 103
(Heart Transplant); DRG 480 (Liver Transplant); DRG 495 (Lung
Transplant); and DRGs 512 (Simultaneous Pancreas/Kidney Transplant) and
513 (Pancreas Transplant). Because these acquisition costs are paid
separately from the prospective payment rate, it is necessary to make
an adjustment to exclude them from the relative weights for these DRGs.
Therefore, we subtracted the acquisition charges from the total charges
on each transplant bill that showed acquisition charges before
computing the average charge for the DRG and before eliminating
statistical outliers.
When we recalibrated the DRG weights for previous years, we set a
threshold of 10 cases as the minimum number of cases required to
compute a reasonable weight. We used that same case threshold in
recalibrating the DRG weights for FY 2003. Using the FY 2001 MedPAR
data set, there are 41 DRGs that contain fewer than 10 cases. We
computed the weights for these 41 low-volume DRGs by adjusting the FY
2002 weights of these DRGs by the percentage change in the average
weight of the cases in the other DRGs.
The new weights are normalized by an adjustment factor (1.43889) so
that the average case weight after recalibration is equal to the
average case weight before recalibration. This adjustment is intended
to ensure that recalibration by itself neither increases nor decreases
total payments under the prospective payment system.
We did not receive any comments on DRG recalibration.
Section 1886(d)(4)(C)(iii) of the Act requires that, beginning with
FY 1991, reclassification and recalibration changes be made in a manner
that assures that the aggregate payments are neither greater than nor
less than the aggregate payments that would have been made without the
changes. Although normalization is intended to achieve this effect,
equating the average case weight after recalibration to the average
case weight before recalibration does not necessarily achieve budget
neutrality with respect to aggregate payments to hospitals because
payments to hospitals are affected by factors other than average case
weight. Therefore, as we have done in past years and as discussed in
section II.A.4.a. of the Addendum to this final rule, we make a budget
neutrality adjustment to ensure that the requirement of section
1886(d)(4)(C)(iii) of the Act is met.
D. Add-On Payments for New Services and Technologies
1. Background
Section 533(b) of Public Law 106-554 amended section 1886(d)(5) of
the Act to add subparagraphs (K) and (L) to establish a process of
identifying and ensuring adequate payment for new medical services and
technologies under Medicare. Section 1886(d)(5)(K)(ii)(I) of the Act
specifies that the process must apply to a new medical service or
technology if, ``based on the estimated costs incurred with respect to
discharges involving such service or technology, the DRG prospective
payment rate otherwise applicable to such discharges * * * is
inadequate.'' Section 1886(d)(5)(K)(vi) of the Act specifies that a
medical service or technology will be considered ``new'' if it meets
criteria established by the Secretary (after notice and opportunity for
public comment).
In the September 7, 2001 final rule (66 FR 46902), we established
that a new technology would be an appropriate candidate for an
additional payment when it represents an advance in medical technology
that substantially improves, relative to technologies previously
available, the diagnosis or treatment of Medicare beneficiaries
(Sec. 412.87(b)(1)).
We also established that new technologies meeting this clinical
definition must be demonstrated to be inadequately paid otherwise under
the DRG system to receive special payment treatment
(Sec. 412.87(b)(3)). To assess whether technologies would be
inadequately paid under the DRGs, we established this threshold at one
standard deviation beyond the geometric mean standardized charge for
all cases in the DRGs to which the new technology is assigned (or the
case-weighted average of all relevant DRGs, if the new technology
occurs in many different DRGs) (Sec. 412.87(b)(3)).
Table 10 in the Addendum of this final rule lists the qualifying
criteria by DRG based on the discharge data that we are using to
calculate the FY 2003 DRG weights. These thresholds will be used to
evaluate applicants for new technology add-on payments during FY 2004
(beginning October 1, 2003). Similar to the timetable for applying for
new technology add-on payments during FY 2003, we are requiring
applicants for FY 2004 to submit a significant sample of the data no
later than early October 2002. The complete request also must include a
full
[[Page 50010]]
description of the clinical applications of the technology and the
results of any clinical evaluations demonstrating that the new
technology represents a substantial clinical improvement. Subsequently,
we are requiring that a complete database be submitted no later than
mid-December 2002.
Applications for consideration under this provision for FY 2004
should be sent to the following address: Centers for Medicare &
Medicaid Services, c/o Inpatient New Technology Applications, Mail Stop
C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244.
In addition to the clinical and cost criteria, we established that,
in order to qualify for the special payment treatment, a specific
technology must be ``new'' under the requirements of Sec. 412.87(b)(2)
of our regulations. The statutory provision contemplated the special
payment treatment for new technologies until such time as data are
available to reflect the cost of the technology in the DRG weights
through recalibration (no less than 2 years and no more than 3 years).
There is a lag of 2 to 3 years from the point a new technology is first
introduced on the market and when data reflecting the use of the
technology are used to calculate the DRG weights. For example, data
from discharges occurring during FY 2001 are used to calculate the FY
2003 DRG weights in this final rule.
Technology may be considered ``new'' for purposes of this provision
within 2 or 3 years after the point at which data begin to become
available reflecting the ICD-9-CM code assigned to the technology.
After CMS has recalibrated the DRGs to reflect the costs of an
otherwise new technology, the special add-on payment for new technology
will cease (Sec. 412.87(b)(2)). For example, an approved new technology
that received Food and Drug Administration (FDA) approval in October
2001 would be eligible to receive add-on payments as a new technology
until FY 2004 (discharges occurring before October 1, 2003), when data
reflecting the costs of the technology would be used to recalibrate the
DRG weights. Because the FY 2004 DRG weights will be calculated using
FY 2002 MedPAR data, the costs of such a new technology would be
reflected in the FY 2004 DRG weights.
In the September 7, 2001 final rule, we established that Medicare
would provide higher payments for cases with higher costs involving
identified new technologies, while preserving some of the incentives
under the average-based payment system. The payment mechanism is based
on the cost to hospitals for the new technology. Under Sec. 412.88,
Medicare would pay a marginal cost factor of 50 percent for the costs
of the new technology in excess of the full DRG payment. If the actual
costs of a new technology case exceed the DRG payment by more than the
estimated costs of the new technology, Medicare payment would be
limited to the DRG payment plus 50 percent of the estimated costs of
the new technology.
The report language accompanying section 533 of Public Law 106-554
indicated Congressional intent that the Secretary implement the new
mechanism on a budget neutral basis (H.R. Conf. Rept. No. 106-1033,
106th Cong., 2d Sess. at 897 (2000)). Section 1886(d)(4)(C)(iii) of the
Act requires that the adjustments to annual DRG classifications and
relative weights must be made in a manner that ensures that aggregate
payments to hospitals are not affected. Therefore, we account for
projected payments under the new technology provision during the
upcoming fiscal year at the same time we estimate the payment effect of
changes to the DRG classifications and recalibration. The impact of
additional payments under this provision would then be included in the
budget neutrality factor, which is applied to the standardized amounts
and the hospital-specific amounts.
Because any additional payments directed toward new technology
under this provision must be offset to ensure budget neutrality, it is
important to consider carefully the extent of this provision and ensure
that only technologies representing substantial advances are recognized
for additional payments. In that regard, we indicated that we will
discuss in the annual proposed and final rules those technologies that
were considered under this provision; our determination as to whether a
particular new technology meets our criteria for a new technology;
whether it is determined further that cases involving the new
technology would be inadequately paid under the existing DRG payment;
and any assumptions that went into the budget neutrality calculations
related to additional payments for that new technology, including the
expected number, distribution, and costs of these cases.
To balance appropriately Congress' intent to increase Medicare's
payments for eligible new technologies with concern that the total size
of those payments not result in significantly reduced payments for
other cases, we set a target limit for estimated special payments for
new technology under the provisions of section 533(b) of Public Law
106-554 at 1.0 percent of estimated total operating prospective
payments.
If the target limit is exceeded, we would reduce the level of
payments for approved technologies across the board, to ensure
estimated payments do not exceed the limit. Using this approach, all
cases involving approved new technologies that would otherwise receive
additional payments would still receive special payments, albeit at a
reduced amount. Although the marginal payment rate for individual
technologies would be reduced, this would be offset by large overall
payments to hospitals for new technologies under this provision.
Comment: Numerous commenters expressed concern that the method by
which payments are made--in a budget neutral manner--reduces the amount
of DRG payments for other cases. The commenters noted that shifting
money around within the prospective payment system leaves hospitals
without the additional money they need to ensure beneficiaries have
access to the newest medical tests and treatments. Many of the
commenters believed that reducing payments for other services in order
to increase payments for new technology is inappropriate, as the costs
associated with all other inpatient procedures are not declining. The
commenters noted that they will continue to urge Congress to adopt an
appropriate adjustment to hospital payments without redistributing
payments from elsewhere in the system.
Some commenters also wrote that the new technologies listed in the
proposed rule are worthy of additional funding, but, since budget
neutrality would reduce payments for all other inpatient procedures,
even though costs for these procedures are not declining, the
applications should not be approved. However, if the applications are
approved, the commenters stressed the need to maintain the requirement
that no more than 1 percent of total acute inpatient prospective
payments may be used for new technology payments. Furthermore, if
actual total add-on payments were less than estimated in calculating
the budget neutrality adjustment, the commenters argued that unspent
funds should be restored to the standardized amount.
Response: As stated above, the Congressional Report language
accompanying section 533 of Public Law 106-554 clearly indicated
Congress' intent that this provision is to be implemented in a budget
neutral manner. Therefore, the commenters are correct that Congress is
the appropriate body to consider concerns about the budget neutrality
of this provision. We
[[Page 50011]]
also agree with the commenters about the need to limit the total
payments made under this provision. In the September 7, 2001 final
rule, we established a target limit of 1 percent of total acute
inpatient prospective payment system payments for new technology. This
target is intended to limit the redistributional impact of these higher
payments for new technology relative to payments for other services.
Although our estimates are influenced by past experience, it has
been our longstanding practice not to adjust our budget neutrality
calculations retroactively on the basis of actual payments. We note
that hospitals may either benefit or lose in any given year, depending
on whether we underestimate or overestimate the budget neutrality
factor. We would note that, in years when hospitals benefited from an
underestimate of the budget neutrality factor, we did not recoup any
payments resulting from the underestimate.
Comment: Some commenters criticized our implementation of the add-
on payment provision for new technology. They claimed that the criteria
we set make it impossible for technologies to qualify for add-on
payments and suggest that many companies did not apply for new
technology add-on payments because the threshold and other criteria
were set so high. As proof, the commenters pointed to the small number
of applications we received for new technology add-on payments for FY
2003, and to the apparent denial of all applicants. The commenters
argued that our criteria operate to nullify the effect of the provision
and, therefore, go against Congress' intent.
Response: Unlike the commenters, we believe the limited number of
applications lends support to the appropriateness of the criteria. It
was our intention to implement this provision without fundamentally
disrupting the prospective payment system. A substantial number of
cases receiving extra cost-based payments, (or substantial
disaggregation of the DRGs into smaller units of payment) would
undermine the efficiency incentives of the DRG payment system. This
system, is founded on the theory that, by paying for patients with
similar clinical characteristics based on the average resources needed
to treat those patients, the system creates an incentive for physicians
and hospitals to evaluate the most appropriate treatment approach for
an individual patient, knowing that the payment to the hospital will,
on average, reflect the average resources utilized across all patients
in the DRG. Add-on payments for specific new technologies influence the
financial incentives faced by the physician and the hospital, and,
because these payments are implemented in a budget neutral manner, they
impact the average payments for all DRGs.
While we recognize Congress' intent that Medicare beneficiaries
have faster access to new technologies that may be introduced more
slowly otherwise due to payment concerns, we believe Congress also did
not intend to fundamentally disrupt the incentives of the prospective
payment system. We will continue to carefully evaluate whether our
criteria appropriately balance these two objectives.
Comment: Many commenters repeated objections to policies proposed
in the May 4, 2001 proposed rule (66 FR 22646). These comments are
listed here.
Several commenters argued that the one standard deviation threshold
was too high for most new technologies to qualify. Commenters also
wrote that the substantial clinical improvement criterion should be
removed, and that the 50-percent pass-through payment does not
adequately reimburse hospitals for the cost of new technologies. Many
commenters suggested that we use the 80-percent standard that we use
for outlier thresholds.
One commenter objected to our requirement of a ``significant
sample'' of ``verifiable'' external data. This commenter wrote that any
economic data required should be reasonably derived from the clinical
trials conducted in conjunction with submissions to the FDA. In
addition, our data requirements should not be overly burdensome and
should recognize the difficulties faced by hospitals, such as
compliance with patient confidentiality regulations.
Some commenters suggested that we incorporate new technologies
directly into the DRG system and adjust the weights to reflect the
increased costs of the item(s) as data become available. They argued
that this method would be more consistent with the fundamental
structure of the acute care hospital inpatient prospective payment
system and would avoid the complexity of coding and billing for new
technology cases.
Some commenters suggested that the ICD-9-CM Coding System cannot
continue to be expanded to create new codes to identify new
technologies in the long term, and the ICD-10-Procedure Coding System
(ICD-10-PCS) would be an appropriate long-term solution. One commenter,
a national hospital association, referred to ICD-10-PCS as ``the system
of choice with appropriate attention given to implementation, education
and system related issues.'' This commenter recommended that the
approval process be revised to include a requirement that the applicant
must barcode each item for ease of hospital reporting and billing,
based on Universal Product Numbers.
Response: We discussed our positions on each of these issues in
detail in the September 7, 2001 final rule (66 FR 46905). We appreciate
the interest of the many stakeholders in ensuring that Medicare
beneficiaries have full access to improvements in medical technology.
Our rationales for these policies have not changed since we discussed
them in that final rule, and we did not propose changes to these
policies in the May 9, 2002 proposed rule. Therefore, readers are
referred to the September 7, 2001 final rule for our responses to these
comments. However, we will continue to assess each of these policies as
we gain more experience with this provision, and would appreciate the
commenters' continued input.
Comment: MedPAC agreed with the approach that we have taken in
implementing this provision. MedPAC stated that our approach is ``a
reasonable compromise between the need to provide quick access to
important new technologies for Medicare beneficiaries and not spending
more than necessary.''
Response: We appreciate the supportive comments submitted by
MedPAC.
Comment: In conjunction with concern regarding overall payment
decreases as a result of the requirement that add-on payments for new
technology be budget neutral, several other commenters indicated that
they agreed with our proposed denial of all of the new technology
applications.
Response: We want to clarify the misunderstanding expressed by some
new technology applicants that we proposed to deny all of the
applications. In the May 9, 2002 proposed rule, we stated that, for two
of the applicants, XigrisTM and the InFUSE TM
Bone Graft/LT-CAGE TM Lumbar Tapered Fusion Device, we were
withholding a final determination on whether these technologies
represented a substantial clinical improvement or met the cost
threshold until the final rule. We did propose to deny the other two
applicants, ZyvoxTM and RenewTM Radio Frequency
Spinal Cord Stimulation Therapy.
Comment: One commenter believed that the cost threshold for a new
technology to qualify for add-on payments is too high, but also
expressed
[[Page 50012]]
concern that recent proposed legislation, which would establish that
the cost of new technology must exceed the lesser of the current
threshold or 50 percent above the standardized amount (about $2,100),
was too low. This commenter urged us to amend our regulations to
continue to allow the threshold to vary by DRG (currently, the
threshold is based on the DRG's geometric mean charge plus the DRG's
standard deviation of charges), but at a lower level than at present.
However, another commenter argued in favor of the alternative lower
threshold. This commenter wrote that the current cost threshold was the
primary reason that many technology manufacturers determined that
submission of an application for an add-on payment would be fruitless.
Response: We agree with the commenter that the alternative
threshold proposed in the legislation is too low. Reducing the
threshold to such an extent would lead to many more technologies
qualifying for add-on payments, which would be contrary to the bundling
theory of the DRG system and would be inflationary. Under these lower
thresholds, technology sponsors would have a strong incentive to
establish prices for otherwise low-cost technologies at marginally
higher levels that would meet this minimal threshold. In contrast,
market forces prevent otherwise low-cost technologies being priced at a
level sufficient to meet our present, higher threshold. Even though the
add-on payments are budget neutral, this price inflation would
eventually be reflected in the market basket. On the other hand, the
current thresholds greatly limit inflationary pressures by targeting
technologies that have extraordinarily high costs. However, we will
continue to assess the adequacy of our current criteria as we continue
to gain experience implementing the provision for add-on payments for
new technologies.
Comment: One commenter argued that the evaluation of an application
for the substantial clinical improvement criteria should focus on the
potential for the new technology to result in a substantial improvement
over currently covered therapies. The commenter noted that very few
medical devices are approved by the FDA on the basis of clinical trials
that directly compare the new technology to other Medicare-covered
alternatives. Data demonstrating a clear advantage in clinical outcomes
are often not available until several years after FDA approval.
The commenter believed this approach would be beneficial to CMS,
noting that the current process suggests a coverage-type analysis,
potentially limiting CMS' ability to undertake any later coverage
review after a substantial improvement determination is made. The
commenter added that denying a request on the basis that a technology
does not represent a substantial improvement could lead local Medicare
contractors to restrict coverage based upon such a denial.
Response: We disagree that data needed to evaluate whether new
devices are a substantial improvement over current therapies are
unavailable until years after the technology is introduced. Our
experience evaluating the applications discussed below, as well as
under the outpatient prospective payment system pass-through policy,
demonstrates that the sponsors of new technologies generally do collect
data that can be used to assess whether a new technology is a
substantial improvement over previously available technologies.
Further, we believe it would be difficult, if not infeasible, to assess
objectively the validity of an unsupported claim about potential
outcomes. Rather, we believe it is appropriate and reasonable to expect
applicants to present verifiable data demonstrating a substantial
improvement of any applicant new technology relative to available
alternatives.
We also do not believe that denial of an application on the grounds
that the new technology is not a substantial improvement over existing
technologies would lead to Medicare's contractors denying coverage. The
criteria for substantial improvement determinations are quite different
from coverage determinations, and we do not believe our contractors are
likely to confuse the two.
Comment: One commenter wrote that it would be inappropriate to
apply the budget neutrality adjustment to the hospital-specific
payments to sole community hospitals (SCHs) and Medicare-dependent
hospitals (MDHs). The commenter's argument appears to be based on the
presumption that the add-on payments would not be available to
hospitals paid using the hospital-specific rates.
Response: The commenter has correctly pointed out that we did not
address whether add-on payments would be made to SCHs or MDHs paid on
the basis of their hospital-specific amount in accordance with
Sec. 412.92(d) and Sec. 412.108(c), respectively. We believe these
additional payments for new technologies should be available to SCHs
and MDHs paid on the basis of their hospital-specific amounts. These
hospitals' payments under the hospital-specific amount methodology are
adjusted by the DRG weight for each discharge. Because the costs of new
technology would not be reflected in the base years used to calculate
the applicable hospital-specific amounts, it is appropriate to provide
for these hospitals to receive the add-on payments under this
provision. Therefore, we are amending Sec. 412.88(a)(1) to reflect this
oversight.
Because SCHs and MDHs will be eligible to receive add-on payments
in addition to their hospital-specific amounts, it is also appropriate
to apply the applicable budget neutrality adjustments to the hospital-
specific amounts.
Comment: Some commenters requested a payment calculation, showing
that the add-on payment is made before the outlier adjustment. The
commenters also were confused about the add-on payments in transfer
situations. They wanted clarification on whether the transferring
hospital would get the full add-on payment or if it would receive a
prorated payment, and requested an example.
In addition, one commenter asked whether payments for indirect
medical education (IME) or the disproportionate share hospital (DSH)
adjustment are included in the ``DRG payment amount'' that is compared
against costs to determine whether an individual case qualifies for the
add-on payment. The commenter argued that if the add-on payment amount
is calculated before outlier payments, it would logically follow that
they would also be calculated before IME and DSH payments.
Response: The commenters are correct that the add-on payment is
made prior to calculating whether the case qualifies for outlier
payments (see Sec. 412.80(a)(3)). In response to the request for a
payment example, consider a new technology estimated to cost $3,000, in
a DRG that pays $20,000. A hospital submits three claims for cases
involving this new technology. After applying the hospital's cost-to-
charge ratio, it is determined that the costs of these three cases are
$19,000, $22,000, and $25,000. Under the proposed approach, Medicare
would pay $20,000 (the DRG payment, including any IME or DSH payments)
for the first claim. For the second claim, Medicare would pay one half
of the amount by which the costs of the case exceed the DRG payment, up
to the estimated cost of the new technology, or $21,000 ($20,000 plus
one half of the amount by which costs of the case exceed the standard
DRG payment). For the third claim, Medicare would pay $21,500 ($20,000
plus one half of the
[[Page 50013]]
total estimated costs of the new technology). In the event the hospital
had a fourth case with extraordinarily high costs, the fixed-loss
outlier threshold would be applied to the total DRG payment plus the
add-on payment for new technology ($21,500), for comparison with the
actual costs to determine whether the case would qualify for outlier
payments.
With respect to the comment requesting clarification regarding the
amount of the add-on payment made to a transferring hospital where the
new technology eligible for add-on payments is provided prior to the
transfer, the amount of the new technology add-on payment is not
adjusted, but is paid up to 50 percent of the full cost of the new
technology. This is appropriate because the hospital is likely to incur
the full cost of the new technology when it is used. We are amending
Sec. 412.88(a)(1) to reflect this clarification.
With respect to whether IME and DSH payments are excluded from the
comparison between the full DRG payment for the case and the costs for
purposes of computing the add-on payment, Sec. 412.88(a)(1) states that
the full DRG payment ``includes indirect medical education and
disproportionate share.'' This amount is then compared to the costs of
the discharge to compute the amount of the add-on payment
Sec. 412.88(a).
Comment: One commenter, representing a national hospital
association, recommended against approving new technologies with very
limited utilization because these technologies should already be
receiving additional funds as outlier cases, and the added
administrative burden of including these items negates any benefit.
This commenter also suggested that we limit the number of applications
that can be approved by setting a minimum of $30 million in projected
payments for each new technology.
This commenter argued that this limitation would reflect the added
burden and administrative expense for hospitals associated with each
additional new technology item that is approved. The commenter stated
that training and operational and behavioral changes in response to
specific coding requirements were examples of such additional costs.
Response: We believe the incremental costs to hospitals associated
with this provision should be minimal. Specifically, the additional
payments are triggered by the presence of an ICD-9-CM code on the bill,
information already required to process the claim for normal DRG
payment. Accordingly, there should be little need for training or other
operational changes in response to the approval of a new technology for
add-on payments.
Comment: Commenters requested further guidance for future
applications.
Response: We are developing more detailed instructions for
applicants, based on our experience in processing the FY 2003
applications. In the meantime, individuals interested in obtaining more
information about the application process should call the Division of
Acute Care at (410) 786-4548.
2. Applicants for FY 2003
We received five applications for new technologies to be designated
eligible for inpatient add-on payments for new technology. One of these
applications was subsequently withdrawn. In the proposed rule, we
proposed that two of the applicants, ZyvoxTM and
RenewTM Radio Frequency Spinal Cord Stimulation Therapy, did
not meet our criteria. We withheld a final determination on two other
applicants, XigrisTM and the InFUSETM Bone Graft/
LT-CAGETM Lumbar Tapered Fusion Device, pending further
review to determine whether they met the substantial clinical
improvement criteria.
Comment: A few commenters noted that, according to the final rule
last year (66 FR 46914), we indicated we would propose our
determination regarding new technology applications in the proposed
rule. The public would then have the opportunity to comment on the
proposed determinations. Because the FY 2003 proposed rule did not
include specific proposed determinations for two technologies, the
commenters argued that we did not give the public and the provider
community an appropriate notice and comment period before the decisions
take effect on October 1, 2002. These commenters urged us to allow for
additional public comments on our final decisions announced in this
final rule.
Response: We presented the results of our analysis of the available
data in the May 9, 2002 proposed rule, including the budget neutrality
implications, to provide an opportunity for those interested to submit
specific comments on the applications. In fact, we did receive comments
on specific aspects of the applications, as noted below. In addition,
we clearly indicated in the proposed rule we were continuing to
evaluate XigrisTM and the InFUSETM Bone Graft/LT-
CAGETM Lumbar Tapered Fusion Device for possible approval in
the final rule (67 FR 31428 and 31429). Therefore, we believe
interested parties had sufficient information to evaluate our proposed
decisions and to provide informed comments. For these reasons, we are
not extending the period for providing public comment on the decisions
on applicants announced below.
We also noted in the May 9 proposed rule that, due to the very
limited timeframe between enactment of this provision, its
implementation through the final rule, and the deadlines to submit
applications for consideration for FY 2003, it was necessary to be more
flexible this first year in working with the applicants to ensure that
they were given every opportunity to demonstrate that their new
technology qualified for add-on payments. Insofar as possible, we
intend in the future to announce our proposed determinations in the
annual proposed rule updating the acute care hospital inpatient
prospective payment system.
a. Drotrecogin Alfa (Activated)--XigrisTM
Eli Lilly and Company (Lilly) developed drotrecogin alfa
(activated), trade name XigrisTM, as a new technology and
submitted an application to us for consideration under the new
technology add-on provision. XigrisTM is used to treat
patients with severe sepsis.
According to the application--
``Approximately 750,000 cases of sepsis associated with acute organ
dysfunction (severe sepsis) occur annually in the United States. The
mortality rates associated with severe sepsis in the United States
range from 28 percent to 50 percent and have remained essentially
unchanged for several decades. Each year, 215,000 deaths are associated
with severe sepsis; deaths after acute myocardial infarction occur at
approximately an equal rate.''
XigrisTM is a biotechnology product that is a
recombinant version of naturally occurring Activated Protein C (APC).
APC is needed to ensure the control of inflammation and clotting in the
blood vessels. In patients with severe sepsis, Protein C cannot be
converted in sufficient quantities to the activated form. It appears
that XigrisTM has the ability to bring blood clotting and
inflammation back into balance and restore blood flow to the organs.
In support of its application, Lilly submitted data from the Phase
III Protein C Worldwide Evaluation in Severe Sepsis (PROWESS) trial.
According to Lilly, this was ``an international, multicenter,
randomized, double-blind, placebo-controlled trial in which 1,690
patients with severe sepsis received either placebo (n = 840) or
[[Page 50014]]
drotrecogin alfa (activated) (n = 850).'' The results of the trial were
published in an article in the March 8, 2001 edition of The New England
Journal of Medicine (Bernard, G. R., Vincent, J. L., et. al.,
``Efficacy and Safety of Recombinant Human Activated Protein C for
Severe Sepsis,'' Vol. 344, No, 10, p. 699).
XigrisTM was approved by the FDA in November 2001. In
its approval letter, the FDA wrote that this biologic ``is indicated
for the reduction of mortality in adult patients with severe sepsis
(sepsis associated with acute organ dysfunction) who have a high risk
of death (for example, as determined by APACHE II [acute physiology and
chronic health evaluation]).'' In the May 9, 2002, proposed rule,
however, we indicated that we were unable to conclude, based on the
published data, that XigrisTM represents an advance that
substantially improves, relative to technology previously available,
treatment for Medicare beneficiaries. Specifically, because the
reduction in mortality in the published data was the result of a
treatment effect in a relatively small number of patients and mortality
was examined for only 28 days after treatment, we indicated that we
planned to review unpublished data on all-cause mortality at the time
of hospital discharge for all patients enrolled in the study.
Subsequent to the publication of the proposed rule, Lilly submitted
additional data in response to our request. The major endpoint of the
PROWESS study was a reported reduction in 28-day all-cause mortality of
6.1 percent. At the time the study ended, many of the participants were
still hospitalized and whether they would ultimately recover was
unknown. We requested data about those hospitalized patients to
determine if the reported advantage in mortality from
XigrisTM use persisted for all study participants. These
data are now available and show an overall decrease in mortality for
all patients, including patients over 65 years of age.
Therefore, we have concluded that, when used in accordance with the
following FDA-listed indications and contraindications,
XigrisTM meets the substantial improvement criteria for
additional payment for new medical services and technologies under
Sec. 412.87(b)(1):
Active internal bleeding;
Recent (within 3 months) hemorrhagic stroke;
Recent (within 2 months) intracranial or intraspinal
surgery or severe head trauma;
Trauma with an increased risk of like-threatening
bleeding;
Presence of an epidural catheter;
Intracranial neoplasm or mass lesion or evidence of
cerebral herniation.
Detailed bills were available for 604 of 705 patients in the United
States in the PROWESS clinical trial (303 placebo patients and 301
treatment patients). In all, 83 hospitals submitted detailed bills. Of
the 604 cases with detailed billing data, 274 were patients age 65 or
older. The average total charge for these 274 cases, including the
average standardized charge for the biological, was $86,184 (adjusted
for inflation using the applicable hospital market baskets, as patients
were enrolled in the trial from July 1998 through June 2000). The
inflated average standardized charge of the biological only for these
cases was $15,562.
Lilly also submitted detailed ICD-9-CM diagnosis and procedure
codes for a subset of 157 of the 604 U.S. patients with billing data
from the PROWESS trial. These data were not requested as part of the
trial, but were sent in separately. Of these 157 patients, 82 were over
65 years of age. These 82 patients grouped into 23 DRGs. Approximately
75 percent of these 82 cases were in 5 DRGs: 29 percent were in DRG 475
(Respiratory System Diagnosis with Ventilator Support); 17 percent were
in DRG 483 (Tracheostomy Except for Face, Mouth, and Neck Diagnoses);
15 percent were in DRG 416 (Septicemia Age>17); 7 percent were in DRG
415 (OR Procedure for Infectious and Parasitic Diseases); and 5 percent
were in DRG 148 (Major Small and Large Bowel Procedures With CC).
Using the methodology described in the September 7, 2001 final rule
(66 FR 46918), we calculated a case-weighted threshold based on the
distribution of these 82 cases across 23 DRGs. In order to qualify for
new technology payments based on these DRGs, the threshold would be
$82,882 (compared to the average standardized charge of $86,184 noted
above).
In the September 7, 2001 final rule, we stated that the data
submitted must be of a sufficient sample size to demonstrate a
significant likelihood that the sample mean approximates the true mean
across all cases likely to receive the new technology. Using a standard
statistical methodology for determining the needed (random) sample size
based on the standard deviations of the DRGs identified in the trial as
likely to include cases receiving XigrisTM, we have
determined that a random sample of 274 cases can be reasonably expected
to produce an estimate within $3,500 of the true mean.\2\ Of course,
the data submitted do not represent a random sample of all cases in
these DRGs across all hospitals.
---------------------------------------------------------------------------
\2\ The formula is n = 4\2\/B\2\, where is
the standard deviation of the population, and B is the bound on the
error of the estimate (the range within which the sample means can
reliably predict the population mean). See Statistics for Management
and Economics, Fifth Edition, by Mendenhall, W., Reinmuth, J.,
Beaver, R., and Duhan, D.
---------------------------------------------------------------------------
The 274 case sample was for all U.S. patients over age 65 included
in the PROWESS trial. In the September 7, 2001 final rule, we indicated
our preference for using Medicare cases identifiable in our MedPAR
database, although data from a trial without matching MedPAR data could
be considered. We also indicated our intention to independently verify
the data submitted.
We noted in the May 9, 2002 proposed rule (67 FR 31429) that, due
to the passage of Public Law 106-554 in December 2000, and the
publication of the final rule in September 2001, it was understandable
that the data requirements that were included in the final rule in
order to ensure that we would receive the information necessary to
analyze applicants for new technology add-on payments were not
accommodated in the design of the PROWESS trial. Therefore, in this
case, it was necessary for CMS to work with Lilly to verify
independently the data in order to determine whether
XigrisTM represents a substantial clinical improvement.
After publication of the proposed rule, we analyzed our MedPAR data
to develop a cohort group of patients in order to assess the validity
of the charges reported for the patients in the PROWESS trial. Using
the same methodology as Lilly, we were able to identify a cohort group
of cases in the MedPAR data with similar criteria as the patients who
were screened for the PROWESS trial and were discharged from the
hospitals included in the trial. We calculated that the average total
charges for these cases closely approximated the total charges that
Lilly sent with its analysis. Based on this analysis, we have
determined that the average standardized charges of $86,184 described
above exceeds the cost threshold criteria of $82,882 for the DRGs
involved. Therefore, we are approving XigrisTM for add-on
payments under Sec. 412.88, to be effective for FY 2003 and FY 2004.
Cases where XigrisTM is administered will be identified
by use of the new ICD-9-CM procedure code 00.11 (Infusion of
drotrecogin alfa (activated)). According to Lilly, ``(t)he net
wholesale
[[Page 50015]]
price for drotrecogin alfa (activated) is $210 for a 5-milligram vial
and $840 for a 20-milligram vial. The average cost for a one-time 96-
hour course of therapy for an average adult patient is $6,800
(24g/kg/hr for 96 hours for a 70kg person).'' Therefore, cases
involving the administration of XigrisTM as identified by
the presence of code 00.11 are eligible for additional payments of up
to $3,400 (50 percent of the average cost of the drug).
For purposes of budget neutrality, we have estimated the additional
payments that would be made under this provision during FY 2003. Lilly
had estimated that, initially, 25,000 Medicare patients would receive
XigrisTM. However, Lilly's estimate does not fully reflect
severe sepsis patients who may not have multiple organ failure, but for
whom XigrisTM is indicated nonetheless due to APACHE II
scores in the third and fourth quartiles. Therefore, for purposes of
our budget neutrality estimates, we are projecting 50,000 Medicare
patients will receive XigrisTM during FY 2003. We believe
this projection reflects modest growth in FY 2003 from $35 million in
sales reported by Lilly through February 2002 (since the drug was
approved in November 2001). (At $6,800 per patient, $35 million in
sales equates to just over 5,000 cases for the first 4 months since FDA
approval.) We note that some analysts project sales of
XigrisTM as high as approximately 100,000 cases annually. We
believe our estimate reflects the potential for growth beyond the
current usage since FDA approval in November 2001, and for the use of
XigrisTM in treating patients without multiple organ failure
for whom the drug is indicated but who were not included in Lilly's
estimate.
If the maximum $3,400 add-on payment is made for all 50,000 of
these patients, the total amount that would be paid for these cases
would be an additional $170 million. However, comparing the total
standardized charges for the 274 patients age 65 or older, we
calculated that 56 percent had average standardized charges below the
weighted average standardized charges for the 23 DRGs into which these
cases were categorized. Therefore, assuming the costs for these cases
would be below the payment received, these 56 percent of cases would
not receive any additional payment. Therefore, for purposes of budget
neutrality, we estimate the total payments likely to be made under this
provision during FY 2003 for cases involving the administration of
XigrisTM would be $74.8 million (44 percent of $170
million).
Comment: Numerous commenters recommended that we approve
XigrisTM. Many of the commenters described
XigrisTM as a major advance in the treatment of patients
with severe sepsis. However, some commenters indicated that its use has
substantially increased the costs of caring for these patients. One
commenter reported rationing of this drug at some institutions due to
cost considerations. Another commenter submitted an article from a
pharmaceutical newsletter recommending the ``best method for patient
selection is to use the criteria for enrollment in the PROWESS trial.''
Response: We are pleased to approve XigrisTM for add-on
payments under this provision. As described above, we believe this drug
represents a substantial improvement over currently available therapies
for the treatment of severe sepsis in patients who have a high risk of
death. We note that our finding that XigrisTM represents a
substantial clinical improvement is limited to the indications and
contraindications listed in the approved FDA labeling guidelines.
Comment: Some commenters, including the applicant, objected to CMS'
request for additional data and endpoints beyond those requested by the
FDA for its approval of XigrisTM. The commenters argued that
the FDA has the regulatory responsibility to monitor safety and
efficacy of drugs and medical devices and provides rigorous review and
oversight to the approval of drugs. They further contended that the
placement of drugs under FDA ``priority review'' process for approval
should be given weight when determining whether a drug meets the CMS
``substantial improvement'' criteria.
According to the commenters, by asking manufacturers for additional
data to determine if an applicant meets our substantial clinical
improvement criteria, CMS has inappropriately substituted its judgment
for that of the FDA. The commenters suggested that we implement
policies to ensure that these ``improprieties'' will not be repeated.
One commenter argued that, if we plan to ask for unpublished data from
future sponsors, we should amend our rulemaking to specify the
conditions under which unpublished data may be required.
Response: Although we are affiliated with the FDA and we do not
question the FDA's regulatory responsibility for decisions to approve
drugs, we are not using FDA guidelines to determine what drugs,
devices, or technologies qualify for new technology add-on payments
under Medicare. Our criteria do not depend on the standard of safety
and efficacy that the FDA sets for general use, but on a demonstration
of substantial clinical improvement in the Medicare population
(particularly patients over age 65).
To clarify this distinction, we offer the following example. The
FDA approves a drug for general use to control the effects of seasonal
allergies. This drug works well and has minimal side effects, but it
makes some people feel nauseous if they take it without food. Two years
later, another company creates a new allergy medicine that does not
cause nausea. This drug also gets approval from the FDA. This does not
necessarily mean that the new drug represents a substantial clinical
improvement over the existing drug. The new drug may be better for some
patients to take, but it is only an equivalent treatment, or another
option, to the first drug. Therefore, the new drug would not meet the
CMS substantial clinical improvement criteria.
We also disagree with the suggestion that the FDA priority review
process should be the standard by which CMS should approve new
technologies for add-on pass-through payments. We do not want to accept
a priority review determination by the FDA as a de facto substantial
improvement determination by us because: (1) The FDA decision is made
prior to reviewing all the clinical data about the product (the
decision to review the marketing application as a priority review is
made at the beginning of the review process); (2) if the FDA changes
its criteria for priority review, it would change the criteria for
substantial improvement; (3) the current criteria used by the FDA for
priority review are not the same across product types; (4) the criteria
for priority review are not exactly the same as CMS substantial
improvement in all instances; and (5) it would mean that the FDA would
be making a de facto reasonable and necessary determination, since a
product that offers a substantial improvement is certainly reasonable
and necessary.
With respect to the comments regarding the request for submission
of unpublished data, we note that the September 7, 2001 final rule
indicated that we would require applicants to submit evidence that the
technology does provide a substantial clinical improvement over
existing technologies (66 FR 46914). Therefore, we disagree with the
commenter that it is necessary to amend our regulatory process in this
regard.
Comment: The applicant commenter made several additional points in
addition to the previous comment. The
[[Page 50016]]
applicant objected to the suggestion in the proposed rule that payment
would likely be limited to patients meeting the FDA labeling
guidelines. The applicant also objected to the statement in the
proposed rule that the charge data submitted did not represent a random
sample. The applicant reiterated its estimate that 25,000 Medicare
beneficiaries would receive XigrisTM in FY 2003.
Response: We are approving XigrisTM for add-on payments
on the basis that it represents a substantial clinical improvement over
other treatments for patients consistent with the FDA-listed
indications. We do not have an administrable mechanism to identify
patients who may receive this drug without having the FDA-listed
indications. We will review potential options to enable us to more
precisely make such distinctions in the future. We reserve the right to
reexamine the issue of limiting the types of patients for which add-on
payments are made for FY 2004.
In determining whether a new technology is eligible for add-on
payments, we compare the average standardized charges of cases
involving the applicant technology to the weighted threshold of the
relevant DRGs, which reflects the charges of all cases in those DRGs
that are discharged from all hospitals (weighted by the number of cases
in each DRG). Thus, our statement that the data submitted did not
represent a random sample was made in the context of measuring whether
the average standardized charge of the PROWESS trial data was
statistically significantly higher than the threshold. In order for
such a significance test to be truly valid, the trial cases would have
to have been drawn randomly from all cases and all hospitals with cases
in the relevant DRGs. Clearly, the PROWESS trial was not designed in
this manner, nor would we expect it to be. Thus, we were attempting to
approximate a standard using a methodology that requires certain
assumptions that were not met by the data at hand, and we were merely
acknowledging it was only an approximation.
As stated above, we believe the applicant's estimate of 25,000
Medicare patients receiving XigrisTM during FY 2003 does not
reflect cases without multiple organ failures but with APACHE II scores
in the third and fourth quartiles.
Comment: Some commenters noted that ICD-9-CM codes do not
distinguish between dosage amounts for drugs. They recommended (at
least until ICD-10-PCS becomes available) relying on ICD-9-CM for
identifying new procedures such as a new pancreas implant or a
minimally invasive hip replacement; and incorporating the HCPCS Level
II codes. (HCPCS stands for Health Care Financing Administration
[recently renamed the Centers for Medicare & Medicaid Services] Common
Procedure Coding System) for new drugs or supplies.
One commenter indicated that ICD-9-CM codes appear to be sufficient
at this time, but, as new technologies proliferate, they will become
overwhelming. However, the commenter did request guidance from us about
using ``nontraditional'' ICD-9-CM codes, as well as information about
reporting these codes in instances where more than six procedure codes
(the maximum spaces provided on the bill) are involved.
Response: We appreciate the insight provided by this commenter
regarding future coding options and will take it into consideration as
we look to future refinements to this policy. However, for the reasons
addressed at length in the September 7, 2001 final rule, we are using
the ICD-9-CM codes at this time to identify cases eligible for the new
technology add-on (66 FR 46909-10). However, because of limited space
available for new ICD-9-CM codes, we are unable at this time to
differentiate the volume of drugs that are administered. Therefore, as
described above, we will pay on the basis of an average dose per
patient.
As stated above, add-on payments for XigrisTM will be
calculated for cases identified by use of the ICD-9-CM code 00.11 (when
other conditions are met). In relation to guidance on the use of this
code, we believe the documentation requirements are straightforward:
consistent with the definition of the code, the medical record must
indicate infusion of drotrecogin alfa (activated). With respect to
situations where more than six procedure codes may be involved,
hospitals should follow normal coding guidelines for selecting which
codes to include.
b. Bone Morphogenetic Proteins (BMPs) for Spinal Fusions
BMPs have been isolated and shown to have the capacity to induce
new bone formation. Using recombinant techniques, some BMPs (referred
to as rhBMPs) can be produced in large quantities. This has cleared the
way for their potential use in a variety of clinical applications such
as in delayed unions and nonunions of fractured bones and spinal
fusions. One such product, rhBMP-2, is developed for use instead of a
bone graft with spinal fusions.
An application was submitted by Medtronic Sofamor Danek for the
InFUSETM Bone Graft/LT-CAGETM Lumbar Tapered
Fusion Device for approval as a new technology eligible for add-on
payments. The product is applied through use of an absorbable collagen
sponge and an interbody fusion device, which is then implanted at the
fusion site. The patient undergoes a spinal fusion, and the product is
placed at the fusion site to promote bone growth. This is done in place
of the more traditional use of autogenous iliac crest bone graft.
In 1997, in a pilot study conducted under a FDA approved device
exemption, 14 patients were enrolled at 4 investigational sites. Eleven
patients received rhBMP-2, with 3 control patients. Radiographs and
computed tomography scans at 6, 12, and 24 months after surgery showed
that all 11 patients who received rhBMP-2 had solid fusions, whereas
only 2 of the 3 patients who received autogeneous bone graft had solid
fusions. Scores from the Oswestry Low Back Pain Disability
Questionnaire showed that 6 of 11 patients treated with rhBMP-2 had a
successful outcome at 3 months after surgery, compared with 0 of 3
control patients. After 6 months, the results had changed to 7 of 11
rhBMP-2 patients and 2 control patients with successful treatments; and
at 12 months, 10 rhBMP-2 patients and 2 control patients were judged
successful. The results were unchanged at 24 months. The trial results
were presented in an article in the February 1, 2000 edition of SPINE
(Bone, S., Zdeblick, T., et al., ``The Use of rhBMP-2 in Interbody
Fusion Cages--Definitive Evidence of Osteoinduction in Humans: A
Preliminary Report''), Vol. 25, No. 3, p. 376.
The above study was then expanded to involve 281 patients at 16
sites, with 143 patients in the rhBMP-2 group and 138 patients in the
autogenous iliac crest bone graft group. In the rhBMP-2 group, 76.9
percent of the patients showed an improvement of at least 15 points in
their disability scores at 12 months postoperatively. This compared
favorably to 75 percent of patients in the control group. At 6 months
following surgery, 97 percent of patients in the rhBMP-2 group showed
evidence of interbody fusion, as compared to 95.8 percent in the
control group. At 12 months, 96.9 percent of patients in the rhBMP-2
group were fused as compared to 92.5 percent in the control group. At
this time, the results of this study are unpublished.
[[Page 50017]]
Cost data were submitted for 88 patients participating in the
follow-up study described above. This trial was a single-level,
anterior lumbar interbody fusion clinical study. Of the 88 bills with
cost data, the applicant calculated an average standardized charge for
these single-level fusion cases of $33,757. According to the applicant,
``it is anticipated that a large number, if not the majority, of cases
using BMP technology will, in practice, be multi-level fusions.'' The
applicant reported the estimated hospital charges (based on general
charging practices) to be $17,780 for each level. In order to account
for the use of this technology in multilevel spinal fusions, the
applicant assumed 47 percent of spinal fusions were multilevel (based
on analysis of Medicare spinal fusion cases). Increasing the average
standardized charge for the cases in the trial by $17,780, the
applicant calculated a weighted average standardized charge (53 percent
single-level and 47 percent multilevel) of $45,556.
Of these 88 cases, 11 were assigned to DRG 497 (Spinal Fusion
Except Cervical With CC) and 77 were assigned to DRG 498 (Spinal Fusion
Except Cervical Without CC). In order to qualify for new technology
payments based on these DRGs, the threshold would be $37,815.
