[Federal Register Volume 67, Number 169 (Friday, August 30, 2002)]
[Rules and Regulations]
[Pages 55954-56090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-22016]



[[Page 55953]]

-----------------------------------------------------------------------

Part III





Department of Health and Human Services





-----------------------------------------------------------------------



Centers for Medicare & Medicaid Services



-----------------------------------------------------------------------



42 CFR Parts 412, 413, and 476



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

  Federal Register / Vol. 67, No. 169 / Friday, August 30, 2002 / Rules 
and Regulations  

[[Page 55954]]


-----------------------------------------------------------------------

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 412, 413, and 476

[CMS-1177-F]
RIN 0938-AK69


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

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

ACTION: Final rule.

-----------------------------------------------------------------------

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

EFFECTIVE DATE: The provisions of this final rule are effective on 
October 1, 2002.

FOR FURTHER INFORMATION CONTACT:   
Tzvi Hefter, (410) 786-4487 (General information)
Judy Richter, (410) 786-2590 (General information, transition payments, 
payment adjustments, and onsite discharges and readmissions)
Michele Hudson, (410) 786-5490 (Calculation of the payment rates, 
relative weights and case-mix index, update factors, and payment 
adjustments)
Tiffany Eggers, (410) 786-0400 (Short-stay outliers, interrupted stays)
Ann Fagan, (410) 786-5662 (Patient classification system)
Miechal Lefkowitz, (410) 786-5316 (High-cost outliers, capital 
payments, budget neutrality, market basket, and data sources)
Linda McKenna, (410) 786-4537 (Payment adjustments and transition 
period)

SUPPLEMENTARY INFORMATION:   

Availability of Copies and Electronic Access

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

Table of Contents

I. General Background
II. Publication of Proposed Rulemaking
III. Overview of the Current Payment System for LTCHs
    A. Exclusion of Certain Facilities from the Acute Care Hospital 
Inpatient Prospective Payment System
    B. Requirements for LTCHs to be Excluded from the Acute Care 
Hospital Inpatient Prospective Payment System
    C. Payment System Requirements Prior to the BBA
    D. Effects of the Current Payment System
    E. Research and Discussion of a Prospective Payment System for 
LTCHs Prior to the BBA
IV. Requirements of the BBA, BBRA, and BIPA for LTCHs
    A. Provisions of the Current Payment System
    1. BBA
    2. BBRA
    3. BIPA
    B. Provisions for a LTCH Prospective Payment System
    1. BBA
    2. BBRA
    3. BIPA
V. Research and Data Supporting the Establishment of the LTCH 
Prospective Payment System`
    A. Legislative Requirements
    B. Description of Sources of Research Data
    C. The Universe of LTCHs
    1. Background Issues
    2. General Medicare Policies
    3. Exclusion from the Acute Care Hospital Inpatient Prospective 
Payment System
    4. Geographic Distribution
    5. Characteristics by Date of Medicare Participation
    6. Hospitals-Within-Hospitals and Satellite Facilities
    7. Specialty Groups of LTCHs by Patient Mix
    8. Sources and Destinations of LTCH Patients
    9. LTCHs and Patterns Among Postacute Care Facilities
    D. Overview of Systems Analysis for the LTCH Prospective Payment 
System
    E. Evaluation of DRG-Based Patient Classification Systems
VI. Recommendations by MedPAC for a LTCH Prospective Payment System
VII. Evaluated Options for the Prospective Payment System for LTCHs
VIII. Elements of the LTCH Prospective Payment System
    A. Overview of the System
    B. Applicability
    1. Criteria for Classification
    2. Change in the Average 25-Day Total Inpatient Stay Requirement
    3. LTCHs Not Subject to the LTCH Prospective Payment System
    C. Limitation on Charges to Beneficiaries
    D. Medical Review Requirements
    E. Furnishing of Inpatient Hospital Services Directly or Under 
Arrangements
    F. Reporting and Recordkeeping Requirements
    G. Transition Period for Implementation of the LTCH Prospective 
Payment System
    H. Implementation Procedures
IX. Long-Term Care Diagnosis-Related Group (LTC-DRG) Classifications
    A. Background
    B. Historical Exclusion of LTCHs
    C. Patient Classifications by DRGs
    1. Objectives of the Classification System
    2. DRGs and Medicare Payments
    D. LTC-DRG Classification System for LTCHs
    E. ICD-9-CM Coding System
    1. Historical Use of ICD-9-CM Codes
    2. Uniform Hospital Discharge Data Set (UHDDS) Definitions
    3. Maintenance of the ICD-9-CM Coding System
    4. Coding Rules and Use of ICD-9-CM Codes in LTCHs
X. Payment System for LTCHs
    A. Development of the LTC-DRG Relative Weights
    1. Overview of Development of the LTC-DRG Relative Weights
    2. Steps for Calculating the Relative Weights
    B. Special Cases: General
    C. Special Cases: Short-Stay Outliers
    D. Discussion of Proposed Policy on Payment for Very Short-Stay 
Discharges
    E. Special Cases: Interrupted Stay
    F. Other Special Cases
    G. Onsite Discharges and Readmittances
    H. Additional Issues for Onsite Facilities
    I. Monitoring System
    J. Payment Adjustments
    1. Area Wage Adjustment
    2. Adjustment for Geographic Reclassification

[[Page 55955]]

    3. Adjustment for Disproportionate Share of Low-Income Patients
    4. Adjustment for Indirect Teaching Costs
    5. Cost-of-Living Adjustment (COLA) for Alaska and Hawaii
    6. Adjustment for High-Cost Outliers
    K. Calculation of the Standard Federal Payment Rate
    1. Overview of the Development of the Standard Payment Rate
    2. Development of the Standard Federal Payment Rate
    L. Development of the Federal Prospective Payments
    M. Computing the Adjusted Federal Prospective Payments
    N. Transition Period
    O. Payments to New LTCHs
    P. Method of Payment
XI. Provisions of the Final Rule
XII. Regulatory Impact Analysis
    A. Introduction
    1. Executive Order 12866
    2. Regulatory Flexibility Act (RFA)
    3. Impact on Rural Hospitals
    4. Unfunded Mandates
    5. Federalism
    B. Anticipated Effects
    1. Budgetary Impact
    2. Impact on Providers
    3. Calculation of Current Payments
    4. Calculation of Prospective Payments
    5. Results
    6. Effect on the Medicare Program
    7. Effect on Medicare Beneficiaries
    8. Computer Hardware and Software
    C. Alternatives Considered
    D. Executive Order 12866
XIII. Collection of Information Requirements
Regulations Text
Addendum--Tables
Appendix A--Market Basket for LTCHs
Appendix B--Update Framework

Acronyms

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

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

I. General Background

    When the Medicare statute was originally enacted in 1965, Medicare 
payment for hospital inpatient services was based on the reasonable 
costs incurred in furnishing services to Medicare beneficiaries. 
Section 223 of the Social Security Act Amendments of 1972 (Pub. L. 92-
603) amended section 1861(v)(1) of the Social Security Act (the Act) to 
set forth limits on reasonable costs for hospital inpatient services. 
Section 101(a) of the Tax Equity and Fiscal Responsibility Act of 1982 
(TEFRA) (Pub. L. 97-48) amended the Medicare statute to limit payment 
by placing a cap on allowable costs per discharge. Section 601 of the 
Social Security Amendments of 1983 (Pub. L. 98-21) added section 
1886(d) to the Act that replaced the reasonable cost-based payment 
system for most hospital inpatient services. Section 1886(d) of the Act 
provides for a prospective payment system for the operating costs of 
acute care hospital inpatient stays, effective with hospital cost 
reporting periods beginning on or after October 1, 1983.
    Although most hospital inpatient services became subject to the 
acute care hospital inpatient prospective payment system, certain 
specialty hospitals are excluded from that system. These hospitals 
included long-term care hospitals (LTCHs), rehabilitation and 
psychiatric hospitals, rehabilitation and psychiatric units of acute 
care hospitals, and children's hospitals. Cancer hospitals were added 
to the list of excluded hospitals by section 6004(a) of the Omnibus 
Budget Reconciliation Act of 1989 (Pub. L. 101-239).
    Subsequent to the implementation of the acute care hospital 
inpatient prospective payment system, both the number of excluded 
hospitals and Medicare payments to these hospitals grew rapidly. 
Consequently, Congress enacted various provisions in the Balanced 
Budget Act (BBA) (Pub. L. 105-33), the Medicare, Medicaid, and SCHIP 
[State Children's Health Insurance Program] Balanced Budget Refinement 
Act of 1999 (BBRA) (Pub. L. 106-113), and the Medicare, Medicaid, and 
SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. L. 
106-554) to provide for the development and implementation of a 
prospective payment system for the following excluded hospitals:
     Rehabilitation hospitals (including units in acute care 
hospitals).
     Psychiatric hospitals (including units in acute care 
hospitals.
     LTCHs.
    Section 4422 of the BBA mandated that the Secretary develop a 
legislative proposal, for presentation to the Congress by October 1, 
1999, for a case-mix adjusted LTCH prospective payment system under the 
Medicare program. This system was to include an adequate patient 
classification system that reflects the differences in patient resource 
use and costs among LTCHs. Furthermore, in developing the legislative 
proposal for the prospective payment system, the Secretary was to 
consider several payment methodologies, including the feasibility of an 
expansion of the acute care hospital inpatient prospective payment 
system (diagnosis-related group (DRG) based system) established under 
section 1886(d) of the Act.
    In the interim, section 4414 of the BBA imposed national limits (or 
caps) on hospital-specific target amounts (that is, the annual per 
discharge limit) for these excluded hospitals until cost reporting 
periods beginning on or after October 1, 2002. At the same time that 
the Congress modified the payment system based on limits on target 
amounts, it also included a provision in the BBA to require the 
Secretary to develop a legislative proposal for establishing a 
prospective payment system for LTCHs.
    With the passage of the BBRA in November 1999, in section 122, the 
Congress refined some policies of the BBA before the implementation of 
the prospective payment systems for LTCHs and psychiatric hospitals and 
units. Section 123 of the BBRA further requires that the Secretary 
develop a per discharge, DRG-based system for LTCHs and requires that 
this system be described in a report to the Congress by

[[Page 55956]]

October 1, 2001, and be in place by October 1, 2002. Section 307(b)(1) 
of BIPA modified the BBRA's requirements for the prospective payment 
system for LTCHs by mandating that the Secretary'' * * * shall examine 
the feasibility and the impact of basing payment under such a system on 
the use of existing (or refined) hospital diagnosis-related groups 
(DRGs) that have been modified to account for different resource use of 
long-term care hospital patients as well as the use of the most 
recently available hospital discharge data.'' Furthermore, section 
307(b)(1) of BIPA provided that the Secretary'' * * * shall examine and 
may provide for appropriate adjustments to the long-term hospital 
prospective payment system, including adjustments to DRG weights, area 
wage adjustments, geographic reclassification, outliers, updates, and a 
disproportionate share adjustment * * *.'' In the event that the 
Secretary is unable to implement the LTCH prospective payment system by 
October 1, 2002, section 307(b)(2) of BIPA requires the Secretary to 
implement a prospective payment system using the existing hospital 
DRGs, modified when feasible, to account for resource use by LTCHs.
    (We note that, even though the LTCH prospective payment system in 
this final rule is effective for cost reporting periods that begin on 
or after October 1, 2002, we will not have computer system changes in 
place that are necessary to accommodate claims processing and payment 
under the prospective payment system until after January 1, 2003. As of 
October 16, 2002, a LTCH that is required to comply with the HIPAA 
Administrative Simplification Standards must submit electronic claims 
to the fiscal intermediary in compliance with 42 CFR 162.1002 and 45 
CFR 162.1102, using the ICD-9-CM coding system, unless the LTCH obtains 
an extension in compliance with the Administrative Compliance Act (Pub. 
L. 107-105). Beginning October 16, 2003, LTCHs that obtained an 
extension and that are required to comply with the HIPAA Administrative 
Simplification Standards must start submitting electronic claims in 
compliance with the HIPPA regulations cited above, among others. We 
intend that, as of January 1, 2003, the fiscal intermediary will 
reconcile the payment amounts that have been made to LTCHs for all 
covered inpatient hospital services furnished to Medicare beneficiaries 
from cost reporting periods that begin on or after October 1, 2002 
until the date of the systems implementation, with the amounts that are 
payable under the LTCH prospective payment methodology. Since LTCHs 
will receive payment under the LTCH prospective payment system at the 
start of their first cost reporting periods that begin on or after 
October 1, 2002, only those LTCHs with cost reporting periods starting 
October 1, 2002 until the date of the systems implementation will 
experience the payment reconciliation necessitated by this differential 
period. We also emphasize that the claims submission procedure of using 
ICD-9-CM codes will not change following the systems implementation of 
the LTCH prospective payment system. A detailed discussion on the 
operational procedures for this differential period appears in sections 
VIII.H. and X.N. of this final rule.)

II. Publication of Proposed Rulemaking

    On March 22, 2002, we published a proposed rule in the Federal 
Register (67 FR 13416) that set forth the proposed Medicare prospective 
payment system for LTCHs as authorized under Public Law 106-113 and 
Public Law 106-554. In accordance with the requirements of section 123 
of Public Law 106-113, as modified by section 307(b) of Public Law 106-
554, we proposed to implement a prospective payment system for LTCHs to 
replace the current reasonable cost-based payment system under TEFRA. 
The proposed prospective payment system used information from LTCH 
patient records to classify patients into distinct DRGs based on 
clinical characteristics and expected resource needs. Separate payments 
would be calculated for each DRG with additional adjustments applied.
    In the proposed rule and in this final rule, we discuss the 
development, policies, and implementation of the LTCH prospective 
payment system. These discussions in this final rule include the 
following:
     An overview of the current payment system for LTCHs 
(section III.).
     A discussion of the statutory requirements for developing 
and implementing a LTCH prospective payment system (section IV.).
     A discussion of research findings on LTCHs (section V.).
     A detailed discussion of the LTCH prospective payment 
system, including the patient classification system (section IX.), 
relative weights (section X.A.), payment rates (section X.B.), 
additional payments (section X.C.), and the budget-neutrality 
requirements (section X.F.) mandated by section 123 of Pub. L. 106-113.
     An analysis of the estimated impact of the LTCH 
prospective payment system on the Federal budget and LTCHs (section 
XII.).
     Changes to existing regulations and the establishment of 
regulations in 42 CFR Chapter IV to implement the LTCH prospective 
payment system.
    We designed the prospective payment system for LTCHs with the 
following objectives:
     To base the prospective payment system on an analysis of 
the best information and data available.
     To establish a payment model using our experience in 
implementing other prospective payment systems.
     To provide incentives to control costs and to furnish 
services as efficiently as possible.
     To base payment on clinically coherent categories and to 
appropriately reflect average resource needs across different 
categories.
     To minimize opportunities and incentives for 
inappropriately maximizing Medicare payments.
     To establish a system that is beneficiary centered by 
formulating procedures for quality monitoring.
     To develop a system that is administratively feasible.
    We received a total of 52 timely items of correspondence containing 
multiple comments on the proposed rule. The major issues addressed by 
the commenters included: the criteria for determining the 25-day 
average length of stay for LTCHs; payment adjustments for area wage 
differences; payments for special cases of short stays and interrupted 
stays; and data sources used to compute the prospective payments. 
Summaries of the public comments received and our responses to those 
comments are set forth below under the appropriate subject heading.

III. Overview of the Current Payment System for LTCHs

A. Exclusion of Certain Facilities From the Acute Care Hospital 
Inpatient Prospective Payment System

    Although payment for operating costs of most hospital inpatient 
services became subject to a prospective payment system under the 
Social Security Amendments of 1983 (Pub. L. 98-21), which added section 
1886(d) to the Act, certain types of hospitals and units were excluded 
from that payment system. Section 1886(d)(1)(B) of the Act lists the 
following classes of excluded hospitals:
     Psychiatric hospitals and units.
     Rehabilitation hospitals and units.
     LTCHs.
     Children's hospitals.
    Effective with cost reporting periods beginning on or after October 
1, 1989,

[[Page 55957]]

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

B. Requirements for LTCHs to be Excluded From the Acute Care Hospital 
Inpatient Prospective Payment System

    Under section 1886(d)(1)(B) of the Act, the prospective payment 
system for hospital inpatient operating costs set forth in section 
1886(d) of the Act does not apply to several specified types of 
hospitals, including LTCHs, which are defined in section 
1886(d)(1)(B)(iv)(I) of the Act as ``* * * a hospital which has an 
average inpatient length of stay (as determined by the Secretary) of 
greater than 25 days.'' Section 4417(b)(1)(B) of the BBA added section 
1886(d)(1)(B)(iv)(II) to the Act, which also provides another 
definition of LTCHs: specifically, a hospital that was first excluded 
in 1986 that has an average inpatient length of stay (as determined by 
the Secretary) of greater than 20 days and has 80 percent or more of 
its annual Medicare inpatient discharges with a principal diagnosis of 
neoplastic disease in the 12-month cost reporting period ending in FY 
1997.
    Implementing regulations at Sec. 405.471(c)(5) (now Sec. 412.23(e)) 
require the facility to have a provider agreement with Medicare to 
participate as a hospital, and an average inpatient length of stay 
greater than 25 days as calculated under the following formula: the 
average length of stay is calculated by dividing the total number of 
inpatient days (excluding leave of absence or pass days) for all 
patients by the total number of discharges for the hospital's most 
recent complete cost reporting period. The determination of whether or 
not a hospital qualifies as an LTCH is based on the hospital's most 
recently filed cost report, or if a change in the hospital's average 
length of stay is indicated, by the same method for the immediately 
preceding 6-month period (Sec. 412.23(e)(3)). (Requirements for 
hospitals seeking classification as LTCHs that have undergone a change 
in ownership, as described in Sec. 489.18, are set forth in 
Sec. 412.23(e)(3)(iii).)

C. Payment System Requirements Prior to the BBA

    Hospitals that are excluded from the acute care hospital inpatient 
prospective payment system under section 1886(d)(1)(B) of the Act are 
paid for inpatient operating costs under the provisions of Public Law 
97-248 (TEFRA) that are found in section 1886(b) of the Act and 
implemented in regulations at 42 CFR part 413. Public Law 97-248 
established payments based on hospital-specific limits for inpatient 
operating costs. A ceiling on payments to hospitals excluded from the 
acute care hospital inpatient prospective payment system is determined 
by calculating the product of a facility's base year costs (the year on 
which its target reimbursement limit is based) per discharge, updated 
to the current year by a rate-of-increase percentage, and multiplied by 
the number of total current year discharges. (A detailed discussion of 
target amount payment limits under Public Law 97-248 can be found in 
the September 1, 1983 final rule published in the Federal Register (48 
FR 39746).)
    The base year for a facility varied, depending on when the facility 
was initially determined to be a prospective payment system-excluded 
provider. The base year for facilities that were established before the 
implementation of Public Law 97-248 was 1982, when Public Law 97-248 
was enacted. For facilities established after implementation of Public 
Law 97-248 (section 1886(b) of the Act), we originally provided in the 
regulations for payment to these facilities for their full 
``reasonable'' costs for their first 3 cost reporting years, and 
allowed the facilities to choose which of those years would be used in 
the future to determine their target limit. This ``new provider'' 
period was later shortened to 2 cost reporting years (Sec. 413.40(f)(1) 
(1992)), and we designated the second cost reporting year as the cost 
reporting year used to determine the hospital's per discharge target 
amount.
    Excluded facilities whose costs were below their target amounts 
received bonus payments equal to the lesser of half of the difference 
between costs and the target amount, up to a maximum of 5 percent of 
the target amount, or the hospital's costs. For excluded facilities 
whose costs exceeded their target amounts, Medicare provided relief 
payments equal to half of the amount by which the hospital's costs 
exceeded the target amount up to 10 percent of the target amount. 
Excluded facilities that experienced a more significant increase in 
patient acuity could also apply for an additional amount under the 
regulations for Medicare exception payments (Sec. 413.40(d)).

D. Effects of the Current Payment System

    Use of postacute care services has grown rapidly in recent years 
since the implementation of the acute care hospital inpatient 
prospective payment system. The average length of stay in acute care 
hospitals has decreased, and patients are increasingly being discharged 
to postacute care settings such as LTCHs, skilled nursing facilities

[[Page 55958]]

(SNFs), home health agencies (HHAs), and inpatient rehabilitation 
facilities (IRFs) to complete their course of treatment. The increased 
use of postacute care providers, including hospitals excluded from the 
acute care hospital inpatient prospective payment system, has resulted 
in the rapid growth in Medicare payments to these hospitals in recent 
years. In addition, there has been a significant increase in the number 
of LTCHs. In 1991, there were 91 LTCHs; in 1994, 155 LTCHs; in 1999, 
225 LTCHs; in December 2000, 252 LTCHs; and in November 2001, 270 
LTCHs. Payments to postacute care providers were among the fastest 
growing providers under the Medicare program throughout the 1990s. 
(Prospective Payment Assessment Commission (ProPAC) June 1996 Report to 
Congress, p. 91.)
    LTCHs have experienced faster growth in the number of facilities 
and Medicare program payments than any other category of prospective 
payment system-excluded provider. In its June 1996 Report to Congress, 
ProPAC found that, from 1990 to 1993, payment to rehabilitation 
facilities rose about 25 percent per year, while payments to LTCHs 
increased 33 percent annually (p. 92). ProPAC also found that, from 
1991 to 1995, the number of rehabilitation facilities increased 21 
percent (from 852 in 1991 to 1,029 in 1995), while the number of LTCHs 
increased 93 percent (from 91 in 1991 to 176 in 1995) (p. 93). The best 
available Hospital Cost Report Information System (HCRIS) data indicate 
$398 million in payments for inpatient operating services to 105 LTCHs 
in FY 1993 and $1.05 billion in payments for inpatient operating 
services to 206 LTCHs in FY 1998. This amount represents more than a 
96-percent increase in the number of LTCHs and a 164-percent increase 
in payments to LTCHs in 5 years.
    In its March 1999 Report to Congress, the Medicare Payment Advisory 
Commission (MedPAC) (formerly ProPAC) stated that: ``[The] TEFRA system 
has remained in effect longer than expected partly because of 
difficulties in accounting for the variation in resource use across 
patients in exempted facilities. The unintended consequences of 
sustaining that system have been a steady growth in the number of 
prospective payment system-exempt facilities and a substantial payment 
inequity between older and newer facilities. In particular, the payment 
system encouraged new exempt facilities to maximize their costs in the 
base year to establish high cost limits. Once subject to its relatively 
high limit, a recent entrant could reduce its costs below its limit, 
resulting in reimbursement of its full costs plus bonus payment. By 
contrast, facilities that existed before they became subject to TEFRA 
could not influence their cost limits. Given the relatively low limits 
of older facilities, they are more likely to incur costs above their 
limits and thus receive payments less than their costs.'' (p. 72)
    To address concerns regarding the historical growth in payments and 
the disparity in payments to existing and newly excluded hospitals and 
units, the BBA mandated several changes to the existing payment system. 
These changes are outlined in section IV. of this preamble.

E. Research and Discussion of a Prospective Payment System for LTCHs 
Prior to the BBA

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

[[Page 55959]]

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

A. Provisions of the Current Payment System

1. BBA
    The BBA amendments to section 1886(b) of the Act significantly 
altered the payment provisions for excluded hospitals and units and 
also added other qualifying criteria for certain hospitals excluded 
from the acute care hospital inpatient prospective payment system 
(sections 4411 to 4419). Provisions of these amendments that related to 
the current payment system were explained in detail and implemented in 
the acute care hospital inpatient prospective payment system final rule 
published in the Federal Register on August 29, 1997 (62 FR 45966).
    Section 4411 of the BBA amended section 1886(b)(3)(B) of the Act 
and restricted the rate-of-increase percentages that are applied to 
each provider's target amount so that excluded hospitals and units 
experiencing lower inpatient operating costs relative to their target 
amounts receive lower rates of increase.
    Section 4412 of the BBA amended section 1886(g) of the Act to 
establish a 15-percent reduction in capital payments for excluded 
psychiatric and rehabilitation hospitals and units and LTCHs, for 
portions of cost reporting periods occurring during the period of 
October 1, 1997, through September 30, 2002.
    Section 4413(b) of the BBA amended section 1886(b)(3) of the Act to 
permit certain LTCHs to elect a rebasing of the target amount for the 
12-month cost reporting period beginning during FY 1996.
    Section 4414 of the BBA amended section 1886(b)(3) of the Act to 
establish caps on the target amounts for excluded hospitals and units 
at the 75th percentile of target amounts for similar facilities for 
cost reporting periods beginning on or after October 1, 1997, through 
September 30, 2002. These caps on the target amounts apply only to 
psychiatric and rehabilitation hospitals and units and LTCHs. Payments 
for these excluded hospitals and units are based on the lesser of a 
provider's cost per discharge or its hospital-specific cost per 
discharge, subject to this cap.
    Section 4415 of the BBA amended section 1886(b)(1) of the Act by 
revising the percentage factors used to determine the amount of bonus 
and relief payments, and establishing continuous improvement bonus 
payments for cost reporting periods beginning on or after October 1, 
1997 for hospitals and units excluded from the acute care hospital 
inpatient prospective payment system that meet specified criteria. If a 
hospital is eligible for the continuous improvement bonus, the 
continuous improvement bonus payment is equal to the lesser of: (1) 50 
percent of the amount by which operating costs are less than expected 
costs; or (2) 1 percent of the target amount.
    Sections 4416 and 4419 of the BBA amended section 1886(b) of the 
Act to establish a new framework for payments for new excluded 
providers. Section 4416 added a new section 1886(b)(7) to the Act that 
established a new statutory methodology for new psychiatric and 
rehabilitation hospitals and units and LTCHs. Before this change, new 
hospitals excluded from the acute care hospital inpatient prospective 
payment system were exempted from the target amount per discharge 
ceiling until the end of the first cost reporting period ending at 
least 2 years after they accepted their first patient. This new 
provider ``exemption'' was eliminated from all classes of excluded 
providers except children's hospitals for cost reporting periods 
beginning on or after October 1, 1997, by section 4419(a) of the BBA. 
Under section 4416, payment to these new excluded providers for their 
first two cost reporting periods is limited to the lesser of the 
operating costs per case, or 110 percent of the national median of 
target amounts, as adjusted for differences in wage levels, for the 
same class of hospital for cost reporting periods ending during FY 
1996, updated to the applicable period.
    It is important to note that before enactment of the BBA, the 
payment provisions for excluded hospitals and units applied 
consistently to all classes of excluded providers (that is, 
psychiatric, rehabilitation, long-term care, children's, and cancer). 
However, effective for cost reporting periods beginning on or after 
October 1, 1997, there are specific payment provisions for certain 
classes of excluded providers, as well as modifications for all 
excluded providers.
    Section 4417 of the BBA specified that a hospital that was 
classified by the Secretary on or before September 30, 1995, as an 
excluded LTCH must continue to be so classified, notwithstanding that 
it is located in the same building, or on the same campus, as another 
hospital.
    Section 4418 of the BBA amended section 1886(d)(1)(B)(v) of the 
Act, providing an additional category of hospitals that could qualify 
as cancer hospitals for purposes of exclusion from the acute care 
hospital inpatient prospective payment system.
2. BBRA
    With the enactment of the BBRA of 1999, the Congress refined some 
of the policies mandated by the BBA for hospitals excluded from the 
acute care hospital inpatient prospective payment system. The 
provisions of the BBRA, which amended section 1886(b)(3)(H) of the Act 
relating to the current payment system for excluded hospitals, were 
explained in detail and implemented in the acute care hospital 
inpatient prospective payment system interim final rule published in 
the Federal Register on August 1, 2000 (65 FR 47026) and in the acute 
care hospital inpatient prospective payment system final rule also 
published on August 1, 2000 (65 FR 47054).
    Section 4414 of the BBA provided for caps on target amounts for 
excluded hospitals and units for cost reporting periods beginning on or 
after October 1, 1997. Section 121 of the BBRA amended section 
1886(b)(3)(H) of the Act to provide for an appropriate wage adjustment 
to these caps on the target amounts for existing psychiatric and 
rehabilitation hospitals and units and LTCHs, effective for cost 
reporting periods beginning on or after October 1, 1999 through 
September 30, 2002.
    Section 122 of the BBRA provided for an increase in the continuous 
improvement bonus for eligible LTCHs and psychiatric hospitals and 
units for cost reporting periods beginning on or after October 1, 2000 
and before September 30, 2002.
3. BIPA
    Two provisions of the BIPA that amended section 1886(b)(3) of the 
Act were directed at LTCHs. Section 307(a) of the BIPA provided for a 
2-percent increase to the wage-adjusted 75th percentile cap on the 
target amount for existing LTCHs, effective for cost reporting periods 
beginning during FY 2001. Section 307(a) of the BIPA also provided a 
25-percent increase to the hospital-specific target amounts for 
existing LTCHs for cost reporting periods beginning in FY 2001, subject 
to the wage-adjusted national cap.

B. Provisions for a LTCH Prospective Payment System

1. BBA
    In section 4422 of the BBA, the Congress mandated that the 
Secretary develop a legislative proposal for a case-mix adjusted 
prospective payment system for LTCHs under the Medicare program, for 
submission by October 1999 based on consideration of several payment 
methodologies, including the feasibility of expanding the current

[[Page 55960]]

DRGs and the prospective payment system currently in place for acute 
care hospitals.
2. BBRA
    Section 123 of the BBRA specifically requires that the prospective 
payment system for LTCHs be designed as a per discharge system with a 
DRG-based patient classification system that reflects the differences 
in patient resources and costs in LTCHs while maintaining budget 
neutrality. Section 123 also requires that a report be submitted to the 
Congress describing the system design of the mandated LTCH prospective 
payment system no later than October 1, 2001, and that the system be 
implemented for cost reporting periods beginning on or after October 1, 
2002.
3. BIPA
    The BIPA reiterated the dates of implementation of the LTCH 
prospective payment system set forth in the BBRA. Section 307(b)(1) of 
the BIPA also directs the Secretary to examine the following specific 
payment adjustments: adjustments to DRG weights, area wage adjustments, 
geographic reclassification, outliers, updates, and a disproportionate 
share adjustment. Furthermore, if the Secretary is unable to implement 
the prospective payment system by October 1, 2002, section 307(b)(2) of 
the BIPA mandates that a default LTCH prospective payment system be 
implemented, based on existing DRGs, modified where feasible to account 
for the specific resource use of long-term care patients.

V. Research and Data Supporting the Establishment of the LTCH 
Prospective Payment System

A. Legislative Requirements

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

B. Description of Sources of Research Data

    The records for all Medicare hospital inpatient discharges 
(including discharges for LTCHs) are contained in the Medicare provider 
analysis and review file (MedPAR), which includes patient demographics 
(age, gender, race, and residence zip code), clinical characteristics 
(diagnoses and procedures), and hospitalization characteristics. 
(Beneficiary data were encrypted to prevent the identification of 
specific Medicare beneficiaries.) The Medicare cost report data 
constitute the HCRIS, and includes information on facility 
characteristics, utilization data, and cost and charge data by cost 
center.
    The 1997 Online Survey Certification and Reporting (OSCAR) system 
data provided information from the State survey and certification 
process to identify and characterize providers that participate in 
Medicare and Medicaid and include a list of all hospitals that were 
designated as LTCHs by Medicare. OSCAR data included the number of 
employees of various types and the number of different types of beds 
and care units, as well as variables on certification date, type of 
control, geographic region, and hospital size.

C. The Universe of LTCHs

1. Background Issues
    LTCHs typically furnish extended medical and rehabilitative care 
for patients who are clinically complex and have multiple acute or 
chronic conditions. Generally, Medicare patients in LTCHs have been 
transferred from acute care hospitals and receive a range of 
``postacute care'' services at LTCHs, including comprehensive 
rehabilitation, cancer treatment, head trauma treatment, and pain 
management. (MedPAC March 1999 Report to Congress, p. 95.) A LTCH must 
be certified as an acute care hospital that meets criteria set forth in 
section 1861(e) of the Act in order to participate as a hospital in the 
Medicare program. Generally, under Medicare, hospitals are paid as 
LTCHs if they have an inpatient average length of stay greater than 25 
days.
    LTCHs are a heterogeneous group of facilities ranging from old 
tuberculosis and chronic disease hospitals to newer facilities designed 
primarily to care for ventilator-dependent patients. They are unevenly 
distributed across the United States, with one-third (72 of 203 in 
1997) located in Massachusetts, Texas, and Louisiana. As of 1997, 203 
facilities were determined by Medicare to be LTCHs; by early 2000, 239 
facilities were determined by Medicare to be LTCHs; and as of November 
2001, OSCAR had data on 270 LTCHs.
    LTCHs constitute a relatively small provider group in the Medicare 
program and have not been widely studied. Only limited information has 
been published about their characteristics in terms of types of 
patients served and resources used. As stated earlier in section V.A. 
of this preamble, the primary goal of the initial research contract 
with Urban was to increase our knowledge about LTCHs and their 
patients. In addition to describing the providers and patients, the 
study was expected to provide insight into the ways in which LTCHs 
differ from other Medicare postacute care providers. In the following 
summary and tables, we provide a description of Urban's findings that 
formed the basis for the design of the prospective payment system for 
LTCHs presented in the March 2002 proposed rule and in this final rule.
2. General Medicare Policies
    Inpatient stays at LTCHs are covered under the Medicare Part A 
hospital benefit and include room and board, medical and nursing 
services, laboratory tests, X-ray, pharmaceuticals, supplies, and other 
diagnostic or therapeutic services (Secs. 409.10 and 412.50). LTCHs can 
offer specialized services (for example, physical rehabilitation or 
ventilator-dependent care) or can provide more generalized services 
(for example, chronic disease care).
    Hospital services are covered for up to 90 days during a Medicare-
defined

[[Page 55961]]

``benefit period,'' which is a period that begins with admission of a 
Medicare beneficiary as an inpatient to an acute care or other hospital 
and ends when the beneficiary has spent 60 consecutive days outside of 
an inpatient facility (Sec. 409.60). There are 60 additional covered 
lifetime reserve days that may be used over a beneficiary's lifetime. 
One inpatient deductible payment ($792 in calendar year 2002) is 
required for each benefit period, so a beneficiary generally does not 
have to make a new deductible payment for a LTCH stay unless the LTCH 
stay is not preceded by another hospital stay. However, a beneficiary 
with a long LTCH stay is subject to a coinsurance payment ($198 in 
calendar year 2002) for days 61 through 90 of hospital use during a 
benefit period. For the lifetime reserve days, a Medicare beneficiary 
is subject to a daily coinsurance amount ($396 in calendar year 2002) 
(Sec. 409.61).
    LTCHs must meet State licensure requirements for acute care 
hospitals and must have a provider agreement with Medicare in order to 
receive Medicare payment. Fiscal intermediaries verify that LTCHs meet 
the required average length of stay of greater than 25 days.
3. Exclusion From the Acute Care Hospital Inpatient Prospective Payment 
System
    As discussed more fully in section III.B. of this preamble, LTCHs 
were excluded from the FY 1984 implementation of the acute care 
hospital inpatient prospective payment system and continued to be paid 
based on their cost per discharge, subject to per discharge limits.
4. Geographic Distribution
    Overall, 203 LTCHs filed Medicare claims in 1997. This was the data 
set used by Urban for its analysis of the universe of LTCHs that formed 
the basis for policies we proposed in our proposed rule on March 22, 
2002 (67 FR 13416). This number translates into an average of 
approximately one facility per 200,000 Medicare enrollees. As can be 
seen in Chart 1, LTCHs were not (and are still not) distributed across 
all States in proportion to the number of Medicare enrollees in those 
States. They were unevenly distributed across the United States, with 
one-third (72 of 203) located in Massachusetts, Texas, and Louisiana. 
These three States together accounted for 36 percent of the LTCHs, but 
only fewer than 10 percent of Medicare enrollees. Furthermore, 13 small 
States have no LTCHs, although they accounted for approximately 7 
percent of Medicare enrollees. In contrast, the three largest Medicare 
States (California, Florida, and New York) accounted for 24.1 percent 
of Medicare enrollees together, but only 13.8 percent of LTCHs.

[[Page 55962]]



         Chart 1.--Percentage Distribution of Number of Long-Term Care Hospitals (LTCHs), Medicare Enrollees, and Certified Beds, by State, 1997
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             Number of      Percent of
                          State                              Number of      Percent of       medicare        medicare        Number of      Percent of
                                                               LTCHs           LTCHs         enrollees       enrollees    certified beds  certified beds
--------------------------------------------------------------------------------------------------------------------------------------------------------
Alabama.................................................               1            0.5          696,586            1.8              191            1.0
Alaska..................................................               0            0.0           38,570            0.1                0            0.0
Arizona.................................................               4            2.0          667,226            1.7              187            1.0
Arkansas................................................               0            0.0          453,195            1.1                0            0.0
California..............................................              12            5.9        3,920,674            9.9            1,304            7.1
Colorado................................................               4            2.0          464,299            1.2              277            1.5
Connecticut.............................................               4            2.0          531,805            1.3              716            3.9
Delaware................................................               0            0.0          111,171            0.3                0            0.0
District of Columbia....................................               1            0.5           80,028            0.2               23            0.1
Florida.................................................              11            5.4        2,853,420            7.2              805            4.4
Georgia.................................................               6            3.0          915,577            2.3              557            3.0
Hawaii..................................................               1            0.5          163,217            0.4               13            0.1
Idaho...................................................               0            0.0          163,303            0.4                0            0.0
Illinois................................................               5            2.5        1,701,123            4.3              703            3.8
Indiana.................................................              11            5.4          877,656            2.2              434            2.4
Iowa....................................................               0            0.0          498,288            1.3                0            0.0
Kansas..................................................               3            1.5          406,752            1.0               74            0.4
Kentucky................................................               1            0.5          633,802            1.6              337            1.8
Louisiana...............................................              19            9.4          622,805            1.6            1,288            7.0
Maine...................................................               0            0.0          218,265            0.6                0            0.0
Maryland................................................               4            2.0          651,710            1.7              465            2.5
Massachusetts...........................................              17            8.4          991,641            2.5            3,077           16.8
Michigan................................................               3            1.5        1,435,420            3.6              280            1.5
Minnesota...............................................               2            1.0          669,708            1.7              313            1.7
Mississippi.............................................               2            1.0          428,729            1.1               65            0.4
Missouri................................................               3            1.5          888,959            2.3              317            1.7
Montana.................................................               0            0.0          139,392            0.4                0            0.0
Nebraska................................................               1            0.5          263,287            0.7               25            0.1
Nevada..................................................               3            1.5          225,152            0.6              106            0.6
New Hampshire...........................................               0            0.0          170,031            0.4                0            0.0
New Jersey..............................................               3            1.5        1,239,890            3.1              212            1.2
New Mexico..............................................               2            1.0          231,517            0.6               86            0.5
New York................................................               5            2.5        2,780,994            7.0            1,262            6.9
North Carolina..........................................               1            0.5        1,129,329            2.9               59            0.3
North Dakota............................................               0            0.0          107,628            0.3                0            0.0
Ohio....................................................               7            3.4        1,766,266            4.5              653            3.6
Oklahoma................................................               8            3.9          523,358            1.3              294            1.6
Oregon..................................................               0            0.0          500,035            1.3                0            0.0
Pennsylvania............................................               6            3.0        2,183,850            5.5              412            2.3
Rhode Island............................................               1            0.5          177,247            0.4              700            3.8
South Carolina..........................................               2            1.0          562,732            1.4                0            0.0
South Dakota............................................               0            0.0          123,401            0.3              211            1.2
Tennessee...............................................               6            3.0          838,357            2.1              210            1.1
Texas...................................................              36           17.7        2,275,673            5.8            1,818            9.9
Utah....................................................               1            0.5          204,525            0.5               39            0.2
Vermont.................................................               0            0.0           89,821            0.2                0            0.0
Virginia................................................               3            1.5          893,602            2.3              664            3.6
Washington..............................................               2            1.0          742,589            1.9               97            0.5
West Virginia...........................................               0            0.0          349,684            0.9                0            0.0
Wisconsin...............................................               1            0.5          806,951            2.0               34            0.2
Wyoming.................................................               1            0.5           65,699            0.2                3            0.0
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................             195          100.00      36,322,068          100.00          18,311          100.00 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: 1997 Online Survey Certification and Reporting System (OSCAR).


[[Page 55963]]

    Although the distribution of certified beds generally tracked the 
distribution of LTCHs across States, there is not always a direct 
relationship between the number of LTCHs and the bed capacity in a 
given State. For instance, Massachusetts had only 8.4 percent of LTCHs, 
but 16.8 percent of Medicare-certified beds. In contrast, Texas had 
17.7 percent of LTCHs, but only 9.9 percent of the certified beds.
5. Characteristics by Date of Medicare Participation
    The OSCAR system provided data captured by the State survey and 
certification process that can be used to identify and characterize 
providers participating in Medicare and Medicaid. The following 
analyses were based on LTCHs for which data were available. Eight 
facilities, which accounted for only 1 percent of all LTCH stays and 
1.3 percent of certified beds, were excluded from the analysis since 
1997 OSCAR records were not available for these facilities.
    Given the known payment variations for old and new facilities that 
were excluded facilities paid under the target amount methodology, we 
divided the LTCHs by age (the date of the LTCH's first Medicare 
participation, as reported by OSCAR) to gain a sense of the variation 
among the existing LTCHs in 1997. A strong correlation was found 
between the age of a LTCH and other key characteristics, such as 
location and ownership control, as well as operating costs and Medicare 
payments. For analytical purposes, therefore, the total sample of LTCHs 
was stratified based on age (``old,'' ``middle,'' or ``new''). Of the 
195 LTCHs in OSCAR in 1997, 20 percent were in existence before the 
acute care hospital inpatient prospective payment system and the acute 
care hospital inpatient prospective payment system exclusions went into 
effect in October 1983 (old LTCHs); 30 percent were determined to be 
LTCHs between October 1983 and September 1993 (middle LTCHs); and 50 
percent were determined to be LTCHs between October 1993 and September 
1997 (new LTCHs). This pattern is consistent with reports of the large 
growth in the number of LTCHs in recent years. (As of November 2001, 
OSCAR had data on 270 LTCHs, which indicate that the growth has 
continued.)
    Old LTCHs were generally located in the northeast region of the 
United States, while newer LTCHs are typically located in the southern 
region. Most notably, the ownership of the LTCHs that began Medicare 
participation before and after the implementation of the acute care 
hospital inpatient prospective payment system was quite different. Old 
LTCHs were either government controlled (about 63 percent) or nonprofit 
(about 37 percent). In contrast, one-half of the LTCHs that began 
participation in Medicare between 1983 and 1993 and two-thirds of those 
that began participation in Medicare in FY 1994 or later were 
proprietary facilities. Virtually no new LTCHs were government 
controlled.
6. Hospitals-Within-Hospitals and Satellite Facilities
    The Medicare statute does not contemplate the recognition of ``LTCH 
units'' of prospective payment system acute care hospitals; the statute 
does reference rehabilitation and psychiatric units. Long-term care 
units of prospective payment system hospitals are not allowed in part 
because of the concern that transfers of acute care patients into the 
LTCH units could inappropriately maximize prospective payments under 
the acute care hospital inpatient prospective payment system. The 
presence of a long-term care ``unit'', excluded from the acute care 
hospital inpatient prospective payment system and co-located in an 
acute care hospital, could enable the acute care hospital to shift 
patients to the long-term care ``unit'' without completing the full 
course of treatment. These patient transfers could result in 
inappropriate payments under Medicare since the acute care hospital 
would make money in those cases where it received a full DRG payment 
without providing the full course of treatment to the beneficiary and 
could avoid losing any money for other more costly patients by 
prematurely discharging them to the LTCH. Since payments to hospitals 
under the acute care hospital inpatient prospective payment system were 
based on hospital costs that included the costs of patients with longer 
lengths of stay, such a patient shift would result in an 
``overpayment'' to the acute care hospital and the LTCH would receive 
an additional payment for that same patient.
    Nonetheless, in the mid-1990s, of the roughly 150 LTCHs in 
existence at the time, about 12 recently established LTCHs were, in 
fact, LTCHs located in the buildings or on the campuses of acute care 
hospitals. In order to prevent the shifting of costs within the 
Medicare payment system that would result from inappropriate transfers 
between the inpatient acute care hospital and the LTCH located within 
the acute care hospital, we have implemented additional qualifying 
criteria at Sec. 412.22(e) for these entities. These criteria require 
that in order to be excluded from the acute care hospital inpatient 
prospective payment system, a hospital located in or on the campus of 
an acute care hospital (referred to as a ``hospital-within-a-
hospital'') must have a separate governing body, chief executive 
officer, chief medical officer, and medical staff. In addition, the 
hospital must perform basic functions independently from the host 
hospital, incur no more than 15 percent of its total inpatient 
operating costs for items and services supplied by the hospital in 
which it is located, and have an inpatient load of which at least 75 
percent of patients are admitted from sources other than the host 
hospital. Originally, these regulations were effective as of October 
1994. However, section 4417(a) of the BBA amended section 1886(d)(1)(B) 
of the Act to provide that a hospital that was excluded from the acute 
care hospital inpatient prospective payment system on or before 
September 30, 1995, as an LTCH, must continue to be so classified, 
notwithstanding that it is located in the same building or in one or 
more buildings located on the same campus as another hospital 
(Sec. 412.22(f)). This provision, codified in Sec. 412.22(f), exempts 
certain LTCHs that are hospitals-within-hospitals from the ownership 
and control requirements discussed above.
    In the late 1990s, we became aware of a newly developing entity 
that was physically similar, but legally unrelated, to a hospital-
within-a-hospital. These entities were hospital-within-hospital type 
facilities (in the buildings or on the campuses of acute care 
hospitals) owned by a separate existing LTCH. We identified these 
facilities as ``long-term care hospital satellites.''
    In the July 30, 1999 Federal Register (64 FR 41540), we revised 
Sec. 412.22(h) to require that in order to be excluded from the acute 
care hospital inpatient prospective payment system, a satellite of a 
hospital: (1) Must maintain admission and discharge records that are 
separately identified from those of the hospital in which it is 
located; (2) cannot commingle beds with beds of the hospital in which 
it is located; (3) must be serviced by the same fiscal intermediary as 
the hospital of which it is a part; (4) must be treated as a separate 
cost center of the hospital of which it is a part; (5) for cost 
reporting purposes, must use an accounting system that properly 
allocates costs and maintains adequate data to support the basis of 
allocation; and (6) must report costs in the cost report of the 
hospital of which it is a part, covering the same fiscal period and 
using the same method of apportionment as that hospital. In

[[Page 55964]]

addition, the satellite facility must independently comply with the 
qualifying criteria for exclusion from the acute care hospital 
inpatient prospective payment system. The total number of State-
licensed and Medicare-certified beds (including those of the satellite 
facility) for a hospital that was excluded from the acute care hospital 
inpatient prospective payment system for the most recent cost reporting 
period beginning before October 1, 1997, may not exceed the hospital's 
number of beds on the last day of that cost reporting period.
7. Specialty Groups of LTCHs by Patient Mix
    There is a widely held view that the population of LTCHs is 
heterogeneous. We believe that understanding the composition of this 
population and identifying and classifying subgroups within it are 
fundamental to designing a prospective payment system for LTCHs.
    Broad categories of conditions as defined by major diagnostic 
categories (MDCs), the principal diagnostic categorization tool used 
under the acute care hospital inpatient prospective payment system, 
were used to classify LTCHs according to the medical conditions of 
their patient caseloads. (MDCs were formed by dividing all possible 
principal diagnoses into 25 mutually exclusive categories. Most MDCs 
correspond to a major organ system, though a few correspond to 
etiology.)
    We also explored the possibility of grouping patients by DRGs or by 
selected individual diagnoses. These attempts resulted in creating 
groups too small for any effective characterization. However, the 
analysis did reveal that while some LTCHs treat a wide range of 
conditions, others specialize in one or two types of conditions. In 
order to analyze a grouping based on patient mix, under its contract 
with us, Urban first examined the proportion of facilities' caseloads 
in specific MDCs. There were five MDCs in which at least one LTCH has a 
majority (that is, more than 50 percent) of its cases. Patients with 
respiratory system problems were the most common caseload 
concentration--in 1997, 13 percent of LTCHs had a caseload 
concentration of 50 percent to 75 percent, and another 7 percent of 
LTCHs had more than 75 percent of their cases in this MDC.
    The other three MDCs that made up a majority of at least one LTCH's 
patient caseload (nervous system MDC, musculoskeletal and connective 
tissue disorders MDC, and factors influencing health status MDC) were 
all related to rehabilitation needs. (Because rehabilitation-related 
DRGs were common to LTCHs and fell into the ``Factors Influencing 
Status'' MDC, we are classifying all cases in this MDC as 
rehabilitation services for the purpose of this analysis.) Seven 
percent of LTCHs had a majority of their caseload in an MDC related to 
rehabilitation-related services. A significantly less common 
concentration was seen in the 2 percent of LTCHs that had a majority of 
their patients in the mental diseases and disorders MDC. All but two 
LTCHs in our analysis had some share of patients with respiratory 
system problems. Similarly, all but five LTCHs had some patients with 
circulatory problems.
    Based on these findings, we developed a grouping that consists of 
four broad categories of LTCHs based on patient caseload. Facilities 
with greater than 50 percent of their cases in the respiratory MDC were 
assigned to a ``respiratory specialty'' group for the purpose of this 
analysis. Similarly, all facilities with over 50 percent of their 
caseload in the mental MDC were designated as ``mental specialty'' 
facilities. The three rehabilitation-related MDCs were combined into 
one ``rehabilitation-related MDC'' category and grouped into a 
``rehabilitation specialty'' group. All remaining facilities (that did 
not have high concentrations of patients in the respiratory MDC, the 
mental MDC, or the rehabilitation-related MDCs category) were placed 
into a ``multispecialty'' facility group. LTCHs in this category 
provide care to a wider range of patient types than LTCHs in the first 
three categories.
    To better understand the relatively large number of multispecialty 
LTCHs, we explored their MDC composition. Not unexpectedly, most of 
these facilities had high proportions of cases in the respiratory MDC 
and the rehabilitation-related MDCs category, although some LTCHs did 
not serve either of these populations in great numbers. Few LTCHs did 
have a significant share of their caseload in either the respiratory 
MDC or the rehabilitation-related MDCs category. Only 2 percent of 
multispecialty LTCHs had less than 25 percent of their caseload in 
either specialty group. Similarly, only 7 percent of multispecialty 
facilities had less than 35 percent of their caseload in either of the 
two groups. In contrast, about 60 percent of LTCHs had at least half of 
their caseload in either the respiratory MDC or the rehabilitation-
related MDCs category. This high share demonstrated that, despite their 
assignment to the multispecialty category, most LTCHs served a high 
percentage of patients with respiratory or rehabilitation problems, or 
both.
    Although respiratory and rehabilitation specialty facilities were 
prevalent in the LTCH population, there were also some ``niche'' LTCHs 
that have unique patient populations or provide uncommon services. 
These hospitals included, for example, a large hospital where most 
admitted individuals (90 percent) die in the facility.
    Several LTCHs provided services for special populations. One 
facility provided services for a prison population. A large share of 
this facility's funding was through Medicaid; cost report data showed 
that Medicaid covers two-thirds of its patient stays.
    Some other facilities worked with similarly specialized populations 
and have very small Medicare caseloads. In particular, two facilities 
that focused on developmentally disabled children and younger adults 
had fewer than 10 Medicare stays in 1997. Cost reports show that one of 
these facilities, which provides rehabilitation for its Medicare 
patients, has few discharges (under 100) regardless of payer source. 
The other, which provides mostly psychiatric services, relies on public 
funding for only a small share of its discharge payments.
    Although there are a few niche facilities in the LTCH population, 
our analysis indicated that a preponderance of the LTCHs could be 
classified in distinct specialty groups that focused on adult 
rehabilitation and respiratory system care.
8. Sources and Destinations of LTCH Patients
    Another useful perspective on LTCHs was the pattern of sources from 
which patients are admitted to LTCHs and destinations to which LTCH 
patients are discharged. This information showed how such transition 
patterns differ among the specialty groups. In general, the findings 
were consistent with the notion that LTCHs as a group were 
heterogeneous in terms of the patients they serve.
    The vast majority (70 percent) of LTCH patients were admitted from 
acute care hospitals. Within this group, acute care patients whose 
stays were designated as ``outlier'' stays, as defined by section 
1886(d)(5)(A)(i) of the Act and implemented in Sec. 412.80, were 
identified separately. Sixteen percent of LTCH admissions were acute 
care hospital outlier patients, while 54 percent were admitted from 
acute care hospitals but did not have extraordinarily long acute care 
stays.

[[Page 55965]]

After acute care hospitals, direct admission from the community was the 
next most common source of admissions (14 percent) to LTCHs.
    The admission patterns varied somewhat by LTCH specialty type. 
Notably, 85 percent of admissions to respiratory specialty LTCHs were 
from acute care hospitals, including 22 percent that were acute care 
hospital outlier cases. A very small percentage (7 percent) of 
admissions to respiratory specialty LTCHs were from the community. In 
contrast, the admission sources for the rehabilitation specialty LTCHs 
were more similar to that of the multispecialty LTCHs. Notably, a 
higher than average share of patients come from SNFs (8 percent) and 
HHAs (6 percent) and a lower percentage of patients transitioned from 
acute care hospital outlier stays (12 percent). A relatively large 
share (11 percent) of patients at rehabilitation specialty LTCHs were 
admitted directly from the community compared to patients at 
respiratory specialty LTCHs (7 percent). These findings suggest that 
patients admitted to rehabilitation specialty LTCHs might present a 
less medically intensive clinical picture than patients admitted to 
respiratory specialty LTCHs.
    The admission pattern of patients admitted to the mental specialty 
LTCHs was quite different from those of the other specialties. Thirty 
one percent of patients are admitted from acute care hospitals, and 
only 2 percent of patients are admitted after being acute care hospital 
outlier cases. In contrast, 40 percent of patients were admitted 
directly from the community and 27 percent were admitted from some 
other type of Medicare provider.
    An analysis of the pattern of discharge destinations for LTCHs 
shows that, overall, 38 percent of LTCH stays were discharged to the 
community without additional Medicare services. Almost equal 
percentages (18 percent) were discharged to SNFs and acute care 
hospitals, and 21 percent of patients were discharged to HHAs.
    Some variations in discharge destination patterns existed among 
LTCHs by specialty. Relative to the overall sample, the respiratory 
specialty LTCHs had higher than average percentages of patients 
discharged to SNFs (24 percent versus 18 percent), and lower 
percentages discharged to HHAs (14 percent versus 21 percent). However, 
rehabilitation specialty facilities had a relatively high proportion of 
cases (34 percent) discharged to HHAs, and a lower than average 
proportion discharged to the community without additional Medicare 
services (28 percent versus 38 percent). Finally, mental specialty 
hospitals have an unusually high percent of cases (71 percent) 
discharged to the community without additional Medicare services. These 
findings suggest that patients served by respiratory specialty LTCHs 
are more likely to require extended care in institutional settings (for 
example, SNFs), while patients discharged from rehabilitation specialty 
facilities also require extended care, but not necessarily in 
institutional settings.
9. LTCHs and Patterns Among Postacute Care Facilities
    Urban's research also produced data regarding a comparison of LTCHs 
with other postacute care settings in order to provide us with the 
broadest possible understanding of the universe of LTCHs. The findings 
were only preliminary comparisons of patients among and across 
postacute settings because of the nature of each category of postacute 
care providers. Even though data suggest substantial clinical 
differences among the providers with some areas of overlap, because of 
some similarities we found it useful to draw parallels and distinctions 
among postacute care providers. Moreover, findings from this research 
supported conclusions published in several reports to the Congress 
produced by ProPAC and MedPAC over the past decade.
    Most patients in LTCHs had several diagnosis codes on their 
Medicare claims, indicating that they had multiple comorbidities and 
are probably less stable upon admission than patients admitted to other 
postacute care settings. Relative to IRFs, LTCHs had a higher 
proportion of patient costs attributable to ancillary services (for 
example, pharmacy, laboratory, and radiology charges) (MedPAC March 
1999 Report to Congress, p. 95). LTCHs also provided care to a 
disproportionately large number of Medicare beneficiaries who are 
eligible because of disability. While individuals with disabilities 
make up about 10 percent of the Medicare population, they make up 17 
percent of LTCH patients.
    Urban's analysis also explored the demographic characteristics of 
LTCH patients compared to IRF patients. The proportion of LTCH patients 
who are under 65 years of age (18 percent) was twice that of IRF 
patients (9 percent). The share of LTCH patients over 85 years old was 
slightly higher (18 percent) compared to IRF patients (14 percent). 
LTCHs also had a higher proportion of male patients and a lower 
proportion of white patients than IRFs. LTCHs had long median lengths 
of stay: 21 days versus 16 days for IRFs. About one-third of the LTCH 
Medicare stays were by beneficiaries who are also eligible for 
Medicaid, compared to fewer Medicaid-eligible beneficiary stays at IRFs 
(17 percent). It has been widely documented that dually eligible 
beneficiaries are generally much sicker than non-Medicaid eligible 
Medicare beneficiaries.
    Urban's analysis also included a description of the demographic 
characteristics of LTCH patient stays by admission sources--outlier 
acute care hospital, nonoutlier acute care hospital, and other. Those 
with prior outlier acute care hospital stays seem to be the most 
distinctive group in terms of length of stay, gender, race, and 
poverty: they had the highest mean and median length of stay in the 
LTCH, the highest male proportion, the highest white proportion, and 
the lowest proportion of Medicaid-eligible patients. However, in terms 
of age, those with prior hospital stays (whether outlier or nonoutlier) 
were quite different from those with other admission sources. Those 
without a prior acute care hospital stay were younger and about twice 
as many are under age 65, whose mean age was about 5 and 3 years lower 
than those with a prior outlier stay and those with a prior nonoutlier 
stay, respectively. Among those with an acute care hospital stay, the 
nonoutlier patients were slightly older on average, with higher 
percentages in the oldest groups (75 to 84 and 85 plus) and the highest 
median age of all three groups.
    The policies in the March 22, 2002 proposed rule and in this final 
rule were determined in part based on analysis of the above data and 
information gathered on LTCHs and their Medicare patients.

D. Overview of Systems Analysis for the LTCH Prospective Payment System

    For the systems analysis, 3M used the MedPAR (FY 1999 through FY 
2000), OSCAR (FY 2000), and HCRIS (FYs 1998 and early 1999) files for 
the March 22, 2002 proposed rule. Specifically, 3M performed the 
following tasks:
     Construction of an updated data file, using the most 
recent data available from CMS.
     Analysis of issues, factors, or variables and presentation 
of options for possible use in the design and implementation of the 
prospective payment system.
     Data simulation of various system features to analyze 
their impact on the design of the prospective payment system.
    A data file was constructed to serve as the basis of our patient 
classification system presented in the proposed rule

[[Page 55966]]

and the development of proposed payment weight rates and proposed 
payment adjustments. The analysis of this data file helped us regarding 
the structure of the prospective payment system in the proposed rule. 
We relied upon patient charge data from FY 2000 MedPAR for proposing 
LTC-DRG weights and upon costs data from FY 1998 and FY 1999 cost 
reports for proposed payment rates.
    For this final rule, we used updated and expanded data from the FY 
2000 MedPAR file to develop the payment weight rates and payment 
adjustments for FY 2003. Section X.K. of this final rule contains a 
detailed discussion of the data used to develop the FY 2003 payment 
rates and payment adjustments, the public comments received on the 
proposed rates and adjustments, and our responses to those comments.

E. Evaluation of DRG-Based Patient Classification Systems

    Section 307(b)(1) of Public Law 106-554 modified the requirements 
of section 123 of Public Law 106-113 by specifically requiring that the 
Secretary examine ``the feasibility and the impact of basing payment 
under such a system [the LTCH prospective payment system] on the use of 
existing (or refined) hospital diagnosis-related groups (DRGs) that 
have been modified to account for different resource use of long-term 
care hospital patients as well as the use of the most recently 
available hospital discharge data.''
    In order to comply with statutory mandates, our evaluation of DRG-
based patient classification systems focused on two models--the LTC-all 
patient-refined DRGs (LTC-APR-DRGs, Version 1.0), a severity-based 
case-mix classification system developed specifically for LTCHs; and 
the LTC-CMS-DRGs, a modification of the DRG system used in the acute 
care hospital inpatient prospective payment system.
    The LTC-APR-DRGs, a condensed version of 3M's all-patient refined 
DRGs (APR-DRGs) for acute care hospitals, was developed by 3M Health 
Information Systems, for exclusive use in LTCHs. The LTC-APR-DRG system 
was designed to reflect the clinical characteristics of LTCH patients. 
This case-mix classification model contains 26 base LTC-APR-DRGs, 
subdivided by 4 severity of illness levels to yield 104 classification 
levels. In this system, the patient's secondary diagnoses, their 
interaction, and their clinical impact on the primary diagnosis 
determine the severity level assigned to each of the 26 LTC-APR-DRGs.
    The LTC-CMS-DRGs are based on research done by The Lewin Group 
(Developing a Long-Term Hospital Prospective Payment System Using 
Currently Available Administrative Data for the National Association of 
Long-Term Hospitals (NALTH), July 1999). This model uses our existing 
hospital inpatient DRGs with weights that accounted for the difference 
in resource use by patients exhibiting the case complexity and multiple 
medical problems characteristic of LTCHs. In order to deal with the 
large number of low volume DRGs (all DRGs with fewer than 25 cases), 
the LTC-CMS-DRG model groups low volume DRGs into 5 quintiles based on 
average charge per discharge. The result was 184 classification groups 
(179 DRG-based and 5 charge-based payment groups) based on patient data 
from FYs 1994 and 1995. (CMS updated this analysis using patient data 
from FYs 1999 and 2000 for purposes of system evaluations.)
    As discussed in the March 22, 2002 proposed rule (67 FR 13426), 
under either classification system, DRG weights would be based on data 
for the population of LTCH discharges, reflecting the fact that LTCH 
patients represent a different patient mix than patients in short-term 
acute care hospitals. GROUPER software programs enabled us to examine 
the most recent LTCH and acute care hospital inpatient prospective 
payment system patient discharge data in light of the features of each 
system. Using regression analyses and simulations, the impact of each 
patient classification system on potential adjustment features for the 
prospective payment system was assessed. (Data files used in these 
analyses are specified in section V.B. of this preamble.) Our medical 
staff as well as physicians involved in treatment of patients at LTCHs 
provided additional input from the standpoint of clinical coherence and 
practical applicability.
    The system that we are adopting in this final rule for the LTCH 
prospective payment system is the LTC-CMS-DRG GROUPER based on the 
Lewin model that we proposed in the March 22, 2002 proposed rule (67 FR 
13426). We believe this system accurately predicts costs without the 
problems that we believe could be inherent with the APR-DRG system. (In 
section IX. of this final rule, which describes the functioning of the 
classification system as a component of the LTCH prospective payment 
system, the LTC-CMS-DRGs are referred to as the LTC-DRGs.)
    It is important to note that we have analyzed both systems based on 
MedPAR files generated by LTCH patient data, using the best available 
data. Since the TEFRA payment system, under which LTCHs are currently 
paid, is not tied to patient diagnoses, the coding data from LTCHs have 
not been used for payment. Nevertheless, data analyses indicated that 
there was a minimal difference in both systems' abilities to predict 
costs. (The difference in the R2, a statistical measure of 
how much variation in resource use among cases is explained by the 
models, was only 0.0313.)
    In the March 22, 2002 proposed rule (67 FR 13426), we indicated 
that we believed that either classification system would result in more 
equitable payments for LTCHs compared to current payment methods. The 
LTCH prospective payment system would generally improve the accuracy of 
payments for more clinically complex patients. (See our discussion of 
the TEFRA payment system in section III.C. of this final rule.) As the 
Congress intended, the DRG weights under the LTCH prospective payment 
system would reflect the ``* * * different resource use of long-term 
care hospital patients.'' Patients requiring more intensive complex 
services would be classified in LTC-DRGs with higher relative weights 
and hospitals would receive appropriately higher payments for these 
patients. In the proposed rule, we solicited comments on the impact 
that one system may have over another as it applies to different kinds 
of LTCHs. Any public comments that we received on the impact of both 
systems are included in sections IX. and XII. of this final rule.
    Although either system would result in more equitable payments to 
LTCHs, we have several interrelated concerns about adopting the LTC-
APR-DRG system based upon its complexity, its clinical subjectivity, 
and its utility as it relates to other Medicare prospective payment 
systems. The LTC-APR-DRG model provides a clinical description of the 
population of LTCHs, patients exhibiting a range of severity of illness 
with multiple comorbidities as indicated by secondary diagnoses. The 
clinical interaction of the primary diagnosis with these comorbidities 
determines the severity level of the primary diagnoses, resulting in 
the final assignment to a LTC-APR-DRG by the GROUPER software designed 
for this system.
    One aspect of our examination of the LTC-APR-DRG system included 
clinical review of actual case studies provided by physicians at 
several LTCHs and evaluations of the LTC-APR-DRG assignments that would 
have resulted based on the clinical logic of

[[Page 55967]]

the APR-DRG GROUPER. A review of a number of those cases by different 
medical professionals resulted in different possible classifications 
for the GROUPER program. Looking at the same case, different views were 
held as to which APR-DRG category or to which level of severity the 
case should be grouped. Given the array of specialization at different 
LTCHs reflecting a range of services and patient types, as described in 
section V.C.7. of this preamble, we believe that we lack sufficient 
data, at this point in time, to definitely determine the effect of 
particular comorbidities on patient resource needs in LTCHs. 
Furthermore, it appears that depending on how many of the diagnoses are 
coded, medical judgement suggests that it could be possible to classify 
the same patient in more than one group or level of severity. Because 
of these concerns, we believe that payments under such a policy could 
be insufficiently well-defined, given currently available data, to 
ensure consistently appropriate Medicare payments.
    We note that the prospective payment system that we have adopted 
for IRFs is based on a patient classification system that includes a 
measure of comorbidities, the combination of the case-mix group (CMG) 
and comorbidity tier. In general, most IRF patients are treated for one 
primary rehabilitation condition (for example, a hip replacement) that 
is associated with functional measures and sometimes age. The CMGs 
constructed for IRF patients account for diagnostic, functional, and 
age variables. These variables are used to explain the variability in 
the cost among the various CMGs. Some of the remaining variability in 
cost could then be further explained by selected comorbidities which 
the inpatient rehabilitation data showed were statistically 
significant.
    In contrast, determining whether particular comorbidities increase 
the cost of a case for a LTCH patient is complicated by the nature of 
the clinical characteristics of these patients. More specifically, many 
LTCH patients have numerous conditions that may not all be relevant to 
the cost of care for a particular discharge. Although the patient 
actually has a specific condition, including this condition among 
secondary diagnoses coded under the LTC-APR-DRG system may assign an 
inaccurate severity level to the primary diagnosis and result in 
inappropriate LTC-APR-DRG payment. We also believe that reliance on 
existing comorbidity information submitted on LTCH bills could result 
in significant variation in the assignment of the specific LTC-APR-
DRGs.
    The LTC-CMS-DRG system is a system that is familiar to hospitals 
because it is based on the current DRG system under the acute care 
hospital inpatient prospective payment system. We believe that the 
familiarity of the LTC-CMS-DRG model may best facilitate the transition 
from the reasonable cost-based system to the prospective payment system 
as well as providing continuity in payment methodology across related 
sites of care (for example, an acute care hospitalization for a patient 
with a chronic condition).
    We further note that the adoption of severity-adjusted DRGs will be 
explored by CMS for use under the acute care hospital inpatient 
prospective payment system. In its June 2000 Report to Congress, MedPAC 
recommended that the Secretary ''* * * improve the hospital inpatient 
prospective payment system by adopting, as soon as practicable, 
diagnosis related group refinements that more fully capture differences 
in severity of illness among patients.'' (Recommendation 3A, p. 63)
    In the March 22, 2002 proposed rule, although we did not propose 
adopting the LTC-APR-DRGs in the LTCH prospective payment system, we 
did solicit comments on its possible use.
    Even though we are using LTC-DRGs in the LTCH prospective payment 
system in this final rule, we may have the opportunity to propose a 
severity-adjusted patient classification for LTCHs in the future, 
particularly if the acute care hospital inpatient prospective payment 
system moves in this direction. Any public comments that we received on 
the possible use of LTC-APR-DRG or some other system in the future are 
addressed in section IX. of this final rule.

VI. Recommendations by MedPAC for a LTCH Prospective Payment System

    As we noted in the section III.E. of this final rule, since the 
establishment of the acute care hospital inpatient prospective payment 
system in 1983, the topic of postacute care payments under Medicare has 
been addressed in reports to the Congress prepared by ProPAC and its 
successor, MedPAC. Recommendations in these reports encouraged 
modifications to Medicare payment policies, examined the differences 
among postacute care providers and within each category of providers, 
and reiterated the goal of eventually implementing prospective payment 
systems for providers being paid under the target amount payment 
methodology.
    In its March 1, 1996 Report and Recommendations to the Congress, 
ProPAC recommended that ``prospective payment systems should be 
implemented for all postacute services. The payment method for each 
service should be consistent across delivery sites. The Secretary 
should explore methods to control the volume of postacute service use, 
such as bundling services for a single payment.'' (Recommendation 20, 
p. 75)
    The following year, in its March 1, 1997 Report and Recommendations 
to the Congress, ProPAC recommended ``* * * the Congress and the 
Secretary to consider the overlap in services and beneficiaries across 
postacute care providers as they modify Medicare payment policies. 
Changes to one provider's payment method could shift utilization to 
other sites and thus fail to curb overall spending. To this end, ProPAC 
commends HCFA's [now CMS'] efforts to identify elements common to the 
various facility-specific patient classification systems to use in 
comparing beneficiaries across settings.'' Ultimately, Medicare should 
move towards more uniform payment policies across sites, the Report 
continued, and ``payment amounts should vary depending on the intensity 
and nature of the services beneficiaries require, rather than on the 
setting. Further, providers should have incentives to coordinate 
services or an episode* * *.'' (p. 60)
    However, with enactment of the BBA, the Congress enacted 
legislation to provide for distinct prospective payment systems for 
HHAs (section 4603(b)), SNFs (section 4432(a)), and IRFs (section 
4421). The BBA further required the development of a legislative 
proposal for the case-mix adjusted LTCH prospective payment system. 
Section 123 of the BBRA requires the Secretary to develop a per 
discharge DRG-based system for LTCHs, and section 307(b)(1) of the BIPA 
mandates that the Secretary examine the feasibility and impact of 
basing payments to LTCHs using the existing or refined DRGs, modified 
to account for the resource use of LTCH patients. Thus, the Congress 
mandated distinct systems that would result in different payments, 
depending on the type of Medicare provider, and not a system that is 
uniform across sites of care.
    Notwithstanding the mandate to establish postacute care prospective 
payment systems, MedPAC continued to articulate concern regarding the 
overlap of services among postacute providers. In its June 1998 Report 
to Congress, MedPAC stated that ``all of these policy changes, in 
combination with the fact

[[Page 55968]]

that similar services can be provided in multiple postacute settings, 
indicate the need for continued monitoring and analysis of postacute 
providers, policies, and service utilization.'' (p. 90)
    In its March 1999 Report to Congress, MedPAC encouraged the 
Secretary to ``* * * collect a core set of patient assessment 
information across all postacute care settings.'' (Recommendation 5A, 
p. 82)
    Section 123 of the BBRA specifically mandated a per discharge, DRG-
based prospective payment system for LTCHs and established a timetable 
for the presentation of the proposed system in a report to the Congress 
by October 1, 2001 and for implementation of the actual prospective 
payment system by October 1, 2002. Further direction for a distinct 
prospective payment system for LTCHs was indicated in section 307(b) of 
the BIPA, which directed the Secretary to examine a number of payment 
adjustment factors and established a default system if the Secretary is 
unable to meet the implementation timetable.
    As we developed the prospective payment system for LTCHs described 
in this final rule, however, we wish to state that we do not believe 
that the establishment of distinct prospective payment systems for each 
postacute care provider group eliminates the need to monitor payments 
and services across all service settings. We endorse MedPAC's 
Recommendation 3G, in its March 2000 Report to Congress, that 
encourages the Secretary to ``assess important aspects of the care 
uniquely provided in a particular setting, compare certain processes 
and outcomes of care provided in alternative settings, and evaluate the 
quality of care furnished in multiple-provider episodes of postacute 
care.'' (p. 65) We intend to monitor the appropriateness of LTCH stays 
by tracking the number of LTCH patients and SNF patients and the 
frequency of subsequent admissions to an acute care hospital. We 
believe these data will be valuable in assessing the outcome of care 
provided in these settings.
    Furthermore, we strongly support the additional research that will 
be required to choose or to develop an assessment instrument that will 
evaluate the quality of services delivered to beneficiaries in 
postacute settings.

VII. Evaluated Options for the Prospective Payment System for LTCHs

    Section 123 of the BBRA and section 307(b) of the BIPA establish 
the statutory authority for the development of the prospective payment 
system for LTCHs that is discussed in this final rule. Under the BBRA, 
we are required to:
     Develop a per discharge prospective payment system for 
inpatient hospital services furnished by LTCHs described in section 
1886(d)(1)(B)(iv) of the Act.
     Include an adequate patient classification system that is 
based on DRGs that reflect the differences in patient resource use and 
costs.
     Maintain budget neutrality.
     Submit a report to the Congress describing this system by 
October 1, 2001.
     Implement this system for cost reporting periods beginning 
on or after October 1, 2002.
    Section 307(b) of the BIPA modified the requirements of section 123 
of the BBRA by requiring the Secretary to--
     Examine the feasibility and the impact of basing payment 
under the prospective payment system on the use of existing (or 
refined) DRGs that have been modified to account for different resource 
use of LTCH patients, as well as the use of the most recently available 
hospital data.
     Examine appropriate adjustments to LTCH prospective 
payments, including adjustments to DRG weights, area wage adjustments, 
geographic reclassification, outliers, updates, and a disproportionate 
share adjustment.
    Although the statutory mandate for development of the LTCH 
prospective payment system established in the BBRA and the BIPA 
requires a per discharge, DRG-based system, generally the statute gives 
the Secretary broad discretion in designing the prospective payment 
system. The design of any prospective payment system requires decisions 
on the following issues:
     The categories used to classify services such as DRGs.
     The methodology for calculating the relative weights that 
are assigned to each patient category to reflect the relative 
difference in resource use across DRGs (these are relative values in 
economic terminology).
     The methodology for calculating the base rate, which is 
the basis for determining the DRG-based Federal payment rates. It is a 
standardized payment amount that is based on average costs from a base 
period and also reflects the combined aggregate effects of the payment 
weights and various facility-level and case-level adjustments. 
Operating and capital-related costs may be combined in this base rate 
or may be treated separately.
     Adjustments to the base rate to reflect cost differences 
across providers, such as disproportionate share adjustments, indirect 
graduate medical education programs, and outliers.
     Finally, a procedure for the transition from the current 
system to the DRG-based prospective payment system must be established.
    We pursued a two-pronged strategy as we developed the prospective 
payment system for LTCHs. First, we analyzed the data and empirical 
facts about LTCH patients and providers summarized in section V.C. of 
this preamble. Secondly, in light of this information, we analyzed each 
option based on regressions and simulations, using the data sets 
described in section V.B. of this preamble.
    Both technical and policy considerations were important in these 
design proposals. We reviewed features of other recent prospective 
payment systems designed or implemented by CMS for other postacute care 
providers to determine the feasibility of including features in the 
LTCH prospective payment system and to identify modifications that 
might enhance their application for this system. In addition, we 
considered factors that were important to the development of Medicare's 
acute care hospital inpatient prospective payment system, such as urban 
and rural location and whether the hospital served a disproportionate 
share of low-income patients. We also analyzed clinical significance, 
administrative simplicity, availability of data, and consistency with 
other Medicare payment policies.
    In addition to satisfying statutory requirements, the design of the 
prospective payment system for LTCHs presented in this final rule is 
the result of the following factors:
     Our empirical understanding of the ``universe'' of LTCHs 
and long-term care patients, as set forth in section V.C. of this 
preamble.
     Our experience with the acute care hospital inpatient 
prospective payment system.
     Consideration of recommendations in MedPAC's reports to 
Congress on postacute care.
     Our monitoring of the establishment and continuing 
development and refinement of prospective payment systems for IRFs, 
SNFs, and HHAs.
    In addition, as we deliberated on the choice of the specific model 
of DRG-based system that was to be used for the LTCH prospective 
payment system, we gathered information from LTCH physicians and LTCH 
representatives.

VIII. Elements of the LTCH Prospective Payment System

A. Overview of the System

    We are implementing a prospective payment system for LTCHs that 
will use

[[Page 55969]]

information from LTCH patient records to classify patients into 
distinct LTC-DRGs based on clinical characteristics and expected 
resource needs. This patient classification system is discussed in 
detail in section IX. of this final rule. The separate payments that 
will be calculated for each LTC-DRG and any adjustments to these 
payments are discussed in detail in section X.J. of this final rule. 
Below we discuss the applicability of the requirements of the system 
and other implementation provisions.

B. Applicability

1. Criteria for Classification
    Our existing regulations at 42 CFR Part 482, Subparts A through D, 
set forth the general conditions that hospitals must meet to qualify to 
participate in Medicare. There are no additional conditions for LTCHs 
as there are for psychiatric facilities.
    Criteria for classification of a hospital as a LTCH for purposes of 
payment are set forth in existing Sec. 412.23(e). Section 412.23(e) 
provides that a LTCH must--
     Have a provider agreement to participate as a hospital and 
an average inpatient length of stay greater than 25 days; or for cost 
reporting periods beginning on or after August 5, 1997, for a hospital 
that was first excluded from the acute care hospital inpatient 
prospective payment system in 1986, have an average inpatient length of 
stay of greater than 20 days and demonstrate that at least 80 percent 
of its annual Medicare inpatient discharges in the 12-month cost 
reporting period ending in FY 1997 have a principal diagnosis that 
reflects a finding of neoplastic disease, as defined in regulations. 
The calculation of the average inpatient length of stay is calculated 
by dividing the number of total inpatient days (less leave or pass 
days) by the number of total discharges for the hospital's most recent 
complete cost reporting period.
     Meet the additional criteria specified in Sec. 412.22(e) 
if it is to be classified as a hospital-within-a-hospital and to be 
excluded from the acute care hospital inpatient prospective payment 
system.
     Meet the additional criteria specified in Sec. 412.22(h) 
if it is to be classified as a satellite facility and to be excluded 
from the acute care hospital inpatient prospective payment system.
    In the March 22, 2002 proposed rule, we proposed that we would 
apply the existing criteria described above for classification as a 
LTCH under the LTCH prospective payment system with one exception 
relating to the average length of stay requirement discussed in section 
VIII.B.2. below.
    Comment: One commenter described a specific LTCH that specializes 
in end-of-life palliative care for advanced stage cancer patients. 
Because of the costs associated with this LTCH's case-mix, the 
commenter was concerned that the LTCH would be unable to continue to 
offer this type of care based on the payments it expected to receive 
under the LTCH prospective payment system. Therefore, the commenter 
requested that CMS allow the hospital to qualify as either a critical 
access hospital (CAH) or a cancer hospital and continue to be exempted 
from the acute care hospital inpatient prospective payment system and 
be paid on a reasonable cost basis.
    Response: In order for a hospital to be classified as a CAH and not 
as a LTCH, the hospital would have to meet the statutory criteria for 
classification as a CAH in section 1820(c)(1)(B) of the Act. Similarly, 
a hospital would have to meet the statutory criteria for classification 
as a cancer hospital in section 1886(d)(1)(B)(v) of the Act to be 
classified as such. To the extent that a hospital does not satisfy the 
statutory criteria to be classified as a CAH or a cancer hospital and 
continues to satisfy the statutory criteria to be classified as a LTCH, 
the hospital will continue to be classified as a LTCH as required by 
the statute. Any changes in either of these criteria and the 
accompanying requirements would require legislative action.
    Comment: Several commenters referenced existing provisions at 
Sec. 412.22(f) that ``grandfather'' certain LTCHs for participation in 
the Medicare program and questioned how this status would be affected 
by the implementation of the LTCH prospective payment system.
    Response: We interpret section 4417 of the BBA, codified as section 
1886(d)(1)(B) of the Act and implemented under in Sec. 412.22(f), to 
permit existing LTCHs that were designated LTCHs on or before September 
30, 1995, and were co-located with acute care hospitals as hospitals-
within-hospitals, to be exempt from compliance with Sec. 412.22(e) 
concerning the ownership and control requirements for hospital-within-
hospital status without losing their status as hospitals excluded from 
the acute care hospital inpatient prospective payment system. The 
``grandfathered'' status conferred by the statute, which allowed these 
particular LTCHs to retain the preexisting relationships with their 
host hospitals, will be unaffected by the implementation of the 
prospective payment system for LTCHs. However, we emphasize that, for 
these ``grandfathered'' LTCHs to receive payment under the LTCH 
prospective payment system, they must still satisfy the new 
requirements established under the LTCH prospective payment system for 
the average length of stay for Medicare patients of greater than 25 
days under revised Sec. 412.23(e)(2) discussed below. Moreover, since 
we believe that the intent of the statute was to only exempt those pre-
FY 1996 LTCHs that are hospitals-within-hospitals from the requirements 
of Sec. 412.23(e), these ``grandfathered'' LTCHs will be subject to the 
onsite discharge and readmission policies set forth in Sec. 412.532, in 
the same way that they were under the 5-percent threshold established 
by the TEFRA system (64 FR 41537, July 30, 1999).
    Comment: Two commenters responded to the description of the 
universe of LTCHs in the proposed rule by suggesting that CMS require 
LTCHs that treat large percentages of rehabilitation patients to seek 
certification as IRFs. Another commenter urged CMS to require LTCHs to 
monitor their admission criteria to require evaluation of 
rehabilitation needs and that patients who predominantly need 
rehabilitation, without complex acute medical needs, should be excluded 
from admission to a LTCH. The commenter also suggested that CMS enforce 
an equivalence of payment between LTCHs and IRFs for patients with 
acute rehabilitation needs. An additional commenter suggested that 
LTCHs specializing in treating patients with psychiatric LTC-DRGs be 
required to seek certification as psychiatric facilities.
    Response: Under section 1886(d)(1)(B) of the Act, the prospective 
payment system for acute care hospital inpatient operating costs set 
forth in section 1886(d) of the Act does not apply to several specified 
types of hospitals, including LTCHs which are defined in section 
1886(d)(1)(B)(iv)(I) of the Act as ``* * * a hospital which has an 
average inpatient length of stay (as determined by the Secretary) of 
greater than 25 days.'' Section 1886(d)(1)(B)(iv)(II) of the Act also 
provides another definition of LTCHs: specifically, a hospital that 
first received payment under this subsection in 1986 which has an 
average inpatient length of stay (as determined by the Secretary) of 
greater than 20 days and has 80 percent or more of its annual Medicare 
inpatient discharges with a principal diagnosis of neoplastic disease 
in the 12-month cost reporting period ending in FY 1997. Accordingly, 
the statute does not provide any exclusions from payment as

[[Page 55970]]

a LTCH based on any other criteria, such as treating rehabilitation 
patients or psychiatric patients. As required by the BBRA and the BIPA, 
we designed a prospective payment system for LTCHs, effective October 
1, 2002, as a distinct classification of hospitals excluded from the 
acute care hospital inpatient prospective payment system. Congressional 
action would be required for any additional requirements or 
restrictions for classification as LTCHs. After a hospital qualifies as 
a LTCH and meets the conditions of participation set forth in existing 
regulations at 42 CFR 482, Subparts A through D, the hospital is free 
to determine the type of services it will provide. If a LTCH chooses to 
be treated as a particular type of hospital for Medicare payment 
purposes, it would have to meet the statutory criteria for that 
particular type of hospital.
    Comment: Two commenters questioned specific aspects of the Medicare 
requirements for hospitals to be paid under the LTCH prospective 
payment system. One of the commenters suggested using the collection of 
information requirements established under the Paperwork Reduction Act 
of 1995 as a rationale for urging CMS to gather more information on 
LTCH patients so that CMS could develop a mandatory functional status 
measure for LTCH patients falling into three LTC-DRGs that the 
commenter identified as reflecting rehabilitation needs. The other 
commenter urged CMS to require the development and use of a patient 
assessment tool for LTCH patients classified in rehabilitation LTC-DRGs 
similar to the IRF patient assessment instrument (PAI).
    Response: Section 123 of the BBRA and section 307 of the BIPA 
confers broad authority on the Secretary to design and implement a 
prospective payment system for LTCHs. In particular, although section 
123(a)(2) of the BBRA provides that the Secretary may require LTCHs to 
submit such information as the Secretary requires to develop a LTCH 
prospective payment system, the statute contains no requirement for 
LTCHs to collect information on measuring an individual patient's 
functional status. Section 123 of the BBRA provided the Secretary with 
the authority to collect such information from LTCHs that may be 
necessary to develop the LTCH prospective payment system. The system we 
have developed incorporates all of the DRGs used in the acute care 
hospital inpatient prospective payment system. While many patients 
admitted to LTCHs are rehabilitation patients, most of the patients 
treated by LTCHs are not rehabilitation patients. Accordingly, since 
the IRF prospective payment system, which was developed for 
rehabilitation patients, incorporates functional status as an integral 
part of the classification system, it was necessary to collect patient 
functional status information. However, since, for LTCHs, we have 
adopted the same DRGs used for inpatient acute care hospitals, 
functional status is not a part of that system and, therefore, that 
information is not necessary to collect.
2. Change in the Average 25-Day Total Inpatient Stay Requirement
    Section 1886(d)(1)(B)(iv)(I) of the Act describes a LTCH generally 
as ``a hospital which has an average inpatient length of stay (as 
determined by the Secretary) of greater than 25 days.'' Thus, the 
statute gives the Secretary broad discretion in determining the average 
inpatient length of stay for hospitals for purposes of determining 
whether a hospital warrants exclusion from the acute care hospital 
inpatient prospective payment system under section 1886(d) of the Act. 
Existing Medicare regulations at Secs. 412.23(e)(1) and (e)(2) include 
all hospital inpatients in this calculation of the average inpatient 
length of stay.
    As we indicated in the March 22, 2002 proposed rule (67 FR 13430), 
our data revealed that approximately 52 percent of Medicare patients at 
LTCHs have lengths of stay of less than two-thirds of the average 
length of stay for the LTC-DRGs, and 20 percent have a length of stay 
of even less than 8 days. This means that some hospitals, while 
currently qualifying as LTCH by averaging non-Medicare long-stay 
patients to maintain a length of stay of over 25 days, do not generally 
furnish ``long-term care'' to their Medicare patients. In these 
situations, many of the hospitals' short-stay Medicare patients could 
be receiving appropriate services as patients at acute care hospitals. 
Under the LTCH prospective payment system, the LTC-DRG weights and 
standard Federal payment rate are based on the charges and costs of 
services furnished to LTCH patients, which are typically more medically 
complex and more costly than those furnished to acute care hospital 
patients.
    The LTCH prospective payment system will result in higher per 
discharge payments for LTCHs than payments under the acute care 
hospital inpatient prospective payment system for patients that will 
group into identical DRGs under each system. Therefore, we stated that 
we believed that application of current policy, which factors in non-
Medicare patients' lengths of stay in determining LTCH status, could 
result in inappropriately higher payments for those Medicare short-stay 
patients who happen to be treated in a LTCH instead of an acute care 
hospital. This is the case when a hospital does not reach the mandatory 
25-day average length of stay for designation as a LTCH without non-
Medicare patients included in the calculation. Therefore, we proposed 
that if a hospital were not treating Medicare patients that, on 
average, require the more costly services offered at LTCHs that 
differentiate these hospitals from acute care hospitals, Medicare 
payments would be determined under the acute care hospital inpatient 
prospective payment system. Such payments would be lower for each acute 
care DRG than for each LTC-DRG, reflecting the lower costs of acute 
care hospitals.
    Under the current reasonable cost-based reimbursement system, 
Medicare payments to LTCHs are commensurate with the actual reasonable 
costs incurred by the hospital. Therefore, under that system, Medicare 
payments for shorter lengths of stay patients reflect the lower costs 
of those patients. However, under the LTCH prospective payment system, 
which is based on average costs of treatment for particular diagnosis, 
the hospital will receive prospective payments based on the average 
costs for these much shorter length of stay patients. Even under our 
short-stay outlier policy, as described in section X.C. of this final 
rule, the hospital will have the opportunity to be paid 120 percent of 
its costs.
    Therefore, in the March 22, 2002 proposed rule, we proposed to 
include the hospital's Medicare patients, but not non-Medicare 
patients, in determining the average inpatient length of stay 
(Sec. 412.23(e)(2)) for purposes of section 1886(d)(1)(B)(iv)(I) of the 
Act.
    Our proposal was based on a belief that there would be a strong 
incentive for LTCHs not to admit many short-stay Medicare patients 
since doing so could jeopardize their status as a LTCH. Instead, those 
patients could receive appropriate care at an acute care hospital and 
the care will be paid under the acute care hospital inpatient 
prospective payment system. Furthermore, our proposal to change the 
methodology for determining the average inpatient length of stay to be 
based only on Medicare patients was consistent with the intent of our 
proposed policies to make different payments for cases of very short-
short stay discharge and short-stay outliers. These proposed policies 
also were intended to discourage LTCHs under the prospective payment 
system from treating Medicare patients who do not

[[Page 55971]]

require the more costly resources of LTCHs and who could reasonably be 
treated in acute care hospitals.
    We received a substantial number of comments on the proposed change 
to the average 25-day length of stay requirement.
    Comment: The majority of the commenters endorsed the proposed 
policy of counting only Medicare patients in determining the 25-day 
average length of stay. However, the commenters believed that the 
calculation should be based on total days that a Medicare patient 
received care in the LTCH rather than just the days for which the cost 
of care was covered by Medicare (that is, ``covered days'').
    Since a high percentage of LTCH patients are admitted following 
inpatient stays at acute care hospitals, the commenters expressed 
concern that some patients could exhaust their Medicare coverage before 
it was clinically appropriate for them to be discharged from the LTCH. 
The commenters were concerned that if only Medicare-covered days were 
counted in the average length of stay calculation for qualification as 
a LTCH, it would behoove a hospital to treat only those Medicare 
patients who were far from exhausting their Part A benefits and, 
concomitantly, to refuse admittance to patients with limited or no 
remaining Medicare days, regardless of the clinical appropriateness of 
such an admission in order to retain (or attain) LTCH status. The 
commenters gave the following as an example: If only covered days were 
counted in the qualification formula, a Medicare patient who was 
actually in the LTCH for 30 days but only had 4 days of Medicare Part A 
coverage remaining upon admittance to the LTCH, for purposes of the 
formula, would count as a patient stay of 4 days. Thus, the commenters 
pointed out, while the hospital would be treating Medicare patients who 
have an average length of stay of over 25 days, a number of these 
admissions could jeopardize the hospital's payment under Medicare as a 
LTCH.
    Two commenters also noted that, under existing policy which counted 
all patient days, Medicare noncovered days were not excluded from the 
25-day average length of stay calculations. They urged us to continue 
this policy while restricting the actual patient count to Medicare 
patients.
    Response: As noted above, our data analyses disclosed that a 
significant number of Medicare patients at LTCHs were treated for 
considerably less time than the average length of stay. In many cases, 
in order to maintain the current 25-day length of stay requirement, 
these shorter Medicare stays were being offset by much longer stays of 
non-Medicare patients. Given the Secretary's broad discretion under 
section 1886(d)(1)(B)(iv)(I) of the Act to define the 25-day average 
length of stay, we proposed to revise Sec. 412.23(e)(1) to limit the 
average inpatient length of stay calculation solely to Medicare 
patients. Our purpose was to ensure that payments under the LTCH 
prospective payment system are based on the charges and costs of 
treating Medicare patients with the high medical complexity associated 
with LTCHs, and not the costs of providing highly complex care to non-
Medicare patients.
    We do not wish to create any barriers for LTCHs to treat Medicare 
patients who require long-term hospitalization and who could benefit 
from the particular treatment modalities available in some LTCHs. LTCHs 
exist as a provider-type in order to treat Medicare patients requiring 
complex long-term, hospital-level care. We believe that a hospital's 
right to qualify for payments under the prospective payment system for 
LTCHs should result from the actual provision of clinically appropriate 
care to Medicare LTCH patients rather than on the number of Medicare 
covered days remaining for any of their patients during any particular 
cost reporting period. Accordingly, in this final rule, we are 
maintaining our current policy of counting all patient stays and 
revising Secs. 412.23(e)(2) and (e)(3) to specify that we will count 
all the days in a Medicare patient's stay (covered and noncovered 
days), that is, total days, in the LTCH in calculating whether a LTCH 
meets the average 25-day length of stay requirement.
    Comment: Two commenters disagreed with the proposed policy change 
and requested CMS to retain the policy of counting all patient days in 
the calculation. One of the commenters noted that, based on its 
experience, its non-Medicare patients required more complicated 
treatment than its Medicare patients and, therefore, for a hospital's 
status to hinge on the shorter length of stay of Medicare patients 
contradicted the purpose of a LTCH.
    Response: We reiterate that section 1886(d)(1)(B)(iv)(I) of the Act 
confers broad authority on the Secretary to determine the parameters of 
the ``average inpatient length of stay of greater than 25 days.'' We 
interpret the provisions to apply to payment for patients who are 
provided care under Medicare. We believe that the redefinition of the 
average length-of-stay criterion as limited solely to Medicare patients 
at LTCHs conforms to the requirements of section 123 of the BBRA for 
the development of a prospective payment system for payment of 
inpatient hospital services furnished by LTCHs ``under the [M]edicare 
program.'' Furthermore, nothing in this revised criterion prevents or 
discourages LTCHs from accepting non-Medicare patients. Should a LTCH 
be unable to retain its status within this payment category because a 
significant number of its Medicare patients do not require long-term 
hospital-level care, we believe that it is reasonable for the facility 
to reevaluate the appropriateness of its admission policies. 
Notwithstanding any changes in the type of patients treated at the 
hospital, the hospital will still be able to admit and be paid by 
Medicare as an acute care hospital.
    Comment: Several commenters expressed concern about the length of 
time an existing LTCH would have to comply with the proposed revised 
average 25-day length of stay requirement before its ability to 
participate in Medicare as an LTCH would be jeopardized and questioned 
compliance monitoring. The commenters suggested that CMS institute a 
``grace period'' for LTCHs to comply with the new requirement.
    Response: The revised definition for an average length of stay, 
which is determined on Medicare inpatients only, is effective for LTCH 
hospitals starting with their first cost reporting period that begins 
on or after October 1, 2002. We have directed our fiscal intermediaries 
to determine whether existing LTCHs qualify for payments under the LTCH 
prospective payment system according to the revised criteria after 
October 1, 2002. In addition, we have directed our fiscal 
intermediaries to notify LTCHs about whether a LTCH qualifies for 
payment under the LTCH prospective payment system before the start of 
the LTCH's next cost reporting period.
    Under existing policy at Sec. 412.22(d), changes in a hospital's 
status are effective at the beginning of the next cost reporting period 
and are effective for the entire cost reporting period. Therefore, for 
example, in the case of an existing LTCH with a cost reporting period 
beginning on October 1, 2002, for which a LTCH's fiscal intermediary 
determined on January 15, 2003, that the LTCH did not meet the new 25-
day average length of stay criterion for the 12-month period for which 
the fiscal intermediary or CMS has the most recent cost report data, 
the LTCH would be paid as a LTCH until September 30, 2003. The LTCH 
would then lose its LTCH status as of October 1, 2003 unless for the 6 
months prior to

[[Page 55972]]

September 30, 2003, the LTCH demonstrated that it had an average length 
of stay of greater than 25 days for its Medicare inpatients under 
existing Sec. 412.23(e)(3)(ii), which we are not revising. If the 
hospital was able to demonstrate that during the 6 months prior to 
September 30, 2003, that it had an average Medicare length of stay of 
greater than 25 days, the hospital would continue to be paid as a LTCH 
even after October 1, 2003 (Sec. 412.23(e)(3)(ii)). Therefore, 
notification by the LTCH's fiscal intermediary following the effective 
date of the LTCH prospective payment system on October 1, 2002, will 
permit LTCHs that would not qualify based on their most recent cost 
report data to adapt to the revised length of stay criterion before 
reaching the actual point where they would cease to be paid as LTCHs.
    As a further example, a LTCH that begins its next cost reporting 
period on January 1, 2003 will be notified about whether it satisfies 
the revised average length of stay criterion effective on October 1, 
2002, for the 12-month period for which the fiscal intermediary or CMS 
has the most recent cost report data, by its fiscal intermediary after 
the start of its fiscal year on January 1, 2003. In the event that a 
LTCH's most recent cost report indicates that it would not qualify, the 
LTCH would still be paid as a LTCH from January 1, 2003 through 
December 31, 2003. The hospital would lose its LTCH status as of 
January 1, 2004, and be paid under the acute care hospital inpatient 
prospective payment system unless it provides data to its fiscal 
intermediary for the 6-month period immediately preceding December 31, 
2003, which demonstrate that it satisfies the average length of stay 
criterion (Sec. 412.23(e)(3)(ii)).
    Through application of the existing regulations described above, we 
believe that LTCHs are granted sufficient time to adapt to the new 
length of stay requirements for payment under the LTCH prospective 
payment system and we do not believe that it is necessary or 
appropriate to grant an additional ``grace period'' for this purpose.
    Comment: One commenter noted that juxtaposing the proposed 
interrupted stay policy with the revised average 25-day length of stay 
criterion could be problematic in determining whether a hospital 
continued to qualify for Medicare payments as a LTCH. The commenter 
described the following scenario: a patient, after a 100-day stay at a 
LTCH, is discharged to an acute care hospital 5 days before the end of 
a Medicare fiscal year that resulted in an average length of stay of 
25.01 days. The patient is then readmitted at the start of the next 
Medicare fiscal year to the LTCH as an interrupted stay from the acute 
care hospital. Under our proposed interrupted stay policy, we would 
treat both stays as one discharge from the LTCH. Therefore, the 
patient's 100-day stay from the prior Medicare cost reporting period 
would be counted in the following year's cost reporting period and the 
LTCH's average Medicare inpatient length of stay for the prior cost 
reporting period would drop below 25 days. The commenter questioned 
whether, for purposes of calculating the average 25-day length of stay, 
the LTCH be at risk of losing LTCH status if the average length of stay 
for the previous Medicare fiscal year fell below the 25 days.
    Response: Under our proposed interrupted stay policy, a LTCH 
patient who is discharged to an acute care inpatient hospital, an IRF, 
or a SNF and then returns to the same LTCH would be treated as an 
interrupted stay (with one LTC-DRG payment) or as a new admission (with 
two separate LTC-DRG payments) depending on the patient's length of 
stay compared to the average length of stay and the standard deviation 
for the acute care hospital inpatient prospective payment system DRG, 
the IRF combination of the CMG and the comorbidity tier, or 45 days for 
all Medicare SNF cases.
    We have revised the proposed interrupted stay policy in this final 
rule. The interrupted stay policy set forth in section X.E. of this 
final rule provides that the lengths of stay at acute care hospitals 
and IRFs are based on one standard deviation from the average length of 
stay for all patients in acute hospitals and IRFs, respectively. 
Therefore, in this final rule, the interrupted stay policy for acute 
care hospitals, IRFs, and SNFs are based on the same formula. Under 
this revised policy, the patient stay described by the commenter would 
be an interrupted stay if the patient returned to the LTCH from the 
acute care hospital before reaching the 9-day threshold for acute care 
hospitals. The readmission to the LTCH would be considered as a 
resumption of the treatment from the original admission rather than as 
a second admission. Therefore, the patient's original discharge from 
the LTCH at the end of the fiscal year would not count as a discharge 
for length of stay calculations for that fiscal year because the 
discharge to the acute care hospital is merely the point at which the 
stay was interrupted, and the patient ultimately returned to the same 
LTCH within a specified fixed day period. For both Medicare payment 
determinations under the interrupted stay policy and length of stay 
calculations, the discharge for that patient would occur when the 
patient is discharged from the LTCH during the next fiscal year. This 
is the case since the calculation of a LTCH's average length of stay 
for purposes of qualifying as a LTCH is based on discharges during a 
cost reporting period. Consequently, in accordance with the 
requirements at Sec. 412.23(e), while the days of care provided to this 
patient would be included in the length of stay calculation in the 
first year, the discharge for that patient with the 100-day stay would 
be counted in the length of stay calculation for the subsequent fiscal 
year.
    We understand the commenter's concern that such a scenario could 
jeopardize the hospital's ability to participate in the Medicare 
program as a LTCH. We emphasize that, under the policy described in the 
previous response, this is not the case.
    The procedure by which a LTCH will be evaluated by its fiscal 
intermediary to determine whether it will qualify as a LTCH under the 
revised 25-day average length of stay criterion is the same procedure 
presently employed under the TEFRA system. Following the review of the 
LTCH's most recent cost report by the fiscal intermediary, which for FY 
2003 will occur following the effective date of the LTCH prospective 
payment system, the LTCH will be notified whether, based on that cost 
report, it satisfies the greater than 25-day average length of stay 
requirement for its Medicare patients for payment as a LTCH under the 
LTCH prospective payment system. As noted above, the LTCH will become 
subject to this revised criterion for its first cost reporting period 
beginning on or after October 1, 2002.
    A LTCH with a cost reporting year of October 1, 2002 through 
September 30, 2003 that does not qualify as a LTCH under the new 
criterion based on its FY 2001 cost report will continue to be paid as 
a LTCH until October 1, 2003. The hospital will then be paid as an 
acute care hospital unless it demonstrates that, during the 6 months 
prior to October 1, 2003, it had an average Medicare inpatient length 
of stay of greater than 25 days (Sec. 412.23(e)(3)(ii)). Therefore, 
under the scenario presented by the commenter in which the LTCH that 
failed the 25-day average length of stay requirement for its Medicare 
patients during one fiscal year because the pivotal discharge for that 
year was forced into the next year by the interrupted stay policy, the 
LTCH would not lose its designation if it could present 6 months of 
data indicating compliance with the new requirement