At the time of the proposed rule, this technology was not approved
for general use by the FDA. Therefore, we indicated that if the FDA
approved the product for general use prior to our issuance of the final
rule, we would issue a determination whether this technology represents
a substantial clinical improvement under the criteria outlined in the
September 7, 2001 final rule.
On July 2, 2002, the FDA approved this technology. The approval was
for spinal fusion procedures in skeletally mature patients with
degenerative disc disease at one level from L4-S1. Therefore, based on
the FDA's approval, multilevel usages of this technology would be off-
label. As noted above, this technology would meet the cost threshold
only if the added costs of multilevel fusions are taken into account.
Because the FDA has not approved this technology for multilevel
fusions, and the applicant has not submitted data to demonstrate this
technology is a substantial clinical improvement for multilevel fusions
(as described above, the clinical trial upon which the application was
based was a single-level fusion trial), we cannot issue a substantial
clinical improvement determination for multilevel fusions. Therefore,
because the average charges for this new technology, when used for
single-level spinal fusions, does not exceed the threshold of $37,815
noted above, we are denying this application for add-on payments during
FY 2003. Because the new technology did not qualify on the basis of
charges above the thresholds, we did not make a substantial improvement
determination.
Comment: A few commenters were very supportive of approving
Medtronic Sofamor Danek's InFUSETM Bone Graft technology.
These commenters note that this rhBMP-2 technology is a substantial
clinical improvement as it obviates the need for a second surgical
procedure to harvest autogenous iliac crest bone. The commenters noted
that this substantial improvement focuses mostly on relief of pain in
patients because many patients who undergo bone harvesting have pain at
the donor site up to 10 years after the surgery.
Several other commenters, however, recommend that we not approve
this application for add-on payments. These commenters stated that
``the clinical trial results solidly counter the claim of significant
improvement.'' Commenters also objected to the data that the
manufacturer provided, stating that in order for the threshold to be
met, the manufacturer provided estimates for procedures that would
involve multilevel fusions. At the time of the proposed rule, the FDA
had not approved the treatment, and commenters noted that the FDA could
not approve the treatment for multilevel surgeries because it had been
given no clinical evidence for these procedures. The commenters pointed
out that FDA's approval (which came on July 2, 2002) could (and does)
only indicate approval for use of the product for single-level fusions.
Therefore, the commenters strongly opposed the approval of the BMP
applicant because it does not meet our financial threshold. The
commenters also were concerned that, if approved for new technology
payments, the technology may be used inappropriately off label and for
indications that have not been approved by the FDA.
Response: We stated in the September 7, 2001 final rule that we
believe the technologies approved for add-on payments should be limited
to those new technologies that have been demonstrated to represent a
substantial improvement in caring for Medicare beneficiaries, such that
there is a clear advantage to creating a payment incentive for
physicians and hospitals to utilize the new technology (66 FR 46913).
Further, we stated that we believe it is in the best interest of
Medicare beneficiaries to proceed very carefully with respect to the
incentives created to quickly adopt new technology.
As noted above, we are denying this application for add-on payments
during FY 2003 because it does not meet our cost threshold when used
for single-level spinal fusions, and there is no available evidence
upon which to determine whether it represents a substantial improvement
for multilevel uses.
c. ZyvoxTM
ZyvoxTM is the first antibiotic in the oxazolidinone
class and is widely used by hospitals in the United States and other
countries against the medically significant gram-positive bacteria,
including those that are resistant to other therapies. Gram-positive
bacterial infections have become increasingly prevalent in recent
years, most commonly implicated in infections in the lower respiratory
tract, skin and soft tissue, bone and bloodstream, and in meningitis.
Significant morbidity and mortality trends are associated with such
pathogens. Epinomics Research, Inc., submitted the application on
behalf of Pharmacia Corporation (Pharmacia), which markets the drug.
The FDA approved ZyvoxTM on April 18, 2000, for the
treatment of serious infections caused by antibiotic-resistant
bacteria. The applicant contends that this qualifies ZyvoxTM
for approval within the 2-year to 3-year period referenced at
Sec. 412.87(b)(2). Furthermore, the applicant notes that the approval
of the new ICD-9-CM code 00.14 (Injection or infusion of oxazolidinone
class of antibiotics) effective October 1, 2002, will permit a more
precise identification of these cases. However, as noted previously,
technology will no longer be considered new after the costs of the
technology are reflected in the DRG weights. Because the costs of
ZyvoxTM are currently reflected in the DRG weights,
ZyvoxTM does not meet our criterion that a medical service
or technology be ``new''. The FY 2001 MedPAR data used to calculate the
proposed DRG weights for FY 2003 include cases where ZyvoxTM
was administered. The application itself noted that the use of
ZyvoxTM is widespread. Therefore, even though the existing
code, 99.21 (Injection of antibiotic) is a general code used for the
administration of various antibiotics including ZyvoxTM, and
does not separately identify the administration of ZyvoxTM
as will be possible with the new code 00.14, the charges associated
with these cases are reflected in the proposed FY 2003 DRG weights.
As stated above, we note that the applicant itself points out that
ZyvoxTM
[[Page 50018]]
is widely used currently by hospitals. In its 4th quarter 2001 earnings
report, Pharmacia reports total sales in the United States of $97
million, which is an increase of 105 percent over the previous year.
This would indicate expanding access to the drug.
We would point out that, in response to a comment that technologies
should qualify as ``new'' beginning with the assignment of an
appropriate tracking code, we clarified in the September 7, 2001 final
rule that we would not consider technologies that have been on the
market for more than 2 or 3 years to be ``new'' on the basis that a
more precise ICD-9-CM procedure code has been created (66 FR 46914).
However, although such technologies would not qualify for add-on
payments under this provision, we did indicate that we would evaluate
whether the existing DRG assignments of the technology are appropriate.
For example, currently the administration of ZyvoxTM
does not affect the DRG to which a case is assigned. In its application
for add-on payments, Epinomics provided CMS data that included clinical
trials as well as data from a sample that spanned MedPAR files from FY
2000 through FY 2002. For its sample study, Epinomics obtained patient
records from 70 hospitals that used ZyvoxTM treatment on 832
Medicare patients. The cases were distributed across 151 DRGs.
Epinomics calculated that the mean standardized charge for these 485
cases was $74,174. The case-weighted mean standardized charge for all
cases in these DRGs would be $33,740 (based on the distribution of
ZyvoxTM cases across the 151 DRGs).
The unit price for the drug varies from approximately $30 for a 100
milliliter bag (200 milligram linezolid) to approximately $1,350 for
600 milligram tablets (unit doses of 30 tablets). Nevertheless, it
appears the high average charges associated with patients receiving the
drug are not directly attributable to the administration of
ZyvoxTM. Therefore, in the May 9, 2002 proposed rule, we did
not propose any changes to the DRG assignment of these cases. We
indicated that to the extent these cases are more expensive due to the
severity of illness of the patients being treated, the current outlier
policy will offset any extraordinarily high costs incurred.
Comment: Several commenters, including the applicant, strongly
objected to our denial of ZyvoxTM for new technology
payments. They criticized our decision not to approve it on the grounds
that payments for this expensive drug are already incorporated into the
DRG recalibration for FY 2003. The commenters argued that, based on the
recent assignment of an ICD-9-CM code, the drug still qualifies for
add-on payments under the Congressional intent of the law.
The commenters referenced the language of section
1886(d)(5)(K)(ii)(II) of the Act in support of their claim that this
technology qualifies as new. They believed the 2-year to 3-year period
``beginning on the date on which an inpatient hospital code is issued
with respect to the service or technology'' applicable to
ZyvoxTM should begin October 1, 2002, when new code 00.14
becomes effective. They argued that this new code will allow data to be
accumulated to track the costs of these cases.
Response: Again, we do not believe it would be appropriate to
consider technologies that have been on the market for 2 or 3 years for
approval under this provision on the basis that a new, more precise,
procedure code is subsequently issued. Allowing technologies that have
already been in use to attain higher payments as a result of the
assignment of a new, more specific ICD-9-CM code would open the door
for the sponsors of any medical device or technology to consider
whether they might qualify their product for add-on payments by
requesting and receiving a new code from the ICD-9-CM Coordination and
Maintenance Committee. We do not believe it was Congress' intent that
this provision should be interpreted that way.
Therefore, it is necessary to establish a point after which
previously existing technologies are not eligible to qualify for add-on
payments under this new provision. We believe it is reasonable to
establish the cutoff point such that those technologies with data
available in the FY 2001 MedPAR to be included in the calculation of
the FY 2003 DRG weights will not be eligible for new technology
payments. We note that this process of incorporating new technologies
into existing DRGs, where they eventually affect the weights depending
on their utilization, was how all new technologies have been introduced
since 1984. While we recognize Congress' intent to revise this process
to expedite the introduction of new technologies, there was no
indication in the legislation that the new policy was to apply to
technologies whose costs were already reflected in the DRG weights.
Comment: The applicant criticized CMS for delaying the
implementation of the provision. The commenter noted that the provision
was to be implemented, ``[n]ot later than October 1, 2001'' and stated
that CMS failed to implement the law by October 1, 2001. They argued
that, by delaying the implementation, CMS effectively prevented
ZyvoxTM from ever meeting the ``new'' criteria, even though
the drug got approval only 8 months before the provision was passed.
Response: We disagree that we delayed implementation of this
provision. In the September 7, 2001 final rule, we stated that,
although we did not approve any new technologies for add-on payments
effective October 1, 2001, we did carefully evaluate all technologies
that were brought to our attention, either as a result of our internal
analysis or by the public, including those submitted for consideration
during the public comment period on the May 4, 2001 proposed rule.
ZyvoxTM was not among the technologies submitted for
consideration at that time.
Comment: Commenters argued that, although ZyvoxTM was
available and used during FY 2001, and therefore would be reflected in
hospitals' charges used to set the FY 2003 DRG relative weights, due to
the high cost of the drug, it is far from clear that hospitals
prescribed the product for the majority of Medicare patients for whom
it would be most appropriate. Therefore, the impact of the costs of the
drug on the DRG weights is understated.
Response: We cannot assess whether the utilization of
ZyvoxTM was hampered by Medicare payments during FY 2001.
However, we would note that ZyvoxTM was treated in the same
manner as other new technologies have been over the years. Further, we
will continue to evaluate the appropriateness of payment for these
patients as we do all other technologies and patient categories.
Comment: One commenter objected to the reference to
ZyvoxTM sales figures as evidence of expanding general
access to the drug. The commenter stated that we provided no evidence
to indicate this sale growth is the result of expanding use in the
treatment of Medicare beneficiaries. The commenter went on to argue
that ``sales reports and other company financial data must be
considered outside the scope of the review process.''
Response: We disagree that we should ignore sales reports related
to a product seeking additional payments to promote its expansion into
the medical market. This market analysis was certainly not the basis
for our decision not to approve this applicant, as described above. The
sales reports were simply a portion of data we considered in our
evaluation of the effects of our decision. We also note
[[Page 50019]]
that we received no evidence during the comment period to document that
the sales growth referenced above did not pertain to Medicare
beneficiaries.
Comment: The applicant expressed concern that, during discussions
and meetings with CMS, no mention was made that there might be an issue
related to the application meeting the ``new'' criterion.
Response: The criteria to qualify for add-on payments were
specified clearly in the September 7, 2001 final rule. Clearly, the
applicant believed it met the criteria, as evidenced by the fact that
it applied and its subsequent comments on our proposed decision. The
facts regarding the point at which ZyvoxTM was approved by
the FDA and when it became available for use are agreed upon. The
difference of opinion centers on the criteria for ``new''. The
commenter has described its interpretation, with which we disagree, as
discussed above. The public comment process is part of the review and
approval process. We believe the public comment process is the most
appropriate avenue to consider the interpretation of legislative and
regulatory criterion. As discussed above, we do not believe that it
would be appropriate to allow technologies that have already been in
use to attain higher payments as a result of the assignment of a new,
more specific, ICD-9-CM code.
d. RenewTM Radio Frequency Spinal Cord Stimulation Therapy
An application was submitted by Advanced Neuromodulation Systems
(ANS) for the RenewTM Spinal Cord Stimulation Therapy for
approval as a new technology eligible for add-on payments. ANS is a
medical device company that deals with management of chronic pain that
is severe, persistent, and unresponsive to drugs or surgery. Spinal
cord stimulation (SCS) offers a treatment alternative to expensive
ongoing comprehensive care. RenewTM SCS was introduced in
July 1999 as a device for the treatment of chronic intractable pain of
the trunk and limbs.
According to the applicant:
``SCS is a reversible method of pain control that works well for
certain types of chronic intractable pain. SCS requires a surgical
procedure to implant a receiver and leads. These implanted devices
generate electrical stimulation that interrupts pain signals to the
brain. SCS is considered to be a treatment of last resort, and is
usually undertaken only when first and second-line therapies for
chronic pain fail to provide adequate relief. SCS uses low-intensity
electrical impulses to trigger nerve fibers selectively along the
spinal cord. The stimulation of these nerve fibers diminishes or blocks
the intensity of the pain message being transmitted to the brain. SCS
replaces areas of intense pain with a more pleasant sensation * * *,''
masking the pain that is normally present.
Prior to RenewTM, SCS systems offered few technical
capabilities for treating complex chronic pain patients who suffered
with pain that spanned noncontiguous areas (multi-focal) or that varied
in intensity over the painful area. The RenewTM system
features a multiplex output mode that controls separate stimulation
programs to allow outputs of varying frequencies to be used at the same
time. According to ANS, ``The significance of this technology is that
it is now possible to multiplex (link and cycle) up to 8 programs to
provide pain relieving paresthesia overlap of anatomical regions that
are not contiguous or that cannot be captured by a single program.''
The RenewTM technology also allows the concomitant use
of separate programs for patients who require different power settings
for different areas that have pain. With this technology, separate
programs can be programmed from the same unit, with electrical output
parameters customized for each painful region. ANS contends that the
clinical significance of this technology is that patients who find
satisfactory pain relief will require fewer alternative treatments to
treat unrelieved pain.
The ANS application specifically requests add-on payments for the
costs of the Radio Frequency System (RF System). This system only
requires one surgical placement and does not require additional
surgeries to replace batteries as do other internal SCS systems. ANS
estimates that there are 2,900 RF Systems implanted annually; only 10
percent are in the inpatient setting. ANS is the only company that
offers a 16-channel/electrode system.
ANS provided the 2001 hospital acquisition cost for ANS
RenewTM 8 and 16 Channel/Electrode RF SCS Systems as
follows:
------------------------------------------------------------------------
ANS 2001
list price
------------------------------------------------------------------------
8 Channel/Electrode System:
One Lead (8 Electrode).................................... $2,750.00
One Extension (8 Electrode)............................... 695.00
Receiver (8 Channel)...................................... 4,995.00
Transmitter (8 Channel)................................... 4,995.00
Total System............................................ 13,435.00
16 Channel/Electrode System:
Two Leads (16 electrode).................................. 5,550.00
Two Extensions (16 electrode)............................. 1,390.00
Receiver (16 Channel)..................................... 7,295.00
Transmitter (16 Channel).................................. 7,295.00
Total System............................................ 21,480.00
------------------------------------------------------------------------
Currently, implanting the ANS 8 or 16 Channel/Electrode SCS System
falls into DRG 4 (Spinal Procedures) under ICD-9-CM procedure code,
03.93 (Insertion or replacement, spinal neurostimulation). According to
the September 7, 2001 Federal Register, the threshold to qualify for
additional new technology payments for services classified to DRG 4
would be $38,242 (based on adding the geometric mean and the standard
deviation of standardized charges) (66 FR 46922).
Relative to hospital invoice information, ANS provided the
following estimates:
`` * * * 90% of the U.S. hospital cost-to-charge ratios fall
between .24 and .69, and 75% fall between .29 and .58. The median is
.41. This median costs-to-charge ratio equates to an average hospital
markup of 144%. If you apply the average hospital markup of 144% to the
device acquisition cost plus the estimated facility cost, the result is
an estimated hospital invoice for the SCS implant procedure of
$40,101.00, for the 8 Channel/Electrode System and $59,731.00 for the
16 Channel/Electrode System.''
In support of its application, ANS provided detailed bills for 12
patients. Of the 12 cases with detailed billing data, 3 patients were
age 65 or older. The average total charge for these 3 cases, including
the average standardized charge for operating room costs, was $42,820.
As noted previously, technology will no longer be considered new
after the costs of the technology are reflected in the DRG weights.
Because the RenewTM RF System was introduced in July 1999,
the FY 2001 MedPAR data used to calculate the DRG weights for FY 2003
includes any Medicare cases that involved the implantation of the
RenewTM RF System. The charges associated with these cases
are reflected in the FY 2003 DRG weights. Therefore, the
RenewTM RF System is not considered ``new'' under our
criteria. However, we will continue to monitor these cases in DRG 4 to
determine whether this is the most appropriate DRG assignment.
Comment: Several commenters objected to our proposed decision to
not approve this application because the technology does not meet our
criterion for ``new'' designation.
[[Page 50020]]
Response: We continue to believe that this technology does not meet
the criterion for the reasons given in the proposed rule, as elaborated
on in our response to comments discussed above in relation to
ZyvoxTM.
III. Changes to the Hospital Wage Index
A. Background
Section 1886(d)(3)(E) of the Act requires that, as part of the
methodology for determining prospective payments to hospitals, the
Secretary must adjust the standardized amounts ``for area differences
in hospital wage levels by a factor (established by the Secretary)
reflecting the relative hospital wage level in the geographic area of
the hospital compared to the national average hospital wage level.'' In
accordance with the broad discretion conferred under the Act, we
currently define hospital labor market areas based on the definitions
of Metropolitan Statistical Areas (MSAs), Primary MSAs (PMSAs), and New
England County Metropolitan Areas (NECMAs) issued by the Office of
Management and Budget (OMB). OMB also designates Consolidated MSAs
(CMSAs). A CMSA is a metropolitan area with a population of one million
or more, comprising two or more PMSAs (identified by their separate
economic and social character). For purposes of the hospital wage
index, we use the PMSAs rather than CMSAs since they allow a more
precise breakdown of labor costs. If a metropolitan area is not
designated as part of a PMSA, we use the applicable MSA. Rural areas
are areas outside a designated MSA, PMSA, or NECMA. For purposes of the
wage index, we combine all of the rural counties in a State to
calculate a rural wage index for that State.
We note that, effective April 1, 1990, the term Metropolitan Area
(MA) replaced the term MSA (which had been used since June 30, 1983) to
describe the set of metropolitan areas consisting of MSAs, PMSAs, and
CMSAs. The terminology was changed by OMB in the March 30, 1990 Federal
Register to distinguish between the individual metropolitan areas known
as MSAs and the set of all metropolitan areas (MSAs, PMSAs, and CMSAs)
(55 FR 12154). For purposes of the prospective payment system, we will
continue to refer to these areas as MSAs.
Under section 1886(d)(8)(B) of the Act, hospitals in certain rural
counties adjacent to one or more MSAs are considered to be located in
one of the adjacent MSAs if certain standards are met. Under section
1886(d)(10) of the Act, the Medicare Geographic Classification Review
Board (MGCRB) considers applications by hospitals for geographic
reclassification from a rural area to a MSA, one rural area to another
rural area, or from one MSA to another MSA, for purposes of payment
under the acute care hospital inpatient prospective payment system.
In a December 27, 2000 notice published in the Federal Register (65
FR 82228), OMB issued its revised standards for defining MSAs. In that
notice, OMB indicated that it plans to announce in calendar year 2003
definitions of MSAs based on the new standards and the Census 2000
data. We will evaluate the new area designations and their possible
effects on the Medicare wage index, as well as other provider payment
implications. Although the final construct of the redefined MSAs will
not be known until 2003, we intend to work closely with OMB to begin to
assess the potential ramifications of these changes.
Beginning October 1, 1993, section 1886(d)(3)(E) of the Act
requires that we update the wage index annually. Furthermore, this
section provides that the Secretary base the update on a survey of
wages and wage-related costs of short-term, acute care hospitals. The
survey should measure, to the extent feasible, the earnings and paid
hours of employment by occupational category, and must exclude the
wages and wage-related costs incurred in furnishing skilled nursing
services. As discussed below in section III.F. of this preamble, we
also take into account the geographic reclassification of hospitals in
accordance with sections 1886(d)(8)(B) and 1886(d)(10) of the Act when
calculating the wage index.
Section 304(c) of Public Law 106-554 amended section 1886(d)(3)(E)
of the Act to provide for the collection of data every 3 years on the
occupational mix of employees for each short-term, acute care hospital
participating in the Medicare program, in order to construct an
occupational mix adjustment to the wage index. The initial collection
of these data must be completed by September 30, 2003, for application
beginning October 1, 2004 (the FY 2005 wage index).
In the May 4, 2001 proposed rule (66 FR 22674), we suggested
possible occupational categories from the Occupational Employment
Statistics (OES) survey conducted by the Bureau of Labor Statistics. In
response to comments on the proposed rule, we agreed to work with the
health care industry to develop a workable data collection tool. After
we develop a method that appropriately balances the need to collect
accurate and reliable data with the need to collect data that hospitals
can be reasonably expected to have available, we will issue
instructions as to the type of data to be collected, in advance of
actually requiring hospitals to begin providing the data.
Comment: Commenters strongly encouraged us to take the time needed
to develop the most appropriate survey instrument for collecting
occupational mix data and to provide adequate time for hospitals to
have available the required information. One commenter wrote that
neither CMS nor the hospital industry is ready to implement an
occupational mix adjustment. The commenter believed that, when the law
was passed requiring occupational mix data to be collected by the end
of September 2003, Congress did not understand the burden and
complexity of collecting and using the information. The commenter noted
that, over 10 years, CMS encountered many problems when it first tried
to collect occupational mix data and believed that, today, hospitals
are in no better position to provide the necessary information.
A commenter also requested that we publish a rule for comment that
delineates our proposed occupational mix methodology and illustrates
how the index mix would be calculated and used to adjust the overall
wage index. The commenter expressed interest in continuing to work with
us on this effort.
MedPAC has recommended that CMS collect the occupational mix data
as part of the Medicare cost report, just as the wage data are
currently collected. MedPAC notes that a separate survey usually has a
lower initial response rate, and incorporating the survey as part of
the cost report should minimize reporting burden on hospitals, enhance
data accuracy, and help to achieve a 100-percent response rate. MedPAC
recommended that we modify the cost report form and instructions as
soon as possible to enable the collection of this data during the
second round of data collection. MedPAC also recommended that we
provide detailed information as soon as possible to hospitals regarding
the specific occupational mix data they will be required to report in
order to allow hospitals time to modify their information systems to
collect the necessary wage and hours data. Although, MedPAC
acknowledges it may not be possible to collect accurate data for FY
2002, it believes that it still may be feasible to collect the data for
FY 2003 and meet the Congressional mandate to implement an occupational
[[Page 50021]]
mix adjustment for the FY 2005 wage index.
A few commenters expressed concern that an occupational mix
adjustment would only recognize geographical differences in the price
hospitals pay for a particular employee category and would not reflect
that a hospital, such as a teaching hospital, may have higher labor
costs because its patient population requires a larger number of highly
skilled, highly priced employees. The commenters noted that a previous
MedPAC study showed that an occupational mix adjustment would lower the
wage index values for many areas where teaching hospitals are located.
The commenters also expressed concern that Medicare's current DRG
payment system does not adequately recognize patient severity and the
higher resource costs that are associated with treating complex
patients. The commenters believed that the current wage index
methodology more appropriately reflects a higher employee skill mix, as
reflected in higher wage indices where teaching hospitals are located,
allowing teaching hospitals to recoup some of the losses they incur
under the current DRG system. The commenters suggested that, if we
include an occupational mix adjustment in the wage index, we should
also refine the DRG system to ensure that more complex cases are
adequately reimbursed.
Response: We appreciate all the comments we received and the
continued support and assistance of hospitals in developing the
occupational mix adjustment. Before implementing the adjustment, we
will publish the details of the occupational mix methodology in the
Federal Register and provide for public comment.
B. FY 2003 Wage Index Update
The FY 2003 wage index values in section V. of the Addendum to this
final rule (effective for hospital discharges occurring on or after
October 1, 2002 and before October 1, 2003) are based on the data
collected from the Medicare cost reports submitted by hospitals for
cost reporting periods beginning in FY 1999 (the FY 2002 wage index was
based on FY 1998 wage data).
The final FY 2003 wage index includes the following categories of
data associated with costs paid under the hospital inpatient
prospective payment system (as well as outpatient costs), which were
also included in the FY 2002 wage index:
Salaries and hours from short-term, acute care hospitals.
Home office costs and hours.
Certain contract labor costs and hours.
Wage-related costs.
Consistent with the wage index methodology for FY 2002, the wage
index for FY 2003 also continues to exclude the direct and overhead
salaries and hours for services such as skilled nursing facility (SNF)
services, home health services, and other subprovider components that
are not paid under the hospital inpatient prospective payment system.
We calculate a separate Puerto Rico-specific wage index and apply
it to the Puerto Rico standardized amount. (See 62 FR 45984 and 46041.)
This wage index is based solely on Puerto Rico's data. Finally, section
4410 of Public Law 105-33 provides that, for discharges on or after
October 1, 1997, the area wage index applicable to any hospital that is
not located in a rural area may not be less than the area wage index
applicable to hospitals located in rural areas in that State.
C. FY 2003 Wage Index
1. Removal of Wage Costs and Hours Related to Graduate Medical
Education (GME) and Certified Registered Nurse Anesthetists (CRNAs)
Because the hospital wage index is used to adjust payments to
hospitals under the acute care hospital inpatient prospective payment
system, the wage index should, to the extent possible, reflect the wage
costs associated with those cost centers and units paid under the
hospital inpatient prospective payment system. Costs related to
graduate medical education (GME) (teaching physicians and residents)
and certified registered nurse anesthetists (CRNAs) are paid by
Medicare separately from the hospital inpatient prospective payment
system. In 1998, the AHA convened a workgroup to develop a consensus
recommendation on this issue. The workgroup, which consisted of
representatives from national and State hospital associations,
recommended that costs related to GME and CRNAs be phased out of the
wage index calculation over a 5-year period. Based upon our analysis of
hospitals' FY 1996 wage data, and consistent with the AHA workgroup's
recommendation, we specified in the July 30, 1999 final rule (64 FR
41505) that we would phase out these costs from the calculation of the
wage index over a 5-year period, beginning in FY 2000.
FY 2003 would be the fourth year of the phaseout. Therefore, the
wage index calculation for FY 2003 would blend 20 percent of a wage
index with GME and CRNA costs included and 80 percent of a wage index
with GME and CRNA costs removed. FY 2004 would begin the calculation
with 100 percent of the GME and CRNA costs removed. However, in the May
9, 2002 proposed rule, we proposed to remove 100 percent of GME and
CRNA costs from the FY 2003 wage index.
We have analyzed the FY 2003 wage index both with 100 percent of
GME and CRNA costs removed and with 80 percent of these costs removed
used the final wage index file. We found that the majority of labor
market areas, both rural and urban, would benefit by the removal of all
of these costs (304 out of 373). Only one rural labor market area would
be negatively impacted by this change (New Hampshire by -0.09 percent).
We note that, as part of its Report to the Congress on Medicare in
Rural America (June 2001), MedPAC recommended fully implementing this
phaseout during FY 2002. Similar to our findings, MedPAC found the
effect of completely eliminating GME and CRNA costs ``might not be
negligible for some areas, but it would not be large in any case''
(page 76). Of the urban labor market areas that would be negatively
affected the decreases range from .01 to 1.0 percent.
Because we believe removing GME and CRNA costs from the wage index
calculation is appropriate, and the impact is generally positive and
relatively small, we proposed to remove 100 percent of GME and CRNA
costs beginning with FY 2003 wage index.
Comment: Several commenters stated that, although the early
elimination of GME and CRNA costs from the wage index calculation is
not as significant as some other payment reductions, the proposed
policy represents a net reduction in payments for some hospitals
compared to payments using a wage index with 80 percent of GME and CRNA
costs removed. Based on CMS' analysis presented in the proposed rule,
the commenters noted that excluding 100 percent of these costs from the
FY 2003 wage index would negatively affect hospitals in more than 20
percent of the labor market areas. Commenters also noted that the
affected areas are primarily urban, where large teaching hospitals are
more likely to be located. In addition, the commenters noted that urban
hospitals have to absorb increased indigent care costs.
The commenters believed that our current 5-year phaseout policy was
the result of a good-faith agreement negotiated with a hospital
industry workgroup. They further believed that adoption of the proposed
accelerated phaseout for the FY 2003 wage index would establish an
unfortunate
[[Page 50022]]
precedent that questions the rationale for hospital associations to
enter into any future negotiations with CMS. The commenters request us
to adhere to our original 5-year phaseout schedule.
One commenter supported our proposal to remove 100 percent of GME
and CRNA costs from the FY 2003 wage index.
Response: We implemented changes to the FY 1995 cost report (used
to calculate the FY 1999 wage index) in order to separately identify
the wage data associated with GME and CRNAs. However, due to data
reporting problems, we were unable to remove these costs until the FY
2000 wage index. In the meantime, the hospital industry established a
workgroup that developed a compromise agreement on the removal of these
data from the wage index, including a 5-year phaseout to alleviate the
negative impact this change would have on some areas. The
recommendations of the workgroup were presented to CMS, and most (but
not all) of them were accepted (see the July 30, 1999 final rule, 64 FR
41505). However, we note that CMS was not a party to the industry
workgroup that developed the compromise agreement.
As noted above, Medicare pays hospitals for GME and CRNA costs
separately from the acute care hospital inpatient prospective payment
system. CMS is responsible for ensuring the accuracy and fairness of
the wage index and it is our assessment at this time that, due to the
small impact as described above, of removing GME and CRNA costs from
the wage index, and because hospitals that are negatively impacted by
this change are in areas that have benefited from the inclusion of
these costs over the years, it is in the interest of improving the
overall fairness of the wage index to accelerate the phaseout.
Therefore, we are proceeding with removing 100 percent of GME and CRNA
costs beginning with the FY 2003 wage index.
Comment: One commenter representing CRNAs requested that we
continue to include in the wage index the costs of contract CRNAs who
are used by hospitals to address staffing shortages. The commenters
noted that our proposal recognizes the fact that hospitals are
increasingly reliant upon contract labor for providing direct and
indirect patient care. The commenter believed that hospitals should not
be penalized for having to use contract CRNAs to meet staffing needs.
Response: As explained above, we believe the wage index should, to
the extent possible, reflect those costs for which hospitals receive
payment under the acute care hospital inpatient prospective payment
system. Because hospitals are not paid under this system for CRNAs'
services, we continue to believe that CRNA costs are appropriately
excluded from the wage index.
2. Contract Labor for Indirect Patient Care Services
Our policy concerning the inclusion of contract labor costs for
purposes of calculating the wage index has evolved with the increasing
role of contract labor in meeting special personnel needs of many
hospitals. In addition, improvements in the wage data have allowed us
to more accurately identify contract labor costs and hours. As a
result, effective with the FY 1994 wage index, we included the costs
for direct patient care contract services in the wage index
calculation, and with the FY 1999 wage index, we included the costs for
certain management contract services. (The August 30, 1996 final rule
(61 FR 46181) provided an in-depth discussion of the issues related to
the inclusion of contract labor costs in the wage index calculation.)
Further, the FY 1999 wage index included the costs for contract
physician Part A services, and the FY 2002 wage index included the
costs for contract pharmacy and laboratory services.
We continue to consider whether to expand our contract labor
definition to include more types of contract services in the wage
index. In particular, we have examined whether to include the costs for
acquired dietary and housekeeping services, as many hospitals now
provide these services through contracts. Costs for these services tend
to be below the average wages for all hospital employees. Therefore,
excluding the costs and hours for these services if they are provided
under contract, while including them if the services are provided
directly by the hospital, creates an incentive for hospitals to
contract for these services in order to increase their average hourly
wage for wage index purposes.
It has also been suggested that we expand our definition to include
all contract services, including both direct and indirect patient care
services, in order to more appropriately calculate relative hospital
wage costs. Our goal is to ensure that our wage index policy continues
to be responsive to the changing need for contract labor and allow
those hospitals that must depend on contract labor to supply needed
services to reflect those costs in their wage data. At the same time,
we are concerned about hospitals' ability to provide documentation that
sufficiently details contract costs and hours. The added overhead,
supplies, and miscellaneous costs typically associated with contract
labor may result in higher costs for contract labor compared to
salaried labor. If these costs are not separately identifiable and
removed, they may cause distortions in the wage index.
We agree that it may be appropriate to include indirect patient
care contract labor costs in the wage index. However, in light of
concerns about hospitals' ability to accurately document and report
these costs, we believe the best approach is to assess and include
these costs incrementally. Through incremental changes, we can better
determine the impact that specific costs have on area wage index
values. Also, by including these costs incrementally, hospitals and
fiscal intermediaries are able to adjust to the additional
documentation and review requirements associated with reporting the
additional contract costs and hours.
In the May 9, 2002 proposed rule, we proposed to begin collecting
contract labor costs and hours for management services and the
following overhead services: administrative and general, housekeeping,
and dietary. We selected these three overhead services because they are
provided at all hospitals, either directly or through contracts, and
together they comprise about 60 percent of a hospital's overhead hours.
In addition, consistent with our consideration of administrative and
general services, we proposed to collect costs and hours associated
with contract management services that are not currently included on
Worksheet S-3, Part II, Line 9 (that is, management services other than
those of the chief executive officer, chief financial officer, chief
operating officer, and nurse administrator).
Comment: Several commenters supported our continuing efforts to
examine contract labor costs for inclusion in the wage index and to
ensure that the wage index is not manipulated to distort an area's wage
level. MedPAC commented that ``excluding contract labor costs may
affect the accuracy of the wage index and introduces undesirable
incentives that may affect hospital employment decisions.'' However,
some commenters cautioned that it will be challenging for hospitals to
provide the required detailed data and documentation for the
appropriate costs and hours and to exclude nonlabor expenses, such as
equipment and supplies, from total contract expenses. The commenters
believed that, for most housekeeping and dietary services contracts,
[[Page 50023]]
meaningful data regarding hours are nonexistent. For management
contracts, some commenters believed that the collection of cost and
hours data may be more feasible. However, the contract itself may not
provide enough detail to be a sufficient source of documentation. One
commenter disagreed with the inclusion of contract labor costs in the
administrative and general cost center because the commenter believed
that the types of costs reported in that center vary too widely across
hospitals to be comparable.
The commenters advised that it is important for us to ensure
consistency among fiscal intermediaries in their auditing of supporting
documentation for contract labor. Further, some commenters supported a
delay in including the additional contract labor costs until we develop
clear definitions and acceptable methods for tracking the costs and
hours. A delay would also allow hospitals more time to assure the
appropriate and accurate collection of the required data. One commenter
also requested that CMS make the new data regarding contract labor
costs available for review, analysis, and comment prior to including
these costs in the wage index.
Response: Due to, among other things, the general support we
received for our proposal to include costs for contract indirect
patient care services in the wage index, we are proceeding as proposed.
We will revise the cost report form and instructions, as early as it is
feasible to do so. We also will monitor the hospital industry for
information regarding hospitals' ability to provide the data. Further,
we will work with hospitals and intermediaries to develop acceptable
methods for tracking the costs and hours. Finally, before including
these additional costs in the wage index, we will provide a detailed
analysis of the impact of including these additional costs in the wage
index values in the Federal Register and provide for public comment.
Our final decision on whether to include contract indirect patient care
labor costs in our calculation of the wage index will depend on the
outcome of our analyses and public comments.
Comment: One commenter believed that, in order to be a true measure
of labor market differences, the wage index should reflect only those
jobs and employment practices that are the same in every geographic
area. In addressing the disparity in the current wage index policy that
excludes the costs for contracted low paying jobs from the wage index,
while the costs for the same services under direct hire are included,
the commenter suggested that we consider excluding from the wage index
all labor costs that are obtained under different methods across
hospitals.
Response: The use of contract labor is widespread among hospitals,
and the practice of hiring under contract exists to some degree in
virtually every service a hospital provides. Under the commenter's
proposal, the resulting wage index would reflect too few categories of
services to be representative of hospitals' labor force. Therefore, we
believe it would not be feasible to exclude from the wage index all
services that are obtained by hospitals using different employment
methods.
D. Verification of Wage Data From the Medicare Cost Report
The data for the FY 2003 wage index were obtained from Worksheet S-
3, Parts II and III of the FY 1999 Medicare cost reports. The data file
used to construct the wage index includes FY 1999 data submitted to us
as of July 2002. As in past years, we performed an intensive review of
the wage data, mostly through the use of edits designed to identify
aberrant data.
We asked our fiscal intermediaries to revise or verify data
elements that resulted in specific edit failures. The unresolved data
elements that were included in the calculation of the proposed FY 2003
wage index have been resolved and are reflected in calculation of the
final FY 2003 wage index.
The final rule we removed data for 36 hospitals that failed edits.
For 14 of these hospitals, we were unable to obtain sufficient
documentation to verify or revise the data because the hospitals are no
longer participating in the Medicare program, are under new ownership,
or are in bankruptcy status, and supporting documentation is no longer
available. We identified 22 hospitals with incomplete or inaccurate
data resulting in zero or negative, or otherwise aberrant, average
hourly wages. Therefore, the hospitals were removed from the
calculation. As a result, the final FY 2003 wage index is calculated
based on FY 1999 wage data for 4,797 hospitals.
Comment: One commenter requested that we remove the data from the
FY 2003 wage index calculation for a specific hospital that closed in
2001. According to the commenter, the hospital had a major accounting
and recordkeeping problem dating back several years.
Response: We have always maintained, subject to limited
expectations, that any hospital that is in operation during the data
collection period used to calculate the wage index should be included
in the database, since the hospital's data reflect conditions occurring
in that labor market area during the period surveyed (59 FR 45353).
While we also believe it is appropriate to eliminate data for
terminated hospitals when there is reason to believe that the data are
incorrect, and the data cannot be verified due to the hospital's
closure, if the wage data for a terminated hospital does not fail any
of our edits for reasonableness, the hospital's data are included in
the calculation of the area's wage index.
During FY 1999, the period used to calculate the FY 2003 wage
index, the hospital in question was the second largest hospital in its
MSA. We find the hospital's FY 1999 Worksheet S-3 wage data to be
consistent with hospitals of similar size in the MSA. Therefore, we
will retain the wage data for the closed hospital in the FY 2003 wage
index. We also note that removing the hospital's data from the wage
index calculation would actually lower the MSA's wage index value.
Comment: One commenter representing a national hospital association
requested that CMS add a fatal edit to the cost reporting systems to
eliminate obvious errors that are difficult or impossible to correct 4
years later when we use the data for the wage index. Examples of such
errors are negative average hourly wages or a line item that includes
salaries but no associated hours. Currently, we delete the problematic
data elements, but the commenter believed that this does not
necessarily make the reported data better, nor does it make the data
consistent with data reported by other hospitals. The commenter
recommended that we include a fatal edit that will not allow the cost
report to be filed by the hospital until all required wage data have
been entered.
Response: We agree with the commenter that these obvious errors
should be corrected by the hospital before the cost report is filed.
The cost reporting system currently has an edit that prevents the
reporting of negative adjusted salaries. Therefore, no line item should
have a negative average hourly wage. However, due to the complexities
of the cost report software, a hospital is unable to simply adjust
Worksheet S-3, Part II salaries to zero, if hours are missing or
inaccurate, without also triggering a necessary adjustment to the trial
balance (Worksheet A), as most salary items reported on Worksheet S-3,
Part II are directly transferred from Worksheet A. Because Worksheet S-
3, Part II wage
[[Page 50024]]
data are only used for wage index purposes, we believe it is preferable
for both CMS and hospitals not to have the entire cost report rejected,
and risk an untimely submission of the cost report, because the hours
on Worksheet S-3, Part II are problematic.
We are working on revising the intermediaries' software to improve
their edits and give them more flexibility to make adjustments directly
to Worksheet S-3, Part II when the adjustments are necessary for wage
index purposes only. We acknowledge that this revision would not help
hospitals to detect obvious errors as early as possible, that is,
before they file their cost reports with their intermediaries. However,
improved intermediary edits would allow the errors to be identified and
corrected before the data are submitted to us to be used in developing
the wage index.
E. Computation of the FY 2003 Wage Index
The method used to compute the final FY 2003 wage index follows.
Step 1--As noted above, we based the FY 2003 wage index on wage
data reported on the FY 1999 Medicare cost reports. We gathered data
from each of the non-Federal, short-term, acute care hospitals for
which data were reported on the Worksheet S-3, Parts II and III of the
Medicare cost report for the hospital's cost reporting period beginning
on or after October 1, 1998 and before October 1, 1999. In addition, we
included data from some hospitals that had cost reporting periods
beginning before October 1998 and reported a cost reporting period
covering all of FY 1999. These data were included because no other data
from these hospitals would be available for the cost reporting period
described above, and because particular labor market areas might be
affected due to the omission of these hospitals. However, we generally
describe these wage data as FY 1999 data. We note that, if a hospital
had more than one cost reporting period beginning during FY 1999 (for
example, a hospital had two short cost reporting periods beginning on
or after October 1, 1998 and before October 1, 1999), we included wage
data from only one of the cost reporting periods, the longest, in the
wage index calculation. If there was more than one cost reporting
period and the periods were equal in length, we included the wage data
from the latest period in the wage index calculation.
Step 2--Salaries--Beginning with the FY 2003 wage index, the method
used to compute a hospital's average hourly wage excludes all GME and
CRNA costs.
In calculating a hospital's average salaries plus wage-related
costs, we subtracted from Line 1 (total salaries) the GME and CRNA
costs reported on lines 2, 4.01, and 6, the Part B salaries reported on
Lines 3 and 5, home office salaries reported on Line 7, and excluded
salaries reported on Lines 8 and 8.01 (that is, direct salaries
attributable to SNF services, home health services, and other
subprovider components not subject to the acute care hospital inpatient
prospective payment system). We also subtracted from Line 1 the
salaries for which no hours were reported on Line 4. To determine total
salaries plus wage-related costs, we added to the net hospital salaries
the costs of contract labor for direct patient care, certain top
management, pharmacy, laboratory, and nonteaching physician Part A
services (Lines 9, 9.01, 9.02, and 10), home office salaries and wage-
related costs reported by the hospital on Lines 11 and 12, and
nonexcluded area wage-related costs (Lines 13, 14, and 18).
We note that contract labor and home office salaries for which no
corresponding hours are reported were not included. In addition, wage-
related costs for nonteaching physician Part A employees (Line 18) are
excluded if no corresponding salaries are reported for those employees
on Line 4.
Step 3--Hours--With the exception of wage-related costs, for which
there are no associated hours, we computed total hours using the same
methods as described for salaries in Step 2.
Step 4--For each hospital reporting both total overhead salaries
and total overhead hours greater than zero, we then allocated overhead
costs to areas of the hospital excluded from the wage index
calculation. First, we determined the ratio of excluded area hours (sum
of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours
(Line 1 minus the sum of Part II, Lines 2, 3, 4.01, 5, 6, 7, and Part
III, Line 13 of Worksheet S-3). We then computed the amounts of
overhead salaries and hours to be allocated to excluded areas by
multiplying the above ratio by the total overhead salaries and hours
reported on Line 13 of Worksheet S-3, Part III. Next, we computed the
amounts of overhead wage-related costs to be allocated to excluded
areas using three steps: (1) We determined the ratio of overhead hours
(Part III, Line 13) to revised hours (Line 1 minus the sum of Lines 2,
3, 4.01, 5, 6, and 7); (2) we computed overhead wage-related costs by
multiplying the overhead hours ratio by wage-related costs reported on
Part II, Lines 13, 14, and 18; and (3) we multiplied the computed
overhead wage-related costs by the above excluded area hours ratio.
Finally, we subtracted the computed overhead salaries, wage-related
costs, and hours associated with excluded areas from the total salaries
(plus wage-related costs) and hours derived in Steps 2 and 3.
Step 5--For each hospital, we adjusted the total salaries plus
wage-related costs to a common period to determine total adjusted
salaries plus wage-related costs. To make the wage adjustment, we
estimated the percentage change in the employment cost index (ECI) for
compensation for each 30-day increment from October 14, 1998 through
April 15, 2000 for private industry hospital workers from the Bureau of
Labor Statistics' Compensation and Working Conditions. We use the ECI
because it reflects the price increase associated with total
compensation (salaries plus fringes) rather than just the increase in
salaries. In addition, the ECI includes managers as well as other
hospital workers. This methodology to compute the monthly update
factors uses actual quarterly ECI data and assures that the update
factors match the actual quarterly and annual percent changes. The
factors used to adjust the hospital's data were based on the midpoint
of the cost reporting period, as indicated below.
Midpoint of Cost Reporting Period
------------------------------------------------------------------------
After Before Adjustment factor
------------------------------------------------------------------------
10/14/98 11/15/98 1.04550
11/14/98 12/15/98 1.04325
12/14/98 01/15/99 1.04111
01/14/99 02/15/99 1.03880
02/14/99 03/15/99 1.03632
03/14/99 04/15/99 1.03369
04/14/99 05/15/99 1.03092
05/14/99 06/15/99 1.02801
06/14/99 07/15/99 1.02509
07/14/99 08/15/99 1.02230
08/14/99 09/15/99 1.01962
09/14/99 10/15/99 1.01687
10/14/99 11/15/99 1.01385
11/14/99 12/15/99 1.01056
12/14/99 01/15/00 1.00710
01/14/00 02/15/00 1.00358
02/14/00 03/15/00 1.00000
03/14/00 04/15/00 0.99638
------------------------------------------------------------------------
For example, the midpoint of a cost reporting period beginning
January 1, 1999 and ending December 31, 1999 is June 30, 1999. An
adjustment factor of 1.02509 would be applied to the wages of a
hospital with such a cost reporting period. In addition, for the data
for any cost reporting period that began in FY 1999 and covered a
period of less than 360 days or more than 370 days, we annualized the
data to reflect a 1-year
[[Page 50025]]
cost report. Annualization is accomplished by dividing the data by the
number of days in the cost report and then multiplying the results by
365.
Step 6--Each hospital was assigned to its appropriate urban or
rural labor market area before any reclassifications under section
1886(d)(8)(B) or section 1886(d)(10) of the Act. Within each urban or
rural labor market area, we added the total adjusted salaries plus
wage-related costs obtained in Step 5 for all hospitals in that area to
determine the total adjusted salaries plus wage-related costs for the
labor market area.
Step 7--We divided the total adjusted salaries plus wage-related
costs obtained under both methods in Step 6 by the sum of the
corresponding total hours (from Step 4) for all hospitals in each labor
market area to determine an average hourly wage for the area.
Step 8--We added the total adjusted salaries plus wage-related
costs obtained in Step 5 for all hospitals in the nation and then
divided the sum by the national sum of total hours from Step 4 to
arrive at a national average hourly wage. Using the data as described
above, the national average hourly wage is $23.2295.
Step 9--For each urban or rural labor market area, we calculated
the hospital wage index value by dividing the area average hourly wage
obtained in Step 7 by the national average hourly wage computed in Step
8.
Step 10--Following the process set forth above, we developed a
separate Puerto Rico-specific wage index for purposes of adjusting the
Puerto Rico standardized amounts. (The national Puerto Rico
standardized amount is adjusted by a wage index calculated for all
Puerto Rico labor market areas based on the national average hourly
wage as described above.) We added the total adjusted salaries plus
wage-related costs (as calculated in Step 5) for all hospitals in
Puerto Rico and divided the sum by the total hours for Puerto Rico (as
calculated in Step 4) to arrive at an overall average hourly wage of
$11.0086 for Puerto Rico. For each labor market area in Puerto Rico, we
calculated the Puerto Rico-specific wage index value by dividing the
area average hourly wage (as calculated in Step 7) by the overall
Puerto Rico average hourly wage.
Step 11--Section 4410 of Public Law 105-33 provides that, for
discharges on or after October 1, 1997, the area wage index applicable
to any hospital that is located in an urban area of a State may not be
less than the area wage index applicable to hospitals located in rural
areas in that State. Furthermore, this wage index floor is to be
implemented in such a manner as to ensure that aggregate prospective
payment system payments are not greater or less than those that would
have been made in the year if this section did not apply. For FY 2003,
this change affects 180 hospitals in 39 MSAs. The MSAs affected by this
provision are identified by a footnote in Table 4A in the Addendum of
this final rule.
Comment: Two commenters opposed our use of 3-year-old data for
developing the wage index. The commenters believed that the FY 2003
wage index does not reflect current market conditions for nurses. For
example, one commenter stated that, due to the current nursing
shortage, her facility's average hourly wage has increased 10 percent
over the past 18 months. However, the wage index does not adequately
reflect the increased wage costs. The commenter noted that rural
hospitals have been severely impacted by the nursing shortage. Since
rural hospitals are reliant upon Medicare reimbursement, the commenter
suggested that we revise the wage index methodology to allow the wage
index to reflect labor cost increases sooner.
Response: The wage index is a relative measure, which compares area
average hourly wages to the national average hourly wage. The nursing
shortage and increased nursing wages are a national phenomenon. We
believe the wage index is minimally impacted by inflationary effects of
increased nursing costs. Increases in hospital wages overall would be
reflected in the market basket.
In computing the wage index, we use data from cost reports
beginning during the most recent Federal fiscal year for which we have
a complete year's worth of data. For the FY 2003 wage index, that is
cost reports that began during FY 1999. Because hospitals' cost reports
may end as late as August or even September of the following year, it
would not be feasible for us to use cost reports that began during FY
2000 (many of which would not close until the latter part of 2001). Due
to the time period allowed for: (1) Hospitals to complete and submit
their cost reports to their intermediaries; (2) intermediaries to
perform a separate, detailed review of all hospitals' wage data and
submit the results to CMS; and (3) CMS to compile a complete set of all
hospitals' wage data from a given Federal fiscal year, it would not be
possible to use FY 2000 cost report data to calculate the FY 2003 wage
index. As described in the proposed rule (67 FR 31434) and section
III.E. of this final rule, we adjust the wage index to a common period
that reflects the latest cost reporting period for the filing year. For
the FY 2003 wage index, this period is September 1, 1999 to August 31,
2000.
Comment: One commenter recommended that, to reflect the labor
markets in which rural hospitals compete more accurately, the wage
index value for a rural area should be the average of the three lowest
MSA rates in the geographic area.
Response: We note that the statute requires that we apply wage
indexes that reflect ``the relative hospital wage level in the
geographic area of the hospital'' (section 1886(d)(3)(E) of the Act).
Furthermore, in some States, there are some MSAs for which the
calculated wage index value is actually lower than the rural area of
the state. As we discussed in the proposed rule (67 FR 31435) and in
section III.E. of this final rule, for those urban areas, we assign the
statewide rural wage index value. We are uncertain as to whether the
commenter considered this policy in its recommendation. While the
commenter did not provide details of its rationale for the recommended
change, we appreciate the commenter's suggestion and welcome a more
detailed discussion and analysis.
Comment: One commenter wrote that CMS' instructions for developing
wage-related costs using Generally Accepted Accounting Principles
(GAAP) are inconsistently communicated by CMS staff and inconsistently
applied by the fiscal intermediaries. The commenter urged us to ensure
the credibility of the wage index by requiring that our staff and
contractors understand and consistently apply our wage index policies
to eliminate variations in interpretation and application of the wage
data.
Response: In an effort to clarify our instructions and to promote
consistency in hospitals' reporting and CMS' and the intermediary's
handling of wage-related costs that are developed using GAAP, we have
revised the cost report instructions (in Transmittals 8 and, soon to be
released, 9) and the intermediary's desk review program. Because of the
wide variation in GAAP methodologies, we continue to emphasize that it
is the responsibility of the hospitals to be able to provide adequate
support for the GAAP methodologies they apply. In addition, if a
hospital believes that an intermediary may be incorrectly handling a
particular issue, the hospital is encouraged to bring it to our
attention. We will continue our efforts to ensure uniform reporting of
the wage data.
Comment: One commenter, representing the District of Columbia,
[[Page 50026]]
indicated that the Washington, DC-MD-VA-WV MSA includes 16 Virginia
hospitals, 13 Maryland hospitals, 12 District of Columbia hospitals,
and 2 West Virginia hospitals. The commenter was concerned about the
negative impact of the West Virginia and Maryland hospitals on the
Washington, DC-MD-VA-WV MSA wage index (although the commenter did not
specify a particular issue with the West Virginia hospitals). Unlike
hospitals in all other States and the District of Columbia, Maryland
hospitals, which are under a waiver from the acute inpatient
prospective payment system, do not rely on the wage index adjustment
factor to adjust their inpatient Medicare payments. Therefore, the
commenter wrote, Maryland hospitals have no incentive to accurately
report their wage costs on the Medicare cost report or to review and
request corrections to CMS' wage index public use files. The commenter
requested us to carefully review the impact of Maryland's all-payor
system on hospitals within the same MSA.
Response: As the commenter notes, Maryland hospitals are paid under
a program waiver (section 1814(b)(3) of the Act), in which the State
establishes hospital inpatient and outpatient payment rates for
Medicare, Medicaid, and private payors. The Medicare wage index is not
a factor in the State's ratesetting methodology. However, in recent
years the wage index has been applied to the Medicare payment rates for
other providers that are not under the State's waiver, such as SNFs,
hospices, and home health agencies. Many Maryland hospitals own, or are
members of systems that own, facilities or entities that are now
directly impacted by the quality of the hospitals' reported data.
As with all hospitals in the wage index, we edited the FY 1999 wage
data for the Maryland and West Virginia hospitals. We found no
significant problems in their wage data. We believe that the Maryland
hospitals' wage data are reasonable for the State and the MSA. The
lower average hourly wages for the West Virginia hospitals are
comparable to other hospitals in that State. Furthermore, under OMB's
definition of the Washington, DC-MD-VA-WV MSA, these Maryland and West
Virginia hospitals are part of that MSA. Therefore, the wage data for
these hospitals will continued to be used in the calculation of the
area wage index for the Washington DC-MD-VA-WV MSA.
F. Revisions to the Wage Index Based on Hospital Redesignation
1. General
Under section 1886(d)(10) of the Act, the Medicare Geographic
Classification Review Board (MGCRB) considers applications by hospitals
for geographic reclassification for purposes of payment under the
prospective payment system. Hospitals can elect to reclassify for the
wage index or the standardized amount, or both, and as individual
hospitals or as rural groups. Generally, hospitals must be proximate to
the labor market area to which they are seeking reclassification and
must demonstrate characteristics similar to hospitals located in that
area. Hospitals must apply for reclassification to the MGCRB, which
issues its decisions by the end of February for reclassification to
become effective for the following fiscal year (beginning October 1).
The regulations applicable to reclassifications by the MGCRB are in
Secs. 412.230 through 412.280.
Section 1886(d)(10)(D)(v) of the Act provides that, beginning with
FY 2001, a MGCRB decision on a hospital reclassification for purposes
of the wage index is effective for 3 fiscal years, unless the hospital
elects to terminate the reclassification. Section 1886(d)(10)(D)(vi) of
the Act provides that the MGCRB must use the 3 most recent years'
average hourly wage data in evaluating a hospital's reclassification
application for FY 2003 and any succeeding fiscal year.
Section 304(b) of Public Law 106-554 provides that, by October 1,
2001, the Secretary must establish a mechanism under which a statewide
entity may apply to have all of the geographic areas in the State
treated as a single geographic area for purposes of computing and
applying a single wage index, for reclassifications beginning in FY
2003.
Beginning October 1, 1988, section 1886(d)(8)(B) of the Act permits
a hospital located in a rural county adjacent to one or more urban
areas to be designated as being located in the MSA to which the
greatest number of workers in the county commute, if the rural county
would otherwise be considered part of an urban area under the standards
published in the Federal Register on January 3, 1980 (45 FR 956) for
designating MSAs (and for designating NECMAs), and if the commuting
rates used in determining outlying counties (or, for New England,
similar recognized area) were determined on the basis of the aggregate
number of resident workers who commute to (and, if applicable under the
standards, from) the central county or counties of all contiguous MSAs
(or NECMAs). Hospitals that met the criteria using the January 3, 1980
version of these OMB standards were deemed urban for purposes of the
standardized amounts and for purposes of assigning the wage index.
Section 402 of Public Law 106-113 provided that, for FYs 2001 and
2002, hospitals could elect whether to apply standards developed by OMB
in 1980 or 1990 in order to qualify for redesignation under section
1886(d)(8)(B) of the Act. In accordance with section
1886(d)(8)(B)(ii)(II) of the Act, in the May 9, 2002 proposed rule, we
proposed that, beginning with FY 2003, redesignation under section
1886(d)(8)(B) of the Act will be based on the standards published in
the Federal Register by the Director of OMB based on the most recent
decennial census.
2. Effects of Reclassification
The methodology for determining the wage index values for
redesignated hospitals is applied jointly to the hospitals located in
those rural counties that were deemed urban under section 1886(d)(8)(B)
of the Act and those hospitals that were reclassified as a result of
the MGCRB decisions under section 1886(d)(10) of the Act. Section
1886(d)(8)(C) of the Act provides that the application of the wage
index to redesignated hospitals is dependent on the hypothetical impact
that the wage data from these hospitals would have on the wage index
value for the area to which they have been redesignated. Therefore, as
provided in section 1886(d)(8)(C) of the Act, the wage index values
were determined by considering the following:
If including the wage data for the redesignated hospitals
would reduce the wage index value for the area to which the hospitals
are redesignated by 1 percentage point or less, the area wage index
value determined exclusive of the wage data for the redesignated
hospitals applies to the redesignated hospitals.
If including the wage data for the redesignated hospitals
reduces the wage index value for the area to which the hospitals are
redesignated by more than 1 percentage point, the area wage index
determined inclusive of the wage data for the redesignated hospitals
(the combined wage index value) applies to the redesignated hospitals.
If including the wage data for the redesignated hospitals
increases the wage index value for the area to which the hospitals are
redesignated, both the area and the redesignated hospitals receive the
combined wage index value.
[[Page 50027]]
The wage index value for a redesignated urban or rural
hospital cannot be reduced below the wage index value for the rural
areas of the State in which the hospital is located.
Rural areas whose wage index values would be reduced by
excluding the wage data for hospitals that have been redesignated to
another area continue to have their wage index values calculated as if
no redesignation had occurred.
Rural areas whose wage index values increase as a result
of excluding the wage data for the hospitals that have been
redesignated to another area have their wage index values calculated
exclusive of the wage data of the redesignated hospitals.
The wage data for a reclassified urban hospital is
included in both the wage index calculation of the area to which the
hospital is reclassified (subject to the rules described above) and the
wage index calculation of the urban area where the hospital is
physically located.
The wage index values for FY 2003 are shown in Tables 4A, 4B, 4C,
and 4F in the Addendum to this final rule. Hospitals that are
redesignated should use the wage index values shown in Table 4C. Areas
in Table 4C may have more than one wage index value because the wage
index value for a redesignated urban or rural hospital cannot be
reduced below the wage index value for the rural areas of the State in
which the hospital is located.
Tables 3A and 3B in the Addendum of this final rule list the 3-year
average hourly wage for each labor market area before the redesignation
of hospitals, based on FYs 1997, 1998, and 1999 wage data. Table 3A
lists these data for urban areas and Table 3B lists these data for
rural areas. In addition, Table 2 in the Addendum to this final rule
includes the adjusted average hourly wage for each hospital from the FY
1997 and FY 1998 cost reporting periods, as well as the FY 1999 period
used to calculate the FY 2003 wage index. The 3-year averages are
calculated by dividing the sum of the dollars (adjusted to a common
reporting period using the method described previously) across all 3
years, by the sum of the hours. If a hospital is missing data for any
of the previous years, its average hourly wage for the 3-year period is
calculated based on the data available during that period.
We indicated in the proposed rule that, at the time the proposed
wage index was constructed, that the MGCRB had completed its review of
FY 2003 reclassification requests. Table 9 of this final rule shows
hospitals that have been reclassified under either section
1886(d)(8)(B) or section 1886(d)(10)(D) of the Act. This table includes
hospitals reclassified for FY 2003 by the MGCRB, as well as hospitals
that were reclassified for the wage index in either FY 2001 or FY 2002
and are, therefore, in either the third or second year of their 3-year
reclassification. This table also includes hospitals reclassified for
purposes of the standardized amount and hospitals located in urban
areas that have been designated rural in accordance with section
1886(d)(8)(E) of the Act. There are 54 hospitals reclassified for the
wage index beginning during FY 2003. In addition, 367 hospitals are
reclassified for FY 2003 based on their 3-year reclassification that
became effective during FY 2001, and 181 hospitals are reclassified for
FY 2003 based on their 3-year reclassification that became effective
during FY 2002. There are 24 hospitals included in the 3-year
reclassification from FY 2001 that were reclassified in accordance with
section 152(b) of Public Law 106-113. In addition, there are 34 rural
hospitals redesignated to an urban area under section 1886(d)(8)(B) of
the Act, and 14 urban hospitals that have been designated rural in
accordance with section 1886(d)(8)(E) of the Act. Finally, there are 59
hospitals reclassified by the MGCRB for the standardized amount for FY
2003 (including one hospital that is also redesignated under section
1886(d)(8)(B) of the Act to a different MSA). The final FY 2003 wage
index values incorporate all of these hospitals. Since publication of
the May 9 proposed rule, the number of reclassifications has changed
because some MGCRB decisions were still under review by the
Administrator and because some hospitals decided to withdraw their
requests for reclassification.
Applications for FY 2004 reclassifications are due to the MGCRB by
September 3, 2002. We note this is also the deadline for canceling a
previous wage index reclassification withdrawal or termination under
Sec. 412.273(d) (as added by this final rule). At the time of
publication the May 9, 2002 proposed rule, the internet site for
reclassification (http://www.hcfa.gov/regs/mgcinfo.htm) was not
operational. To obtain an application for MGCRB reclassification, call
the MGCRB at (410) 786-1174. The mailing address of the MGCRB is: 2520
Lord Baltimore Drive, Suite L, Baltimore, MD 21244-2670.
Changes to the wage index that resulted from withdrawals of
requests for reclassification, wage index corrections, appeals, and the
Administrator's review process have been incorporated into the wage
index values published in this final rule. The changes may affect not
only the wage index value for specific geographic areas, but also the
wage index value redesignated hospitals receive; that is, whether they
receive the wage index value for the area to which they are
redesignated, or a wage index value that includes the data for both the
hospitals already in the area and the redesignated hospitals. Further,
the wage index value for the area from which the hospitals are
redesignated may be affected.
In the May 9, 2002 proposed rule, we proposed limited changes and
clarifications to the policies related to withdrawals, terminations,
and cancellations of the 3-year wage index reclassifications. These are
discussed in section V. of this preamble, including any comments
received and our responses to those comments.
We receive several comments pertaining to the FY 2003 or FY 2004
MGCRB reclassification process. These are addressed below.
Comment: One commenter expressed concern that the methodology used
for wage index reclassification for FY 2003 reclassification
applications does not include a process by which corrections to 1996
and 1997 cost reporting data may be submitted. The commenter suggested
that we allow for the correction of inaccurate data from prior years as
part of a hospital's bid for geographic reclassification, and that not
to allow corrections to the data results in inequities in the
calculation in the average hourly wage for purposes of
reclassification.
Response: Effective with reclassifications for FY 2003, section
1886(d)(10)(D)(vi)(II) of the Act provides that the MGCRB must use the
average of the 3 most recent years of hourly wage data for the hospital
when evaluating a hospital's request for reclassification. To evaluate
applications for wage index reclassifications for FY 2003, the MGCRB
used the 3-year average hourly wages published in Table 2 of the August
1, 2001 Federal Register. These average hourly wages are taken from
data used to calculate the wage indexes for FY 2000, FY 2001, and FY
2002, based on cost reporting periods beginning during FY 1996, FY
1997, and FY 1998, respectively.
In the August 1, 2001 Federal Register, we revised the Medicare
regulations at Sec. 412.230(e)(2)(ii)(A) to specify that hospitals
seeking reclassification must provide a 3-year average hourly wage
using data from the hospital wage survey used to construct the wage
index in effect for prospective payment purposes (66 FR 39934).
[[Page 50028]]
Hospitals have ample opportunity to verify the accuracy of the wage
data used to calculate their wage index and to request revisions, but
must do so within the prescribed timelines. We consistently instruct
hospitals that they are responsible for reviewing their data and
availing themselves to the opportunity to correct their wage data
within the prescribed timeframes. Once the data are finalized and the
wage indexes published in the final rule, they may not be revised,
except through the mid-year correction process set forth in the
regulations at Sec. 412.63(x)(2). Accordingly, it has been our
consistent policy that if a hospital does not request corrections
within the prescribed timeframes for the development of the wage index,
the hospital may not later seek to revise its data in an attempt to
qualify for MGCRB reclassification.
Allowing hospitals the opportunity to revise their data beyond the
timelines required to finalize the data used to calculate the wage
index each year would lessen the importance of complying with those
deadlines. The likely result would be that the data used to compute the
wage index would not be as carefully scrutinized because hospitals
would know they may change it later, leading to inaccuracy in the data
and less stability in the wage indexes from year to year.
Comment: Several commenters requested that we clarify whether we
intend to utilize OMB's new MSA standards and, if so, how we intend to
incorporate the changes into the Medicare program. Relatedly, one
commenter requested that we specify in the text of the final rule
whether or not a hospital that was treated as a rural referral center
(RRC) as of October 1, 2000, will continue to qualify for the RRC
exception if their physical location becomes urban as a result of
subsequent updates to metropolitan areas issued by the OMB. The
commenter is concerned that the absence of a clear statement in the
regulations text indicating that the grandfathered status of RRCs will
continue into subsequent years could possibly result in a loss of their
special status. The commenter referenced the instance when many RRCs
located in areas that were redesignated as urban by OMB lost their RRC
status. (See the August 29, 1997 final rule (62 FR 45999) for a more
detailed explanation.)
Response: At this time, it is our understanding that OMB is not
expected to announce changes to the new MSA standards until after we
have published the proposed rule for FY 2004. Even if the new standards
are announced in advance of the publication of our FY 2004 proposed
rule, we would need time to assess their implications for payment
purposes (for example, how will the new Micropolitan Areas designated
by OMB, which will encompass counties currently considered rural,
interact with other statutory and regulatory requirements for special
hospital designation, such as an RRC).
Therefore, we intend at this time to continue to use the current
MSA standards for FY 2004 acute inpatient prospective payment system
payments. Hospitals applying for MGCRB reclassification for FY 2004
must apply based on the existing MSA definitions. With respect to the
commenter's concern regarding the implications of the revised MSA
definitions on RRCs, we are not prepared at this time to address this
issue. We intend to evaluate this and other issues related to the new
MSA definitions when they become available next year.
Comment: One commenter requested clarification as to whether Table
9, Hospital Reclassifications and Redesignations by Individual
Hospital, is an official list and whether the wage index calculation is
affected by errors in omission. The commenter indicated that the list
in the proposed rule includes hospitals that have withdrawn their FY
2002 reclassifications and subsequently cancelled the withdrawal for FY
2003 and FY 2004, as well as omits hospitals that have received
approval letters from the MGCRB reinstating the remaining years of the
3-year appeal.
Response: We indicated in the proposed rule that, while Table 9
shows hospitals that have been reclassified under either section
1886(d)(8)(B) or section 1886(d)(10)(D) of the Act, it may not reflect
all withdrawals from reclassifications approved by the MGCRB or
decisions of the CMS Administrator if those withdrawals were made
subsequent to the preparation of the proposed rule. Similar to the
other provisions and tables included in the proposed rule, publication
of Table 9 in the proposed rule provided an opportunity for affected
hospitals to review and verify the accuracy of the data. In situations
such as those described by the commenter, we encourage affected
providers to furnish us with specific feedback regarding the
information contained in the proposed rule. Any changes that result
from withdrawals of requests for reclassification, wage index
corrections, appeals, and the Administrator's review process are
incorporated into the wage index values and Table 9 published in the
final rule.
Comment: Several commenters requested that the wage data for urban
hospitals redesignated as rural under section 1886(d)(8)(E) of the Act,
be included both in the MSA where the hospital is physically located
and the rural area to which they are redesignated for purposes of the
wage index. Commenters cited section 1886(d)(8) of the Act and section
152(b) of the Balanced Budget Refinement Act of 1999 (Pub. L. 106-113)
in support of their request. The commenters asserted that section
1886(d)(8) of the Act protects nonreclassified hospitals from being
negatively impacted by reclassifications. They also pointed out that in
implementing the statutory reclassifications required by section 152(b)
of Public Law 106-113, CMS calculated the wage index values of the MSAs
that contain the counties specified in section 152(b) by ``including
the wages of hospitals that were reclassified out of the MSA by section
152(b).'' The commenters stated that the exclusion of hospitals
redesignated under section 1886(d)(8)(E) of the Act in calculating the
wage index is contrary to the expectations of the hospitals prior to
the enactment of this provision (by section 401 of Public Law 106-113).
Response: Section 1886(d)(8)(E) of the Act permits an urban
hospital to apply to the Secretary to be treated as being located in
the rural area of the State in which the hospital is located. A
hospital granted redesignation under section 1886(d)(8)(E) of the Act
is therefore treated as a rural hospital for all purposes of payment
under the Medicare acute inpatient prospective payment system,
including standardized amount, wage index, and disproportionate share
calculations, as of the effective date of the redesignation. Therefore,
for purposes of calculating the wage index as a result of the
redesignation to a rural area, the wage index data of the redesignated
hospital is treated as though the hospital were located in the rural
area of the State. That is, its data are excluded from the wage index
calculation for the urban area where the hospital is geographically
located and included in the wage index calculation for the rural area
to which the hospital is designated. This is consistent with the
statutory language requiring that a hospital be treated as though it is
located in a rural area.
In the case of section 1886(d)(8) of the Act, Congress specifically
acted to provide special protection for rural hospitals negatively
impacted by reclassifications. Section 1886(d)(8)(C) of the Act
provides that rural areas are held harmless for decisions resulting
from the application of section
[[Page 50029]]
1886(d)(8)(B) of the Act, or of decisions of the MGCRB or the
Secretary. Redesignations under section 1886(d)(8)(E) of the Act are
not covered under this provision.
In the case of section 152(b) of Public Law 106-113, Congress
specifically directed the Secretary to treat these statutorily mandated
reclassifications as decisions by the MGCRB. Section 1886(d)(8)(E) of
the Act directs the Secretary to treat the redesignated hospitals as
being located in the rural area of the State in which the hospital is
located. We did not exclude the wages of the hospitals reclassified
under section 152(b) in calculating the FY 2001 wage index for the
affected areas because we believed that this approach appropriately
reflected the expectations of the hospitals that had applied to
reclassify into the areas affected by this provision prior to enactment
of this provision. Because section 1886(d)(8)(E) of the Act has been in
place for well over a year, hospitals applying for reclassification for
FY 2003 could not reasonably have expected, in light of the language of
that section, that they would benefit from the inclusion of the wage
data of the redesignated hospitals in two different areas.
We note that the commenters' suggestion would not uniformly benefit
hospitals remaining in or reclassified into the urban area from which
the now rural hospital was reclassified. Our analysis indicates several
such areas would be negatively impacted. The greatest positive impact
would occur in the area of concern to the commenter.
3. OMB Standards for Hospitals to Qualify for Redesignation
In the August 1, 2001 final rule, we implemented section 402 of
Public Law 106-113. Section 402 provided that hospitals could elect
whether to apply standards developed by OMB in 1980 or 1990 in order to
qualify for redesignation under section 1886(d)(8)(B) of the Act.
However, section 402 also states that, beginning with FY 2003,
hospitals will be required to use the standards published in the
Federal Register by the Director of OMB based on the most recent
decennial census.
At this time, the 1990 standards are the most recent available.
Although OMB is working to develop updated standards based on the 2000
census, that work is not yet completed. For purposes of redesignation
for FY 2003 under section 1886(d)(8)(B) of the Act, qualifying
hospitals must be located in counties meeting the 1990 standards.
In the August 1, 2001 final rule, we determined that three counties
that qualified for redesignation under the 1980 standards qualified for
redesignation to a different MSA using the 1990 standards (66 FR
39869). These counties, which will be redesignated to the MSA to which
they qualify based on the 1990 standards, are as follows:
--------------------------------------------------------------------------------------------------------------------------------------------------------
Rural county 1980 MSA designation 1990 MSA designation
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ionia, MI........................ Lansing-East Lansing, MI..................... Grand Rapids-Muskegon-Holland, MI.
Caswell, NC...................... Danville, VA................................. Greensboro-Winston Salem-High Point, NC.
Harnett, NC...................... Fayetteville, NC............................. Raleigh-Durham-Chapel Hill, NC.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Section 402 of Public Law 106-113 amended section 1886(d)(8)(B) of
the Act by adding clause (ii). This clause allowed hospitals to elect
to use either the January 3, 1980 standards or March 30, 1990 standards
for payments during FY 2001 and FY 2002. Several hospitals in counties
that did not qualify for redesignation under the January 3, 1980
standards elected to use those older standards so they would not
receive the urban designation accorded to them under section 402
because they would lose their special rural designation (that is, an
RRC, a sole community hospital (SCH), or a Medicare-dependent hospital
(MDH)). Under section 1886(d)(8)(B)(ii) of the Act, the option to make
such an election was available only for FY 2001 and FY 2002. Effective
for FY 2003, as we proposed, we are providing that hospitals located in
counties qualifying for redesignation under section 1886(d)(8)(B) of
the Act based on the 1990 standards will be redesignated under this
provision.
We also noted in the August 1, 2001 final rule that five rural
counties no longer meet the qualifying criteria when we apply the 1990
OMB standards (66 FR 39870). These rural counties are as follows:
Indian River, FL; Mason, IL; Owen, IN; Morrow, OH; and Lincoln, WV.
Therefore, beginning FY 2003, hospitals in these counties will not be
eligible for redesignation under section 1886(d)(8)(B) of the Act
unless the counties again qualify when the standards based on the 2000
census data are available.
Comment: One commenter expressed concern that the reclassification
based on 1990 standards disadvantages hospitals classified as RRCs,
SCHs, or MDHs by taking away their special status classification
because they are no longer considered rural. The commenter was
concerned that the provision is not in keeping with Congressional
intent. As an alternative, the commenter suggested that an affected
hospital should be allowed to request reclassification as a rural
hospital under Sec. 412.103(a)(3), which allows hospitals to be treated
as rural if they qualify as either a rural referral center or a SCH.
Response: Because the law does not provide for an election on the
part of the hospital for FY 2003, while specifying such an election for
FYs 2001 and 2002, hospitals in affected counties are reclassified as
urban. Therefore, consistent with our longstanding policy that
hospitals reclassified as urban for purposes of the standardized amount
are considered urban and lose their eligibility for special rural
hospital status, the commenter is correct that a hospital becoming
urban under section 1886(d)(8)(B)(ii)(II) of the Act would lose its
special status as a result. With respect to the commenter's request
that, in the event an affected hospital is not permitted the option to
decline reclassification to an urban area that it may apply to be
redesignated rural under Sec. 412.103, we agree with the commenter that
a reclassified hospital may seek rural redesignation under
Sec. 412.103. We will then determine whether the hospital meets the
criteria for reclassification under this regulation. However, any such
reclassification would be subject to the limitations on
reclassification at Sec. 412.230(a)(5)(iv), which prohibit a hospital
that has been granted redesignation as a rural hospital under
Sec. 412.103 from receiving an additional reclassification by the
MGCRB.
We also note that it has been brought to our attention that the
reclassifications applicable under section 1886(d)(8)(B)(ii) of the Act
are applicable for cost reporting periods beginning in the relevant
Federal fiscal year. Therefore, in applying such reclassifications for
FY 2003, they are effective as of the beginning of the hospital's cost
reporting period beginning during FY 2003. This effective date has no
impact on hospitals that are reclassified to the same MSA under this
provision as they were reclassified into for FY 2002. Such
[[Page 50030]]
hospitals will be paid in accordance with the FY 2003 wage index value
of the area to which they are reclassified effective with discharges on
or after October 1, 2002. However, hospitals whose reclassification
changes as a result of applying the 1990 standards for FY 2003 will be
paid in accordance with the wage index applicable to the area to which
they would otherwise have been classified were it not for section
1886(d)(8)(B)(ii) of the Act at the start of FY 2003. Then, for
discharges occurring on or after the date of the start of their cost
reporting period beginning during FY 2003, they will be paid in
accordance with the wage index applicable to the area they are
reclassified into under section 1886(d)(8)(B)(ii).
G. Requests for Wage Data Corrections
In the May 9, 2002 proposed rule, we stated that, to allow
hospitals time to construct the proposed FY 2003 hospital wage index,
in May 2002 we would make available a final public data file containing
the FY 1999 hospital wage data.
The final wage data file was released on May 10, 2002. As noted
above in section III.D. of this preamble, this file included hospitals'
cost report data obtained from Worksheet S-3, Parts II and III of their
FHY 1999 Medicare cost reports. In addition, Table 2 in the Addendum to
this final rule contains each hospital's adjusted average hourly wage
used to construct the wage index values for the past 3 years, including
the FY 1999 data used to construct the final FY 2003 wage index.
In a memorandum dated December 19, 2001, we instructed all Medicare
intermediaries to inform the prospective payment hospitals they service
of the availability of the wage data file and the process and timeframe
for requesting revisions. The wage data file was made available on
January 12, 2002, through the Internet at CMS's home page (http://www.hcfa.gov). We also instructed the intermediaries to advise
hospitals of the availability of these data either through their
representative hospital organizations or directly from CMS. Additional
details on ordering this data file were discussed in section IX.A. of
the preamble of the May 9, 2002 proposed rule, ``Requests for Data from
the Public.''
In addition, Table 2 in the Addendum to the proposed rule contained
each hospital's adjusted average hourly wage used to construct the
proposed wage index values for the past 3 years, including the FY 1999
data used to construct the proposed FY 2003 wage index. We noted that
the hospital average hourly wages shown in Table 2 only reflected
changes made to a hospital's data and transmitted to CMS prior to
February 15, 2002. Changes approved by a hospital's fiscal intermediary
and forwarded to CMS by April 5, 2002, were reflected in the final
public use wage data file made available on May 10, 2002.
We believe hospitals had sufficient time to ensure the accuracy of
their FY 1999 wage data. Moreover, the ultimate responsibility for
accurately completing the cost report rests with the hospital, which
must attest to the accuracy of the data at the time the cost report is
filed. Hospitals should know what wage data were submitted on their
cost reports. In addition, they were notified of any changes to their
data as a result of their fiscal intermediary's review. However, if a
hospital believed that its FY 1999 wage data were incorrectly reported,
the hospital was provided an opportunity to submit corrections along
with complete, detailed supporting documentation to its intermediary by
February 8, 2002.
After reviewing requested changes submitted by hospitals, fiscal
intermediaries transmitted any revised cost reports to CMS and
forwarded a copy of the revised Worksheet S-3, Parts II and III to the
hospitals. In addition, fiscal intermediaries notified hospitals of the
changes or the reasons that changes were not accepted. This procedure
ensures that hospitals have every opportunity to verify the data that
will be used to construct their wage index values. We believe that
fiscal intermediaries are generally in the best position to make
evaluations regarding the appropriateness of a particular cost and
whether it should be included in the wage index data. However, if a
hospital disagrees with the fiscal intermediary's resolution of a
policy issue (whether a general category of cost is allowable in the
wage data), the hospital may contact CMS in an effort to resolve policy
disputes. We noted that the April 5, 2002 deadline also applied to
these requested changes. During this review, we did not consider issues
such as the adequacy of a hospital's supporting documentation, as these
types of issues should have been resolved earlier in the process.
These deadlines were necessary to allow sufficient time to review
and process the data so that the final wage index calculation could be
completed for development of the final FY 2003 prospective payment
rates published in this final rule.
We have created the process described above to resolve all
substantive wage data correction disputes before we finalize the wage
data for the FY 2003 payment rates. Accordingly, hospitals that did not
meet the procedural deadlines set forth above were not afforded a later
opportunity to submit wage data corrections or to dispute the
intermediary's decision with respect to requested changes.
Specifically, our policy is that hospitals that do not meet the
procedural deadlines set forth above are not permitted to challenge
later, before the Provider Reimbursement Review Board, CMS's failure to
make a requested data revision (See W. A. Foote Memorial Hospital v.
Shalala, No. 99-CV-75202-DT (E.D. Mich. 2001)).
As stated above, the final wage data public use file was released
on May 10, 2002. Hospitals had an opportunity to examine both Table 2
of the proposed rule and the May 2002 final public use wage data file
(which reflected revisions to the data used to calculate the values in
Table 2) to verify the data CMS used to calculate the wage index.
As with the file made available in January 2002, CMS made the final
wage data file released in May 2002 available to hospital associations
and the public on the Internet. However, the May 2002 public use file
was made available solely for the limited purpose of identifying any
potential errors made by CMS or the fiscal intermediary in the entry of
the final wage data that result from the correction process described
above (with the February 8 deadline). Hospitals were encouraged to
review their hospital wage data promptly after the release of the May
2002 file. Data presented at that time could not be used by hospitals
to initiate new wage data correction requests.
If, after reviewing the May 2002 final file, a hospital believed
that its wage data were incorrect due to a fiscal intermediary or CMS
error in the entry or tabulation of the final wage data, it was
provided an opportunity to send a letter to both its fiscal
intermediary and CMS, outlining why the hospital believed an error
existed and providing all supporting information, including relevant
dates (for example, when it first became aware of the error). These
requests had to be received by CMS and the fiscal intermediaries no
later than June 7, 2002.
Changes to the hospital wage data were only made in those very
limited situations involving an error by the intermediary or CMS that
the hospital could not have known about before its review of the final
wage data file. Specifically, at this stage of the process, neither the
intermediary nor CMS accepted the following types of requests:
Requests for wage data corrections that were submitted too
late to be
[[Page 50031]]
included in the data transmitted to CMS by fiscal intermediaries on or
before April 5, 2002.
Requests for correction of errors that were not, but could
have been, identified during the hospital's review of the January 2002
wage data file.
Requests to revisit factual determinations or policy
interpretations made by the intermediary or CMS during the wage data
correction process.
Verified corrections to the wage index received timely (that is, by
June 7, 2002) are incorporated into the final wage index in this final
rule, to be effective October 1, 2002.
Again, we believe the wage data correction process described above
provides hospitals with sufficient opportunity to bring errors in their
wage data to the fiscal intermediaries' attention. Moreover, because
hospitals had access to the final wage data by early May 2002, they
have had the opportunity to detect any data entry or tabulation errors
made by the fiscal intermediary or CMS before the development and
publication of the FY 2003 wage index in this final rule, and the
implementation of the FY 2003 wage index on October 1, 2002. If
hospitals availed themselves of this opportunity, the wage index
implemented on October 1 should be accurate. Nevertheless, in the event
that errors are identified after publication in the final rule, we
retain the right to make midyear changes to the wage index under very
limited circumstances.
Specifically, in accordance with Sec. 412.63(x)(2) of our existing
regulations, we make midyear corrections to the wage index only in
those limited circumstances in which a hospital can show (1) that the
intermediary or CMS made an error in tabulating its data; and (2) that
the hospital could not have known about the error, or did not have an
opportunity to correct the error, before the beginning of FY 2003 (that
is, by the June 7, 2002 deadline). As indicated earlier, since a
hospital had the opportunity to verify its data, and the fiscal
intermediary notified the hospital of any changes, we do not expect
that midyear corrections would be necessary. However, if the correction
of a data error changes the wage index value for an area, the revised
wage index value will be effective prospectively from the date the
correction is approved.
This policy for applying prospective corrections to the wage index
was originally set forth in the preamble to the January 3, 1984 final
rule (49 FR 258) implementing the hospital inpatient prospective
payment system. It has been our longstanding policy to make midyear
corrections to the hospital wage data and adjust the wage index for the
affected areas on a prospective basis.
Section 412.63(x)(3) states that revisions to the wage index
resulting from midyear corrections to the wage index values are
incorporated in the wage index values for other areas at the beginning
of the next Federal fiscal year. Prior to October 1, 1993, the wage
index was based on a wage data survey submitted by all hospitals (prior
to that, the data came from the Bureau of Labor Statistics' hospital
wage and employment data file). Beginning October 1, 1993, as required
by section 1886(d)(3)(E) of the Act, we began updating the wage index
data on an annual basis. Because the wage index has been updated
annually since FY 1994, Sec. 412.63(x)(3) is no longer necessary, and
in the May 9, 2002 proposed rule we proposed to delete it. Similarly,
Sec. 412.63(x)(4) provides that the effect on program payments of
midyear corrections to the wage index values is taken into account in
establishing the standardized amounts for the following year. Again,
the wage data are now updated annually. Therefore, Sec. 412.63(x)(4) is
no longer necessary, and in the May 9, 2002 proposed rule we proposed
to delete it as well.
Finally, we proposed to revise Sec. 412.63(x)(2) to clarify that
CMS will make a midyear correction to the wage index for an area only
if a hospital can show that the intermediary or CMS made an error in
tabulating the hospital's own data. That is, this provision is not
available to a hospital seeking to revise another hospital's data that
may be affecting the requesting hospital's wage index. As described
above, the requesting hospital must show that it could not have known
about the error, or that it did not have the opportunity to correct the
error, before the beginning of the Federal fiscal year.
Comment: One commenter disagreed with the proposed revision to
clarify Sec. 412.63(x)(2). The commenter stated that the clarification
that CMS will make a midyear correction to the wage index for an area
only if a hospital can show that the intermediary or CMS made an error
in tabulating the hospital's own data is illogical. The commenter
believed that we should allow all potentially affected hospitals to
report what they believe to be errors that they failed to correct
before the beginning of the Federal fiscal year.
Response: We frequently instruct hospitals that they are
responsible for reviewing their data and notifying the intermediary if
there is an error or omission.
The proposed revision is consistent with the current rules in that
it reinforces for hospitals the responsibility they have for assuring
the accuracy of the wage data they submit.
The wage index is recalculated each year based on wage data from
acute care hospitals nationwide. Since this calculation must be carried
out on a nationwide basis, it is critical that we have the necessary
data from all hospitals in a timely fashion so that the wage index
values can be calculated prior to the beginning of the upcoming fiscal
year. Accordingly, we set out well in advance a detailed timetable for
reviewing and revising the data that hospitals, fiscal intermediaries,
and CMS must follow. In this way, all hospitals are given an equal
opportunity to review and correct their data within the established
process. To further assist in the wage data review process, we require
that fiscal intermediaries notify state hospital associations when a
hospital fails to respond to issues raised during the wage data review
process. The purpose of the notification is to inform the hospital
association that its member hospital's failure to respond to matters
raised by the fiscal intermediary can result in data being disallowed,
thereby possibly lowering an area's wage index value. Consistent with
out efforts to finalize the data used to construct the wage index prior
to publication of the final rule, we make mid-year data revisions in
only very limited circumstances, so that the disruptive effects of such
changes can be avoided to the greatest extent possible. In turn,
consistent with that principle, we think it is appropriate to limit
such mid-year revisions to those pertaining only to the data of the
requesting hospital. We do not believe this revision will unduly
restrict the ability of hospitals to bring to our attention the need
for revisions in a neighboring hospital's data; under our wage data
revision process, hospitals have an ample opportunity to do this prior
to the publication of the rule. Therefore, we disagree with the
commenter that it is necessary or advisable to allow other hospitals an
opportunity to request changes to a hospital's wage data after the
final rule is published, and we are adopting our proposed changes as
final.
Comment: One commenter representing Medicare fiscal intermediaries
recommended that we revise the wage index development process to
provide an incentive for hospitals to submit accurate wage data with
their as-filed cost reports. The
[[Page 50032]]
commenter noted that, in the August 1, 2001 Federal Register (66 FR
39871), we implemented procedural changes that allow the intermediaries
additional time to review hospital's wage data. In that rule, we
indicated that wage data were revised between the publication of the
proposed and final rules for 30 percent of the hospitals. To reduce
this percentage, and the number of ``second'' desk reviews that
intermediaries must perform when hospitals revise their wage data, the
commenter recommended the following changes:
CMS should publish an initial wage index public use file
in September based on provider as-filed wage data.
Hospitals should be allowed 4 weeks to review and submit
to their intermediaries requests for corrections to the initial wage
index public use file.
After the hospitals 4-week review and correction request
period, intermediaries should perform a single desk review of each
hospital s wage data and make the appropriate requested corrections.
After CMS publishes the reviewed final wage index file,
hospitals should submit only corrections due to CMS' or the fiscal
intermediary's mishandling of the wage data.
Response: We appreciate the commenter's recommendation, and we
agree that revisions to the current wage index process should be
considered to reduce duplicative review efforts. We will carefully
explore options and their associated risks before making further
refinements to the wage index development process.
IV. Rebasing and Revision of the Hospital Market Baskets
A. Operating Costs
1. Background
Effective for cost reporting periods beginning on or after July 1,
1979, we developed and adopted a hospital input price index (that is,
the hospital ``market basket'') for operating costs. Although ``market
basket'' technically describes the mix of goods and services used to
produce hospital care, this term is also commonly used to denote the
input price index (that is, cost category weights and price proxies
combined) derived from that market basket. Accordingly, the term
``market basket'' as used in this document refers to the hospital input
price index.
The percentage change in the market basket reflects the average
change in the price of goods and services hospitals purchased in order
to furnish inpatient care. We first used the market basket to adjust
hospital cost limits by an amount that reflected the average increase
in the prices of the goods and services used to furnish hospital
inpatient care. This approach linked the increase in the cost limits to
the efficient utilization of resources.
With the inception of the acute care hospital inpatient prospective
payment system, the projected change in the hospital market basket has
been the integral component of the update factor by which the
prospective payment rates are updated every year. A detailed
explanation of the hospital market basket used to develop the
prospective payment rates was published in the Federal Register on
September 3, 1986 (51 FR 31461). We also refer the reader to the August
29, 1997 Federal Register (62 FR 45966) in which we discussed the
previous rebasing of the hospital input price index. For FY 2003,
payment rates will be updated by the projected increase in the hospital
market basket minus 0.55 percentage points.
The hospital market basket is a fixed-weight, Laspeyres-type price
index that is constructed in three steps. First, a base period is
selected and total base period expenditures are estimated for a set of
mutually exclusive and exhaustive spending categories based upon type
of expenditure. Then, the proportion of total operating costs that each
category represents is determined. These proportions are called cost or
expenditure weights. Second, each expenditure category is matched to an
appropriate price or wage variable, referred to as a price proxy. These
price proxies are price levels derived from publicly available
statistical series that are published on a consistent schedule,
preferably at least on a quarterly basis.
Finally, the expenditure weight for each category is multiplied by
the level of the respective price proxy. The sum of these products
(that is, the expenditure weights multiplied by the price levels) for
all cost categories yields the composite index level of the market
basket in a given year. Repeating this step for other years produces a
series of market basket index levels over time. Dividing one index
level by an earlier index level produces rates of growth in the input
price index over that time.