[[Page 55973]]

for the period preceding the cost reporting period for which it would 
lose its designation.
    Comment: Three commenters recommended that CMS change the day 
requirement in the average length of stay criterion. One commenter 
recommended lowering the 25 days to 20 days. Another commenter 
recommended requiring that only 95 percent of all LTCHs meet the 25-day 
requirement. The third commenter recommended changing the length of 
stay criterion so that it is computed based on the median length of 
stay rather than the average length of stay.
    Response: Section 1886(d)(1)(B)(iv)(I) of the Act defines a LTCH as 
``* * * a hospital which has an average inpatient length of stay (as 
determined by the Secretary) of greater than 25 days'' (emphasis 
added). Although the Secretary has been granted broad authority in 
defining how the statute is implemented, section 1886(d)(1)(B)(iv)(I) 
of the Act clearly and unambiguously establishes the 25-day standard 
and the use of the average in the computation. The changes suggested by 
the commenters would require legislative action.
    Comment: One commenter questioned why CMS decided to limit the 
average 25-day length of stay criterion to Medicare patients only, but 
in establishing the prospective payment system for IRFs, the ``75 
percent rule'' was applied to all patients, regardless of payer source.
    Response: The only requirement imposed by section 
1886(d)(1)(B)(iv)(I) of the Act that differentiates a LTCH from another 
acute hospital is the average length of stay requirement. In addition, 
as stated earlier, our data revealed that a considerable proportion of 
Medicare patients are not receiving ``long-term care'' at LTCHs. The 
revision was proposed on the basis of the calculation of the greater 
than 25-day length of stay requirement, but did not restrict the 
patient census of the LTCH. Notwithstanding the proposed revision, a 
LTCH is free to admit and treat any patient it believes is clinically 
appropriate. Should that LTCH admit a short-stay Medicare patient, 
under this final rule the stay will be paid for under the short-stay 
outlier policy (section X.C. of this preamble and Sec. 412.529 of the 
final regulations).
    The objective of our revised policy is to establish a payment 
system for the care of Medicare patients at LTCHs that truly require 
the type of care and resources available at LTCHs and, therefore, incur 
costs to the Medicare system in accordance with such treatment. Should 
a LTCH admit many short-stay Medicare patients, it could well 
jeopardize its ability to participate under Medicare as a LTCH.
    We are currently reviewing criteria for qualifying as an IRF, 
including the 75-percent rule, to determine whether any changes to the 
policy or administrative procedures for enforcing it are appropriate. 
Accordingly, rather than making changes to the types of patients used 
in calculating the 75 percent criterion at this time, we intend to 
address this issue as it affects IRFs when we address all of the 
qualifying criteria.
    Comment: One commenter pointed out that as a LTCH improves its 
efficiency under the LTCH prospective payment system, the result could 
be shorter lengths of stay for Medicare patients, an outcome that would 
jeopardize the hospital's status as a LTCH.
    Response: We agree with the commenter that as a LTCH becomes more 
efficient, its average length of stay may be reduced. Our experience 
with implementing other prospective payment systems under Medicare 
encourages us to believe that, even under circumstances of providing 
treatment for the most severely ill patient, quality of care can be 
preserved and even be improved once hospitals adapt to such a payment 
system. Our data, reflecting LTCHs throughout the country as well as 
acute care hospitals that treat patients who could also be treated in 
LTCHs, reveal a range of lengths of stay for the same diagnoses. If 
this reduction brings the hospital's average length of stay to 25 days 
or less, the hospital would lose its LTCH status. However, the 
requirements for both the DRG-based prospective payment system and the 
greater than 25-day average length of stay criterion are statutory. Any 
changes in these requirements must be pursued at the legislative level.
    Comment: One commenter suggested that, since the proposed systems 
design for the LTCH prospective payment system was based on data 
gathered from all hospitals identified in our provider files as LTCHs, 
if CMS changed the criteria for payment under Medicare from a 
consideration of average lengths of stay for all patients to those of 
only Medicare patients, data from LTCHs that would lose their 
designation under this change should be excluded from payment modeling.
    Response: Payment modeling for the LTCH prospective payment system 
was based on an analysis of data from existing LTCHs on their Medicare 
patients, costs, charges, and payments. The commenter appears to 
presume the following: That as of October 1, 2002, existing LTCHs not 
qualifying under the revised average length of stay requirement would 
lose their designation as LTCHS and that data from these hospitals 
should therefore not be included in payment simulations and policy 
determinations. We disagree with the commenter's points. The revised 
length of stay policy is a requirement of the prospective payment 
system for LTCHs and will become effective for any LTCH when that 
hospital becomes subject to the prospective payment system, that is, 
when the LTCH starts its first cost reporting period that begins on or 
after October 1, 2002. It is not appropriate to determine whether a 
hospital meets the new length of stay criterion for our modeling 
purposes. Changes in a hospital's status are effective only at the 
beginning of a cost reporting period and are effective for the entire 
cost reporting period under existing Sec. 412.22(d). For example, if an 
existing LTCH with a cost reporting period that begins on October 1, 
2002, does not meet the 25-day average length of stay criterion 
according to its fiscal intermediary's determination, the LTCH would 
not lose its LTCH status earlier than October 1, 2003, the beginning of 
its next cost reporting period. If in the 6 months prior to October 1, 
2003, the hospital demonstrated an average length of stay of greater 
than 25 days for its Medicare patients, the hospital would continue to 
be paid as a LTCH even after October 1, 2003. We believe that LTCHs 
have a strong incentive to reevaluate their admission policies based on 
this new criterion, and that many of the LTCHs that presently may not 
meet the new requirement may achieve compliance when required and not 
lose their LTCH status. In addition, including the data from those 
hospitals that currently treat Medicare patients with an average length 
of stay of 25 days or less is appropriate. As explained in section 
X.A.2. of this preamble, in calculating the relative weights for each 
LTC-DRG, we adjusted the weight for short-stay outlier cases based on 
the average costs for that LTC-DRG. This adjustment allowed us to 
appropriately include more cases in the calculation of the LTC-DRG 
relative weight. Accordingly, we disagree with the commenter and did 
not remove data from those hospitals in developing the LTCH prospective 
payment system.
    After consideration of public comments received on the proposed 
change in the average 25-day length of stay requirement for LTCHs, in 
this final rule we are adopting the proposed change as final with one 
clarification. Under this final rule, we will determine

[[Page 55974]]

the average inpatient length of stay in a LTCH, for purposes of section 
1886(d)(1)(B)(iv)(I) of the Act, for the hospital's Medicare patients, 
but not non-Medicare patients. In addition, we are clarifying that the 
hospital's 25-day average Medicare inpatient length of stay includes 
all inpatient days (covered and noncovered) of Medicare patients' stays 
at the LTCH.
    In addition, as we indicated in the proposed rule and as authorized 
under the statute, we are changing the methodology for determining the 
average inpatient length of stay for purposes of section 
1886(d)(1)(B)(iv)(I) of the Act, but we are not changing the 
methodology for purposes of section 1886(d)(1)(B)(iv)(II) of the Act 
(Sec. 412.23(e)). For purposes of the latter provision (subclause 
(II)), we are retaining the current methodology (which includes non-
Medicare as well as Medicare patients) because we believe that the 
considerations underlying the change in methodology for subclause (I) 
are not present under subclause (II). As discussed above, we are 
revising the methodology for purposes of the general definition of LTCH 
under subclause (I) because under the current methodology some 
hospitals that might not warrant exclusion from the acute care hospital 
inpatient prospective payment system have nevertheless obtained status 
as excluded hospitals. We believe that excluding non-Medicare patients 
in determining the average inpatient length of stay for purposes of 
subclause (I) would be more appropriate in identifying the hospitals 
that warrant exclusion under the general definition of LTCH in 
subclause (I). However, in enacting subclause (II), Congress provided 
an exception to the general definition of LTCH under subclause (I), and 
we have no reason to believe that the change in methodology for 
determining the average inpatient length of stay would better identify 
the hospitals that Congress intended to exclude under subclause (II).
    We will monitor the types of hospitals that will qualify as LTCHs 
based on the revised 25-day length of stay criterion. It is possible 
that hospitals that currently qualify as either rehabilitation 
hospitals or psychiatric hospitals will now also qualify as LTCHs under 
the revised criterion and will choose to be LTCHs and be paid as LTCHs. 
We also will monitor whether the change in methodology for measuring 
the average length of stay in LTCHs will result in unanticipated shifts 
of patients to IRFs and psychiatric facilities. If this pattern of 
behavior is observed, we will address it at that time.
3. LTCHs Not Subject to the LTCH Prospective Payment System
    In this final rule, we are specifying that only hospitals 
qualifying as LTCHs under the revised criteria described in section 
VIII.B.1. and 2. of this preamble and in revised Sec. 412.23(e) by 
October 1, 2002, will be subject to the LTCH prospective payment 
system. Our treatment of new hospitals first qualifying as LTCHs on or 
after October 1, 2002, is addressed in section X.O. of this final rule.
    The following hospitals are paid under special payment provisions, 
as described in existing Sec. 412.22(c) and, therefore, will not be 
subject to the LTCH prospective payment system rules:
     Veterans Administration hospitals.
     Hospitals that are reimbursed under State cost control 
systems approved under 42 CFR Part 403.
     Hospitals that are reimbursed in accordance with 
demonstration projects authorized under section 402(a) of Public Law 
90-248 (42 U.S.C. 1395b-1) or section 222(a) of Public Law 92-603 (42 
U.S.C. 1395b-1 (note)) (statewide all-payer systems, subject to the 
rate-of-increase test at section 1814(b) of the Act).
     Nonparticipating hospitals furnishing emergency services 
to Medicare beneficiaries.

C. Limitation on Charges to Beneficiaries

    In accordance with existing regulations and for consistency with 
other established hospital prospective payment systems policies, we are 
specifying in this final rule that a LTCH may not charge a beneficiary 
for any services for which a full DRG payment is made by Medicare, even 
if the hospital's costs of furnishing services to that beneficiary are 
greater than the amount the hospital will be paid for those services 
under the LTCH prospective payment system (Sec. 412.507).
    In the proposed rule under Sec. 412.507(b), we specified that a 
LTCH receiving a prospective payment for a covered hospital stay may 
charge the Medicare beneficiary or other person only for the applicable 
deductible and coinsurance amounts under Secs. 409.82, 409.83, and 
409.87 of the existing regulations, and for items or services specified 
under Sec. 489.20(a) of the existing regulations.
    Comment: Some commenters expressed concern with the interaction of 
the proposed reduced per discharge payments for both very short-stay 
discharges and short-stay outliers and the requirements at proposed 
Sec. 412.507 of the regulations which limit the amount the LTCH may 
bill the beneficiary and the effect this will have on Medigap payments.
    Response: We have reviewed our proposed policy and have concluded 
that the language in proposed Sec. 412.507 requires clarification. We 
proposed that beneficiaries who had exhausted their Part A coverage 
prior to two-thirds of the average length of stay (changed in this 
final rule to five-sixths of the geometric average length of stay) for 
each LTC-DRG to receive payments as short-stay outliers. The 
commenters' questions regarding the interaction of the short-stay 
outlier payment policy and Medigap indicate that the commenters also 
understood the intent of our short-stay policy. However, because the 
regulation text may not clearly indicate our intent, we are revising it 
to reflect this intended policy.
    We are revising the language at Sec. 412.507(b) to state that a 
LTCH may not bill the patient for more than the deductible and 
coinsurance amounts if the Medicare payment to the LTCH is the full 
LTC-DRG payment amount. However, if the Medicare payment is for a 
short-stay outlier case that is less than the full LTC-DRG payment 
amount, the LTCH may also charge the beneficiary for services for which 
the costs of those services or the days those services were provided 
were not a basis for calculating the Medicare short-stay outlier 
payment.
    Proposed Sec. 412.507(b) had stated that ``A long-term care 
hospital that receives payment * * * for a covered hospital stay (that 
is, a stay that includes at least one covered day) may charge the 
Medicare beneficiary or other person only for the applicable deductible 
and coinsurance amounts under Secs. 409.82, 409.83, and 409.87 of this 
subchapter, and for items and services as specified under 
Sec. 489.20(a) of this chapter.'' We are revising the language in the 
regulation, since that language could appear to have provided for 
payment of the full LTC-DRG payment (with no adjustment for a short-
stay outlier) as long as the Medicare beneficiary had a stay that 
included at least one covered day. However, payments to LTCHs are 
adjusted for short-stay outliers. By revising Sec. 412.507(b) in this 
final rule, we are clarifying the provision so that Medigap will be 
responsible for payment for the costs of those ``services provided 
during the stay that were not the basis for the short-stay payment.''
    Comment: Several commenters have expressed concern that if Medigap 
insurers are only required to pay outlier rates once a patient has 
exhausted the Medicare-covered days (as is the case

[[Page 55975]]

under the existing acute care hospital inpatient prospective payment 
system and the IRF prospective payment system), LTCHs will most likely 
be seriously underpaid. The commenters asked for clarification that, 
under the LTCH prospective payment system, Medigap insurers are 
required to pay more than a mere continuation of the outlier rate since 
the full DRG payment will not be made in the case of an admission that 
occurs near the point at which the patient would exhaust his or her 
lifetime reserve days.
    Specifically, the commenters asked that CMS issue a program 
memorandum to State insurance commissioners and issuers (commonly 
referred to as a Medigap bulletin) clarifying Medigap insurers' payment 
responsibilities under the new LTCH prospective payment system.
    Response: During any covered Medicare Part A hospital benefit 
period, from days 61 through 90, every Medigap policy must pay the 
hospital coinsurance amount of one-fourth of the hospital deductible 
per day. For every lifetime reserve day (91st to the 150th day) that 
the policyholder uses, the Medigap insurer must pay the coinsurance 
amount of one-half of the hospital deductible. If the policyholder 
exhausts his or her lifetime reserve days, the Medigap insurer is 
required to provide ``coverage of the Medicare Part A eligible expenses 
for hospitalization paid at the DRG day outlier per diem or other 
appropriate standard of payment, subject to a lifetime maximum benefit 
of an additional 365 days.'' (Section 8.B(3) of the Model Regulation 
for Medicare Supplement Policies developed by the National Association 
of Insurance Commissioners (NAIC), which is incorporated by reference 
into section 1882 of the Act.) The term ``Medicare eligible expenses'' 
is defined in the NAIC Model Regulation as expenses of the kinds 
covered by Medicare, to the extent recognized as reasonable and 
medically necessary by Medicare.
    We have consistently interpreted this language to require that the 
Medigap insurer make payments at the rate Medicare would have paid, had 
Medicare Part A hospital days not been exhausted. Under the acute care 
hospital inpatient prospective payment system, even if a patient has 
only one day of Medicare coverage remaining at the time of admission, 
Medicare pays the full DRG payment amount. A Medigap insurer would 
simply be responsible for outliers, if any. Similarly, since patients 
who exhaust their Medicare covered days are frequently in outlier 
status already, the Medigap insurer's responsibility is simply to 
continue paying what Medicare had been paying on the last day of 
coverage (that is, the outlier amount).
    However, under the LTCH prospective payment system, the payment 
methodology is more complex. The LTC-DRG payment amount is based, in 
part, on how long the patient is expected to stay in the LTCH. The 
payment to the LTCH is determined after the patient is discharged, and 
will be reduced if the patient is discharged significantly earlier than 
the expected length of stay. Such stays are referred to as ``short-stay 
outliers.'' The fiscal intermediary follows the formulas specified in 
section X.C. of this preamble to determine the actual payment amount, 
which is expressed in terms of an adjustment to the LTC-DRG payment.
    Accordingly, if a patient with a Medigap policy exhausts Medicare 
covered days before being discharged from a LTCH, the only way to 
determine the ``appropriate standard of payment'' for which the Medigap 
insurer is responsible is to use the same methodology used by Medicare. 
If the beneficiary exhausted Medicare benefits while he or she is still 
within the period of time considered to be a ``short-stay outlier,'' 
Medicare will make payment to the LTCH as if it were a short-stay, 
regardless of the length of stay. This means that the payment that 
happens to be attributed to the last day of Medicare coverage is not an 
accurate basis for calculating the Medigap insurer's responsibility. It 
may be more, or less, than the appropriate LTC-DRG payment ultimately 
applicable to the full stay. The Medigap insurer should use the LTCH 
methodology to calculate the amount Medicare would have paid for the 
full hospital stay, and deduct the amount paid by Medicare for the days 
prior to the exhaustion of benefits.
    Comment: One commenter expressed concern that State Medicaid 
programs might determine the amount of Medicaid payment based on what 
Medicare would pay under the very short-stay policy. The existing 
regulations at Sec. 447.205(b)(1) allows a State to use Medicare level 
of reimbursement without public notice. The commenter was concerned 
that very short-stay rates of payment could migrate to the Medicaid 
program and be used to pay hospitals without regard to the Medicaid 
average length of stay of a patient.
    Response: Medicaid is a joint Federal and State program that 
assists with medical costs for people with low incomes and limited 
resources. Under the Medicaid program, States have the option to pay 
based on Medicare's payment principles or other alternative 
methodologies, subject to the overall Medicare upper payment 
limitation. While, for example, some State Medicaid programs may adopt 
the Medicare payment policy for short-stay cases, the Medicare program 
has no authority to dictate payment policy to State Medicaid programs. 
The commenter raised a concern with the proposed very short-stay 
discharge payment policy. As discussed earlier in this final rule, we 
have eliminated the very short-stay policy and included those stays in 
our short-stay policy in this final rule. The final short-stay policy 
will pay for those cases with lengths of stay at or below five-sixths 
of the geometric average length of stay for the LTC-DRG at the least 
of: (1) 120 percent of the LTC-DRG specific per diem; (2) 120 percent 
of the cost of the case; or (3) the full LTC-DRG payment.
    In accordance with existing regulations and for consistency with 
other established hospital prospective payment systems policies, we are 
specifying in this final rule that a LTCH may not charge a beneficiary 
for any services for which a full LTC-DRG payment is made by Medicare, 
even if the hospital's costs of furnishing services to that beneficiary 
are greater than the amount the hospital will be paid under the LTCH 
prospective payment system (Sec. 412.507).

D. Medical Review Requirements

    In accordance with existing regulations at Secs. 412.44, 412.46, 
and 412.48 and for consistency with other established hospital 
prospective payment systems policies, we proposed and are specifying in 
this final rule that a LTCH must have an agreement with a Quality 
Improvement Organization (QIO) (formerly, a Peer Review Organization 
(PRO)) to have the QIO review, on an ongoing basis, the medical 
necessity, reasonableness, and appropriateness of hospital admissions 
and discharges and of inpatient hospital care for which outlier 
payments are sought; the validity of the hospital's diagnostic and 
procedural information; the completeness, adequacy, and quality of the 
services furnished in the hospital; and other medical or other 
practices with respect to beneficiaries or billing for services 
furnished to beneficiaries (Sec. 412.508(a)). In addition, we are 
requiring that, because payment under the prospective payment system is 
based in part on each patient's principal and secondary diagnoses and 
major procedures performed, as evidenced by the physician's entries in 
the patient's medical record, physicians must

[[Page 55976]]

complete an acknowledgement statement to that effect. We are applying 
the existing hospital requirements for the contents and filing of the 
physician acknowledgment statement (Sec. 412.508(b)).
    Also, as proposed and now codified in this final rule, consistent 
with existing established hospital prospective payment system policies, 
if CMS determines, on the basis of information supplied by the QIO, 
that a hospital has misrepresented admissions, discharges, or billing 
information or has taken an action that results in the unnecessary 
admission or multiple admission of individuals entitled to Part A 
benefits or other inappropriate medical or other practices, CMS may 
deny payment (in whole or in part) for LTCH hospital services related 
to the unnecessary or subsequent readmission of an individual or 
require the hospital to take actions necessary to prevent or correct 
the inappropriate practice. Notice and appeal of a denial of payment 
will be provided under procedures established to implement section 1155 
of the Act. In addition, a determination of a pattern of inappropriate 
admissions and billing practices that has the effect of circumventing 
the prospective payment system will be referred to the Department's 
Office of Inspector General, for handling in accordance with 42 CFR 
1001.301.

E. Furnishing of Inpatient Hospital Services Directly or Under 
Arrangements

    In accordance with existing regulations at Sec. 414.15(m) and for 
consistency with other established hospital prospective payment systems 
policies, a LTCH must furnish covered services to Medicare 
beneficiaries either directly or under arrangements. Under 
Sec. 412.509, the LTCH prospective payment will be payment in full for 
all covered inpatient hospital services, as defined in Sec. 409.10 of 
the existing regulations. We will not pay any provider or supplier 
other than the LTCH for services furnished to a Medicare beneficiary 
who is an inpatient of the LTCH, except for those services that are not 
included as inpatient hospital services that are listed under existing 
Sec. 412.50 (that is, physicians' services that meet the requirements 
of Sec. 415.102(a) for payment on a fee schedule basis; physician 
assistant services as defined in section 1861(s)(2)(K)(i) of the Act; 
nurse practitioners and clinical nurse specialist services, as defined 
in section 1861(s)(2)(K)(ii) of the Act; certified nurse midwife 
services, as defined in section 1861(gg) of the Act; qualified 
psychologist services, as defined in section 1861(ii) of the Act; and 
services of an anesthetist, as defined in Sec. 410.69).

F. Reporting and Recordkeeping Requirements

    In this final rule, we are imposing the same recordkeeping and cost 
reporting requirements of Secs. 413.20 and 413.24 of the existing 
regulations on all LTCHs that will participate in the LTCH prospective 
payment system (Sec. 412.511).

G. Transition Period for Implementation of the LTCH Prospective Payment 
System

    In this final rule, we are providing for a 5-year transition period 
from cost-based reimbursement to fully Federal prospective payment for 
LTCHs as discussed in section X.N. of this preamble. During this 
period, two payment percentages will be used to determine a LTCH's 
total payment under the prospective payment system. The blend 
percentages are as follows:

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

    Therefore, for a cost reporting period beginning on or after 
October 1, 2002, and before October 1, 2003, the total prospective 
payment will consist of 80 percent of the amount based on the current 
reasonable cost-based reimbursement system and 20 percent of the 
Federal prospective payment rate. The percentage of payment based on 
the LTCH prospective payment Federal rate will increase by 20 percent 
and the reasonable cost-based reimbursement rate percentage will 
decrease by 20 percent for each of the remaining 4 fiscal years in the 
transition period. For cost reporting periods beginning on or after 
October 1, 2006, Medicare payment to LTCHs will be determined entirely 
under the Federal prospective payment system methodology. Furthermore, 
LTCHs subject to the blend have the option to elect to be paid 100 
percent of the Federal rate and not be subject to the 5-year 
transition.
    Section X.N. of this final rule contains a detailed description of 
our payment policies during the 5-year transition period, the public 
comments received on our proposal and our responses to those comments, 
and a discussion of changes in the claims processing procedures for an 
interim period of October 1, 2002 until the date of the systems 
implementation, because of a delay in system changes necessary for us 
to accommodate claims processing under the LTCH prospective payment 
system.

H. Implementation Procedures

    In the March 22, 2002 proposed rule, we proposed procedures for 
implementing the LTCH prospective payment system. Section X. of this 
final rule contains more details on the application of these 
procedures. In summary, upon the discharge of the patient from a LTCH, 
the LTCH must assign appropriate diagnosis and procedure codes from the 
International Classification of Diseases, Ninth Revision, Clinical 
Modification (ICD-9-CM). Under a requirement of the Health Insurance 
Portability and Accountability Act of 1996 (HIPAA), Public Law 104-191, 
electronic health care claims, including Medicare claims, will be 
required to be in the new national standard claims format and medical 
data code sets in accordance with regulations at 45 CFR Parts 160 and 
162. Beginning on October 16, 2002, a LTCH that is required to comply 
with the HIPAA Administrative Simplification Standards and that has not 
obtained an extension in compliance with the Administrative Compliance 
Act (Public Law 107-105) must comply with the standards at 42 CFR 
162.1002 and 45 CFR 162.1102 and submit the completed claims form to 
its Medicare fiscal intermediary. The Medicare fiscal intermediary will 
enter the information into its claims

[[Page 55977]]

processing systems and subject it to a series of edits called the 
Medicare Code Editor (MCE). This editor is designed to identify cases 
that will require further review before classification into a LTC-DRG 
(described in section X. of this final rule).
    After screening through the MCE, each claim will be classified into 
the appropriate LTC-DRG by the Medicare LTCH GROUPER. The LTCH GROUPER 
is specialized computer software based on the GROUPER utilized by the 
acute care hospital inpatient prospective payment system, which was 
developed as a means of classifying each case into a DRG on the basis 
of diagnosis and procedure codes and other demographic information 
(age, sex, and discharge status). Following the LTC-DRG assignment, the 
Medicare fiscal intermediary will determine the prospective payment by 
using the Medicare PRICER program, which accounts for hospital-specific 
adjustments.
    As provided for under the acute care hospital inpatient prospective 
payment system, we are providing an opportunity for the LTCH to review 
the LTC-DRG assignments made by the fiscal intermediary 
(Sec. 412.513(c)). A hospital will have 60 days after the date of the 
notice of the initial assignment of a discharge to a LTC-DRG to request 
a review of that assignment. The hospital will be allowed to submit 
additional information as part of its request. The fiscal intermediary 
will review that hospital's request and any additional information and 
will decide whether a change in the LTC-DRG assignment is appropriate. 
If the intermediary decides that a different LTC-DRG should be 
assigned, the appropriate QIO, as specified in Sec. 476.71(c)(2), will 
review the case. Following this 60-day period, the hospital will not be 
able to submit additional information with respect to the LTC-DRG 
assignment or otherwise revise its claim.
    Comment: One commenter requested that we allow a LTCH 90 days 
instead of 60 days following the date of the notice of the initial 
assignment of a discharge to a LTC-DRG to request a review of that 
assignment during the 5-year phasein of the prospective payment system.
    Response: We do not believe that an extension of the 60-day window 
for a LTCH to request a review of the LTC-DRG assignment by the fiscal 
intermediary is warranted. The ICD-9-CM coding system, on which the 
discharge from the LTCH will be based, has been in use in the United 
States since 1979, and all hospitals have been required to use this 
system for submission of Medicare claims. The patient classification 
system (LTC-DRGs) that we have chosen for the LTCH prospective payment 
system is based on the existing DRG system for acute care hospitals, 
which is familiar to coders, physicians, and providers. In addition, 
the timeframe is consistent with the existing 60-day timeframe allowed 
under the acute care hospital inpatient prospective payment system for 
hospitals to request review of DRG assignments by the fiscal 
intermediary (Sec. 412.60(d)). We do not believe that any change in the 
timeframe is warranted here because the provider is a LTCH.
    As discussed in detail in section X.N. of this final rule, we will 
not have in place before January 1, 2003, the standard computer systems 
changes necessary to accommodate claims processing and payment under 
the LTCH prospective payment system. However, beginning October 16, 
2002, we are requiring all LTCHs that are required to comply with the 
HIPAA Administrative Simplification Standards and that have not 
obtained an extension in compliance with the Administrative Compliance 
Act, Public Law 107-105, to submit their claims in compliance with the 
standards at 42 CFR 162.1002 and 45 CFR 162.1102 to their fiscal 
intermediaries using the ICD-9-CM coding. We intend that, as of January 
1, 2003, the fiscal intermediary will reconcile the payment amounts 
that have been made to LTCHs for all covered inpatient hospital 
services furnished to Medicare beneficiaries from cost reporting 
periods that begin on or after October 1, 2002 until the date of the 
systems implementation, with the amounts that are payable under the 
LTCH prospective payment methodology. We will issue specific 
operational instructions to fiscal intermediaries and providers for 
completing and submitting Medicare claims under the LTCH prospective 
payment system through a Medicare Program Memorandum prior to the 
effective date of this final rule.
    Although our computer systems will continue to make payments as in 
the past for an interim period after October 1, 2002, Medicare payments 
to LTCHs will be reconciled after January 1, 2003, based on the LTC-
DRGs as determined by the ICD-9-CM codes recorded on the patient 
claims. Therefore, we urge LTCHs to focus on improved coding practices, 
which are addressed in section IX.E. of this final rule.
    In proposed Sec. 412.535, we proposed a schedule for publishing 
information on the LTCH prospective payment system for each fiscal year 
in the Federal Register, prior to the start of each fiscal year, on or 
before August 1. This cycle coincides with the statutorily mandated 
publication schedule for the acute care hospital inpatient prospective 
payment system. Section 1886(e)(5)(A) of the Act requires that, for the 
acute care hospital inpatient prospective payment system, the proposed 
rule be published in the Federal Register ``not later than the April 1 
before each fiscal year; and the final rule, not later than the August 
1 before such fiscal year.'' The Act imposes no such publication 
schedule for the LTCH prospective payment system. Therefore, in order 
to avoid concurrent publication of annual rules for these two systems, 
for purposes of administrative feasibility and efficiency, we will be 
considering a change in the publication schedule for updating the LTCH 
prospective payment system to July 1 of each year. We will address this 
issue in a future proposed rule.

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

    Section 307(b)(1) of Public Law 106-554 requires that the Secretary 
examine ``the feasibility and the impact of basing payment under such a 
system [the LTCH prospective payment system] on the use of existing (or 
refined) hospital diagnosis-related groups (DRGs) that have been 
modified to account for different resource use of long-term care 
hospital patients as well as the use of the most recently available 
hospital discharge data.'' The LTC-DRG-based patient classification 
system we describe in this section is based on the existing CMS-DRG 
system used in the acute care hospital inpatient prospective payment 
system. As required by section 307(b)(1) of Public Law 106-554, we 
examined the feasibility and the impact of basing payment on the use of 
existing (or refined) hospital DRGs that have been modified to account 
for different resource use of LTCH patients. Therefore, an overview of 
pertinent facts about the existing CMS-DRG system is essential to an 
understanding of the LTC-DRGs that are employed in the LTCH prospective 
payment system.
    As discussed below, we proposed the implementation of LTC-DRGs as a 
patient classification system for the LTCH prospective payment system. 
The LTC-DRGs classify patient discharges based on the principal 
diagnosis, up to eight additional diagnoses, and up to six procedures 
performed during the stay, as well as age, sex, and discharge status of 
the patient. We began the development of the LTC-DRGs system described 
in our proposed rule by using the CMS-DRGs that are currently used in 
the acute care hospital inpatient prospective payment system with the

[[Page 55978]]

most recent data available from the FY 2000 MedPAR file. For this final 
rule, we used data from the FY 2001 MedPAR file. In a departure from 
the acute care hospital inpatient prospective payment system, we also 
proposed the concept of the use of low volume LTC-DRGs (less than 25 
LTCH cases) in determining the LTC-DRG weights, since LTCHs do not 
typically treat the full range of diagnoses as do acute care hospitals.

A. Background

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

B. Historical Exclusion of LTCHs

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

C. Patient Classifications by DRGs

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

[[Page 55979]]

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

D. LTC-DRG Classification System for LTCHs

    Unless otherwise noted, our analysis of a per discharge DRG-based 
patient classification system is based on LTCH data from the FY 2001 
MedPAR file, which contains hospital bills received through May 31, 
2001, for hospital discharges occurring in FY 2001.
    The patient classification system for the LTCH prospective payment 
system is based on the acute care hospital inpatient prospective 
payment system currently used for Medicare beneficiaries. Within the 
LTCH data set, as identified by provider number, we classified all 
cases to the CMS-DRGs. For the proposed rule, we identified individual 
LTCH cases with a length of stay equal to or less than 7 days and 
grouped them into two very short-stay LTC-DRGs, which we discussed in 
detail (67 FR 13434 and 13453-13454). However, as discussed later in 
section X.D. of this preamble, we are not adopting the proposed very 
short-stay discharge policy in this final rule. Instead, we are 
revising the short-stay outlier policy to take into account adjustments 
to payments for cases in which the stay at the LTCH is five-sixths of 
the geometric average length of stay for LTCHs.
    As a result, the patient classification system consists of 510 DRGs 
that form the basis of the FY 2003 LTCH prospective payment system 
GROUPER. The 510 LTC-DRGs include two ``error DRGs''. As in the acute 
care hospital inpatient prospective payment system, we are including 
two error DRGs in which cases that cannot be assigned to valid DRGs 
will be grouped. These two error DRGs are DRG 469 (Principal Diagnosis 
Invalid as a Discharge Diagnosis) and DRG 470 (Ungroupable). (See 66 FR 
40062, August 1, 2001.) The other 508 LTC-DRGs are the same DRGs used 
in the acute care hospital inpatient prospective payment system GROUPER 
for FY 2003 (Version 20.0). Therefore, cases submitted to the fiscal 
intermediaries will be processed using the data elements, MCE, and the 
GROUPER system already in place for the acute care hospital inpatient 
prospective payment system as described above.
    Although payments to LTCHs will be made for the 3-month period 
following the effective date of the LTCH prospective payment system on 
October 1, 2002 under the existing electronic claims processing 
procedure, using ICD-9-CM coding, LTCH payments will be reconciled once 
the claims processing systems are changed to recognize the new LTCH 
prospective payment system. LTCHs will be paid based on the LTC-DRGs as 
determined by the ICD-9-CM codes recorded on the patient claims. 
Therefore, we would urge LTCHs to focus on improved coding practices, 
which are addressed in section IX.E. of this final rule.

E. ICD-9-CM Coding System

1. Historical Use of ICD-9-CM Codes
    The Ninth Revision of the International Classification of Diseases, 
Clinical Modification, was adapted for use in the United States in 
1979. This

[[Page 55980]]

coding system is the basis for the CMS-DRGs, upon which the LTC-DRGs 
are based. The ICD-9-CM codes have historically been used on all 
hospital inpatient claims submitted to CMS for payment. Volumes 1 and 2 
of the ICD-9-CM coding scheme (including the Official ICD-9-CM 
Guidelines for Coding and Reporting) describe diagnoses, including 
diseases, injuries, impairments, other health problems, their 
manifestations, and their causes. The ICD-9-CM Volume 3 describes 
procedures performed on patients (including the Official ICD-9-CM 
Guidelines for Coding and Reporting). These guidelines are available 
through a number of sources, including the following Web site: http://www.cdc.gov/nchs/data/icdguide.pdf.
    We note that should the Secretary, in the future, adopt a different 
medical data code set, hospitals participating in the Medicare program 
would be required to use that code set.
2. Uniform Hospital Discharge Data Set (UHDDS) Definitions
    Because the assignment of a case to a particular LTC-DRG will 
determine the amount that will be paid for the case, it is important 
that the coding is accurate. Classifications and terminology used in 
the LTCH prospective payment system will be consistent with the ICD-9-
CM and the UHDDS, as recommended to the Secretary by the National 
Committee on Vital and Health Statistics (``Uniform Hospital Discharge 
Data: Minimum Data Set, National Center for Health Statistics, April 
1980'') and as revised in 1984 by the Health Information Policy Council 
(HIPC) of the U.S. Department of Health and Human Services.
    We wish to point out that the ICD-9-CM coding terminology and the 
definitions of principal and other diagnoses of the UHDDS are 
consistent with the requirements of the HIPPA Administrative 
Simplification Act of 1996 (45 CFR Part 162). Furthermore, the UHDDS 
has been used as a standard for the development of policies and 
programs related to hospital discharge statistics by both governmental 
and nongovernmental sectors for over 30 years. In addition, the 
following definitions (as described in the 1984 Revision of the Uniform 
Hospital Discharge Data Set, approved by the Secretary of Health and 
Human Services for use starting January 1986) are requirements of the 
ICD-9-CM coding system, and have been used as a standard for the 
development of the CMS-DRGs:
     Diagnoses include all diagnoses that affect the current 
hospital stay.
     Principal diagnosis is defined as the condition 
established after study to be chiefly responsible for occasioning the 
admission of the patient to the hospital for care.
     Other diagnoses (also called secondary diagnoses or 
additional diagnoses) are defined as all conditions that coexist at the 
time of admission, that develop subsequently, or that affect the 
treatment received or the length of stay or both. Diagnoses that relate 
to an earlier episode of care that have no bearing on the current 
hospital stay are excluded.
    All procedures performed will be reported. This includes those that 
are surgical in nature, carry a procedural risk, carry an anesthetic 
risk, or require specialized training.
    As discussed in section VIII.H. of this final rule and consistent 
with the procedures for review of CMS-DRGs under the acute care 
hospital inpatient prospective payment system, we are providing LTCHs 
with a 60-day window after the date of the notice of the initial LTC-
DRG assignment to request review of that assignment. Additional 
information may be provided by the LTCH to the fiscal intermediary as 
part of that review.
3. Maintenance of the ICD-9-CM Coding System
    In September 1985, the ICD-9-CM Coordination and Maintenance (C&M) 
Committee was formed. This is a Federal interdepartmental committee, 
co-chaired by the National Center for Health Statistics (NCHS) and CMS, 
that is charged with maintaining and updating the ICD-9-CM system. The 
C&M 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 C&M Committee is also responsible for 
promoting the use of Federal and non-Federal educational programs and 
other communication techniques with a view toward standardizing coding 
applications and upgrading the quality of the classification system.
    The NCHS has lead responsibility for the ICD-9-CM diagnosis codes 
included in the Tabular List and Alphabetic Index for Diseases, while 
CMS has lead responsibility for the ICD-9-CM procedure codes included 
in the Tabular List and Alphabetic Index for Procedures.
    The C&M Committee encourages participation by health-related 
organizations in the above process. 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 those comments submitted in writing, the C&M 
Committee formulates recommendations, which then must be approved by 
the heads of the respective agencies.
    The C&M committee presents proposals for coding changes at two 
public meetings per year held at the CMS Central Office located in 
Baltimore, Maryland. The agenda and date of the meeting can be accessed 
on the CMS Web site at: http://www.cms.gov/medicare/icd9cm.asp.
    After consideration of public comments received at both meetings 
and in writing, CMS publishes the coding changes in the annual proposed 
and final rules in the Federal Register on Medicare program changes to 
the short-term, acute care hospital inpatient prospective payment 
system. For example, new codes effective for discharges on or after 
October 1, 2002, can be found in Tables 6A through 6F of the August 1, 
2002 hospital inpatient prospective payment system and rates for FY 
2003 final rule (67 FR 50239 through 50243).
    All changes to the ICD-9-CM coding system affecting DRG assignment 
are addressed annually in the acute care hospital inpatient prospective 
payment system proposed and final rules. Since the DRG-based patient 
classification system for the LTCH prospective payment system is based 
on the acute care hospital inpatient prospective payment system DRGs, 
these changes will also affect the LTCH prospective payment system DRG 
patient classification system. As coding changes may have an impact on 
DRG assignment, LTCHs will be encouraged to obtain and correctly use 
the most current edition of the ICD-9-CM codes. The official version of 
the ICD-9-CM codes is available on CD-ROM from the U.S. Government 
Printing Office. The FY 2003 version can be ordered by contacting the 
Superintendent of Documents, U.S. Government Printing

[[Page 55981]]

Office, Dept. 50, Washington, DC 20402-9329, telephone: (202) 512-1800. 
The stock number is not available at this time, but the price is 
$22.00. This version will go out of date on October 1, 2002. LTCHs can 
also order the CD-ROM online at http://www.bookstore.gpo.gov. In 
addition, private vendors also publish the ICD-9-CM Codes in book and 
electronic formats.
    Copies of the procedure portion only of the ICD-9-CM Coordination 
and Maintenance Committee minutes can be obtained from the CMS Web site 
at: http://www.cms.gov/medicare/icd9cm.asp. There is a direct link to 
NCHS's Web site from this Web site. We encourage commenters to address 
suggestions on coding issues involving diagnosis codes to: Donna 
Pickett, Co-Chairperson, ICD-9-CM Coordination and Maintenance 
Committee, NCHS Room 1100, 6525 Belcrest Road, Hyattsville, MD 20782. 
Comments may be sent by e-mail to: [email protected].
    Questions and comments concerning the procedure codes should be 
addressed to: Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination 
and Maintenance Committee, CMS, Center for Medicare Management, 
Purchasing Policy Group, Division of Acute Care, Mail Stop C4-08-06, 
7500 Security Boulevard, Baltimore, MD 21244-1850. Comments may be sent 
by e-mail to: [email protected].
    As noted above, the ICD-9-CM code changes that have been approved 
would become effective at the beginning of the Federal fiscal year, 
October 1. Of particular note to LTCHs will be the invalid diagnosis 
codes (Table 6C) and the invalid procedure codes (Table 6D) located in 
the annual proposed and final rules of the acute care hospital 
inpatient prospective payment system. Claims with invalid codes will 
not be processed by the Medicare claims processing system.
4. Coding Rules and Use of ICD-9-CM Codes in LTCHs
    The emphasis on the need for proper coding cannot be overstated. 
Inappropriate coding of cases can adversely affect the uniformity of 
cases in each LTC-DRG and produce inappropriate weighting factors at 
recalibration.
    Although payments to LTCHs will be made for the 3-month period 
following the effective date of the LTCH prospective payment system on 
October 1, 2002, using the existing electronic claims processing 
procedure, LTCH payments will be reconciled once the claims processing 
systems are changed to recognize the new LTCH prospective payment 
system. LTCHs will be paid based on the LTC-DRGs as determined by the 
ICD-9-CM codes recorded on the patient claims. Therefore, we are urging 
LTCHs to focus on improved coding practices which are addressed in 
section IX.E. of this final rule.
    Because of our concern with correct coding practice, CMS has been 
working with AHA's Editorial Advisory Board on its publication, Coding 
Clinic for ICD-9-CM, since 1984. The Coding Clinic was developed to 
improve the accuracy and uniformity of medical record coding and is 
recognized in the industry as the definitive source of coding 
instruction. In 1987, the AHA created the cooperating parties, who have 
final approval of the coding advice provided in the Coding Clinic. The 
cooperating parties consist of the AHA, the AHIMA (formerly AMRA), CMS 
(formerly HCFA), and NCHS. As we participate on the Editorial Advisory 
Board and are one of the cooperating parties, we support the use of the 
Coding Clinic for coding advice for LTCHs. Information about the Coding 
Clinic can be obtained from the American Hospital Association, Central 
Office on ICD-9-CM, One North Franklin, Chicago, IL 60606, or at its 
Web site at http://www.ahacentraloffice.org.
    Based on our review of claims data submitted by LTCHs, we believe 
it is worthwhile to review some of the basic instructions for coding. 
Our compelling need is based on the review of the data submitted by 
LTCHs. We note that the logic of the care patterns or place of 
treatment should not be considered in reviewing the following 
scenarios. Rather, these are merely examples to illustrate correct 
coding practice.
     Principal diagnosis--As noted above, the specific 
definition for principal diagnosis established by the 1984 Revision of 
the Uniform Hospital Discharge Data Set is ``the condition established 
after study to be chiefly responsible for occasioning the admission of 
the patient to the hospital for care.'' When a patient is discharged 
from an acute care facility and admitted to a LTCH, the appropriate 
principal diagnosis at the LTCH is not necessarily the same diagnosis 
for which the patient received care at the acute care hospital. For 
example, a patient who suffers a stroke (code 436, Acute, but ill-
defined, cerebrovascular disease) is admitted to an acute care hospital 
for diagnosis and treatment. The patient is then discharged and 
admitted to a LTCH for further treatment of left-sided hemiparesis and 
dysphasia. The appropriate principal diagnosis at the LTCH would be a 
code from section 438 (Late effects of cerebrovascular disease), such 
as 438.20 (Late effects of cerebrovascular disease, Hemiplegia 
affecting unspecified side) or 438.12 (Late effects of cerebrovascular 
disease, Dysphasia).
    Coding guidelines state that the residual condition is sequenced 
first followed by the cause of the late effect. In the case of 
cerebrovascular disease, the combination code describes both the 
residual of the stroke (for example, speech or language deficits or 
paralysis) and the cause of the residual (the stroke). Code 436 is used 
only for the first (initial) episode of care for the stroke that was in 
the acute care setting.
     Other diagnoses--Secondary diagnoses that have no bearing 
on the LTCH stay are not coded. For example, a patient who has 
recovered from pneumonia during a previous episode of care will not 
have a diagnosis code for pneumonia included in his or her list of 
discharge diagnoses. The pneumonia was not treated during this LTCH 
admission and, therefore, has no bearing on this case.
     Procedures--Codes reflecting procedures provided during a 
previous acute care hospital stay are not included because the 
procedure was not performed during this LTCH admission. For example, a 
patient with several chronic illnesses is admitted to an acute care 
hospital with a diagnosis of appendicitis for which he or she receives 
an appendectomy. The patient subsequently is transferred to a LTCH for 
medical treatment following surgery, and as a result of the multiple 
secondary conditions, the patient needs a higher level of care than he 
or she could receive at home with an HHA. In this situation, 
appendicitis will not be coded because this condition was resolved with 
the removal of the appendix. The procedure code for appendectomy will 
not be used on the LTCH record, as the procedure was performed in the 
acute care setting, not during the LTCH admission.
    We will train fiscal intermediaries and providers on the new 
system. We also will issue manuals containing procedures as well as 
coding instructions to LTCHs and fiscal intermediaries following the 
publication of this final rule.
    Comment: One commenter approved of CMS' intent to use ICD-9-CM 
codes and the Official Guidelines for Coding and Reporting, but noted 
that LTCHs will need clarification regarding which portion of the 
guidelines applies to them. The commenter specifically mentioned that 
the scenario presented as an example of selection of a principal 
diagnosis for a stroke patient (67 FR 13436) specifies ICD-9-CM code 
438

[[Page 55982]]

(Late effects of cerebrovascular disease) rather than the 436 codes 
reportable by an acute care hospital, and noted that the LTCH admission 
should be considered a transfer.
    Response: We intend that the Official Guidelines for Coding and 
Reporting, available at http://www.cdc.gov/nchs/data/icdguide.pdf, be 
used for LTCHs in the same manner that they are used by short-term 
acute care hospitals. The Guidelines state that selection of a 
principal diagnosis is always governed by the circumstances of the 
admission (Section 2, Selection of Principal Diagnosis). Further, we 
also recommend that the American Hospital Association's publication 
Coding Clinic for ICD-9-CM be used to improve the accuracy and 
uniformity of medical record coding in LTCHs, just as it is used in 
acute care hospitals.
    In the example cited above, we referenced Coding Clinic Fourth 
Quarter 1998 (pp. 88 through 89) for advice on coding CVA. 
Specifically, we stated that codes from categories 430-437 should be 
used throughout the initial episode of care for an acute cerebral 
hemorrhage or infarction. When codes from the 430-437 series are used, 
additional codes are needed to identify any sequelae present (for 
example, hemiplegia [a code from category 342] and aphasia [784.3]). 
Once a patient has completed the initial treatment or is discharged 
from care, codes from category 438 should be assigned instead of codes 
from the 430-437 series to identify residual neurologic deficits.
    When a patient is discharged from a short-term acute care hospital 
and is admitted to a LTCH, the initial treatment period is over and it 
is assumed that the patient has maximized the benefits of 
hospitalization possible for that level of care. When the patient is 
then admitted to a LTCH, the focus of treatment has shifted from 
identification and treatment of the acute episode to treatment for the 
sequelae or residual deficits resulting from the acute process. We 
further note that, for coding purposes, a transfer from an acute care 
setting to a LTCH is, as defined at Sec. 412.4(c), a discharge instead 
of a transfer. (For payment purposes, if the acute care DRG falls into 
the postacute transfer policy, regulations at Sec. 412.4 govern.)
    Therefore, we reiterate that our advice in the coding example cited 
in the proposed rule was correct. The appropriate principal diagnosis 
at the LTCH would be a code from section 438 (Late effects of 
cerebrovascular disease).
    Comment: One commenter stated that CMS should ensure that its 
contractors (fiscal intermediaries) have been thoroughly trained and 
prepared for the LTCH prospective payment system before it is 
implemented. This commenter also suggested that fiscal intermediaries 
should be required to attest to their training and preparation. The 
commenter further suggested that CMS issue coding and training manuals 
to LTCHs as far in advance of implementation of the LTCH prospective 
payment system as possible.
    Another commenter noted that current coding guidelines are vague 
insofar as they pertain to LTCHs, and called for the development of 
specific coding guidelines relating to the transfer of patients from 
acute care hospitals so that records will be appropriately coded for 
the LTCH prospective payment system.
    Response: The fiscal intermediaries have been processing claims for 
acute care hospitals under the acute care hospital inpatient 
prospective payment system since its inception in 1983. We are 
confident that, given almost two decades of experience, they are 
prepared for, and capable of, processing LTCH claims for LTC-DRGs as 
well. However, the fiscal intermediaries will be receiving instruction 
and an overview of the new system before its implementation on October 
1, 2002. The LTCH prospective payment system so closely mimics the 
acute care hospital inpatient prospective payment system that we have 
no overriding concerns about the fiscal intermediaries' capabilities. 
We do not believe an attestation by the fiscal intermediaries is 
necessary, and will monitor their performance as with the 
implementation of any new payment system.
    The training that is to be provided by the fiscal intermediaries 
will be coordinated through CMS' Division of Provider Education and 
Training. That schedule has not yet been established, but information 
will be forthcoming to member hospitals from their fiscal 
intermediaries at a later date. This training will be given as soon as 
possible before the implementation of the LTCH prospective payment 
system.
    With regard to coding issues, both the LTCHs and the short-term 
acute care hospitals should be applying the coding rules in the same 
manner. Since the inception of the acute care hospital inpatient 
prospective payment system, we have recommended that providers adopt 
and use the ICD-9-CM Guidelines for Coding and Reporting and the 
reporting definitions as set forth in the Uniform Hospital Discharge 
Data Set (UHDDS). We stated this recommendation in the proposed rule 
(67 FR 13435), and it was also discussed in the Standards for 
Electronic Transactions (65 FR 50312). In the proposed rule, we also 
expressed our concern for correct coding practice (67 FR 13436), and 
suggest that providers use the American Hospital Association's 
publication Coding Clinic for ICD-9-CM to improve the accuracy and 
uniformity of medical record coding and reporting. We take this 
opportunity to reiterate that we are one of the four cooperating 
parties on AHA's Editorial Advisory Board for Coding Clinic, and we 
support the use of Coding Clinic for coding advice for LTCHs.
    The LTCHs will be using the same guidelines as the short-term, 
acute care hospitals. We anticipate that when coding questions arise, 
the AHA will manage them in the same manner for both types of 
facilities. That is, coding questions submitted to the AHA will be 
brought before their Editorial Advisory Board for consideration and 
resolution. Answers to questions will either be published in Coding 
Clinic or will be answered directly. Information concerning Coding 
Clinic should be obtained from the American Hospital Association, 
Central Office on ICD-9-CM, One North Franklin, Chicago, IL 60606, or 
at its Web site at http://www.ahacentraloffice.org.
    With regard to the comment that development of specific coding 
guidelines be developed that take into account the ``transfer'' of 
patients from acute care hospitals to LTCHs, we again state that when a 
patient is discharged from a short-term, acute care hospital and is 
admitted to a LTCH, the initial treatment period is over. Subsequent 
admission to a LTCH would require that the reason for the admission be 
examined and the principal diagnosis determined based on the merits of 
that admission.
    Comment: Two commenters expressed concern that CMS had inaccurately 
determined the volume and subsequent relative weights for two LTC-DRGs. 
Those LTC-DRGs are DRG 475 (Respiratory System Diagnosis with 
Ventilator Support) and DRG 87 (Pulmonary Edema and Respiratory 
Failure). Patients grouped to DRG 475 were given a proposed relative 
weight of 2.3043, while patients grouped to DRG 87, who are patients 
not requiring ventilator support, were given a higher proposed weight 
of 2.4202. The commenter believed that when providers submitted 
multiple interim bills, the procedure code reflecting ventilator use 
was not reported on each interim bill, resulting in an inaccurate 
number of cases in each of the two DRGs and ultimately resulting in an

[[Page 55983]]

inaccurate computation of the relative weights for both DRGs.
    Response: While the relative weights of 475 and 87 are not a coding 
issue, the hospital's method of reporting the codes has impacted DRG 
assignments and relative weights. The impact of how codes are reported 
is an issue that we did not anticipate when we computed the original 
relative weights. When providers submit multiple interim bills to us, 
only the diagnostic and procedural code data contained on the most 
recent bill are extracted for the MedPAR data file. When the DRG 
relative weights for the proposed rule were computed, they were based 
on the most recent MedPAR data. However, this data set contained some 
cases that apparently did not include all the codes that would have 
been present on the first billing. In one of the most striking 
examples, in those situations when the procedure code for ventilator 
use was not included on the bill, the DRG shifted from 475 to 87. As a 
result of this finding, we have reviewed the MedPAR file and 
recalibrated the relative weights based on the first data submitted to 
MedPAR. Relative weights in Table 3 in the Addendum to this final rule 
reflect our revised calculations.
    Relative to correct coding practice for hospitals submitting 
interim bills, we have consulted with the members of the four 
Cooperating Parties (as discussed in section VIII.E.4. of this 
preamble) and have determined that correct coding practice includes the 
following concepts:
     The principal diagnosis will remain the same throughout 
the entire LTCH stay, and will be reported as the principal diagnosis 
on each claim submitted.
     Secondary or additional diagnoses will be coded as these 
conditions develop and will be reported on each claim submitted. For 
example, a LTCH patient develops a condition, such as decubiti, that 
was not present on admission. The code for this condition should be 
added to the next claim submitted, and will continue to be coded, even 
if the decubiti are successfully treated and ultimately resolved before 
the patient's discharge from the LTCH. If all appropriate secondary 
diagnoses, up to eight, are not present on the final claim, the DRG may 
not be correctly assigned. It is the responsibility of the LTCH to make 
sure their coding practices reflect proper coding on their claims.
     All procedures performed in the LTCH will be reported. 
This means that if a patient is on a ventilator at the beginning of his 
or her LTCH stay, or is placed on a ventilator during that stay, but is 
subsequently weaned from the ventilator, the ventilator code will 
continue to appear on all claims. This is true for the duration of that 
LTCH stay. Likewise, if a patient has another type of procedure such as 
54.51 (Laparoscopic lysis of peritoneal adhesions), code 54.51 should 
continue to be reported on each claim submitted for the duration of the 
patient's stay at the LTCH.
    The above guidelines are in place for short-term, acute care 
hospitals and assure accurate and consistent coding practice. LTCHs are 
to follow the coding guidelines for the acute care hospitals to ensure 
that same accuracy and consistency. There will be only one DRG assigned 
per long-term care hospitalization; it will be assigned at the 
discharge. Therefore, it is mandatory that the coders continue to 
report the same principal diagnosis on all claims and include all 
diagnostic codes that coexist at the time of admission, that 
subsequently develop, or that affect the treatment received. Similarly, 
all procedures performed during that stay are to be reported on each 
claim.