The market basket is described as a fixed-weight index because it
answers the question of how much it would cost, at another time, to
purchase the same mix of goods and services that was purchased in the
base period. The effects on total expenditures resulting from changes
in the quantity or mix of goods and services (intensity) purchased
subsequent to the base period are not measured. For example, shifting a
traditionally inpatient type of care to an outpatient setting might
affect the volume of inpatient goods and services purchased by the
hospital for use in providing inpatient care, but would not be factored
into the price change measured by a fixed weight hospital market
basket. In this manner, the index measures only the pure price change.
Only rebasing (changing the base year) the index would capture these
quantity and intensity effects in the market basket. Therefore, we
rebase the market basket periodically so the cost weights reflect
changes in the mix of goods and services that hospitals purchase
(hospital inputs) in furnishing inpatient care. We last rebased the
hospital market basket cost weights in 1997, effective for FY 1998 (62
FR 45993). This market basket, used through FY 2002, reflects base year
data from FY 1992 in the construction of the cost weights.
We note that there are separate market baskets for acute care
hospital inpatient prospective payment system hospitals and excluded
hospitals and hospital units. In addition, we are in the process of
conducting the necessary research to determine if separate market
baskets for the inpatient rehabilitation, long-term care, and
psychiatric hospital prospective payment systems can be developed.
However, for the purpose of this preamble, we are only discussing the
market basket based on all excluded hospitals combined.
2. Rebasing and Revising the Hospital Market Basket
The terms rebasing and revising, while often used interchangeably,
actually denote different activities. Rebasing means moving the base
year for the structure of costs of an input price index (for example,
the base year cost structure for the prospective payment system
hospital index shifts from FY 1992 to FY 1997). Revising means changing
data sources, cost categories, or price proxies used in the input price
index.
We used a rebased and revised hospital market basket in developing
the FY 2003 update factor for the prospective payment rates. The
rebased and revised market basket reflects FY 1997, rather than FY
1992, cost data. The 1997-based market baskets use data for hospitals
from Medicare cost reports for cost reporting periods beginning on or
after October 1, 1996, and before October 1, 1997. Fiscal year 1997 was
selected as the new base year because 1997 is the most recent year for
which relatively complete data are available. These include data from
FY 1997 Medicare cost reports as well as 1997 data from two U.S.
Department of
[[Page 50033]]
Commerce publications: the Bureau of the Census' Business Expenditure
Survey (BES) and the Bureau of Economic Analysis' Annual Input-Output
Tables. In addition, analysis of FYs 1998 and 1999 Medicare cost report
data showed little difference in comparable cost shares from FY 1997
data.
In developing the rebased and revised market baskets set forth in
the May 9, 2002 proposed rule (67 FR 31438) and adopted in this final
rule, we used hospital operating expenditure data in determining the
market basket cost weights. We relied primarily on Medicare hospital
cost report data for the rebasing. We prefer to use cost report data
wherever possible because these are the cost data supplied directly
from hospitals. Other data sources such as the BES and the input-output
tables serve as secondary sources used to fill in where cost report
data are not available or appear to be incomplete. We are providing the
following detailed discussion of the process for calculating cost share
weights.
Cost category weights for the FY 1997-based market baskets were
developed in several stages. First, base weights for several of the
operating cost categories (Wages and Salaries, Employee Benefits,
Contract Labor, Pharmaceuticals, and Blood and Blood Products) were
derived from the FY 1997 Medicare cost reports. The expenditures for
these categories were calculated as a percentage of total operating
costs from those hospitals covered under the inpatient hospital
prospective payment system. These data were then edited to remove
outliers and ensure that the hospital participated in the Medicare
program and had Medicare costs. However, we were unable to measure only
those operating costs attributable to the inpatient portion of the
hospital because many of the hospitals' cost centers are utilized for
both inpatient and outpatient care. Health Economics Research (HER),
under contract with CMS, just recently completed a feasibility study on
the construction of a separate outpatient market basket for our
outpatient hospital prospective payment system. While this research
provided some insight about ways to separate inpatient and outpatient
costs, HER also found that substantially more data would need to be
collected from hospitals in order to accomplish this. Furthermore, we
excluded hospital-based subprovider cost centers (for example, skilled
nursing, nursing, hospice, psychiatric, rehabilitation, intermediate
care/mental retardation, and other long-term care) as well as the
portion of overhead and ancillary costs incurred by these subproviders.
Second, the weight for professional liability insurance was
calculated using data from a survey conducted by ANASYS under contract
to CMS. This survey, called the National Hospital Malpractice Insurance
Survey (NHMIS), was conducted to estimate hospital malpractice
insurance costs over time at the national level. A more detailed
description of this survey is found later in this preamble.
Third, data from the 1997 Business Expenditure Survey (BES) was
used to develop a weight for the utilities and telephone services
categories. Like most other data sources, the BES includes data for all
hospitals and does not break out data by payor. However, we believe the
overall data from the BES does not produce results that are
inconsistent with the prospective payment system hospitals,
particularly at the detailed cost category level with which we are
working.
Fourth, the sum of the weights for wages and salaries, employee
benefits, contract labor, professional liability insurance, utilities,
pharmaceuticals, blood and blood products, and telephone services was
subtracted from operating expenses to obtain a portion for all other
expenses.
Finally, the weight for all other expenses was divided into
subcategories using relative cost shares from the 1997 Annual Input-
Output Table for the hospital industry, produced by the Bureau of
Economic Analysis, U.S. Department of Commerce. The 1997 Benchmark
Input-Output data will be available, at the earliest, in late 2002, so
we are unable to incorporate these data in this final rule.
Comment: Several commenters mentioned the need for an improved
market basket, where the composition of the market basket is a more
contemporary reflection of the cost pressures hospitals are facing.
They suggest that we rebase more frequently than the current interval
of approximately every 5 years.
Response: As explained in the May 9, 2002 proposed rule (67 FR
31439), FY 1997 was selected as the base year for the revised and
rebased hospital market basket because it is the most recent year for
which relatively complete data are available.
It is important to realize that the Medicare cost reports were used
as the primary source of data because these data were supplied directly
from hospitals. The independent secondary sources such as the BES and
the input-output table fill in where cost report data were not
available or appeared to be incomplete. While the major cost categories
are available for a more recent year from the cost reports, the
additional detail derived from the input-output tables and the BES was
not, as the Bureau of the Census only publishes these data for 5-year
intervals. In addition, the major cost category weights determined
using the FY 1997 Medicare cost reports were compared to weights
calculated using FY 1998 and FY 1999 Medicare cost reports. These
results were then compared to the weights calculated from the 1997
Medicare cost reports. The results were very similar to those
calculated using FY 1997 Medicare cost report data. Thus, 1997 data are
the most recent, complete, and consistent data readily available for
our rebasing work this year, and using more recent data woud not
produce dissimilar results.
Below, we further describe the sources of the six main category
weights and their subcategories in the FY 1997-based market basket
while noting the differences between the methodologies used to develop
the FY 1992-based and the FY 1997-based market baskets.
Wages and Salaries: The cost weight for the wages and
salaries category was derived using Worksheet S-3 from the FY 1997
Medicare cost reports. Contract labor, which is also derived from the
FY 1997 Medicare cost reports, is split between the wages and salaries
and employee benefits cost categories, using the relationship for
employed workers. An example of contract labor is registered nurses who
are employed and paid by firms that contract for their work with the
hospital. The wages and salaries category in the FY 1992-based market
basket was developed from the FY 1992 Medicare cost reports. In
addition, we used the 1992 Current Population Survey to break out more
detailed occupational subcategories. These subcategories were not
broken out for the FY 1997-based market basket.
Employee Benefits: The cost weight for the employee
benefits category was derived from Worksheet S-3 of the FY 1997
Medicare cost reports. The employee benefits category in the FY 1992-
based market basket was developed from FY 1992 Medicare cost reports
and we used the 1992 Current Population Survey to break out various
occupational subcategories. These subcategories were not broken out for
the FY 1997-based market basket.
Nonmedical Professional Fees: This category refers to
various types of nonmedical professional fees such as legal,
accounting, engineering, and management and consulting fees. Management
and consulting and legal
[[Page 50034]]
fees make up the majority of professional fees in the hospital sector.
The cost weight for the nonmedical professional fees category was
derived from the Bureau of Economic Analysis Input-Output data for
1997. The FY 1992-based index used a combination of data from the
American Hospital Association (AHA) and the Medicare cost reports to
arrive at a weight. However, because the AHA survey data for
professional fees are no longer published, we were unable to duplicate
this method. Had we used the FY 1997-based methodology to calculate the
FY 1992 nonmedical professional fees component, the proportion would
have been similar to the FY 1997 share.
Professional Liability Insurance: The FY 1997-based market
basket uses a weight for professional liability insurance derived from
a survey conducted by ANASYS under contract to CMS (Contract Number
500-98-005). This survey attempted to estimate hospital malpractice
insurance costs over time at the national level for years 1996 and
1997. The population universe of the survey was defined as all non-
Federal, short-term, acute care prospective payment system hospitals. A
statistical sample of hospitals was drawn from this universe and data
collected from those hospitals. This sample of hospitals was then
matched to the appropriate cost report data so that a malpractice cost
weight could be calculated. The questions used in the survey were based
on a 1986 General Accounting Office (GAO) malpractice survey
questionnaire that was modified so data could be collected to calculate
a malpractice cost weight and the rate of change for a constant level
of malpractice coverage at the national level. The 1997 proportion as
calculated by ANASYS was compared to limited data for FYs 1998 and 1999
contained in the Medicare Cost Reports System. The percentages are
relatively comparable. However, since this field was virtually
incomplete in the FY 1997 cost report file, we were unable to use this
cost report data.
In contrast, the FY 1992-based market basket professional liability
insurance weight was determined using the cost report data for PPS-6
(cost reporting periods beginning in FY 1989), the last year these
costs had to be treated separately from all other administrative and
general costs, trended forward to FY 1992 based on the relative
importance of malpractice costs found in the previous market basket.
Comment: A few commenters indicated that the explanation provided
for the derivation of the professional liability insurance weight does
not convey a full understanding of the methodology and data used; they
would like additional information. They also questioned the
appropriateness of assuming a constant level of malpractice coverage at
a national level across time when updating this weight.
Response: We believe the method for calculating the weight for
professional liability insurance in the hospital market basket is
reasonable given the alternatives we examined. The weight for
professional liability insurance was derived from a survey conducted by
ANASYS for CMS called the National Hospital Malpractice Insurance
Survey (NHMIS). This survey was designed to collect hospital
malpractice insurance costs of primary and excess coverage as well as
deductible and other costs for 1996 and 1997. The survey collected
malpractice information directly from a representative sample of
hospitals derived from a universe defined as all non-Federal short-term
acute care prospective payment system hospitals. The hospitals were
sent a questionnaire derived from a 1986 General Accounting Office
Survey. Follow-up phone calls were made where necessary resulting in a
total response rate to the survey was 67 percent. After the data were
collected, several edits were run to test the validity and
reasonableness of the data. The total malpractice cost was derived by
adding the adjusted primary and excess premiums, deductible costs, and
other costs. The survey hospitals were then matched to the
corresponding Medicare cost reports to derive a total hospital cost
using the malpractice insurance policy year and hospital fiscal year as
matching variables. The total professional liability insurance cost for
each hospital calculated from the survey was then divided by the total
hospital costs calculated from the Medicare cost reports to arrive at a
weight for professional liability insurance for the hospital. The mean
cost weight of all of the hospital weights was then used as the
professional liability insurance weight.
Other methods, such as using the Medicare cost reports or trending
1992 data forward, presented significant data limitations. We were
unable to use the Medicare cost report data in the development of a
weight because 1997 data were incomplete, with very few hospitals
submitting information on professional liability insurance. We compared
weights derived from 1998 and 1999 cost report data, which were much
more complete than 1997 data, and found that they produced results very
similar to the weight calculated in the ANASYS report. We were also
unable to use the prior method of calculating a professional liability
insurance weight by trending 1992 data forward. This method would only
capture the effect of price changes over time and would not reflect
increases or decreases in the quantities of professional liability
insurance purchased that should be reflected in the cost category
weight. In the development of the 1992-based market basket, the method
used was the only available option. Therefore, given the data available
from ANASYS and the limitations of other methods we considered, we
believe that the method of calculating a weight chosen was reasonable.
To address the commenters' second point, we feel that it is
appropriate to assume a constant level of malpractice coverage at a
national level. By doing so, we are able to capture only the `pure'
price change in professional liability premiums and not the additional
effect of increasing or decreasing liability coverage. This method is
consistent with the methods used by Bureau of Labor Statistics (BLS) in
constructing its Producer Price Indexes (PPIs).
Comment: Several commenters believe that we should explicitly
account for other insurance categories such as property and general
liability insurance in the market basket and not just professional
liability insurance because of large premium increases in those
categories. In addition, the commenters believe that we should adjust
the weight given to insurance, blood products, and other items that
experience extraordinary price increases.
Response: The market basket implicitly accounts for increases in
other insurance categories under the All Other-Labor Intensive Services
category. We are unable to separate out other detailed insurance
categories in the market basket due to data limitations. A publicly
available data source that meets our criteria for developing weights
for these other insurance categories does not exist at this time. In
addition, data for price proxies such as the BLS PPI for property and
casualty insurance show similar price movements to those of the All
Other-Labor Intensive category in the market basket.
In addition, we cannot inflate the weights of some categories and
not others. This would violate the general principles of price index
construction. We have compiled data for all of the cost categories in
addition to total costs for a common base year and developed a set of
weights that are consistent with respect to the principles of price
index construction. Attempting to reflect more
[[Page 50035]]
recent trends in some categories and not in others would not accurately
capture the entire cost structure that hospitals face at a given time.
In addition, while expenditures for a category may be increasing, this
may not necessarily lead to a greater weight for that category in the
market basket. For example, property insurance expenditures could be
increasing, but other categories could be increasing faster, so that
the weight for property insurance in the market basket would be
declining. Thus, it is necessary that all of the weights are reflective
of a consistent base year.
Utilities: For the FY 1997-based market baskets, the cost
weight for utilities is derived from the Bureau of the Census' Business
Expenditures Survey. For the FY 1992-based market baskets, the cost
weight for utilities was derived from the Bureau of the Census' Asset
and Expenditures Survey. Even though the Business Expenditure Survey
replaced the Asset and Expenditure Survey, the categories and results
are still similar.
All Other Products and Services: The all other products
and services category includes the remainder of products and services
that hospitals purchase in providing care. Products found in this
category include: direct service food, contract service food,
pharmaceuticals, blood and blood products, chemicals, medical
instruments, photographic supplies, rubber and plastics, paper
products, apparel, machinery and equipment, and miscellaneous products.
Services found in this category include: telephone, postage, other
labor-intensive services, and other nonlabor-intensive services. Labor-
intensive services include those services for which local labor markets
would likely influence prices.
The shares for pharmaceuticals and blood and blood products are
derived from the FY 1997 Medicare cost reports, while the share for
telephone services was derived from the BES. Relative shares for the
other subcategories are derived from the 1997 Bureau of Economic
Analysis Annual Input-Output Table for the hospital industry. The
calculation of these subcategories involved calculating a residual from
the Input-Output Table using categories similar to those not yet
accounted for in the market basket. Subcategory weights were then
calculated as a proportion of this residual and applied to the similar
residual in the market basket.
Blood and blood products: When the market basket was last
revised and rebased to FY 1992, the component for blood services was
discontinued because of the lack of appropriate data to determine a
weight. The Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act of 2000 (BIPA) (Pub. L. 106-554) required that we
consider the prices of blood and blood products purchased by hospitals
and determine whether those prices are adequately reflected in the
market basket. In accordance with this requirement, we have done
considerable research to determine if a component for blood and blood
products should be added to the market basket and, if so, how the
weight should be determined. We studied four alternative data sources
to possibly determine a weight for blood in the market basket. If none
of these data sources were deemed acceptable, we could conclude that a
component for blood should not be reintroduced in the hospital market
basket. In its December 2001 report entitled ``Blood Safety in
Hospitals and Medicare Inpatient Payment,'' MedPAC recommended that the
market basket should explicitly account for the cost of blood and blood
products by reintroducing a separate component for their prices.
The first alternative data source studied was using data from the
Medicare cost reports. The cost reports have two cost centers where the
costs of blood can be recorded: (1) Whole blood and packed red blood
cells (nonsalary); and (2) blood storing, processing, and transfusion
(nonsalary). Although all prospective payment system hospitals submit a
cost report, less than half of these hospitals reported data in either
of the two blood cost centers. However, if we can determine that the
hospitals reporting blood are representative of all prospective payment
system hospitals, then a cost share can be computed using the cost
reports.
The second alternative involves constructing weights from the
Input-Output Table from the BEA, Department of Commerce. These data
were used to construct the weight when the market basket was revised
before FY 1992. Unfortunately, BEA stopped reporting blood separately
in their Input-Output Table in 1987. One possible use of these data
would be to calculate a weight by updating the prior weight by the
relative price change for blood between the last data point available
and 1997. However, by using this method, only the escalation in prices,
not the changes in quantity or intensity of use of blood products,
would be captured.
The third alternative was using data from the MedPAR files. This
option was discussed in MedPAC's December 2001 report, and involves
using claims data or data on hospital charges. In order to construct a
weight for the market basket, the underlying costs of blood must be
calculated from the claims data. An analysis of cost-to-charge ratios
of hospitals can determine if this is feasible.
The final alternative data source is the Bureau of the Census'
quinquennial Business Expenditure Survey and the Economic Census. A
weight can be obtained indirectly by taking the ratio of receipts of
nonprofit blood collectors to total operating expenses of hospitals.
Some adjustments would be needed in order for the weight calculated in
this way to be completely valid. In addition, this method assumes that
all blood used by hospitals comes from nonprofit sources. However, in
1999, hospitals collected 7 percent of the donated units.
After a thorough analysis, we have determined that the Medicare
cost reports, after minor adjustments, are the best option. The data
from the Input-Output Table are not optimal because they are not
current and would have to be aged using only price data, which do not
reflect quantity and intensity changes over this period. Although the
MedPAR data could be adjusted to compute a cost share, using claims
data is not the preferred alternative. Census data would be an
attractive option if the cost reports were not available.
The main weakness of the Medicare cost reports is the inconsistent
reporting of hospitals in the two blood cost centers. In 1997, only
48.0 percent of all hospitals reported blood in one or both cost
centers. However, these hospitals accounted for 62.2 percent of the
operating costs of all hospitals. In order for the calculation of the
blood cost share weight to be acceptable, the hospitals that reported
blood would need to be adjusted to be representative of all hospitals,
including those that did not report blood on the cost reports.
Because of the similarity of data in the two blood cost centers,
the assumption was made that if a hospital reported blood in only one
of the two cost centers, all of its blood costs were reported in that
cost center. In the FY 1997 cost reports, of the hospitals that
reported blood, 41.3 percent reported only in the blood cells cost
center, 58.2 percent reported only in the blood storing cost center,
and only 0.5 percent reported in both blood cost centers. To calculate
a weight, the numerator was the summation of the data in both blood
cost centers. The denominator was the summation of the operating costs
of each hospital that reported blood in each cost center minus the
operating costs of the few hospitals that reported blood in both cost
centers to avoid double counting.
The blood cost share calculated from these data was then adjusted
so that the hospitals reporting blood had the same
[[Page 50036]]
characteristics of all other hospitals. Adjustments were necessary
because the hospitals that reported blood were more likely to be urban
and teaching hospitals than those hospitals that did not report blood.
The adjustments made less than a 0.1 percent difference in the cost
share.
The weight produced using the FY 1997 cost reports was 0.875
percent. We also looked at cost report data from FYs 1996 and 1998. The
weights calculated in these years were similar to the FY 1997 weight.
The calculation of the blood cost share using the alternative data
sources cited above was similar to the results using the cost reports.
In this final rule, we use the Medicare cost reports to determine a
weight for blood and blood products in the hospital market basket given
the consistency with these other sources, the representativeness of our
estimate, and the stability of the cost share.
Overall, our work resulted in the identification of 23 separate
cost categories in the rebased and revised hospital market basket.
There is one more category than was included in the FY 1992-based
market basket (FY 1992-based had 22 categories). The differences
between the weights of the major categories determined from the
Medicare cost reports for the FY 1997-based index and the previous FY
1992-based index are summarized in Table 1.
Table 1.--FY 1992-Based and FY 1997-Based Prospective Payment System
Hospital Operating Major Cost Categories and Weights as Determined from
the Medicare Cost Reports
------------------------------------------------------------------------
Rebased FY 1997- FY 1992-Based
Expense categories based hospital hospital market
market basket basket
------------------------------------------------------------------------
Wages and Salaries................ 50.686 50.244
Employee Benefits................. 10.970 11.146
Pharmaceuticals................... 5.416 4.162
Blood and Blood Products.......... 0.875 .................
All Other......................... 32.053 34.448
-------------------------------------
Total......................... 100.000 100.000
------------------------------------------------------------------------
Table 2 sets forth all of the market basket cost categories and
weights. For comparison purposes, the 1992-based cost categories and
weights are included in the table.
Table 2.--FY 1992-Based and FY 1997-Based Prospective Payment Hospital
Operating Cost Categories and Weights
------------------------------------------------------------------------
Rebased FY 1997-
based hospital FY 1992-based
Expense categories market basket hospital market
weights basket weights
------------------------------------------------------------------------
1. Compensation................... 61.656 61.390
A. Wages and Salaries......... 50.686 50.244
B. Employee Benefits.......... 10.970 11.146
2. Professional Fees.............. 5.401 2.127
3. Utilities...................... 1.353 1.542
A. Fuel, Oil, and Gasoline.... 0.284 0.369
B. Electricity................ 0.833 0.927
C. Water and Sewerage......... 0.236 0.246
4. Professional Liability 0.840 1.189
Insurance........................
5. All Other...................... 30.749 33.752
A. All Other Products......... 19.537 24.825
(1.) Pharmaceuticals...... 5.416 4.162
(2.) Direct Purchase Food. 1.370 2.314
(3.) Contract Service Food 1.274 1.072
(4.) Chemicals............ 2.604 3.666
(5.) Blood and Blood 0.875 .................
Products.................
(6.) Medical Instruments.. 2.192 3.080
(7.) Photographic Supplies 0.204 0.391
(8.) Rubber and Plastics.. 1.668 4.750
(9.) Paper Products....... 1.355 2.078
(10.) Apparel............. 0.583 0.869
(11.) Machinery and 1.040 0.207
Equipment................
(12.) Miscellaneous 0.956 2.236
Products.................
B. All Other Services......... 11.212 8.927
(1.) Telephone Services... 0.398 0.581
(2.) Postage.............. 0.857 0.272
(3.) All Other: Labor 5.438 7.277
Intensive................
(4.) All Other: Non-Labor 4.519 0.796
Intensive................
-------------------------------------
Total......................... 100.000 100.000
------------------------------------------------------------------------
Note: Due to rounding, weights may not sum to total.
[[Page 50037]]
3. Selection of Price Proxies
After computing the FY 1997 cost weights for the rebased and
revised hospital market basket, it was necessary to select appropriate
wage and price proxies for each expenditure category. Most of the
indicators are based on BLS data and are grouped into one of the
following BLS categories:
Producer Price Indexes--Producer Price Indexes (PPIs)
measure price changes for goods sold in other than retail markets. PPIs
are preferable price proxies for goods that hospitals purchase as
inputs in producing their outputs because a PPI would better reflect
the prices faced by hospitals. For example, we used the PPI for ethical
(prescription) drugs, rather than the Consumer Price Index (CPI) for
prescription drugs, because hospitals generally purchase drugs directly
from the wholesaler. The PPIs that we use measure price changes at the
final stage of production.
Consumer Price Indexes--Consumer Price Indexes (CPIs)
measure price changes of final goods and services bought by the typical
consumer. Because they may not represent the price faced by a producer,
the consumer price indexes were used only if an appropriate PPI was not
available or if the expenditure was more similar to that of retail
consumers in general rather than wholesale purchasers. For example, the
CPI for food purchased away from home was used as a proxy for
contracted food services.
Employment Cost Indexes--Employment Cost Indexes (ECIs)
measure the rate of change in employee wage rates and employer costs
for employee benefits per hour worked. These indexes are fixed-weight
indexes and strictly measure the change in wage rates and employee
benefits per hour. They are appropriately not affected by shifts in
skill mix.
Table 3 sets forth the complete hospital market basket including
cost categories, weights, and price proxies. For comparison purposes,
we also list the respective FY 1992-based market basket price proxies.
A summary outlining the choice of the various proxies follows the
table.
Table 3.--FY 1997-Based Prospective Payment System Hospital Operating Cost Categories and Weights, and FY 1992-
Based and FY 1997-Based Price Proxies
----------------------------------------------------------------------------------------------------------------
Rebased FY 1997
Expense categories hospital market Rebased FY 1997 hospital FY 1992 hospital market
basket weights market basket price proxy basket price proxy
----------------------------------------------------------------------------------------------------------------
1. Compensation.................... 61.656
Wages and Salaries................. 50.686 ECI-Wages and Salaries, CMS Occupational Wage Proxy
Civilian Hospital Workers.
Employee benefits.................. 10.970 ECI-Benefits, Civilian CMS Occupational Benefit
Hospital Workers. Proxy
2. Professional Fees............... 5.401 ECI-Compensation for ECI-Compensation for
Professional, Specialty & Professional, Specialty &
Technical. Technical
3. Utilities....................... 1.353
A. Fuel, Oil, And Gasoline..... 0.284 PPI Commercial Natural Gas. PPI Commercial Natural Gas
B. Electricity................. 0.833 PPI Commercial Electric PPI Commercial Electric
Power. Power
C. Water and Sewerage.......... 0.236 CPI-U Water & Sewerage CPI-U Water & Sewerage
Maintenance. Maintenance
4. Professional Liability Insurance 0.840 CMS Professional Liability CMS Professional Liability
Insurance Premium Index. Insurance Premium Index
5. All Other....................... 30.749
All Other Products............. 19.537
(1.) Pharmaceuticals....... 5.416 PPI Ethical (Prescription) PPI Ethical (Prescription)
Drugs. Drugs
(2.) Direct Purchase Food.. 1.370 PPI Processed Foods & Feeds PPI Processed Foods & Feeds
(3.) Contract Service Food. 1.274 CPI-U Food Away From Home.. CPI-U Food Away From Home
(4.) Chemicals............. 2.604 PPI Industrial Chemicals... PPI Industrial Chemicals
(5.) Blood and Blood 0.875 PPI Blood and Blood N/A
Products. Derivatives, Human Use.
(6.) Medical Instruments... 2.192 PPI Medical Instruments & PPI Medical Instruments &
Equipment. Equipment
(7.) Photographic Supplies. 0.204 PPI Photographic Supplies.. PPI Photographic Supplies
(8.) Rubber and Plastics... 1.668 PPI Rubber & Plastic PPI Rubber & Plastic
Products. Products
(9.) Paper Products........ 1.355 PPI Converted Paper & PPI Converted Paper &
Paperboard Products. Paperboard Products
(10.) Apparel.............. 0.583 PPI Apparel................ PPI Apparel
(11.) Machinery and 1.040 PPI Machinery & Equipment.. PPI Machinery & Equipment
Equipment.
(12.) Miscellaneous 0.956 PPI Finished Goods less PPI Finished Goods
Products. Food and Energy.
B. All Other Services.......... 11.212
(1.) Telephone Services.... 0.398 CPI-U Telephone Services... CPI-U Telephone Services
(2.) Postage............... 0.857 CPI-U Postage.............. CPI-U Postage
(3.) All Other: Labor 5.438 ECI-Compensation for ECI-Compensation for
Intensive. Private Service Private Service
Occupations. Occupations
(4.) All Other: Non-Labor 4.519 CPI-U All Items............ CPI-U All Items
Intensive.
-------------------
Total.......................... 100.000
----------------------------------------------------------------------------------------------------------------
Note: Totals may not sum to 100 due to rounding.
[[Page 50038]]
a. Wages and Salaries
For measuring the price growth of wages in the FY 1997-based market
basket, we use the ECI for civilian hospitals. This differs from the
proxy used in the FY 1992-based index in which a blended occupational
wage index was used. The blended occupational wage proxy used in the FY
1992-based index and the ECI for wages and salaries for hospitals both
reflect a fixed distribution of occupations within the hospital. The
major difference between the two proxies is in the treatment of
professional and technical wages. In the blended occupational wage
proxy, the professional and technical category was blended evenly
between the ECI for wages and salaries for hospitals and the ECI for
wages and salaries for professional and technical occupations in the
overall economy, instead of hospital-specific occupations as reflected
in the ECI for hospitals. This blend was done to create a normative
price index that did not reflect the market imperfections in the
hospital labor markets that existed for much of the 1980s and early
1990s.
Between 1987 (the first year the ECI for hospitals was available,
although the pattern existed before then using other measures of
hospital wages) and 1994, the ECI for wages and salaries for hospital
workers grew faster than the blended occupational wage proxy. During
the period from 1995 through 2000, this trend reversed; each year the
ECI grew slower than the blended occupational wage proxy. This is the
apparent result of the shift of private insurance enrollees from fee-
for-service plans to managed care plans and the tighter controls these
plans exhibited over hospital utilization and incentives to shift care
out of the inpatient hospital setting. More recently, the ECI for wages
and salaries for hospital workers has again grown faster than the
blended occupational wage proxy, raising the question of whether the
relationship between hospital wages and the occupational wage blend
from 1994 through 2000 was the signaling of a new era in the
competitiveness of the hospital labor market, or simply the temporary
reversal of the long-term pattern of labor market imperfections in
hospitals.
In order to answer this question, we researched the historical
determinants of this relationship and estimated what the future market
conditions are likely to be. Our analysis indicated that the driving
force behind the long-term differential between hospital wages and the
blended occupational wage proxy was the increased demand for hospital
services and the subsequent increase in hospital utilization,
particularly in outpatient settings. However, during the 1994 through
2000 period, the major force behind the reversal of the differential
was the shift of enrollees to managed care plans that had tighter
restrictions on hospital utilization and encouraged the shift of care
out of the hospital setting. To a lesser extent, the robust economic
growth and tight economy-wide labor markets that accompanied this
period helped to reverse the differential as well. Over the last few
years, there has been a move back towards less restrictive plans, and a
subsequent increase in the utilization of hospital services. This
recent surge appears to reflect the true underlying effect of rising
health care demand.
This concept is reinforced by the similar patterns being observed
for nursing homes and other health sectors as well. This is an
important development, specifically when compared to the ECI for wages
and salaries for nursing homes, which reflect less skilled occupations,
yet still experienced a similar acceleration in wage growth. Thus, we
would expect that this recent surge in hospital wages is reflective of
competitive labor market conditions, and would likely persist only as
long as the underlying demand for health care was accelerating.
While the shift to managed care plans had a noticeable one-time
effect, our analysis has indicated that the hospital labor market is
more competitive than before this period and that the expected shift
towards more restrictive insurance plans over the coming decade will
act to create a wage differential that reflects the underlying
increases in demand for hospital services. For FY 2003, the hospital
market basket is forecast to increase 0.2 percentage points faster (3.5
versus 3.3) than it would have if the occupational blend had been used.
Based on this, we use the ECI for wages and salaries for hospitals as
the proxy in the hospital market basket for wages. The ECI met our
criteria of relevance, reliability, availability, and timeliness.
Relevance means that the proxy is applicable and representative of the
cost category that it proxies. Reliability indicates that the index is
based on valid statistical methods and has low sampling variability.
Availability means that the proxy is publicly available. Timeliness
implies that the proxy is published regularly, at least quarterly.
b. Employee Benefits
The FY 1997-based hospital market basket uses the ECI for employee
benefits for civilian hospitals. This differs from the FY 1992-based
index in which a blended occupational index was used. Our conclusions
were based on an analysis similar to that done for the wages and
salaries proxy described above.
c. Nonmedical Professional Fees
The ECI for compensation for professional and technical workers in
private industry is applied to this category since it includes
occupations such as management and consulting, legal, accounting, and
engineering services. The same price measure was used in the FY 1992-
based market basket.
d. Fuel, Oil, and Gasoline
The percentage change in the price of gas fuels as measured by the
PPI (Commodity Code #0552) is applied to this component. The same price
measure was used in the FY 1992-based market basket.
e. Electricity
The percentage change in the price of commercial electric power as
measured by the PPI (Commodity Code #0542) is applied to this
component. The same price measure was used in the FY 1992-based market
basket.
f. Water and Sewerage
The percentage change in the price of water and sewerage
maintenance as measured by the Consumer Price Index (CPI) for all urban
consumers (CPI Code #CUUR0000SEHG01) is applied to this component. The
same price measure was used in the FY 1992-based market basket.
g. Professional Liability Insurance
The percentage change in the hospital professional liability
insurance price as estimated by the CMS Hospital Malpractice Index is
applied. In the FY 1992-based market basket, the same proxy was used.
We are currently conducting research into improving our proxy for
professional liability insurance. This research includes subcontracting
with ANASYS through a contract with DRI-WEFA to extend the results of
its NHMIS survey to set up a sample of hospitals from which malpractice
insurance premium data will be directly collected. This new
information, which would include liability estimates for hospitals that
self-insure, would be combined with our current proxy data to obtain a
more accurate price measure. In addition, we continue to monitor a BLS
PPI for medical malpractice premiums that in the future could be used
as a proxy for this cost category.
[[Page 50039]]
Comment: Several commenters indicated that hospital malpractice
costs are increasing much faster than the professional liability
portion of the market basket and we should consider other alternatives.
Response: We believe that our price proxy for professional
liability insurance adequately measures the increases in professional
liability insurance costs facing hospitals. While anecdotal evidence
suggests that malpractice costs are increasing at double-digit rates,
actual data as measured by the CMS hospital professional liability
insurance survey as well as data on insurance from the BLS Producer
Price Index through 2001 do not reflect this. Since the FY 2003 market
basket increase is based on a forecast from DRI-WEFA, the expected
trends in hospital professional liability insurance premiums are indeed
reflected. As is the case with all of our indexes, we regularly review
all of the proxies in the index to verify that they are representative
of current industry trends. In addition, as mentioned in the May 9,
2002 proposed rule (67 FR 31444), we are currently exploring
alternatives to our price proxy for hospital professional liability
insurance including possibly using the BLS Producer Price Index for
medical malpractice. We are also working with our contractor to explore
possible methods of improving our hospital professional liability
proxy, though this research is not yet complete.
h. Pharmaceuticals
The percentage change in the price of prescription drugs as
measured by the PPI (Commodity Code #PPI283D#RX) is applied to this
variable. This is a special index produced by BLS. The previous price
proxy used in the FY 1992-based index (Commodity Code #0635) was
discontinued after BLS revised its indexes.
i. Food, Direct Purchases
The percentage change in the price of processed foods as measured
by the PPI (Commodity Code #02) is applied to this component. The same
price measure was used in the FY 1992-based market basket.
j. Food, Contract Services
The percentage change in the price of food purchased away from home
as measured by the CPI for all urban consumers (CPI Code #CUUR0000SEFV)
is applied to this component. The same price measure was used in the FY
1992-based market basket.
k. Chemicals
The percentage change in the price of industrial chemical products
as measured by the PPI (Commodity Code #061) is applied to this
component. While the chemicals hospitals use include industrial as well
as other types of chemicals, the industrial chemicals component
constitutes the largest proportion by far. Thus, Commodity Code #061 is
the appropriate proxy. The same price measure was used in the FY 1992-
based market basket.
l. Blood and Blood Products
The percentage change in the price of blood and derivatives for
human use as measured by the PPI (Commodity Code #063711) is applied to
this component. As discussed earlier in this preamble, a comparable
cost category was not available in the FY 1992-based market basket.
We use the PPI for blood and blood derivatives as the price proxy
for the blood and blood products cost category. This proxy is relevant,
reliable, available, and timely. We considered placing the blood weight
in the Chemicals or Pharmaceuticals cost category, but found this made
only minor changes to the total index. We also considered constructing
an index based on blood cost data received from the American Red Cross,
America's Blood Centers, and Zeman and Company. However, these data are
collected annually and are not widely available. The PPI for blood and
blood derivatives was the only index we found that met all of our
criteria.
Comment: Several commenters supported the separate expense category
for blood and blood products in the market basket and the use of the
PPI for blood and blood derivatives for human use as the price proxy
for monitoring the rate of change in blood costs. However, the
commenters indicated that it is important to ensure that the PPI for
blood and blood derivatives is appropriately and timely updated by the
BLS so that it adequately tracks changing blood technologies and safety
initiatives. The commenters added that ensuring the safety of the
nation's blood supply requires constant attention to developing disease
states and testing technologies and creates changing costs that must be
captured by the blood PPI to ensure adequate reflection in the
prospective payment system market basket.
Response: We agree that the PPI for blood and blood derivatives
should appropriately reflect the price of blood and blood products. We
will continue to monitor the PPI to ensure that this is the case. We
are supportive of efforts by the BLS to collect the necessary
information on the price of blood and blood products so they are
accurately reflected in the PPI for blood and blood derivatives.
Organizations that represent blood providers are also encouraged to
work with BLS to accomplish this goal.
Comment: One commenter suggested that we use data from the Red
Cross, America's Blood Centers or Zeman and Company in developing a
price proxy that reflects recent cost increases for blood products.
Response: We require that all price indexes used in our market
baskets to be relevant, reliable, available, and timely. The BLS PPI
for blood and blood derivatives is an independent estimate of prices
for these products that are published on a regular schedule (monthly).
It is based on sound statistical methods and meets our criteria listed
above. The possible sources of data mentioned by the commenter are not
available frequently enough and on a regular basis and, therefore, do
not meet the criterion of timeliness. Also, it has not been determined
if indexes based on these data would be relevant or reliable enough for
use in the CMS market baskets. Furthermore, because of their method of
construction, the BLS indexes that we use as price proxies in the
market baskets reflect only the effect of price changes and not the
effects of quantity or quality changes. Our market baskets are designed
to measure only the price change effects on increases in costs and not
the quantity or quality effects. It has not been demonstrated whether
indexes from these other data sources would capture only price effects
or whether they mix price and quantity/quality effects.
m. Surgical and Medical Equipment
The percentage change in the price of medical and surgical
instruments as measured by the PPI (Commodity Code #1562) is applied to
this component. The same price measure was used in the FY 1992-based
market basket.
n. Photographic Supplies
The percentage change in the price of photographic supplies as
measured by the PPI (Commodity Code #1542) is applied to this
component. The same price measure was used in the FY 1992-based market
basket.
o. Rubber and Plastics
The percentage change in the price of rubber and plastic products
as measured by the PPI (Commodity Code #07) is applied to this
component. The same
[[Page 50040]]
price measure was used in the FY 1992-based market basket.
p. Paper Products
The percentage change in the price of converted paper and
paperboard products as measured by the PPI (Commodity Code #0915) is
used. The same price measure was used in the FY 1992-based market
basket.
q. Apparel
The percentage change in the price of apparel as measured by the
PPI (Commodity Code #381) is applied to this component. The same price
measure was used in the FY 1992-based market basket.
r. Machinery and Equipment
The percentage change in the price of machinery and equipment as
measured by the PPI (Commodity Code #11) is applied to this component.
The same price measure was used in the FY 1992-based market basket.
s. Miscellaneous Products
The percentage change in the price of all finished goods less food
and energy as measured by the PPI (Commodity Code #SOP3500) is applied
to this component. The percentage change in the price of all finished
goods was used in the FY 1992-based market basket. This change was made
to remove the effect of food and energy prices, which are already
captured elsewhere in the market basket.
t. Telephone
The percentage change in the price of telephone services as
measured by the CPI for all urban consumers (CPI Code #CUUR0000SEED) is
applied to this component. The same price measure was used in the FY
1992-based market basket.
u. Postage
The percentage change in the price of postage as measured by the
CPI for all urban consumers (CPI Code #CUUR0000SEEC01) is applied to
this component. The same price measure was used in the FY 1992-based
market basket.
v. All Other Services, Labor Intensive
The percentage change in the ECI for compensation paid to service
workers employed in private industry is applied to this component. The
same price measure was used in the FY 1992-based market basket.
w. All Other Services, Nonlabor Intensive
The percentage change in the all-items component of the CPI for all
urban consumers (CPI Code #CUUR0000SA0) is applied to this component.
The same price measure was used in the FY 1992-based market basket.
For further discussion of the rationale for choosing many of the
specific price proxies, we reference the August 30, 1996 final rule (61
FR 46326). Table 4 shows the historical and forecasted updates under
both the FY 1997-based and the FY 1992-based market baskets.
Table 4.--FY 1992-Based and FY 1997-Based Prospective Payment Hospital
Operating Index Percent Change, 1995-2004
------------------------------------------------------------------------
Rebased
1997-based FY 1992-
Fiscal year (FY) hospital based
market market
basket basket
------------------------------------------------------------------------
Historical Data:
FY 1995....................................... 2.8 3.1
FY 1996....................................... 2.3 2.4
FY 1997....................................... 1.6 2.1
FY 1998....................................... 2.7 2.9
FY 1999....................................... 2.7 2.5
FY 2000....................................... 3.3 3.6
FY 2001....................................... 4.3 4.1
Average FYs 1995-2001......................... 2.8 3.0
Forecast:
FY 2002....................................... 3.9 3.0
FY 2003....................................... 3.5 3.2
FY 2004....................................... 3.1 3.2
Average FYs 2002-2004......................... 3.5 3.1
------------------------------------------------------------------------
Source: Global Insights, Inc, DRI-WEFA, 2nd Qtr. 2002; @USMACRO/MODTREND
@CISSIM/TL0502.SIM
As indicated by Table 5, switching the proxy for wages and benefits to
the ECI for Civilian Hospitals has a minimal effect over time. While
the FY 2003 update is 0.2 percentage points higher than using the
previous blended occupational wage proxy, we believe that it is a more
appropriate measure of price change in hospital wages and benefit
prices given the current labor market conditions facing hospitals.
Table 5.--1997-Based Prospective Payment System Hospital Operating Index
Percent Change, Using Different Wage and Benefit Proxies, 1995-2004
------------------------------------------------------------------------
Rebased
1997 Rebased 1997
hospital market
market basket using
Fiscal year (FY) basket occupational
using ECIs wage and
for wages benefit
and proxies
benefits
------------------------------------------------------------------------
Historical Data:
[[Page 50041]]
FY 1995...................................... 2.8 3.0
FY 1996...................................... 2.3 2.5
FY 1997...................................... 1.6 2.2
FY 1998...................................... 2.7 3.2
FY 1999...................................... 2.7 3.0
FY 2000...................................... 3.3 3.4
FY 2001...................................... 4.3 4.1
Average FYs 1995-2001........................ 2.8 3.1
Forecast:
FY 2002...................................... 3.9 3.3
FY 2003...................................... 3.5 3.3
FY 2004...................................... 3.1 3.3
Average FYs 2002-2004........................ 3.5 3.3
------------------------------------------------------------------------
Source: Global Insights, Inc, DRI-WEFA, 2nd Qtr. 2002; @USMACRO/
MODTREND @CISSIM/TL0502.SIM
4. Labor-Related Share
Sections 1886(d)(2)(H) and (d)(3)(E) of the Act direct the
Secretary to estimate from time to time the proportion of payments that
are labor-related: ``The Secretary shall adjust the proportion (as
estimated by the Secretary from time to time) of hospitals' costs which
are attributable to wages and wage-related costs of the DRG prospective
payment rates * * *.'' The labor-related share is used to determine the
proportion of the national prospective payment system base payment rate
to which the area wage index is applied. In the past, we have defined
the labor-related share for prospective payment system acute care
hospitals as the national average proportion of operating costs that
are related to, influenced by, or vary with the local labor market. The
labor-related share for the acute care hospital inpatient prospective
payment system market basket has been the sum of the weights for wages
and salaries, fringe benefits, professional fees, contract labor,
postage, business services, and labor-intensive services.
In its June 2001 Report to Congress, MedPAC recommended that ``To
ensure accurate input-price adjustments in Medicare's prospective
payment systems, the Secretary should reevaluate current assumptions
about the proportions of providers' costs that reflect resources
purchased in local and national markets.'' (Report to the Congress:
Medicare in Rural America, p. 80, Recommendation 4D.) MedPAC believes
that the labor-related share is an estimate of the national average
proportion of providers' costs associated with inputs that are only
affected by local market wage levels. MedPAC recommended the labor-
related share include the weights for wages and salaries, fringe
benefits, contract labor, and other labor-related costs for locally
purchased inputs only. By changing the methodology, and thereby
lowering the labor-related share, funds would be transferred from urban
to rural hospitals, which generally have wage index values less than
1.0.
Our proposed methodology was consistent with that used in the past
to determine the labor-related share, which is the summation of the
cost categories from the market basket deemed to vary with the local
labor market. However, we noted that, while we did not propose to
change the methodology for calculating the labor-related share in the
proposed rule, we have begun the research necessary to reevaluate the
current assumptions used in determining this share. This reevaluation
is consistent with MedPAC's recommendation in their June 2001 report.
Our research involves analyzing the compensation share separately for
urban and rural hospitals, using regression analysis to determine the
proportion of costs influenced by the area wage index, and exploring
alternative methodologies to determine whether all or just a portion of
professional fees and nonlabor intensive services should be considered
labor-related.