X. Payment System for LTCHs

    In accordance with section 123(a)(1) of Public Law 106-113, we are 
using a discharge as the payment unit for the LTCH prospective payment 
system for Medicare patients. We will update the per discharge payment 
amounts annually. The payment rates encompass both inpatient operating 
and capital-related costs of furnishing covered inpatient LTCH 
services, including routine and ancillary costs, but not the costs of 
bad debts, approved educational activities, blood clotting factors, 
anesthesia services furnished by hospital-employed nonphysician 
anesthetists or obtained under arrangement, or the costs of 
photocopying and mailing medical records requested by a QIO, which are 
costs paid outside the prospective payment system. Generally, 
consistent with current policy under Sec. 412.42, beneficiaries may be 
charged only for deductibles, coinsurance, and noncovered services (for 
example, telephone and television). In addition, beneficiaries may be 
charged for services furnished during a LTCH stay that are not covered 
under Medicare. They may not be charged for the differences between the 
hospital's cost of providing covered care and the Medicare LTCH 
prospective payment amount for the full LTC-DRG. (For further details, 
see section VIII.C. of this preamble.)
    We determine the LTCH prospective payment rates using relative 
weights to account for the variation in resource use among LTC-DRGs. 
During FY 2003, the LTCH prospective payment system will be ``budget 
neutral'' in accordance with section 123(a)(1) of Public Law 106-113. 
That is, total payments for LTCHs during FY 2003 will be projected to 
equal payments that would have been paid for operating and capital-
related costs of LTCHs had this new payment system not been enacted. 
Budget neutrality is discussed in detail in section X.J.2.h. of this 
preamble.
    Based on our analysis of the data, we will make additional payments 
to LTCHs for discharges meeting specified criteria as high-cost 
``outliers.'' Outliers are cases that have unusually high costs, 
exceeding the LTC-DRG payment plus the fixed loss amount, as discussed 
in section X.J.6. of this preamble. In addition to a high-cost outlier 
policy, we also are implementing payment policies regarding short-stay 
outliers and interrupted stays (sections X.C. and X.E. of this 
preamble).
    In general, we are adopting the provisions for determining the 
prospective payments under the LTCH prospective payment system that we 
included in our March 22, 2002 proposed rule. If changes in this final 
rule have been made as a result of comments received, we discuss those 
changes in the context of the policy areas specified in this section of 
the preamble.
    The LTCH prospective payment system uses Federal prospective 
payment rates across 499 distinct LTC-DRGs. We have established a 
standard Federal payment rate based on the best available LTCH cost 
data. LTC-DRG relative weights are applied to the standard Federal rate 
to account for the relative differences in resource use across the LTC-
DRGs. As finalized in this final rule, the system also includes 
adjustments for short-stay outliers, differences in area wages 
(transitioned over 5 years), COLAs in Alaska and Hawaii, and high-cost 
outlier cases, as described in sections X.D., X.J.1., X.J.5., and 
X.J.6. of this preamble, respectively.
    The standard Federal prospective payment rate, which is the basis 
for determining Federal payment rates for each LTC-DRG, is determined 
based on average costs from a base period, and also reflects the 
combined aggregate effects of the payment weights and other policies 
discussed in this section. In discussing the methodology, we begin by 
describing the various adjustments and factors that were considered in 
establishing the standard Federal prospective payment rate. We 
developed prospective payments for LTCHs using the following major 
steps:

[[Page 55984]]

     Develop the LTC-DRG relative weights.
     Determine appropriate payment system adjustments.
     Calculate the budget neutral standard Federal prospective 
payment rate.
     Calculate the Federal LTC-DRG prospective payments.
    A detailed description of each step and a discussion of our 
policies for special cases, payment adjustments, phase-in 
implementation, and other policies follow.

A. Development of the LTC-DRG Relative Weights

1. Overview of Development of the LTC-DRG Relative Weights
    As previously stated, one of the primary goals for the 
implementation of the LTCH prospective payment system is to pay each 
LTCH an appropriate amount for the efficient delivery of care to 
Medicare patients. The system must be able to account adequately for 
each LTCH's case-mix in order to ensure both fair distribution of 
Medicare payments and access to adequate care for those Medicare 
patients whose care is more costly. To accomplish these goals, we 
adjust the standard Federal prospective payment system rate by the LTC-
DRG relative weights in determining payment to LTCHs for each case.
    In this payment system, relative weights for each LTC-DRG are a 
primary element used to account for the variations in cost per 
discharge and resource utilization among the payment groups 
(Sec. 412.515). To ensure that Medicare patients classified to each 
LTC-DRG have access to an appropriate level of services and to 
encourage efficiency, we calculate a relative weight for each LTC-DRG 
that represents the resources needed by an average inpatient LTCH case 
in that LTC-DRG. For example, cases in a LTC-DRG with a relative weight 
of 2 will, on average, cost twice as much as cases in a LTC-DRG with a 
weight of 1.
    To calculate the relative weights in the proposed rule, we obtained 
charges from FY 2000 Medicare hospital bill data from the June 2001 
update of the MedPAR file, and we used Version 18.0 of the CMS GROUPER 
(used under the acute care hospital inpatient prospective payment 
system for FY 2001). In this final rule, we recalculated the relative 
weights based on the most recent MedPAR data (that is, the March 2002 
update of the FY 2001 Medicare hospital bill data, which include bills 
submitted through March 31, 2002) and Version 20.0 of the CMS GROUPER 
(used under the acute care hospital inpatient prospective payment 
system for FY 2003). As we stated in the proposed rule, we have 
recalculated the LTC-DRG relative weights based on the most recent 
available data in this final rule. At the time the proposed rule was 
published, we anticipated that Version 19 of the CMS GROUPER (used 
under the hospital inpatient prospective payment system for FY 2002) 
would be the most recently available. However, due to the recent 
publication of the FY 2003 acute care hospital inpatient prospective 
payment system final rule, we were able to use the Version 20 of the 
CMS GROUPER.
    As we discuss in further detail in section X.K.2.a. of this 
preamble, based on comments regarding the data used in the development 
of the proposed LTCH prospective payment system, we have reconsidered 
the appropriateness of including data from LTCHs that are all-inclusive 
rate providers (AIRPs) and LTCHs that are reimbursed in accordance with 
demonstration projects authorized under section 402(a) of Public Law 
90-248 (42 U.S.C. 1395b-1) or section 222(a) of Public Law 92-603 (42 
U.S.C. 1395b-1).
    Since all-inclusive rate providers have no charge structure, it is 
not feasible to use charge data for these LTCHs to accurately project 
variations in Medicare patient resource use. We do not believe their 
charges are at all comparable to the data for other LTCHs and, 
therefore, believe that including data from AIRPs would have the 
potential to inappropriately skew relative weight determinations. As a 
result, in order to eliminate the influence that including AIRPs would 
have on the LTC-DRG relative weights, we have excluded the data of the 
17 AIRPs in the calculation of the final LTC-DRG relative weights. 
Excluding the AIRPs' data is consistent with the methodology used in 
establishing the IRF prospective payment system (66 FR 41351, August 7, 
2001). In addition, LTCHs that are reimbursed in accordance with 
demonstration projects are not subject to the LTCH prospective payment 
system. Therefore, we determined it would not be appropriate to include 
their data in the development of the LTC-DRG relative weights, and we 
have excluded the data from these three LTCHs in calculating the final 
LTC-DRG relative weights.
    Comment: One commenter inquired whether data on ``charges'' and 
``length of stay'' from the MedPAR cases used to determine the proposed 
LTC-DRG relative weights were covered charges and covered days, rather 
than total charges and total days.
    Response: For the proposed rule, we used covered charges and 
covered days in the determination of the proposed LTC-DRG relative 
weights. However, in this final rule, we have reevaluated this decision 
and determined that consistent with our use of total days in the LTCH 
length of stay qualification formula (section VIII.B.2. of this 
preamble), it is appropriate to use total days and total charges in the 
calculation of the LTC-DRG relative weights. As we explain in section 
VIII.B.2. of this final rule, in our determination of whether a 
hospital qualifies for payment under the LTCH prospective payment 
system, total patient days, rather than covered days, will be used in 
computing a LTCH's required average length of stay of greater than 25 
days for Medicare patients. We are adopting this policy because we 
believe that a criterion based on the total number of treatment days 
for Medicare patients is a better indication of the appropriateness of 
the patient's stay at a LTCH than the number of days covered by 
Medicare for payment purposes.
    In the same way that counting total days better reflects whether or 
not the patient was appropriately hospitalized at a LTCH, charges for 
the entire length of stay (for example, charges for both the covered 
and noncovered days of the stay) will more accurately reflect the 
clinical resources expended in providing care for a specific diagnosis 
than will charges based only on Medicare-covered days. We believe that 
the number of covered days for individual Medicare patients treated in 
LTCHs may not be a reliable source of clinical information for 
determining and recalibrating the LTC-DRG relative weights. For 
example, a patient with a diagnosis of a pulmonary embolism would be 
grouped to LTC-DRG 78, which has an average length of stay of 20.5 
days. If that patient only had 2 days of Medicare coverage remaining 
such that only those 2 covered days and charges were included in 
determining the LTC-DRG relative weights, those numbers would not 
represent the actual clinical services required to treat a patient in 
that LTC-DRG. Therefore, we have revised our methodology and have 
calculated the final LTC-DRG relative weights using total charges and 
total days. Using total charges and total lengths of stay enables us to 
more accurately measure the resources expended in treating a particular 
LTC-DRG as compared to other LTC-DRGs. This will allow us to establish 
a clinically driven determination of relative weights (unaffected by a 
patient's number of covered days of

[[Page 55985]]

care) and, therefore, will result in more appropriate payments.
    By nature, LTCHs often specialize in certain areas, such as 
ventilator-dependent patients and rehabilitation and wound care. Some 
case types (DRGs) may be treated, to a large extent, in hospitals that 
have, from a perspective of charges, relatively high (or low) charges. 
Such nonarbitrary distribution of cases with relatively high (or low) 
charges in specific LTC-DRGs has the potential to inappropriately 
distort the measure of average charges. To account for the fact that 
cases may not be randomly distributed across LTCHs, as we stated in the 
proposed rule, we use a hospital-specific relative value method to 
calculate relative weights. We believe this method will remove this 
hospital-specific source of bias in measuring average charges. 
Specifically, we reduce the impact of the variation in charges across 
providers on any particular LTC-DRG relative weight by converting each 
LTCH's charge for a case to a relative value based on that LTCH's 
average charge. As MedPAC noted in its June 2000 Report to Congress, 
the hospital-specific relative value method eliminates distortion in 
the weights due to systematic differences among hospitals in the level 
of charge markups or costs (p. 58). The case-mix index is the average 
case weight (adjusted to eliminate the effect of short-stay outliers 
that are described in section X.C. of this preamble) for cases at each 
LTCH.
    As we explained in the proposed rule (67 FR 13437), under the 
hospital-specific relative value method, we standardize charges for 
each LTCH by converting its charges for each case to hospital-specific 
relative charge values and then adjusting those values for the LTCH's 
case-mix. The adjustment for case-mix is needed to rescale the 
hospital-specific relative charge values (which, by definition, 
averages 1.0 for each LTCH). The average relative weight for a LTCH is 
its case-mix, so it is reasonable to scale each LTCH's average relative 
charge value by its case-mix. In this way, each LTCH's relative charge 
value is adjusted by its case-mix to an average that reflects the 
complexity of the cases it treats relative to the complexity of the 
cases treated by all other LTCHs (the average case-mix of all LTCHs).
    We standardize charges for each case by first dividing the adjusted 
charge for the case (adjusted for short-stay outliers as described in 
section X.C. of this preamble) by the average adjusted charge for all 
cases at the LTCH in which the case was treated. The average adjusted 
charge reflects the average intensity of the health care services 
delivered by a particular LTCH and the average cost level of that LTCH. 
The resulting ratio is multiplied by that LTCH's case-mix index to 
determine the standardized charge for the case.
    As we explained in the proposed rule, multiplying by the LTCH's 
case-mix index accounts for the fact that the same relative charges are 
given greater weight in a hospital with higher average costs than they 
would at a LTCH with low average costs which is needed to adjust each 
LTCH's relative charge value to reflect its case-mix relative to the 
average case-mix for all LTCHs. Because we standardize charges in this 
manner, we count charges for a Medicare patient at a LTCH with high 
average charges as less resource intensive than they would be at a LTCH 
with low average charges. For example, a $10,000 charge for a case in a 
LTCH with an average adjusted charge of $17,500 reflects a higher level 
of relative resource use than a $10,000 charge for a case in a LTCH 
with the same case-mix, but an average adjusted charge of $35,000. We 
believe that the adjusted charge of an individual case more accurately 
reflects actual resource use for an individual LTCH because the 
variation in charges due to systematic differences in the markup of 
charges among LTCHs is taken into account.
    In order to account for LTC-DRGs with low volume (that is, with 
fewer than 25 LTCH cases), as we discussed in the proposed rule (67 FR 
13438), we group those low volume LTC-DRGs into one of five categories 
(quintiles) based on average charges, for the purposes of determining 
relative weights. For this final rule, using LTCH cases from the March 
2002 update of the FY 2001 MedPAR file, we identified 161 LTC-DRGs that 
contained between 1 and 24 cases. This list of LTC-DRGs was then 
divided into one of the five low volume quintiles, each containing a 
minimum of 32 LTC-DRGs (161/5 = 32 with 1 LTC-DRG as a remainder). We 
made an assignment to a specific quintile by sorting the 161 low volume 
DRGs in ascending order by average charge. Since the number of LTC-DRGs 
with less than 25 LTCH cases is not evenly divisible by five, the 
average charge of the low volume LTC-DRG was used to determine which 
quintile received the additional LTC-DRG. After sorting the 161 volume 
LTC-DRGs in ascending order, the first fifth of low volume (32) LTC-
DRGs with the lowest average charge are grouped into Quintile 1. This 
process was repeated through the remaining low volume LTC-DRGs so that 
4 quintiles contained 32 LTC-DRGs and 1 quintile contained 33 LTC-DRGs. 
Since the average charge of the 97th LTC-DRG in the sorted list is 
closer to the previous LTC-DRG's average charge (assigned to Quintile 
3) than to the average charge of the 98th LTC-DRG on the sorted list 
(to be assigned to Quintile 4), it is placed into Quintile 3. The 
highest average charge cases are grouped into Quintile 5. In order to 
determine the relative weights for the LTC-DRGs with low volume, we 
used the five low volume quintiles described above. The composition of 
each of the five low volume quintiles shown below in Chart 2 are used 
in determining the final LTC-DRG relative weights for FY 2003. We 
determine a relative weight and average length of stay for each of the 
five low volume quintiles using the formula applied to the regular LTC-
DRGs (25 or more cases), as described in section X.A.2. of this final 
rule. We assign the same relative weight and average length of stay to 
each of the LTC-DRGs that make up that low volume quintile. We note 
that as this system is dynamic, it is entirely possible that the number 
and specific type of LTC-DRGs with a low volume of LTCH cases will vary 
in the future. We use the best available claims data in the MedPAR file 
to identify low volume LTC-DRGs and to calculate the relative weights 
based on our methodology.

[[Page 55986]]



              Chart 2.--Composition of Low Volume Quintiles
------------------------------------------------------------------------
           LTC-DRG                            Description
------------------------------------------------------------------------
                               Quintile 1
------------------------------------------------------------------------
021.........................  VIRAL MENINGITIS
045.........................  NEUROLOGICAL EYE DISORDERS
047.........................  OTHER DISORDERS OF THE EYE AGE 17 W/O CC
066.........................  EPISTAXIS
067.........................  EPIGLOTTITIS
072.........................  NASAL TRAUMA & DEFORMITY
084.........................  MAJOR CHEST TRAUMA W/O CC
095.........................  PNEUMOTHORAX W/O CC
118.........................  CARDIAC PACEMAKER DEVICE REPLACEMENT
150.........................  PERITONEAL ADHESIOLYSIS W CC
157.........................  ANAL & STOMAL PROCEDURES W CC
208.........................  DISORDERS OF THE BILIARY TRACT W/O CC
224.........................  SHOULDER,ELBOW OR FOREARM PROC,EXC MAJOR
                               JOINT PROC, W/O CC
230.........................  LOCAL EXCISION & REMOVAL OF INT FIX
                               DEVICES OF HIP & FEMUR
234.........................  OTHER MUSCULOSKELET SYS & CONN TISS O.R.
                               PROC W/O CC
262.........................  BREAST BIOPSY & LOCAL EXCISION FOR NON-
                               MALIGNANCY
284.........................  MINOR SKIN DISORDERS W/O CC
290.........................  THYROID PROCEDURES
301.........................  ENDOCRINE DISORDERS W/O CC
307.........................  PROSTATECTOMY W/O CC
311.........................  TRANSURETHRAL PROCEDURES W/O CC
329.........................  URETHRAL STRICTURE AGE 17 W/O
                               CC
339.........................  TESTES PROCEDURES, NON-MALIGNANCY AGE 17
348.........................  BENIGN PROSTATIC HYPERTROPHY W CC
359.........................  UTERINE & ADNEXA PROC FOR NON-MALIGNANCY W/
                               O CC
360.........................  VAGINA, CERVIX & VULVA PROCEDURES
399.........................  RETICULOENDOTHELIAL & IMMUNITY DISORDERS W/
                               O CC
410.........................  CHEMOTHERAPY W/O ACUTE LEUKEMIA AS
                               SECONDARY DIAGNOSIS
420.........................  FEVER OF UNKNOWN ORIGIN AGE 17
                               W/O CC
455.........................  OTHER INJURY, POISONING & TOXIC EFFECT
                               DIAG W/O CC
494.........................  LAPAROSCOPIC CHOLECYSTECTOMY W/O C.D.E. W/
                               O CC
522.........................  ALCOHOL/DRUG ABUSE OR DEPENDENCE W
                               REHABILITATION THERAPY W/O CC
------------------------------------------------------------------------
                               Quintile 2
------------------------------------------------------------------------
017.........................  NONSPECIFIC CEREBROVASCULAR DISORDERS W/O
                               CC
022.........................  HYPERTENSIVE ENCEPHALOPATHY
031.........................  CONCUSSION AGE 17 W CC
044.........................  ACUTE MAJOR EYE INFECTIONS
046.........................  OTHER DISORDERS OF THE EYE AGE 17 W CC
055.........................  MISCELLANEOUS EAR, NOSE, MOUTH & THROAT
                               PROCEDURES
068 **......................  OTITIS MEDIA & URI AGE >17 W CC
108.........................  OTHER CARDIOTHORACIC PROCEDURES
149.........................  MAJOR SMALL & LARGE BOWEL PROCEDURES W/O
                               CC
178.........................  UNCOMPLICATED PEPTIC ULCER W/O CC
206.........................  DISORDERS OF LIVER EXCEPT MALIG,CIRR,ALC
                               HEPA W/O CC
229.........................  HAND OR WRIST PROC, EXCEPT MAJOR JOINT
                               PROC, W/O CC
237.........................  SPRAINS, STRAINS, & DISLOCATIONS OF HIP,
                               PELVIS & THIGH
257.........................  TOTAL MASTECTOMY FOR MALIGNANCY W CC
273.........................  MAJOR SKIN DISORDERS W/O CC
276.........................  NON-MALIGANT BREAST DISORDERS
305.........................  KIDNEY,URETER & MAJOR BLADDER PROC FOR NON-
                               NEOPL W/O CC
319.........................  KIDNEY & URINARY TRACT NEOPLASMS W/O CC
323.........................  URINARY STONES W CC, &/OR ESW LITHOTRIPSY
324.........................  URINARY STONES W/O CC
326.........................  KIDNEY & URINARY TRACT SIGNS & SYMPTOMS
                               AGE 17 W/O CC
341.........................  PENIS PROCEDURES
347.........................  MALIGNANCY, MALE REPRODUCTIVE SYSTEM, W/O
                               CC
369.........................  MENSTRUAL & OTHER FEMALE REPRODUCTIVE
                               SYSTEM DISORDERS
427.........................  NEUROSES EXCEPT DEPRESSIVE
432.........................  OTHER MENTAL DISORDER DIAGNOSES
443.........................  OTHER O.R. PROCEDURES FOR INJURIES W/O CC
447.........................  ALLERGIC REACTIONS AGE 17
450.........................  POISONING & TOXIC EFFECTS OF DRUGS AGE 17
                              W/O CC
467.........................  OTHER FACTORS INFLUENCING HEALTH STATUS
479.........................  OTHER VASCULAR PROCEDURES W/O CC
520.........................  CERVICAL SPINAL FUSION W/O CC
------------------------------------------------------------------------
                               Quintile 3
------------------------------------------------------------------------
043.........................  HYPHEMA

[[Page 55987]]

 
068 *.......................  OTITIS MEDIA & URI AGE >17 W CC
069.........................  OTITIS MEDIA & URI AGE >17 W/O CC
116.........................  OTH PERM CARD PACEMAK IMPL OR PTCA W
                               CORONARY ARTERY STENT IMPLNT
124.........................  CIRCULATORY DISORDERS EXCEPT AMI, W CARD
                               CATH & COMPLEX DIAG
168.........................  MOUTH PROCEDURES W CC
171.........................  OTHER DIGESTIVE SYSTEM O.R. PROCEDURES W/O
                               CC
177.........................  UNCOMPLICATED PEPTIC ULCER W CC
185.........................  DENTAL & ORAL DIS EXCEPT EXTRACTIONS &
                               RESTORATIONS, AGE 17
199.........................  HEPATOBILIARY DIAGNOSTIC PROCEDURE FOR
                               MALIGNANCY
218.........................  LOWER EXTREM & HUMER PROC EXCEPT
                               HIP,FOOT,FEMUR AGE 17 W CC
227.........................  SOFT TISSUE PROCEDURES W/O CC
266.........................  SKIN GRAFT &/OR DEBRID EXCEPT FOR SKIN
                               ULCER OR CELLULITIS W/O CC
275 ***.....................  MALIGNANT BREAST DISORDERS W/O CC
295.........................  DIABETES AGE 0-35
299.........................  INBORN ERRORS OF METABOLISM
306.........................  PROSTATECTOMY W CC
308.........................  MINOR BLADDER PROCEDURES W CC
336.........................  TRANSURETHRAL PROSTATECTOMY W CC
345.........................  OTHER MALE REPRODUCTIVE SYSTEM O.R. PROC
                               EXCEPT FOR MALIGNANCY
352.........................  OTHER MALE REPRODUCTIVE SYSTEM DIAGNOSES
367.........................  MALIGNANCY, FEMALE REPRODUCTIVE SYSTEM W/O
                               CC
400.........................  LYMPHOMA & LEUKEMIA W MAJOR O.R. PROCEDURE
449.........................  POISONING & TOXIC EFFECTS OF DRUGS AGE 17 W CC
454.........................  OTHER INJURY, POISONING & TOXIC EFFECT
                               DIAG W CC
465.........................  AFTERCARE W HISTORY OF MALIGNANCY AS
                               SECONDARY DIAGNOSIS
486.........................  OTHER O.R. PROCEDURES FOR MULTIPLE
                               SIGNIFICANT TRAUMA
492.........................  CHEMOTHERAPY W ACUTE LEUKEMIA AS SECONDARY
                               DIAGNOSIS
493.........................  LAPAROSCOPIC CHOLECYSTECTOMY W/O C.D.E. W
                               CC
498.........................  SPINAL FUSION W/O CC
508.........................  FULL THICKNESS BURN W/O SKIN GRFT OR INHAL
                               INJ W CC OR SIG TRAUMA
509.........................  FULL THICKNESS BURN W/O SKIN GRFT OR INH
                               INJ W/O CC OR SIG TRAUMA
511.........................  NON-EXTENSIVE BURNS W/O CC OR SIGNIFICANT
                               TRAUMA
519.........................  CERVICAL SPINAL FUSION W CC
------------------------------------------------------------------------
                               Quintile 4
------------------------------------------------------------------------
004.........................  SPINAL PROCEDURES
005.........................  EXTRACRANIAL VASCULAR PROCEDURES
008.........................  PERIPH & CRANIAL NERVE & OTHER NERV SYST
                               PROC W/O CC
146.........................  RECTAL RESECTION W CC
152.........................  MINOR SMALL & LARGE BOWEL PROCEDURES W CC
154.........................  STOMACH, ESOPHAGEAL & DUODENAL PROCEDURES
                               AGE 17 W CC
159.........................  HERNIA PROCEDURES EXCEPT INGUINAL &
                               FEMORAL AGE 17 W CC
193.........................  BILIARY TRACT PROC EXCEPT ONLY CHOLECYST W
                               OR W/O C.D.E. W CC
200.........................  HEPATOBILIARY DIAGNOSTIC PROCEDURE FOR NON-
                               MALIGNANCY
210.........................  HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT
                               AGE 17 W CC
216.........................  BIOPSIES OF MUSCULOSKELETAL SYSTEM &
                               CONNECTIVE TISSUE
223.........................  MAJOR SHOULDER/ELBOW PROC, OR OTHER UPPER
                               EXTREMITY PROC W CC
225.........................  FOOT PROCEDURES
226.........................  SOFT TISSUE PROCEDURES W CC
233.........................  OTHER MUSCULOSKELET SYS & CONN TISS O.R.
                               PROC W CC
268.........................  SKIN, SUBCUTANEOUS TISSUE & BREAST PLASTIC
                               PROCEDURES
292.........................  OTHER ENDOCRINE, NUTRIT & METAB O.R. PROC
                               W CC
304.........................  KIDNEY,URETER & MAJOR BLADDER PROC FOR NON-
                               NEOPL W CC
310.........................  TRANSURETHRAL PROCEDURES W CC
317.........................  ADMIT FOR RENAL DIALYSIS
342.........................  CIRCUMCISION AGE 17
344.........................  OTHER MALE REPRODUCTIVE SYSTEM O.R.
                               PROCEDURES FOR MALIGNANCY
368.........................  INFECTIONS, FEMALE REPRODUCTIVE SYSTEM
389.........................  FULL TERM NEONATE W MAJOR PROBLEMS
401.........................  LYMPHOMA & NON-ACUTE LEUKEMIA W OTHER O.R.
                               PROC W CC
408.........................  MYELOPROLIF DISORD OR POORLY DIFF NEOPL W
                               OTHER O.R.PROC
414 ***.....................  OTHER MYELOPROLIF DIS OR POORLY DIFF NEOPL
                               DIAG W/O CC
421.........................  VIRAL ILLNESS AGE 17
428.........................  DISORDERS OF PERSONALITY & IMPULSE CONTROL
505.........................  EXTENSIVE 3RD DEGREE BURNS W/O SKIN GRAFT
515.........................  CARDIAC DEFIBRILATOR IMPLANT W/O CARDIAC
                               CATH
518.........................  PERCUTANEOUS CARDIVASCULAR PROC W/O
                               CORONARY ARTERY STENT OR AMI
------------------------------------------------------------------------
                               Quintile 5
------------------------------------------------------------------------
001.........................  CRANIOTOMY AGE 17 W CC

[[Page 55988]]

 
002.........................  CRANIOTOMY AGE 17 W/O CC
061.........................  MYRINGOTOMY W TUBE INSERTION AGE 17
063.........................  OTHER EAR, NOSE, MOUTH & THROAT O.R.
                               PROCEDURES
075.........................  MAJOR CHEST PROCEDURES
077.........................  OTHER RESP SYSTEM O.R. PROCEDURES W/O CC
110.........................  MAJOR CARDIOVASCULAR PROCEDURES W CC
111.........................  MAJOR CARDIOVASCULAR PROCEDURES W/O CC
115.........................  PRM CARD PACEM IMPL W AMI,HRT FAIL OR
                               SHK,OR AICD LEAD OR GNRTR P
125.........................  CIRCULATORY DISORDERS EXCEPT AMI, W CARD
                               CATH W/O COMPLEX DIAG
191.........................  PANCREAS, LIVER & SHUNT PROCEDURES W CC
197.........................  CHOLECYSTECTOMY EXCEPT BY LAPAROSCOPE W/O
                               C.D.E. W CC
198.........................  CHOLECYSTECTOMY EXCEPT BY LAPAROSCOPE W/O
                               C.D.E. W/O CC
201.........................  OTHER HEPATOBILIARY OR PANCREAS O.R.
                               PROCEDURES
209.........................  MAJOR JOINT & LIMB REATTACHMENT PROCEDURES
                               OF LOWER EXTREMITY
231.........................  LOCAL EXCISION & REMOVAL OF INT FIX
                               DEVICES EXCEPT HIP & FEMUR
288.........................  O.R. PROCEDURES FOR OBESITY
303.........................  KIDNEY,URETER & MAJOR BLADDER PROCEDURES
                               FOR NEOPLASM
312.........................  URETHRAL PROCEDURES, AGE 17 W
                               CC
358.........................  UTERINE & ADNEXA PROC FOR NON-MALIGNANCY W
                               CC
365.........................  OTHER FEMALE REPRODUCTIVE SYSTEM O.R.
                               PROCEDURES
394.........................  OTHER O.R. PROCEDURES OF THE BLOOD AND
                               BLOOD FORMING ORGANS
406.........................  MYELOPROLIF DISORD OR POORLY DIFF NEOPL W
                               MAJ O.R.PROC W CC
424.........................  O.R. PROCEDURE W PRINCIPAL DIAGNOSES OF
                               MENTAL ILLNESS
476.........................  PROSTATIC O.R. PROCEDURE UNRELATED TO
                               PRINCIPAL DIAGNOSIS
488.........................  HIV W EXTENSIVE O.R. PROCEDURE
497.........................  SPINAL FUSION W CC
499.........................  BACK & NECK PROCEDURES EXCEPT SPINAL
                               FUSION W CC
501.........................  KNEE PROCEDURES W PDX OF INFECTION W CC
503.........................  KNEE PROCEDURES W/O PDX OF INFECTION
506.........................  FULL THICKNESS BURN W SKIN GRAFT OR INHAL
                               INJ W CC OR SIG TRAUMA
517.........................  PERCUTANEOUS CARDIVASCULAR PROC W NON-DRUG
                               ELUTING STENT W/O AMI
------------------------------------------------------------------------
* One of the original 161 low volume LTC-DRGs initially assigned to a
  different low volume quintile; reassigned to this low volume quintile
  in addressing nonmonotonicity (see step 4 below).
** One of the original 161 low volume LTC-DRGs initially assigned to
  this low volume quintile; reassigned to a different low volume
  quintile in addressing nonmonotonicity (see step 4 below).
*** One of the original 161 low volume LTC-DRGs initially assigned to
  this low volume quintile; removed from the low volume quintiles in
  addressing nonmonotonicity (see step 4 below).


[[Page 55989]]

    After grouping the cases in the appropriate LTC-DRG, we calculate 
the relative weights in this final rule by first removing statistical 
outliers and cases with a length of stay of 7 days or less. Next we 
adjust the number of cases in each LTC-DRG for the effect of short-stay 
outlier cases under Sec. 412.529. The short-stay adjusted discharges 
and corresponding charges are used to calculate ``relative adjusted 
weights'' in each LTC-DRG using the hospital-specific relative value 
method described above. We describe each of these steps in greater 
detail in section X.A.2. of this preamble.
    Comment: Two commenters notified us of a data problem regarding the 
proposed LTC-DRG relative weight values that were determined using 
MedPAR (claims) data for FYs 2000 and 2001. The commenters were 
concerned that two high-volume and high-resource use LTC-DRGs were 
incorrectly weighted and that this error would not only result in 
inaccurate payments for certain LTCHs, but also would have negative 
implications for the accuracy of the overall payment system.
    Response: Following notification of this problem, we researched the 
commenter's claims and determined that, given the long stays at LTCHs, 
some providers had submitted multiple bills for payment under the TEFRA 
reimbursement system for the same stay. In establishing the LTC-DRG 
relative weights in the proposed rule, these claims from the MedPAR 
file were run through the LTCH GROUPER and used in determining the 
proposed relative weights for each LTC-DRG. Based upon our research, we 
became aware of the following situation: in certain LTCHs, hospital 
personnel apparently reported a different principal diagnosis on each 
bill since, under the TEFRA system, payment was not dependent upon 
principal diagnosis as it is under a DRG-based system. Moreover, since 
we discovered that only data from the final bills were being extracted 
for the MedPAR file, it is possible that the original MedPAR file would 
not be receiving the correct principal diagnosis. In this final rule, 
we have addressed the problem by identifying all LTCH cases in the 
MedPAR file for which multiple bills were submitted. For each of these 
cases, beginning with the first bill and moving forward consecutively 
through subsequent bills for that stay, we recorded the first unique 
diagnosis codes up to 10 and the first unique procedure codes up to 10. 
We then used these codes to group each case to a LTC-DRG. Using this 
methodology, we note in this final rule that there are significant 
changes in the relative weights for several LTC-DRGs and consequential 
changes to the relative weights for the other LTC-DRGs. We recognize 
the impact that this information had on the accuracy and integrity of 
the LTCH prospective payment system and appreciate the commenters who 
brought this issue to our attention and allowed us to address it.
2. Steps for Calculating the Relative Weights
    In the March 22, 2002 proposed rule (67 FR 13441-13445), we 
described the steps for calculating the proposed relative weights for 
the proposed LTC-DRGs under the proposed LTCH prospective payment 
system. Proposed Step 1 was ``Adjust charges for the effects of short-
stay outliers'' and proposed Step 2 was ``Remove statistical 
outliers.'' As we have stated in Question 5.8 of the ``Frequently Asked 
Questions'' posted on the CMS website, the stated order of proposed 
Step 1 and proposed Step 2 was inadvertently reversed in the proposed 
rule. In fact, statistical outliers were removed before short-stay 
outliers were adjusted. These steps are shown in the correct order in 
the description given below for calculating the final relative weights. 
In addition, in this final rule, we are adding a new step as a result 
of our elimination of the proposed very short-stay discharge policy 
discussed in sections X.C. and X.D. of this preamble.

Step 1--Remove statistical outliers.

    The first step in the calculation of the relative weights is to 
remove statistical outlier cases. As we stated in the proposed rule, we 
define statistical outliers as cases that are outside of 3.0 standard 
deviations from the mean of the log distribution of both charges per 
case and the charges per day for each LTC-DRG. These statistical 
outliers are removed prior to calculating the relative weights. We 
believe that they may represent aberrations in the data that distort 
the measure of average resource use. Including those cases in the 
calculation of the relative weights could result in an inaccurate 
weight that does not truly reflect relative resource use among the LTC-
DRGs. Thus, removing statistical outliers results in more appropriate 
LTC-DRG relative weights and payments.

Step 2--Remove cases with a length of stay of 7 days or less.

    In the proposed calculation of the LTC-DRG relative weights, we did 
not include cases with a length of stay of 7 days or less since we had 
proposed to assign those cases to one of two very short-stay discharge 
LTC-DRGs (section X.C. of this preamble). Thus, in the proposed rule, 
the costs of cases with stays of 7 days or less were factored into 
those very short-stay discharge LTC-DRG relative weights. As we discuss 
in further detail in sections X.C. and X.D. of this preamble, even 
though in this final rule we are now including cases with a length of 
stay of 7 days or less under the short-stay outlier policy 
(Sec. 412.529), we continue to believe that, generally, cases with a 
length of stay 7 days or less do not belong in a LTCH. Because these 
cases do not use the same amount or type of resources as typical inlier 
cases, our simulations have indicated that including these cases in the 
calculations of the LTC-DRG relative weights would significantly bias 
payments against inlier cases. (For purposes of payment under the LTCH 
prospective payment system, an ``inlier case'' means a stay in which 
Medicare-covered days exceed five-sixths of the geometric average 
length of stay for a particular LTC-DRG, and the estimated costs for a 
particular LTC-DRG, and the estimated costs for a particular discharge 
do not exceed the high-cost outlier threshold (that is, the adjusted 
LTCH prospective payment system payment for a particular LTC-DRG plus a 
fixed-loss amount).) The LTC-DRG relative weights should reflect the 
average of resources used on representative cases of a specific type. 
Therefore, we continue to believe that cases with stays of 7 days or 
less should not be included in the calculation of the relative weights.
    Stays of 7 days or less generally do not fully receive or benefit 
from treatment that is typical in a LTCH stay and full resources are 
often not used in the earlier stages of admission to a LTCH. If we did 
include stays of 7 days or less in the computation of the LTC-DRG 
relative weights, the value of many weights would decrease and, 
therefore, inlier payments would decrease to a level that may no longer 
be appropriate. We do not believe that it is appropriate to compromise 
the integrity of the payment determination for those LTCH inlier cases 
that actually benefit from and receive a full course of treatment at a 
LTCH, in order to include data from these very short-stays. Thus, in 
determining the final LTC-DRG relative weights, we have removed cases 
with a length of stay of 7 days or less.

Step 3--Adjust charges for the effects of short-stay outliers.

    The third step in the calculation of the relative weights is to 
adjust each LTCH's charges per discharge for short-stay outlier cases 
(that is, a patient with

[[Page 55990]]

a length of stay that is less than or equal to five-sixths the average 
length of stay of the LTC-DRG as described in section X.C. of this 
final rule).
    We make this adjustment by counting a short-stay outlier as a 
fraction of a discharge based on the ratio of the length of stay of the 
case to the average length of stay for the LTC-DRG for nonshort-stay 
outlier cases. This has the effect of proportionately reducing the 
impact of the lower charges for the short-stay outlier cases in 
calculating the average charge for the LTC-DRG. This process produces 
the same result as if the actual charges per discharge of a short-stay 
outlier case were adjusted to what they would have been had the 
patient's length of stay been equal to the average length of stay of 
the LTC-DRG.
    As we stated in the proposed rule, counting short-stay outlier 
cases as full discharges with no adjustment in determining the relative 
weights would lower the relative weight for affected LTC-DRGs because 
the relatively lower charges of the short-stay outlier cases bring down 
the average charge for all cases within a LTC-DRG. This would result in 
an ``underpayment'' to nonshort-stay outlier cases and an 
``overpayment'' to short-stay outlier cases. Therefore, in this final 
rule, we are adjusting for short-stay outlier cases in this manner 
since it will result in more appropriate payments for all LTCH cases. 
The result of step 3 is that each LTCH's average cost per discharge is 
adjusted for short-stay outliers (as described above) before 
calculating the LTC-DRG relative weights on an iterative basis (step 4) 
using the hospital-specific relative value method.

Step 4--Calculate the LTC-DRG relative weights on an iterative basis.

    As explained in the proposed rule, the process of calculating the 
LTC-DRG relative weights is iterative. First, for each case, we 
calculate a hospital-specific relative charge value by dividing the 
short-stay outlier adjusted charge per discharge (see step 3) of the 
case (after removing the statistical outliers (see step 1)) and cases 
with a length of stay of 7 days or less (see step 2) by the average 
charge per discharge for the LTCH in which the case occurred. The 
resulting ratio is then multiplied by the LTCH's case-mix index to 
produce an adjusted hospital-specific relative charge value for the 
case. An initial case-mix index value of 1.0 is used for each LTCH.
    For each LTC-DRG, the LTC-DRG relative weight is calculated by 
dividing the average of the adjusted hospital-specific relative charge 
values (from above) for the LTC-DRG by the overall average hospital-
specific relative charge value across all cases for all LTCHs. Using 
these recalculated LTC-DRG relative weights, each LTCH's average 
relative weight for all of its cases (case-mix) is calculated by 
dividing the sum of all the LTCH's LTC-DRG relative weights by its 
total number of cases. The LTCHs' hospital-specific relative charge 
values above are multiplied by these hospital specific case-mix 
indexes. These hospital-specific case-mix adjusted relative charge 
values are then used to calculate a new set of LTC-DRG relative weights 
across all LTCHs. In this final rule, this iterative process is 
continued until there is convergence between the weights produced at 
adjacent steps, for example, when the maximum difference is less than 
0.0001.

Step 5--Adjust the LTC-DRG relative weights to account for 
nonmonotonically increasing relative weights.

    As explained in section IX.D. of this preamble, the LTC-DRGs 
contain ``pairs'' that are differentiated based on the presence or 
absence of CCs. LTC-DRGs with CCs are defined by certain secondary 
diagnoses not related to or inherently a part of the disease process 
identified by the principal diagnosis, but the presence of additional 
diagnoses does not automatically generate a CC. The value of 
monotonically increasing relative weights rises as the resource use 
increases (for example, from uncomplicated to more complicated). The 
presence of CCs in a LTC-DRG means that cases classified into a 
``without CC'' LTC-DRG are expected to have lower resource use (and 
lower costs). In other words, resource use (and costs) are expected to 
decrease across ``with CC''/``without CC'' pairs of LTC-DRGs. For a 
case to be assigned to a LTC-DRG with CCs, more coded information is 
called for (that is, at least one relevant secondary diagnosis), than 
for a case to be assigned to a LTC-DRG without CCs (which is based on 
only one principal diagnosis and no relevant secondary diagnoses). 
Currently, the database includes both accurately coded cases without 
complications and cases that have complications (and cost more) but 
were not coded completely. Both types of cases are grouped to a LTC-DRG 
``without CCs'' since only one principal diagnosis was coded. Since 
LTCHs are currently paid under cost-based reimbursement, which is not 
based on patient diagnoses, LTCHs' coding for these cases may not have 
been as detailed as possible.
    Thus, as we explained in the proposed rule, in developing the 
relative weights for the LTCH prospective payment system, we found on 
occasion that the data suggested that cases classified to the LTC-DRG 
``with CCs'' of a ``with CC''/``without CC'' pair had a lower average 
charge than the corresponding LTC-DRG ``without CCs.'' We believe this 
anomaly may be due to coding that may not have fully reflected all 
comorbidities that were present. Specifically, LTCHs may have failed to 
code relevant secondary diagnoses, which resulted in cases that 
actually had CCs being classified into a ``without CC'' LTC-DRG. It is 
not appropriate to pay a lower amount for the ``with CC'' LTC-DRG. 
Therefore, in this final rule, we continue to group both the cases 
``with CCs'' and ``without CCs'' together for the purpose of 
calculating the relative weights for the LTC-DRGs until we have 
adequate data to calculate appropriate separate weights for these 
anomalous LTC-DRG pairs. We expect that, as was the case when we first 
implemented the acute care hospital inpatient prospective payment 
system, this problem will be self-correcting, as LTCHs submit more 
completely coded data in the future.
    For this final rule, using the LTCH cases in the March 2002 update 
of the FY 2001 MedPAR file, we identified three types of ``with CC'' 
and ``without CC'' pairs of LTC-DRGs that are nonmonotonic, that is, 
where the ``without CC'' LTC-DRG would have a higher average charge 
than the ``with CC'' LTC-DRG.
    The first category of nonmonotonically increasing relative weights 
for LTC-DRG pairs ``with and without CCs'' contains 1 pair of LTC-DRGs 
in which both the LTC-DRG ``with CCs'' and the LTC-DRG ``without CCs'' 
had 25 or more LTCH cases and, therefore, did not fall into one of the 
5 quintiles. For that pair of LTC-DRGs, we combine the cases and 
compute a new relative weight based on the case-weighted average of the 
combined cases of the LTC-DRGs. The case-weighted average charge is 
determined by dividing the total charges for all cases by the total 
number of cases for the combined LTC-DRG. This new relative weight is 
assigned to both of the LTC-DRGs in the pair. For the FY 2003 
implementation of the LTCH prospective payment system in this final 
rule, LTC-DRGs 10 and 11 are in this category.
    The second category of nonmonotonically increasing relative weights 
for LTC-DRG pairs with and without CCs consists of 1 pair of LTC-DRGs 
that has fewer than 25 cases and are both grouped to different 
quintiles in which the ``without CC'' LTC-DRG is in a higher-weighted 
quintile than the

[[Page 55991]]

``with CC'' LTC-DRG. For that pair, we combine the cases and determine 
the case-weighted average charge for all cases. The case-weighted 
average charge is determined by dividing the total charges for all 
cases by the total number of cases for the combined LTC-DRG. Based on 
the case-weighted average charge, we determined which quintile the 
``combined LTC-DRG'' is grouped. Both LTC-DRGs in the pair are then 
grouped into the same quintile, and thus have the same relative weight. 
For the FY 2003 implementation of the LTCH prospective payment system 
in this final rule, LTC-DRGs 68 and 69 (low volume quintile 3) are in 
this category.
    The third category of nonmonotonically increasing relative weights 
for LTC-DRG pairs with and without CCs consists of 2 pairs of LTC-DRGs 
where one of the LTC-DRGs has fewer than 25 LTCH cases and is grouped 
to a quintile and the other LTC-DRG has 25 or more LTCH cases and has 
its own LTC-DRG weight, and the LTC-DRG ``without CCs'' has the higher 
weight. We remove the low volume LTC-DRG from the quintile and combine 
it with the other LTC-DRG for the computation of a new relative weight 
for each of these LTC-DRGs. This new relative weight is assigned to 
both LTC-DRGs, so they each have the same relative weight. For the FY 
2003 implementation of the LTCH prospective payment system, the 
following LTC-DRGs are in this category: LTC-DRGs 274 and 275, and LTC-
DRGs 413 and 414.
    In addition, for the FY 2003 implementation of the LTCH prospective 
payment system, we determine the relative weight for each LTC-DRG using 
charges reported in the March 2002 update of the FY 2001 MedPAR file. 
Of the 510 LTC-DRGs in the CMS LTCH prospective payment system, we 
identified 159 LTC-DRGs for which there were no LTCH cases in the 
database. That is, based on the FY 2001 MedPAR file used in this final 
rule, no patients who would have been classified to those DRGs were 
treated in LTCHs during FY 2001 and, therefore, no charge data were 
reported for those DRGs. Thus, in the process of determining the 
relative weights of LTC-DRGs, we were unable to determine weights for 
these 159 LTC-DRGs using the method described above. However, since 
patients with a number of the diagnoses under these LTC-DRGs may be 
treated at LTCHs beginning in FY 2003, when the LTCH prospective 
payment system is implemented, we are assigning relative weights to 
each of the 159 ``no volume'' LTC-DRGs based on clinical similarity and 
relative costliness to one of the remaining 351 (510 - 159 = 351) LTC-
DRGs for which we are able to determine relative weights, based on FY 
2001 charge data.
    As there are currently no LTCH cases in these ``no volume'' LTC-
DRGs, we establish relative weights for the 165 LTC-DRGs with no LTCH 
cases in the FY 2001 MedPAR file used in this final rule by grouping 
them to the appropriate low volume quintile. This methodology is 
consistent with our methodology used in determining relative weights to 
account for low volume LTC-DRGs described above.
    As we described in the proposed rule, our methodology for 
determining relative weights for the ``no volume'' LTC-DRGs is as 
follows: First, we cross-walk the no volume LTC-DRGs by matching them 
to other similar LTC-DRGs for which there were LTCH cases in the FY 
2001 MedPAR file based on clinical similarity and intensity of use of 
resources as determined by care provided during the period of time 
surrounding surgery, surgical approach (if applicable), length of time 
of surgical procedure, post-operative care, and length of stay. We 
assign the weight for the applicable quintile to the no volume LTC-DRG 
if the LTC-DRG to which it would be cross-walked was grouped to one of 
the low volume quintiles. If the LTC-DRG to which the no volume LTC-DRG 
would be cross-walked was not one of the LTC-DRGs grouped to one of the 
low volume quintiles, we compare the weight of the LTC-DRG to which the 
no volume LTC-DRG would be cross-walked to the weights of each of the 
five quintiles and assign the no volume LTC-DRG the relative weight of 
the quintile with the closest weight. For this final rule, a list of 
the no volume LTC-DRGs and the LTC-DRG to which it would be crosswalked 
in order to determine the appropriate low volume quintile for the 
assignment of a relative weight is shown below in Chart 3.

[[Page 55992]]



                        Chart 3.--No Volume LTC-DRG Crosswalk and Quintile Assignment \1\
----------------------------------------------------------------------------------------------------------------
                                                                                                    Low volume
          LTC-DRG                                Description                       Cross-walked      quintile
                                                                                      LTC-DRG        assigned
----------------------------------------------------------------------------------------------------------------
3..........................  CRANIOTOMY AGE 0-17................................               1      Quintile 5
6..........................  CARPAL TUNNEL RELEASE..............................             224      Quintile 1
26.........................  SEIZURE & HEADACHE AGE 0-17........................              25      Quintile 1
30.........................  TRAUMATIC STUPOR & COMA, COMA <1 HR AGE 0-17.......              29      Quintile 3
32.........................  CONCUSSION AGE 17 W/O CC................              25      Quintile 1
33.........................  CONCUSSION AGE 0-17................................              25      Quintile 1
36.........................  RETINAL PROCEDURES.................................              47      Quintile 1
37.........................  ORBITAL PROCEDURES.................................              47      Quintile 1
38.........................  PRIMARY IRIS PROCEDURES............................              47      Quintile 1
39.........................  LENS PROCEDURES WITH OR WITHOUT VITRECTOMY.........              47      Quintile 1
40.........................  EXTRAOCULAR PROCEDURES EXCEPT ORBIT AGE                  47      Quintile 1
                              17.
41.........................  EXTRAOCULAR PROCEDURES EXCEPT ORBIT AGE 0-17.......              47      Quintile 1
42.........................  INTRAOCULAR PROCEDURES EXCEPT RETINA, IRIS & LENS..              47      Quintile 1
48.........................  OTHER DISORDERS OF THE EYE AGE 0-17................              47      Quintile 1
49.........................  MAJOR HEAD & NECK PROCEDURES.......................              63      Quintile 5
50.........................  SIALOADENECTOMY....................................              55      Quintile 2
51.........................  SALIVARY GLAND PROCEDURES EXCEPT SIALOADENECTOMY...              55      Quintile 2
52.........................  CLEFT LIP & PALATE REPAIR..........................              55      Quintile 2
53.........................  SINUS & MASTOID PROCEDURES AGE 17.......              55      Quintile 2
54.........................  SINUS & MASTOID PROCEDURES AGE 0-17................              55      Quintile 2
56.........................  RHINOPLASTY........................................              55      Quintile 2
57.........................  T&A PROC, EXCEPT TONSILLECTOMY &/OR ADENOIDECTOMY                55      Quintile 2
                              ONLY, AGE 17.
58.........................  T&A PROC, EXCEPT TONSILLECTOMY &/OR ADENOIDECTOMY                55      Quintile 2
                              ONLY, AGE 0-17.
59.........................  TONSILLECTOMY &/OR ADENOIDECTOMY ONLY, AGE               55      Quintile 2
                              17.
60.........................  TONSILLECTOMY &/OR ADENOIDECTOMY ONLY, AGE 0-17....              55      Quintile 2
62.........................  MYRINGOTOMY W TUBE INSERTION AGE 0-17..............              55      Quintile 2
70.........................  OTITIS MEDIA & URI AGE 0-17........................              67      Quintile 1
71.........................  LARYNGOTRACHEITIS..................................              67      Quintile 1
74.........................  OTHER EAR, NOSE, MOUTH & THROAT DIAGNOSES AGE 0-17.              67      Quintile 1
81.........................  RESPIRATORY INFECTIONS & INFLAMMATIONS AGE 0-17....              67      Quintile 1
91.........................  SIMPLE PNEUMONIA & PLEURISY AGE 0-17...............              90      Quintile 3
98.........................  BRONCHITIS & ASTHMA AGE 0-17.......................              97      Quintile 1
104........................  CARDIAC VALVE & OTHER MAJOR CARDIOTHORACIC PROC W               110      Quintile 5
                              CARDIAC CATH.
105........................  CARDIAC VALVE & OTHER MAJOR CARDIOTHORACIC PROC W/O             110      Quintile 5
                              CARDIAC CATH.
106........................  CORONARY BYPASS W PTCA.............................             110      Quintile 5
107........................  CORONARY BYPASS W CARDIAC CATH.....................             110      Quintile 5
109........................  CORONARY BYPASS W/O PTCA OR CARDIAC CATH...........             110      Quintile 5
117........................  CARDIAC PACEMAKER REVISION EXCEPT DEVICE                        118      Quintile 1
                              REPLACEMENT.
119........................  VEIN LIGATION & STRIPPING..........................             131      Quintile 2
137........................  CARDIAC CONGENITAL & VALVULAR DISORDERS AGE 0-17...             136      Quintile 2
147........................  RECTAL RESECTION W/O CC............................             146      Quintile 4
151........................  PERITONEAL ADHESIOLYSIS W/O CC.....................             150      Quintile 1
153........................  MINOR SMALL & LARGE BOWEL PROCEDURES W/O CC........             171      Quintile 3
155........................  STOMACH, ESOPHAGEAL & DUODENAL PROCEDURES AGE               171      Quintile 3
                              17 W/O CC.
156........................  STOMACH, ESOPHAGEAL & DUODENAL PROCEDURES AGE 0-17.             171      Quintile 3
158........................  ANAL & STOMAL PROCEDURES W/O CC....................             157      Quintile 1
160........................  HERNIA PROCEDURES EXCEPT INGUINAL & FEMORAL AGE             178      Quintile 2
                              17 W/O CC.
161........................  INGUINAL & FEMORAL HERNIA PROCEDURES AGE               178      Quintile 2
                              17 W CC.
162........................  INGUINAL & FEMORAL HERNIA PROCEDURES AGE                178      Quintile 2
                              17 W/O CC.
163........................  HERNIA PROCEDURES AGE 0-17.........................             178      Quintile 2
164........................  APPENDECTOMY W COMPLICATED PRINCIPAL DIAG W CC.....             171      Quintile 3
165........................  APPENDECTOMY W COMPLICATED PRINCIPAL DIAG W/O CC...             171      Quintile 3
166........................  APPENDECTOMY W/O COMPLICATED PRINCIPAL DIAG W CC...             178      Quintile 2
167........................  APPENDECTOMY W/O COMPLICATED PRINCIPAL DIAG W/O CC.             178      Quintile 2
169........................  MOUTH PROCEDURES W/O CC............................             178      Quintile 2
184........................  ESOPHAGITIS, GASTROENT & MISC DIGEST DISORDERS AGE              183      Quintile 2
                              0-17.
186........................  DENTAL & ORAL DIS EXCEPT EXTRACTIONS &                          185      Quintile 3
                              RESTORATIONS, AGE 0-17.
187........................  DENTAL EXTRACTIONS & RESTORATIONS..................             185      Quintile 3
190........................  OTHER DIGESTIVE SYSTEM DIAGNOSES AGE 0-17..........             189      Quintile 2
192........................  PANCREAS, LIVER & SHUNT PROCEDURES W/O CC..........             193      Quintile 4
194........................  BILIARY TRACT PROC EXCEPT ONLY CHOLECYST W OR W/O               199      Quintile 3
                              C.D.E. W/O CC.
195........................  CHOLECYSTECTOMY W C.D.E. W CC......................             199      Quintile 3
196........................  CHOLECYSTECTOMY W C.D.E. W/O CC....................             199      Quintile 3
211........................  HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT AGE               218      Quintile 3
                              17 W/O CC.
212........................  HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT AGE 0-17.             218      Quintile 3
219........................  LOWER EXTREM & HUMER PROC EXCEPT HIP,FOOT,FEMUR AGE             218      Quintile 3
                              17 W/O CC.
220........................  LOWER EXTREM & HUMER PROC EXCEPT HIP,FOOT,FEMUR AGE             218      Quintile 3
                              0-17.
228........................  MAJOR THUMB OR JOINT PROC,OR OTH HAND OR WRIST PROC             229      Quintile 2
                              W CC.
232........................  ARTHROSCOPY........................................             234      Quintile 1
252........................  FX, SPRN, STRN & DISL OF FOREARM, HAND, FOOT AGE 0-             234      Quintile 1
                              17.

[[Page 55993]]

 
255........................  FX, SPRN, STRN & DISL OF UPARM,LOWLEG EX FOOT AGE 0-            234      Quintile 1
                              17.
258........................  TOTAL MASTECTOMY FOR MALIGNANCY W/O CC.............             257      Quintile 2
259........................  SUBTOTAL MASTECTOMY FOR MALIGNANCY W CC............             257      Quintile 2
260........................  SUBTOTAL MASTECTOMY FOR MALIGNANCY W/O CC..........             257      Quintile 2
261........................  BREAST PROC FOR NON-MALIGNANCY EXCEPT BIOPSY &                  262      Quintile 1
                              LOCAL EXCISION.
267........................  PERIANAL & PILONIDAL PROCEDURES....................             157      Quintile 1
279........................  CELLULITIS AGE 0-17................................             278      Quintile 2
282........................  TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE 0-17..             281      Quintile 2
286........................  ADRENAL & PITUITARY PROCEDURES.....................             292      Quintile 4
289........................  PARATHYROID PROCEDURES.............................             290      Quintile 1
291........................  THYROGLOSSAL PROCEDURES............................             290      Quintile 1
293........................  OTHER ENDOCRINE, NUTRIT & METAB O.R. PROC W/O CC...             149      Quintile 2
298........................  NUTRITIONAL & MISC METABOLIC DISORDERS AGE 0-17....             297      Quintile 2
309........................  MINOR BLADDER PROCEDURES W/O CC....................             311      Quintile 1
313........................  URETHRAL PROCEDURES, AGE 17 W/O CC......             311      Quintile 1
314........................  URETHRAL PROCEDURES, AGE 0-17......................             311      Quintile 1
322........................  KIDNEY & URINARY TRACT INFECTIONS AGE 0-17.........             326      Quintile 2
327........................  KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE 0-17...             329      Quintile 1
328........................  URETHRAL STRICTURE AGE 17 W CC..........             324      Quintile 2
330........................  URETHRAL STRICTURE AGE 0-17........................             329      Quintile 1
333........................  OTHER KIDNEY & URINARY TRACT DIAGNOSES AGE 0-17....             329      Quintile 1
334........................  MAJOR MALE PELVIC PROCEDURES W CC..................             344      Quintile 4
335........................  MAJOR MALE PELVIC PROCEDURES W/O CC................             336      Quintile 3
337........................  TRANSURETHRAL PROSTATECTOMY W/O CC.................             341      Quintile 2
338........................  TESTES PROCEDURES, FOR MALIGNANCY..................             341      Quintile 2
340........................  TESTES PROCEDURES, NON-MALIGNANCY AGE 0-17.........             339      Quintile 1
343........................  CIRCUMCISION AGE 0-17..............................             329      Quintile 1
349........................  BENIGN PROSTATIC HYPERTROPHY W/O CC................             348      Quintile 1
351........................  STERILIZATION, MALE................................             348      Quintile 1
353........................  PELVIC EVISCERATION, RADICAL HYSTERECTOMY & RADICAL             358      Quintile 5
                              VULVECTOMY.
354........................  UTERINE,ADNEXA PROC FOR NON-OVARIAN/ADNEXAL MALIG W             344      Quintile 4
                              CC.
355........................  UTERINE,ADNEXA PROC FOR NON-OVARIAN/ADNEXAL MALIG W/            344      Quintile 4
                              O CC.
356........................  FEMALE REPRODUCTIVE SYSTEM RECONSTRUCTIVE                       344      Quintile 4
                              PROCEDURES.
357........................  UTERINE & ADNEXA PROC FOR OVARIAN OR ADNEXAL                    344      Quintile 4
                              MALIGNANCY.
361........................  LAPAROSCOPY & INCISIONAL TUBAL INTERRUPTION........             149      Quintile 2
362........................  ENDOSCOPIC TUBAL INTERRUPTION......................             149      Quintile 2
363........................  D&C, CONIZATION & RADIO-IMPLANT, FOR MALIGNANCY....             367      Quintile 3
364........................  D&C, CONIZATION EXCEPT FOR MALIGNANCY..............             369      Quintile 2
370........................  CESAREAN SECTION W CC..............................             352      Quintile 3
371........................  CESAREAN SECTION W/O CC............................             369      Quintile 2
372........................  VAGINAL DELIVERY W COMPLICATING DIAGNOSES..........             369      Quintile 2
373........................  VAGINAL DELIVERY W/O COMPLICATING DIAGNOSES........             359      Quintile 1
374........................  VAGINAL DELIVERY W STERILIZATION &/OR D&C..........             359      Quintile 1
375........................  VAGINAL DELIVERY W O.R. PROC EXCEPT STERIL &/OR D&C             359      Quintile 1
376........................  POSTPARTUM & POST ABORTION DIAGNOSES W/O O.R.                   359      Quintile 1
                              PROCEDURE.
377........................  POSTPARTUM & POST ABORTION DIAGNOSES W O.R.                     359      Quintile 1
                              PROCEDURE.
378........................  ECTOPIC PREGNANCY..................................             369      Quintile 2
379........................  THREATENED ABORTION................................             359      Quintile 1
380........................  ABORTION W/O D&C...................................             359      Quintile 1
381........................  ABORTION W D&C, ASPIRATION CURETTAGE OR HYSTEROTOMY             359      Quintile 1
382........................  FALSE LABOR........................................             359      Quintile 1
383........................  OTHER ANTEPARTUM DIAGNOSES W MEDICAL COMPLICATIONS.             359      Quintile 1
384........................  OTHER ANTEPARTUM DIAGNOSES W/O MEDICAL                          359      Quintile 1
                              COMPLICATIONS.
385........................  NEONATES, DIED OR TRANSFERRED TO ANOTHER ACUTE CARE             360      Quintile 1
                              FACILITY.
386........................  EXTREME IMMATURITY.................................             369      Quintile 2
387........................  PREMATURITY W MAJOR PROBLEMS.......................             369      Quintile 2
388........................  PREMATURITY W/O MAJOR PROBLEMS.....................             360      Quintile 1
390........................  NEONATE W OTHER SIGNIFICANT PROBLEMS...............             369      Quintile 2
391........................  NORMAL NEWBORN.....................................             360      Quintile 1
392........................  SPLENECTOMY AGE 17......................             177      Quintile 3
393........................  SPLENECTOMY AGE 0-17...............................             149      Quintile 2
396........................  RED BLOOD CELL DISORDERS AGE 0-17..................             399      Quintile 1
402........................  LYMPHOMA & NON-ACUTE LEUKEMIA W OTHER O.R. PROC W/O             400      Quintile 3
                              CC.
405........................  ACUTE LEUKEMIA W/O MAJOR O.R. PROCEDURE AGE 0-17...             347      Quintile 2
407........................  MYELOPROLIF DISORD OR POORLY DIFF NEOPL W MAJ                   400      Quintile 3
                              O.R.PROC W/O CC.
411........................  HISTORY OF MALIGNANCY W/O ENDOSCOPY................             410      Quintile 1
412........................  HISTORY OF MALIGNANCY W ENDOSCOPY..................             410      Quintile 1
417........................  SEPTICEMIA AGE 0-17................................             416      Quintile 3
422........................  VIRAL ILLNESS & FEVER OF UNKNOWN ORIGIN AGE 0-17...             420      Quintile 1
441........................  HAND PROCEDURES FOR INJURIES.......................             229      Quintile 2

[[Page 55994]]

 
446........................  TRAUMATIC INJURY AGE 0-17..........................             445      Quintile 3
448........................  ALLERGIC REACTIONS AGE 0-17........................             455      Quintile 1
451........................  POISONING & TOXIC EFFECTS OF DRUGS AGE 0-17........             455      Quintile 1
471........................  BILATERAL OR MULTIPLE MAJOR JOINT PROCS OF LOWER                209      Quintile 5
                              EXTREMITY.
481........................  BONE MARROW TRANSPLANT.............................             394      Quintile 5
482........................  TRACHEOSTOMY FOR FACE,MOUTH & NECK DIAGNOSES.......              55      Quintile 2
484........................  CRANIOTOMY FOR MULTIPLE SIGNIFICANT TRAUMA.........               2      Quintile 5
485........................  LIMB REATTACHMENT, HIP AND FEMUR PROC FOR MULTIPLE              209      Quintile 5
                              SIGNIFICANT TR.
491........................  MAJOR JOINT & LIMB REATTACHMENT PROCEDURES OF UPPER             209      Quintile 5
                              EXTREMITY.
496........................  COMBINED ANTERIOR/POSTERIOR SPINAL FUSION..........             233      Quintile 4
500........................  BACK & NECK PROCEDURES EXCEPT SPINAL FUSION W/O CC.             498      Quintile 3
502........................  KNEE PROCEDURES W PDX OF INFECTION W/O CC..........             498      Quintile 3
504........................  EXTENSIVE 3RD DEGREE BURNS W SKIN GRAFT............             506      Quintile 5
507........................  FULL THICKNESS BURN W SKIN GRFT OR INHAL INJ W/O CC             508      Quintile 3
                              OR SIG TRAUMA.
514........................  CARDIAC DEFIBRILATOR IMPLANT W CARDIAC CATH........             116      Quintile 3
516........................  PERCUTANEOUS CARDIVASCULAR PROCEDURE W AMI.........             116      Quintile 3
525........................  HEART ASSIST SYSTEM IMPLANT........................             111      Quintile 5
526........................  PERCUTANEOUS CARVIOVASCULAR PROC W DRUG-ELUTING                 116      Quintile 3
                              STENT W AMI.
527........................  PERCUTANEOUS CARVIOVASCULAR PROC W DRUG-ELUTING                 116     Quintile 3
                              STENT W/O AMI.
----------------------------------------------------------------------------------------------------------------
\1\ This chart does not reflect the six transplant LTC-DRGs (103, 302, 480, 495, 512, and 513) or the two
  ``error'' LTC-DRGs (469 and 470), for which we assign a relative weight of 0.0000.


[[Page 55995]]

    To illustrate the methodology for determining relative weights for 
the 159 LTC-DRGs with no LTCH cases, we provide the following examples, 
which refer to the no volume LTC-DRGs crosswalk information provided 
above in Chart 3:
    Example 1: There were no cases in the FY 2001 MedPAR file used for 
this final rule for LTC-DRG 3 (Craniotomy Age 0-17). Since the period 
of time surrounding the surgery and the post-operative care are similar 
in resource use and the length and complexity of the surgical 
procedures and the length of stay are similar, we determined that LTC-
DRG 1 (Craniotomy Age 17 Except for Trauma), which is 
assigned to low volume quintile 5 for the purpose of determining the 
relative weights, displayed similar clinical and resource use. 
Therefore, we assign the same relative weight of LTC-DRG 1 of 1.8783 
(quintile 5) (Table 3 in the Addendum to this final rule) to LTC-DRG 3.
    Example 2: There were no LTCH cases in the FY 2001 MedPAR file used 
in this final rule for LTC-DRG 91 (Simple Pneumonia and Pleurisy Age 0-
17). Since the severity of illness in patients with bronchitis and 
asthma are similar in patients regardless of age, we determined that 
LTC-DRG 90 (Simple Pneumonia and Pleurisy Age 17 without CC) 
displayed similar clinical and resource use characteristics and have a 
similar length of stay to LTC-DRG 91. There were over 25 cases in LTC-
DRG 90. Therefore, it is not assigned to a low volume quintile for the 
purpose of determining the relative weights. However, under our 
methodology, LTC-DRG 91, with no LTCH cases, needs to be grouped to a 
low volume quintile. We identified that the quintile with the closest 
weight to LTC-DRG 90 (0.7921; see Table 3 in the Addendum to this final 
rule) was low volume quintile 3 (0.8284; see Table 3 in the Addendum to 
this final rule). Therefore, we assign LTC-DRG 91 a relative weight of 
0.08284.
    Furthermore, we establish LTC-DRG relative weights of 0.0000 for 
heart, kidney, liver, lung, pancreas, and simultaneous pancreas/kidney 
transplants (LTC-DRGs 103, 302, 480, 495, 512 and 513, respectively) 
because Medicare will only cover these procedures if they are performed 
at a hospital that has been certified for the specific procedures by 
Medicare. We only include these six transplant LTC-DRGs in the GROUPER 
program for administrative purposes. Since we use the same GROUPER 
program for LTCHs as is used under the acute care hospital inpatient 
prospective payment system, removing these DRGs would be 
administratively burdensome. Based on our research, we found that most 
LTCHs only perform minor surgeries, such as minor small and large bowel 
procedures, to the extent any surgeries are performed at all. Given the 
extensive criteria that must be met to become certified as a transplant 
center for Medicare, we believe it is unlikely that any LTCHs would 
become certified as a transplant center. In fact, in the nearly 20 
years since the implementation of the acute care hospital inpatient 
prospective payment system, there has never been a LTCH that even 
expressed an interest in becoming a transplant center.
    Again, we note that as this system is dynamic, it is entirely 
possible that the number of LTC-DRGs with a zero volume of LTCH cases 
based on the system will vary in the future. We used the best most 
recent available claims data in the MedPAR file to identify zero volume 
LTC-DRGs and to determine the relative weights in this final rule.
    Table 3 in the Addendum to this final rule lists the LTC-DRGs and 
their respective relative weights and arithmetic mean length of stay.

B. Special Cases: General

    Under section 123 of Public Law 106-113, the Secretary generally 
has broad authority in developing the prospective payment system for 
LTCHs. The statute also provides the Secretary with broad authority in 
determining whether (and how) to make adjustments to LTCH prospective 
payment system payments. Section 307 of Public Law 106-554 directs the 
Secretary to ``examine'' appropriate adjustments to the LTCH 
prospective payment system, including certain specific adjustments, but 
the Secretary continues to have discretion as to whether to provide for 
adjustments to reflect variations in the necessary costs of treatment 
among LTCHs.
    Generally, LTCHs, as described in section 1886(d)(1)(B)(iv) of the 
Act, are distinguished from other inpatient hospital settings by 
maintaining an average length of stay greater than 25 days. However, 
LTCHs also have certain ``special'' cases that have stays of 
considerably less than the average length of stay and that receive 
significantly less than the full course of treatment for a specific 
LTC-DRG. Such cases would be paid inappropriately if the hospital were 
to receive the full LTC-DRG payment. Further, because of the budget 
neutrality requirement of section 123(a)(1) of Public Law 106-113, 
``overpayment'' for these ``special'' cases would reduce payments for 
all other cases that warrant full payment based on the LTCH services 
delivered. We discuss the special cases below in terms of definitions, 
policy rationale, and payment methodology.
    In the proposed rule, we proposed three subsets of special cases: 
very short-stay discharges, short-stay outlier discharges, and 
interrupted stays. In this final rule, in response to comments, we are 
not adopting our policy concerning very short-stay discharges, and are 
instead extending a revised short-stay outlier policy to include stays 
of 1 to 7 days, as explained in the comments and responses regarding 
short-stay outliers in section X.C. of this preamble. However, we have 
specifically addressed the comments regarding very short-stay 
discharges in section X.D. of this preamble. Also, in response to 
comments, we are simplifying our interrupted stay policy to incorporate 
a methodology that relies on a fixed number of days to determine 
payment for readmission from acute care hospitals or IRFs, as explained 
in section X.E. of this preamble.

C. Special Cases: Short-Stay Outliers

    In the March 22, 2002 proposed rule, we proposed to apply a special 
payment policy to short-stay cases with a length of stay between 8 and 
two-thirds the average length of stay for each LTC-DRG. We based the 
proposed policy on the belief that many of these patients could have 
been treated more appropriately in an acute hospital subject to the 
acute care hospital inpatient prospective payment system. Therefore, we 
proposed to implement a short-stay outlier policy for cases with a 
length of stay beyond 7 days, but not more than two-thirds the average 
length of stay for the DRG.
    A short-stay outlier case may occur when a beneficiary receives 
less than the full course of treatment at the LTCH before being 
discharged. These patients may be discharged to another site of care or 
they may be discharged and not readmitted because they no longer 
require treatment. Furthermore, patients may expire early in their LTCH 
stay.
    As noted above, generally LTCHs are defined by statute as having an 
average length of stay of greater than 25 days. We believe that a 
payment adjustment for short-stay outlier cases results in more 
appropriate payments, since these cases most likely would not receive a 
full course of treatment in such a short period of time and a full LTC-
DRG payment may not always be appropriate. Payment-to-cost ratios 
simulated for LTCHs, for the cases described above, show that if LTCHs 
receive a full LTC-DRG payment for those cases, they would be 
significantly ``overpaid'' for the resources they have actually 
expended.

[[Page 55996]]

    We also believe that providing a reduced payment for short-stay 
outlier cases neither encourages hospitals to admit patients for whom 
they knowingly are unable to provide complete treatment in order to 
maximize payment, nor severely penalizes providers that, in good faith, 
admit a patient and provide some services before realizing that the 
beneficiary would receive more appropriate treatment at another site of 
care. As explained in the proposed rule, establishing a short-stay 
outlier payment for these types of cases addresses the incentives 
inherent in a discharge-based prospective payment system for LTCHs for 
treating patients with a short length of stay. One of the primary 
objectives of a prospective payment system is to provide incentives for 
hospitals to become more efficient and, in doing so, to ensure that 
they can still receive adequate and appropriate payments. Because the 
LTCH prospective payment system rates are set to be budget neutral, 
providing a full prospective payment system payment for those cases 
that do not actually require the full course of treatment would reduce 
payments for cases that warrant full payment based on the LTCH services 
furnished. Therefore, we continue to believe that a short-stay outlier 
policy permits more equitable payment.
    In considering possible short-stay outlier policies, we sought to 
balance appropriate payments to shorter stay cases, which are generally 
less expensive than the average case in each LTC-DRG, and payments to 
the more expensive inlier cases (as defined in section X.A.2. of this 
preamble) in each LTC-DRG. In the absence of a short-stay outlier 
policy, based on analysis of payment-to-cost ratios, the full LTC-DRG 
payment would ``overpay'' the short-stay cases and ``underpay'' the 
inlier cases. We estimated that a short-stay outlier policy that 
results in payment-to-cost ratios that are at (or close to) 1.0 would 
ensure appropriate payments to both short-stay and inlier cases within 
a LTC-DRG because, on average, payments closely match costs for these 
cases under this prospective payment system.
    With no short-stay outlier policy, we estimated that payment-to-
cost ratios would be greater than 2.0 for cases with lengths of stay 
below the average length of stay for the LTC-DRG. In the proposed rule, 
we considered determining adjustments to the per discharge payment 
using the following three alternative short-stay outlier threshold 
policies:
     The least of 100 percent of the cost of the case, 100 
percent of the LTC-DRG specific per diem amount multiplied by the 
length of stay, or the full LTC-DRG payment for cases with a length of 
stay between 8 days and the average length of stay of the LTC-DRG;
     The least of 150 percent of the cost of the case, 150 
percent of the LTC-DRG specific per diem amount multiplied by the 
length of stay, or the full LTC-DRG payment for cases with a length of 
stay between 8 days and two-thirds of the average length of stay of the 
LTC-DRG; or
     The least of 200 percent of the cost of the case, 200 
percent of the LTC-DRG specific per diem amount multiplied by the 
length of stay, or the full LTC-DRG payment for cases with a length of 
stay between 8 days and half of the average length of stay of the LTC-
DRG.
    In each of the three alternatives examined, the short-stay outlier 
day threshold corresponds to the day where the full LTC-DRG payment 
would be reached by paying the specified percentage of the per diem 
amount for the LTC-DRG. This would result in a gradual increase in 
payment as the length of stay increases without producing a ``payment 
cliff,'' which will provide an incentive to discharge a patient one day 
later because there will be a significant increase in the payment.
    Our analysis in the proposed rule showed that of these three 
options, in conjunction with the proposed very short-stay discharge 
policy, the most appropriate policy for short-stay outliers was to 
adjust the per discharge payment by paying the least of 150 percent of 
cost, 150 percent of the LTC-DRG per diem amount, or the full LTC-DRG 
payment. The analysis showed that payment-to-cost ratios for both cases 
that would be identified as short-stay outliers and inlier cases (that 
are below the high-cost outlier threshold) will be at or slightly above 
1.0. We believed that this alternative would most appropriately pay 
cases identified as short-stay outliers, inlier cases, and longer stay 
cases without an incentive to provide inefficient care.
    Payment simulations that we conducted for the proposed rule showed 
that, of the LTCH cases in the FY 2000 MedPAR file with a length of 
stay between 8 days and two-thirds of the average length of stay of the 
LTC-DRG under the system, payment to 60.8 percent of those cases would 
be capped at 150 percent of cost. Therefore, we proposed to define a 
short-stay outlier as a case that had a length of stay between 8 days 
and two-thirds of the arithmetic average length of stay for each LTC-
DRG (proposed Sec. 412.529). We also proposed to adjust the per 
discharge payment by paying a short-stay outlier case (defined in 
proposed Sec. 412.529(a)) the least of: (1) 150 percent of the LTC-DRG 
specific per diem amount multiplied by the length of stay; (2) 150 
percent of the cost of the case; or (3) the full LTC-DRG payment 
(proposed Sec. 412.529(c)(1)).
    We proposed to determine the LTC-DRG specific per diem based 
payment using the standard Federal payment rate (Federal payment rate x 
LTC-DRG weight) and the arithmetic mean length of stay of the specific 
LTC-DRG (proposed Sec. 412.529(c)(2)). We proposed that the cost of a 
case would be determined using the hospital-specific cost-to-charge 
ratio and the Medicare allowable charges for the case (proposed 
Sec. 412.529(c)(3)).
    Comment: Several commenters supported the proposed short-stay 
outlier policy. However, they recommended that this policy also be used 
as the basis for payment for cases in which the LTCH stay is 7 days or 
less in lieu of our proposed very short-stay discharge policy.
    Response: We appreciate the commenters' support for the short-stay 
outlier policy and the suggestion to apply it to stays of 7 days or 
less, which, in the proposed rule, fell under the very short-stay 
discharge policy. Accounting for stays significantly under the average 
length of stay in a LTCH is an important feature of a LTCH prospective 
payment system.
    In response to the commenters' recommendation, we reconsidered the 
policies for both the very short-stay discharge and the short-stay 
outlier. Policy considerations underlying the short-stay outlier and 
the proposed very short-stay discharge categories were similar. Patient 
stays that fell under either category were not likely to have received 
a full course of treatment and, therefore, for these cases, LTCHs 
should not receive payment based on the provision of a full course of 
treatment. Based on the similar policy underpinnings of each policy and 
our awareness of the payment ``cliff'' effect between stays with a 
length of stay of 7 days and a length of stay of 8 days, we revisited 
our data. As a result of our reevaluation, we have determined that we 
can still meet the goals of our policy considerations by eliminating 
the very short-stay discharge policy and extending a modified version 
of the short-stay outlier policy to days 1 through 7 in the LTCH length 
of stay.
    In order to accommodate the addition of cases with a length of stay 
of 7 days or less to the short-stay outlier payment category, we 
analyzed numerous data simulations to determine how to reasonably 
adjust the proposed payment

[[Page 55997]]

percentage formula, for example, the lesser of 150 percent of cost or 
150 percent of the LTC-DRG specific per diem amount multiplied by the 
length of stay. If we were to simply maintain the proposed methodology 
for short-stay outliers and apply it to discharges with a length of 
stay between 1 and 7 days, we found that we would be ``overpaying'' 
significantly for those stays and ``underpaying'' for stays categorized 
as inliers. We considered adjusting the percentage to 130 or 125 
percent; however, we found these percentages did not result in payments 
with an appropriate disincentive for admitting patients who are likely 
to stay at the LTCH for 7 days or less. After additional simulations, 
we determined that the most appropriate percentage that maintains a 
payment-to-cost ratio of approximately 1 for 7 days or less is 120 
percent. We determined that if we adjust the payment percentage from 
150 to 120 percent, we also need to adjust the upper day threshold from 
two-thirds of the average length of stay for the LTC-DRG to five-sixths 
of the geometric average length of stay for the LTC-DRG. As discussed 
in detail later in this section, we found that five-sixths of the 
geometric (versus the arithmetic) average length of stay would be the 
short-stay outlier threshold where the full LTC-DRG payment would be 
made at 120 percent. That is, by adjusting the per discharge payment by 
paying at 120 percent of the per diem DRG payment, once a stay reaches 
five-sixths of the geometric average length of stay for the LTC-DRG, 
the full DRG payment will have been made. This results in a gradual 
increase in payment as the length of stay increases. If we retained the 
original two-thirds of the average length of stay for the LTC-DRG 
criteria, it would have produced a payment ``cliff'' that would have 
provided an incentive to extend a patient's stay for one or more days 
beyond the ``two-thirds average day'' in order to receive a significant 
increase in payment.
    As a result of this analysis, in this final rule, we are revising 
the short-stay outlier policy to adjust the per discharge payment by 
paying the least of 120 percent of the cost of the case, 120 percent of 
the LTC-DRG specific per diem amount multiplied by the length of stay 
of that discharge, or the full LTC-DRG payment, for all cases with a 
length of stay up to and including five-sixths of the geometric average 
length of stay of the LTC-DRG.
    As a consequence of our elimination of the very short-stay 
discharge policy, the reduction to the percentage from 150 to 120 
percent, and the extension of the upper day threshold from two-thirds 
of the arithmetic average length of stay to five-sixths of the 
geometric average length of stay, the standard Federal base rate 
increased from $27,649 in the proposed rule to $34,956 in this final 
rule. The reduction in the percentage to 120 percent does not 
necessarily correlate to a reduction in payment under the revised 
short-stay outlier policy since the 120 percent is applied to a higher 
LTC-DRG payment. Furthermore, because we are ultimately constrained by 
maintaining budget neutrality, a change in one policy may require 
corresponding changes to other policies. However, these changes are not 
necessarily substantial, and, as a result, the overall effects of our 
changes in this final rule may be minimal. For example, when we 
consider how the elimination of the very short-stay discharge policy 
actually impacts payment under the LTCH prospective payment system for 
LTC-DRGs 271 and 461, the actual adjusted payment for these DRGs did 
not change significantly between the proposed rule and the final rule.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                             Payment per
                                      Base rate                                            Relative     Average      Full DRG     Per diem      day at
                Rule                     (BR)        DRG             Description         weight (RW)   length of     payment     (full DRG   appropriate
                                                                                                      stay (ALOS)    (BR*RW)     pay/AlOS)    percentage
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed (150%)....................      $27,649        271  Skin Ulcers...............       1.2354         39.1      $34,158         $873       $1,310
Final (120%).......................       34,956        271  Skin Ulcers...............       0.9714         31.1       33,956        1,092        1,310
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed (150%)....................      $27,649        416  Septicemia Age           1.1222         29.4      $31,028       $1,055       $1,583
                                                              17.
Final (120%).......................       34,956        416  Septicemia Age           0.9612         25.9       33,600        1,297        1,557
                                                              17.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Thus, despite the reduction of the percentage from 150 to 120 
percent, it is evident that the actual payment differences between the 
two policies are remarkably minimal.
    To summarize, the results of the changes in this final rule to the 
short-stay outlier policy are as follows: (1) The percentage that is 
applied to determine payment under the short-stay outlier policy is 
changed from 150 percent to 120 percent; (2) the number of discharges 
paid as short-stay outliers will increase, due to the inclusion of 
cases that would formerly have been paid as very short-stay discharges; 
(3) the upper day threshold for short-stay outliers is extended from 
two-thirds of the arithmetic average length of stay for a LTC-DRG to 
five-sixths of the geometric average length of stay for the LTC-DRG; 
(4) the cases that fell under the very short-stay discharge policy in 
the proposed rule will now be paid at a higher rate under the revised 
short-stay outlier policy; (5) the standard Federal base rate will 
increase, resulting in higher overall payments being made to inliers 
and a higher base amount upon which short-stay outlier payments are 
determined; and (6) the fixed-loss amount for high-cost outliers will 
decrease (see section X.J.6. of this preamble for information on high-
cost outliers).
    Comment: A number of commenters considered our proposal to pay the 
least of three payment amounts for short-stay outliers to be too 
burdensome. They indicated a preference to a one-payment methodology, 
regardless of the number of days of a patient's stay. Some commenters 
recommended elimination of the payment related to a percentage of cost 
because they believed this method creates the wrong incentive and does 
not reward efficiency. The commenters added that the definition of 
``cost'' under the short-stay outlier payment provision is confusing 
because it is not clear whether the ``hospital-specific cost-to-charge 
ratio'' used in the proposed rule applies to the current year, the 
prior year, or some other period.
    Response: We do not agree with the commenters that the calculation 
of the short-stay outlier payment is a burden on the LTCH. The Medicare 
payment for short-stay outliers using the least of the three payment 
amounts is determined by the fiscal intermediary with the PRICER 
software developed specifically for the LTCH prospective payment 
system. The LTCH is not required to calculate which of the payment 
options is appropriate for each individual discharge. Rather, the 
intermediary is responsible for this calculation.
    We also do not agree with the commenters that a LTCH's payment 
should be based on a one-payment

[[Page 55998]]

methodology, regardless of the patient's length of stay. As we have 
stated above, a single payment that does not account for shorter 
lengths of stay would ``overpay'' the short-stay cases and ``underpay'' 
the inlier cases. Furthermore, since under this final rule, Medicare 
will adjust the per discharge payment by paying the least of 120 
percent of the cost of the case, 120 percent of the LTC-DRG specific 
per diem amount multiplied by the length of stay of that discharge, or 
the full LTC-DRG payment for cases with a length of stay up to and 
including five-sixths of the geometric average length of stay of the 
LTC-DRG, we do not believe a lesser payment based on 120 percent of the 
cost of the case creates the wrong incentives. Finally, the costs used 
to determine Medicare payment under the short-stay outlier policy are 
taken from the cost-to-charge ratio appearing on the most recent cost 
report as submitted by the LTCH to the fiscal intermediary.
    Comment: One commenter indicated that the payment amount for short-
stay outliers is too high and provides for reimbursement that exceeds 
costs by 50 percent.
    Response: The commenter is incorrect in stating that, under the 
proposed rule, payment for short-stay outliers would exceed costs by 50 
percent. Under the proposed rule, LTCHs would not have necessarily been 
provided with a payment that exceeded costs by 50 percent, since the 
proposed short-stay policy would have paid the least of 150 percent of 
the cost of the case, 150 percent of the LTC-DRG specific per diem 
amount multiplied by the length of stay of that discharge, or the full 
LTC-DRG payment. Depending on the stay, any one of the three payment 
categories could have applied, two of which were not related to costs. 
In addition, the short-stay outlier policy to which the commenters are 
referring has been changed in the final rule, as explained above. Under 
the revised short-stay outlier methodology in this final rule, the 
percentage upon which short-stay outlier payment is based is no longer 
150 percent, but is now 120 percent. We prepared extensive payment 
simulations in order to develop an equitable short-stay payment policy 
for implementation in the prospective payment system described in this 
final rule. In reconsidering the policy, we factored in the elimination 
of the very short-stay discharge policy and the inclusion of days 1 
through 7 into the short-stay outlier policy. We determined that the 
least of 120 percent of the cost of the case, 120 percent of the LTC-
DRG specific per diem amount multiplied by the length of stay, or the 
full LTC-DRG payment for cases with a length of stay up to and 
including five-sixths of the geometric average length of stay of the 
LTC-DRG would be a reasonable payment for short-stay outlier cases. At 
this percentage, we found that there were still payment-to-cost ratios 
that provided a disincentive for admission of patients that were likely 
to stay 7 days or less. We also determined that at 120 percent, stays 
falling under the short-stay outlier category would not be ``overpaid'' 
and a larger amount of total payments would be made for the care of 
true inlier patients.
    Comment: Several commenters indicated that the short-stay and very 
short-stay outlier payment amounts are too low. They recommended that, 
since short-stay cases have medical therapies and treatment provided on 
the day of admission, short-stay outliers should be grouped into the 
appropriate LTC-DRG and paid at 200 percent of the specific LTC-DRG per 
diem for the first day of admission and 100 percent of the per diem for 
each day of stay thereafter. Other commenters recommended a 150-percent 
per diem for the first day and a 100-percent per diem for each day 
afterward, based on the specific LTC-DRG. Both groups of commenters 
believe that a policy of an increased payment for the first day of the 
stay is consistent with our policy on payment for transfers under the 
acute care hospital inpatient prospective payment system.
    Response: As noted above, in response to public comments, we have 
revised the proposed very short-stay discharge policy. Under the 
revised short-stay policy, all short-stays, even those with a length of 
stay between 1 and 7 days, will be grouped into their specific LTC-
DRGs. In response to the suggestion that we should provide for an 
increased payment for the first day of the stay consistent with 
payments under the acute care hospital inpatient prospective payment 
system, we call the commenters' attention to the distinctions between 
the treatment and care of patients at acute care hospitals and the 
treatment and care at LTCHs. For acute care hospitals, existing 
regulations at Sec. 412.4(f) establish a payment rate of twice the per 
diem amount for the first day of the stay at the acute care hospital 
for the 10 DRGs included in the special transfer rule and payment at 
the per diem amount for each subsequent day, up to the full DRG 
payment. This policy presumes that the patient has been admitted as an 
inpatient to the acute care hospital with an acute medical condition. 
Even if the patient did not receive a full course of treatment at the 
acute care hospital and was subsequently transferred to a LTCH or 
another excluded hospital, SNF, or HHA, the immediate diagnostic care 
and patient stabilization required during that first day is resource-
intensive and costly.
    There are several reasons why we do not believe it is appropriate 
to adopt this policy for short-stays under the LTCH prospective payment 
system. First, according to research done by Urban, as well as 
anecdotal reports contained in many of the comments we received, a 
significant majority of LTCH patients are admitted from an acute care 
hospital, their medical conditions having been diagnosed and treated 
and their conditions stabilized to the extent that they can be 
discharged for additional hospital-level care at a LTCH. In this common 
situation, we do not believe that the costs incurred on that first day 
would reasonably exceed by 100 percent, or even by 50 percent, the 
costs of each subsequent day of hospitalization.
    Second, the calculations that determined the daily payments under 
the short-stay policy were derived from the DRG-specific payment rate 
that is based on the average length of stay for each LTC-DRG. This 
means that when the patient is appropriately hospitalized in a LTCH 
over the course of the stay, any higher costs incurred in the first 
days of the stay were already accounted for in calculating the LTC-DRG 
relative weight. Finally, we reiterate that we are not finalizing the 
proposed very short-stay discharge policy and are instead extending the 
revised short-stay outlier policy to stays of 7 days or less. We 
believe that the short-stay outlier policy that we have promulgated in 
this final rule strikes an appropriate balance between not encouraging 
the inappropriate admission of short-stay patients to LTCHs while 
providing reasonable and equitable payments for Medicare patients who 
may have been admitted in good faith, but whose stays fall in a range 
below the average length of stay for a LTCH.
    Comment: Several commenters believed that the short-stay outlier 
upper day threshold is too high and pointed to evidence that suggests 
that under the proposed LTCH prospective payment system, nearly half of 
all LTCH cases would be reimbursed on a per diem rather than on a 
discharge basis as required under the law. They believed that having a 
large number of cases reimbursed on a per diem basis discourages the 
efficiency of a discharge-based prospective payment system.

[[Page 55999]]

    The commenters recommended the use of an upper day threshold of 
one-half the arithmetic average length of stay. They believed this 
upper day threshold would reduce the high industry-wide portion of 
cases that would be paid on a per diem basis.
    In addition, one commenter noted that the very short-stay 
discharges were removed from the calculation of the average length of 
stay for each LTC-DRG, thereby inflating each mean. In effect, the 
commenter indicated that cases with shorter lengths of stay (1 through 
7 days) are not included in calculating the average length of stay; and 
as a result, the average length of stay for each LTC-DRG is higher. 
This commenter believed that the application of the threshold of two-
thirds to an ``inflated'' average length of stay would penalize LTCHs 
twice for short-stay outlier patients.
    Response: The LTCH prospective payment system in this final rule 
was designed predominantly to encourage efficiency in LTCHs treating 
patients requiring long-term hospital-level care. This system functions 
on a per discharge basis that complies with statutory requirements, and 
provides for adjustments for concerns specific to LTCHs. In fact, the 
LTCH prospective payment system is structured so that greater overall 
dollars are spent on cases that approximate the 25-day average stay of 
a LTCH patient, which encourages LTCHs to admit and efficiently treat 
patients who specifically need long-term care. Using the upper day 
threshold of one-half, as the commenter suggested, may indeed reduce 
the number of cases paid under the adjusted per discharge short-stay 
outlier policy. However, for the reasons given in this response, the 
commenter's suggestion does not comport with the overall goals of the 
LTCH prospective payment system; and we are not adopting it.
    Although the regression analyses and simulations based on prior 
years' TEFRA data may seem to indicate that nearly half of LTCH cases 
will be paid on an adjusted per discharge amount, we believe this data 
analysis does not necessarily predict the future behavior of LTCHs 
operating under a prospective payment system. The data used in the 
analysis are a product or reflection of the practice patterns of 
hospitals that operate under the mechanisms of the TEFRA payment 
system, which are different from the principles of a prospective 
payment system. However, these are the best data available upon which 
we can simulate LTCH behavior under the new LTCH prospective payment 
system. We believe that once the LTCH prospective payment system is 
implemented, the practice patterns of LTCHs will change. We anticipate 
that hospitals will alter their admission, treatment, and discharge 
patterns. Thus, we fully expect that an increasing majority of cases 
will be reimbursed on an unadjusted per discharge basis during the 
transition from reasonable cost-based reimbursement to prospective 
payments. The transition period of 5 years, designed to allow LTCHs to 
gradually adapt to the LTCH prospective payment system, should give 
LTCHs the opportunity to alter admission, discharge, treatment, and 
transfer patterns as needed for maximum clinical, as well as 
administrative, efficiency.
    Based on our experience in implementing other Medicare prospective 
payment systems, we fully expect that as new data are received, we may 
revisit policy decisions described in this final rule. Furthermore, our 
Office of Research, Development, and Information will be tracking the 
impact of the prospective payments on LTCHs, other hospitals that treat 
long-term care patients, and other postacute care providers, which will 
enable us to determine whether additional policy changes are warranted.
    As explained previously, the short-stay outlier upper day threshold 
corresponds to the day where the full LTC-DRG payment would be reached 
by paying the specified percentage of the per diem amount for the LTC-
DRG. This threshold was chosen to create a gradual increase in payment 
as the length of stay increases without producing a payment ``cliff''. 
In the proposed rule, short-stay outlier payments were limited by 150 
percent of the per diem amount for the LTC-DRG. Accordingly, the upper 
day threshold was also established at two-thirds to assure that the 
full DRG payment would be paid should the patient's stay equal two-
thirds of the arithmetic average length of stay of the LTC-DRG.
    Because we revised the proposed short-stay outlier policy for this 
final rule to also apply to discharges that had been proposed to be 
paid as very short-stay discharges, as requested by the commenters, we 
also reviewed the methodology for calculating the average length of 
stay for each LTC-DRG to determine the percentage of discharges that 
will be treated as short-stay outliers. Although we had originally used 
the arithmetic mean (which is the most commonly used measure of central 
tendency) for this calculation in the proposed rule, we now believe 
that there are certain statistical advantages, such as increased 
mathematical stability and accuracy, in using the geometric mean for 
determining the average length of stay for each LTC-DRG in the revised 
short-stay outlier policy. Lengths of stays within a DRG are log-
normally distributed. This is because each individual length of stay 
may or may not be extremely long, but it cannot be less than zero. A 
log-normal distribution, by definition, is normal when converted to 
logarithms. After further simulations and research, we have found that 
the geometric mean is statistically more accurate in locating the 
center of the distribution of length of stays within a DRG, which is 
the result we desire. In addition, geometric weights are not likely to 
be influenced by a few very long-stay cases and, therefore, are more 
stable over time. Accordingly, we are revising our calculation for 
determining length of stay for short-stay outliers to account for the 
geometric mean. In the acute care hospital inpatient prospective 
payment system postacute transfer policy (Sec. 412.4(f)), the geometric 
mean length of stay for each DRG is used to determine per diem 
payments. For the reasons outlined above, we believe that it is 
desirable to adopt a methodology in the final rule consistent with that 
used in the acute care hospital inpatient prospective payment system.
    In this final rule, we have set the per discharge adjustment for 
each LTC-DRG at 120 percent of the adjusted per diem amount for each 
LTC-DRG for the short-stay outlier policy. The corresponding upper day 
threshold that must be established to assure that the full DRG payment 
is made by the last day of the short-stay outlier payment is five-
sixths of the geometric average length of stay of the LTC-DRG. We are 
aware that this upper day threshold may initially create a situation 
where there are a higher number of cases that are paid on an adjusted 
per discharge-basis. However, we expect significant changes in the 
types of patients admitted to LTCHs, as LTCHs adjust to the prospective 
payment system, which will reduce the number of patients in LTCHs that 
are paid as short-stay outliers.
    We disagree that our method of calculating the average length of 
stay for the short-stay outlier policy would penalize LTCHs twice. As 
the commenter indicated, we do not include days 1 through 7 in the 
calculation of the average length of stay for each LTC-DRG. Even though 
we are now incorporating days 1 through 7 into the short-stay outlier 
payment category, our simulations have indicated that by including 
these extremely short stays in our mean calculations, the average

[[Page 56000]]

length of stay for each LTC-DRG would be inappropriately reduced and 
would then significantly bias payments against inlier cases. If stays 
of 7 days or less were included in the calculations of the average 
length of stay for each LTC-DRG, then the mean of each LTC-DRG would 
decrease and stays of shorter days would qualify for a full LTC-DRG 
payment. As the system must be budget neutral, this leads to a 
situation where more total dollars of payment would be shifted to 
shorter stays and, therefore, longer stays would receive less payment. 
We do not believe that it is appropriate to decrease payment to longer 
stays that actually receive a more representative and complete course 
of care in order to increase payments to shorter stays. Therefore, in 
this final rule, we continue to exclude stays of 7 days or less from 
our calculations of the average length of stay for each DRG, as was 
provided for in the proposed rule.
    In addition, in the proposed rule, cases of 7 days or less were 
assigned to two specific DRGs in the proposed rule, and their costs 
were factored into those DRG weights. Although cases that we proposed 
to be assigned as very short-stay discharges are paid in this final 
rule under the category of short-stay outliers, we continue to believe 
that cases with stays of up to 7 days should not be included in the 
calculation of relative weights. This is because DRG relative weights 
should reflect the average of resources used on representative cases of 
a specific type. Stays of 7 days or less do not receive or benefit from 
treatment that is typical in a LTCH stay. Full resources are not used 
in the earlier stages of admission to a LTCH. If we did include stays 
of 7 days or less in the computation of the relative weights, the value 
of most weights would decrease and, therefore, inlier payments would 
decrease. We do not believe that it is appropriate to compromise the 
integrity of the payment determination at the expense of those inlier 
cases that actually benefit from and receive a full course of treatment 
at a LTCH, in order to include these very short-stays in the 
computation of the relative weights. (As noted in section X.A.2. of 
this preamble, stays of 8 days or over are included in the calculations 
of the relative weights on a fractional basis.)
    Nevertheless, for payment purposes, we are treating LTCH stays of 7 
days or less as short-stay outliers, since we believe that a LTCH 
should not be penalized for those occasions when, in good faith, it 
admits a patient, who shortly after admission, expires or is 
transferred to a more appropriate setting. We also believe that 
incorporating payments for stays of 7 days or less into the final 
short-stay outlier formula considerably simplifies the payment system.
    After consideration of the public comments received and 
reevaluating our proposed policy, we are adopting as final a short-stay 
outlier policy that will apply to all LTCH admissions with a length of 
stay up to and including five-sixths of the geometric average length of 
stay of the LTC-DRG. The short-stay outlier policy will pay the least 
of 120 percent of the cost of the case, 120 percent of the LTC-DRG 
specific per diem amount multiplied by the length of stay for that 
discharge, or the full LTC-DRG payment.