We also noted our concern that the result of our methodology
(increasing the labor-related share from 71.066 percent to 72.495
percent) could have negative impacts that would fall predominantly on
rural hospitals. In addition, we noted that we planned to conduct
further research and would make the appropriate changes in the final
rule if another methodology was found to be superior to our current
methodology.
Comment: Commenters generally supported our expressed willingness
to review this methodology, and emphasized the need for a full and
careful study of any changes before adopting major changes. Comments on
behalf of some national and State hospital associations recommended
that we not make any change to the labor-related share calculation,
while proceeding with market basket rebasing, until completing a more
thorough examination of the proportion of labor costs influenced by the
local labor market, noting that we included in our methodology costs
related to, influenced by, or that vary with the local labor market,
even if these services may be purchased at the national level.
MedPAC commented that it believes that certain expenditures
identified in our methodology as locally purchased are in fact
purchased, in whole or in part, in national markets. The Commission
gave examples such as computing, legal, and accounting services. The
Commission noted it has worked with us in the past to discuss these
issues, and commented that continued use of our proposed approach is
appropriate in the absence of a superior method. Several commenters
referred to the difference between MedPAC's and CMS's methodologies and
suggested that we should adopt MedPAC's methodology.
[[Page 50042]]
Other commenters argued the labor-related share must be decreased,
noting that increasing the percentage will only exacerbate current
flaws in the payment system. Some commenters referred to the fact that
the outpatient prospective payment system labor-related share is only
60 percent. Another commenter suggested the labor-related share should
be changed to a State-specific share.
Still other commenters, some of whom represent national and State
hospital associations, supported the proposed methodology, and
expressed their belief that any revised methodology from the one
discussed in the proposed rule would need to be separately proposed
with an opportunity for specific public comment. It was also noted that
it has been our standard practice to empirically estimate the labor
share in accordance with changes in the market basket, and it was
recommended that we continue to follow our empirical estimate. Another
commenter stated that our proposed methodology is consistent with both
our past practice and statutory mandate.
Response: We have decided not to proceed with reestimating the
labor-related share at this time. We will conduct further analysis to
determine the most appropriate methodology before proceeding.
Therefore, for FY 2003, the labor-related share applicable to the
standardized amounts will remain at 71.066 percent. Any future
revisions to the labor-related share or the methodology will be
proposed and subject to public comment.
We appreciate the input from commenters on this issue, and look
forward to continuing to work with MedPAC and the hospital industry on
future refinements to the labor-related share methodology.
Comment: One commenter offered several specific refinements to the
proposed methodology. The commenter agreed with our proposal to remove
postage costs from the methodology and recommended that insurance costs
and certain other wage-related costs also be removed.
Another commenter noted that we are adjusting the labor portion of
the standardized amount using data that is not measured through the
existing hospital wage index. The commenter reports estimating a labor
share of 61.656 percent by excluding contract labor costs not included
in the wage index.
Response: As noted above, we are not revising our estimate of the
labor-related share at this time. We will take these comments into
consideration in our future analysis.
5. Separate Market Basket for Hospitals and Hospital Units Excluded
From the Acute Care Hospital Inpatient Prospective Payment System
In its March 1, 1990 report, ProPAC recommended that we establish a
separate market basket for hospitals and hospital units excluded from
the acute care hospital inpatient prospective payment system. Effective
with FY 1991, we adopted ProPAC's recommendation to implement separate
market baskets. (See the September 4, 1990 final rule (55 FR 36049).)
Prospective payment system hospitals and excluded hospitals and units
tend to have different case mixes, practice patterns, and composition
of inputs. The fact that excluded hospitals are not included under the
acute care hospital inpatient prospective payment system in part
reflects these differences. Studies completed by HCFA (now CMS),
ProPAC, and the hospital industry have documented different weights for
excluded hospitals and units and prospective payment system hospitals.
The excluded hospital market basket is a composite set of weights
for Medicare-participating psychiatric hospitals and units,
rehabilitation hospitals and units, long-term care hospitals,
children's hospitals, and cancer hospitals. We use cost report data for
excluded freestanding hospitals whose Medicare average length of stay
is within 15 percent (that is, 15 percent higher or lower) of the total
facility average length of stay for excluded hospitals, except
psychiatric hospitals. A tighter measure of Medicare length of stay
within 8 percent (that is, 8 percent higher or lower) of the total
facility average length of stay is used for freestanding psychiatric
hospitals. This is done because psychiatric hospitals have a relatively
small proportion of costs from Medicare and a relatively small share of
Medicare psychiatric cases. While the 15-percent length of stay edit
was used for the FY 1992-based index, the tighter 8-percent edit for
psychiatric hospitals was not. We believe that limiting our sample to
hospitals with a Medicare average length of stay within a comparable
range to the total facility average length of stay provides a more
accurate reflection of the structure of costs for treating Medicare
patients.
Table 6 compares major weights in the rebased FY 1997 market basket
for excluded hospitals with weights in the rebased FY 1997 market
basket for acute care prospective payment system hospitals. Wages and
salaries are 51.998 percent of total operating costs for excluded
hospitals compared to 50.686 percent for acute care prospective payment
hospitals. Employee benefits are 11.253 percent for excluded hospitals
compared to 10.970 percent for acute care prospective payment
hospitals. As a result, compensation costs (wages and salaries plus
employee benefits) for excluded hospitals are 63.251 percent of costs
compared to 61.656 percent for acute care prospective payment
hospitals, reflecting the more labor-intensive services conducted in
excluded hospitals.
A significant difference in the category weights also occurs in
pharmaceuticals. Pharmaceuticals represent 5.416 percent of costs for
acute care prospective payment hospitals and 6.940 percent for excluded
hospitals. The weight for the excluded hospital market basket was
derived using the same data sources and methods as for the acute care
prospective payment market basket which were outlined previously.
Differences in weights between the excluded hospital and acute care
prospective payment hospital market baskets do not necessarily lead to
significant differences in the rate of price growth for the two market
baskets. If individual wages and prices move at approximately the same
annual rate, both market baskets may have about the same overall price
growth, even though the weights may differ substantially, because both
market baskets use the same wage and price proxies. Also, offsetting
price increases for various cost components can result in similar
composite price growth in both market baskets.
[[Page 50043]]
Table 6.--FY 1997-Based Excluded Hospital and Prospective Payment System
Hospital Market Baskets, Comparison of Significant Weights
------------------------------------------------------------------------
Rebased FY 1997-
Rebased FY 1997- based prospective
Category based excluded payment system
hospital market hospital market
basket basket
------------------------------------------------------------------------
Wages and Salaries................ 51.998 50.686
Employee Benefits................. 11.253 10.970
Professional Fees................. 4.859 5.401
Pharmaceuticals................... 6.940 5.416
All Other......................... 24.950 25.527
-------------------------------------
Total......................... 100.000 100.000
------------------------------------------------------------------------
Table 7 lists the cost categories, weights, and proxies for the FY
1997-based excluded hospital market basket. For comparison, the FY
1992-based cost category weights are included. The proxies are the same
as those used in the FY 1997-based acute care hospital inpatient
prospective payment system market basket.
Table 7.--FY 1992-Based and FY 1997-Based Excluded Hospital Operating Cost Categories, Weights and Price Proxies
----------------------------------------------------------------------------------------------------------------
Rebased FY 1997-
based excluded FY 1992-based
Expense categories hospital market excluded hospital FY 1997-based price proxy
basket weights market weights
----------------------------------------------------------------------------------------------------------------
1. Compensation.................... 63.251 63.721 .....................................
A. Wages and Salaries.......... 51.998 52.152 ECI-Wages and Salaries, Civilian
Hospital Workers
B. Employee Benefits........... 11.253 11.569 ECI-Benefits, Civilian Hospital
Workers
2. Professional Fees............... 4.859 2.098 ECI-Compensation for Professional,
Specialty & Technical
3. Utilities....................... 1.296 1.675 .....................................
A. Fuel, Oil, and Gasoline..... 0.272 0.401 PPI Commercial Natural Gas
B. Electricity................. 0.798 1.007 PPI Commercial Electric Power
C. Water and Sewerage.......... 0.226 0.267 CPI-U Water & Sewerage Maintenance
4. Professional Liability Insurance 0.805 1.081 CMS Professional Liability Insurance
Premiums Index
5. All Other....................... 29.790 31.425 .....................................
A. All Other Products.......... 19.680 24.227 .....................................
(1.) Pharmaceuticals........... 6.940 3.070 PPI Ethical (Prescription) Drugs
(2.) Direct Purchase Food.. 1.233 2.370 PPI Processed Foods and Feeds
(3.) Contract Service Food. 1.146 1.098 CPI-U Food Away From Home
(4.) Chemicals............. 2.343 3.754 PPI Industrial Chemicals
(5.) Blood and Blood 0.821 N/A PPI Blood and Blood Derivatives,
Products. Human Use
(6.) Medical Instruments... 1.972 3.154 PPI Medical Instruments & Equipment
(7.) Photographic Supplies. 0.184 0.400 PPI Photographic Supplies
(8.) Rubber and Plastics... 1.501 4.865 PPI Rubber & Plastic Products
(9.) Paper Products........ 1.219 2.182 PPI Converted Paper & Paperboard
Products
(10.) Apparel.............. 0.525 0.890 PPI Apparel
(11.) Machinery and 0.936 0.212 PPI Machinery & Equipment
Equipment.
(12.) Miscellaneous 0.860 2.232 PPI Finished Goods less Food and
Products. Energy
B. All Other Services.......... 10.110 7.198 .....................................
(1.) Telephone Services.... 0.382 0.631 CPI-U Telephone Services
(2.) Postage............... 0.771 0.295 CPI-U Postage
(3.) All Other: Labor 4.892 5.439 ECI-Compensation for Private Service
Intensive. Occupations
(4.) All Other: Non-Labor 4.065 0.833 CPI-U All Items
Intensive.
Total.......................... 100.000 100.000 .....................................
--------------------------------------
----------------------------------------------------------------------------------------------------------------
Note: Due to rounding, weights may not sum to total.
Table 8 shows the historical and forecasted updates under both the
FY 1997-based and the FY 1992-based excluded hospital market baskets.
[[Page 50044]]
Table 8.--FY 1992-Based and FY 1997-Based Excluded Hospital Operating
Index Percent Change, 1995-2004
------------------------------------------------------------------------
Rebased FY FY 1992-
1997-based based
excluded excluded
Fiscal year (FY) hospital hospital
market market
basket basket
------------------------------------------------------------------------
Historical Data:
FY 1995....................................... 2.7 3.2
FY 1996....................................... 2.4 2.5
FY 1997....................................... 1.7 2.0
FY 1998....................................... 3.0 2.7
FY 1999....................................... 2.9 2.4
FY 2000....................................... 3.3 3.6
FY 2001....................................... 4.3 4.1
Average FYs 1995-2001......................... 2.9 2.9
Forecast:
FY 2002....................................... 4.0 3.0
FY 2003....................................... 3.5 3.2
FY 2004....................................... 3.1 3.2
Average FYs 2002-2004......................... 3.5 3.1
------------------------------------------------------------------------
Source: Global Insights, Inc, DRI-WEFA, 2nd Qtr. 2002; @USMACRO/MODTREND
@CISSIM/TLO502.SIM.
A comparison of the FY 1997-based index incorporating the new wage
and benefits proxies (ECIs) and updated occupational wage proxies is
included in Table 9. Like the FY 1997-based prospective payment
hospital index showed, there is little difference in the index over
time when different compensation proxies are used.
Table 9.--FY 1997-Based Excluded Hospital Operating Index Percent
Change, Using Different Wage and Benefit Proxies, 1995-2004
------------------------------------------------------------------------
Rebased FY 1997-based
excluded hospital market
basket
--------------------------
Fiscal year (FY) Using ECIs Using
for occupational
hospital wages and
wage and Benefits
benefit proxies
------------------------------------------------------------------------
Historical Data:
FY 1995...................................... 2.7 2.9
FY 1996...................................... 2.4 2.5
FY 1997...................................... 1.7 2.2
FY 1998...................................... 3.0 3.5
FY 1999...................................... 2.9 3.0
FY 2000...................................... 3.3 3.5
FY 2001...................................... 4.3 4.1
Average FYs 1995-2001........................ 2.9 3.1
Forecast:
FY 2002...................................... 4.0 3.4
FY 2003...................................... 3.5 3.3
FY 2004...................................... 3.1 3.3
Average FYs 2002-2004........................ 3.5 3.3
------------------------------------------------------------------------
Source: Global Insights, Inc, DRI-WEFA, 2nd Qtr. 2002; @USMACRO/MODTREND
@CISSIM/TL0502.SIM
B. Capital Input Price Index
The Capital Input Price Index (CIPI) was originally detailed in the
September 1, 1992 Federal Register (57 FR 40016). There have been
subsequent discussions of the CIPI presented in the May 26, 1993 (58 FR
30448), September 1, 1993 (58 FR 46490), May 27, 1994 (59 FR 27876),
September 1, 1994 (59 FR 45517), June 2, 1995 (60 FR 29229), September
1, 1995 (60 FR 45815), May 31, 1996 (61 FR 27466), and August 30, 1996
(61 FR 46196) rules in the Federal Register. The August 30, 1996 rule
discussed the most recent revision and rebasing of the CIPI to a FY
1992 base year, which reflects the capital cost structure facing
hospitals in that year.
We are revising and rebasing the CIPI to a FY 1997 base year to
reflect a more recent structure of capital costs. To do this, we
reviewed hospital expenditure data for the capital cost categories of
depreciation, interest, and other capital expenses. As with the FY
1992-based index, we have developed two sets of weights in order to
calculate the FY 1997-based CIPI. The first set of weights identifies
the proportion of hospital capital expenditures attributable to each
capital expenditure category, while the second is a set of relative
vintage weights for depreciation and interest. The set of vintage
weights is used to identify the proportion of capital expenditures
within a cost category that
[[Page 50045]]
is attributable to each year over the useful life of capital assets in
that category. A more thorough discussion of vintage weights is
provided later in this section.]
Both sets of weights are developed using the best data sources
available. In reviewing source data, we determined that the Medicare
cost reports provided accurate data for all capital expenditure cost
categories. We are using the FY 1997 Medicare cost reports for acute
care prospective payment system hospitals, excluding expenses from
hospital-based subproviders, to determine weights for all three cost
categories: Depreciation, interest, and other capital expenses. We
compared the weights determined from the Medicare cost reports to other
data sources for 1997, specifically the Bureau of the Census' BES and
the AHA Annual Survey, and found the weights to be consistent with
those data sources.
Lease expenses are not a separate cost category in the CIPI, but
are distributed among the cost categories of depreciation, interest,
and other, reflecting the assumption that the underlying cost structure
of leases is similar to capital costs in general. We assumed 10 percent
of lease expenses are overhead and assigned them to the other capital
expenses cost category as overhead, as was done in previous capital
market baskets. The remaining 90 percent of lease expenses were
distributed to the three cost categories based on the weights of
depreciation, interest, and other capital expenses not including lease
expenses.
Depreciation contains two subcategories: Building and fixed
equipment and movable equipment. The split between building and fixed
equipment and movable equipment was determined using the Medicare cost
reports. This methodology was also used to compute the FY 1992-based
index.
Table 10 presents a comparison of the rebased FY 1997 capital cost
weights and the FY 1992 capital cost weights.
Table 10.--Comparison of FY 1992 and Rebased FY 1997 Cost Category
Weights
------------------------------------------------------------------------
Rebased
Expense categories FY 1992 FY 1997 Price proxy
weights weights
------------------------------------------------------------------------
Total........................ 1.0000 1.0000 .....................
Total depreciation....... 0.6484 0.7135 .....................
Building and Fixed 0.3009 0.3422 Boeckh Institutional
Equipment Construction Index--
Depreciation. vintage weighted (23
years)
Movable Equipment 0.3475 0.3713 PPI for machinery and
Depreciation. equipment--vintage
weighted (11 years)
Total interest........... 0.3184 0.2346 .....................
Government/Nonprofit 0.2706 0.1994 Average yield on
Interest. domestic municipal
bonds (Bond Buyer 20
bonds)--vintage
weighted (23 years)
For-profit Interest.. 0.0478 0.0352 Average yield on
Moody's Aaa bonds--
vintage weighted (23
years)
Other.................... 0.0332 0.0519 CPI--Residential Rent
------------------------------------------------------------------------
Because capital is acquired and paid for over time, capital
expenses in any given year are determined by past and present purchases
of physical and financial capital. The vintage-weighted CIPI is
intended to capture the long-term consumption of capital, using vintage
weights for depreciation (physical capital) and interest (financial
capital). These vintage weights reflect the purchase patterns of
building and fixed equipment and movable equipment over time. Because
depreciation and interest expenses are determined by the amount of past
and current capital purchases, we used the vintage weights to compute
vintage-weighted price changes associated with depreciation and
interest expense.
Vintage weights are an integral part of the CIPI. Capital costs are
inherently complicated and are determined by complex capital purchasing
decisions over time, based on such factors as interest rates and debt
financing. Capital is depreciated over time instead of being consumed
in the same period it is purchased. The CIPI accurately reflects the
annual price changes associated with capital costs, and is a useful
simplification of the actual capital accumulation process. By
accounting for the vintage nature of capital, we are able to provide an
accurate, stable annual measure of price changes. Annual nonvintage
price changes for capital are unstable due to the volatility of
interest rate changes. These unstable annual price changes do not
reflect the actual annual price changes for Medicare capital-related
costs. CMS's CIPI reflects the underlying stability of the capital
acquisition process and provides hospitals with the ability to plan for
changes in capital payments.
To calculate the vintage weights for depreciation and interest
expenses, we used a time series of capital purchases for building and
fixed equipment and movable equipment. We found no single source that
provides the best time series of capital purchases by hospitals for all
of the above components of capital purchases. The early Medicare cost
reports did not have sufficient capital data to meet this need. While
the AHA Panel Survey provided a consistent database back to 1963, it
did not provide annual capital purchases. The AHA Panel Survey did
provide time series of depreciation and interest expenses that could be
used to infer capital purchases over time. Although the AHA Panel
Survey was discontinued after September 1997, we were able to use all
of the available historical data from this survey since our base year
is FY 1997.
In order to estimate capital purchases from AHA data for
depreciation and interest expenses, the expected life for each cost
category (building and fixed equipment, movable equipment, debt
instruments) is needed. The expected life is used in the calculation of
vintage weights. We used FY 1997 Medicare cost reports to determine the
expected life of building and fixed equipment and movable equipment.
The expected life of any piece of equipment can be determined by
dividing the value of the fixed asset (excluding fully-depreciated
assets) by its current year depreciation amount. This calculation
yields the estimated useful life of an asset if depreciation were to
continue at current year levels, assuming straight-line depreciation.
From the FY 1997 cost reports, we determined the expected life of
building and fixed equipment to be 23 years, and the expected life of
movable equipment to be 11 years. By comparison, the FY 1992-based
index showed that the expected life for
[[Page 50046]]
building and fixed equipment was 22 years, while that for movable
equipment was 10 years. Our analysis of data for FYs 1996, 1998, and
1999 indicates very little change in these measures over time.
We used the fixed and movable weights derived from the FY 1997
Medicare cost reports to separate the AHA Panel Survey depreciation
expenses into annual amounts of building and fixed equipment
depreciation and movable equipment depreciation. By multiplying the
annual depreciation amounts by the expected life calculations from the
FY 1997 Medicare cost reports, we determined year-end asset costs for
building and fixed equipment and movable equipment. We subtracted the
previous year asset costs from the current year asset costs and
estimated annual purchases of building and fixed equipment and movable
equipment back to 1963. From this capital purchase time series, we were
able to calculate the vintage weights for building and fixed equipment,
movable equipment, and debt instruments. Each of these sets of vintage
weights is explained in detail below.
For building and fixed equipment vintage weights, we used the real
annual capital purchase amounts for building and fixed equipment
derived from the AHA Panel Survey. The real annual purchase amount was
used to capture the actual amount of the physical acquisition, net of
the effect of price inflation. This real annual purchase amount for
building and fixed equipment was produced by deflating the nominal
annual purchase amount by the building and fixed equipment price proxy,
the Boeckh institutional construction index. Because building and fixed
equipment has an expected life of 23 years, the vintage weights for
building and fixed equipment are deemed to represent the average
purchase pattern of building and fixed equipment over 23-year periods.
Vintage weights for each 23-year period are calculated by dividing
the real building and fixed capital purchase amount in any given year
by the total amount of purchases in the 23-year period. This
calculation is done for each year in the 23-year period, and for each
of the twelve 23-year periods from 1963 to 1997. The average of the
twelve 23-year periods is used to determine the 1997 average building
and fixed equipment vintage weights.
For movable equipment vintage weights, we used the real annual
capital purchase amounts for movable equipment derived from the AHA
Panel Survey. The real annual purchase amount was used to capture the
actual amount of the physical acquisition, net of price inflation. This
real annual purchase amount for movable equipment was calculated by
deflating the nominal annual purchase amount by the movable equipment
price proxy, the PPI for machinery and equipment. Because movable
equipment has an expected life of 11 years, the vintage weights for
movable equipment are deemed to represent the average purchase pattern
of movable equipment over 11-year periods.
Vintage weights for each 11-year period are calculated by dividing
the real movable capital purchase amount for any given year by the
total amount of purchases in the 11-year period. This calculation is
done for each year in the 11-year period, and for each of the twenty-
four 11-year periods from 1963 to 1997. The average of the twenty-four
11-year periods is used to determine the FY 1997 average movable
equipment vintage weights.
For interest vintage weights, we used the nominal annual capital
purchase amounts for total equipment (building and fixed, and movable)
derived from the AHA Panel Survey. Nominal annual purchase amounts were
used to capture the value of the debt instrument. Because debt
instruments have an expected life of 23 years, the vintage weights for
interest are deemed to represent the average purchase pattern of total
equipment over 23-year periods.
Vintage weights for each 23-year period are calculated by dividing
the nominal total capital purchase amount for any given year by the
total amount of purchases in the 23-year period. This calculation is
done for each year in the 23-year period and for each of the twelve 23-
year periods from 1963 to 1997. The average of the twelve 23-year
periods is used to determine the FY 1997 average interest vintage
weights. The vintage weights for the FY 1992 CIPI and the FY 1997 CIPI
are presented in Table 11.
Table 11.--1992-Based and 1997-Based Vintage Weights for Capital-Related Price Proxies
----------------------------------------------------------------------------------------------------------------
Building and fixed Movable equipment Interest
equipment ---------------------------------------------------
Year (From farthest to most --------------------------
recent) FY 1992 22 FY 1997 23 FY 1992 10 FY 1997 11 FY 1992 22 FY 1997 23
years years years years years years
----------------------------------------------------------------------------------------------------------------
1................................. 0.019 0.018 0.069 0.063 0.007 0.007
2................................. 0.020 0.021 0.075 0.068 0.008 0.009
3................................. 0.023 0.023 0.083 0.074 0.010 0.011
4................................. 0.026 0.025 0.091 0.080 0.012 0.012
5................................. 0.028 0.026 0.097 0.085 0.014 0.014
6................................. 0.030 0.028 0.103 0.091 0.016 0.016
7................................. 0.031 0.030 0.109 0.096 0.018 0.019
8................................. 0.032 0.032 0.115 0.101 0.021 0.022
9................................. 0.036 0.035 0.124 0.108 0.024 0.026
10................................ 0.039 0.039 0.133 0.114 0.029 0.030
11................................ 0.043 0.042 -- 0.119 0.035 0.035
12................................ 0.047 0.044 -- -- 0.041 0.039
13................................ 0.050 0.047 -- -- 0.047 0.045
14................................ 0.052 0.049 -- -- 0.052 0.049
15................................ 0.055 0.051 -- -- 0.059 0.053
16................................ 0.059 0.053 -- -- 0.067 0.059
17................................ 0.062 0.057 -- -- 0.074 0.065
18................................ 0.065 0.060 -- -- 0.081 0.072
19................................ 0.067 0.062 -- -- 0.088 0.077
20................................ 0.069 0.063 -- -- 0.093 0.081
21................................ 0.072 0.065 -- -- 0.099 0.085
22................................ 0.073 0.064 -- -- 0.103 0.087
[[Page 50047]]
23................................ ........... 0.065 -- ........... -- 0.090
-----------------------------------------------------------------------------
Total......................... 1.000 1.000 1.000 1.000 1.000 1.000
----------------------------------------------------------------------------------------------------------------
After the capital cost category weights were computed, it was
necessary to select appropriate price proxies to reflect the rate of
increase for each expenditure category. Our price proxies for the FY
1997-based CIPI are the same as those for the FY 1992-based CIPI. We
still believe these are the most appropriate proxies for hospital
capital costs that meet our selection criteria of relevance,
timeliness, availability, and reliability. We ran the FY 1997-based
index using the Moody's Aaa bonds average yield and using the Moody's
Baa bonds average yield as proxy for the for-profit interest cost
category. There was no difference in the two sets of index percent
changes either historically or forecasted. A more detailed explanation
of our rationale for selecting the price proxies is in the August 30,
1996 final rule (61 FR 46196). The proxies are presented in Table 10.
Global Insights, Inc., DRIWEFA forecasts a 0.7 percent increase in
the rebased FY 1997 CIPI for FY 2003, as shown in Table 12.
Table 12.--FY 1992 and FY 1997-Based Capital Input Price Index, Percent
Change, 1995-2004
------------------------------------------------------------------------
CIPI, FY CIPI, FY
Federal fiscal year 1992- 1997-
based based
------------------------------------------------------------------------
1995.............................................. 1.2 1.5
1996.............................................. 1.0 1.3
1997.............................................. 0.9 1.2
1998.............................................. 0.7 0.9
1999.............................................. 0.7 0.9
2000.............................................. 0.9 1.1
2001.............................................. 0.6 0.9
Average: FYs 1995-2001............................ 0.9 1.1
Forecast:
2002.............................................. 0.6 0.8
2003.............................................. 0.5 0.7
2004.............................................. 0.6 0.8
Average: FYs 2002-2004............................ 0.6 0.8
------------------------------------------------------------------------
Source: Global Insights, Inc, DRI-WEFA, 2nd\t\ Qtr. 2002; @USMACRO/
MODTREND @CISSIM/TL0502.SIM.
This 0.7 percent increase is the result of a 1.3 percent increase
in projected vintage-weighted depreciation prices (building and fixed
equipment, and movable equipment) and a 3.0 percent increase in other
capital expense prices, partially offset by a 2.3 percent decrease in
vintage-weighted interest rates in FY 2003, as indicated in Table 13.
Table 13.--CMS Capital Input Price Index Percent Changes, Total and Components, Fiscal Years 1995-2005
----------------------------------------------------------------------------------------------------------------
Depreciation,
Total building and Depreciation,
Fiscal Year Total depreciation fixed movable Interest Other
equipment equipment
----------------------------------------------------------------------------------------------------------------
Weights FY 1997............. 1.000 0.7135 0.3422 0.3713 0.2346 0.0519
----------------------------------------------------------------------------------------------------------------
Vintage-Weighted Price Changes
----------------------------------------------------------------------------------------------------------------
1995........................ 1.5 2.7 4.0 1.6 -1.8 2.5
1996........................ 1.3 2.5 3.8 1.4 -2.3 2.6
1997........................ 1.2 2.3 3.6 1.2 -2.4 2.8
1998........................ 0.9 2.1 3.3 0.9 -3.0 3.2
1999........................ 0.9 1.9 3.2 0.7 -2.8 3.2
2000........................ 1.1 1.7 3.1 0.4 -1.6 3.4
2001........................ 0.9 1.5 2.9 0.1 -2.2 4.3
----------------------------------------------------------------------------------------------------------------
Forecast
----------------------------------------------------------------------------------------------------------------
2002........................ 0.8 1.4 2.8 0.0 -2.2 4.3
2003........................ 0.7 1.3 2.7 -0.1 -2.3 3.0
2004........................ 0.8 1.3 2.6 -0.1 -2.0 2.8
2005........................ 0.7 1.3 2.4 -0.1 -2.1 2.8
----------------------------------------------------------------------------------------------------------------
Source: Global Insights, Inc, DRI-WEFA, 2nd Qtr. 2002; @USMACRO/MODTREND @CISSIM/TL0502.SIM.
Rebasing the CIPI from FY 1992 to FY 1997 increased the percentage
change in the FY 2003 forecast by 0.2 percentage points, from 0.5 to
0.7 as shown in Table 12. The difference is caused mostly by changes in
cost category weights, particularly the smaller weight for interest and
larger weight for depreciation. Because the interest component has a
negative price change associated with it for FY 2003, the smaller share
it accounts for in the FY 1997-based index means it has less of an
impact than in the FY 1992-based index. The changes in the expected
life and
[[Page 50048]]
vintage weights have only a minor impact on the overall percent change
in the index. We did not receive any public comments on the rebasing
and revising of the capital input price index.
V. Other Decisions and Changes to the Prospective Payment System
for Inpatient Operating Costs and Graduate Medical Education Costs
A. Transfer Payment Policy
1. Expanding the Postacute Care Transfer Policy to Additional DRGs
(Sec. 412.4)
Existing regulations at Sec. 412.4(a) define discharges under the
acute care hospital inpatient prospective payment system as situations
in which a patient is formally released from an acute care hospital or
dies in the hospital. Section 412.4(b) defines transfers from one acute
care hospital to another, and Sec. 412.4(c) defines transfers to
certain postacute care providers. Our policy provides that, in transfer
situations, full payment is made to the final discharging hospital and
each transferring hospital is paid a per diem rate for each day of the
stay, not to exceed the full DRG payment that would have been made if
the patient had been discharged without being transferred.
Under section 1886(d)(5)(J) of the Act, which was added by section
4407 of Public Law 105-33, a ``qualified discharge'' from one of 10
DRGs selected by the Secretary, to a postacute care provider is treated
as a transfer case beginning with discharges on or after October 1,
1998. This section requires the Secretary to define and pay as
transfers all cases assigned to one of 10 DRGs selected by the
Secretary, if the individuals are discharged to one of the following
postacute care settings:
A hospital or hospital unit that is not a subsection
1886(d) hospital. (Section 1886(d)(1)(B) of the Act identifies the
hospitals and hospital units that are excluded from the term
``subsection (d) hospital'' as psychiatric hospitals and units,
rehabilitation hospitals and units, children's hospitals, long-term
care hospitals, and cancer hospitals.)
A skilled nursing facility (as defined at section 1819(a)
of the Act).
Home health services provided by a home health agency, if
the services relate to the condition or diagnosis for which the
individual received inpatient hospital services, and if the home health
services are provided within an appropriate period (as determined by
the Secretary).
In the July 31, 1998 final rule (63 FR 40975 through 40976), we
specified the appropriate time period during which we would consider a
discharge to postacute home health services to constitute a transfer as
within 3 days after the date of discharge. Also, in the July 31, 1998
final rule, we did not include in the definition of postacute care
transfer cases patients transferred to a swing-bed for skilled nursing
care (63 FR 40977).
The Conference Agreement that accompanied Public Law 105-33 noted
that ``(t)he Conferees are concerned that Medicare may in some cases be
overpaying hospitals for patients who are transferred to a postacute
care setting after a very short acute care hospital stay. The conferees
believe that Medicare's payment system should continue to provide
hospitals with strong incentives to treat patients in the most
effective and efficient manner, while at the same time, adjust PPS
[prospective payment system] payments in a manner that accounts for
reduced hospital lengths of stay because of a discharge to another
setting.'' (H.R. Report No. 105-217, 105th Cong., 1st Sess., 740
(1997).)
In the July 31, 1998 final rule (63 FR 40975), we implemented
section 1886(d)(5)(J) of the Act, which directed the Secretary to
select 10 DRGs based upon a high volume of discharges to postacute care
and a disproportionate use of postacute care services. As discussed in
the July 31, 1998 final rule, these 10 DRGs were selected in 1998 based
on the MedPAR data from FY 1996. Using that information, we identified
and selected the first 20 DRGs that had the largest proportion of
discharges to postacute care (and at least 14,000 such transfer cases).
In order to select 10 DRGs from the 20 DRGs on our list, we considered
the volume and percentage of discharges to postacute care that occurred
before the mean length of stay and whether the discharges occurring
early in the stay were more likely to receive postacute care. We
identified the following DRGs to be subject to the special 10 DRG
transfer rule:
DRG 14 (Specific Cerebrovascular Disorders Except
Transient Ischemic Attack);
DRG 113 (Amputation for Circulatory System Disorders
Except Upper Limb and Toe);
DRG 209 (Major Joint Limb Reattachment Procedures of Lower
Extremity);
DRG 210 (Hip and Femur Procedures Except Major Joint
Procedures Age >17 with CC);
DRG 211 (Hip and Femur Procedures Except Major Joint
Procedures Age >17 without CC);
DRG 236 (Fractures of Hip and Pelvis);
DRG 263 (Skin Graft and/or Debridement for Skin Ulcer or
Cellulitis with CC);
DRG 264 (Skin Graft and/or Debridement for Skin Ulcer or
Cellulitis without CC);
DRG 429 (Organic Disturbances and Mental Retardation); and
DRG 483 (Tracheostomy Except for Face, Mouth and Neck
Diagnoses).
Similar to our existing policy for transfers between two acute care
hospitals, the transferring hospital in a postacute care transfer for 7
of the 10 DRGs receives twice the per diem rate the first day and the
per diem rate for each following day of the stay prior to the transfer,
up to the full DRG payment. However, 3 of the 10 DRGs exhibit a
disproportionate share of costs very early in the hospital stay in
postacute care transfer situations. For these 3 DRGs, hospitals receive
50 percent of the full DRG payment plus the per diem for the first day
of the stay and 50 percent of the per diem for the remaining days of
the stay, up to the full DRG payment. This is consistent with section
1886(d)(5)(J)(i) of the Act, which recognizes that in some cases ``a
substantial portion of the costs of care are incurred in the early days
of the inpatient stay.''
The statute provides that, after FY 2000, the Secretary is
authorized to expand this policy to additional DRGs. In July 1999, the
previous Administration committed to not expanding the number of DRGs
included in the policy until FY 2003. Therefore, CMS did not propose
any change to the postacute care settings or the 10 DRGs in FY 2001 or
FY 2002.
Under contract with CMS (Contract No. 500-95-0006), Health
Economics Research, Inc. (HER) conducted an analysis of the impact on
hospitals and hospital payments of the current postacute care transfer
provision. We included in the August 1, 2000 final rule (65 FR 47079) a
summary of that analysis. Among other issues, the analysis sought to
evaluate the reasonableness of expanding the transfer payment policy
beyond the current 10 selected DRGs.
The analysis supported the initial 10 DRGs selected as being
consistent with the nature of the Congressional mandate. According to
HER, ``[t]he top 10 DRGs chosen initially by HCFA exhibit very large
PAC [postacute care] levels and PAC discharge rates (except for DRG
264, Skin Graft and/or Debridement for Skin Ulcer or Cellulitis without
CC, which was paired with DRG 263). All 10 appear to be excellent
[[Page 50049]]
choices based on the other criteria as well. Most have fairly high
short-stay PAC rates (except possibly for Strokes, DRG 14, and Mental
Retardation, DRG 429).''
The HER report discussed the issues related to potential expansion
of the postacute care transfer policy to all DRGs. In favor of this
expansion, HER pointed to the following benefits:
A simple, uniform, formula-driven policy;
The same policy rationale exists for all DRGs;
DRGs with little utilization of short-stay postacute care
would not be harmed by the policy;
Less confusion in discharge destination coding; and
Eliminate disparities between hospitals that happen to be
disproportionately treating the current 10 DRGs and hospitals with an
aggressive, short-stay, postacute care transfer policy for other DRGs.
The complete HER report may be obtained at: http://www.cms.hhs.gov/medicare/ippsmain.asp.
In the May 9, 2002 proposed rule, we stated that, consistent with
HER's findings, we believed expanding the postacute care transfer
policy to all DRGs might be the most equitable approach, since a policy
that is limited to certain DRGs may result in disparate payment
treatment across hospitals, depending on the types of cases treated.
For example, a hospital specializing in some of the types of cases
included in the current 10 DRG transfer policy would receive reduced
payments for those cases transferred for postacute care after a brief
acute inpatient stay, while a hospital specializing in cases not
included in the current 10 DRGs could be just as aggressive in
transferring its patients for postacute care, but it would receive full
payment for those cases.
Another aspect of the issue is that some hospitals have fewer
postacute care options available for their patients. In its June 2001
Report to Congress: Medicare in Rural America, MedPAC wrote: ``[a]
shortage of ambulatory and post-acute care resources may prevent rural
hospitals from discharging patients as early in the episode of care as
urban hospitals would'' (page 68). MedPAC went on to note that the
decline in length of stay for urban hospitals since 1989 was greater
for hospitals than for rural hospitals (34 percent compared with 25
percent through 1999), presumably due to earlier discharges to
postacute care settings. Although the MedPAC report contemplated
returning money saved by expanding the policy to the base payment rate,
thereby increasing payments for nontransfer cases, currently section
1886(d)(5)(I)(ii) of the Act provides that any expansion to the
postacute care transfer policy would not be budget neutral. (Budget
neutrality refers to adjusting the base payment rates to ensure total
aggregate payments are the same after implementing a policy change as
they were prior to the change.) Nevertheless, over the long run,
reducing Medicare Trust Fund expenditures for patients who are
transferred to a postacute care setting after a very short acute care
hospital stay would improve the program's overall financial stability.
As noted in the proposed rule, we believe that the current policy
may create payment inequities among patients and among hospitals. By
expanding the postacute care transfer policy, we would expect to reduce
or eliminate these possible inequities. Therefore, in the May 9, 2002
proposed rule, we announced two options that we might use to expand the
postacute care transfer provision and solicited comments and additional
methodologies from commenters. The first method we proposed was to
expand the postacute care transfer provision to all DRGs. The second
proposal was to expand the provision to an additional 13 DRGs (We
selected 10 DRGs using the same methodology we used in the July 31,
1998 final rule. Three of these 10 additional DRGs were paired, making
the total 13.). However, expanding the postacute care transfer policy
in this limited manner would retain many of the potential inequities of
the current system.
As discussed further in the specific comments and responses that
follow, we are not expanding the discharge to postacute care provision
to additional DRGs for FY 2003. We believe the commenters have raised
many issues regarding the impact of expanding this policy that we need
to consider carefully before proceeding. In particular, due to the
limited time between the close of the comment period and the required
publication date of August 1, we were unable to completely analyze and
respond to all of the points that were raised. However, we will
continue to conduct research to assess whether further expansion of
this policy may be warranted for FY 2004 or subsequent years and, if
so, how to design any such refinements.
Comment: Many commenters argued that, in a system based on
averages, expansion of the postacute care transfer policy negatively
influences, and in fact penalizes, hospitals for efficient care. They
claimed that this policy indiscriminately penalizes hospitals for
efficient treatment and for ensuring that patients receive the right
care at the right time in the right place. They believed that the
postacute care transfer provision creates a perverse incentive for
hospitals to keep patients longer.
Commenters also stated their concern that the expansion of the
transfer provision violates the fundamental principle of the Medicare
DRG payment system. The system is based on payments that will, on
average, be adequate. These commenters argued that expansion of the
transfer policy would give the system a per-diem focus and would mean
that hospitals would be paid less for shorter than average lengths of
stay, although they would not be paid more for the cases that are
longer than average (except for outlier cases). One commenter suggested
that if we expand the transfer rule, we should adopt a policy to pay
more for long-stay cases.
Response: The Conference Agreement accompanying Public Law 105-33
states that ``Medicare's payment system should continue to provide
hospitals with strong incentives to treat patients in the most
effective and efficient manner, while at the same time, adjust
[prospective payment system] payments in a manner that accounts for
reduced hospital lengths of stay because of a discharge to another
setting.'' The current postacute care transfer policy adjusts payments
to hospitals to reflect the reduced length of stay arising from the
shift of patient care from the acute care setting to the postacute care
setting. In addition, because Medicare also often pays for the
postacute care portion of beneficiaries' care, the transfer policy
appropriately adjusts hospitals' payments to avoid duplicate payments
for the care provided during a patient's episode of care.
However, we are not expanding the postacute care transfer policy in
this final rule because we are not able to completely respond to all of
the points raised by commenters prior to publication of the final rule.
Specifically, we intend to undertake a more comprehensive analysis of
the impact on the averaging aspects of the prospective payment system
if this policy were to be expanded. We agree with the commenters that
the transfer policy should not hamper the provision of effective
patient care, and any future expansion will consider both the need to
reduce payments to reflect cost-shifting due to reductions in length of
stay attributable to early postacute care transfers and the need to
ensure that payments, on average, remain adequate to ensure effective
patient care.
[[Page 50050]]
Comment: Commenters believed that the proposal to expand the
postacute care transfer policy would place an additional administrative
burden on hospitals and would expand the liability of hospitals for
decisions that are not in their control, particularly after the patient
has gone home. In cases where an acute care hospital is unaware that a
patient has been sent to a postacute care facility or is receiving home
health care, the commenters argued that it should not be the burden of
the hospital to obtain that information.
Response: As stated previously, we are not expanding the postacute
care transfer policy at this time. In response to the point raised by
the commenter, with respect to our current policy, in those cases where
the hospital discharges a beneficiary to home and the beneficiary
subsequently receives postacute care, without the hospital's knowledge,
the incorrect discharge code will not be considered fraudulent.
However, if the hospital has knowledge of the beneficiary receiving
postacute care after discharge, the hospital is responsible for
submitting the claim as a transfer or submitting an adjustment bill.
Comment: Some commenters noted that, although the statute clearly
states that the Secretary is authorized to expand the postacute care
transfer policy to additional DRGs, the Secretary is not required to do
so. These commenters pointed to the policy decisions made in FY 2001
and FY 2002 not to expand the policy and encouraged CMS to make the
same policy decision for this and all subsequent years, calling the
proposed expansion unjustified and unreasonable.
Several commenters argued that, although the Secretary does have
authority to expand the postacute care transfer provision, the
Secretary was not given the authority to expand the provision to all
DRGs. Section 1886(d)(5)(J)(iv) of the Act provides that the Secretary
may extend the policy to additional DRGs with high volumes of
discharges to postacute care settings. Commenters noted that not all
DRGs meet this criteria.
Response: We agree that we are not required by section
1886(d)(5)(J)(iv) of the Act to expand the transfer provision beyond
the 10 DRGs currently covered under the policy. However, the statute
clearly indicates that the policy may be expanded further, as
appropriate. Whether the policy should be expanded to all DRGs or a few
will be considered in future analysis.
Comment: Several commenters believed that the impact of the
expansion of the postacute care transfer needs to be considered more
thoroughly and noted that the impact of such an expansion was not
included in the proposed rule impact tables. These commenters were
concerned that the overall effect of implementing either of the two
proposed expansions would result in an overall decrease in per case
payments in FY 2003. Commenters believed this expansion would
disproportionately harm teaching hospitals that treat the most costly
and complex cases within each DRG. They further charged that this
policy would interfere with good clinical decisionmaking.
Response: We did not analyze the postacute care transfer policy in
the impact tables in the proposed rule because we did not propose a
specific policy expansion. We did include overall savings estimates
attributable to the provision in the preamble discussion. The full
impact of any proposed expansion of this policy, including the impacts
on specific categories of hospitals, would be considered fully before
proceeding to expand the policy in the future.
Comment: Many commenters strongly opposed the proposal to expand
the postacute care transfer policy to all DRGs. Several commenters
suggested that we repeal the original 10 DRG postacute care transfer
policy provision, on the grounds that, through experience, hospitals
have learned to operate more efficiently and seek best practices in
patient care management. Therefore, the prospective payment system has
met its objectives and lengths of stay have been reduced. In addition,
the commenters noted that the lower length of stay achieved is better
for patients due to lower risk of acquiring a nosocomial infection and
better recovery rates at home. Therefore, the commenters argued,
hospitals that have shortened the length of stay across all DRGs should
not be punished by a reduction in payment amounts to per diem rates. As
such, the commenters argued that premature discharges should be
identified through the Quality Improvement Organization review process
and not by the prospective payment system.
Response: We agree that shorter lengths of stay are better for
patients in general and that more efficient hospitals should not be
penalized for greater than average efficiency. In the July 31, 1998
final rule implementing the policy for the current 10 DRGs, we included
analysis showing that, across virtually all lengths of stay for each of
the 10 DRGs, Medicare paid in excess of costs even after the
implementation of this provision. We also note that we do not believe
the intent of this policy was to require a change in physician clinical
decisionmaking, nor in the manner in which physicians and hospitals
practice medicine. Rather, it simply addresses the appropriate level of
payments once those decisions have been made, so the intent of the
policy was to avoid overpayments. We agree with the commenter that an
appropriate mechanism to identify premature discharges is the quality
review process. As we have noted above, we will consider fully all of
the financial implications on hospitals before proceeding to expand the
policy in the future.
Comment: Some commenters stated that there is no longer any
justification to expand the postacute care policy, particularly to all
DRGs. Commenters argued that expansion is unjustified because at the
time the original policy was implemented, data showed that lengths of
stay were dropping and that use of postacute care was increasing. The
commenters indicated that, since that time, inpatient length of stay
has stabilized and Medicare spending on postacute care has slowed. In
addition, any incentive hospitals may have had to discharge patients
early to a postacute care facility has been removed now that Medicare
also pays these facilities under prospective payment systems.
In addition, commenters stated that neither CMS nor its contractor,
HER, has provided data to support the assumption that hospitals are
benefiting financially from short-stay postacute care transfer cases.