D. Proposed Payments for Special Cases of Very Short-Stay Discharges

    As mentioned earlier in section X.B. of this preamble, in the March 
22, 2002 proposed rule, we proposed at Sec. 412.527 to define a very 
short-stay discharge as a discharge that has a length of stay of 7 days 
or less (regardless of the LTC-DRG assignment), irrespective of the 
discharge designation (including cases where the patient expires). We 
indicated that a very short-stay discharge often occurs when it is 
determined, following admission to a LTCH, that the beneficiary would 
receive more appropriate care in another setting. For example, a 
patient may experience an acute episode or require more intensive 
rehabilitation therapy than is available at the LTCH. Other 
circumstances that we believed would warrant classification as a very 
short-stay discharge would involve patients who were either discharged 
to their home or who expired within the first 7 days of being admitted 
to a LTCH.
    Since LTCHs are defined by statute as generally having an average 
length of stay greater than 25 days, we proposed to make an adjustment 
for very short-stay discharges in order to make appropriate payment to 
cases that may not necessarily require the type of services intended to 
be provided at a LTCH or may have been transferred from an acute 
hospital prematurely. Further, we believed that providing a special 
payment for very short-stay discharges neither encourages hospitals to 
admit patients for whom they knowingly are unable to provide complete 
treatment in order to maximize payment, nor severely penalizes 
providers that, in good faith, admit a patient and provide some 
services before realizing that the beneficiary will receive more 
appropriate treatment at another site of care.
    As stated in the proposed rule, we also believed that establishing 
a special payment for a discharge with a very short length of stay is 
critical in implementing a discharge-based prospective payment system. 
Because the rates are set to be budget neutral, if we did not make an 
adjustment for stays significantly shorter than the average length of 
stay in a LTCH, providing a full prospective payment system payment for 
very short-stay LTCH cases would inappropriately reduce payments for 
nonshort-stay LTCH cases.
    To improve the accuracy of the payments, we proposed to categorize 
very short-stay discharge cases into two categories based on the 
primary diagnosis--one for psychiatric cases and one for all other 
types of cases. We believed it would be appropriate to separate very 
short-stay discharge cases into psychiatric and nonpsychiatric 
categories because our analysis showed that the resources used to treat 
these two types of patients during the first 7 days differ 
significantly. In our simulations, combining psychiatric very short-
stay discharge cases with all other very short-stay discharge cases 
resulted in a considerable ``overpayment'' for the very short-stay 
discharge psychiatric cases and a substantial ``underpayment'' of all 
other (nonpsychiatric) very short-stay discharge cases. A detailed 
explanation of the proposed split of very short-stay outliers into two 
categories and the proposed assignment to LTC-DRGs appears in the 
proposed rule published in the Federal Register on May 22, 2002 (67 FR 
13453-13454). We proposed to calculate the relative weights for the two 
very short-stay discharge LTC-DRGs using the hospital-specific relative 
value methodology. The very short-stay discharge LTC-DRG per diem 
amount would have been determined by dividing the applicable Federal 
payment rate (Federal payment rate x LTC-DRG weight) by 7 days.
    Comment: Many of the commenters questioned the basis for treating 
cases with a length of stay of 7 days or less as very short-stay 
discharges. They indicated that the policy ignores the difficult 
clinical decisions that LTCHs consistently face daily and that the 
policy will severely penalize providers who in good faith admit a 
patient, but the patient exhausts their Medicare Part A number of day 
benefits within 8 days of admission, or the patient's condition worsens 
and later needs treatment elsewhere, or the patient dies. They added 
that the very short-stay policy would create financial incentives for 
LTCHs to avoid patients close to the end of Medicare coverage for 
hospital stays, but who need LTCH care. These commenters suggested that 
the very short-stay policy be abandoned in favor

[[Page 56001]]

of an extension of the short-stay outlier policy to cases that have 
stays of 7 days or less.
    Some commenters urged us to eliminate the ``cliff'' between the 
payment of a 7-day very short-stay and the payment of an 8-day short-
stay outlier, which could be as much as $10,000, depending on the DRG. 
They indicated that this ``cliff'' could encourage LTCHs to keep 
patients extra days simply to receive the windfall that occurs at day 8 
and suggested that we apply the proposed short-stay outlier policy to 
all stays of 7 days or less.
    Response: Our data analyses of the MedPAR files from FY 1999 
through FY 2000 originally led us to differentiate between LTCH stays 
of 7 days or less and those of more than 7 days, but still considerably 
less than the average length of stay for the LTC-DRG to which the stay 
was grouped. (See section X.C. for our discussion on short-stay 
outliers.) However, after reconsidering the policy in light of the 
commenters' concerns, including the need to eliminate the incentive for 
LTCHs to keep patients additional days simply to receive the monetary 
windfall that occurs with a payment ``cliff'', we have decided to 
eliminate this category of patient stays, and instead, extend the now 
revised short-stay outlier policy to stays of 7 days or less, as 
discussed in detail in section X.C. of this final rule.
    The short-stay outlier policy, when extended to stays of 7 days or 
less, addresses our concerns of ``overpaying'' for incomplete 
treatment, while also recognizing and appropriately compensating LTCHs 
for expenses related to treating patients that have a shortened length 
of stay due to deaths or for care of patients who are not actually 
discharged, but whose Medicare coverage is exhausted within 7 days or 
less of their admission. (The issue of deaths occurring within the 
first 7 days is discussed in more detail in the next comment.) 
Specifically, with regard to the commenters' concerns about patients 
who exhaust their Medicare coverage in 7 days or less of their stay in 
the LTCH, since many LTCH patients are admitted to a LTCH following a 
hospitalization at an acute care hospital, it is possible that a 
patient who could benefit from continued medical care at a LTCH could 
have used up the maximum 150 Medicare days allowed for that spell of 
illness. We wish to clarify that under the final rule, Medicare 
payments for patients that have 7 days or less remaining days of 
Medicare coverage will receive payment based on the revised short-stay 
outlier policy in this final rule.
    With respect to patients whose conditions suddenly worsen within 
the first 7 days of admission, while the ultimate outcome for any given 
patient may be difficult to predict at the time of admission, LTCHs by 
and large should be admitting patients who predictably need the 
particular type of care that LTCHs offer. LTCH patients often present 
with multiple comorbidities, but their overall condition in most cases 
should be relatively stable if they were discharged from an acute care 
hospital and do not require the intense intervention associated with 
acute care hospitals. Further, in admitting such patients, we believe 
that LTCH personnel should determine that these patients actually 
require and can benefit from hospital-level care for what is intended 
to be an average stay of greater than 25 days. Even if a LTCH is 
focusing on admitting the appropriate types of patients, it may still 
infrequently admit patients whose conditions suddenly worsen. We 
believe that the number of unpredictable cases would be small, and 
payment for simpler cases, requiring fewer resources, should typically 
balance out higher cost cases of stays that are 7 days or less that are 
unforeseeable.
    In addition, we note that with the elimination of the very short-
stay discharge policy, most cases with a stay of 7 days or less will 
now be paid at the higher DRG-specific short-stay outlier rate. 
Moreover, for the highly unusual phenomenon of a short-stay case that 
actually falls into the high-cost outlier category, outlier payments 
will be available once the patient's costs exceed the payments under 
the short-stay outlier policy and the fixed loss threshold, under 
Sec. 412.525.
    Based on our policy revision regarding the elimination of the very 
short-stay discharge payment category, we do not anticipate any 
penalty, as described by the commenter, for stays of 7 days or less 
that were admitted in good faith. In establishing a payment category 
for shorter stays that, in an increasing progression, reflects the LTCH 
resources used for a specific episode of care, we believe that we have 
effectively and equitably addressed the problem of treating short-term 
patients in a LTCH.
    We appreciate the comments concerning the ``payment cliff,'' which 
potentially could have provided a significant incentive for LTCHs to 
keep patients who would otherwise have been paid for as very short-stay 
discharges. Our concern also about this ``cliff'' effect created by 
payments under the proposed very short-stay policy contributed to our 
decision to eliminate the policy. In this final rule, we are 
establishing a policy for all cases with a length of stay up to and 
including five-sixths of the geometric average length of stay of the 
specific LTC-DRG (including stays of 7 days or less). These cases will 
be paid under the short-stay outlier policy, thus eliminating the 
incentives present with the ``cliff.'' Under the short-stay outlier 
policy, there will be a steady daily increase in payments beginning 
with the first day, without a windfall payment on any given day, as 
described in section X.C. of this preamble, and LTCHs will be 
encouraged to base discharge decisions on clinical judgment rather than 
on financial gain.
    Comment: Some commenters indicated that the severity of a LTCH 
patient's medical condition is typically very high upon admission, 
requiring significant resources and resulting in high costs within the 
first several days. The commenters pointed out that the DRG weights 
assigned to the proposed very short-stay discharges for determining the 
payment ignores this fact. As a result, LTCHs would not receive 
adequate reimbursement for these services. The commenters pointed out 
that there are high costs associated with patients who receive high 
intensity ``code blue'' services, including patients who expire. They 
recommended the establishment of a separate DRG for patient expiration 
cases that would have a higher case weight than the proposed very 
short-stay discharge DRGs.
    Response: While we understand the commenters' concerns, we point 
out that, even under the now eliminated proposed very short-stay 
discharge policy, payment was based on two LTC-DRGs, one for 
psychiatric cases and one for nonpsychiatric cases. The computation of 
the weights for those LTC-DRGs did include total charges for all such 
cases, and generally, payments would have been based on LTC-DRG weights 
that have balanced out the most complex admissions with the simpler 
admissions. Under the final rule, payments for stays of 7 days or less 
will likely be higher under the revised short-stay outlier policy that 
we are adopting as outlined in section X.C. of this preamble, and 
payments will be LTC-DRG specific, with rates reflecting relative 
medical complexity and severity of a patient condition. We believe that 
this revision in our short-stay policy addresses the commenters' 
concerns.
    With regard to the commenters' suggestion that we create a separate 
DRG to compensate for the high costs associated with patients who 
expire, with our elimination of the proposed

[[Page 56002]]

very short-stay discharge policy, payments for these patients will also 
be paid under the short-stay outlier policy. Under the short-stay 
outlier policy, each case is classified into a LTC-DRG and the per diem 
payment adjustment is based on our calculations of relative resource 
use for that LTC-DRG. As we note in section X.A. of this preamble, LTC-
DRG weights were derived from data simulations that were adjusted for 
short-stay outliers and included deaths that occurred prior to the 
short-stay outlier threshold for each LTC-DRG. In addition, adjusted 
payments for each case that fall within the short-stay outlier 
category, based on the least of 120 percent of the cost of the case, 
120 percent of the LTC-DRG specific per diem amount multiplied by the 
length of stay, or the full LTC-DRG payment, should generally 
compensate for any increased costs associated with treating a severely 
sick patient who dies. Moreover, in keeping with the principles 
underlying prospective payments, even if a hospital did not profit, or 
even recover its costs for a specific case, there are other cases for 
which the hospital will receive payment in excess of its costs. 
Therefore, we do not believe that a separate DRG is necessary for 
patient expiration cases.
    Accordingly, based on our analysis of the public comments received 
and our further evaluation of the proposed very short-stay policy, we 
have decided not to implement the very short-stay policy as proposed. 
We are removing the proposed Sec. 412.527 from the regulation text and 
not adopting it as final. Instead, we are extending the short-stay 
outlier policy to all stays up to and including five-sixths of the 
geometric average length of stay for the specific LTC-DRG, as discussed 
in detail under section X.C. of this preamble.

E. Special Cases: Interrupted Stay

    In the March 22, 2002 proposed rule, we proposed to define cases 
involving an interruption of a stay in a LTCH as those cases in which a 
LTCH patient is discharged to an inpatient acute care hospital, an IRF, 
or a SNF for treatment or services not available at the LTCH for a 
specified period followed by readmittance to the same LTCH 
(Sec. 412.531). For a discharge to an acute care hospital, the proposed 
period of interruption was within (less than or equal to) one standard 
deviation from the arithmetic average length of stay for the DRG 
assigned for the inpatient acute care hospital stay. For a discharge to 
an IRF, the proposed period of interruption was within one standard 
deviation from the arithmetic average length of stay for the CMG and 
the comorbidity tier assigned for the IRF stay. For a discharge to a 
SNF, the proposed period of interruption was within 45 days in a SNF 
(that is, one standard deviation from the average length of stay for 
all Medicare SNF cases).
    In considering an appropriate proposed interrupted stay threshold, 
we attempted to balance the payment incentives of both the LTCH and the 
acute care hospital, IRF, or SNF to which the LTCH patient is 
discharged before being readmitted to the LTCH. In order to assure that 
discharges from LTCHs are based on clinical considerations and not 
financial incentives, we proposed that the interrupted stay day 
threshold would only pay the LTCH for more than one discharge if the 
patient's length of stay at the acute care hospital, IRF, or SNF 
exceeded one standard deviation from the average length of stay for the 
DRG, the combination of the CMG and the comorbidity tier, or for all 
Medicare SNF cases, respectively. We believed this would have made it 
more difficult for a LTCH to find a prospectively paid acute care 
hospital, IRF, or SNF that would admit a LTCH patient just to allow the 
LTCH to receive two separate LTC-DRG payments.
    We believed that the proposed interrupted stay day threshold of one 
standard deviation from the average length of stay for either the acute 
care hospital DRG, the IRF combination of the CMG and the comorbidity 
tier, or for all Medicare SNF cases would provide the appropriate 
disincentive since cases that stay significantly longer than the 
average length of stay are more costly than the average case. Since the 
SNF prospective payment system is a per diem system and not a per 
discharge system, we proposed to implement the same threshold for all 
SNF cases regardless of the resource utilization group (RUG) 
classification used for SNF payment. We believed the proposed 
interrupted stay threshold was appropriate because, in general, the 
average length of stay plus one standard deviation would capture the 
majority of the discharges that are similar to the average length of 
stay for the respective DRG, combination CMG and comorbidity tier, or 
for all Medicare SNF cases. In addition, this proposal was consistent 
with the basis for our payment policy for new technologies under the 
acute care hospital inpatient prospective payment system where the cost 
of a new technology must exceed one standard deviation beyond the mean 
standardized charge for all cases in the DRG to which the new 
technology is assigned in order to receive additional payments (see the 
September 7, 2001 inpatient hospital final rule, 66 FR 46914). Under 
the proposed rule, the counting of the days for the interruption of the 
stay would begin on the day of discharge from the LTCH and end on the 
day the patient is readmitted to the LTCH.
    For the purposes of payment under the LTCH prospective payment 
system, we proposed that a case that meets the definition of an 
interrupted stay would be considered a single discharge from the LTCH, 
and, therefore, would receive only one LTC-DRG payment. Since the two 
LTCH stays are considered as a single case for the purposes of payment 
under the LTCH prospective payment system, the second discharge from 
the LTCH is included in the single LTC-DRG payment. The acute care 
hospital, the IRF, or the SNF stay would be paid in accordance with the 
applicable payment policies for those providers.
    We also proposed to make one discharge payment under the LTCH 
prospective payment system for an interrupted stay case, as defined 
under Sec. 412.531(a), to reduce the incentives inherent in a 
discharged-based prospective payment system of ``shifting'' patients 
between Medicare-covered sites of care in order to maximize Medicare 
payments. We believed that the proposed policy was particularly 
appropriate for LTCHs since, as a group, these hospitals are 
considerably diverse and offer a broad range of services such that 
where some LTCHs may be able to handle certain acute conditions, others 
will need to transfer their patients to acute care hospitals. (Section 
V.C. of this preamble contains a description of the universe of LTCHs.)
    For instance, some LTCHs are equipped with operating rooms and 
intensive care units and are capable of performing some surgeries. 
However, other LTCHs are unable to provide those services and will need 
to transfer the beneficiary to an acute care hospital. Similarly, a 
patient who no longer requires hospital-level care, but is not ready to 
return to the community, could be transferred to a SNF. This incentive 
to ``shift'' patients between Medicare-covered sites of care in order 
to maximize Medicare payments is of a particular concern when the LTCH 
is physically located within the walls of another hospital. Often, the 
LTCH patient may not even be aware of a transfer to the other hospital 
or SNF because he or she will have only been moved down the hall or to 
another wing of the building. Moreover, our research reveals that 
hospitals-within-hospitals are the fastest growing type of LTCH. We 
also believe that the same incentives

[[Page 56003]]

for inappropriate discharges and readmittance exist for satellite LTCHs 
that are located within acute care hospitals, described in 
Sec. 412.22(h), as well as for distinct part SNFs co-located with 
LTCHs. (We address the particular issues of onsite discharges and 
readmittances in section X.G. (Sec. 412.532(d)) in this final rule.)
    We proposed that whether or not a LTCH patient who is discharged to 
an inpatient acute care hospital, an IRF, or a SNF and then returns to 
the same LTCH is treated as an interrupted stay (with one LTC-DRG 
payment) or as a new admission (with two separate LTC-DRG payments) 
depended on the patient's length of stay at the acute care hospital, 
IRF, or SNF compared to the arithmetic average length of stay and the 
standard deviation for the acute care hospital inpatient prospective 
payment system DRG, the IRF combination of the CMG and the comorbidity 
tier, or 45 days for all Medicare SNF cases. In the proposed rule, we 
specified in tables the arithmetic average length of stay and one 
standard deviation for each acute care hospital DRG and each IRF 
combination of the CMG and the comorbidity tier. (As noted above, this 
was not necessary for SNFs, as we used a set number of days for SNF 
stays in the proposed rule.)
    While the proposed interrupted stay policy under Sec. 412.531 was 
based in part on clinical considerations, we realized that it may be 
somewhat administratively burdensome for the LTCH to determine the DRG 
for the acute care hospital stay or the combination of the CMG and the 
comorbidity tier for the IRF stay, in order to determine whether or not 
a beneficiary who is discharged to an acute care hospital or an IRF and 
then returns to the LTCH would be an interrupted stay (with a single 
LTCH prospective payment system payment) or a new admission (with two 
separate LTCH prospective payment system payments). Therefore, we 
discussed in the proposed rule our intent to further analyze Medicare 
claims data to determine if we should consider treating all patients 
who are discharged to either an acute care hospital or an IRF and 
admitted back to the LTCH within a fixed number of days (as we had 
proposed for SNFs), regardless of the DRG of the patient in the acute 
care hospital or the combination of the CMG and the comorbidity tier of 
the patient in the IRF, as an interrupted stay. We indicated that 9 
days for acute care hospitals and 27 days for IRFs might be appropriate 
thresholds to identify interrupted stay cases because, in both cases, 
the thresholds are one standard deviation from the average length of 
stay of all patients in those respective settings. We were aware that, 
under such a policy, less clinically complex brief acute care hospital 
and IRF stays would be included and would become an interrupted stay if 
the beneficiary returns to a LTCH. However, those types of cases would 
be offset by other stays that require more intensive and lengthy care.
    For this final rule, we have decided to treat all patients who are 
discharged to either an acute care hospital or an IRF and admitted back 
to the LTCH within a fixed period of time (as we did in the proposed 
rule for discharges to SNFs), regardless of the DRG or the combination 
CMG and comorbidity tier, as an interrupted stay. This decision will 
relieve the administrative burden on providers and eliminate the need 
to make claims billing system changes, as discussed in our responses to 
the first two public comments in this section. We believe that 9 days 
for acute care hospital stays and 27 days for IRF stays are appropriate 
thresholds to identify interrupted stay cases because, in both cases, 
the thresholds are one standard deviation from the average length of 
stay of all patients in those respective settings. We are retaining as 
final the proposed 45-day threshold for SNFs.
    Comment: Over half of the commenters objected to our proposed 
policy for determining the LTC-DRG payment for an interrupted stay 
(with a single LTCH prospective payment system payment) based on a 
number-of-day threshold that equals one standard deviation from the 
average length of stay for the DRG for the acute care hospital or the 
IRF combination of CMG and comorbidity tier for the IRF stay. The same 
commenters did not object to the proposed policy for SNFs, because it 
used a specified number of days (45) for all stays in a SNF for 
computing the period of interruption.
    The commenters believed that (1) the proposed methodology for acute 
care hospitals and IRF stays would be an extreme administrative burden 
on providers; (2) it would be difficult for LTCHs to determine assigned 
DRGs and CMGs and comorbidity tiers and length of stays (discharge and 
readmittance dates) during the interruption for these cases; and (3) 
the proposed policy would be too costly for both providers and 
intermediaries to implement within the Medicare claims billing and data 
systems. Some commenters believed there might be an issue of possible 
compromise of the Privacy Rule relating to disclosure of certain 
individually identifiable patient health information to certain 
entities under the provisions of the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA).
    Response: In the proposed rule, we acknowledged that it might be 
somewhat administratively burdensome to determine the DRG for the acute 
care hospital stay or the combination of the CMG and the comorbidity 
tier for the IRF stay in order to determine whether or not a 
beneficiary who is discharged to an acute care hospital or an IRF and 
then returns to the LTCH will be considered an interrupted stay (with a 
single LTCH prospective payment system payment) or a new admission 
(with two separate LTCH prospective payment system payments). For that 
reason, we solicited specific comments on an alternative methodology.
    We have further evaluated our proposal and agree that LTCHs might 
be unnecessarily burdened if they were required to determine the other 
facility's assigned DRGs and CMG and comordibity tiers for the 
interruption and that numerous changes would have to be made to the 
Medicare billing and data systems to implement the policy. As a result, 
we agree with the commenters that it is more feasible to implement the 
proposed alternative methodology for determining the LTC-DRG payment 
for interrupted stays based on a fixed day threshold for each provider 
level of care, as discussed in our response to the next comment. This 
policy change should relieve most of the administrative burden that the 
commenters were concerned with and eliminate the need to determine the 
DRGs and CMGs and comorbidity tiers assigned to the patient at the 
other facility. In response to the commenters' concern regarding HIPPA, 
even under the proposed rule, we do not believe privacy implications 
under HIPPA would have been implicated.
    Comment: In response to our request for alternatives to the 
proposed methodology for determining the interruption of stay 
threshold, commenters recommended several methodologies for assigning a 
fixed number of days of absences at each provider level for determining 
an interrupted stay. Specifically, some commenters agreed with our 
proposed alternatives of a 9-day threshold for acute care hospital 
stays, a 27-day threshold for IRF stays, and retention of the 45-day 
threshold for SNF stays. One commenter believed that the 45-day 
threshold for SNFs is too long. Other commenters recommended one of the 
following for all sites: (1) A 9-day threshold, regardless of the 
service codes or discharge setting; (2) a threshold range of 10 to 12 
days or 11 days or less; or (3) a fixed threshold that

[[Page 56004]]

reflects the average length of stay of hospitalizations for all DRGs. 
Two commenters recommended not including any interrupted stay policies 
in the final rule. One commenter suggested that any positive or 
negative effects of the 9-day, 27-day, and 45-day thresholds on budget 
neutrality as set forth in the proposed rule be adjusted through the 
standard Federal payment amount.
    Response: After consideration of the public comments and our 
further analysis of MedPAR data, we are revising the proposed 
thresholds under our interrupted stay policy, as it relates to 
discharges to acute care hospitals and IRFs, to incorporate a fixed 
period of time. For this final rule, we have decided to treat all 
patients who are discharged to either an acute care hospital or an IRF 
and admitted back to the LTCH within a fixed period of time (as we did 
in the proposed rule for discharges to SNFs), regardless of the DRG or 
the combination CMG and comorbidity tier, as an interrupted stay. We 
believe that 9 days for acute care hospital stays and 27 days for IRF 
stays are appropriate thresholds to identify interrupted stay cases 
because, in both cases, the thresholds are set at one standard 
deviation from the average length of stay of all patients in those 
respective settings. We are retaining in the final rule the proposed 
45-day threshold for SNFs. We do not agree with the commenter who 
stated that the 45-day threshold for SNFs is too long. A length of stay 
of 45 days is the average number of days plus one standard deviation 
for all SNF Medicare patients. In addition, we are not adopting the 
commenters' suggestion that we dispense with the interrupted stay 
policy because we believe this policy is an essential component of the 
LTCH prospective payment system, as explained elsewhere in this 
section.
    In response to the comment about the impact that any revised 
interrupted stay policy will have on the budget neutrality 
calculations, we wish to assure the commenter that the interrupted stay 
policy in this final rule is one of several policies that have been 
revised based on public comments and taken into consideration in 
developing the final standard Federal prospective payment rates for FY 
2003. The recalibration of the prospective payment rates in this final 
rule based on those revisions will continue to satisfy the statutory 
requirement for budget neutrality.
    Comment: Some commenters believed the payment system should not 
penalize those providers who make clinically appropriate transfers. 
Four commenters indicated that, based on experience, the number of 
readmissions to LTCHs are minimal, especially from IRFs and SNFs, and 
questioned CMS data on interruptions of stays at LTCHs. These 
commenters objected to the proposed interrupted stay policy because 
they believed it would impose a significant burden solely to prevent 
certain questionable transfers that rightfully should be reviewed on an 
individual basis for appropriateness.
    Response: We proposed making one payment under the LTCH prospective 
payment system for an interrupted stay to preserve the integrity of the 
per discharge LTCH prospective payment system. We are not attempting to 
restrict a LTCH from pursuing necessary clinical care from another 
facility. However, we do not believe it is appropriate for the LTCH to 
receive a second payment for a patient if the patient returns to the 
LTCH to complete treatment already begun in the LTCH at the time of the 
earlier admission. Nowhere in the interrupted stay policy are we 
suggesting that the treatment at the secondary site would be 
unnecessary or clinically inadvisable. In addition, we believe that 
LTCHs, certified as acute care hospitals, should generally be able to 
handle nonsurgical urgent care needs. Therefore, the need to transfer 
should not arise as frequently as it might from a different provider. 
While we did not base this policy on specific data, and at this point 
we cannot quantify the number of readmissions to LTCHs, the interrupted 
stay policy is intended, in part, to reduce the incentives inherent in 
a discharge-based prospective payment system of ``shifting'' patients 
between Medicare-covered sites of care in order to maximize Medicare 
payments. We believe that payment under this policy is fair and is 
particularly appropriate for LTCHs since, by definition, the hospital 
treats patients with an average length of stay of greater than 25 days, 
and while payments are determined based on average lengths of stay, 
there may be an incentive for the LTCH to discharge the patient for 
part of that stay to another hospital. We believe we have eliminated 
the significant burden that the commenters were concerned with by 
revising the threshold criteria, as discussed earlier.
    Comment: A few commenters suggested that cases that are readmitted 
to the LTCH from another facility in less than the specified timeframe 
should be treated as separate cases under the LTCH prospective payment 
system if the second admission to the LTCH is unrelated to the primary 
reason for the initial admission.
    Response: As noted above, under the interrupted stay policy that we 
are adopting in this final rule, if the patient's length of stay away 
from the LTCH does not exceed the fixed day thresholds, the return to 
the LTCH is considered part of the first admission and will be paid as 
one admission. The situation the commenters describe is, and will 
continue to be, viewed as one stay. In section VIII. of this preamble, 
we provide details on patient classifications by DRG and highlight the 
fact that the principal diagnosis and secondary diagnoses form the 
basis upon which a LTC-DRG will be assigned for the entire stay. On the 
other hand, if the patient exceeds the total fixed day threshold 
outside of the LTCH at another facility before being readmitted, two 
separate LTC-DRG payments would be made, one based on the principal 
diagnosis for the first admittance and the other based on the principal 
diagnosis for the second admittance. If the principal diagnoses are the 
same for both admissions, the hospital could receive two similar 
payments.
    If the LTCH stay were not interrupted, the patient still could have 
developed other indications or complicating factors while in the LTCH. 
In this situation, grouping for the LTC-DRG would be based 
predominantly on the principal diagnosis, along with data from 
complicating secondary or additional diagnoses, any procedures, and 
age, gender, and discharge status as is done under the acute care 
hospital inpatient prospective payment DRG system. However, secondary 
diagnoses that have no bearing on the LTCH stay may be discarded by the 
GROUPER software when classifying cases for the purposes of determining 
payment. The presence of additional diagnoses does not automatically 
generate a comorbid or complicating condition for all DRGs, as 
explained in section IX.E. of this preamble relating to the ICD-9-CM 
coding system. In a situation of an interrupted stay or a stay that is 
not considered an interrupted stay, comorbidity could develop and the 
principal diagnosis would still be the factor most significantly 
affecting the DRG assignment.
    The acute care hospital inpatient prospective payment system, upon 
which we based the LTCH prospective payment system, treats one stay at 
an acute care facility similarly, where cases are classified into DRGs 
for payment based on the patient's principal diagnosis. Additional or 
secondary diagnoses may be recorded and may slightly influence DRG 
assignment for a case. However, the principal diagnosis,

[[Page 56005]]

with which the patient originally entered the acute care facility, is 
the dominant indicator for the DRG assignment.
    In addition, the typical LTCH patient has multiple, complex medical 
problems represented by several ICD-9-CM codes that will be listed on 
any one patient's claim. If we were to allow a new LTC-DRG assignment 
after an interrupted stay based solely upon whether one of these other 
conditions had increased in severity, it would not be difficult for the 
LTCH to select a different principal diagnosis following the patient's 
return to the LTCH. Medicare would then make two payments for what was, 
in reality, one single episode of treatment for the type of patient who 
is ideally suited for hospitalization in a LTCH, a very sick patient 
with multiple comorbidities.
    A DRG-based prospective payment system is designed to set payment 
at an average of hospital charges for all admittances of a particular 
type of diagnosis. This average should reflect more complex and costly 
cases along with cases that require less care. As cases are paid based 
on an average, some less resource intensive cases of the same diagnosis 
will receive the same payment as more resource intensive cases. 
Overall, under prospective payment systems, hospitals that are 
efficient will receive fair compensation. We believe that this payment 
system ultimately results in more equitable payments for LTCHs.
    Comment: One commenter questioned why there is not an interrupted 
stay policy for discharge and readmittance between one LTCH and another 
LTCH.
    Response: In our data, we did not find that transfers between LTCHs 
occurred frequently enough to require a separate policy. However, we 
will be monitoring LTCH behavior and if, in the future, we become aware 
of data that indicate that this activity is occurring, we would revisit 
this issue.
    Comment: One commenter questioned whether the following scenario 
would be considered an interrupted stay: a LTCH patient is discharged 
to an acute care hospital for 3 days, the acute care hospital then 
discharges the patient to a SNF for 43 days, and then the patient is 
readmitted to the LTCH.
    Response: In this final rule, the interrupted stay policy only 
encompasses situations where a patient is discharged from a LTCH to 
another facility and then readmitted directly from that one facility to 
the same LTCH. It does not address situations where the patient is 
admitted to more than one facility or goes home between LTCH stays. Our 
data did not show this situation to be a significant problem. 
Therefore, at this time we are not extending the interrupted stay 
policy to this situation. Currently, a patient admitted to a LTCH who 
is subsequently discharged to home or to at least two other facilities 
before readmission at the LTCH will be paid for as two admissions, and 
not be subject to the interrupted stay policy. However, we will 
continue to monitor LTCH readmissions and should the above example, 
where the LTCH patient has multiple short stays in several facilities 
before readmission, prove to be significant, we will consider proposing 
a change in policy.
    Comment: One commenter asked whether, for hospitals paid under the 
5-year transition, an interrupted stay under the LTCH prospective 
payment system would still qualify as two discharges for TEFRA payment 
purposes.
    Response: As explained earlier in section VIII. of this preamble, 
we are implementing a 5-year transition period from reasonable cost-
based reimbursement to fully Federal prospective payment for LTCHs. 
During this period, two payment percentages will be used to determine a 
LTCH's total payment. The blend percentages can be found in sections 
II.D. and X.N. of this final rule. The interrupted stay policy will 
apply to the portion of the blended percentage that represents the 
prospective payment Federal rate percentage.
    TEFRA policy on readmissions will apply to the portion of the 
blended percentage that represents the reasonable cost-based 
reimbursement percentage. Under TEFRA policy, each admission and 
discharge is counted separately as two discharges with no consideration 
given to the length of stay at another facility before readmission. 
However, there is one scenario when, even under the TEFRA payment 
policy, two discharges from a LTCH will be counted as one stay for 
payment purposes. There are specific TEFRA regulations governing 
readmission to excluded hospitals, such as LTCHs, with regard to 
hospitals-within-hospitals at Sec. 413.40(a)(3) (July 30, 1999, Federal 
Register, 64 FR 41535). During a cost reporting period, if the 
hospital-within-a-hospital discharges more than 5 percent of its 
inpatients to another co-located hospital, and those patients are 
directly readmitted to the excluded hospital, Medicare considers each 
patient's entire stay as one discharge for purposes of calculating the 
cost per discharge of the excluded hospital. This policy is still in 
effect for the TEFRA portion of the payment blend for long-term care 
hospitals-within-hospitals. (For more information on how a hospital-
within-a-hospital would be paid under the LTCH prospective payment 
system, see section X.G. of this preamble, which outlines onsite 
discharge and readmission policy.) Therefore, other than this 
particular scenario for LTCHs that are hospitals-within-hospitals, for 
an episode of patient care that, under the LTCH prospective payment 
system, would be paid as an interrupted stay, the portion of payments 
under TEFRA paid to LTCHs during the transition period will continue to 
count separately for each discharge from the LTCH.
    Accordingly, based on the public comments received and our further 
analysis of Medicare claims data, in this final rule we are adopting 
the proposed interrupted stay policy as final with the following 
changes. We are revising the interrupted day threshold so that patients 
who are discharged from a LTCH to an acute care hospital and readmitted 
to the LTCH within a 9-day period of time will be considered as an 
interrupted stay and only a single LTCH prospective payment system 
payment will be made. To be considered an interrupted stay for patients 
who are discharged from the LTCH to an IRF and readmitted to the LTCH, 
the fixed day threshold is 27 days. We are retaining as final the 
proposed 45-day threshold for discharges from a LTCH to a SNF and 
readmission to the LTCH. Any readmissions to a LTCH from these three 
provider levels of care that are subsequently discharged from the LTCH 
that involve interruptions that are longer than these thresholds will 
be treated as new admissions and two separate LTCH prospective payments 
will be made.
    We wish to point out that an interrupted stay could occur during a 
regular inlier case (length of stay greater than five-sixths of the 
geometric average length of stay for the LTC-DRG), as described in 
section X.A. of this final rule. A short-stay outlier (as explained in 
section X.C. of this preamble) could also become an interrupted stay if 
the beneficiary is discharged to an acute care hospital, an IRF, or a 
SNF. Whether or not the beneficiary's stay would remain in this 
category depends on the total length of stay in the LTCH. Upon the 
initial discharge to the acute care hospital, the IRF, or the SNF, the 
LTCH ``day count'' would stop. For an interrupted stay case, this count 
is resumed upon readmission to the LTCH until the beneficiary's final 
discharge (home, another site of care, or death). Thus, the period of 
absence (number of days) that the beneficiary is a patient in

[[Page 56006]]

the acute care hospital, the IRF, or the SNF during a LTCH interrupted 
stay is not included in determining the length of stay of the LTCH 
stay.
    If the total number of days at the LTCH, from the initial admission 
to the final discharge, still falls into the short-stay outlier payment 
category, the LTCH receives payment according to the short-stay outlier 
policy described in section X.C. of this preamble. If, on the other 
hand, the total number of days in the LTCH exceeds five-sixths of the 
geometric average length of stay of the LTC-DRG (the short-stay outlier 
criteria), one full LTC-DRG payment is made for the case. Moreover, all 
applicable payment policies, including outliers and transfers for the 
acute care hospital inpatient prospective payment system and the IRF 
prospective payment system still apply under this policy.
    The following are examples of possible ways in which these policies 
would interact:
    Example 1: A beneficiary stays in the LTCH for 5 days and is 
discharged to an inpatient acute care hospital and the length of 
stay at the acute care hospital is greater than 9 days before being 
discharged and readmitted back to the LTCH. Medicare hospital 
payments for this beneficiary are as follows:
     One short-stay outlier LTCH prospective payment system 
payment to the LTCH for the first (5-day length of stay) LTCH 
discharge.
     Payment to the acute care hospital under the acute care 
hospital inpatient prospective payment system for the acute care 
stay.
     A separate LTCH prospective payment system payment 
either as a short-stay outlier (see Sec. 412.529) or regular inlier 
case (as described in section X.A.2. of this preamble), depending on 
the second LTCH length of stay.
    This case would not be an interrupted stay because the acute 
care hospital stay was greater than 9 days, which represents more 
days than one standard deviation from the average length of stay 
under the acute care hospital inpatient prospective payment system 
for all DRGs.
    Example 2: A beneficiary stays in the LTCH for 5 days and is 
discharged to an inpatient acute care hospital and the length of 
stay at the acute care hospital is a number of days that is 9 days 
or less before being discharged and readmitted back to the LTCH. The 
beneficiary remains in the LTCH for an additional 9 days after 
readmission to the LTCH following the acute care hospital stay. This 
case would be treated as an interrupted stay and Medicare hospital 
payments for this beneficiary would be as follows:
     Payment to the acute care hospital under the acute care 
hospital inpatient prospective payment system for the DRG for the 
acute care hospital stay.
     The stay was interrupted because the acute care 
hospital stay was 9 days or less. Therefore, a single payment will 
be made to the LTCH under the LTCH prospective payment system. This 
payment would be a short-stay outlier payment (under Sec. 412.529) 
if the total LTCH length of stay (14 days) is up to and including 
five-sixths of the geometric average length of stay of the LTC-DRG. 
If the total LTCH length of stay is greater than five-sixths of the 
geometric average length of stay of the LTC-DRG, then the LTCH would 
receive the full DRG payment.
    Example 3: A beneficiary stays in the LTCH for 5 days and is 
discharged to an IRF and the length of stay at the IRF is 27 days or 
less. The beneficiary is readmitted to the LTCH for an additional 12 
days, so that the combined 17 days is greater than five-sixths of 
the geometric average length of stay for the LTC-DRG after 
readmission to the LTCH following the IRF stay. This case will be an 
interrupted stay and Medicare hospital payments for this beneficiary 
will be as follows:
     Payment to the IRF under the IRF prospective payment 
system for the combination of the CMG and the comorbidity tier for 
the IRF stay; and
     Since the stay was interrupted because the IRF stay was 
within one standard deviation from the geometric average length of 
stay at an IRF, a single payment will be made under LTCH prospective 
payment system. This payment will be a full LTC-DRG payment because 
the total LTCH length of stay is greater than five-sixths of the 
geometric average length of stay of the LTC-DRG.
    In Example 2 and Example 3, upon return to the LTCH following the 
discharge from the acute care hospital or the IRF, the day count will 
be resumed at day 6 of the LTCH stay. If the beneficiary was then 
discharged within a period that is up to and including five-sixths of 
the geometric average length of stay for the LTC-DRG, the stay will be 
paid as a short-stay outlier (see Sec. 412.529); and if the beneficiary 
was discharged beyond the short-stay threshold (five-sixths of the 
geometric average length of stay for the LTC-DRG), the case will be 
paid for the full LTC-DRG.

F. Other Special Cases

    Under other Medicare prospective payment systems, specifically for 
inpatient acute care hospitals and for IRFs, there are separate 
policies for other types of special cases such as transfer cases and 
patients who expire. As stated in the proposed rule, we continue to 
believe the short-stay outlier policy (under Sec. 412.529) and the 
interrupted stay policy (under Sec. 412.531) will adequately address 
these circumstances. For instance, a case with a stay that is up to and 
including five-sixths of the geometric average length of stay of the 
LTC-DRG will be paid under the short-stay outlier policy regardless of 
whether or not the patient is transferred upon discharge to his or her 
home or to another setting where Medicare will make additional 
payments, or whether the patient expired. Moreover, if a beneficiary's 
stay at the LTCH is greater than five-sixths of the geometric average 
length of stay of the LTC-DRG, a full LTC-DRG payment will be made 
regardless of the destination following discharge. Therefore, in this 
final rule, we are not implementing a separate policy for cases that 
are transferred (except for those that are encompassed by the 
interrupted stay policy) or for patients who expire.
    Currently, under the acute care hospital inpatient prospective 
payment system, discharges in 10 DRGs are considered to be transfers if 
the patients are discharged to another Medicare postacute site of care, 
such as a LTCH, under section 1886(d)(5)(J)(ii) of the Act and 
implemented in regulations at Sec. 412.4. The rationale behind this 
provision was Congressional concern 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.'' 
(Conference Agreement, H.R. Conf. Rept. No. 105-217, 105th Cong., 1st 
Sess., at 740 (1997).) In such a scenario, Medicare will also have to 
pay the postacute care provider for care that theoretically could have 
been provided at the acute care hospital. Section 1886(d)(5)(J)(iv) of 
the Act authorizes the Secretary to expand the postacute care transfer 
policy to additional DRGs. From the standpoint of LTCHs, the impact of 
expanding the acute care hospital inpatient prospective payment system 
postacute care transfer policy could be significant for the LTCH 
prospective payment system since this policy could affect behavior at 
acute care hospitals. If additional discharges will be paid as 
transfers, these patients may be kept longer at acute care hospitals in 
order to avoid a reduced payment for the transfer and then have a 
shorter length of stay during the subsequent stay at the LTCH. 
Presently, approximately 70 percent of LTCH Medicare patients are 
admitted following discharge from an acute care hospital. In the FY 
2003 acute care hospital inpatient prospective payment system proposed 
rule (67 FR 31455), we solicited public comment on the feasibility of 
an expansion of the postacute care transfer policy (10-DRG policy). 
However, based on the public comments received, as described in the 
acute care hospital inpatient prospective payment system final rule on 
August 1, 2002 (67 FR 50048-50052), we decided not to expand this 
policy for FY 2003, but to further study the issue for consideration at 
a later date.

[[Page 56007]]

    Comment: One commenter argued against a possible expansion of the 
inpatient acute hospital postacute care transfer policy to LTCHs 
because of its possible effects on LTCHs.
    Response: As we indicated above, we have decided to postpone any 
expansion of the postacute care transfer policy under the acute care 
hospital inpatient prospective payment system until we have done 
further study and evaluation.

G. Onsite Discharges and Readmittances

    As we explained above, we do not believe that a separate policy 
governing transfers of Medicare patients between LTCHs and acute care 
hospitals is necessary at this time. However, we are implementing a 
policy that will address transfers between LTCHs and distinct-part 
SNFs, acute care hospitals, IRFs, or psychiatric facilities when the 
LTCH and any of these other providers are co-located because of the 
potential for inappropriate shifting of patients among these providers 
without clinical justification to maximize Medicare payment. This 
situation may occur when a distinct-part SNF is part of a LTCH or when 
the LTCH is located within an acute care hospital or an IRF as either a 
``hospital-within-a-hospital (as defined in Sec. 412.22(e)) or a 
``satellite facility'' (as defined in Sec. 412.22(h)) and a distinct-
part SNF (as defined in section 1819(a) of the Act) is also part of the 
same acute care hospital or IRF. (Section V.C.9. of this preamble 
describes findings from Urban's research on the admission and discharge 
patterns between LTCHs and SNFs.)
    Similarly, a long-term care ``hospital-within-a-hospital'' or 
satellite facility may be co-located with a psychiatric or 
rehabilitation hospital that is also a hospital within the same acute 
care hospital or is a satellite facility situated in the same acute 
care hospital (Secs. 412.25 and 412.27), or may be co-located in an 
acute care hospital with a psychiatric unit (Sec. 412.27) or a 
satellite psychiatric or rehabilitation unit (Sec. 412.25(e)).
    We believe that a per discharge system, such as the prospective 
payment system for LTCHs, could provide inappropriate incentives to 
prematurely discharge patients to one of these other onsite providers 
once their lengths of stay at the LTCH exceeded the thresholds 
established by the short-stay outlier policies described in section 
X.C. of this preamble. These discharges will be based on payment 
considerations rather than on a clinical basis as an extension of the 
normal progression of appropriate patient care. If the long-term care 
hospital-within-a-hospital inappropriately discharges Medicare patients 
to the distinct-part SNF, or the onsite IRF, psychiatric facility, or 
acute care hospital without providing a complete episode of hospital-
level care, Medicare will make inappropriate payments to the long-term 
care hospital-within-a-hospital, since payments under the prospective 
payment system will have been calculated based on a complete episode of 
such care. This type of a case could then be followed by a readmission 
to the LTCH from the onsite provider for an additional LTC-DRG payment. 
(In the case of a discharge from a LTCH to an offsite acute care 
hospital, an IRF, or a SNF with a subsequent return to the LTCH, 
payments will also be considered under the interrupted stay policy set 
forth at section X.E. of this final rule and at Sec. 412.531.)
    In determining an appropriate response to onsite discharges and 
readmittances, we are implementing a policy consistent with our policy 
described in the July 30, 1999 acute care hospital inpatient 
prospective payment system final rule (64 FR 41535) that addresses 
inappropriate discharges of patients between an acute care hospital 
inpatient prospective payment system excluded hospital-within-a-
hospital (such as a LTCH) to the host acute care hospital, that 
culminated in a readmission to the hospital-within-a-hospital. In that 
context, we expressed the same concern noted above--that these types of 
moves were occurring for financial rather than clinical reasons. In 
order to discourage these practices, we implemented regulations at 
Sec. 413.40(a)(3) to specify how to calculate the cost per discharge 
under the excluded hospital payment provisions. Under those 
regulations, during a cost reporting period, if the hospital-within-a-
hospital discharges more than 5 percent of its inpatients to the acute 
care hospital where it is located, and those patients are readmitted to 
the excluded hospital-within-a-hospital, Medicare considers each 
patient's entire stay as one discharge for purposes of calculating the 
cost per discharge of the excluded hospital-within-a-hospital. In 
determining whether a patient has previously been discharged and then 
readmitted, we consider all prior discharges, even if the discharge 
occurs late in one cost reporting period and the readmission occurs in 
the next cost reporting period. Only when the excluded hospital's 
number of cases involving a discharge from the excluded hospital-
within-a-hospital to the host acute care hospital followed by a 
readmission to the hospital-within-a-hospital exceed 5 percent of the 
total number of its discharges in a particular cost reporting period 
are the first discharges not counted for payment purposes. (If the 5-
percent threshold is not triggered, all discharges are counted 
separately.)
    With the implementation of the per discharge prospective payment 
system for LTCHs, in this final rule and in the proposed rule, we are 
adopting a similar policy to address inappropriate discharges and 
readmittances between LTCHs and other onsite providers by establishing 
a threshold beyond which the original patient stay and the readmission 
will be paid as one discharge (see Sec. 412.532). By paying only one 
discharge, we will discourage those transfers that will be based on 
payment considerations instead of on a clinical basis. Generally, if a 
LTCH readmits more than 5 percent of its Medicare patients who are 
discharged to an onsite SNF, IRF, or psychiatric facility, or to an 
onsite acute care hospital, only one LTC-DRG payment will be made to 
the LTCH for discharges and readmittances during the LTCH's cost 
reporting period. Therefore, payment for the entire stay will be paid 
either as one full LTC-DRG payment or a short-stay outlier, depending 
on the duration of the entire LTCH stay.
    In applying the 5-percent threshold, we will apply one threshold 
for discharges and readmittances with a co-located acute care hospital, 
consistent with the policy that has been in place under 
Sec. 413.40(a)(3) for acute care hospitals and excluded hospitals 
described above. There will also be a separate 5-percent threshold for 
all discharges and readmittances with co-located SNFs, IRFs, and 
psychiatric facilities. In the case of a LTCH that is co-located with 
an acute care hospital, an IRF, or a SNF, the onsite discharge and 
readmittance policies would apply in addition to the interrupted stay 
policy that we discussed in section X.E. of this preamble and at 
Sec. 412.531. This means that even if a discharged LTCH patient who was 
readmitted to the LTCH following a stay in an acute care hospital of 
greater than 9 days, if the facilities share a common location and the 
5-percent threshold were exceeded, the subsequent discharges from the 
LTCH will not represent a separate hospitalization for payment 
purposes, so only one LTC-DRG payment will be made.
    Similarly, if the LTCH has exceeded its 5-percent threshold for all 
discharges to an onsite IRF, SNF, or psychiatric hospital or unit with 
readmittances to the LTCH, the subsequent discharges

[[Page 56008]]

will not be treated as a separate discharge for Medicare payment 
purposes, notwithstanding provisions of the interrupted stay policy 
with regard to lengths of stay at an IRF or a SNF (see 
Secs. 412.531(b)(4)(ii) and (b)(4)(iii)). (As under the interrupted 
stay policy, payment to an acute care hospital under the acute care 
hospital inpatient prospective payment system, to an IRF under the IRF 
prospective payment system, and to a SNF under the SNF prospective 
payment system, will not be affected. Payments to the psychiatric 
facility also will not be affected.) We are aware that situations could 
arise where, under sound clinical judgment, a patient who no longer 
required LTCH-level of care could be discharged to a SNF and then 
experience a setback necessitating rehospitalization. However, it is 
likely that, in such a scenario, in most cases the patient will be 
subsequently admitted to an acute care hospital rather than readmitted 
to the LTCH located within the acute care hospital. In addition, as we 
stated in the proposed rule, if the patient is being treated by a LTCH 
that also specializes in treating psychiatric or rehabilitation 
patients, it is unlikely that the patient who, for some medical reason, 
needed to be transferred to an onsite psychiatric or rehabilitation 
hospital or unit, will need to be readmitted to the LTCH. We believe 
that the 5-percent thresholds for discharges to onsite acute care 
hospitals and for discharges to onsite IRFs, SNFs, and psychiatric 
facilities followed by readmission to the LTCH provide adequate 
flexibility for those rare circumstances where such actions would be 
clinically preferable.
    We continue to believe that the combination of a discharge-based 
payment system that inherently contains financial incentives for 
shifting patients to another site of care and the close proximity of 
other sites of care such as other onsite hospitals-within-hospitals, 
satellites, and distinct-part SNFs, necessitates this type of policy. 
We will monitor such discharges and analyze data and compare practice 
patterns before and after the implementation of the LTCH prospective 
payment system and, if warranted, may consider extending it to offsite 
providers.
    Comment: Several commenters urged us to postpone implementation of 
this policy pending the collection of data or a formal study confirming 
that patient-shifting abuses among co-located providers are actually 
occurring.
    Response: As we note in section X.I. of this final rule, we will be 
developing a monitoring system that would, among other things, assist 
us in evaluating the impact of the LTCH prospective payment system on 
patient care patterns among Medicare providers. We are sufficiently 
concerned about the growth in the number of co-located providers and 
the inappropriate shifting of patients to co-located providers. 
Therefore, we disagree with commenters that our onsite discharges and 
readmittances policy should be postponed. As noted above, we have 
designed this policy in order to discourage patient-shifting for other 
than clinical purposes. In addition, our policy for onsite discharges 
and readmittances is consistent with the policy originally described in 
the July 30, 1999 acute care hospital inpatient prospective payment 
system final rule (64 FR 41535) which addressed inappropriate 
discharges from an excluded hospital paid under the TEFRA system, such 
as a LTCH, that was co-located as a hospital-within-a-hospital to a 
host acute care hospital, culminating in the readmission to the LTCH. 
In establishing this onsite policy (as well as the interrupted stay 
policy discussed in section X.E. of this preamble) for separately 
located providers, there has been no attempt to discourage the transfer 
of a Medicare patient at a LTCH to another onsite provider for 
treatment not available at the LTCH or for nonhospital level care 
available in a SNF. However, we have established regulations regarding 
a patient's subsequent readmission to the LTCH immediately following 
the discharge from this other onsite provider, a circumstance that we 
believe could have less clinical justification than the initial LTCH 
discharge and admission to the other onsite provider. We continue to 
believe that the two 5-percent thresholds in this final rule for 
readmittances to the LTCH prior to the triggering of payment 
consequences for the LTCH provide sufficient flexibility for those 
unusual cases when such action could be clinically warranted.
    Comment: Several commenters noted that the onsite discharge and 
transfer policy was unnecessary since the interrupted stay policy 
already addressed our concerns in this area. In addition, one commenter 
stated that readmissions to freestanding LTCHs equaled those to onsite 
LTCHs and that an additional onsite policy imposed expensive and 
unnecessary recordkeeping responsibilities on providers.
    Response: Notwithstanding the concerns that led us to establish our 
interrupted stay policy, we believe that the very nature of co-located 
Medicare providers provides an even stronger incentive for unnecessary 
patient shifting and must be discouraged at the outset of establishing 
prospective payments for LTCHs. Unless and until a LTCH exceeds the 5-
percent threshold for readmittances from the onsite acute care hospital 
or the 5-percent threshold for readmittances from onsite IRFs, 
psychiatric hospitals or units, or SNFs, Medicare payments will be 
based on the interrupted stay policy. This means that if a LTCH patient 
is admitted to one of these other providers following a LTCH 
hospitalization, and then readmitted to the LTCH, the length of stay at 
the intervening provider will determine whether the LTCH 
hospitalizations are paid as one or more discharges. Should one of the 
5-percent thresholds be exceeded, all LTCH readmissions from either the 
acute care hospital or the IRF, SNF, and psychiatric facility combined 
for that cost reporting year will be paid as one discharge, regardless 
of the length of stay at the intervening provider.
    We wish to clarify that if, for example, the 5-percent threshold 
for onsite discharges and readmissions is exceeded during a particular 
cost reporting period between the co-located LTCH and the acute care 
hospital, all onsite discharges and readmittances between these two 
providers during that cost reporting period will be paid as one 
discharge, even those that occurred prior to the threshold having been 
exceeded. This would also be the case for onsite discharges and 
readmissions that exceed the combined 5-percent threshold for IRFs, 
SNFs, and psychiatric facilities that are co-located with a LTCH.
    This policy reflects our concerns about patient transfers among co-
located providers that are based on financial rather than medical 
considerations. As noted above, although a patient's discharge from a 
LTCH to another Medicare provider could represent a reasonable sequence 
of care, the direct admission of that patient to the LTCH should be a 
relatively rare occurrence. However, if over 5 percent of the total 
number of patients who are discharged from a LTCH during a cost 
reporting period are subsequently directly readmitted from a co-located 
provider, we believe that such behavior signifies a pattern of 
inappropriate patient-shifting among onsite Medicare providers and, 
therefore, we will treat all of the patients in that site of care group 
who are discharged and readmitted as if they are only one discharge and 
make only one LTC-DRG payment for those discharges.
    We do not believe that the onsite policy (or the interrupted stay 
policy as it has been revised in this final rule)

[[Page 56009]]

imposes an additional burden on providers since the standard of care in 
clinical practice requires tracking a patient's recent medical history 
upon admission, and sound hospital management requires ongoing 
evaluation of discharge and readmittance patterns.
    Comment: Several commenters urged us to support, with research, any 
extension of the onsite policy to Medicare providers that are not co-
located with LTCHs.
    Response: Our monitoring of all LTCH discharges and readmittances 
as we implement the LTCH prospective payment system will yield data 
that will enable us to determine whether extension of this policy is 
warranted.
    Comment: One commenter pointed to the distinction between co-
located and co-owned hospitals. Two commenters sought to clarify what 
was meant by the category of ``co-located'' or ``onsite'' providers. 
Another commenter suggested that we apply the onsite policy with regard 
to SNFs only to those SNFs that are co-located in the same building.
    Response: There is clearly a distinction between the co-location 
and co-ownership of Medicare providers, although some hospitals and 
units are both co-located and owned by the same corporate entity. 
Governing regulations at Sec. 412.22(e) and (f) for hospitals-within-
hospitals and Sec. 412.22(h) and (i) for satellite facilities, and at 
Sec. 412.25 for satellite units place no restriction on hospital or 
unit ownership. As we monitor the implementation of the LTCH 
prospective payment system, we will be noting the impact of ownership 
and location patterns, among others, in our evaluation of existing 
payment policy.
    We are defining ``co-located'' and ``onsite'' for purposes of the 
policy established under Sec. 412.532, in accordance with existing 
definitions for hospitals-within-hospitals and satellite facilities. 
Under Sec. 412.22(e), hospitals-within-hospitals are defined as ``* * * 
hospital that occupies space in a building also used by another 
hospital, or in one or more entire buildings located on the same campus 
as buildings used by another hospital * * *'' Satellite facilities are 
defined in Sec. 412.22(h) as ``* * * a part of a hospital that provides 
inpatient services in a building that is also used by another hospital, 
or in one or more entire buildings located on the same campus as 
buildings used by another hospital.'' The definition of ``campus'' is 
set forth in Sec. 413.65(a)(2). In this final rule, we have revised 
Sec. 412.532 to specifically reference these definitions. We do not see 
any basis for us to change these definitions only for SNFs and, 
therefore, we will be categorizing onsite SNFs by the same standards as 
that used for other Medicare providers.
    Comment: Two commenters expressed concern that, in promulgating a 
policy that discouraged onsite patient transfers, we were ignoring the 
fact that SNFs were a logical destination for LTCH patients upon 
completion of their course of treatment. These commenters believed that 
we should not establish payment disincentives for a LTCH that 
discharges a patient to a co-located SNF.
    Response: We agree with the commenters that, in some instances, a 
patient's placement in a SNF following hospitalization in a LTCH is a 
reasonable sequence of care. Our onsite discharge and readmission 
policy does not challenge the initial discharge from the LTCH or 
admission to the SNF, but rather the subsequent readmission to the LTCH 
directly from the onsite SNF. We do not believe that our onsite 
transfer policy discourages appropriate onsite patient transfers. Under 
the LTCH prospective payment system, if, during a cost reporting 
period, a LTCH readmits more than 5 percent of its total number of 
Medicare patients from an onsite or co-located SNF, IRF, or psychiatric 
hospital or unit or readmits more than 5 percent of its patients from 
an onsite acute care hospital (in both situations, generating a second 
admission to the LTCH for that patient), the Medicare program will pay 
the LTCH for only one discharge in such cases for all patient 
discharges and readmittances from that provider or group of providers 
during that cost reporting period. The principal goal of our onsite 
discharge and readmission policy is to discourage patient-shifting from 
one Medicare site of care to another so that Medicare will pay only 
once for a particular episode of illness.
    Existing ownership regulations do not guard against the potential 
gaming of the Medicare system in this way by a corporate entity owning 
both co-located providers (as well as an onsite acute care hospital, an 
IRF, or a psychiatric hospital or unit). Therefore, our policies under 
the LTCH prospective payment system have been designed to discourage 
financially motivated movement of patients among onsite Medicare 
providers. We also believe that the two distinct 5-percent thresholds 
allow for those unusual circumstances when therapeutic judgment could 
reasonably dictate a patient's readmission to the onsite LTCH from the 
other onsite provider to which the patient had been originally 
discharged.
    Comment: One commenter, a corporation that owns IRFs, suggested 
that the onsite discharge and readmission policy should limit 
readmissions to LTCHs to 5 percent total readmissions from all co-
located providers (acute care hospitals, IRFs, psychiatric facilities, 
and SNFs) rather than 5 percent from an onsite acute care hospital and 
5 percent from an onsite IRF, SNF, and psychiatric facility combined.
    Response: We believe that the 2 distinct 5-percent onsite discharge 
and readmission thresholds are based on a realistic understanding of 
current treatment patterns at LTCHs and provide adequate flexibility 
for clinical decisionmaking. When we were designing the onsite 
discharge and readmission policy, we took into account research by 
Urban that detailed sources and destinations of LTCH patients. As we 
noted in our discussion of the universe of LTCHs in section V.C. of 
this final rule, most LTCH patients who are transferred to other sites 
of care go to acute care hospitals. Therefore, at one end of the 
spectrum were patients who required further acute care, and at the 
other end, patients who no longer required LTCH-level care. Our two 5-
percent threshold policies recognize that there are two distinct groups 
of patient groups being discharged from LTCHs: (1) Those requiring more 
intensive, acute hospital care; and (2) those whose medical conditions 
have stabilized or improved so that they can receive care at an IRF, a 
psychiatric facility or to a SNF.
    We believe that it is appropriate that acute care hospitals have a 
separate 5-percent threshold, and since fewer patients go to SNFs, 
IRFs, and psychiatric facilities, a collective 5-percent threshold for 
those facilities is adequate.
    Comment: Two commenters questioned how we would actually implement 
the onsite discharge and readmission policy from a systems perspective.
    Response: In order to practically implement payments under the 
onsite discharge and readmission policy, fiscal intermediaries will 
reconcile Medicare payments and discharge data received by LTCHs during 
the course of that cost reporting year, at the close of each cost 
reporting period. We will issue program memoranda detailing 
instructions for fiscal intermediaries and providers regarding billing, 
data collection, and systems operations following the publication of 
this final rule.
    Comment: One commenter supported reducing the incentives to 
transfer patients inappropriately, but also

[[Page 56010]]

expressed concern that our onsite policy may not take into account the 
clinical needs of Medicare patients and could discourage even 
appropriate transfers. The commenter further suggested that Medicare's 
QIO should monitor patient care at LTCHs in general and onsite 
readmissions in particular. Another commenter believed that our onsite 
policy constrained clinical decisionmaking and restricted a Medicare 
beneficiary's choice of provider.
    Response: We appreciate the commenter's support for our policy 
efforts regarding inappropriate transfer of patients among onsite 
Medicare providers. While we agree that the decision to move a patient 
from one care setting to another should be made on purely clinical 
grounds, we remain concerned about discharges based on financial 
concerns, particularly among Medicare providers that are both co-
located and owned by the same parent corporation. In this final rule, 
we are establishing a payment policy for LTCHs based on our best 
available data. We are not prohibiting a LTCH from serving a patient 
nor have we dictated where a patient should receive care. For this 
reason, we will retain the onsite discharge and readmission policy as 
we implement the LTCH prospective payment system. Regarding review by 
QIOs, we have established medical review requirements at 
Sec. 412.508(a) in accordance with existing regulations at 
Secs. 412.44, 412.46, and 412.48 and consistent with other established 
prospective payment systems policies. As noted throughout this final 
rule, we expect that the implementation of the LTCH prospective payment 
system will generate data that will allow indepth analysis and 
evaluation of our policies. To that end, we have established a 
monitoring protocol with our Office of Research, Development, and 
Information.

H. Additional Issues for Onsite Facilities

1. Issues Proposed for Discussion in the March 22, 2002 Proposed Rule 
(67 FR 13416)
    As we prepare to implement a prospective payment system for LTCHs, 
we are reevaluating certain existing policies for hospitals-within-
hospitals and satellite facilities that were established under the 
TEFRA payment system for excluded hospitals.
    Existing regulations at Sec. 412.22(e) specify exclusion criteria 
based on ownership and control for hospitals-within-hospitals and their 
host hospitals (59 FR 45330, September 1, 1994). We are concerned about 
possible manipulation of Medicare payments by a single entity that owns 
or controls an acute care hospital and a co-located LTCH. We believe 
that such a situation could lead to premature patient discharges from 
the acute care hospital to the co-located LTCH, resulting in two 
Medicare payments to the controlling entity for one episode of care. 
Since LTCHs are generally capable of providing a wide range of medical 
treatment, we are concerned about the following scenario: the costs of 
treating an acute care hospital patient exceed the payment that the 
hospital would receive for that specific DRG and the acute care 
hospital ``discharges'' the patient who still requires treatment, for 
admission to an onsite LTCH. Under this circumstance, the LTCH would, 
in fact, function as an excluded unit of an acute care hospital, a 
situation inconsistent with section 1886(d)(1)(B) of the Act, which 
allows excluded rehabilitation and psychiatric units in acute care 
hospitals but not long-term care units. Through the interrupted stay 
and onsite discharge and readmittance policies set forth in sections 
X.E. and X.G., respectively, of this final rule, which limit potential 
inappropriate Medicare payments, we believe that we have addressed some 
of the concerns that originally led us to establish the rules in 
Sec. 412.22(e).
    In the March 22, 2002 proposed rule, we solicited comments on 
possible changes to our payment policy regarding ownership and control 
for hospitals-within-hospitals.
    Comment: Two commenters supported maintaining the existing 
regulations governing hospitals-within-hospitals and further endorsed 
the proposed interrupted stay and co-located discharge and readmittance 
provisions. Several commenters encouraged stricter enforcement of our 
present policy on control and ownership. The commenters believed that, 
even though our regulations require hospital-within-hospitals to have 
separate governing bodies, chief medical officers, separate medical 
staffs and chief executive officer from host hospitals 
(Sec. 412.23(e)(1) through (e)(4)) and require basic hospital functions 
to be separated according to the fulfillment of one of three criteria 
at Sec. 412.23(e)(5), some hospitals-within-hospitals and their host 
hospitals have managed to circumvent the regulations. One of these 
commenters noted that, in such situations, the long-term care 
hospitals-within-hospitals were, in effect, functioning as LTCH units.
    Response: The expressed intent of existing separateness criteria at 
Sec. 412.22(e), first presented in the September 1, 1994 acute care 
hospital inpatient prospective payment system final rule (59 FR 45390 
and 45396), was to disallow the formation of a single hospital facility 
that included an acute care hospital paid under the prospective payment 
system and what would effectively be a LTCH unit that would be paid 
under the TEFRA payment system. We believe that formation of such a 
facility was contrary to the statutory intent of section 1886(d)(1)(B) 
of the Act. The existing regulations were implemented to prohibit such 
an arrangement. As we implement the prospective payment system for 
LTCHs, we remain extremely concerned about rapid growth in long-term 
care hospitals-within-hospitals and will be collecting data on the 
relationship among host hospitals, hospitals-within-hospitals, and 
parent corporations in order to determine the need for additional 
regulation or monitoring.
    Comment: Ten commenters urged us to strengthen existing 
separateness criteria in the regulation. Among the policies suggested 
were disallowing the establishing of separate corporations with common 
ownership and funding to operate a hospital-within-hospital by parent 
or controlling companies or host hospitals; precluding the provision of 
goods and services not consistent with ``fair market value''; and the 
guaranteeing of the long-term care hospital-within-hospital's loans or 
debts by the host hospital. Commenters pointed to loopholes in existing 
regulations that allow corporations to evade our intent. One hospital 
association urged us to disallow a parent company of the host hospital 
to establish a separate corporation that would control both the host 
hospital and finance a hospital-within-a-hospital. Another commenter 
proposed a percentage ceiling on patients that a long-term care 
hospital-within-a-hospital could admit from the host hospital, a strict 
definition of ``direct'' and ``indirect'' control for purposes of 
limiting common corporate ownership. One commenter noted that, although 
the forthcoming LTCH prospective payment system onsite discharge and 
admission policies (section X.G. of this final rule and Sec. 412.532) 
could deter LTCHs from financially benefiting from discharging patients 
and subsequently readmitting them, acute care hospitals could still 
make financially driven transfers of patients to LTCHs.
    Response: We believe that existing regulations, including the 
existing 10-DRG postacute care transfer policy at Sec. 412.4, are 
effective disincentives for acute care hospitals to transfer patients, 
for whom they could reasonably provide

[[Page 56011]]

treatment, to LTCHs. However, as noted below, we are requiring all 
LTCHs to inform their fiscal intermediary and their CMS Regional Office 
if they are co-located Medicare providers and will be collecting data 
on the corporate relationships between these providers. We plan to 
revise our policies and take action as necessary if our research 
reveals circumvention of CMS policy goals.
    Comment: One commenter suggested that an additional criteria to 
prevent abuse by hospitals-within-hospitals would be to strengthen the 
regulations about disclosure of other alternatives as part of hospital 
discharge planning, one of the Medicare conditions of participation for 
hospitals, as described in Sec. 482.43.
    Response: Discharge planning is one of our basic hospital health 
and safety requirements. Under Sec. 482.43(b)(6), a hospital is 
currently required to discuss the results of the discharge planning 
evaluation with the patient or individual acting on the patient's 
behalf. In addition, Secs. 482.43(c)(4) and (c)(5) already require the 
hospital to reassess the patient's discharge plan if there are factors 
that may affect continuing care needs or the appropriateness of the 
discharge plan and to counsel and prepare patients and family members 
for posthospital care. Accordingly, based on these existing safeguards, 
we do not believe that there is a need to modify Sec. 482.43.
    Comment: Five commenters urged us to refrain from issuing any 
additional regulations affecting hospitals-within-hospitals, 
particularly relating to ownership of a hospital-within-a-hospital. Two 
commenters recommended the elimination of all LTCH ownership rules, and 
one commenter suggested that we consider ``leveling the long-term acute 
care hospital playing field''. The commenter believed that such action 
would allow true competition and remove any unnecessary barrier to 
general acute care hospitals entering into the long-term acute care 
hospital business.
    Response: We believe it essential to establish regulations 
discouraging the transfer of Medicare patients from one provider to 
another for any reason other than for clear clinical benefits of the 
patient. However, without the separate ownership and control 
requirements at Sec. 412.22(e), we believe that LTCHs located within a 
host acute care hospital could function as LTCH units. This is a 
prospect that is inconsistent with the purpose and scheme of section 
1886(d)(1)(B) of the Act, which provides for the exclusion of 
psychiatric and rehabilitation units, but not for the exclusion of LTCH 
units. The acute care hospital inpatient prospective payment system was 
originally based on the principle of determining an average cost per 
discharge, and the average was determined by including all discharges, 
short and long stays. For an acute care hospital to move its patients 
to a ``LTC unit'' rather than treating the patient for the entire spell 
of illness would allow the hospital to have had the benefit of a 
payment for that patient that had been based on including long-stay 
patients in calculating the average cost per discharge, while in 
actuality no longer treating those longer stay types of patients.
    In our final rule for the acute care hospital inpatient prospective 
payment system (September 1, 1994 Federal Register (59 FR 45389)), we 
noted that we intended for the hospital-within-hospital policy to allow 
``adequate flexibility for legitimate networking and sharing of 
services * * *'' and we believe that existing policies can contribute 
to efficiency, convenience and clinical benefits. Whether or not we 
will promulgate additional ownership and control regulations for 
hospitals-within-hospitals will be based on the results of our 
collection and analysis of data that we will be gathering for 
monitoring and compliance purposes.
    Comment: Several commenters urged us to publish a proposed rule to 
provide the opportunity for public comments for any proposed changes to 
the regulations governing hospitals-within-hospitals.
    Response: At this point, we do not have specific plans to revise 
any existing policies on hospitals-within-hospitals. As we implement 
the LTCH prospective payment system, we will be monitoring hospitals-
within-hospitals and satellite facilities for, among other behaviors, 
compliance with existing regulations, growth in numbers, and transfer 
patterns. In order to facilitate this monitoring and compliance, we are 
requiring that LTCHs notify their fiscal intermediaries and their CMS 
regional office about their co-location with any other Medicare 
providers by December 1, 2002 (within 60 days following the initial 
effective date of the LTCH prospective payment system).
    Therefore, we are revising the regulations at Secs. 412.22(e) and 
412.22(h) to incorporate this required notification. If, as a 
consequence of these monitoring activities, we determine that we need 
to revisit existing regulations dealing with ownership and control of 
hospitals-within-hospitals, we will follow the notice and comment 
rulemaking process.
    Comment: One commenter, a LTCH that is co-located, as a hospital-
within-a-hospital with a larger tertiary care center that is an acute 
care hospital, with both facilities having a common owner, asserted 
that the single ownership of both hospitals actually affords 
significant benefits to patients in the LTCH from the standpoint of 
clinical care as well as medical efficiency and management.
    Response: We agree with the commenter's assertion that the location 
of a long-term care hospital-within-a-hospital co-located within a host 
acute care hospital has a number of advantages from the standpoint of 
patient convenience and management, provided the requirements set forth 
in Sec. 412.22(e) are satisfied and the patients in each of the co-
located hospitals receive a full episode of care in that hospital.
    Comment: One commenter suggested that the prospective payment 
system for LTCHs take into account that freestanding LTCHs have 
considerably higher infrastructure costs than LTCHs that exist as 
hospitals-within-hospitals.
    Response: The Urban Institute's research based on FY 1997 cost 
reports from LTCHs revealed that there is no significant difference 
between the payment-to-cost ratios for LTCHs that exist as hospitals-
within-hospitals and freestanding LTCHs. We expect to update these data 
and, therefore, as noted above, we are revising the regulations at 
Secs. 412.22(e) and (h) to require LTCHs to notify their fiscal 
intermediaries and their CMS regional office of their co-location with 
any other Medicare providers within 60 days of their first cost 
reporting period that begins on or after October 1, 2002. These data 
will enable us to evaluate possible cost differentials between LTCHs 
that are co-located and those that are freestanding. As we analyze the 
data, we will determine if and what payment system adjustments would be 
appropriate to propose.
    Comment: One commenter questioned whether we were soliciting 
comments on the possibility of allowing LTCHs to house units of other 
excluded hospital categories, such as rehabilitation or psychiatric 
units.
    Response: Under Sec. 412.25(a)(1)(ii), a unit excluded from the 
acute care hospital inpatient prospective payment system is precluded 
from locating in a facility that is excluded from the acute care 
hospital inpatient prospective payment system, such as a LTCH. We have 
no plans to revise this policy.
    We also solicited comments on our policy regarding LTCHs that have 
established satellite facilities. In Sec. 412.22(h)(1), we define a 
satellite as ``a part of a hospital that provides inpatient

[[Page 56012]]

services in a building also used by another hospital, or in one or more 
entire buildings located on the same campus as buildings used by 
another hospital.'' Satellite arrangements exist when an existing 
hospital that is excluded from the acute care hospital inpatient 
prospective payment system and that is either a freestanding hospital 
or a hospital-within-a-hospital under Sec. 412.22(e) shares space in a 
building or on a campus occupied by another hospital in order to 
establish an additional location for the excluded hospital. The July 
30, 1999 acute care hospital inpatient prospective payment system final 
rule (64 FR 41532-41534) includes a detailed discussion of our policies 
regarding Medicare payments for satellite facilities of hospitals 
excluded from the acute care hospital inpatient prospective payment 
system. In the March 22, 2002 proposed rule, we indicated that we would 
consider the possibility of revisiting the policies we established for 
these satellites. In accordance with section 1886(b) of the Act, as 
amended by sections 4414 and 4416 of Public Law 105-33, we established 
two different target limits on payments to excluded hospitals, 
depending upon when the facilities were established. The target amount 
limit for excluded hospitals or units established before October 1, 
1997 was set at the 75th percentile of the target amounts of similarly 
classified hospitals, as specified in Sec. 413.40(c)(4)(iii), for cost 
reporting periods ending during FY 1996, as updated to the applicable 
cost reporting period. For excluded hospitals and units established on 
or after October 1, 1997, under section 4416 of Public Law 105-33, the 
payment amount for the hospital's first two 12-month cost reporting 
periods, as specified at Sec. 413.40(f)(2)(ii), may not exceed 110 
percent of the national median of target amounts of similarly 
classified hospitals for cost reporting periods ending during FY 1996, 
updated to the first cost reporting period in which the hospital 
receives payment.
    Because we were concerned that a number of pre-1997 excluded 
hospitals, governed by Sec. 413.40(c)(4)(iii), would seek to create 
satellite arrangements in order to avoid the effect of the lower 
payment caps that would apply to new hospitals under 
Sec. 413.40(f)(2)(ii), we established rules regarding the exclusion of 
and payments to satellites of existing facilities. If the number of 
beds in the hospital or unit (including both the base hospital or unit 
and the satellite location) exceeds the number of State-licensed and 
Medicare-certified beds in the hospital or unit on the last day of the 
hospital's or unit's last cost reporting period beginning before 
October 1, 1997, the facility would be paid under the acute care 
hospital inpatient DRG system. Therefore, while an excluded hospital or 
unit could ``transfer'' bed capacity from a base facility to a 
satellite, if it increased total bed capacity beyond the level it had 
in the most recent cost reporting period before October 1, 1997 (see 64 
FR 41532-41533, July 30, 1999), the hospital will not be paid as a 
hospital excluded from the acute care hospital inpatient prospective 
payment system. However, no similar limitation was imposed with respect 
to the number of total beds in excluded hospitals and units and 
satellite facilities of those excluded hospitals and units established 
after October 1, 1997, since those excluded hospitals and units were 
already subject to the lower payment limits of section 4416 of Public 
Law 105-33, and would, therefore, not benefit from the higher cap by 
creating a satellite facility.
    Section 123 of Public Law 106-113 confers broad authority on the 
Secretary regarding the implementation of the prospective payment 
system for LTCHs, and as described in section X.N. of this final rule, 
we will transition the LTCH prospective payment system over 5 years. 
During this period, payments to LTCHs will gradually change from a 
blend of hospital-specific reasonable cost-based payments and the 
Federal rate to a fully 100 percent Federal per-discharge LTC-DRG-based 
prospective payment system. In addition, IRFs also will be transitioned 
to 100 percent fully Federal prospective payment system payment 
starting with cost reporting periods beginning during FY 2003. In the 
proposed rule, we stated that we would consider whether to propose 
elimination of the bed-number criteria in Sec. 412.22(h)(2)(i) for pre-
1997 hospitals, once the applicable prospective payment system is fully 
phased in. All LTCHs would be paid based on 100 percent of the LTCH 
Federal rate by FY 2007 and the payment rates established under the 
TEFRA system at that time will no longer exist for this class of 
hospitals. In addition, we noted that, starting with cost reporting 
periods that begin during FY 2003, payment to IRFs are no longer cost 
based. We also noted that any policy change for lifting the bed-number 
criteria for hospitals under the LTCH or IRF prospective payment 
systems that we consider to propose would not apply while hospitals 
continue to be paid under the TEFRA system. Therefore, in the proposed 
rule, we stated that during the 5-year phasein period, the policies in 
Sec. 412.22(h)(2)(i) would continue to apply to LTCH satellites 
facilities.
    Comment: One commenter endorsed the policy that we may limit 
criterion for LTCHs with satellites once the LTCH prospective payment 
system is fully phased in by FY 2007. Under that existing policy, we 
limit a LTCH with a satellite to the number of beds that does not 
exceed the total number of beds the hospital was licensed to have on 
the last day of the hospital's last cost reporting period beginning 
before October 1, 1997.
    Ten other commenters urged us to adopt a policy eliminating the 
bed-number restrictions for satellites established by pre-1997 LTCHs as 
soon as a LTCH elects to be paid based on 100 percent of the standard 
Federal rate. The commenters recommended not waiting to eliminate the 
bed limit until FY 2007. The commenters explained that the rationale 
for the policies regarding bed limits for LTCHs with satellites was 
established subsequent to the enactment of the BBA in 1997, which set 
different target amount limits for each group. The commenters believed 
the policy should be obsolete once a LTCH is paid 100 percent under the 
fully Federal rate. Two of these commenters, while agreeing that we 
should adopt regulations eliminating the bed limits for pre-1997 LTCHs 
that elect to be paid based on 100 percent of the Federal rate, 
suggested limiting any proposal to those situations when the LTCH's 
TEFRA payment rate is lower than the most recent cap under 
Sec. 413.40(f)(2)(ii).
    Response: We agree that it may be appropriate to propose an 
elimination of the bed restriction prior to all hospitals transition to 
the LTCH prospective payment system. Although, in the proposed rule, we 
indicated that we would consider proposing a change to the existing 
bed-limit criterion in Sec. 412.22(h)(2)(i) for pre-1997 LTCHs once the 
LTCH prospective payment system was fully phased in, we agree with the 
argument presented by the commenters that it may be appropriate to 
propose dispensing with bed-number restrictions for those pre-1997 
LTCHs that elect to be paid under 100 percent of the Federal rate, at 
the start of the cost reporting period when this election is made. The 
rationale for the bed limit provision at Sec. 412.22(h)(2)(i) was the 
potential for gaming by creating a satellite location with a higher 
TEFRA target amount cap, where in reality the satellite would have been 
a separately certified LTCH but would have been subject to the lower 
cap on payments.

[[Page 56013]]

Once the hospital is paid under 100 percent of the prospective payment 
system rate, there is no longer a reason for the hospital to create a 
new hospital as a satellite since such a creation would not affect the 
hospital's prospective payment system payment. Accordingly, we will 
address a change in the policy concerning bed limits in the next update 
of the LTCH prospective payment system. Since the bed-restriction 
provisions on LTCHs with satellites were applicable under the TEFRA 
payment system, those LTCHs that are transitioning into full 
prospective payment and that, therefore, are still receiving a 
percentage of their payments under TEFRA rules, we believe, should 
continue to be subject to these restrictions during the phasein.
    Finally, we do not believe that it may be appropriate to propose 
the more restrictive option suggested by the two commenters. Allowing 
only those hospitals with TEFRA target amounts that are below the BBA 
cap or the target amount to exceed the limit is not consistent with our 
original basis for the limit. Once a hospital is not subject to the BBA 
cap on the target amount, the limit should be lifted with no 
consideration of the comparison of the hospital's cost to its target 
amount.
    Comment: Several commenters urged us to consider dispensing with 
the satellite bed-number restrictions for IRFs once the IRF prospective 
payment system is fully phased in for cost reporting periods beginning 
during FY 2003.
    Response: We appreciate the comments on this issue. This area is 
currently under our review and may be addressed in the future when 
changes to the IRF prospective payment system are addressed.
    Comment: One commenter suggested that, under the LTCH prospective 
payment system, satellite facilities should not have to independently 
comply with the 25-day average length of stay requirements separate 
from the parent LTCH.
    Response: We disagree with the commenter's suggestion and are not 
revising the regulations that require a satellite facility of a LTCH to 
independently meet the average 25-day length of stay requirement under 
Sec. 412.22(h)(2)(ii)(D). In establishing regulations for satellite 
facilities of excluded hospitals in the July 30, 1999 acute care 
hospital inpatient prospective payment system final rule (64 FR 41534), 
we clarified the need to establish financial and administrative linkage 
between the satellite facility and the parent excluded hospital, and we 
required the satellite facility to comply independently with selected 
statutory requirements for qualifying into the category of excluded 
provider of the parent hospital. We were concerned that existing 
hospitals that were excluded from the prospective payment system were 
establishing new hospitals under the guise of satellite facilities in 
order to circumvent several Medicare payment provisions. We also wanted 
to safeguard against the possibility of these satellites of excluded 
hospitals actually functioning as a part of an acute care hospital for 
the financial benefit of both facilities without any consequential 
clinical benefit to patients who could have reasonably been treated at 
an acute care hospital.
    We continue to believe it is essential that the satellite facility 
of such an excluded hospital retain the identity of the type of 
excluded hospital of which it is a part by separately complying with 
such requirements, thereby ensuring that patients hospitalized at the 
satellite facility would receive the appropriate specialized care for 
which Medicare is paying. In the case of a LTCH, we require that a 
satellite facility meet the 25-day average length of stay requirement 
independently, since we do not believe patients not requiring long-term 
hospital-level care should be admitted to either the LTCH or its 
satellite and we are concerned that, without requiring separate 
compliance, shorter lengths of stay at either the LTCH or its satellite 
could be balanced by longer stays at the other. Therefore, we will 
continue to separately calculate the length of stay for patients at 
LTCH satellite facilities to ensure that the satellite facility is 
actually a LTCH that warrants payments under the LTCH prospective 
payment system.
    Comment: One commenter urged us to limit the growth of LTCH 
satellites by prohibiting additional LTCH satellites from being 
established after October 1, 2002.
    Response: We do not believe that the action suggested by the 
commenter is warranted at this time.
2. Criteria for Exclusion of Satellite Facilities From the Hospital 
Inpatient Prospective Payment System Published in the August 1, 2002 
Acute Care Hospital Final Rule (67 FR 49982)
    In the final rule for the acute care hospital inpatient prospective 
payment system, published on August 1, 2002 (67 FR 49982), we included 
a discussion of policy changes for satellites of prospective payment 
system-excluded hospitals and units and revised Sec. 412.22(h) (67 FR 
50105). Effective for cost reporting periods beginning on or after 
October 1, 2002, a hospital or unit that has a satellite facility must 
meet the following criteria in order to be excluded from the acute care 
hospital inpatient prospective payment system for any period: (1) It is 
not under the control of the governing body or the chief executive 
officer of the hospital in which it is located; and (2) it furnishes 
inpatient care through the use of medical personnel who are not under 
the control of the medical staff or the chief medical officer of the 
hospital in which it is located. We further indicated that a number of 
the criteria that apply to hospitals-within-hospitals would not be 
applicable to satellite facilities. One example is the requirement that 
the cost of services that the hospital-within-a-hospital receives from 
the ``host'' hospital is not more than 15 percent of the hospital's 
inpatient operating costs would not be an appropriate criterion. This 
criterion would not be appropriate because the test would not only look 
at the costs incurred by the satellite facility but also at the costs 
incurred by the entire hospital, including both the satellite facility 
and the main hospital.
    We remain concerned that a significant potential exists for co-
located providers to circumvent Medicare policy. For example, an 
excluded hospital would not be prohibited, under current rules, from 
setting up one or more satellites that could be much larger than the 
main provider hospital, but under the rules published on August 1, 
2002, do not need to meet the separateness requirements for hospitals-
within-hospitals in Sec. 412.22(e)(5). In this scenario, a small main 
provider (having, for example, 50 beds), which itself could be co-
located with an acute hospital as a hospital-within-a-hospital, could 
establish a large satellite (having, for example, 200 beds). Although 
this activity would be equivalent to the creation of a hospital-within-
a-hospital, the hospital would, under current rules, only be required 
to comply with the satellite regulations at Sec. 412.22(h), not the 
additional requirements for hospitals-within-hospitals (see 
Sec. 412.22(e)(5)). We believe such a result would defeat the purpose 
of the hospital-within-a-hospital and satellite rules, by leading to 
the creation of facilities which are not sufficiently independent of 
the hospitals in which they are located to qualify for separate 
payment.
    As noted in the above discussion of hospitals-within-hospitals and 
satellites under the LTCH prospective payment system, we will be 
monitoring all aspects of onsite Medicare providers. If we see 
potentially abusive configurations being developed, we may consider 
proposing further regulations

[[Page 56014]]

that would provide effective safeguards against such abuse, such as 
requiring any satellite facility of a prospective payment system-
excluded hospital that shares a building or a campus with another 
Medicare provider to individually meet separateness requirements 
substantially the same as those in Sec. 412.22(e)(5).

I. Monitoring System

    In the March 22, 2002 proposed rule, we proposed various policies 
that we believed would provide equitable payment for stays that reflect 
less than the full course of treatment and reduce the incentives for 
inappropriate admissions, transfers, or premature discharges of 
patients that are present in a discharge-based prospective payment 
system. We also proposed to collect and interpret data on changes in 
average lengths of stay under the prospective payment system for 
specific LTC-DRGs and the impact of these changes on the Medicare 
program.
    We are planning to develop a monitoring system that will assist us 
in evaluating the LTCH prospective payment system. If our data indicate 
that changes might be warranted, we may revisit these issues and 
consider proposing revisions to these policies in the future.
    Comment: One commenter stated that, in designing the LTCH 
prospective payment system, we compared current costs to payments under 
the new prospective payment system. The commenter indicated that, since 
these costs may be higher than necessary, it is possible that 
additional payments for care provided in LTCHs may not be an 
appropriate expenditure of Medicare funds. The commenter urged us to 
gather data on the following basic issues:
     Where patients who need acute long-term care are treated 
in areas where there are no LTCHs;
     How costs and outcomes compare for similar patients in 
long-term care hospitals and other settings in areas where LTCHs do not 
exists;
     How costs compare for hospitals with and without onsite 
LTCHs;
     How costs compare for onsite LTCHs and freestanding LTCHs; 
and
     How the presence or absence of LTCHS affects transfers to 
acute care hospitals and other post-acute care settings.
    Response: We agree with the commenter that these areas of study are 
essential to our ongoing monitoring and evaluation activities for 
implementation of the LTCH prospective payment system. We note that the 
establishment of the prospective payment system for LTCHs is required 
by statute. The statute specifically requires that the system be budget 
neutral to payments under the current TEFRA system. However, as we 
stated earlier, we intend to develop a monitoring system that will 
assist us in evaluating the LTCH prospective payment system. If our 
data indicate that changes are warranted, we may revisit these issues 
and, consistent with statutory requirements, consider revising these 
policies in the future.
    Given that the only unique requirement that distinguishes a LTCH 
from other hospitals is an average length of stay of greater than 25 
days, we continue to be concerned about the extent to which LTCH 
services and patients differ from those services and patients treated 
in other Medicare covered settings (for example, SNFs and IRFs) and how 
the LTCH prospective payment system will affect the access, quality, 
and costs across the health care continuum. Thus, we will monitor 
trends in the supply and utilization of LTCHs and Medicare's costs in 
LTCH and relative to other Medicare providers. For example, we may 
conduct medical record reviews of Medicare patients to monitor changes 
in service use (for example, ventilator use) over a LTCH episode of 
care and to assess patterns in the average length of stay at the 
facility level. We will consider future changes to LTCH coverage and 
payment policy based upon the results of such analyses.

J. Payment Adjustments

    As indicated earlier, the Secretary generally has broad authority 
under section 123 of Public Law 106-113 in developing the prospective 
payment system for LTCHs. Thus, the Secretary has discretion to 
determine whether (and how) to make adjustments to the prospective 
payments to LTCHs. Section 307(b) of Public Law 106-554 directs the 
Secretary to ``examine'' appropriate adjustments to the prospective 
payments to LTCHs, including certain specific adjustments, but under 
that section the Secretary continues to have discretion as to whether 
to provide for adjustments.
    In determining whether to include specific payment adjustments 
under the prospective payment system for LTCHs, we conducted extensive 
regression analyses of the relationship between LTCH costs (including 
both operating and capital-related costs per case) and several factors 
that may affect costs such as the percent of Medicaid patients treated, 
the percent of Supplemental Security Income (SSI) patients treated, 
geographic location, and medical education programs. The 
appropriateness of potential payment adjustments is based on both cost 
effects estimated by regression analysis and other factors, including 
simulated payments that we discuss later in this section of the 
preamble.
    Our analyses in the proposed rule were based on data from 222 LTCHs 
for which both costs from the cost reports in HCRIS and case-mix data 
from the MedPAR file were available. For this final rule, we collected 
costs from the cost reports and case-mix data from the MedPAR file on 
198 LTCHs. We excluded LTCHs that are all-inclusive providers and 
providers reimbursed in accordance with demonstration projects (section 
X.K.2.a. of this preamble). We estimated costs for each case by 
multiplying hospital-specific cost-to-charge ratios by the LTCH's 
charges for that case. Cost-to-charge ratios were determined by 
obtaining costs from FY 1998 or FY 1999 cost report data, or both, as 
available in the HCRIS minimum data set, and charges from the Medicare 
claims data available in the MedPAR file. Because the universe of LTCHs 
has grown relatively rapidly over the last several years, in order to 
maximize the number of LTCHs in the database, we used the most recent 
cost report data available for each LTCH. If we had both FY 1998 and FY 
1999 cost report data, we used the most complete cost reporting period 
(that is, the cost reporting period with the greater number of months). 
If we used FY 1998 cost report data because FY 1999 data were either 
unavailable (due to the time lag in cost report settlement) or 
incomplete, we updated the FY 1998 data for inflation using the FY 1999 
excluded hospital market basket increase (2.4 percent) as published in 
the July 31, 1998 acute care hospital inpatient prospective payment 
system FY 1999 final rule (63 FR 40954). As indicated in Appendix A of 
this final rule, we are using the excluded hospital market basket with 
a capital component to update payment rates. The excluded hospital 
market basket is currently used to update LTCHs' target amounts for 
inflation under the TEFRA system. We believe that the use of the 
excluded hospital market basket to update LTCHs' costs for inflation is 
appropriate because the excluded hospital market basket measures price 
increases of the services furnished by excluded hospitals, including 
LTCHs. We believe that there is insufficient data to develop a market 
basket based only on LTCH costs at this time.
    As we explained in the proposed rule, in computing hospital-
specific cost-to-charge ratios, we matched the costs for which we had 
the most recent and

[[Page 56015]]

complete cost reporting period data to the claims in the MedPAR file 
for each month in that cost reporting period.
    Comment: One commenter believed that a rural adjustment is an 
important component of the LTCH prospective payment system; the IRF 
prospective payment system provides for a 19.4 percent payment 
adjustment for rural hospitals and units. In the absence of a rural 
adjustment, the commenter believed that those LTCHs located in rural 
areas will be placed at a competitive disadvantage in the purchasing of 
hospital services and medical supplies since they share the labor 
market with rehabilitation hospitals.
    Response: As we explained in the proposed rule, while our data did 
identify 14 rural LTCHs, the analysis of the data associated with these 
rural providers did not support a payment adjustment for LTCHs located 
in rural areas.
    Therefore, under the proposed LTCH prospective payment system, all 
LTCHs would be treated the same for the purposes of payment, regardless 
of location. With regard to the 14 rural LTCHs, in the proposed rule, 
we compared the hospital's projected payments to both their projected 
costs and to what TEFRA payments would be and determined a proposed 
LTCH prospective payment system payment-to-cost ratio of 1.1337 and a 
proposed new LTCH prospective payment system payment-to-current TEFRA 
payment ratio of 1.2327 for those hospitals. These ratios showed that 
the prospective payments under the proposed LTCH prospective payment 
system for rural hospitals were expected to exceed their costs by 13.37 
percent and exceed their payments under the TEFRA system by 23.27 
percent. In this final rule, based on updated data and including the 
policy changes discussed above, rural hospitals are still projected to 
have positive ratios; for example, a new LTCH prospective payment 
system payment-to-current TEFRA payment ratio of 1.0796 and a new LTCH 
prospective payment system payment-to-cost ratio of 1.0333 (based on 
estimated TEFRA payments and case-mix data that were available from the 
MedPAR file for 194 LTCHs). Therefore, we believe the data continue to 
support our position that a rural location adjustment is not warranted 
at this time. We also point out that this was not the case for 
rehabilitation facilities. The regression data for IRFs showed a basis 
for recognizing additional costs at rural locations. Thus, under the 
IRF prospective payment system, there was a need for some type of 
adjustment for rural location.
    Comment: One commenter supported our assessment that because of the 
low number of rural LTCHs (5 percent of the total universe) and the 
modest volume of patients treated in these facilities, there should not 
be a rural location adjustment.
    Response: We appreciate the commenter's support of our position on 
this issue. However, we note that our policy was not based on the 
number of rural LTCHs or the volume of patients. Rather, the policy 
decision not to include a rural adjustment in the LTCH prospective 
payment system is based on a regression analysis of data from rural 
hospitals, which did not show that an adjustment is appropriate.
    Comment: One commenter asked whether the cost-to-charge ratios that 
appear in the ratesetting file on the CMS website were adjusted for 
inflation.
    Response: We did not apply an inflation factor to the cost-to-
charge ratios since both costs and charges were taken from the same 
year's data (for example, FY 1999). Since we would use the same 
inflation factor for both the numerator (costs) and denominator 
(charges), the resulting ratio with the inflation factor applied would 
be equal to the ratio without the application of the inflation factor. 
Therefore, an inflation factor is unnecessary. In determining the cost-
to-charge ratios, costs were taken directly from the MedPAR file.
    Comment: One commenter asked why cost-to-charge ratios greater than 
``2'' were in the calculation of payment amounts.
    Response: We believe that the cost-to-charge ratios greater than 
``2'' are legitimate and, thus, we did not believe it was appropriate 
to exclude them.
    Comment: One commenter noted that cost-to-charge ratios are defined 
as the ``ratio of costs to charges from total cost report data in HCRIS 
matching charge data from the MedPAR files,'' and asked if this meant 
that a ratio of costs from the cost report to charges from the MedPAR 
file was used to determine the cost-to-charge ratio or if this meant 
that the cost-to-charge ratios appearing in the cost reports were 
applied to charges in the MedPAR file. If the latter method was used, 
the commenter wanted to know how the cost-to-charge ratios were 
calculated from the cost report data.
    Response: A ratio of costs from the cost report to charges from the 
MedPAR file was created to determine the cost-to-charge ratio. The 
cost-to-charge ratios were determined by dividing the average cost per 
case from the LTCH's most recent available cost report by the LTCH's 
average covered charge per case from corresponding MedPAR data for the 
same months as the months covered by the cost reporting period. For 
example, for a LTCH with a 12-month cost reporting period beginning on 
July 1, 1999 and ending on June 30, 2000, we used MedPAR data for 
claims discharged from July 1999 through June 2000 to compute its cost-
to-charge ratio. The cost per case for each hospital is calculated by 
summing all costs and dividing by the number of corresponding cases.
    Multivariate regression analysis is the standard statistical 
technique for examining cost variation that was used to analyze 
potential payment adjustments for LTCHs. We looked at two standard 
models--(1) a double log regression explanatory model to examine the 
impact of all relevant factors that might potentially affect a LTCH's 
cost per case; and (2) a payment model that examines the impacts of 
those factors that were determined to affect costs and, therefore, were 
used to determine payment rates. In multivariate regression, the 
estimated average cost per case (the dependent variable) at the LTCH 
can be explained or predicted by several independent variables, 
including the case-mix index, the wage index for the LTCH, and a vector 
of additional explanatory variables that may affect a LTCH's cost per 
case, such as a teaching program or the proportion of low-income 
patients. The case-mix index is the average of the LTC-DRG weights, 
derived by the hospital-specific relative value method, for each LTCH. 
Short-stay outlier cases are weighted based on the ratio of the length 
of stay for the short-stay case to the average length of stay for 
nonshort-stay cases in that LTC-DRG. We simulated payments using an 
estimated budget-neutral payment rate and the regression coefficients 
as proxies for payment system adjustments. Then we calculated payment-
to-cost ratios for different classes of hospitals for specific 
combinations of payment policies.
    We examined payment variables applicable to the hospital inpatient 
and IRF prospective payment systems, including the disproportionate 
share patient percentage, both the resident-to-average daily census 
ratio and the resident-to-bed ratio teaching variables, and variables 
that account for location in a rural or large urban area. A discussion 
of the major payment variables and our findings appears below.
1. Area Wage Adjustment
    Section 307(b) of Public Law 106-554 requires that we examine the

[[Page 56016]]

appropriateness of an area wage adjustment. Such an adjustment would 
account for area differences in hospital wage levels and would be made 
by adjusting the LTCH prospective payment system payment rate by a 
factor that will reflect the relative hospital wage level in the 
geographic area of the hospital, as compared to the national average 
hospital wage level. In the March 22, 2002 proposed rule, we did not 
propose implementing an area wage adjustment for payments to LTCHs 
because our regression analysis indicated at that time that a wage 
adjustment would not increase the accuracy of payments. However, as 
discussed below, based on the comments we received, we have 
reconsidered the appropriateness of including an area wage adjustment 
in the LTCH prospective payment system. Under the acute care hospital 
inpatient prospective payment system, a wage index is applied to the 
labor-related share of the operating standardized amount to adjust for 
local cost variation. The hospital wage data are used also to make an 
area wage adjustment under the IRF prospective payment system, the SNF 
prospective payment system, the home health prospective payment system, 
and the outpatient hospital prospective payment system.
    As we discussed in the March 22, 2002 proposed rule, we analyzed 
the appropriateness of an area wage adjustment for LTCHs by evaluating 
the labor-related share from the excluded hospital with capital market 
basket. (This is the same market basket that is used in the IRF 
prospective payment system.) Currently, under the TEFRA reasonable 
cost-based reimbursement system, the excluded hospital market basket is 
used to update the cap on LTCHs' target amounts, which are used to 
determine payments to LTCHs for inpatient operating costs. Since we 
proposed to implement a single standard Federal rate under the LTCH 
prospective payment system (section X.K. of this preamble), we used a 
market basket with a capital component. A further explanation of the 
excluded hospital with capital market basket can be found in Appendix A 
of this final rule.
    The labor-related share is the relative importance of wages, fringe 
benefits, professional fees, postal services, labor-intensive services, 
and a portion of the capital share for FY 2003. We determined a labor-
related share of the excluded hospital with capital market basket by 
first estimating the portion related to operating costs. The excluded 
hospital with capital market basket is based on available cost data for 
facilities excluded from the acute care hospital inpatient prospective 
payment system, including long-term care, rehabilitation, psychiatric, 
cancer, and children's hospitals.
    In the proposed rule, we determined a labor-related share of the 
excluded hospital with capital market basket by first estimating the 
portion related to operating costs. Using the excluded hospital with 
capital market basket, we determined the labor-related share of 
operating costs to be 69.428 percent for FY 2003, which is calculated 
as the sum of the relative importance for wages and salaries (50.381 
percent), employee benefits (11.525), professional fees (2.059), postal 
services (0.244), and all other labor intensive services (5.219).
    The labor-related share of capital costs in the market basket 
needed to be considered as well. We used the portion of capital 
attributed to labor, which our Office of the Actuary estimated on the 
basis of cumulative knowledge of prospective payment systems, to be 46 
percent. This was the same percentage used for both the acute care 
hospital inpatient capital prospective payment system and the IRF 
prospective payment system. In the proposed rule for FY 2003, we 
estimated, based on the historical knowledge of prospective payment 
systems, the relative importance for capital to be 7.552 percent of the 
excluded hospital with capital market basket. We then multiplied 46 
percent by 7.552 percent to determine that the labor-related share for 
capital costs for FY 2003 to be 3.474 percent. We then added the 3.474 
percent for capital costs to the 69.428 percent for operating costs to 
determine the total labor-related share based on the excluded hospital 
with capital market basket. Thus, in the proposed rule, when we 
examined an adjustment to account for area differences in hospital wage 
levels, we used a labor-related share of 72.902 percent for the LTCH 
prospective payment system.
    Based on updated data, for this final rule we estimate the relative 
importance for capital for FY 2003 to be 7.515 percent of the excluded 
hospital with capital market basket. We then, for this final rule, 
multiplied 46 percent by 7.515 percent to determine that the labor-
related share for capital costs for FY 2003 to be 3.457 percent. 
Accordingly, based on updated data for FY 2003, the labor-related share 
of the excluded hospital with capital market basket is 72.885 percent 
(69.428 plus 3.457).
    Specifically, in the proposed rule, we examined the appropriateness 
of accounting for differences in area wage levels by multiplying the 
labor-related share of the unadjusted Federal payment by the FY 2002 
inpatient acute care hospital wage index, without taking into account 
geographic reclassification under sections 1886(d)(8) and (d)(10) of 
the Act. (This methodology is the same as the methodology used under 
the IRF prospective payment system and the SNF prospective payment 
system.) For purposes of both the proposed rule and the final rule, 
wage data to compute LTCH-specific wage indices were not available. 
However, LTCHs and other postacute care facilities (for example, IRFs, 
SNFs, and HHAs) generally compete in the same local labor market for 
the same types of employees as inpatient acute care hospitals.
    Comment: Several commenters recommended that we develop a wage 
index based on LTCH data. One commenter suggested that if LTCH wage 
data are unavailable due to the lack of Worksheet S-3 data, other means 
could be utilized in the short term to create a labor adjustment 
mechanism. Alternatively, the commenter suggested that the wage indices 
used for the acute care hospital inpatient prospective payment system 
could be weighted to account only for those wage areas containing a 
LTCH.
    One commenter suggested that the payments under the LTCH 
prospective payment system should be adjusted using the current 
inpatient acute care hospital wage indices, but a different labor-
related share should be chosen to reflect the experience of LTCHs. 
Another commenter recommended establishing a LTCH wage index using the 
labor share estimated by the excluded hospital market basket and the 
wage indices used in the IRF prospective payment system.
    Response: At this time, we are unable to develop a separate wage 
index for LTCHs based solely on LTCH data. Currently, there is a lack 
of specific LTCH wage and staffing data necessary to develop a separate 
LTCH wage index accurately. As we stated in the proposed rule, in order 
to accumulate the data needed for such an effort, we would need to make 
modifications to the Medicare hospital cost report. Because we do not 
have LTCH specific wage data, at this time we are unable to determine 
an appropriate weighting factor for the acute care wage index to 
account only for those wage areas containing a LTCH. In the future, we 
will continue to research the appropriateness of the acute care 
hospital wage index for LTCHs and may investigate the feasibility of 
developing a wage index specific to LTCHs. However, at this time, we 
believe that the wage index based on acute care