In fact, commenters noted that the HER report included one table that
suggests the opposite is true. As described by the commenters, Table 4-
8 in the HER report shows the average cost of short-stay cases in the
10 DRGs currently subject to the payment reduction. As shown by this
table, short-stay postacute transfer cases are 7.4 percent more costly
than short-stay nonpostacute care transfer cases. As a result, the
commenters asserted that postacute care transfer cases are
significantly less profitable than the non-postacute care transfer
cases.
Response: While it is true that postacute care providers such as
skilled nursing facilities, home health agencies, and rehabilitation
hospitals are now paid under prospective payment systems rather than
cost-based payment systems, the acute hospital still has an incentive
to discharge patients as soon as possible. The impact of expanding
prospective payments to other settings is that it changes the
incentives for those providers in terms of their willingness to
continue to accept patients needing a more acute level of
[[Page 50051]]
care, because sicker patients are more likely to have above average
costs. There is no impact on the incentives of acute care hospitals.
We point out that the analysis prepared by HER was undertaken as an
evaluation of the original policy, conducted in 2000 based on partial
FY 1999 data. With respect to HER's finding that patients transferred
for postacute care are more expensive than cases discharged home, one
would expect cases receiving followup care to be sicker and require
more resources. In fact, the postacute care transfer policy was
implemented out of concern that these patients were being transferred
out of the acute care setting much earlier in the course of their
treatment than had previously been the case, and that some of the acute
care portion of the patients' hospitalization was being provided by the
postacute care facility. Because the acute care hospital was receiving
the full DRG payment and the postacute care facility was receiving
higher cost-based reimbursement, the Medicare program was paying, in
essence, two facilities for the acute care of the patient.
Comment: Commenters noted that in the proposed rule CMS quoted five
points from the HER report that supported an expansion of the
provision, but did not include the section of the HER report that lists
the arguments against expansion. The commenters included this list of
HER's arguments against expansion:
Expansion to all DRGs would require multiple per-diem
payment policies. The current ten DRGs require two distinct payment
methodologies to ensure equitable reimbursement. A policy covering all
DRGs might require many more methodologies.
The policy would be irrelevant for many DRGs. Many DRGs
have few or no cases that are discharged to postacute care.
Expansion to all DRGs would have relatively high costs
compared to the benefits. There is little benefit to extending the
policy to the many DRGs with low postacute care volume. The cost of
requiring that fiscal intermediaries implement and audit compliance
with the policy for these DRGs would dilute the overall benefit to the
program.
It would be difficult to identify unrelated postacute care
cases prior to admission. If a patient is under postacute care before
admission and then returns to that care after an unrelated admission,
the transfer policy does not apply. With many more DRGs, CMS and
hospitals would have more work sorting out the unrelated admissions.
Many DRGs are ``inhomogeneous.'' HER cautioned that
payment under the postacute care transfer policy would be inequitable
for ``inhomogeneous DRGs'' that contain two or more distinct types of
cases with disparate lengths of stay.
Response: The negative points raised above were included in our
report of HER's analysis in the August 1, 2000 final rule (65 FR
47081). We note that in the final rule we also referred readers to
where they could obtain a copy of the complete report.
Comment: Commenters analyzed the 13 DRGs identified in the proposed
rule for possible partial expansion of the postacute care transfer
policy using information derived from the FY 2000 MedPAR data. The
commenters reported that many of the DRGs are inhomogeneous, including
a wide variety of cases, some of which may be susceptible to early
transfer and some of which may not.
Response: We are not adopting either of the methodologies for
expanding the postacute care transfer policy at this time. However, if
in the future we should consider expanding the policy, we will consider
the effect of inhomogeneity in any DRGs we select.
Comment: Some commenters believed that the current system is
inequitable. However, they argued that targeting 13 additional DRGs
would only worsen the problem, and extending the policy to all DRGs is
not an acceptable response. Commenters urged us to work to have the
policy repealed altogether or at least to revise the policy to make it
more equitable. For example, commenters noted that DRG 483
(Tracheostomy except for face, mouth and neck diagnoses), which is
included under the current policy, has an average length of stay of 35
days. Commenters noted that the variation around the average is quite
high, and that patients requiring this procedure and level of care
almost always require postacute care. Therefore, commenters contended,
because the variation around the average is so large, and the per diem
cost for this DRG is well above average, the postacute care transfer
policy has a very significant impact on payment that is unrelated to
the use of postacute care services. These commenters urged us to
reconsider the current policy because they believed that the logic of
applying the standard per diem methodology to this DRG is flawed. They
urged us either toreplace this DRG with another one on its high-volume
postacute care transfer list or change the payment method to one that
addressed the length of stay volatility.
Response: We believe the current policy remains an appropriate
response to reductions in length of stay resulting from shifting care
out of the acute hospital setting. However, as noted above, we do have
concerns about limiting it to 10 specific DRGs. We will continue to
closely monitor the data to assess whether future expansions or
refinements are needed. With respect to the inclusion of DRG 483 in the
current 10 DRGs covered by the postacute care transfer policy, in the
July 31, 1998 final rule we responded to a similar comment (63 FR
40981). Our analysis showed this DRG was appropriate to include under
the policy. Over 45 percent of discharges from this DRG were to
postacute care, and it was ranked ninth in terms of volume of cases
receiving postacute care. These factors qualify it for inclusion in the
postacute care transfer policy under section 1886(d)(5)(J) of the Act.
Comment: One commenter contended that expanding the postacute care
transfer provision would distort the meaning of a transfer case.
According to the commenter, a transfer is a case that has been admitted
to one hospital and is stabilized there, but which is then sent to
another acute care hospital for treatment that the first hospital was
not equipped to provide. The commenter further explained that patients
discharged to postacute care, in contrast, have completed the acute
care phase of their treatment and need postacute care either to assist
their convalescence or to manage a chronic illness. The commenter
contended that these are very different concepts.
Response: Under the acute inpatient prospective payment system,
payments to the transferring hospital are reduced to reflect the fact
that the patient is transferred prior to receiving the full course of
treatment from the acute hospital. When Congress established the
postacute care transfer policy, it did so in recognition of the fact
that hospitals were transferring patients who still had acute symptoms
into the postacute care setting for the remainder of their care.
Therefore, the principle that the transferring hospital did not provide
the full course of treatment is consistent under both the preexisting
policy and the postacute care transfer policy.
Comment: One commenter claimed that the special payment formula for
a transfer from DRG 209, 210 and 211 often results in less payment than
the flat per diem method. The commenters provided an example assuming
that a DRG with a payment of $10,000 and an average length of stay of 5
days received a per diem rate of $2,000. For a transfer case with a
stay of 4 days under the
[[Page 50052]]
standard per diem transfer payment, the payment rate would be $10,000
($4,000 for the first day and $2,000 for each of the next 3 days). The
commenter argued that, under the special transfer payment policy, the
payment rate would be only $8,000 ($5,000 for the first day and $1,000
for each of the next 3 days). The commenter recommended that we
increase the percentage of the per diem paid on days after the first
day to 75 percent of the per diem under the special payment method.
Response: Under Sec. 412.4(f)(2), payment for a postacute care
transfer case from DRGs 209, 210, or 211 is equal to 50 percent of the
appropriate prospective payment rate for the first day of the stay, and
50 percent of the amount the hospital would receive under the standard
transfer payment methodology. Thus, the example provided by the
commenter is not correct. The payment would be the full $10,000 if the
patient was transferred on the fourth day. Rather than receiving $5,000
for the first day, the hospital in the example would receive $7,000 (50
percent of the full DRG payment equals $5,000, plus 50 percent of the
standard transfer payment equals $2,000, because the standard transfer
payment is double the per diem for the first day of a transfer stay).
The hospital would receive $1,000 for each of the next 3 days,
resulting in total payments under this special transfer payment rule
equal to $10,000 on day 4.
This example also demonstrates that, if the patient stay is one day
shorter than average, the hospital receives the full DRG rate. Using
both postacute care transfer payment methodologies, the hospital would
receive the full DRG amount if the patient stay is one day shorter than
the national average.
Comment: One commenter suggested that we determine if the
administrative resources we are using to recalculate a hospital's
payment under this policy are actually saving the Medicare program
money or if a greater amount of administrative resources are spent to
recover the payment differential for the transferred beneficiary. The
commenter stated that we should not expand a ``cost-savings'' policy
that fails to result in true savings.
Response: Currently, the transfer payment calculation is made at
the time a claim is processed based on the discharge status code
assigned by the hospital to the patient at the time of discharge.
Therefore, there is no recalculation, and thus the administrative costs
associated with this policy are marginal, as long as hospitals
appropriately code the patient's discharge status.
Comment: Another commenter recommended that the postacute care
transfer issue be addressed from a total system perspective, centered
on meeting the patients' needs and include referral dynamics from the
new postacute care prospective payment systems. The commenter also
suggested that there should be an analysis of the medical versus
payment dynamics of the 3-day prior hospitalization requirement for
postacute care coverage.
One commenter suggested that we expand the postacute care transfer
policy to include swing beds. The commenter pointed to the ease with
which hospitals may move these swing beds from one care setting to
another, suggesting that it would be easy for hospitals with swing beds
to get around the existing transfer policy.
Response: We will take these suggestions into consideration as we
continue to monitor the transfer policy. With respect to expanding the
policy to include transfers to swing beds, we indicated in the July 31,
1998 final rule that we elected not to include swing beds under this
policy because of the potential adverse impact on small rural
hospitals. At this time, we are not changing this policy, although we
will continue to evaluate whether it is appropriate to exclude
transfers to swing beds from the postacute care transfer policy.
Comment: One commenter recommended waiting at least 3 years before
expanding the transfer policy to provide for sufficient time for the
entire continuum of care to reach equilibrium. In addition, the
commenter indicated that when independent groups analyzed internal data
on the 10 DRGs initially identified in the existing postacute care
transfer policy, they found only 3 where there were significant numbers
of transfers to postacute care. The commenter recommended reanalyzing
the current policy to determine whether volume and disposition of the
DRGs still require the policy. Some commenters stated that the
perceived ``gaming'' hypothesis does not exist, meaning that hospitals
are not cutting short patient care in order to make more money. Another
commenter suggested that we monitor the recalibration of DRG weights,
noting that if patients are being discharged too soon, these premature
discharges would be reflected in frequent readmissions to the hospital,
would increase the acuity of postacute care providers, and would lower
the charges for acute stays. Earlier discharges will ultimately result
in lower weights for associated DRGs. The commenter indicated that we
could then easily monitor readmissions and acuity of postacute care
treatment to target problem providers.
Response: We will examine these and other issues in future analysis
of this issue. With respect to the treatment of transfers in DRG
recalibration, we note that a transfer case is counted as only a
fraction of a case toward DRG recalibration based on the ratio of its
transfer payment to the full DRG payment for nontransfer cases. This
ensures the DRG weight calculation is consistent with the payment
policy for these cases.
2. Technical Correction
When we revised our regulations on payments for discharges and
transfers under Sec. 412.4 in the July 31, 1998 final rule (63 FR
41003), we inadvertently excluded discharges from one hospital area or
unit to another inpatient area or unit of the hospital that is paid
under the acute care hospital inpatient prospective payment system
(Sec. 412.4(b)(2)) in the types of cases paid under the general rule
for transfer cases. In the May 9, 2002 proposed rule, we proposed to
correct the regulation text to reflect our policy (as reflected in
prior preamble language) that transfers from one area or unit within a
hospital to another are not paid as transfers (except as described
under the special 10 DRG rule at Sec. 412.4(c)). We proposed to correct
this error by revising Sec. 412.4(f)(1) to provide that only the
circumstances described in paragraphs (b)(1) and (c) of Sec. 412.4 are
paid as transfers under the general transfer rule.
We did not receive any public comments on this proposal. Therefore,
we are adopting the proposed revisions of the regulations text as
final. This correction reflects the fact that transfers under
Sec. 412.4(b)(2) are to be paid as discharges and not transfers.
B. Sole Community Hospitals (SCHs) (Secs. 412.77 and 412.92)
1. Phase-In of FY 1996 Hospital-Specific Rates
Under the acute care hospital inpatient prospective payment system,
special payment protections are provided to a sole community hospital
(SCH). Section 1886(d)(5)(D)(iii) of the Act defines an SCH as a
hospital that, by reason of factors such as isolated location, weather
conditions, travel conditions, absence of other like hospitals (as
determined by the Secretary), or historical designation by the
Secretary as an essential access community hospital, is the sole source
of inpatient hospital services reasonably available to Medicare
beneficiaries. The regulations that set forth the criteria that
[[Page 50053]]
a hospital must meet to be classified as an SCH are located in
Sec. 412.92.
To be classified as an SCH, a hospital either must have been
designated as an SCH prior to the beginning of the hospital inpatient
prospective payment system on October 1, 1983, or must be located more
than 35 miles from other like hospitals, or the hospital must be
located in a rural area and meet one of the following requirements:
It is located between 25 and 35 miles from other like
hospitals, and it--
--Serves at least 75 percent of all inpatients, or at least 75 percent
of Medicare beneficiary inpatients, within a 35-mile radius or, if
larger, within its service area; or
--Has fewer than 50 beds and would qualify on the basis of serving at
least 75 percent of its area s inpatients except that some patients
seek specialized care unavailable at the hospital.
It is located between 15 and 35 miles from other like
hospitals, and because of local topography or extreme weather
conditions, the other like hospitals are inaccessible for at least 30
days in each of 2 out of 3 years.
The travel time between the hospital and the nearest like
hospital is at least 45 minutes because of distance, posted speed
limits, and predictable weather conditions.
Effective with hospital cost reporting periods beginning on or
after April 1, 1990, section 1886(d)(5)(D)(i) of the Act, as amended by
section 6003(e) of Public Law 101-239, provides that SCHs are paid
based on whichever of the following rates yields the greatest aggregate
payment to the hospital for the cost reporting period:
The Federal rate applicable to the hospital;
The updated hospital-specific rate based on FY 1982 costs
per discharge; or
The updated hospital-specific rate based on FY 1987 costs
per discharge.
Section 405 of Public Law 106-113 added section 1886(b)(3)(I) to
the Act, and section 213 of Public Law 106-554 made further amendments
to that section of the Act extending to all SCHs the ability to rebase
their hospital-specific rates using their FY 1996 operating costs,
effective for cost reporting periods beginning on or after October 1,
2000. The provisions of section 1886(b)(3)(I) of the Act were addressed
in the June 13, 2001 interim final rule with comment period (66 FR
32177) and were finalized in the August 1, 2001 final rule (66 FR
39872).
In the June 13, 2001 interim final rule, we correctly described the
provisions of section 1886(b)(3)(I) of the Act, as amended, and their
implementation. However, in the August 1, 2001 final rule, in
summarizing the numerous legislative provisions that had affected
payments to SCHs, we incorrectly described the application of the
statutory provisions in the background section of the preamble on SCHs
(66 FR 39872). (We wish to point out that the Addendum to the August 1,
2001 final rule accurately describes the calculation of the hospital-
specific rate (66 FR 39944).) Specifically, the payment options that we
described in the August 1, 2001 preamble language regarding SCHs were
incorrect in that we did not include the Federal rate in the blends.
Therefore, we are providing below a correct description of the
provisions of section 1886(b)(3)(I) of the Act and clarifying their
application in determining which payment options will yield the highest
rate of payment for an SCH.
For purposes of payment to SCHs for which the FY 1996 hospital-
specific rate yields the greatest aggregate payment, the Federal rate
is included in the blend, as set forth below:
For discharges during FY 2001, 75 percent of the greater
of the Federal amount or the updated FY 1982 or FY 1987 hospital-
specific rates (identified in the statute as the subsection
(d)(5)(D)(i) amount), plus 25 percent of the updated FY 1996 hospital-
specific rate (identified in the statute as the ``rebased target
amount'').
For discharges during FY 2002, 50 percent of the greater
of the Federal amount or the updated FY 1982 or FY 1987 hospital-
specific rates, plus 50 percent of the updated FY 1996 hospital-
specific rate.
For discharges during FY 2003, 25 percent of the greater
of the Federal amount or the updated FY 1982 or FY 1987 hospital-
specific rates, plus 75 percent of the updated FY 1996 hospital-
specific rate.
For discharges during FY 2004 and subsequent fiscal years,
the hospital-specific rate would be determined based on 100 percent of
the updated FY 1996 hospital-specific rate.
For each cost reporting period, the fiscal intermediary determines
which of the payment options will yield the highest rate of payment.
Payments are automatically made at the highest rate using the best data
available at the time the fiscal intermediary makes the determination.
However, it may not be possible for the fiscal intermediary to
determine in advance precisely which of the rates will yield the
highest payment by year's end. In many instances, it is not possible to
forecast the outlier payments, the amount of the disproportionate share
hospital (DSH) adjustment, or the indirect medical education (IME)
adjustment, all of which are applicable only to payments based on the
Federal rate. The fiscal intermediary makes a final adjustment at the
close of the cost reporting period to determine precisely which of the
payment rates would yield the highest payment to the hospital.
If a hospital disagrees with the fiscal intermediary's
determination regarding the final amount of program payment to which it
is entitled, it has the right to appeal the fiscal intermediary's
decision in accordance with the procedures set forth in Subpart R of
Part 405, which concern provider payment determinations and appeals.
The regulation text of Sec. 412.77 and Sec. 412.92(d) that was
revised to incorporate the provisions of section 1886(b)(3)(I) of the
Act, as amended, and published in the June 13, 2001 interim final rule
with comment period (66 FR 32192 through 32193) and finalized in the
August 1, 2001 final rule (66 FR 39932), is accurate.
We did not receive any comments on this clarification.
2. SCH Like Hospitals
Section 1886(d)(5)(D)(iii) of the Act provides that, to qualify as
an SCH, a hospital must be more than 35 road miles from another
hospital. In addition, there are several other conditions under which a
hospital may qualify as an SCH, including if it is the ``* * * sole
source of inpatient hospital services reasonably available to
individuals in a geographic area * * *'' because of factors such as the
``* * * absence of other like hospitals * * *'' We have defined a
``like hospital'' in regulations as a hospital furnishing short-term,
acute care (Sec. 412.92(c)(2)). Like hospitals refers to hospitals paid
under the acute care hospital inpatient prospective payment system.
We have become aware that, in some cases, new specialty hospitals
that offer a very limited range of services have opened within the
service area of an SCH and may be threatening the special status of the
SCH. For example, a hospital that offers only a select type of surgery
on an inpatient basis would qualify under our existing rules as an SCH
``like hospital'' if it met the hospital conditions of participation
and was otherwise eligible for payment under the acute care hospital
inpatient prospective payment system. Under our existing regulations,
an SCH could lose its special status due to the opening of such a
specialty hospital, even though there is little, if any, overlap in the
types
[[Page 50054]]
of services offered by the SCH and the specialty hospital.
We believe that limiting eligibility for SCH status to hospitals
without SCH like hospitals in their service area is a way to identify
those hospitals that truly are the sole source of short-term acute-care
inpatient services in the community. A limited-service, specialty
hospital, by definition, would not offer an alternate source of care in
the community for most inpatient services and therefore, we believe,
should not be considered a ``like'' hospital with the effect of
negating SCH status of a hospital that is the sole source of short-term
acute care inpatient services in the community. Therefore, in the May
9, 2002 proposed rule, we proposed to amend the definition of SCH like
hospitals under Sec. 412.92(c)(2), effective with cost reporting
periods beginning on or after October 1, 2002, to exclude any hospital
that provides no more than a very small percent of the services
furnished by the SCH. We believe the percentage of overlapping services
between the SCH and the limited service facility should be sufficiently
small so that we can ensure that only hospitals that truly are the sole
source of short-term acute care in their community qualify for SCH
status. Therefore, we proposed that this percentage be set at 3
percent.
In the May 9, 2002 proposed rule, we solicited public comments on
alternate appropriate levels of service overlap, as well as on the
overall proposed change to the definition of like hospitals.
In response to comments as discussed below, we are adopting
inpatient days as the unit of measurement for determining whether a
hospital applying for SCH status can exclude from consideration as a
like hospital another hospital within its service area (rather than
services, as discussed in the proposed rule). The threshold would be
set so that a hospital with total inpatient days of 8 percent or less
compared to an SCH (or SCH applicant) would not be considered a like
hospital for purposes of SCH designation.
We believe that Medicare inpatient days are a good proxy for
service overlap. However, we will assess the impact of the overall
change to the definition of like hospital and the service overlap proxy
on SCHs and the prospective payment system. This assessment will
determine whether refinements to this policy may be necessary in future
years.
Comment: Many organizations commented on this proposal. Most
supported it, but to varying degrees, because there is additional
information they believe they need in order to better evaluate the
proposal. The commenters noted definitions are needed for terms such as
``services'', ``overlap'', and ``provided services''. They also
indicated that the data source (such as hospital cost reports or actual
claims experience) and the methodology for measuring the services need
to be defined and requested clarification of these issues in the final
rule.
For example, commenters asked how CMS will measure overlap of
services between the specialty hospital and the SCH (or SCH applicant).
Would there be a weighting for volume or the volume capacity of the
limited service specialty hospital? Would it be 3 percent of service
lines (for example, obstetrics, cancer care, or cardiac services), or
discharges, or DRGs reported?
Response: We appreciate the many helpful comments we received on
this proposal. We proposed a 3-percent threshold of service overlap in
an attempt to strike a balance between the need to ensure that SCHs do
not lose their special status due to specialty hospitals opening nearby
and the need to ensure that only hospitals that are the sole source of
short-term acute hospital services for their community qualify as SCHs.
We were concerned not to set the threshold too high because we wanted
to ensure that only hospitals that truly are the sole source of care
for their community continue to qualify as SCHs. Based on the comments
we received, we are adopting alternative criteria, as described below.
Adoption of this alternative criteria, comparing inpatient days,
renders moot many of the questions raised by the commenters discussed
above.
Comment: Some commenters pointed out that specialty hospitals take
away profitable services that subsidizes other critical services such
as emergency room service, intensive care unit services, skilled
nursing care, and home health and hospice care furnished by the
hospitals that typically qualify as SCHs.
These commenters believed SCH status was instituted to allow these
types of providers the ability to provide access to a full range of
services for Medicare patients, and that, as a result, these SCHs need
to be protected.
One commenter requested that we require a hospital, to be
considered a like hospital for purposes of SCH determinations, to
provide, on an ongoing basis, all of the services typically furnished
by an SCH, such as 24-hour emergency service and surgery and obstetrics
services.
Some commenters recommended that the services provided by a
limited-service specialty hospital should be defined so that, if the
hospital had the capability of providing a service such as emergency
service but was not staffed for 24-hour emergency service, was staffed
only to the extent of referring its emergency patients to the SCH, or
provided only its specialty-related emergency service, the hospital
would not be considered to be furnishing emergency services, and, as a
result, the hospital would not be considered a like hospital.
Other commenters did not believe that percentages of specific DRGs
or a similar calculation of limited services would be a fair and
equitable method of determining SCH status, particularly when
considering whether a hospital with SCH status should be permitted to
retain such status.
One commenter supported the proposal to amend the definition of SCH
like hospitals to exclude any hospital that offers a very limited range
of services. However, the commenter did not support the percent-of-
services methodology. The commenter stated that the administrative
burden associated with making this determination would be too great for
both providers and intermediaries.
Response: Our proposal was intended to measure the extent of
overlapping services because this would seem to be a useful indicator
to determine whether another hospital in the community offers a
plausible alternative to the SCH for residents in the area seeking
inpatient acute care. For example, the existing regulations contemplate
situations where hospitals with fewer than 50 beds may become eligible
for SCH status despite the location of an otherwise like hospital
within 35 miles, if the community hospital would admit at least 75
percent of the area residents who become inpatients were it not for the
fact that some beneficiaries or residents were forced to seek care
outside the service area due to the unavailability of necessary
specialty services at the community hospital (Sec. 412.92(a)(1)(ii)).
Section 2810.B.3.d. of the Provider Reimbursement Manual contains
instructions for excluding services not offered by the SCH applicant
from the determination of whether the applicant admits at least 75
percent of the area residents who become inpatients. Under this
process, the hospital obtains information as to the diagnoses of and
services furnished to those residents or Medicare beneficiaries who
obtained care outside the SCH applicant hospital's service area during
the survey period.
In connection with the policy we proposed in the May 9, 2002
proposed
[[Page 50055]]
rule, we contemplated using a similar process to determine whether a
limited-service specialty hospital should be excluded from the
definition of like hospitals. However, we recognize that this process
would be labor and data intensive. As a result, we were interested in
evaluating the recommendations submitted by commenters.
Comment: Several commenters suggested using Medicare inpatient days
in hospital units subject to the acute care hospital inpatient
prospective payment system to identify whether a limited-service
specialty hospital is likely to offer many of the services also offered
by the SCH. Thus, for example, a specialty hospital that only provides
orthopedic surgery with a 1-day recovery period would have its service
weighted to reflect the limited intensity of such services.
Commenters believe that using Medicare inpatient days would allow
easy administration by both CMS and its fiscal intermediaries, because
these data are readily available in hospital cost reports. They
believed that by considering only inpatient days in units subject to
the acute care hospital inpatient prospective payment system, the focus
would be limited only to those services germane to the general acute
care needs of the Medicare community. Other commenters suggested using
actual gross payments for Part A services to Medicare beneficiaries as
the unit of measurement for services provided.
Response: We agree with the commenters who proposed using inpatient
days as the comparative statistic to determine whether a limited-
service specialty hospital may be excluded from the like hospital
definition. Although DRGs provide a comparison that more closely
reflects service overlap, we believe that we will attain a similar
outcome, with less administrative complexity, by comparing inpatient
days. Accordingly, we are adopting patient days attributable to units
that provide a level of care characteristic of the level of care
payable under the acute care hospital inpatient prospective payment
system as the unit of measurement for determining whether a hospital
applying for SCH status can exclude from consideration as a like
hospital another hospital within its service area. The number of
inpatient days is readily available from all participating hospitals
because it is already captured on the cost report.
We believe that Medicare inpatient days are a good proxy for
service overlap. However, we will assess the impact of the overall
change to the definition of like hospital and the service overlap proxy
on SCHs and the prospective payment system. This assessment will
determine whether refinements to this policy may be necessary in future
years.
Comment: The commenters were in agreement that the overlapping
services threshold of 3 percent was too low and would not accomplish
our intent of distinguishing specialty hospitals from full-service
acute care hospitals. Alternative suggestions included overlapping
services thresholds of 8 percent, 10 to 15 percent, and setting the
threshold after evaluating actual data. One commenter stated that
adopting less than a 10-percent overlap threshold would not protect
existing SCHs from losing their special status as a result of a
limited-service specialty hospital opening in their community.
Commenters offered the example where a heart hospital or other
niche provider may perform inpatient services that represent closer to
10 or 15 percent of the services performed by SCHs. In this situation
the SCH continues to remain the sole source of the full range of acute
care services in the community, including essential emergency services,
and thus deserves to retain SCH status. However, if the specialty
hospital is considered a like hospital, it would jeopardize the special
status of the SCH.
One commenter referred to the regulations, where, to qualify for
SCH status, a hospital with another like hospital within 25 to 35 miles
cannot have more than 25 percent of the admissions of residents within
its service area admitted to other hospitals (Sec. 412.92(a)(1)(i)).
The commenter suggested that, where the focus is on specialty hospitals
that are not like hospitals, a threshold on the order of one-third of
that 25-percent threshold would seem appropriate. The commenter
suggests that a specialty hospital with only 8 percent service overlap
with the community hospital would not be able to service the
community's acute care needs.
Response: As stated above, based on our evaluation of the public
comments and the situations, of which we are aware, where an existing
SCH's special status is being threatened by a nearby limited-service
specialty hospital, we believe the best approach would be to revise our
proposed definition of like hospital for SCH purposes to exclude any
hospital where the inpatient services overlap compared to the SCH (or
the SCH applicant) is less than 8 percent, as measured by inpatient
days.
The inpatient services would be measured by total inpatient days as
reported on the hospitals' cost report, and should include all days
attributable to units that provide a level of care characteristic of
the level of care payable under the acute care hospital inpatient
prospective payment system. We believe setting the threshold at 8
percent would distinguish the specialty hospitals, which have very
limited inpatient use and, therefore, limited inpatient days, from
general, acute care hospitals typical of SCHs. Therefore, we are
revising proposed Sec. 412.92 (c)(2) to reflect this change.
To determine whether a hospital qualifies as an SCH, the fiscal
intermediary would make a determination whether a nearby hospital paid
under the acute care hospital inpatient prospective payment system is a
like hospital by comparing the total acute inpatient days of the SCH
applicant hospital with the total acute inpatient days of the nearby
hospital. If the total acute inpatient days of the nearby hospital is
greater than 8 percent of the total inpatient days reported by the SCH
applicant hospital, the hospital is considered a like hospital for
purposes of evaluating the application for SCH status. If the total
acute inpatient days of the nearby hospital is 8 percent or less of the
total acute inpatient days of the applicant hospital, the nearby
hospital is not considered a like hospital for purposes of evaluating
the application for SCH status under Sec. 412.92.
Comment: Some commenters questioned the effective date of the
proposal because they see the definition revision as a clarification of
existing legislation that should be treated as such, applying to all
open matters, not prospectively only.
Response: This change is a revision to our current policy for
defining like hospitals. Therefore, it is being implemented
prospectively, starting with cost reporting periods that begin on or
after October 1, 2002.
Current regulations establish that an approved SCH classification
remains in effect without need for reapproval unless there is a change
in the circumstances under which the classification was approved
(Sec. 412.92(b)(3)). It will be necessary, therefore, in situations
where a SCH's eligibility is contingent on a nearby hospital being
excluded from the like hospital comparison under this provision, for
the fiscal intermediary to reevaluate periodically whether the
exclusion is still appropriate, based on the most current inpatient
days data.
In the event that a new, limited-service specialty hospital opens
within the service area of an existing SCH, the
[[Page 50056]]
fiscal intermediary will monitor the number of patient days at the two
hospitals to ensure that the specialty hospital does not exceed the 8
percent threshold.
Comment: Some commenters stated that, without understanding how the
test actually would be conducted, what data would be used, and why a 3
percent threshold was selected, interested parties could not provide us
with thoughtful, helpful comments. Accordingly, they recommended that
we not finalize our proposal at this time. Instead, we should clarify
our proposal and resolicit comments. In the interim, these commenters
believed that we should grandfather SCH status for all existing SCHs
while it further developing this policy. Similarly, several commenters
suggested we further evaluate and develop this proposal and present it
for public review and comment before finalizing the proposal.
One commenter stated that we should also consider adopting an
altogether different approach. Rather than implement an objective, one-
size-fits-all approach, we should instead develop review guidelines for
our Regional Offices, and allow these Regional Offices to make case-by-
case, fact-specific determinations using the guidelines. Such
guidelines could, for example, utilize a quantitative evaluation,
similar to what we proposed. In addition, Regional Offices could be
directed to examine whether area beneficiaries have a choice in the
area for general-acute care hospital services.
Response: We believe that, based on our understanding of the
situations of which we are aware involving an SCH whose special status
is being jeopardized by the opening of a limited-service specialty
hospital in its service area, and similar situations described in the
comments we received, an 8-percent threshold for the comparison of
inpatient days as described above is appropriate. We are concerned that
a case-by-case approach would result in inappropriate disparities
across geographic areas in terms of how applications are reviewed.
C. Outlier Payments: Technical Change (Sec. 412.80)
Sections 1886(d)(5)(A) and (d)(5)(K) of the Act provide for
payments, in addition to the basic prospective payments, for
``outlier'' cases; that is, cases involving extraordinarily high costs.
Cases qualify for outlier payments by demonstrating costs that exceed a
fixed loss cost outlier threshold equal to the prospective payment rate
for the DRG plus any IME (Sec. 412.105) and DSH (Sec. 412.106) payments
for the case and, for discharges on or after October 1, 2001,
additional payments for new technologies or services.
Implementing regulations for outlier payments are located in
subpart F of Part 412. Paragraph (a) of Sec. 412.80 specifies the basic
rules for making the additional outlier payments, broken down into
three applicable effective periods. We have become aware that in
paragraph (a)(2), which relates to outlier payments for discharges
occurring on or after October 1, 1997, and before October 1, 2001, we
did not include language to specify that the additional costs of
outlier cases must exceed the standard DRG payment and any additional
payment the hospital would receive for IME and for DSH, plus a fixed
loss dollar threshold. Therefore, in the May 9, 2002 proposed rule, we
proposed to make a technical change by revising Sec. 412.80(a)(2),
applicable for discharges occurring during the period between October
1, 1997 and October 1, 2001, to include the appropriate language
regarding additional payments for IME and payments for DSH. (We note
that when we amended Sec. 412.80 to incorporate the provisions on the
additional payments for new technology under paragraph (a)(3) (66 FR
46924, September 7, 2001), effective October 1, 2001, we did include
this language.)
We did not receive any comments on this technical change.
D. Rural Referral Centers Sec. 412.96)
Under the authority of section 1886(d)(5)(C)(i) of the Act, the
regulations at Sec. 412.96 set forth the criteria that a hospital must
meet in order to qualify under the prospective payment system as a
rural referral center. For discharges occurring before October 1, 1994,
rural referral centers received the benefit of payment based on the
other urban amount rather than the rural standardized amount. Although
the other urban and rural standardized amounts were the same for
discharges beginning with that date, rural referral centers continue to
receive special treatment under both the DSH payment adjustment and the
criteria for geographic reclassification.
As discussed in Federal Register documents at 62 FR 45999 and 63 FR
26317, under section 4202 of Public Law 105-33, a hospital that was
classified as a rural referral center for FY 1991 is to be considered
as a rural referral center for FY 1998 and later years so long as that
hospital continues to be located in a rural area and does not
voluntarily terminate its rural referral center status. Otherwise, a
hospital seeking rural referral center status must satisfy applicable
criteria.
Also, effective October 1, 2000, if a hospital located in what is
now an urban area was ever a rural referral center, it was reinstated
to rural referral center status (65 FR 47089).
One of the criteria under which a hospital may qualify as a rural
referral center is to have 275 or more beds available for use
(Sec. 412.96(b)(ii)). A rural hospital that does not meet the bed size
requirement can qualify as a rural referral center if the hospital
meets two mandatory prerequisites (a minimum case-mix index and a
minimum number of discharges) and at least one of three optional
criteria (relating to specialty composition of medical staff, source of
inpatients, or referral volume) (Sec. 412.96(c)(1) through (c)(5)).
With respect to the two mandatory prerequisites, a hospital may be
classified as a rural referral center if--
The hospital's case-mix index is at least equal to the
lower of the median case-mix index for urban hospitals in its census
region, excluding hospitals with approved teaching programs, or the
median case-mix index for all urban hospitals nationally; and
The hospital's number of discharges is at least 5,000 per
year, or, if fewer, the median number of discharges for urban hospitals
in the census region in which the hospital is located. (The number of
discharges criterion for an osteopathic hospital is at least 3,000
discharges per year.)
1. Case-Mix Index
Section 412.96(c)(1) provides that CMS will establish updated
national and regional case-mix index values in each year's annual
notice of prospective payment rates for purposes of determining rural
referral center status. The methodology we use to determine the
proposed national and regional case-mix index values is set forth in
regulations at Sec. 412.96(c)(1)(ii). The proposed national mean case-
mix index value for FY 2003 in the May 9, 2002 proposed rule included
all urban hospitals nationwide, and the proposed regional values for FY
2003 were the median values of urban hospitals within each census
region, excluding those with approved teaching programs (that is, those
hospitals receiving indirect medical education payments as provided in
Sec. 412.105). These values were based on discharges occurring during
FY 2001 (October 1, 2000 through September 30, 2001) and include bills
posted to CMS's records through December 2001.
In the May 9, 2002 proposed rule, we proposed that, in addition to
meeting
[[Page 50057]]
other criteria, hospitals with fewer than 275 beds, if they are to
qualify for initial rural referral center status for cost reporting
periods beginning on or after October 1, 2002, must have a case-mix
index value for FY 2001 that is at least--
1.3229; or
The median case-mix index value for urban hospitals
(excluding hospitals with approved teaching programs as identified in
Sec. 412.105) calculated by CMS for the census region in which the
hospital is located. (See the table set forth in the May 9, 2002
proposed rule at 67 FR 31460).
Based on the latest data available (FY 2001 bills received through
March 31, 2002), in addition to meeting other criteria, hospitals with
fewer than 275 beds, if they are to qualify for initial rural referral
center status for cost reporting periods beginning on or after October
1, 2002, must have a case-mix index value for FY 2002 that is at
least--
1.3225; or
The median case-mix index value for urban hospitals
(excluding hospitals with approved teaching programs as identified in
Sec. 412.105) calculated by CMS for the census region in which the
hospital is located. The final median case-mix index values by region
are set forth in the following table:
------------------------------------------------------------------------
Case-mix
Region index value
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)................. 1.2044
2. Middle Atlantic (PA, NJ, NY)......................... 1.2247
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV).. 1.3014
4. East North Central (IL, IN, MI, OH, WI).............. 1.2345
5. East South Central (AL, KY, MS, TN).................. 1.2418
6. West North Central (IA, KS, MN, MO, NE, ND, SD)...... 1.1621
7. West South Central (AR, LA, OK, TX).................. 1.2595
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)............ 1.3162
9. Pacific (AK, CA, HI, OR, WA)......................... 1.2785
------------------------------------------------------------------------
Hospitals seeking to qualify as rural referral centers or those
wishing to know how their case-mix index value compares to the criteria
should obtain hospital-specific case-mix index values from their fiscal
intermediaries. Data are available on the Provider Statistical and
Reimbursement (PS&R) System. In keeping with our policy on discharges,
these case-mix index values are computed based on all Medicare patient
discharges subject to DRG-based payment.
2. Discharges
Section 412.96(c)(2)(i) provides that CMS will set forth the
national and regional numbers of discharges in each year's annual
notice of prospective payment rates for purposes of determining rural
referral center status. As specified in section 1886(d)(5)(C)(ii) of
the Act, the national standard is set at 5,000 discharges. We are
proposing to update the regional standards based on discharges for
urban hospitals' cost reporting periods that began during FY 2001 (that
is, October 1, 2000 through September 30, 2001). FY 2001 is the latest
year for which we have complete discharge data available.
Therefore, in the May 9, 2002 proposed rule, we proposed that, in
addition to meeting other criteria, a hospital, if it is to qualify for
initial rural referral center status for cost reporting periods
beginning on or after October 1, 2002, must have as the number of
discharges for its cost reporting period that began during FY 2001 a
figure that is at least--
5,000; or
The median number of discharges for urban hospitals in the
census region in which the hospital is located. (See the table set
forth in the May 9, 2002 proposed rule at 67 FR 31460.)
Based on the latest discharge data available for FY 2001, the final
median number of discharges for urban hospitals by census region areas
are as follows:
------------------------------------------------------------------------
Number of
Region discharges
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)................. 6,905
2. Middle Atlantic (PA, NJ, NY)......................... 8,644
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV).. 8,893
4. East North Central (IL, IN, MI, OH, WI).............. 7,890
5. East South Central (AL, KY, MS, TN).................. 6,953
6. West North Central (IA, KS, MN, MO, NE, ND, SD)...... 5,696
7. West South Central (AR, LA, OK, TX).................. 6,226
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)............ 9,167
9. Pacific (AK, CA, HI, OR, WA)......................... 7,053
------------------------------------------------------------------------
We note that the median number of discharges for hospitals in each
census region is greater than the national standard of 5,000
discharges. Therefore, 5,000 discharges is the minimum criterion for
all hospitals.
We reiterate that if an osteopathic hospital is to qualify for
rural referral center status for cost reporting periods beginning on or
after October 1, 2002, the hospital must have at least 3,000 discharges
for its cost reporting period that began during FY 2001.
We did not receive any comments on the criteria for rural referral
centers.
E. Indirect Medical Education (IME) Adjustment (Sec. 412.105)
1. Background
Section 1886(d)(5)(B) of the Act provides that prospective payment
hospitals that have residents in an approved graduate medical education
(GME) program receive an additional payment for a Medicare discharge to
reflect the higher indirect operating costs of teaching hospitals
relative to nonteaching hospitals. The existing regulations regarding
the calculation of this additional payment, known as the indirect
medical education (IME) adjustment, are located at Sec. 412.105. The
additional payment is based on the
[[Page 50058]]
IME adjustment factor. The IME adjustment factor is calculated using a
hospital's ratio of residents to beds, which is represented as r, and a
multiplier, which is represented as c, in the following equation: c x
[(1 + r).405 -1]. The formula is traditionally described in
terms of a certain percentage increase in payment for every 10-percent
increase in the resident-to-bed ratio. Section 1886(d)(5)(B)(ii)(VII)
of the Act provides that, for discharges occurring during FY 2003 and
thereafter, the ``c'' variable, or formula multiplier, is 1.35. The
formula multiplier of 1.35 represents a 5.5-percent increase in IME
payment for every 10-percent increase in the resident-to-bed ratio.
2. Temporary Adjustments to the FTE Cap To Reflect Residents Affected
by Residency Program Closure: Resident-to-Bed Ratio for Displaced
Residents (Secs. 412.105(a) and (f)(1)(ix))
In the August 1, 2001 hospital inpatient prospective payment system
final rule (66 FR 39899), we expanded the policy at existing
Sec. 413.86(g)(8) (to be redesignated as Sec. 413.86(g)(9)) which
allows a temporary adjustment to a hospital's FTE cap when a hospital
trains additional residents because of another hospital's closure, to
also allow a temporary adjustment when a hospital trains residents
displaced by the closure of another hospital's residency program (but
the hospital itself remains open). We revised regulations at existing
Sec. 413.86(g)(8) to state that, if a hospital that closes a residency
training program agrees to temporarily reduce its FTE cap, another
hospital(s) may receive a temporary adjustment to its FTE cap to
reflect residents added because of the closure of the former hospital's
residency training program. We defined ``closure of a hospital
residency training program'' as when the hospital ceases to offer
training for residents in a particular approved medical residency
training program. The methodology for adjusting the caps for the
``receiving'' hospital and the ``hospital that closed its program'' as
they apply to the IME adjustment and direct GME payments is set forth
in the regulations at existing Secs. 412.105(f)(1)(ix) and
413.86(g)(8)(iii), respectively.
In the final notice published in the Federal Register on August 1,
2001 rule, we noted a commenter who requested that CMS further revise
the regulations to grant temporary relief to hospitals in calculating
the IME adjustment with regard to application of the resident-to-bed
ratio cap (66 FR 39900). The commenter believed that while the
regulations provide for the cap on the number of residents to be
temporarily adjusted, if the receiving hospital is not allowed to also
adjust its resident-to-bed ratio in the prior year, the lower resident-
to-bed ratio from the prior year could act to reduce the IME payments
to the receiving hospital. The commenter suggested that, similar to the
exception for residents in hospitals that begin new programs under
Sec. 412.105(a)(1), an adjustment should be made to the prior year's
number of FTE residents, equal to the increase in the current year's
FTEs that is attributable to the transferred residents. In response to
the commenter, we stated that we had decided not to allow the exclusion
of these displaced residents in applying the resident-to-bed ratio cap.
We explained that, while we believed that the receiving hospital may be
held to a lower cap in the first year of training the displaced
residents, the receiving hospital would benefit from the higher cap in
the subsequent years as the displaced residents complete their training
and leave that hospital. However, we indicated that we would consider
suggestions for possible future changes to this policy.
In the proposed regulation, we revisited this policy and explained
that our rationale for not allowing the adjustment for displaced
residents to the resident-to-bed ratio cap may have been faulty. We
initially believed that, in the year following the last year in which
displaced residents trained at the receiving hospital, the receiving
hospital would benefit from the higher resident-to-bed ratio cap.
However, we have determined that, while it is correct that the hospital
will have a higher resident-to-bed ratio cap because of the higher
number of displaced residents in the prior year, the receiving
hospital's actual FTE count decreases as the displaced residents finish
their training. Therefore, the receiving hospital would not need a
higher resident-to-bed ratio in the prior year to accommodate the
remaining FTEs. Consequently, the higher resident-to-bed ratio cap in
fact would not benefit the receiving hospital. Thus, in the May 9, 2002
proposed rule, we proposed to allow the exclusion of residents
displaced by either the closure of another hospital's program or
another hospital's closure in applying the resident-to-bed ratio cap.
Specifically, assuming a hospital is eligible to receive a temporary
adjustment to its FTE cap as described in existing Sec. 413.86(g)(8),
we proposed that, solely for purposes of applying the resident-to-bed
ratio cap in the first year in which the receiving hospital is training
the displaced residents, the receiving hospital may adjust the
numerator of the prior year's resident-to-bed ratio by the number of
FTE residents that has caused the receiving hospital to exceed its FTE
cap. (We note that, as we explain below in response to a comment, in
this final rule we are revising the proposed language of
Sec. 412.105(a)(1)(iii) to state that the exception to the resident-to-
bed ratio cap for closed hospitals and closed programs applies only
through the end of the first 12-month cost reporting period in which
the receiving hospital trains the displaced FTE residents. We further
note that this adjustment to the resident-to-bed ratio cap does not
apply to changes in bed size.) In the years subsequent to the first
year in which the receiving hospital takes in the displaced residents,
we believe an adjustment to the numerator of the prior year's resident-
to-bed ratio is unnecessary because the receiving hospital's actual FTE
count in those years would either stay the same or, as the displaced
residents complete their training or leave that hospital, decrease each
year. If all other variables remain constant, an increase in the
current year's resident-to-bed ratio will establish a higher cap for
the following year. In the second and subsequent years of training the
displaced residents, the receiving hospital's resident-to-bed ratio for
the current year would not be higher than the prior year's ratio and
thus would not be limited by the resident-to-bed ratio cap.
In the cost reporting period following the departure of the last
displaced residents, when the temporary FTE cap adjustment is no longer
applicable, we proposed that, solely for purposes of applying the
resident-to-bed ratio cap, the resident-to-bed ratio be calculated as
if the displaced residents had not trained at the receiving hospital in
the prior year. In other words, in the year that the hospital is no
longer training displaced residents, the attendant FTEs should be
removed from the numerator of the resident-to-bed ratio from the prior
year (that is, the resident-to-bed ratio cap). We explained that
because we proposed to allow the adjustment to the resident-to-bed
ratio cap in the first year in which the receiving hospital trains
displaced residents, it is equitable to remove those FTEs when
calculating the resident-to-bed ratio cap after all the displaced
residents have completed their training at the receiving hospital.
The following is an example of how the receiving hospital's IME
resident-to-bed ratio cap would be adjusted for displaced residents
coming from either a closed hospital or a closed program:
Example: Hospital A has a family practice program with 3 residents.
On
[[Page 50059]]
June 30, 2002, Hospital A closes. Hospital B, which also has a family
practice program, agrees to continue the training of Hospital A's
residents beginning July 1, 2002. Its fiscal year end is June 30. As of
July 1, 2002, the 3 residents displaced by the closure of Hospital A
include 1 PGY1 resident, 1 PGY2 resident, and 1 PGY3 resident. In
addition, Hospital B has 5 of its own residents, an IME FTE resident
cap of 5, and 100 beds. Subject to the criteria under existing
Sec. 413.86(g)(8), Hospital B's FTE cap is temporarily increased to 8
FTEs. According to the proposed policy stated above, Hospital B's
resident-to-bed ratio and resident-to-bed ratio cap would be determined
as follows:
July 1, 2002 through June 30, 2003
Resident-to-bed ratio: 5 FTEs + 3 displaced FTEs / 100
beds = .08 (line 3.18 of Worksheet E, Part A of the Medicare cost
report, Form CMS 2552-96).
Note: For purposes of applying the rolling average calculation at
Sec. 412.105(f)(1)(v) to this example, it is assumed that Hospital B
had 5 FTE residents in both the prior and the penultimate cost
reporting periods. Therefore, 5 FTEs are used in the numerator of the
resident-to-bed ratio. Under Sec. 412.105(f)(1)(v), displaced residents
are added to the receiving hospital's rolling average FTE count in each
year that the displaced residents are training at the receiving
hospital.)
Resident-to-bed ratio cap: 5 FTEs (from fiscal year end
June 30, 2002) + 3 displaced FTEs (from fiscal year end June 30, 2003)
/ 100 beds = .08 (line 3.19 of Worksheet E, Part A of Form CMS 2552-
96).
The lower of the resident-to-bed ratio from the current
year (.08) or the resident-to-bed ratio cap from the prior year (.08)
is used to calculate the IME adjustment. Therefore, Hospital B would
use a resident-to-bed ratio of .08 (line 3.20 of Worksheet E, Part A of
Form CMS 2552-96).
July 1, 2003 through June 30, 2004
The PGY3 displaced resident has completed his or her family
practice training on June 30, 2003 and has left Hospital B. Hospital B
continues to train a displaced (now) PGY2 resident, and a displaced
(now) PGY3 resident.
Resident-to-bed ratio: 5 FTEs + 2 displaced FTEs / 100
beds = .07 (line 3.18 of Worksheet E, Part A of Form CMS 2552-96).
Resident-to-bed ratio cap: 5 FTEs (from fiscal year end
June 30, 2003) + 3 displaced FTEs (from fiscal year end June 30, 2003)
/ 100 beds = .08 (line 3.19 of Worksheet E, Part A of Form CMS 2552-
96).
The lower of the resident-to-bed ratio from the current
year (.07) or the resident-to-bed ratio cap from the prior year (.08)
is used to calculate the IME adjustment. Hospital B would use a
resident-to-bed ratio of .07 (line 3.20 of Worksheet E, Part A of Form
CMS 2552-96).
July 1, 2004 through June 30, 2005
Another of the remaining displaced residents has completed his or
her family practice training on June 30, 2004 and has left Hospital B.
Hospital B continues to train one displaced (now) PGY3 resident.
Resident-to-bed ratio: 5 FTEs + 1 displaced FTE / 100 beds
= .06 (line 3.18 of Worksheet E, Part A of Form CMS 2552-96).
Resident-to-bed ratio cap: 5 FTEs (from fiscal year end
June 30, 2004) + 2 displaced FTEs (from fiscal year end June 30, 2004)
/ 100 beds = .07 (line 3.19 of Worksheet E, Part A of Form CMS 2552-
96).
The lower of the resident-to-bed ratio from the current
year (.06) or the resident-to-bed ratio cap from the prior year (.07)
is used to calculate the IME adjustment. Hospital B would use a
resident-to-bed ratio of .06 (line 3.20 of Worksheet E, Part A of Form
CMS 2552-96).
July 1, 2005 through June 30, 2006
The last displaced resident has completed his or her family
practice training on June 30, 2005 and has left Hospital B. Hospital B
no longer trains any displaced residents, and, therefore, the last
displaced resident is removed from the numerator of the resident-to-bed
ratio cap.
Resident-to-bed ratio: 5 FTEs + 0 displaced FTEs / 100
beds = .05
Resident-to-bed ratio cap: 5 FTEs (from fiscal year end
June 30, 2005) + 0 displaced FTEs (subtract 1 displaced FTE from FYE
June 30, 2005) / 100 beds = .05
The lower of the resident-to-bed ratio from the current
year (.05) or the resident-to-bed ratio cap from the prior year (.05)
is used to calculate the IME adjustment. Hospital B would use a
resident-to-bed ratio of .05.
We proposed that this exception to the resident-to-bed ratio cap
for residents coming from a closed hospital or a closed program would
be effective for cost reporting periods beginning on or after October
1, 2002, which was reflected in proposed revised Sec. 412.105(a)(1).
Comment: Numerous commenters expressed support for our proposal to
allow an adjustment to the resident-to-bed ratio cap for residents
displaced by the closure of another teaching hospital or another
hospital's GME program. One commenter added that, although the proposed
adjustment to the resident-to-bed ratio in the first year would
equitably reimburse hospitals who commence training the displaced
residents at the beginning of their respective fiscal year, this
adjustment would result in the receiving hospital being under-
reimbursed in the first full year of residency training when a hospital
or program closes toward the end of the receiving hospital's fiscal
year. The commenter requested that CMS correct this inequity by
extending the resident-to-bed ratio cap adjustment to include both the
first partial and the first full year of training displaced residents
at the receiving hospital.
Response: We agree with the commenter that our proposal to limit
the adjustment to the resident-to-bed ratio cap to the first (cost
reporting) year in which the receiving hospital is training the
displaced residents may result in reduced payments to the receiving
hospital if the receiving hospital begins training those residents at
some point other than the beginning of a full fiscal year. Therefore,
in this final rule, we are revising the language proposed under
Sec. 412.105(a)(1)(iii) to state that the exception to the resident-to-
bed ratio cap for closed hospitals and closed programs applies through
the end of the first 12-month cost reporting period in which the
receiving hospital trains the displaced FTE residents. We note that the
effective date of this revised policy is for cost reporting periods
beginning on or after October 1, 2002.
For example, if receiving Hospital A has a fiscal year end (FYE) of
December 31, 2003, and it begins training 3 displaced residents on
November 1, 2003, for purposes of applying the resident-to-bed ratio
cap, receiving Hospital A may add a 2 months' proportion of the 3 FTEs
to the numerator of the resident-to-bed ratio cap from the prior cost
reporting period (FYE December 31, 2002). Receiving Hospital A may also
add the FTEs that continue training at the hospital during its cost
reporting period ending December 31, 2004 to the numerator of the
resident-to-bed ratio cap from the FY 2003 cost reporting period.
However, no adjustment may be made for purposes of applying the
resident-to-bed ratio cap for subsequent years. Other than the
allowance for applying the resident-to-bed ratio cap adjustment through
the end of the first 12-month cost reporting period in which the
receiving hospital trains the displaced
[[Page 50060]]
residents, the policy is the same as that in the proposed rule.
Comment: One commenter commended CMS for realizing that it would be
appropriate to allow eligible hospitals to receive a temporary
adjustment to the application of the IME resident-to-bed ratio cap.
However, the commenter believed that in lieu of the rationale that CMS
utilized in drafting the regulation published on August 1, 2001 and to
avoid penalizing eligible hospitals, CMS should apply a retroactive
effective date of October 1, 2001 to this policy.
Response: We understand the commenter's concerns, and in proposing
this policy, we acknowledged the need to allow for the temporary
adjustment to the resident-to-bed ratio cap. However, because we do not
have explicit statutory authority to do so, we are unable to apply this
policy retroactively. Therefore, the effective date of this policy will
be prospective; that is, for cost reporting periods beginning on or
after October 1, 2002.
Comment: Some commenters asserted that the proposal requiring that
the resident-to-bed ratio cap be calculated in the cost reporting
period following the departure of the last displaced residents as if
the displaced residents had not trained at the receiving hospital in
the prior year, adds more complexity to an already burdensome IME
calculation. The commenters stated that the number of residents likely
to be involved with this provision is minimal, and accordingly, CMS
should not finalize this provision.
Response: As we have explained in the proposed rule, we believe
that in light of the addition of FTEs to the resident-to-bed ratio cap
in the first full cost reporting period, it is equitable to remove
those FTEs when calculating the resident-to-bed ratio cap in the year
following the departure of the displaced residents. We disagree that
requiring that the resident-to-bed ratio cap be calculated in the cost
reporting period following the departure of the last displaced
residents as if the displaced residents had not trained at the
receiving hospital in the prior year is overly burdensome. It requires
only a simple subtraction of FTEs from the numerator of the prior year
ratio, and in the next issuance of the Medicare cost report
instructions, we will be making a revision to the instructions for line
3.19 of Worksheet E, Part A of the cost report to reflect this policy.
Comment: One commenter was concerned about our proposal to adjust
``the numerator of the prior year's resident-to-bed ratio by the number
of FTE residents that has caused the receiving hospitals to exceed its
FTE cap'' (emphasis added) (67 FR 31461, May 9, 2002). The commenter
stated that, by describing the increase in the numerator in relation to
the hospital's FTE cap, the intent of the provision will not be
fulfilled unless the hospital is already at its FTE cap. The commenter
explained that if, for example, Hospital A has 4 residents in both cost
reporting years 2002 and 2003, has a FTE cap of 5 FTEs, and accepts 3
displaced residents in 2003, it exceeds the FTE cap by only 2
residents. Therefore, as proposed, the adjustment to the prior year
resident-to-bed ratio would result in a ratio cap of 0.06 ((4+2)/100).
The current year resident-to-bed ratio would be 0.07 ((4+3)/100). Since
this exceeds the hospital's prior year resident-to-bed ratio, the
resident-to-bed ratio for Hospital A will be held to 0.06. The
commenter concluded that since our intent is not to penalize hospitals
that accept displaced residents, the adjustment to the prior year
resident-to-bed ratio must not rely on the FTE cap for a reference
point, but rather, must equal the number of displaced residents.
Response: The original regulations concerning temporary adjustments
for hospital closure were written in response to requests from
hospitals for an exception to the FTE cap, to allow the additional
residents coming from a closed hospital to be counted by the receiving
hospital (63 FR 26329 and 26329, May 12, 1998). Similarly, in the July
30, 1999 final rule (64 FR 41522), we explained that we adopted this
provision because hospitals had indicated a reluctance to accept
additional residents from a closed hospital without a temporary
adjustment to their FTE caps. Accordingly, the existing regulations
discussing hospital and program closure at Sec. 413.86(g)(8)
(Sec. 412.105(f)(1)(ix) for IME) state that ``a hospital may receive a
temporary adjustment to its FTE cap to reflect residents added''
because of the closure of another hospital or another hospital's
program. Furthermore, existing Secs. 413.86(g)(8)(ii)(B) and
(g)(8)(iii)(A)(2) require that, in order for a hospital to receive this
temporary FTE cap adjustment, the hospital must document ``that it is
eligible for this temporary adjustment by identifying the residents who
have * * * caused the hospital to exceed its cap. * * *'' (emphasis
added). These regulations are only applicable in instances where the
training of displaced residents causes a hospital to exceed its FTE
cap; if a hospital has room under its FTE cap to train these residents,
no FTE cap adjustment is needed. Thus, in order for a hospital to
qualify for an adjustment to its resident-to-bed ratio cap (or 3-year
rolling average count), the hospital must first qualify for a temporary
adjustment to its FTE cap. To qualify for a temporary FTE cap
adjustment, the hospital must demonstrate that accepting some number of
displaced residents has caused the hospital to exceed its FTE cap.
Therefore, the proposed resident-to-bed ratio cap adjustment is
necessarily linked to ``the number of FTE residents that has caused the
hospital to exceed its FTE cap.'' Accordingly, we are not accepting the
commenter's request at this time. However, we may consider in the
future proposing to allow hospitals that are below their FTE caps and
train displaced residents to also receive an adjustment for those
displaced residents that are under the cap for purposes of applying the
resident-to-bed ratio cap and the 3-year rolling average. As a final
note, we would like to point out an error in the example that the
commenter provided. In the example, a hospital that has 4 FTEs and an
FTE cap of 5, accepts 3 displaced FTE residents. The commenter stated
that the current year resident-to-bed ratio would be 0.07 ((4+3)/100).
This is incorrect. Since, as explained above, the regulations prescribe
that the receiving hospital's FTE count is only adjusted for those FTEs
that have caused the receiving hospital to exceed its FTE cap, the
current year numerator (as well as the prior year numerator) would be 6
(4+2), because only 2 of the 3 FTEs have caused the hospital to exceed
its FTE cap of 5 FTEs.
Comment: One commenter requested CMS to allow hospitals that train
displaced residents to receive permanent, not temporary, adjustments to
their FTE caps.
Response: We are not addressing this comment in this final rule
because it is outside the scope of what was specifically addressed in
the proposed rule.
3. Counting Beds for the IME and DSH Adjustments (Sec. 412.105(b)
and Sec. 412.106(a)(l)(i))
In the May 9, 2002 proposed rule, we discussed the regulations
located at Sec. 412.105(b) for determining the number of beds to be
used in calculating the resident-to-bed ratio for the IME adjustment.
Those regulations also are used to determine the number of beds for
other purposes, including calculating the DSH adjustment at
Sec. 412.106(a)(l)(i). Section 412.105(b) specifies that the number of
beds in a hospital is determined by counting the number of available
bed days during the
[[Page 50061]]
cost reporting period and dividing that number by the number of days in
the cost reporting period. The number of available bed days does not
include beds or bassinets in the healthy newborn nursery, custodial
care beds, or beds in excluded distinct part hospital units.
We also discussed section 2405.3G of Part I of the Medicare
Provider Reimbursement Manual (PRM), which further defines an
``available'' bed as a bed that is permanently maintained and is
available for use to lodge inpatients.
These discussions were background for our proposal to clarify some
of the uncertainty that had arisen concerning the application of the
definition of ``available.'' For example, a question has arisen as to
whether beds in rooms or entire units that are unoccupied for extended
periods of time should continue to be counted on the basis that, if
there would ever be a need, they could be put into use.
Counting the number of beds in a hospital is intended to measure
the size of a hospital's routine acute care inpatient operations. While
hospitals necessarily maintain some excess capacity, we believe there
is a point where excess capacity may distort the bed count. Therefore,
we proposed to revise our policy concerning the determination of a
hospital's bed size to exclude beds that represent an excessive level
of unused capacity. We stated that the proposed refinement of our bed
counting policy would better capture the size of a hospital's inpatient
operations as described above.
We analyzed Medicare hospital data and found that, among hospitals
that have between 100 and 130 beds, hospitals receiving DSH payments
have lower occupancy rates than similar hospitals not receiving DSH
payments. Because DSH payments are higher for urban hospitals with more
than 100 beds, there may be an incentive for these hospitals to
maintain excess capacity in order to qualify for those higher payments.
Among 189 urban hospitals in this bed-size range that did not receive
DSH payments during FY 1999, the average occupancy rate was 55 percent.
However, among 294 urban hospitals in this bed-size range that did
receive DSH payments during FY 1999, the average occupancy rate was 47
percent. Twenty-five percent of this group of hospitals (those
receiving DSH payments) had occupancy rates below 35 percent. Among the
hospitals not receiving DSH payments, 25 percent had occupancy rates
below 43 percent. We believe this is indicative of a tendency among
some small urban hospitals to maintain excess capacity in order to
qualify for higher DSH payments. Therefore, we proposed that if a
hospital's reported bed count results in an occupancy rate (average
daily census of patients divided by number of beds) below 35 percent,
the applicable bed count, for purposes of establishing the number of
available beds for that hospital, would exclude beds that would result
in an average annual occupancy rate below 35 percent (proposed
Sec. 412.105(b)(3)).
For example, if a hospital reports 105 beds for a cost reporting
period, but has an average daily census of 26 patients for that same
cost reporting period, its occupancy rate equals 24.8 percent (that is,
26/105). Because its occupancy rate is below the proposed minimum
threshold of 35 percent, its maximum available bed count would be 74,
which is the number of beds that would result in an occupancy rate of
35 percent, given an average daily census of 26 patients(that is,
26/.35).
We proposed to otherwise continue to determine a hospital's bed
size using existing regulations and program manual instructions,
including the application of the available bed policy.
We believe that the policy in the May 9, 2002 proposed rule more
accurately indicates the size of a hospital's operations. We proposed
to specify under Sec. 412.105(b)(3) that if a hospital's reported bed
count results in an occupancy rate below 35 percent, the applicable bed
count for that hospital would be the number of beds that would result
in an occupancy rate of 35 percent. We proposed to make the proposed
policy effective for discharges occurring on or after October 1, 2002.
Comment: Numerous commenters questioned why we were interested in
applying an occupancy adjustment to counting beds for IME and DSH
purposes. The commenters strongly opposed the proposed policy, which
they indicated would serve to increase a hospital's IME payment but
would limit a hospital's bed size for DSH payment purposes, if the
hospital's occupancy is below 35 percent. In addition, the commenters
believed that there are other reasons why a hospital may have excess
capacity that may include patients utilizing the outpatient services
instead of inpatient services, and that, due to cost, patients may be
moved sooner from acute care settings to the next level of care.
The commenters contended that this proposal is contrary to the
statutory language and congressional intent. The commenters further
contended that the proposed policy would cause financial hardship to
small urban hospitals that treat a disproportionate number of low-
income patients.
MedPAC indicated that it believed that we are recognizing a real
problem in maintaining integrity in the DSH payment procedures.
However, MedPAC believed that the proposed policy illustrates the
difficulties that arise when qualifying for DSH payments depends in
part on the number of beds a hospital keeps in service. MedPAC
recommended that a single formula apply to all hospitals regardless of
location (urban/rural) or bed size. In addition, MedPAC recommended
that the low-income shares used to determine each hospital's DSH
adjustment reflect all low-income patients, which include patients
receiving uncompensated care. MedPAC stated that a new DSH distribution
formula will be needed when the uncompensated care data are complete,
and that would be an opportune time to eliminate the use of a bed
standard. Based on this information, MedPAC questioned whether it is
worth changing the bed counting methodology now since a more
fundamental change may occur in the next year or two.
Response: We believe our proposed policy represents a reasonable
approach to addressing situations where hospitals appear to be
maintaining excess capacity in order to qualify for higher DSH
payments. With respect to our authority to implement such a change, we
point out that we have broad authority under the statute in
establishing the methodology for determining the number of available
beds.
However, at this time, we have decided not to proceed with the
proposed change. Instead, we will consider this issue as part of a
future comprehensive analysis of our bed and patient day counting
policies. That is, we believe there are other aspects of counting beds
that need to be addressed as well and, upon further consideration, we
have decided to proceed in a more comprehensive manner. We acknowledge
MedPAC's comments as well and will take into account the potential that
bed counting issues for DSH purposes may become less significant.
Accordingly, in this final rule, we are not adopting the proposed
change of Sec. 412.105(b)(3).
Technical Correction
Section 211(b) of Public Law 106-554 amended section
1886(d)(5)(F)(iv)(III) of the Act to revise the calculation of the DSH
payment adjustment for hospitals affected by the revised thresholds as
specified in section 211(a) of Public Law
[[Page 50062]]
106-554. These changes were effective for discharges on or after April
1, 2001, and no changes were made by section 211(b) for discharges
prior to April 1, 2001. When we issued the June 13, 2001 interim final
rule with comment period (66 FR 32172) to update the regulations to
incorporate the changes made by section 211, we inadvertently changed
the adjustment factor for rural hospitals with fewer than 100 beds from
4 percent to 5 percent under Sec. 412.106(d)(2)(iv)(A) for discharges
occurring before April 1, 2001. We are correcting this error in this
final rule by revising Sec. 412.106(d)(2)(iv)(A) to specify that, for
discharges before April 1, 2001, the applicable DSH adjustment factor
for rural hospitals with fewer than 100 beds was 4 percent.
This correction was not included in the May 9, 2002 proposed rule,
as we were only made aware of it after publication of that proposed
rule. The Administrative Procedure Act generally requires that agency
rules be published in the Federal Register as a notice of proposed
rulemaking with a period for public comment (5 U.S.C. 533(b)). This
notice-and-comment procedure can be waived, however, if an agency finds
good cause that the procedure is impracticable, unnecessary, or
contrary to the public interest and incorporates a statement of the
finding and its reasons in the rule issued. Since this change is being
made to correct a technical error, we find that the notice-and-comment
procedure is unnecessary, and, therefore, find good cause to waive the
notice of proposed rulemaking and issue the correction in this final
rule.
F. Medicare-Dependent, Small Rural Hospitals: Ongoing Review of
Eligibility Criteria (Sec. 412.108(b))
Section 6003(f) of the Omnibus Budget Reconciliation Act of 1989
(Pub. L. 101-239) added section 1886(d)(5)(G) to the Act and created
the category of Medicare-dependent, small rural hospitals (MDHs). MDHs
are eligible for a special payment adjustment under the acute care
hospital inpatient prospective payment system. Initially, in order to
be classified as an MDH, a hospital must have met all of the following
criteria:
The hospital is located in a rural area (as defined in
Sec. 412.63(b);
The hospital has 100 or fewer beds (as defined at
Sec. 412.105(b)) during the cost reporting period;
The hospital is not classified as an SCH (as defined at
Sec. 412.92); and
The hospital has no less than 60 percent of its inpatient
days or discharges attributable to inpatients receiving Medicare Part A
benefits during its cost reporting period beginning in FY 1987.
MDHs were eligible for a special payment adjustment under the acute
care hospital inpatient prospective payment system, effective for cost
reporting periods beginning on or after April 1, 1990, and ending on or
before March 31, 1993. Hospitals classified as MDHs were paid using the
same methodology applicable to SCHs, that is, based on whichever of the
following rates yielded the greatest aggregate payment for the cost
reporting period:
The national Federal rate applicable to the hospital.
The updated hospital-specific rate based on FY 1982 costs per
discharge.
The updated hospital-specific rate based on FY 1987 costs per
discharge.
Section 13501(e)(1) of the Omnibus Budget Reconciliation Act of
1993 (Public Law 103-66) extended the MDH provision through FY 1994 and
provided that, after the hospital's first three 12-month cost reporting
periods beginning on or after April 1, 1990, the additional payment to
an MDH whose applicable hospital-specific rate exceeded the Federal
rate was limited to 50 percent of the amount by which the hospital-
specific rate exceeded the Federal rate. The MDH provision expired
effective with cost reporting periods beginning on or after October 1,
1994.
Section 4204(a)(3) of Public Law 105-33 reinstated the MDH special
payment for discharges occurring on or after October 1, 1997 and before
October 1, 2001, but did not revise the qualifying criteria for these
hospitals or the payment methodology.
Section 404(a) of Public Law 106-113 extended the MDH provision to
discharges occurring before October 1, 2006.
As specified in the June 13, 2001 interim final rule with comment
period (66 FR 32172) and finalized in the August 1, 2001 final rule (66
FR 39883), section 212 of Public Law 106-554 provided that, effective
with cost reporting periods beginning on or after April 1, 2001, a
hospital has the option to base MDH eligibility on two of the three
most recently audited cost reporting periods for which the Secretary
has a settled cost report, rather than on the cost reporting period
that began during FY 1987 (section 1886(d)(5)(G)(iv)(IV) of the Act).
According to section 1886(d)(5)(G)(iv)(IV) of the Act, the criteria for
at least 60 percent Medicare utilization will be met if, in at least
``2 of the 3 most recently audited cost reporting periods for which the
Secretary has a settled cost report'', at least 60 percent of the
hospital's inpatient days or discharges were attributable to
individuals receiving Medicare Part A benefits.
We would like to point out that cost reports undergo different
levels of review. For example, some cost reports are settled with a
desk review; others, through a full field audit. We believe the
intention of the law is to provide hospitals the ability to qualify for
MDH status based on their most recent settled cost reporting periods,
each of which undergoes a level of audit in its settlement.
Hospitals that qualify under section 1886(d)(5)(G)(iv)(IV) of the
Act are subject to the other provisions already in place for MDHs. That
is, all MDHs are paid using the payment methodology as defined in
Sec. 412.108(c) and may be eligible for the volume decrease provision
as defined in Sec. 412.108(d).
Under existing classification procedures at Sec. 412.108(b), a
hospital must submit a written request to its fiscal intermediary to be
considered for MDH status based on at least two of its three most
recently audited cost reporting periods for which the Secretary has a
settled cost report (as specified in Sec. 412.108(a)(1)(iii)(c)). The
fiscal intermediary will make its determination and notify the hospital
within 90 days from the date it receives the hospital's request and all
of the required documentation. The intermediary's determination is
subject to review under 42 CFR part 405, Subpart R. MDH status is
effective 30 days after the date of written notification of approval.
In the May 9, 2002 proposed rule, we proposed to clarify and to
codify in the regulations (proposed Sec. 412.108(b)(4)) that an
approved classification as an MDH remains in effect unless there is a
change in the circumstances under which the classification was
approved. That is, in order to maintain its eligibility for MDH status,
a hospital must continue to be a small (100 or fewer beds), rural
hospital, with no less than 60 percent Medicare inpatient days or
discharges during either its cost reporting period beginning in FY 1987
or during at least two of its three most recently settled cost
reporting periods.
We also proposed to clarify and to codify in the regulations
(proposed Sec. 412.108(b)(5)) that the fiscal intermediary will
evaluate on an ongoing basis whether or not a hospital continues to
qualify for MDH status. This proposed clarification included evaluating
whether or not a hospital that qualified for MDH status under section
1886(d)(5)(G)(iv)(IV) of the Act continues to qualify for MDH status
[[Page 50063]]
based on at least two of its three most recently settled cost reporting
periods.
In addition, we proposed (proposed Sec. 412.108(b)(6)) that if a
hospital loses its MDH status, that change in status would become
effective 30 days after the fiscal intermediary provides written
notification to the hospital that it no longer meets the MDH criteria.
If the hospital would like to be considered for MDH status after
another cost reporting period has been audited and settled, we proposed
to require that the hospital must reapply by submitting a written
request to its fiscal intermediary (proposed Sec. 412.108(b)(7)). An
MDH that continues to meet the criteria would not have to reapply.
Comment: Three commenters addressed our proposal to conduct ongoing
reviews of hospitals to determine whether or not they continue to meet
the MDH criteria. The first commenter opposed the proposal for ongoing
reviews of MDHs because this type of review is not specified in the
law, but is an interpretation by CMS. The commenter supported its
position by pointing out that a hospital qualifying based on the
original criterion (that is, 1987 data) is allowed to retain this
status despite any changes in subsequent years. The commenter also
stated this may cause instability in individual hospital payments from
year-to-year, which will be disruptive for a hospital whose revenue
depends heavily on Medicare. The commenter suggested that, if the
proposed reviews are found to be consistent with Congressional intent,
CMS adopt a policy that does not penalize hospitals for small changes
in patient mix and provides stability in the payment system from year
to year. Moreover, the commenter suggested granting MDH status for a 3-
year period before requiring requalification, similar to wage index
reclassifications, or setting the level for requalification at a
slightly lower level (perhaps 55 percent) so that a slight change in
volume does not cause a loss of MDH status.
The second commenter supported the proposal but recommended that
the requirement that hospitals apply for MDH status be removed, since
the fiscal intermediaries will be conducting annual reviews.
The third commenter focused on the loss of MDH status effective 30
days after the intermediary provides written notification to the
hospital that it no longer qualifies for MDH status. The commenter
stated that mid-year MDH status changes provide a number of claims
processing and cost report settlement problems. The commenter
recommended that the effective date for the change in MDH status should
be the first day of the cost reporting period following the
intermediary's notification of the hospital.
Response: We agree that hospitals that qualify based on the
original criteria were not required to requalify based on more recent
data, since the original criteria, as dictated by law, was based on a
specified period, here the 1987 data. However, the law was amended and
specifies the new, additional criterion: ``two of the three most
recently audited cost reporting periods for which the Secretary has a
settled cost report.'' We believe this language supports an
interpretation that a hospital is to qualify as an MDH based on its
most recent data, not based on a one-time qualification, as is the case
with the original criteria (which was based on data from a set period
of time, the hospital's FY 1987 cost reporting period).
With respect to the suggestion that the proposed ongoing reviews of
hospitals MDH status should provide that, once approved, retention of a
hospital's MDH status for a 3-year period, or that the level for
requalification should be at a slightly lower percentage of inpatient
days or discharges attributable to Medicare than 60 percent, the
statute (section 1886(d)(5)(G)(iv)(IV) of the Act) does not provide
such flexibility. Allowing hospitals to qualify using cost report data
from other than two of the three most recently available cost reporting
periods, or using a percentage less than 60 percent, would be
inconsistent with the statutory language.
Regarding the effective date of a status change, the effective date
of 30 days after the date of the notice from the fiscal intermediary is
consistent with current policy for approval of both MDH and SCH status
as well as notices that the hospital no longer meets such eligibility
criteria. Concerning the commenter's request to not require hospitals
to reapply for MDHs status since the intermediaries would already be
reviewing that status on an annual basis, we wish to clarify that the
ongoing reviews would be of hospitals with existing MDHs status only.
Therefore, hospitals that had lost their MDH status would not be
included in an automatic annual review to determine whether or not the
hospitals continue to meet the eligibility criteria for MDH status.
Instead, such hospitals must reapply for MDH status based on two of
their three most recently audited cost reports.
Accordingly, we are adopting as final the proposed revised changes
to the MDH policy under Sec. 412.108(b).
G. Eligibility Criteria for Reasonable Cost Payments to Rural Hospitals
for Nonphysician Anesthetists (Sec. 412.113(c))
Currently, a rural hospital can qualify and be paid on a reasonable
cost basis for qualified nonphysician anesthetists (certified
registered nurse anesthetists (CRNAs) and anesthesiologist assistants)
services for a calendar year beyond 1990 and subsequent years as long
as it can establish before January 1 of that year that it did not
provide more than 500 surgical procedures requiring anesthesia
services, both inpatient and outpatient.
In the September 1, 1983 interim final rule with comment period
that implemented the acute care hospital inpatient prospective payment
system, we established the general policy to include, under that
prospective payment system, inpatient hospital services furnished
incident to a physician's service, with a time-limited exception for
the inpatient hospital services of anesthetists (48 FR 39794). The
purpose of this exception, which originally was for cost reporting
periods beginning before October 1, 1986, was that the practice of
physician-employer and anesthetist-employee was so widespread that we
believed ``it would be disruptive of medical practice and adverse to
the quality of patient care to require all such contracts to be
renegotiated in the limited time available before the implementation of
the prospective payment system.''
Section 2312 of Public Law 98-369 provided for reimbursement to
hospitals on a reasonable cost basis as a pass-through for the costs
that hospitals incur in connection with the services of CRNAs.\1\
Section 2312(c) provided that the amendment was effective for cost
reporting periods beginning on or after October 1, 1984, and before
October 1, 1987.
---------------------------------------------------------------------------
\1\ We noted in the August 31, 1984 final rule that section 2312
and the Conference Report used the term ``CRNA'' throughout.
However, we believed it was Congressional intent to apply this pass-
through payment amount to the services of all qualified hospital-
employed nonphysician anesthetists (49 FR 34748).
---------------------------------------------------------------------------
Section 9320 of Public Law 99-509 (which established a fee schedule
for the services of nurse anesthetists) amended section 2312(c) of
Public Law 98-369 by extending the pass-through provision for cost
reporting periods beginning before January 1, 1989. Section 608 of
Public Law 100-485 limited the pass-through provision effective during
1989, 1990, and 1991, to hospitals meeting the following criteria:
[[Page 50064]]
As of January 1, 1988, the hospital employed or contracted
with a certified nonphysician anesthetist;
In 1987, the hospital had a volume of surgical procedures
(including inpatient and outpatient procedures) requiring anesthesia
services that did not exceed 250 (or such higher number as the
Secretary determines to be appropriate); and
Each certified nonphysician anesthetist employed by, or
under contract with, the hospital has agreed not to bill under Part B
of Medicare for professional services furnished by the anesthetist at
the hospital.
Subsequently, section 6132 of Public Law 101-239 amended section
608 of Public Law 100-458 by raising the established 250-procedure
threshold to 500 procedures (effective for anesthesia services
furnished on or after January 1, 1990), and extended the cost pass-
through indefinitely. However, section 6132 of Public Law 101-239 left
intact the requirement that the hospital must have not exceeded a
maximum number of surgical procedures (effectively raised to 500), both
inpatient and outpatient, requiring anesthesia services during 1987.
Also, the statutory authority for the Secretary to adopt such other
appropriate maximum threshold volume of procedures as determined
appropriate was not affected by section 6132.
In light of the age of this provision, we undertook to reexamine
the appropriateness of the current 500-procedure threshold.
Nonphysician anesthetists who are not employed by or have a contractual
relationship with a hospital paid under this provision may receive
payments under a fee schedule. Payments under the fee schedule are
generally somewhat lower than those made on a reasonable cost basis.
Therefore, hospitals that exceed 500 procedures may have difficulty
retaining access to nonphysician anesthetists' services because cost
reimbursement is unavailable. According to data from the American
Association of Nurse Anesthetists (AANA), the average salary for a CRNA
in rural areas in calendar year 2000 was $111,000, with a total annual
compensation of $141,000. The AANA estimates that, based on payments
under the Medicare fee schedule, a CRNA would have to provide at least
800 anesthesia procedures to reach this average level of compensation.
The statute provides the Secretary with the authority to determine
the appropriateness of the volume threshold, in part, so that changes
necessary to meet the needs of rural hospitals can be made. As we have
found that hospitals that exceed the 500 surgical procedures may have
difficulty in retaining access to nonphysician anesthetists' services,
we believe that the appropriate maximum threshold for surgical
procedures should be raised in order for the payment exception to apply
to those hospitals most in need of this payment treatment. Based upon
the data available to us concerning the best estimates of average total
compensation to a CRNA, we believe that the maximum volume threshold
for surgical procedures requiring anesthesia services should be raised
to 800. Therefore, to ensure continued access to nonphysician
anesthetists' services in rural hospitals, in the May 9, 2002 proposed
rule, we proposed to revise Secs. 412.113(c)(2)(ii) and (c)(2)(iii) to
raise the 500-procedure threshold to 800 procedures.
Comment: Several commenters supported our proposed changes and
indicated that, without the proposed change in the regulations, rural
hospitals will experience serious disruptions in their delivery of
anesthesia services. CRNAs are the sole anesthesia providers in a
number of rural hospitals. The commenters added that, without CRNAs,
these rural hospitals will have difficulty in continuing to meet their
patient's surgical and trauma stabilization services. Patients will be
forced to travel outside of their communities, which could mean great
distance.
One commenter suggested that the threshold should be reviewed every
3 years to ensure it continues to appropriately reflect market
conditions for rural hospitals trying to maintain anesthetists
services.
Response: We agree that the existing regulation providing for 500
procedures per year as a threshold could hinder the ability of some
rural hospitals to sustain access to surgical procedures, which is the
reason for our proposed change. We will continue to monitor this issue
to determine whether future adjustments to the procedure threshold are
warranted.
Comment: Several commenters raised an issue concerning the fact
that some Medicare fiscal intermediaries include nonanesthesia
ancillary services provided by the CRNAs when counting the total number
of surgical procedures. They indicated that many rural hospitals are
not able to qualify for the reasonable cost payment for their CRNAs as
a result.
The commenters suggested a specific definition of surgical
procedures that include cutting, abrading, suturing, and lasering of
otherwise physically changing body tissues and organs. The commenters
indicated that this suggested definition would clarify and eliminate
the confusion in regulatory interpretation across fiscal
intermediaries. One commenter indicated that anesthetists may provide
therapeutic services for pain management unassociated with a surgical
procedure.
Response: In view of the comments on this issue, we believe that
certain steps are needed to improve consistency in the counting of
surgical procedures. We appreciate the commenter's recommended
definition of surgical procedures, and will consider whether such
instructions would reduce inconsistency in counting of procedures,
while still being consistent with the legislative and regulatory intent
of this provision. We also will review all aspects of the counting of
procedures to consider what further actions may be necessary to improve
consistency. Our goal is to facilitate greater consistency in the
manner and criteria used by all intermediaries.
Comment: Several commenters expressed concern that the existing
regulations only allow hospitals in existence as of 1987 to qualify for
reasonable cost pass-through and requested us to review this issue. The
commenters indicated that this threatens new rural hospitals' ability
to continue to provide surgical and anesthesia services to patients.
Response: To enable rural hospitals to secure anesthesia services
for their patients, these regulations include a rural hospital's option
for reasonable cost pass-through for the services of one full-time
equivalent CRNA, as long as the hospital qualifies for ``pass-through''
treatment. The statute specifies the criteria and the regulation tracks
the statutory language. Therefore, we believe we do not have the
authority to extend this provision to hospitals that do not otherwise
meet the criteria as described by the statute.
Comment: Some commenters sought clarification as to whether this
provision is available to SCHs.
Response: SCHs that otherwise meet the statutory criteria are
eligible to receive this pass-through payment. We are not aware that
there has been any confusion in the past on this issue, but we are
clarifying the point here in response to the comment.
Comment: Several commenters recommended that we eliminate the
threshold altogether, or raise it even higher. One commenter stated
that the need for the pass-through demonstrates that fee schedule
payments for nonphysician anesthetists are inadequate to defray the
costs associated with this service.
[[Page 50065]]
Another commenter suggested that CAHs should be exempt from the
qualifying criteria to receive these pass-through payments. The
commenter suggested that removing this requirement for CAHs would
eliminate the unnecessary paperwork required for these hospitals to
demonstrate they continue to meet the minimum thresholds.
A third commenter argued that the cost pass-through provision
should permit rural hospitals to qualify on the basis of employing
anesthesiologists as well. This commenter referred to survey data that
purported to show a serious shortage of anesthesia providers in support
of this argument.
Response: As described above, we believe the statute is specific as
to the threshold requirements to qualify for the CRNA pass-through
payments. Accordingly, a hospital or CAH that wishes to qualify for
CRNA pass-through payments must meet the statutory criteria, including
the threshold requirement. We also believe the statute does not provide
authority to expand this policy to pay pass-through costs to hospitals
for anesthesiologists' services. We believe the change we are making,
increase the threshold from 500 to 800 procedures per year, is
appropriate and note that it is generally supported by the commenters.
Comment: The AANA requested a technical correction to the reference
in the proposed rule that, according to data from AANA, the average
total annual compensation for CRNA in 2001 is approximately $155,000.
According to the AANA, the most recent data for calendar year 2000
reflect an average salary in rural areas of $111,000, with a total
annual compensation of $141,000.
Response: In the preamble of this final rule, we have revised the
prior reference accordingly to avoid any potential confusion.
Comment: One commenter questioned whether anesthesiologists
assistants are recognized as qualified providers under this provision.
Response: As we noted in the proposed rule and in the discussion
above, our understanding of Congressional intent was that this pass-
through payment applied to the services of all qualified hospital-
employed nonphysician anesthetists (67 FR 31464). Therefore, a hospital
otherwise meeting the criteria for this pass-through payment by
employing an anesthesiologists assistant would be eligible for pass-
though payments.
Comment: One commenter requested clarification of whether the
requirement at Sec. 412.113(c)(2)(i)(D) that ``each qualified
nonphysician anesthetist employed by or under contract with the
hospital or CAH has agreed in writing not to bill on a reasonable
charge basis for his or her patient care in that hospital or CAH''
applies only to Medicare beneficiaries or to all patients.
Response: This requirement is to ensure that the nonphysician
anesthetist is not also billing Medicare for Part B services under the
fee schedule. Therefore, the requirement only pertains to services
provided to Medicare beneficiaries. In this final rule, we are adding a
revision to Sec. 412.113(c)(2)(i)(D) to reflect the limited
applicability of this requirement.
Accordingly, we are adopting as final the proposed changes to
Sec. 412.113(c)(2)(ii) and (c)(2)(iii), with one change. We are
revising Sec. 412.113(c)(2)(i)(D) to specify that each qualified
nonphysician anesthetist employed by or under contract with the
hospital or CAH has agreed in writing not to bill on a reasonable
charge basis for his or her patient care to Medicare beneficiaries in
that hospital or CAH.
H. Medicare Geographic Classification Review Board (MGCRB)
Reclassification Process (Secs. 412.230, 412.232, and 412.273)
With the creation of the MGCRB, beginning in FY 1991, under section
1886(d)(10) of the Act, hospitals could request reclassification from
one geographic location to another for the purpose of using the other
area's standardized amount for inpatient operating costs or the wage
index value, or both (September 6, 1990 interim final rule with comment
period (55 FR 36754), June 4, 1991 final rule with comment period (56
FR 25458), and June 4, 1992 proposed rule (57 FR 23631)). Implementing
regulations in Subpart L of Part 412 (Secs. 412.230 et seq.) set forth
criteria and conditions for redesignations from rural to urban, rural
to rural, or from an urban area to another urban area, with special
rules for SCHs and rural referral centers.
1. Withdrawals, Terminations, and Cancellations
Under Sec. 412.273(a) of our regulations, a hospital or hospital
group may withdraw its application for reclassification at any time
before the MGCRB issues its decision or, if after the MGCRB issues its
decision, within 45 days after publication of our annual notice of
proposed rulemaking concerning changes to the acute care hospital
inpatient prospective payment system for the upcoming fiscal year (for
example, the May 9, 2002 proposed rule for FY 2003). In the August 1,
2001 final rule, we specified that, for purposes of implementing
section 304 of Public Law 106-554, the withdrawal procedures and the
applicable timeframes in the existing regulations would apply to
hospitals that receive 3-year reclassification for wage index purposes
(66 FR 39886). Once effective, a withdrawal means that the hospital
would not be reclassified for purposes of the wage index for FY 2003
(and would not receive continued reclassification for FYs 2004 and
2005), unless the hospital subsequently cancels its withdrawal. The
procedure for canceling a withdrawal or termination is discussed in
detail below.
Consistent with section 1886(d)(10)(D)(v) of the Act, a hospital
may terminate its approved 3-year reclassification during the second or
third years (Sec. 412.273(b)). This is a separate action from a
reclassification withdrawal that occurs in accordance with the
timeframes described above. Currently, in order to terminate an
approved 3-year reclassification, we require the hospital to notify the
MGCRB in writing within 45 days after the publication date of the
annual proposed rule for changes to the hospital inpatient prospective
payment system (Sec. 412.273(b)(1)(i)). A termination, unless
subsequently cancelled, is effective for the full fiscal years
remaining in the 3-year period.
We also provided that a hospital may apply for reclassification to
a different area for the year corresponding to the second or third year
of the reclassification (that is, an area different from the one to
which it was originally reclassified) and, if successful, the
reclassification would be for 3 years. Since the publication of the
August 1, 2001 (FY 2002) final rule, we received an inquiry regarding a
situation where a hospital with an existing 3-year wage index
reclassification successfully reclassifies to a different area, then
withdraws from that second reclassification within the allowable
timeframe for withdrawals. This scenario raises several issues not
specifically covered in the August 1, 2001 final rule, which we are
addressing in this final rule.
For example, the question arises, at what point does a hospital's
termination of a 3-year reclassification become effective when a
hospital applies for reclassification to another area? As noted above,
the August 1, 2001 final rule specified that a hospital must file a
written request with the MGCRB within 45 days after publication of the
annual proposed rule to terminate the reclassification. However, the
rules do not specify at what point a previous 3-year reclassification
is terminated when
[[Page 50066]]
a hospital applies for reclassification to another area in subsequent
years. One might conclude that an application for a wage index
reclassification to another area constitutes a written notification of
a hospital's intent to terminate an existing 3-year reclassification.
Under this scenario, however, if the application to the second area
were denied, it would then be necessary for the hospital to formally
cancel the termination of its reclassification to the first area to
avoid a lapse in reclassification status the following year. Therefore,
in the May 9, 2002 proposed rule, we proposed to clarify, in new
paragraph (iii) of Sec. 412.273(b)(2), that, in a situation where a
hospital with an existing 3-year wage index reclassification applies to
be reclassified to another area, its existing 3-year reclassification
will be terminated when a second 3-year wage index reclassification
goes into effect for payments for discharges on or after the following
October 1. In such a case, it will not be necessary for the hospital to
submit a separate written notice of its intent to terminate its
existing 3-year reclassification. Of course, a hospital also may still
terminate an existing 3-year reclassification through written notice to
the MGCRB, regardless of whether it successfully reclassifies to a
different area.
The scenario of a hospital with an existing 3-year reclassification
seeking reclassification to a second area raises another issue. If the
hospital's request is approved by the MGCRB, but the hospital withdraws
from that successful reclassification and ``falls back'' to its
original 3-year reclassification, does the hospital retain the right to
cancel that withdrawal the next year? In this way, a hospital could
accumulate multiple reclassification options from which it could choose
in any given year through canceling prior withdrawals or terminations
to one area and withdrawing or terminating reclassifications to other
areas.
We do not believe section 304 of Public Law 106-554 was intended to
be used in such a manner. Therefore, in the May 9, 2002 proposed rule,
we proposed to clarify existing policy that a previous 3-year
reclassification may not be reinstated after a subsequent 3-year
reclassification to another area takes effect. This means that a
hospital that is reclassified to an area for purposes of the wage index
may have only one active 3-year reclassification at a time. Once a 3-
year reclassification to a second area becomes effective, a previously
terminated 3-year reclassification may not be reinstated by terminating
or withdrawing the reclassification to the second area and then
canceling the termination or withdrawal of the reclassification to the
first area.
As we stated in the August 1, 2001 final rule, we believe the 3-
year wage index reclassification policy was intended to provide
consistency and predictability in hospital reclassifications and the
wage index. Allowing hospitals multiple reclassification options to
choose from would create a situation where many hospitals move in
unpredictable ways between the proposed and final rules based on their
calculation of which of several areas would yield the highest wage
index. This would reduce the predictability of the system, hampering
the ability of the majority of hospitals to adequately project their
future revenues. Therefore, in the May 9, 2002 proposed rule, we
proposed to amend Sec. 412.273(b)(2)(ii) to provide that, once a 3-year
reclassification becomes effective, a hospital may no longer cancel a
withdrawal or termination of another 3-year reclassification, even
within 3 years from the date of such withdrawal or termination. We also
proposed a technical correction to Sec. 412.273(b)(2)(i) to correct the
terminology regarding canceling (rather than terminating) a withdrawal.
Finally, the August 1, 2001 final rule did not specifically
describe the process to cancel a withdrawal or termination. Therefore,
in the May 9, 2002 proposed rule, we proposed to add a new
Sec. 412.273(d) (existing paragraph (d) would be redesignated as
paragraph (e)) to describe the process whereby a hospital may cancel a
previous withdrawal or termination of a 3-year wage index
reclassification. Specifically, a hospital may cancel a previous
withdrawal or termination by submitting written notice of its intent to
the MGCRB no later than the deadline for submitting reclassification
applications for reclassifications effective at the start of the
following fiscal year (Sec. 412.256(a)(2)).
We did not receive any comments on these proposed changes.
Therefore, in this final rule we are adopting the proposed changes as
final.
2. Effect of Change of Ownership on Hospital Reclassifications
Sections 412.230(e)(2)(ii) and 412.232(d)(2)(ii) provide that, for
reclassifications effective beginning FY 2003, a hospital must provide
a weighted 3-year average of its average hourly wages using data from
the CMS hospital wage survey used to construct the wage index in effect
for prospective payment purposes.
As discussed in the August 1, 2001 final rule, we received a
comment suggesting that, for purposes of calculating the 3-year average
hourly wages, we permit a hospital that has changed ownership the
option of excluding prior years' wage data submitted by a previous
owner in order for the new hospital to qualify for reclassification.
Although we responded to the comment in the August 1, 2001 final rule
(66 FR 39890), we have now determined that there is a need to clarify
further our policy regarding change of ownership and hospitals that do
not accept assignment of the previous owner's provider agreement.
In our response to the comment, we stated that, where a hospital
has changed ownership and the new owners have acquired the financial
assets and liabilities of the previous owners, all of the applicable
wage data associated with that hospital are included in the calculation
of its 3-year average hourly wage. Where the new hospital does not
claim the financial assets or assume the liabilities of a predecessor
hospital, the wage data associated with the previous hospital's
provider number would not be used in calculating the new hospital's 3-
year average hourly wage.
Section 489.18(c) provides that, when there is a change of
ownership, the existing provider agreement will automatically be
assigned to the new owner when the parties agree to accept assignment
of the provider agreement. Our regulations at Sec. 412.230(e)(2) do not
specifically address the situation of new hospitals seeking to
reclassify for wage index purposes, in light of the requirement that
reclassification is based on a 3-year average hourly wage. Therefore,
as we proposed in the May 9, 2002 proposed rule, in this final rule we
are revising Sec. 412.230(e)(2), by adding a new paragraph (e)(2)(iii),
to clarify our existing policy to specify that, in situations where a
hospital does not accept assignment of the existing hospital's provider
agreement under Sec. 489.18, the hospital will be treated as a new
hospital with a new provider number. In that case, the wage data
associated with the previous hospital's provider number will not be
used in calculating the new hospital's 3-year average hourly wage. As
we stated in the August 1, 2001 final rule, we believe this policy
clarification is consistent with how we treat hospitals whose ownership
has changed for other Medicare payment purposes. Thus, we are revising
Sec. 412.230 to clarify, under new paragraph (e)(2)(iii), that once a
new hospital has accumulated at least 1 year of wage data using survey
data from the CMS hospital wage survey
[[Page 50067]]
used to determine the wage index, it is eligible to apply for
reclassification on the basis of those data.
Comment: One commenter indicated that our efforts to clarify our
policy regarding change of ownership create a financial incentive for
new owners to go through the ``onerous and costly'' process of
obtaining new provider numbers in order to obtain geographic
reclassification. The commenter believed that any valid change in
ownership under Sec. 489.19 should allow a hospital the opportunity to
request reclassification and that we should clarify that all payment
areas impacted by the assignment of a new provider number should be
consistently applied.
Response: This clarification establishes clear, predictable
guidelines as to how hospitals' data will be treated for
reclassification purposes. The rule was not adopted to govern provider
behavior, since we cannot predict hospitals' behavior in situations
where they may perceive it to be to their financial advantage to change
their ownership arrangements. Rather, given the guidelines established
by CMS, hospitals are free to act in their best interests.
I. Payment for Direct Costs of Graduate Medical Education (Sec. 413.86)
1. Background
Under section 1886(h) of the Act, Medicare pays hospitals for the
direct costs of graduate medical education (GME). The payments are
based in part on the number of residents trained by the hospital.
Section 1886(h) of the Act caps the number of residents that hospitals
may count for direct GME.
Section 1886(h)(2) of the Act, as amended by section 9202 of the
Consolidated Omnibus Reconciliation Act (COBRA) of 1985 (Pub. L. 99-
272), and implemented in regulations at Sec. 413.86(e), establishes a
methodology for determining payments to hospitals for the costs of
approved GME programs. Section 1886(h)(2) of the Act, as amended by
COBRA, sets forth a payment methodology for the determination of a
hospital-specific, base-period per resident amount (PRA) that is
calculated by dividing a hospital's allowable costs of GME for a base
period by its number of residents in the base period. The base period
is, for most hospitals, the hospital's cost reporting period beginning
in FY 1984 (that is, the period of October 1, 1983 through September
30, 1984). The PRA is multiplied by the weighted number of full-time
equivalent (FTE) residents working in all areas of the hospital complex
(or nonhospital sites, when applicable), and the hospital's Medicare
share of total inpatient days to determine Medicare's direct GME
payments. In addition, as specified in section 1886(h)(2)(D)(ii) of the
Act, for cost reporting periods beginning on or after October 1, 1993,
through September 30, 1995, each hospital's PRA for the previous cost
reporting period is not updated for inflation for any FTE residents who
are not either a primary care or an obstetrics and gynecology resident.
As a result, hospitals with both primary care and obstetrics and
gynecology residents and nonprimary care residents in FY 1994 or FY
1995 have two separate PRAs: one for primary care and obstetrics and
gynecology and one for nonprimary care.
Section 1886(h)(2) of the Act was further amended by section 311 of
Public Law 106-113 to establish a methodology for the use of a national
average PRA in computing direct GME payments for cost reporting periods
beginning on or after October 1, 2000, and on or before September 30,
2005. Generally, section 1886(h)(2)(D) of the Act establishes a
``floor'' and a ``ceiling'' based on a locality-adjusted, updated,
weighted average PRA. Each hospital's PRA is compared to the floor and
ceiling to determine whether its PRA should be revised.For cost
reporting periods beginning on or after October 1, 2000, and before
October 1, 2001, the floor PRA is 70 percent of the locality-adjusted,
updated, weighted average PRA. For cost reporting periods beginning on
or after October 1, 2001, and before October 1, 2002, section 511 of
Public Law 106-554 amended the floor PRA to equal 85 percent of the
locality-adjusted, updated, weighted average PRA. PRAs that are below
the applicable floor PRA for a particular cost reporting period would
be adjusted to equal the floor PRA. PRAs that exceed the ceiling, that
is, 140 percent of the locality-adjusted, updated, weighted average
PRA, would, depending on the fiscal year, either be frozen and not
increased for inflation, or be increased by a reduced inflation factor.
Existing regulations at Sec. 413.86(e)(4) specify the methodology for
calculating each hospital's weighted average PRA and the steps for
determining whether a hospital's PRA will be revised.
2. Determining the Weighted Average PRAs for Newly Participating
Hospitals (Sec. 413.86(e)(5))
As stated earlier, under section 1886(h) of the Act and
implementing regulations, in most cases Medicare pays hospitals for the
direct costs of GME on the basis of per resident costs in a 1984 base
year. However, under existing Sec. 413.86(e)(5), if a hospital did not
have residents in an approved residency training program, or did not
participate in Medicare during the base period, the hospital's base
period for its PRA is its first cost reporting period during which the
hospital participates in Medicare and the residents are on duty during
the first month of that period. There must be at least three existing
teaching hospitals with PRAs in the MSA for this calculation.
If there are at least three existing teaching hospitals with PRAs
in the same geographic wage area (MSA), as that term is used in 42 CFR
Part 412, the fiscal intermediary will calculate a PRA based on the
lower of the new teaching hospital's actual cost per resident in its
base period or a weighted average of all the PRAs of existing teaching
hospitals in the same MSA. If there are less than three existing
teaching hospitals with PRAs within the new teaching hospital's MSA,
effective for cost reporting periods beginning on or after October 1,
1997, the fiscal intermediary uses the updated regional weighted
average PRA (determined for each of the nine census regions established
by the Bureau of Census for statistical and reporting purposes) for the
new teaching hospital's MSA (see 62 FR 46004, August 29, 1997). A new
teaching hospital is assigned a PRA equal to the lower of its actual
allowable direct GME costs per resident or the weighted average PRA as
calculated by the fiscal intermediary. Using a methodology based on a
weighted average ensures that a new teaching hospital receives a PRA
that is representative of the costs of training residents within its
specific geographic wage area.
Under existing policy, to calculate the weighted average PRA of
teaching hospitals within a particular MSA, the fiscal intermediary
begins by determining the base year PRA and the base year FTE count of
each respective teaching hospital within that MSA. The weighted average
PRA is (a) the sum of the products of each existing teaching hospital's
base year PRA in the MSA and its base year FTEs, (b) divided by the sum
of the base year FTEs from each of those hospitals. While a methodology
using base year PRAs and FTEs was appropriate and workable in the years
closely following the implementation of hospital--specific PRAs, it has
become administratively burdensome for both CMS and the fiscal
intermediaries to recreate base year information in calculating a
weighted average. The methodology is particularly problematic in
instances where there are large
[[Page 50068]]
numbers of teaching hospitals in an MSA.
In addition, as discussed in section V.I.1. of this final rule,
hospitals that were training nonprimary care residents during FYs 1994
and 1995 have a distinct nonprimary care PRA, because there was no
update in the inflation factor for these years (Sec. 413.86(e)(3)(ii)).
Thus, most teaching hospitals currently have two PRAs: one for primary
care and obstetrics and gynecology; and one for all other residents.
(Hospitals that first train residents after FY 1995 only have a single
PRA, regardless of whether they train primary care or other residents.)
However, since the current methodology for calculating weighted average
PRAs is based on data from FY 1984, which was prior to the years during
which the PRAs were not adjusted for inflation to reflect nonprimary
care residents, the methodology does not account for all PRAs (both
primary care and obstetrics and gynecology and nonprimary care) within
an MSA.
Accordingly, in the May 9, 2002 proposed rule, we proposed to
simplify and revise the weighted average PRA methodology under
Sec. 413.86(e)(5)(i)(B) to reflect the average of all PRAs in an MSA,
both primary care and obstetrics and gynecology, and nonprimary care.
We proposed to continue to calculate a weighted average PRA. However,
rather than using 1984 base year data, we proposed to use PRAs (both
primary care and obstetrics and gynecology and nonprimary care) and FTE
data from the most recently settled cost reports of teaching hospitals
in an MSA. We proposed that the intermediary would calculate the
weighted average PRA using the following steps:
Step 1: Identify all teaching hospitals (including those serviced
by another intermediary(ies)) in the same MSA as the new teaching
hospital.
Step 2: Identify the respective primary care and obstetrics and
gynecology FTE counts, the nonprimary care FTE counts, or the total FTE
count (for hospitals with a single PRA) of each teaching hospital in
step 1 from the most recently settled cost reports. (Use the FTE counts
from line 3.07, line 3.08, and line 3.11 of the Medicare cost report,
CMS-2552-96,Worksheet E-3, Part IV.)
(We note that, under step 2, we have added ``line 3.11'' of the
cost report to capture dental and podiatry FTE counts as part of the
nonprimary care FTE counts. We made this addition in response to a
comment received, as discussed below under the comment and response
section for this area.)
Step 3: Identify the PRAs (either a hospital's primary care and
obstetrics and gynecology PRA and nonprimary care PRA, or a hospital's
single PRA) from the most recently settled cost reports of the
hospitals in step 1, and update the PRAs using the CPI-U inflation
factor to coincide with the fiscal year end of the new teaching
hospital's base year cost reporting period. For example, if the base
year fiscal year end of a new teaching hospital is December 31, 2003,
and the most recently settled cost reports of the teaching hospitals
within the MSA are from the fiscal years ending June 30, 2000,
September 30, 2000, or December 31, 2000, the PRAs from these cost
reports would be updated for inflation to December 31, 2003.
Step 4: Calculate the weighted average PRA using the PRAs and FTE
counts from steps 2 and 3. For each hospital in the calculation:
(a) Multiply the primary care PRA by the primary care and
obstetrics and gynecology FTEs.
(b) Multiply the nonprimary care PRA by the nonprimary care FTEs.
(c) For hospitals with a single PRA, multiply the single PRA by the
hospital's total number of FTEs.
(d) Add the products from steps (a), (b), and (c) for all
hospitals.
(e) Add the FTEs from step 3 for all hospitals.
(f) Divide the sum from step (d) by the sum from step (e). The
result is the weighted average PRA for hospitals within an MSA.
The following is an example of how to calculate a weighted average
PRA under this revised methodology:
Example
Assume that new Hospital A has a June 30 fiscal year end and begins
training residents for the first time on July 1, 2003. Thus, new
Hospital A's base year for purposes of establishing a PRA is the fiscal
year ending June 30, 2004. New Hospital A is located in MSA 1234, in
which three other teaching hospitals exist, Hospital B, Hospital C, and
Hospital D. These three hospitals also have a fiscal year end of June
30 and their most recently settled cost reports are for the fiscal year
ending June 30, 2000. For fiscal year ending June 30, 2000, Hospital B
has 200 primary care and obstetrics and gynecology FTEs, 150 nonprimary
care FTEs, and 150 nonprimary care FTEs. Hospital C has 50 primary care
and obstetrics and gynecology FTEs and 60 nonprimary care FTEs.
Hospital D has 25 FTEs. After updating the PRAs for inflation by the
CPI-U to June 30, 2004, Hospital B has a primary care and obstetrics
and gynecology PRA of $120,000 and a nonprimary care PRA of $115,000,
Hospital C has a primary care and obstetrics and gynecology PRA of
$100,000 and a nonprimary care PRA of $97,000, and Hospital D has a
single PRA of $90,000.
(a) Primary care:
Hospital B: $120,000 x 200 FTEs = $24,000,000
Hospital C: $100,000 x 50 FTEs = $5,000,000
(b) Nonprimary care:
Hospital B: $115,000 x 150 FTEs = $17,250,000
Hospital C: $97,000 x 60 FTEs = $5,820,000
(c) Single PRA:
Hospital D: $90,000 x 25 FTEs =$2,250,000
(d) $24,000,000 + 5,000,000 + $17,250,000 + $5,820,000 + $2,250,000 =
$54,320,000.
(e) 200 + 50 + 150 + 60 + 25 = 485 total FTEs.
(f) $54,320,000/485FTEs = $112,000, the weighted average PRA for MSA
1234 for fiscal year ending June 30,2004.
New Hospital A's PRA would be the lower of $112,000 or its actual
base year GME costs per resident.
In the May 9, 2002 proposed rule, we proposed that the new weighted
average calculation would be effective for hospitals with direct GME
base years that begin on or after October 1, 2002.
In addition, we are taking the opportunity to clarify the language
under existing Sec. 413.86(e)(5)(i)(B), which relates to calculating
the weighted average under existing policy. Specifically, existing
Sec. 413.86(e)(5)(i)(B) states: ``The weighted mean value of per
resident amounts of all hospitals located in the same geographic wage
area, as that term is used in the prospective payment system under part
412 of this chapter, for cost reporting periods beginning in the same
fiscal years [emphasis added].'' We believe this language could be
misinterpreted to imply that only those PRAs of hospitals in the same
geographic wage area (MSA) that have the same fiscal year end as the
new teaching hospital should be used in the weighted average
calculation. However, the PRAs of all hospitals within the MSA of the
new teaching hospital should be used, not just the PRAs of hospitals
with the same fiscal year end as the new teaching hospital. We proposed
a revision under a proposed new Sec. 413.86(e)(5)(i)(C).
Comment: One commenter expressed concern about our proposed changes
to the calculation of weighted average PRAs for new teaching hospitals.
The
[[Page 50069]]
commenter believed that our proposed methodology is as administratively
burdensome as the existing methodology, because the servicing
intermediary would be required to solicit most recently settled cost
report data from all other intermediaries servicing providers in the
defined territory every time a new PRA needs to be calculated. As an
alternative to using most recently settled cost report data, the
commenter suggested that we specify a cost reporting period from which
all future data can be updated (that is, cost reporting periods ending
between October 1, 1998 and September 30, 1999). The commenter
indicated that it would be helpful if we would provide all
intermediaries with a nationwide listing of all teaching hospitals
(extracted from the HCRIS and compiled in a database/spreadsheet
format), including provider number, MSA number, county, PRAs, and
primary and nonprimary care FTE counts from the specified cost
reporting period.
Response: We understand the commenter's concerns, but we believe
that using data from most recently settled cost reports results in a
weighted average PRA that more appropriately reflects the pertinent
dynamics of residency training in a specific geographical area. We note
that the requirement to use data from all hospitals in an MSA,
regardless of whether they are serviced by different intermediaries,
exists even under current regulations. In addition, generally,
hospitals in the same MSA either use the same fiscal intermediary or
one of two fiscal intermediaries and, therefore, we do not believe that
it is unreasonably difficult to obtain information from another
intermediary. Furthermore, as we have done in the past, we will
continue to provide assistance to the intermediaries involved in the
process of calculating the weighted average PRAs. Finally, we will
consider the commenter's suggestion concerning the compilation of a
nationwide database.
Comment: One commenter asked whether, considering that dental and
podiatry residents are also nonprimary care, the FTE count of dental
and podiatry residents from line 3.11 of worksheet E-3 Part IV should
be included in determining the FTE counts in step 2 of the calculation
in the proposed rule (67 FR 31467).
Response: Step 2 of the proposed calculation states, ``Identify the
respective primary care and obstetrics and gynecology FTE counts, the
nonprimary care FTE counts, or the total FTE count (for hospitals with
a single PRA) of each teaching hospital in step 1 from the most
recently settled cost reports. (Use the FTE counts from line 3.07 and
line 3.08 of the Medicare cost report, CMS-2552-96, Worksheet E-3, Part
IV).'' We agree with the commenter that the dental and podiatry FTE
counts should also be included, and, therefore, we are revising step 2
in the example in this final rule to state that intermediaries should
use the FTE counts from line 3.07, line 3.08, and line 3.11 of the
Medicare cost report.
Accordingly, in this final rule, we are adopting as final the
proposed revised Sec. 413.86(e)(5)(i)(B) and the proposed new
Sec. 413.86(e)(5)(i)(C) without modification.
3. Aggregate FTE Limit for Affiliated Groups (Secs. 413.86(b) and
(g)(7))
Section 1886(h)(4)(H)(ii) of the Act permits, but does not require,
the Secretary to prescribe rules that allow institutions that are
members of the same affiliated group (as defined by the Secretary) to
elect to apply the FTE resident limit on an aggregate basis. This
provision allows the Secretary to permit hospitals flexibility in
structuring rotations within a combined cap when they share residents'
time. Consistent with the broad authority conferred by the statute, we
established criteria for defining an ``affiliated group'' and an
``affiliation agreement'' in both the August 29, 1997 final rule (62 FR
45965) and the May 12, 1998 final rule (63 FR 26317). Because we had
received many inquiries from the hospital industry on this policy, we
proposed in the May 9, 2002 proposed rule to clarify in regulations the
requirements for participating in an affiliated group. Most of these
requirements are explicitly derived from the policy explained in the
August 29, 1997 and May 12, 1998 final rules.
Specifically, we proposed to add under Sec. 413.86(b) a new
definition of ``Affiliation agreement.'' Under this new definition, we
proposed to specify that an affiliation agreement is a written, signed,
and dated agreement by responsible representatives of each respective
hospital in an affiliated group (as defined in Sec. 413.86(b)), that
specifies--
The term of the agreement, which, at a minimum must be one
year, beginning on July 1 of a year.
Each participating hospital's direct and indirect FTE cap.
The annual adjustment to each hospital's FTE caps, for
both direct GME and IME. This adjustment must reflect the fact that any
positive adjustment to one hospital's direct and indirect FTE caps must
be offset by a negative adjustment to the other hospital's (or
hospitals') direct and indirect FTE caps of at least the same amount.
The names of the participating hospitals and their
Medicare provider numbers.
In addition, we proposed to add a new Sec. 413.86(g)(5)(iv) and a
new Sec. 413.86(g)(7) to clarify the requirements for a hospital to
receive a temporary adjustment to its FTE cap through an affiliation
agreement. (Existing Sec. 413.86(g)(5)(iv) through (vi) were proposed
to be redesignated as Sec. 413.86(g)(5)(v) through (vii), respectively;
and existing Secs. 413.86(g)(7) through (g)(12) were proposed to be
redesignated as Secs. 413.86(g)(8) through (g)(13), respectively, to
accommodate these additions.) Specifically, we proposed that a hospital
may receive a temporary adjustment to its FTE cap, which is subject to
the averaging rules, to reflect residents added or subtracted because
the hospital is participating in an affiliated group (as that term is
defined under Sec. 413.86(b)). Under the proposed provision--
Each hospital in the affiliated group must submit the
affiliation agreement (as that term is proposed to be defined under
Sec. 413.86(b)), to the CMS fiscal intermediary servicing the hospital
and send a copy to CMS's Central Office no later than July 1 of the
residency program year during which the affiliation agreement will be
in effect.
There must be a rotation of a resident(s) among the
hospitals participating in the affiliated group during the term of the
affiliation agreement, such that more than one of the hospitals counts
the proportionate amount of the time spent by the resident(s) in their
FTE resident counts. (However, no resident may be counted in the
aggregate as more than one FTE.) This requirement is intended to ensure
that the participating hospitals maintain a ``cross-training''
relationship during the term of the affiliation agreement.
The net effect of the adjustments (positive or negative)
on the affiliated hospitals' aggregate FTE cap for each affiliation
agreement must not exceed zero.
If the affiliation agreement terminates for any reason,
the FTE cap for each hospital in the affiliated group will revert to
the individual hospital's pre-affiliation FTE cap.
Except for the proposed new Sec. 413.86(g)(7)(iv) regarding the
treatment of FTE caps after termination of the affiliation agreement,
each provision of proposed new Sec. 413.86(g)(7) was explicitly derived
from policy stated in the May 12, 1998 final rule (63 FR 26336). We
proposed
[[Page 50070]]
to incorporate in regulations policy that was previously established
under the formal rulemaking process.
We proposed a change in policy concerning what happens to each
participating affiliated hospital's FTE cap when an affiliation
agreement terminates (proposed new Sec. 413.86(g)(7)(iv)). In the
preamble of the May 12, 1998 final rule (63 FR 26339), we stated:
``Each agreement must also specify the adjustment to each respective
hospital cap in the event the agreement terminates, dissolves, or, if
the agreement is for a specified time period, for residency training
years and cost reporting periods subsequent to the period of the
agreement for purposes of applying the FTE cap on an aggregate basis.
In the absence of an agreement on the FTE caps for each respective
institution following the end of the agreement, each hospital's FTE cap
will be the indirect and direct medical education FTE count from each
hospital's cost reporting period ending in 1996 and the cap will not be
applied on an aggregate basis.'' Our purpose for allowing hospitals to
redistribute their FTE caps (within the limits of the aggregate FTE
caps) upon the termination of an affiliation was to enable hospitals by
agreement to more closely reflect the realities of the residency
rotational arrangement. However, in practice, very few hospitals have
altered their FTE caps following termination of affiliation agreements.
Rather, in virtually every agreement, hospitals opted to revert to
their respective 1996 FTE caps upon the termination of an affiliation.
In addition, we have found that our existing policy is susceptible to
abusive practices that do not comport with our original purpose for
allowing redistribution of FTE caps among hospitals following
termination of an affiliation agreement. We have learned of a number of
instances in which one hospital (Hospital A) affiliated with another
hospital (Hospital B) in anticipation of Hospital B's closure at some
point during the residency program year. In these instances, the
affiliation agreement was made solely for the purpose of obtaining a
permanent adjustment to Hospital A's FTE cap through the terms of the
termination clause. As we explained in the preamble to the May 9, 2002
proposed rule, we do not believe these permanent FTE cap adjustments
that result from hospital closures (or any other circumstances) were
intended when Congress passed the provision on affiliation agreements.
As stated above, we believe affiliations were meant to provide
flexibility for hospitals in the rotations of residents where, in the
normal course of an affiliation between two or more hospitals, the
actual number of residents training at each hospital may vary somewhat
from year to year. Affiliations were not intended to be used as a
vehicle for circumventing the statutory hospital-specific FTE cap on
the number of residents. In addition, we have separately addressed
issues that arise when residents are displaced because of a hospital
closure. We have in place a policy at existing Sec. 413.86(g)(8) (which
was proposed to be redesignated as Sec. 413.86(g)(9) in the May 9, 2002
proposed rule) that permits temporary FTE cap adjustments for hospitals
that take on the training of residents displaced by the closure of
another hospital.
Therefore, in the May 9, 2002 proposed rule, we proposed that,
effective October 1, 2002, for hospitals with affiliation agreements
that terminate (for any reason) on or after that date, the direct and
indirect FTE caps for each hospital in the affiliated group will revert
back to each individual hospital's original FTE cap prior to the
affiliation (proposed new Sec. 413.86(g)(7)(iv)). This policy would not
preclude the participating hospitals from entering into additional
affiliation agreements for later residency years.
Since the proposed policy would be effective for agreements that
terminate on or after October 1, 2002, hospitals that have already
received a permanent FTE cap adjustment from their fiscal
intermediaries through the existing termination clause policy would
retain those cap adjustments.
We also proposed to make a conforming clarification at
Sec. 412.105(f)(1)(vi) for purposes of IME payments.
Definition of ``Affiliation Agreement'' and the Requirements at Revised
Sec. 413.86(g)(7)
Comment: Several commenters were concerned about our requirement at
proposed Sec. 413.86(b) in the definition of ``affiliation agreement''
that the agreement specify FTE cap adjustments based on a 12-month
period that begins July 1 and ends June 30. Many commenters believed
that the requirement should be changed so that hospitals may execute
affiliation agreements at any time during the year. One commenter
believed that since, regardless of the date it is executed, the
resident count set forth in the agreement must be reconciled with the
hospital's cost reporting period, permitting hospitals to execute
agreements throughout the year would reduce the hospital's
administrative burdens without imposing much, if any, additional
hardship on Medicare program administration. Another commenter
suggested that CMS could delay the filing date for affiliations from
July 1 until either the first day of a hospital's next cost reporting
period beginning after commencement of the July 1 residency period, or
October 1, whichever time period is longer.
Response: We set a July 1 deadline for submission of affiliation
agreements (proposed Sec. 413.86(g)(7)(i)), as well as specifications
of FTE cap adjustments in the affiliation agreements, based on the July
1 residency training year because we believed that choosing one date
was administratively less burdensome to our fiscal intermediaries for
purposes of audit of the participating hospitals' Medicare cost
reports. In addition, we chose July 1 because we believe that date is
the start date of virtually all residency training programs across all
specialties. We would be more sympathetic to the commenters' request
for changes in the execution date if we had heard of residency training
programs that begin on dates other than July 1. Until we hear of
specific programs that begin on other than July 1, we continue to
believe that it is appropriate and consistent with efficient
administration of the Medicare program to maintain the existing policy
based on the July 1 residency training program year. We believe that it
is not only less burdensome for our fiscal intermediaries (as well as
CMS) to receive affiliation agreements at one point in the year alone,
but we also believe it is less burdensome to participating hospitals.
We believe that the vast majority of participating hospitals will know
prior to July 1 how many residents will be training at the hospital in
any given residency program year and how many residents would be
rotating in from other hospitals.
Comment: One hospital commenter described a situation in which its
existing affiliation agreement with another hospital, which was
submitted to the fiscal intermediary with a copy to CMS (at that time
HCFA) Central Office on July 1, 1998, states that the affiliation
agreement ``shall continue in effect on an indefinite basis until
terminated by the agreement of all Hospitals * * * of the affiliated
group.'' The commenter asked us whether this term language meets the
requirements in the proposed rule.
The same commenter mentioned that its affiliation agreement from
1998 does not specify each participating hospital's direct and indirect
FTE cap, ``as this was not required in the August 29, 1997,
[[Page 50071]]
and May 12, 1998 final rules.'' In addition, the commenter asked
whether changes in a hospital's FTE caps can be accounted for under the
proposed rule. Finally, the commenter asked whether documents other
than the affiliation agreement, such as attachments to the affiliation
agreement, can be used to identify a hospital's direct and indirect FTE
caps.
Response: As we proposed at Sec. 413.86(b), each affiliation
agreement should specify the term of the agreement ``which at a minimum
is one year,'' beginning on July 1 of a year. We stated similarly in
the May 12, 1998 final rule on affiliation agreements (63 FR 26341)
that ``each agreement must be for a minimum of one year.'' However,
there is nothing to prohibit affiliation agreements from being
automatically renewable each year or from being for terms greater than
one year in length. Therefore, the language that the commenter
apparently used in its affiliation agreement would meet existing
Medicare policy on affiliation agreements and their effectiveness. As
long as the affiliation agreements cover a period of time of at least
one year beginning July 1 of a year, the affiliation agreements meet
the term requirement at Sec. 413.86(b).
To address the commenter's statement that it did not report the
direct and indirect GME FTE caps for the participating hospitals in its
affiliation agreement because it was not previously required to do so,
we stated clearly in the May 12, 1998 interim final rule that hospitals
must specify the ``planned changes to individual hospital counts under
an aggregate FTE cap'' (63 FR 26341). Although, under existing policy,
hospitals might have reported ``planned changes'' to FTE caps in a
number of ways, there is no question that they were required to do so.
The revised requirements at Sec. 413.86(b) specify that the hospital
must include in the affiliation agreement each participating hospital's
direct and indirect GME FTE caps in effect prior to the affiliation.
The reason for requiring that affiliation agreements specify the direct
and indirect FTE caps for participating hospitals is so that all
hospitals will report the ``planned changes'' in the same way, allowing
for ease of administration for CMS and fiscal intermediaries.
We also understand that some hospitals qualify for other FTE cap
adjustments, such as those for new programs under
Sec. 413.86(g)(6)(ii). Hospitals would report their most current FTE
caps in effect in the period immediately prior to the effective date of
the affiliation for both direct GME and indirect medical education, so
that the caps are reflective of the other FTE cap adjustments.
To respond to the commenter's question about whether attached
documents to the affiliation agreement will suffice to identify direct
and indirect GME FTE caps, we believe attached documents would be
adequate, so long as they are considered part of the overall package of
the affiliation agreement. We have stated repeatedly to the provider
community that affiliation agreements need not be lengthy documents. In
the past, we have received affiliation agreements that range in length
from 2 pages to 30 pages. Each type of agreement (short or long) would
be adequate as long as the affiliation agreement meets the provisions
under proposed Sec. 413.86(b).
Comment: One commenter asked how the proposed rule contemplates
handling changes in the hospital's FTE adjustments if actual rotations
in a given residency year turn out differently than what was stated in
the affiliation agreement at the start of the residency year on July 1.
Response: We stated in the May 12, 1998 final rule (63 FR 26339)
that the hospitals in the affiliated group may submit modifications to
the initially reported distribution of the aggregate FTE count by June
30 of the current residency training year, if actual FTE counts for the
program year are different than projected in the original agreement.
While modifications to the original distribution of the aggregate FTE
cap are permitted in order to allow for some fluctuations based on the
actual placement of those residents within the affiliated hospitals,
the overall affiliation agreement cannot be modified (for example, by
adding other hospitals to increase the original aggregate cap). In most
cases, we expect that the modifications to the affiliation agreements,
which should be signed by all participating hospitals and submitted to
the fiscal intermediary, will reflect the realities of what actually
occurred as far as the number of residents that rotated in and out of
each hospital during the program year. Accordingly, we would be
skeptical of modifications that deviate significantly from the original
affiliation agreement.
Comment: One commenter that suggested a technical change in the
terminology for affiliation agreements to ``resident limit aggregation
agreements'' or ``aggregation agreements.'' The commenter believed that
``affiliation agreement'' historically is a term of art in the academic
community and generally relates to agreements made between hospitals
and medical schools or among sponsors of medical residency education
programs.
Response: We are aware that there has been some confusion at times
among members of the provider community when using the term
``affiliation agreement,'' and we recognize that the term is utilized
in contexts other than in the Medicare usage of the term for GME
payment. However, we believe the Medicare use of the term is an
appropriate one, rather than ``aggregation agreement'' or ``resident
limit aggregation agreement.'' We note that section 1886(h)(4)(H)(ii)
of the Act uses the term ``affiliated group'' and contemplates that the
Secretary will define that term. Further, as we stated above, the point
of the policy is that there are ``affiliations'' among the
participating hospitals; that is, rotations of residents among the
hospitals for purposes of applying the Medicare FTE caps. Therefore, we
are not adopting the commenter's suggested technical change.
Cross-Training Requirement
Comment: Numerous commenters inquired about or addressed our
proposal at Sec. 413.86(g)(7)(ii) to clarify in regulations the
requirement of a rotation of residents among the hospitals
participating in every affiliated group. One commenter agreed that this
requirement is appropriate in regard to nonrelated hospitals that join
together in an affiliation agreement, since the cross-training is the
only basis for the affiliation. However, the commenter believed it
should not be applied to affiliation agreements involving only commonly
owned or related hospitals because commonly owned hospitals in an
affiliated group are already held to the aggregate resident cap. The
commenter believed it is unnecessary and burdensome to add a further
requirement that each hospital participate in a rotation to other
hospitals in order to be included as part of the affiliated group.
Another commenter disagreed that this provision on cross-training
between all hospitals in an affiliated group joined by common ownership
is a clarification instead of a new rule. Consequently, this commenter
believed the implementation of the cross-training provision should be
prospective and deferred to become effective with affiliations
beginning July 1, 2003. The commenter stated that if its proposal is
not accepted, hospitals not in compliance should be given an
opportunity to file a new affiliation agreement rather than forfeit the
ability to affiliate altogether for the 2002-2003 period.
[[Page 50072]]
Response: We disagree with the commenter's statement that commonly
owned hospitals in an affiliated group are ``already'' held to the
aggregate resident cap. Hospitals are only held to an aggregate
resident cap through the act of entering into a Medicare affiliation
agreement, and a Medicare affiliation is not valid without the
existence of a cross-training relationship. Our proposal to add an
explicit cross-training requirement at Sec. 413.86(g)(7)(ii) resulted
from our belief that all hospitals that affiliate, regardless of the
criteria under which they qualify to affiliate, should meet the cross-
training requirement. The intent of affiliated groups is to provide
flexibility within the FTE caps to hospitals that have a rotational
relationship; affiliated groups are not meant to serve as a mechanism
for circumventing the FTE caps. However, we acknowledge that the
existing definition of ``affiliated group'' at Sec. 413.86(b) is silent
with respect to whether the cross-training requirement applies to
hospitals that affiliated based on the common ownership criterion.
Nevertheless, we emphasize that the proposed cross-training
requirement is derived from a broad-based cross-training policy
expressed in previous final rules applying to all affiliated groups,
including hospitals affiliated under common ownership. Specifically, in
the May 12, 1998 final rule (63 FR 26336) we state, ``The criteria we
established to determine whether two or more hospitals qualify to be an
affiliated group were designed to identify hospitals that have
relationships for training residents and to allow those hospitals to
continue to have the flexibility to rotate residents under an aggregate
FTE cap.'' Further, we initially amended the definition of an
affiliated group at Sec. 413.86(b) (63 FR 26337) to include hospitals
under common ownership in response to a commenter's statement that
hospitals under a single health care system ``* * * functionally
operate coordinated and centrally controlled GME programs and often
rotate their residents among their various facilities depending on
training needs and other considerations'' (emphasis added). Finally, we
state, ``A hospital will be permitted to engage in multiple agreements
with different hospitals, as illustrated below. For example, hospital A
can have an agreement with hospital B for an internal medicine program
and another agreement with hospital C for emergency medicine. Although
hospitals B and C do not have an agreement for any program, the
affiliated group is A, B, and C; that is, the FTE resident counts at
hospitals A, B, and C cannot exceed the sum of the combined caps for
the three hospitals'' (63 FR 26338-26339).
Therefore, to be consistent with the cross-training requirement we
proposed at Sec. 413.86(g)(7)(ii), we are adding a reference to the
cross-training requirement in paragraph (3) of the definition of
``affiliated group'' under Sec. 413.86(b). However, because our
existing definition of affiliated group did not explicitly state the
cross-training requirement for hospitals that affiliate based on common
ownership, we recognize that our policy may have been subject to
misinterpretation. Therefore, we are making this cross-training
requirement for hospitals under common ownership effective for
affiliation agreements beginning July 1, 2003, the date of the first
training year beginning after publication of the final regulation.
Accordingly, hospitals that have affiliated under the common ownership
criterion but have not met, or currently are not meeting, the
rotational requirement are not required to meet the cross-training
requirement until July 1, 2003.
We also address the application of the cross-training requirement
at Sec. 413.86(g)(7)(ii) to the other bases for affiliation listed in
the definition of ``affiliated group'' at existing regulations at
Sec. 413.86(b). Concerning hospitals located in the same urban or rural
area or in contiguous areas, we believe that application of the cross-
training requirement is explicit in existing policy and not a change.
We believe that the existing regulations clearly express the cross-
training requirement that residents must rotate among hospitals within
the affiliated group during the course of the program. Paragraph (1) of
the existing definition states that hospitals may qualify as an
affiliated group if the hospitals are in the same urban or rural area
or in contiguous areas, and ``if individual residents work at each of
the hospitals during the course of the program.'' However, to maintain
consistency, we are revising the language under paragraph (1) of the
definition of an ``affiliated group'' to reference the new cross-
training language at Sec. 413.86(g)(7)(ii).
The language in paragraph (2) of the existing definition of
``affiliated group'' comes from the May 12, 1998 final rule (63 FR
26358). When we issued this language at existing paragraph (2)
regarding affiliations of hospitals that are jointly listed as the
sponsor of a program, we did not explicitly restate the cross-training
requirement because it was assumed that these hospitals, by virtue of
joint sponsorship, already meet the cross-training requirement.
However, to be consistent, and to further emphasize that the cross-
training requirement applies to all affiliating hospitals, we are also
adding an explicit cross-training requirement at paragraph (2) in the
definition of ``affiliated group'' under Sec. 413.86(b) by referencing
Sec. 413.86(g)(7)(ii).
Comment: One commenter stated that our requirement concerning the
cross-training of residents within an affiliated group is unwarranted
due to the establishment of a single FTE cap for each hospital, rather
than program-specific FTE caps for each hospital. The commenter
contended that hospitals that agree to affiliate should be allowed to
manage training of residents in a manner that ensures the most
appropriate training is received, even if this means that there is no
cross-training of residents. The commenter included the following
example:
AB Health system operates a pediatrics program and a geriatrics
program in two hospitals, A and B. Individual hospital 1996 FTE caps
were established at 10 FTEs for Hospital A and 10 FTEs for Hospital B.
Historically, residents in both programs rotated between both
hospitals. In 2002, the programs were reorganized so that Hospital A
now specializes in pediatrics and Hospital B now specializes in
geriatrics, and as a result, the hospitals no longer cross-train
residents. Hospital A currently trains 12 pediatric FTEs and Hospital B
currently trains 8 geriatric FTEs.
The commenter explained that the cross-training requirement would
effectively reduce the number of residents Medicare will recognize AB
Health System in 2002 by 2 FTEs less than the number in 1996. The
commenter asserted that, accordingly, the cross-training requirement is
inconsistent with our establishment of one overall FTE cap per
hospital.
Response: As we stated above, the provision for affiliated groups
was included by Congress to accommodate hospitals that have an existing
rotational relationship. It was understood that because of the movement
of residents between hospitals, the number of residents at each
hospital could vary each year. Therefore, because of these existing
rotational arrangements, Congress intended to allow hospitals to
aggregate and modify the FTE caps on a temporary basis. We do not
believe it is appropriate to allow hospitals that do not have a
rotational relationship to aggregate their FTE caps simply as a means
of maximizing their Medicare reimbursement. However, we note, as we
have stated above, hospitals that
[[Page 50073]]
affiliate under the common ownership criteria do not have to meet the
cross-training requirement until July 1, 2003.
We emphasize again that the cross-training requirement for
affiliations is not a new concept in policy regarding Medicare
affiliated groups. Indeed, the May 12, 1998 final rule repeatedly
stated the idea that the policy was established in order to ``allow
those hospitals to continue to have the flexibility to rotate residents
under an aggregate FTE cap'' (63 FR 26336). However, because much
confusion or concern has been expressed in numerous inquiries and among
several commenters about the proposed clarification of the cross-
training requirement, particularly when it relates to the common
ownership scenario, we are amending our regulations to further specify
how the cross-training requirement will be applied in each of the
scenarios for affiliated groups, including common ownership.
Specifically, we are revising Sec. 413.86(g)(7)(ii) to read as follows:
Each hospital in the affiliated group must have a shared
rotational arrangement, as defined in Sec. 413.86(b), with at least
one other hospital within the affiliated group, and all the
hospitals within the affiliated group must be connected by a series
of such shared rotational arrangements.
We are specifying here and also at Sec. 413.86(b) that ``shared
rotational arrangement'' means a residency training program under which
a resident(s) participates in training at two or more hospitals in that
program. If residents rotate from one hospital to another at some point
during the period of years required to complete training in a
particular program, those hospitals have a ``shared rotational
arrangement.'' In addition, all the hospitals within the affiliated
group must be connected by a series of shared rotational arrangements.
In other words, in order for the cross-training requirement to be met,
there must be, at a minimum, a ``chain'' of rotations occurring from
one hospital to the next within the affiliated group. For example,
assume Hospitals A, B, C, and D form an affiliated group. Hospital A
and Hospital B both train residents in an internal medicine program. In
addition, Hospital B trains surgery residents, who also spend time
training at Hospital C. Hospital C and Hospital D both operate an
anesthesiology program and anesthesiology residents train in both
Hospital C and Hospital D. Thus, Hospitals A and B, Hospitals B and C,
and Hospitals C and D are connected by a series of shared rotational
arrangements. This arrangement meets the cross-training requirement.
All hospitals do not have to cross-train residents; this means that
Hospital A does not have to send residents to Hospital B, Hospital C,
and Hospital D, nor does Hospital B have to send residents to Hospital
A, Hospital C, and Hospital D, nor does Hospital C have to send
residents to Hospital A, Hospital B, and Hospital D, etc. A continuous
linear chain is sufficient.
In another example of a ``shared rotational arrangement,'' Hospital
A and Hospital B affiliate and they both offer training in family
practice. If, at some point during the 3 years required to complete the
family practice program, residents rotate from either Hospital A to
Hospital B, Hospital B to Hospital A, or back and forth between
Hospital A and Hospital B, then Hospital A and Hospital B have a
``shared rotational arrangement.'' Hospitals A and B may meet the
definition of a ``shared rotational arrangement'' by rotating residents
for a portion of a particular program year (PGY), or by rotating
residents for an entire program year, so long as the family practice
residents spend time at both hospitals to complete their training in
family practice. For example, family practice residents may spend 3
months of their PGY1 at Hospital A and 9 months at Hospital B, or, the
residents may spend their entire PGY1 training at Hospital A, and spend
their entire PGY2 and PGY3 training at Hospital B. In either case,
Hospital A and Hospital B have a shared rotational arrangement because
they rotate residents over the course of a common training program.
Following are some examples of arrangements that do not meet the
cross-training requirement:
Hospitals A and B train residents at their respective
hospitals but do not rotate residents between the 2 hospitals.