[[Page 56017]]

hospital wage data contains the best and most appropriate data to use, 
and it is the same wage index used in the prospective payment system 
for other postacute care for providers (IRFs, SNFs, and HHAs). 
Therefore, we believe the acute care hospital wage index for FY 2003 is 
appropriate since LTCHs and other postacute care facilities generally 
compete in the same local labor market for the same types of employees 
as inpatient acute care hospitals.
    In addition, we believe that the labor-related share, which is 
based on the excluded hospital with capital market basket, 
appropriately reflects the experience of LTCHs since it is based on 
available cost data for facilities excluded from the acute care 
hospital inpatient prospective payment system, including long-term 
care, rehabilitation, psychiatric, cancer, and children's hospitals.
    Comment: Many commenters expressed concern that no area wage 
adjustment was provided for in the LTCH prospective payment system. 
Specifically, they noted the following issues: (1) LTCHs in high wage 
areas will have difficulty competing in labor markets with other 
providers whose payments are wage adjusted; (2) LTCHs in high wage 
areas will have difficulty in recruiting staff with the appropriate 
skill mixes; and (3) services in high wage areas will need to be cut to 
meet fixed LTCH prospective payment system payments that are not 
adjusted to account for differences in area wages. Given these 
concerns, one commenter submitted findings by The Lewin Group regarding 
the regression analysis on a wage adjustment for LTCHs.
    The Lewin Group performed an analysis which showed that by removing 
from the sample one LTCH that has high volume and very low cost per 
case, the wage index is shown to have a positive and statistically 
significant impact on overall costs (the wage index coefficient was 
found to be 18.8 percent, which is approximately 25 percent of the full 
labor-cost share). Therefore, the commenter believed it is appropriate 
to include the area wage adjustment in a 5-year transition period. The 
commenter also suggested that if we are not inclined to include an area 
wage adjustment, an alternative would be to use a modified area wage 
index adjustment that have ``soft'' upper and lower wage adjustment 
limits to lessen the gains and losses that otherwise might occur.
    Another commenter stated that based on the analysis by The Lewin 
Group, the statistical results found by us may be influenced by a small 
number of extreme values from a few hospitals that unduly influenced 
the statistical models. Other commenters asserted that the sample of 
LTCHs used by us is not statistically valid for determining whether a 
wage adjustment is appropriate. One commenter pointed out that the 
ratesetting file used by us consisted of 20 percent of the LTCHs being 
located in Texas and 10 percent located in Louisiana. The commenter 
believed that, since these two States typically have lower wages than 
the rest of the country, by not incorporating a wage adjustment, we are 
inappropriately reimbursing providers across all States and failing to 
take into account the evidence before it.
    One commenter claimed that as it is obvious the data or the 
statistical analysis, or both, used by us are not accurate or 
appropriate for the sample of LTCHs used, it is not reasonable to 
conclude that LTCHs have a labor-related share of cost of only 19.91 
percent. The commenter cited Tables 7 and 8 of the Health Care 
Financing Administration Review/Winter 2001, which show the cost of 
routine nursing care (including bed and board) as representing an 
average 66 percent of costs of the LTCHs. Another commenter stated that 
even though the results of our regression model do not support a wage 
adjustment, there is empirical data compiled by the Bureau of Labor 
Statistics that clearly identified the wide variability of wages across 
the country. Several other commenters asserted that allowing a wage 
adjustment for other providers, but not LTCHs, based on statistical 
accuracy from a past time period, is poor public policy and this policy 
could lead to destabilization of payments rates and should be avoided.
    One commenter stated that our belief that an area wage index 
adjustment as a component of a LTCH prospective payment system does not 
improve the statistical accuracy of the payment is counter intuitive, 
fails to address concerns that inadequate financing of labor costs will 
adversely affect patient care, and fails to address a statement made by 
MedPAC staff that the quality of LTCH data may have an effect on 
analysis of this issue.
    Several commenters also cited MedPAC's June 2001 Report to 
Congress, in which it states that ``the objective of the geographic 
adjustment is to make Medicare's payment rates accurately reflect the 
costs efficient providers would incur in furnishing services to 
beneficiaries given local market wages.'' In that same report, MedPAC 
also stated that without a geographic wage adjustment, Medicare's 
payment rates would be too high in labor markets with relatively low 
wage rates and providers would face incentives to furnish too many 
services, while Medicare's payment rates would be too low in labor 
markets with relatively high wage rates, ``giving providers financial 
incentives to produce too few services, stint on services or inputs 
(especially labor), or cease participating in Medicare.''
    Other commenters pointed out that numerous older LTCHs, located 
primarily in high wage areas, have been constrained by their TEFRA 
target amounts and have been more vigilant in reigning in their 
expenses. Another commenter speculated that if the average cost per 
case in LTCHs did not vary with the wage index, the data were 
unreliable or there is a wide heterogeneity among services. The 
commenter believed that service heterogeneity is significant because 
newer facilities have not been subject to the same cost limits as older 
facilities, and there is a large mix of old and new facilities in the 
LTCH sector. Furthermore, the commenter explained that, historically, 
older facilities tend to be located in the northeastern region of the 
country where the cost of labor is higher on average than in other 
areas of the country. Therefore, the historical effect of the TEFRA 
caps may be obscuring the effect of regional differences in wage levels 
in the empirical model. The commenter added that, moreover, the theory 
of prospective payment systems is that the national rate is intended to 
cover a set of clinically similar services. Given that wage levels have 
proven to vary regionally, by not providing a wage adjustment, the 
policy gives the national average rate less purchasing power in high 
labor cost regions of the country, thus diminishing the level of care 
available to LTCH Medicare beneficiaries in those areas.
    Other commenters expressed concern that since, at present, 
approximately 33 percent of LTCHs are geographically clustered in three 
States (Texas, Louisiana, and Massachusetts), it would appear that a 
prospective payment system with no wage adjustment would encourage 
further clustering of LTCHs. Another commenter also noted that the 
negative statistical finding could perpetuate acknowledged distortions 
of the TEFRA payment system. Thus, a wage adjustment for high wage 
areas would be appropriate.
    With respect to our assertion that including a wage adjustment 
would inappropriately redistribute payments to LTCHs by shifting 
reimbursement to LTCHs that are located in an area within a higher wage 
index, but in fact, with lower costs, one commenter stated that

[[Page 56018]]

we need to recognize and reward these efficient providers, which would 
be consistent with the objectives of the proposed prospective payment 
system for LTCHs, that is, ``to provide incentives to control costs and 
to furnish services as efficiently as possible.''
    Response: In examining the comments and suggestions we received, 
several issues led us to reconsider our previous decision. First, we 
agree with the commenters that there is a possibility that TEFRA 
policies may have in some way affected the relationship between LTCHs' 
geographic location and costs. As was pointed out by several 
commenters, older LTCHs with relatively low TEFRA ceilings are often 
located in large urban areas, which may provide an explanation for the 
results of our statistical analysis. In addition, the historical effect 
of the TEFRA caps may be affecting the expected effect of regional 
differences in wage levels of LTCHs operating under the prospective 
payment system. We also agree with many of the commenters' concerns 
that, by providing for a wage adjustment, LTCHs in high wage areas may 
help ensure that these LTCHs can compete in labor markets with other 
providers whose payments are wage adjusted; can recruit appropriate 
staff; and can deliver sufficient high quality services to Medicare 
beneficiaries.
    As to the sensitivity analysis that was conducted, we agree with 
commenters that it is reasonable to expect that a hospital's wage costs 
will affect total costs and that, in consequence, the payment amounts 
under the new system should be adjusted using a wage index. However, 
the statistical analysis presented by one commenter included analysis 
where the effect of wages, though small, was positive and significant, 
as well as other models where the effect was small and negative, but 
also significant. This indicates that the regression estimates are very 
sensitive to the inclusion and exclusion of certain facilities. 
Unfortunately, this limits our ability to base policy on the results of 
the commenter.
    We believe that it is reasonable to assume that wages have an 
effect on case-mix adjusted LTCH costs. However, we believe that these 
inconsistent results may be due to limitations in the current data from 
the LTCHs. This is not surprising because case-mix information has not 
been previously used for payment for these hospitals, and since various 
LTCHs have been subject to varying TEFRA limits. Despite the results of 
the commenter's statistical analysis, we have reconsidered our proposal 
not to include a wage adjustment and now believe that the conceptual 
reasons for having an area wage adjustment support transitioning into a 
wage adjustment, notwithstanding the data problems and issues with the 
regression analysis. We reevaluated the statistical analysis presented 
in the proposed rule along with our most recent findings based on the 
latest available data. Based on the results of this reevaluation, we 
now agree with the commenter's suggestion that it is appropriate to 
phase-in a wage adjustment over a transition period.
    In the proposed rule, we analyzed the results of the wage index 
coefficient derived from regression analysis to validate the labor-
related share calculated from the market basket. In the regression, we 
standardized each LTCH's cost per case by the various factors, such as 
case-mix, bed size, number of cases, length of stay, and occupancy. The 
wage index coefficient allowed us to approximate the labor-related 
portion of cost per case. Since the labor-related share derived from 
the market basket is the proportion of costs that have been identified 
as being influenced by the local labor amount, we expected this 
coefficient to be statistically significant and near our market basket 
measure. The double-log regression analysis in the proposed rule 
generated a wage index coefficient, which approximated the labor-
related portion of cost per case, that was not near the market basket 
measure (72.902 percent). For this final rule, based on updated data we 
reran the regression, and the double log regression continues to show a 
wage index coefficient for the market basket, which at most is 
approximately 20 percent.
    While the statistical analysis did not show a significant 
relationship between LTCHs' costs and their geographic location, we 
believe it is appropriate to include some adjustment for area wages. 
Accordingly, we will incorporate a wage index adjustment, but beginning 
with FY 2003, as one commenter suggested, we will transition to a full 
wage adjustment over a 5-year period. Accordingly, for the first year 
of the LTCH prospective payment system, the area wage adjustment will 
be one-fifth of the full FY 2002 wage index without geographic 
reclassifications. We will continue to reevaluate LTCH data as they 
become available and would propose to adjust the phasein if subsequent 
data support a change. Therefore, we are amending Sec. 412.525 to add a 
new paragraph (c), which provides for an appropriate adjustment to the 
labor-related share of the unadjusted LTCH Federal rate.
    As we described in the proposed rule and as several commenters 
supported, we are establishing a LTCH wage index using the labor-
related share estimated by the excluded hospital market basket with 
capital and the wage indices computed from data from inpatient acute 
care hospital wage data without regard to reclassifications under 
sections 1886(d)(8) or 1886(d)(10) of the Act. This is consistent with 
the area wage adjustments under the prospective payment systems for 
other postacute care providers (IRFs, SNFs, and HHAs).
    As discussed above, to calculate wage adjusted payments for the 
payment rates set forth in this final rule, the prospectively 
determined unadjusted LTCH Federal rate is multiplied by the labor-
related percentage (72.902) to determine the labor-related share of 
LTCH Federal rate. The labor-related share is then multiplied by the 
applicable LTCH wage index as shown in Table 1 (for urban areas) and 
Table 2 (for rural areas) in the Addendum of this final rule. For FY 
2003, the applicable LTCH wage index will be one-fifth (the first 
year's proportionate fraction of a 5-year phasein) of the full FY 2002 
inpatient acute care hospital wage index, without taking into account 
geographic reclassification under sections 1886(d)(8) and (d)(10) of 
the Act. (See section X.J.2. of this preamble regarding geographic 
reclassification.) The resulting wage-adjusted labor-related share is 
then added to the nonlabor-related share (27.098 percent), resulting in 
a wage adjusted payment rate. The following example illustrates how the 
wage-adjusted LTCH Federal rate would be computed for a LTCH located in 
Chicago, IL (MSA 1600) with a hypothetical LTCH unadjusted Federal rate 
of $10,000. The FY 2003 one-fifth LTCH wage index value for MSA 1600 is 
1.0202. The labor-related share (72.885 percent) of the hypothetical 
LTCH Federal rate is $7,288.50 ($10,000 x 0.72885) and the nonlabor-
related share (27.115 percent) is $2,711.50 ($10,000 x 0.27115). 
Therefore, the wage-adjusted LTCH payment rate is:

$10,147.23 = ($7,288.50 x 1.0202) + $2,711.50.

    For FY 2003, the applicable LTCH wage index for LTCHs located in 
urban areas and for LTCHs located in rural areas are shown in Tables 1 
and 2, respectively, in the Addendum to this final rule.
    Comment: MedPAC examined two possible reasons why we found that the 
differences in local input prices were not significant predicators of 
costs for care in LTCHs: high correlation of patient need with local 
wages and a lack

[[Page 56019]]

of variation in wages for locations. It found ``the correlation of 
patient need and wages to be low'' and that ``the wages for counties 
where LTCHs are located did vary widely.'' MedPAC also hypothesized 
that limitations on increases in costs imposed by the TEFRA payment 
system could have distorted costs; however, it was unable to test this 
third possibility. MedPAC expressed concern that if we do not adjust 
rates for local input prices, ``hospitals with low wages may be 
overpaid and those with high wages may be underpaid.'' However, MedPAC 
also contended that ``if CMS does adjust to account for differences in 
wages, the opposite error may result.'' In conclusion, MedPAC stated 
that the need for a wage adjustment should be reexamined when better 
data are available.
    Three additional commenters agreed with our proposal not to include 
an adjustment for area wages until better data are available. One 
commenter agreed that there should not be an area wage adjustment for 
payment to LTCHs because there is not a significant distinction between 
the LTCHs' costs and their geographic location. Another commenter also 
agreed that there should not be an area wage adjustment at this time, 
stating that the decision should be made based on LTCH data rather than 
an assertion that all payment systems need to include the same 
components. The same commenter added that until the LTCH data support a 
change in the policy, the proposed position not to include a wage 
adjustment should be maintained.
    Response: We appreciate the commenters' support of our proposal to 
delay implementing the wage adjustment. However, as discussed above, we 
have reconsidered our position and are phasing in a wage index over a 
5-year period.
2. Adjustment for Geographic Reclassification
    In accordance with section 307(b) of Public Law 106-554, we also 
examined the appropriateness of applying an adjustment for geographic 
reclassification to payments under the LTCH prospective payment system, 
where hospitals could request reclassification from one geographic 
location to another for the purpose of using the other area's wage 
index value, Federal payment rates, or both. A similar adjustment is 
available under the acute care hospital inpatient prospective payment 
system in accordance with section 1886(d)(10) of the Act. The 
adjustment would treat a hospital located in one geographic area as 
being located in another geographic area, if certain conditions are 
met. As explained below, at this time, we are not implementing an 
adjustment for geographic reclassification in the prospective payment 
system for LTCHs.
    In the March 22, 2002 proposed rule, we indicated that our data 
identified 14 rural LTCHs, but our analysis supported neither an 
adjustment to account for differences in area wage levels nor an 
adjustment for LTCHs located in rural areas or large urban areas 
because the regression analysis indicated that a wage adjustment would 
not increase the accuracy of payments. Therefore, under the LTCH 
prospective payment system, we proposed that all LTCHs would be treated 
the same for the purposes of payment, regardless of location. Since 
there would have been no purpose for LTCHs to reclassify to another 
area, we did not propose to implement an adjustment for geographic 
reclassification in the prospective payment system for LTCHs.
    After publication of the March 22, 2002 proposed rule, we revisited 
the appropriateness of an adjustment for geographic reclassification. 
Under the TEFRA payment system, hospitals and units excluded from the 
acute care hospital inpatient prospective payment system, including 
LTCHs, are not required to fill out information related to wage-related 
costs on the Medicare cost report (Worksheet S-3). Thus, we would need 
to provide for the collection of pertinent wage information as well as 
developing some type of application and determination process before a 
geographic reclassification process could be implemented.
    In the proposed rule, we had stated that if a wage adjustment was 
ultimately implemented as part of the LTCH prospective payment system, 
and it was determined that it was appropriate to make geographic 
reclassification adjustments, as we stated above, we would need to 
prepare instructions for data collection on LTCH wage-related costs in 
order to determine an appropriate geographic reclassification 
adjustment for LTCHs. It would also be necessary to develop an 
application process as well as determination procedures.
    We have only included a wage index adjustment that will transition 
to a full adjustment over 5 years. Also, we will not be establishing a 
geographic reclassification process at this time. We will monitor all 
incoming wage-related data and will examine the appropriateness of 
implementing a geographic reclassification process at a later date.
    Comment: One commenter supported our position of providing no 
adjustment for geographic reclassification in the LTCH prospective 
payment system. It was the commenter's position that LTCHs, regardless 
of location, should be treated the same for purposes of payment.
    Response: While we appreciate the commenter's support of our 
position in this matter, as we stated in the proposed rule, we have 
revisited the appropriateness of an adjustment for geographic 
reclassification based on the latest data available. Hospitals that are 
currently excluded from the acute care hospital inpatient prospective 
payment system (that is, hospitals paid under the TEFRA payment system) 
are not required to provide wage-related information on the Medicare 
cost report (Worksheet S-3). Thus, in order to provide for an 
adjustment for geographic reclassification, we would first need to 
establish instructions for data collection on LTCH wage-related costs, 
and we would also need to develop an application process and 
determination procedures.
    Also, in order to be consistent with the area wage adjustments made 
to other postacute care providers (that is, under the existing HHA, 
SNF, and IRF prospective payment systems), we are using the inpatient 
acute care hospital wage data without regard to any approved geographic 
reclassifications under section 1886(d)(8) or 1886(d)(10) of the Act. 
Therefore, we are not adopting the use of ``post reclassification'' 
wage data, and the area wage adjustment for a LTCH will be based on the 
provider's actual location, without regard to the urban or rural 
designation of any affiliated or related providers.
    While we are providing for a phased-in wage adjustment for LTCHs, 
as we discussed above, we will be transitioning to a full wage 
adjustment over a 5-year period. That is, the LTCH payment rate will be 
adjusted, but only by one-fifth of the hospital's wage index in the 
first year (FY 2003). Adjustment will be phased-in in one-fifth 
increments to 100 percent of the wage index over the next 4 years. 
Considering that the effect of the adjustment for area wages will be 
reduced significantly for the first year and, therefore, the impact of 
any reclassification would be minimal, we believe the administrative 
burden resulting from an attempt to develop an adjustment for 
geographic reclassification at this time outweighs the benefits of any 
reclassification. However, we intend to examine the feasibility of 
establishing a system for geographic reclassifications as more of

[[Page 56020]]

the wage index in subsequent years is used to establish prospective 
payment system payments.
    Accordingly, in this final rule, we are not providing for an 
adjustment for geographic reclassification in the LTCH prospective 
payment system. However, if we determine at a later date that a 
reclassification adjustment for LTCHs is warranted, we will explore the 
development of an appropriate reclassification process.
3. Adjustment for Disproportionate Share of Low-Income Patients
    Section 307(b) of Public Law 106-554 requires that we examine the 
appropriateness of an adjustment for hospitals serving a 
disproportionate share (DSH) of low-income patients, consistent with 
section 1886(d)(5)(F) of the Act, which establishes this adjustment for 
inpatient acute care hospitals. As we discussed in the proposed rule, 
in assessing the appropriateness of a similar adjustment for LTCHs 
serving low-income patients, as specified in section 1886(d)(5)(F) of 
the Act, we focused our analysis on the relationship between serving 
low-income patients and LTCHs' cost per case. Based on the results of 
our analysis, we did not propose an adjustment for the treatment of a 
disproportionate share of low-income patients. Given the statistical 
analysis presented in the proposed rule (described below) and our most 
recent findings based on the latest available data that confirm the 
analysis in the proposed rule, at this time we are not implementing an 
adjustment for the treatment of a disproportionate share of low-income 
patients.
    Under section 1886(d)(5)(F) of the Act, in calculating Medicare 
payments for inpatient services at acute care hospitals, the 
disproportionate share patient percentage takes into account both the 
percentage of Medicare patients who receive SSI and the percentage of 
Medicaid patients who are not entitled to Medicare. The DSH patient 
percentage is defined as:
[GRAPHIC] [TIFF OMITTED] TR30AU02.008

    Based on this formula, an inpatient acute care hospital qualifies 
for a DSH adjustment under section 1886(d)(5)(F)(v) of the Act (as 
amended by section 211(a) of Public Law 106-554) if the hospital has a 
DSH patient percentage greater than or equal to 15 percent. The 
calculation of the DSH payment adjustments are implemented at 
Sec. 412.106.
    We analyzed the results of applying a DSH adjustment, in accordance 
with the criteria at section 1886(d)(5)(F) of the Act described above, 
on LTCHs. As we discussed in the proposed rule (67 FR 13467), because 
the LTCH prospective payment system must be budget neutral in 
accordance with section 123(a) of Public Law 106-113, in modeling 
payments we found that the inclusion of such a DSH policy would have 
resulted in a 3.31 percent decrease to the base payment rate. 
Furthermore, the inclusion of such a DSH policy would also have 
resulted in a 3.79 percent decrease in the r-squared value (a 
statistical measure of how much variation in resource use among cases 
is explained by the system). Accordingly, we found that including a DSH 
adjustment that is consistent with section 1886(d)(5)(F) of the Act 
would reduce the explanatory power of the LTCH prospective payment 
system, or the ability of the payment system model to predict cost per 
case, while lowering the base payment rate. Thus, we did not propose to 
implement a DSH adjustment consistent with section 1886(d)(5)(F) of the 
Act. For this final rule, based on updated data, we reevaluated the 
inclusion of DSH adjustment consistent with section 1886(d)(5)(F) of 
the Act, and our analysis based on the latest available data confirmed 
the analysis in the proposed rule. In fact, while for a wage index 
adjustment there was at least some (though small) positive and 
significant effect of wages on costs in the regression, this was not 
the case for a DSH adjustment. The regression showed no positive effect 
on costs. Therefore, at this time we are not implementing a DSH 
adjustment consistent with section 1886(d)(5)(F) of the Act.
    As discussed in the proposed rule, we also evaluated an alternative 
adjustment, using regression analysis, that takes into account both the 
percentage of Medicare patients who are receiving SSI (SSI percent) and 
the percentage of Medicaid patients who are not entitled to Medicare 
(Medicare percent) without the other criteria specified in section 
1886(d)(5)(F) of the Act. This analysis was made to determine if there 
was any relationship between these two variables and cost per case. The 
results of this analysis showed that the regression coefficients for 
both the percentage of Medicare patients who are receiving SSI and the 
percentage of Medicaid patients who are not entitled to Medicare would 
be statistically significant at the 99-percent level. However, the 
positive relationship between cost per case and the percentage of LTCH 
Medicare patients who are receiving SSI would be offset by a negative 
relationship between cost per case and the percentage of LTCH Medicaid 
patients who are not entitled to Medicare. This implied that while 
costs per discharge would appear to increase (slightly) as the 
percentage of LTCH Medicare SSI patients increases, costs per discharge 
would decline (slightly) as the percentage of LTCH Medicaid, non-
Medicare patients increased. Therefore, we did not propose to implement 
an adjustment for the treatment of a disproportionate share of low-
income patients based on a LTCH's combined SSI percentage and Medicaid 
percentage. For this final rule, based on latest available data, we 
reevaluated the inclusion of DSH adjustment based on a LTCH's combined 
SSI percentage and Medicaid percentage, and our findings confirmed the 
analysis in the proposed rule. Therefore, at this time we are not 
implementing an adjustment for the treatment of a disproportionate 
share of low-income patients based on a LTCH's combined SSI percentage 
and Medicaid percentage.
    Finally, in the proposed rule, we also examined an adjustment for 
the treatment of low-income patients based solely on a LTCH's SSI ratio 
(the percentage of Medicare patients who are receiving SSI). The SSI 
ratio is calculated by dividing Medicare SSI days by total patient 
days. While the regression coefficient was positive, it was not very 
large (0.04), which meant that for every 1 percent increase in the SSI 
percent, a 0.04 percent increase in cost per case would be observed. 
Thus, at best, an empirically based adjustment based on the SSI percent 
would have been very small. Furthermore, the positive regression 
coefficient for the SSI percentage was significantly influenced by the 
large SSI percentages of only a few LTCHs. Because section 123(a) of 
Public Law 106-113 requires that the LTCH prospective payment system be 
budget neutral, applying such an adjustment under the proposed rule

[[Page 56021]]

would have resulted in a 2.98 percent reduction in the base payment 
rate for all LTCHs that was based on a small positive regression 
coefficient that was due mostly to a relatively small number of LTCHs 
with a large SSI percentage. Therefore, we did not believe it was 
appropriate to implement a DSH adjustment based on a LTCH's SSI 
percentage. Based on updated data, for this final rule, we have 
reexamined an adjustment for the treatment of a disproportionate share 
of low-income patients based on a LTCH's SSI percentage, and our 
analysis confirmed the results presented in the proposed rule. In fact, 
using the same methodology as used in the proposed rule, and using the 
latest available data, the regression coefficient actually decreased 
from .04 percent to .02 percent.
    Because the analyses described above do not indicate an increase in 
the accuracy of payments based on the adjustments examined for the 
treatment of a disproportionate share of low-income patients, we are 
not implementing a disproportionate share adjustment in this final 
rule.
    Comment: Commenters provided various reasons for including a DSH 
adjustment in the LTCH prospective payment system. One commenter 
asserted that the acute care hospital inpatient prospective payment 
system has a DSH policy although it was not significantly correlated 
with Medicare cost per case at implementation. Another commenter stated 
that the omission of a DSH adjustment is inconsistent with other 
Medicare-related payments (for example, acute care hospital inpatient 
prospective payment system and IRF prospective payment system). The 
commenter believed it inappropriate and inaccurate to view LTCHs 
differently in comparison with other types of hospitals. Several 
commenters explained that for the same reasons that acute care 
hospitals that serve a disproportionate number of Medicaid and Medicare 
SSI-eligible patients need additional reimbursement to compensate for 
the financial burden of treating patients from these populations, LTCHs 
being reimbursed under the prospective payment system need supplemental 
payments.
    Another commenter expressed concern that the lack of a DSH 
adjustment, combined with other proposed payment policies in the LTCH 
prospective payment system, may create disincentives for LTCHs to admit 
dually eligible patients, especially those likely to exhaust their 
Medicare Part A benefits during their stay. One commenter noted that a 
DSH payment would appropriately account for high costs incurred by 
facilities that treat a particularly high proportion of low-income 
patients. It was also pointed out by a commenter that the inclusion of 
a DSH adjustment similar to that provided in acute care hospitals under 
the hospital inpatient prospective payment system would help in 
ensuring access to care for low-income patients in LTCHs. In addition, 
the absence of DSH payments, unlike other prospective payment systems 
that provide for such an adjustment, deprives LTCHs the opportunity for 
governmental participation in the cost of care for the medically 
indigent patient population.
    Another commenter stated that even though payments directed to DSH 
hospitals would be diverted from base payments or other elements of 
payment, as a matter of social policy, additional support should be 
provided to DSH hospitals in recognition of the additional burden that 
these hospitals incur by ensuring access to care for low-income 
populations. Moreover, as another commenter pointed out, in the past, 
Congress and MedPAC have established that DSH payments are a matter of 
important public policy. Also, it is the responsibility of the 
government to make DSH payments, as it is an important feature of 
health care policy and should be subordinate to notions of inaccuracy.
    Several commenters understood that a DSH policy had not been 
proposed as part of the LTCH prospective payment system because it 
would not increase payment accuracy, as measured by a case-based 
regression model. However, as one commenter pointed out, the commenters 
believe that the LTCH prospective payment system regression models did 
not show a relationship between cost and indigent care because these 
models had limited utility due to the legacy of the TEFRA caps on older 
LTCHs, based on Medicaid-eligible days.
    Response: As mandated by the statute, we examined the 
appropriateness of an adjustment for LTCHs serving a disproportionate 
share of low-income patients, consistent with Sec. 1886(d)(5)(F) of the 
Act (which established the DSH adjustment for acute care hospitals). 
Examining the most recent LTCH data available to us, we determined that 
an adjustment consistent with that of inpatient acute care hospitals 
would reduce the ability of the payment system to predict cost per case 
while lowering the base payment rate. Also, while the data demonstrated 
in both acute care hospital inpatient prospective payment system, as 
well as the IRF prospective payment system, support the appropriateness 
of a DSH payment adjustment, no such data support was forthcoming for 
LTCHs.
    As directed by the statute, we determined whether a DSH adjustment 
should be established for LTCHs. To provide for a DSH adjustment for 
LTCHs solely because it is consistent with other prospective payment 
systems or appropriate in comparison with other types of hospitals, we 
believe is an insufficient justification for providing such an 
adjustment. Rather, our concern lies in whether we can equitably and 
fairly establish a DSH adjustment in the context of a prospective 
payment system designed for LTCHs. Moreover, we sincerely share the 
concerns of commenters with regard to seeking a means to help pay for 
the additional costs of those facilities that serve a large population 
of low-income Medicare patients. However, we also believe it is our 
responsibility to establish a payment system for LTCHs that would prove 
to be fair and equitable to providers and patients, alike.
    In that regard, we have evaluated alternative methods to provide 
some type of DSH payment adjustment. As stated above, using regression 
analysis which took into account both the percentage of Medicare 
patients receiving SSI and the percentage of Medicaid patients not 
entitled to Medicare, we found no significant empirical relationship 
between these variables and cost per case. In addition, we examined an 
adjustment for the treatment of low-income Medicare patients based 
solely on a LTCH's SSI ratio, but that also did not show significant 
evidence that a DSH adjustment would be appropriate.
    One commenter supposed that the LTCH prospective payment system 
regression models did not show a relationship between LTCH's cost per 
case and serving low-income patients due to the effects of the caps 
imposed on the older LTCHs under the TEFRA payment system. Although it 
may be possible that the effects of cost-based reimbursement may have 
affected the relationship between a LTCH's cost per case and serving 
low-income patients in the regression analysis, we continue to believe 
that the best option available at this time would be to collect and 
interpret new data as it becomes available, after the LTCH prospective 
payment system is implemented and LTCHs' costs are no longer affected 
by the TEFRA target amount limitation.

[[Page 56022]]

4. Adjustment for Indirect Teaching Costs
    In accordance with the directive of section 307(b) of Public Law 
106-554 to examine ``appropriate adjustments'' to payments under the 
LTCH prospective payment system, for the proposed and final rules, we 
also examined the appropriateness of applying an adjustment for 
indirect teaching costs to payments under the LTCH prospective payment 
system. Based on the analysis described below, we did not propose to 
implement an adjustment for indirect teaching costs.
    There are presently 14 LTCHs with teaching programs. LTCHs with 
teaching programs tend to be older, larger (greater than 125 beds) 
hospitals, located in large urban areas, and have a higher proportion 
of low-income patients but with a lower case-mix index. As we discussed 
in the proposed rule (67 FR 13468), based on a double log regression, 
we found that the indirect teaching cost variable would be negative and 
not significant. We looked at different specifications for the teaching 
variable. We used a resident-to-bed ratio as the coefficient for the 
teaching variable in the regression that is currently used to measure 
teaching intensity under the acute care hospital inpatient prospective 
payment system for operating costs. We also used a ratio of residents 
to average daily census (defined as total inpatient days divided by the 
number of days in the cost reporting period) that is currently used 
under the acute care hospital inpatient prospective payment system for 
capital-related costs, as a measure of teaching intensity. We based 
this analysis on the estimated number of full-time equivalent (FTE) 
residents assigned to the inpatient area of the LTCH. In all of our 
payment regressions, we determined that the teaching variable would not 
be significant. This means that no empirical evidence exists to show 
that LTCHs' cost per case would vary with teaching costs.
    For this final rule, based on updated data, we reexamined the 
appropriateness of an adjustment for indirect teaching costs using the 
approach described above. Our most recent findings based on the latest 
available data confirmed the analysis in the proposed rule that no 
empirical evidence exists to show that LTCHs' cost per case would vary 
with teaching costs.
    Comment: One commenter supported our proposal to not include a 
payment adjustment for indirect teaching costs but requested that we 
review the data within 2 years and determine if an adjustment is needed 
at that point.
    Response: We intend to evaluate data on indirect teaching costs in 
LTCHs as more data become available to determine if additional data 
support proposing any future payment adjustments.
    Accordingly, in this final rule, for the same reason indicated 
above, we are not implementing an adjustment for indirect teaching 
costs.
5. Cost-of-Living Adjustment (COLA) for Alaska and Hawaii
    In accordance with the directive of section 307(b) of Public Law 
106-554 to examine ``appropriate adjustments'' to payments under the 
LTCH prospective payment system, we also examined the appropriateness 
of applying a cost-of-living adjustment (COLA) under the LTCH 
prospective payment system for LTCHs located in Alaska and Hawaii.
    There is currently one LTCH in Hawaii and no LTCHs in Alaska. As we 
discussed in the proposed rule (67 FR 13468), in the absence of a COLA, 
we performed simulations, which indicate that the facility in Hawaii 
might experience a payment to cost ratio of 0.89 percent. In this final 
rule, using updated data, we performed simulations and again found that 
the payment to cost ratio is approximately .90 percent. Therefore, as 
we proposed, we are implementing a COLA for LTCHs in Hawaii and Alaska 
to account for the higher costs incurred in those States.
    As we explained in the proposed rule, the IRF proposed rule 
(November 3, 2000, 65 FR 66357) indicated that based on payment 
simulations, without a COLA, the one IRF located in Alaska may have a 
loss and the one IRF for which data were available would have a gain. 
Due to the small number of cases, analysis of the simulation results 
for IRFs were inconclusive regarding whether a cost-of-living 
adjustment would improve payment equity for these facilities. 
Accordingly, we did not include a COLA adjustment for those hospitals 
in the prospective payment system for IRFs (65 FR 66357, November 3, 
2000). We believe it appropriate, however, to implement a COLA for 
LTCHs based on the higher costs found in Hawaii. In general, the COLA 
would account for the higher costs in the LTCH and will eliminate the 
projected loss that the LTCH in Hawaii will experience absent the COLA. 
Furthermore, this policy is consistent with the COLA made to account 
for the higher costs in acute care hospitals in Alaska and Hawaii under 
both the operating prospective payment system and the capital 
prospective payment system. We will make a COLA, under Sec. 412.525(b), 
to payments for LTCHs located in Alaska and Hawaii by multiplying the 
standard Federal payment rate by the appropriate factor listed in the 
table below. These factors are obtained from the U.S. Office of 
Personnel Management.

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

    We received one comment in support of providing a COLA to payments 
for LTCHs located in Alaska and Hawaii. For the reasons noted above, we 
are implementing a cost-of-living adjustment to payments for LTCHs 
located in Alaska and Hawaii, as described above, in this final rule.
6. Adjustment for High-Cost Outliers
    In accordance with the directive of section 307(b) of Public Law 
106-554, we also examined the appropriateness of an adjustment for 
additional payments for outlier cases. These are cases that have 
extraordinarily high costs relative to the costs of most discharges. 
Providing additional payments for outliers could strongly improve the 
accuracy of the LTCH prospective payment system in determining resource 
costs at the patient and hospital level. These additional payments 
would reduce the financial losses that would otherwise be caused by 
treating patients who require more costly care and, therefore, would 
reduce the incentives to underserve these patients.
    In the March 22, 2002 proposed rule (67 FR 13468), we discussed and 
considered various outlier policy options. Specifically, we considered 
outlier policies under which outlier payments would be projected to be 
5 percent, 8 percent, or 10 percent of total LTCH prospective payment 
system payments. We considered the impact of setting the outlier target 
percentage at 5 percent because that percentage is consistent with the 
range of targets provided under section 1886(d)(5)(A)(iv) of the Act 
for the acute care hospital inpatient prospective payment system. We 
also considered an outlier target of 10 percent because that percentage 
was recommended in an

[[Page 56023]]

industry study commissioned by NALTH. In addition, we considered an 
outlier target of 8 percent to analyze the impact of setting the 
outlier target at some percentage between 5 and 10 percent.
    In the proposed rule, we also examined marginal cost factors, or 
the change in total cost with one unit of change in output, of 55 and 
80 percent. We examined an 80-percent marginal cost factor for outlier 
payments because it is the same as the factor used under both the acute 
care hospital inpatient prospective payment system and the IRF 
prospective payment system. We also examined a 55-percent marginal cost 
factor in order to analyze the impact that a lower marginal cost factor 
would have on outlier payments and payments for all other cases.
    As discussed in further detail in the June 4, 1992 acute care 
hospital inpatient prospective payment system proposed rule (57 FR 
23640), a study performed by RAND Corporation indicated that the 
marginal cost of care is usually less than the average cost because 
later days of a stay have considerably lower costs than the earlier 
days of the stay.
    In order to determine the most appropriate outlier policy, we 
analyzed the extent to which the various options would reduce financial 
risk, reduce incentives to underserve costly beneficiaries, and improve 
the overall fairness of the system. We believed an outlier target of 8 
percent would allow us to achieve a balance of the above stated goals. 
Our regression analysis showed that additional increments of outlier 
payments over 8 percent would reduce financial risk, but by 
successively smaller amounts. Since outlier payments are included in 
budget neutrality calculations, outlier payments would be funded by 
prospectively reducing the non-outlier prospective payment system 
payment rates by the proportion of projected outlier payments to 
projected total prospective payment system payments in the absence of 
outlier payments; the higher the outlier target, the greater the 
(prospective) reduction to the base payment rate.
    In the proposed rule, we included a provision for outlier payments 
under the LTCH prospective payment system and proposed to set outlier 
numerical criteria prospectively before the beginning of each Federal 
fiscal year so that outlier payments would be projected to equal 8 
percent of total payments under the LTCH prospective payment system. 
Based on regression analysis and payment simulations, we believed this 
option would optimize the extent to which we would be able to protect 
vulnerable hospitals, while still providing adequate payment for all 
other cases that are not outlier cases.
    We proposed under Sec. 412.525(a) to make an outlier payment for 
any discharges where the estimated cost of a case would exceed the 
adjusted LTCH prospective payment system payment for the LTC-DRG plus a 
fixed-loss amount. The fixed-loss amount is the amount used to limit 
the loss that a hospital will incur under an outlier policy. This would 
result in Medicare and the LTCH sharing financial risk in the treatment 
of extraordinarily costly cases. The LTCH's loss would be limited to 
the fixed-loss amount and the percentage of costs above the marginal 
cost factor. We proposed to calculate the estimated cost of a case by 
multiplying the overall hospital cost-to-charge ratio by the Medicare 
allowable covered charge.
    Our analysis of payment-to-cost ratios for outlier cases showed 
that a marginal cost factor of 80 percent appropriately addresses 
outlier cases that are significantly more expensive than non-outlier 
cases. This factor would ensure that there is a balance between the 
need to protect LTCHs financially, while encouraging them to treat 
expensive patients and maintaining the incentives of a prospective 
payment system to improve the efficient delivery of care. Based on this 
analysis and consistent with the marginal cost factor used under the 
IRF prospective payment system and under section 1886(d) of the Act for 
inpatient acute care hospitals, we proposed to pay outlier cases 80 
percent of the difference between the estimated cost of the case and 
the outlier threshold (the sum of the adjusted Federal prospective 
payment for the LTC-DRG and the fixed-loss amount). We proposed to 
calculate the fixed-loss amount by simulating aggregate payments with 
and without an outlier policy, using FY 2000 MedPAR claims data and the 
best available cost report data in an iterative process to determine a 
fixed-loss threshold that would result in outlier payments being equal 
to 8 percent of total payments. For FY 2003, we proposed to implement a 
fixed-loss amount of $29,852 based on an outlier target of 8 percent 
(67 FR 13472). Therefore, for FY 2003, we proposed to pay an outlier 
case 80 percent of the difference between the estimated cost of the 
case and the outlier threshold (the sum of the adjusted Federal 
prospective payment for the LTC-DRG prospective payment system payment 
and the fixed-loss amount of $29,852). For this final rule, we used FY 
2001 MedPAR claims data and the best available cost report data to 
determine a fixed-loss threshold that would result in outlier payments 
being equal to 8 percent of total payments. In this final rule, for FY 
2003, we are implementing a fixed-loss amount of $24,450 (based on an 
outlier target of 8 percent) as a result of the increase in the 
standard Federal base rate explained in section X.K.2. of this 
preamble. Therefore, for FY 2003, we will pay an outlier case 80 
percent of the difference between the estimated cost of the case and 
the outlier threshold (the sum of the adjusted Federal prospective 
payment for the LTC-DRG prospective payment system payment and the 
fixed-loss amount of $24,450).
    Comment: One commenter believed that the outlier target is 
appropriately set at 8 percent of total Medicare payments to LTCHs and 
strongly recommended that outliers be financed using the same methods 
and principles currently in place for acute care hospitals. Other 
commenters stated that our calculation of an outlier target of 8 
percent is appropriate, but asked that the calculation be reevaluated 
on an annual basis, and that consideration should be given to lowering 
the outlier target gradually down to 5 percent to be consistent with 
the policy established for the acute inpatient hospital prospective 
payment system, if the data support such a lowering of the outlier 
target.
    Response: While our simulations, based on the best data available, 
showed that an outlier target of 8 percent is most appropriate at this 
time, considering that the LTCH prospective payment system is a new 
payment system, we do plan to reevaluate the outlier target payment 
percentage as more data on LTCHs become available and would consider 
proposing a change to the outlier payment percentage if warranted.
    Comment: One commenter expressed concern about our reliance on the 
study conducted by the Rand Corporation, used for the outlier policy 
under the acute care hospital inpatient prospective payment system, 
which found that later days of a stay have considerably lower costs 
than the earlier days of a stay (57 FR 23640, June 4, 1992). The 
commenter disagreed with the findings of this study and stated that the 
findings are not reflective of the situation in its facility where 
there is a high number of ventilator weaning cases. In the commenter's 
facility, as a patient's respiratory status improves, the 
rehabilitation resources are increased to prepare the patient for 
discharge from the LTCH. The commenter also suggested that we further 
evaluate this study in relation to cases where a

[[Page 56024]]

patient makes an end of life decision to be removed from a ventilator, 
which, since this decision may not occur until very late into a 
patient's stay, can be extremely resource intensive and costly.
    Response: While the findings of the RAND study (which was used for 
the outlier policy under the acute care hospital inpatient prospective 
payment system) may not typically reflect the resource usage and costs 
at the commenter's LTCH, they are, however, indicative in general of 
the trends in resource use at hospitals where the costs of later days 
of a stay are less than the costs of earlier days of a stay. We 
understand that LTCHs that treat a high number of ventilator weaning 
cases may have unique cost structures. However, we believe that, 
according to data available at this time, the final policy sufficiently 
reimburses LTCHs for high-cost cases.
    Comment: One commenter noted that, although the fixed-loss amount 
in the proposed adjustment for high-cost outliers is consistent with 
the Medicare acute care hospital inpatient prospective payment system, 
an outlier policy that is more related to the costs and length of stay 
of each LTC-DRG would be more appropriate because many shorter stay 
LTC-DRGs will rarely reach the outlier threshold dollar amount. The 
commenter was also concerned that a fixed outlier payment may result in 
underpayments from some Medigap insurers. As an alternative to the 
uniform fixed loss amount proposed by CMS for all patients regardless 
of their assigned LTC-DRG, the commenter suggested a set of LTC-DRG-
specific outlier thresholds that are set at a fixed multiple of the 
payment for each LTC-DRG. The commenter believed that a fixed multiple 
of slightly more than 2.0 of the LTC-DRG payment amount yields an 
outlier target of 8 percent, meaning that the cost for a case would 
generally need to exceed twice the payment amount to qualify for 
outlier payments. The commenter believed that this approach distributes 
outlier payments evenly across LTC-DRG case types and across LTCHs.
    Another commenter questioned our proposal to set the fixed-loss 
amount across all LTC-DRGs at a fixed amount, and stated that, given 
the small number of LTCHs and the wide variety of patients treated 
relative to acute care hospitals, such a fixed policy may 
inappropriately assume that the underlying cause of all high-cost cases 
is the same across LTC-DRGs. The commenter explained that LTCHs that 
treat a disproportionate number of patients who are unlikely to be 
discharged in a timely manner, including patients with spinal cord 
injuries or who require a ventilator, might experience significant 
losses serving those patients. The commenter requested that we consider 
varying the fixed-loss threshold and the outlier payment percentage by 
LTC-DRG to ensure that LTCHs with longer than average stays receive 
adequate payment.
    Other commenters stated that the proposed outlier target of 8 
percent is too low and will place an unfair financial burden on 
facilities that treat patients with ``clinically appropriate'' long 
stays. One commenter explained that, since its facility specializes in 
caring for ventilator-dependent patients who have ``complex, highly 
acute long lengths of stay'', the proposed outlier policy would create 
a ``significant and unrealistic economic burden'' on the facility. The 
commenter suggested that, if the proposed outlier target is not 
increased, we should reevaluate which DRGs have the most outliers and 
why. The commenter assumed that ``true outliers'' are primarily grouped 
in a very small number of LTC-DRGs.
    As an alternative to the proposed outlier policy, the commenter 
suggested that we consider creating a specific category of LTCHs that 
would meet ``minimum volume threshold'' levels for certain types of 
patients, such as ventilator weaning. Under the commenter's proposal, 
if providers meet a minimum number of cases per year and if the 
threshold has been met, these highly specialized facilities may qualify 
to receive additional reimbursement without having to incur fixed 
losses for cases with long lengths of stay. The commenter recommended a 
threshold of 130 cases per year, given that there are approximately 270 
LTCHs and 70,000 yearly discharges nationally. Since the national 
average number of discharges per facility is 260, a threshold of 130 
cases would indicate that a significant proportion of a facility's 
patients must be in a specific DRG category. The commenter also 
suggested that we create an additional LTC-DRG for excessively long 
lengths of stay, which would be constructed in a way so as not to 
provide any financial gain to facilities that continue to keep patients 
in a LTCH beyond the arithmetic mean length of stay in a given LTC-DRG. 
This suggested additional LTC-DRG would provide reimbursement that is 
appropriate to cover the costs of treating patients in facilities with 
specialized programs.
    Response: In a prospective payment system based on DRGs, the amount 
of funds designated for high-cost outliers and the methodology used to 
make these payments must balance the conflicting considerations of the 
need to protect hospitals with costly cases, while maintaining 
incentives to improve overall efficiency. In this regard, we believe 
the payment methodology should focus on improving efficiency in the 
treatment of the cases, where the greatest amount of control can be 
exercised, in order to compensate somewhat for the ``losses'' incurred 
in treating the more costly cases that are less predictable and more 
difficult to control.
    In selecting an outlier policy, the first consideration is the 
amount that a hospital will ``lose'' before outlier payments begin. The 
``loss'' should be significant enough to avoid an incentive to reach 
the outlier threshold, yet not large enough to create excessive 
financial hardship. Since the proposed FY 2003 LTCH standard Federal 
rate was $27,649.02, as a measure of scale, we believed that the fixed-
loss amount should relate to this amount. We did examine the impact of 
setting the outlier target percentage at 5 percent, 8 percent, and 10 
percent. We found that an outlier target of 8 percent is the most 
reasonable since our regression analysis showed that additional 
increments of outlier payments over 8 percent would reduce financial 
risk, but by successively smaller amounts. In addition, since the LTCH 
prospective payment system is a budget neutral payment system, any 
increase in outlier payment must be offset by a decrease in payment for 
all discharges that are not outliers.
    Given the range in the costs of each case treated across all LTCHs, 
we believe that a policy that uses a uniform fixed-loss amount for all 
LTC-DRGs is most equitable. Use of a fixed-loss amount avoids creating 
an outlier payment incentive to differentially accept or treat patients 
in different LTC-DRGs, or both. That is, if cases in one LTC-DRG become 
eligible for outlier payments after a $10,000 loss is incurred, whereas 
cases in another LTC-DRG must incur a $20,000 loss before qualifying 
for outlier payments, cases in the first LTC-DRG might be favored and 
greater efforts might be made to limit acceptance and treatment of 
cases in the second LTC-DRG. We believe that it is particularly 
important to avoid such an incentive, given the tendency for certain 
LTCHs to specialize in treating specific types of patients, some which 
may be extremely costly. Therefore, we are not adopting the commenter's 
proposal to vary the fixed-loss amount by each LTC-DRG.
    We also examined the impact of a marginal cost factor of 55 percent 
instead of the 80-percent factor that was

[[Page 56025]]

proposed. Under either marginal cost factor, while the amount 
designated for payment of high-cost outliers would remain set at 8 
percent, the higher the marginal cost factor, the higher the fixed-loss 
amount. Our analysis showed that a marginal cost factor of 80 percent 
is most suitable because, under this method using a higher threshold, 
the cases identified as outliers are very expensive, whereas the 
additional cases that would qualify for an outlier payment due to the 
lower threshold under a marginal cost factor of 55 percent are not 
unusually expensive. Our intent is to reimburse a LTCH for only those 
outlier cases that are unusually costly. We believe that, by 
establishing the fixed-loss amount at $24,450 based on more recent 
available data (instead of the proposed $29,852) with the concomitant 
marginal cost factor of 80 percent, we are ensuring that only the 
unusually costly cases would qualify for additional reimbursement. 
Alternatively, if a marginal cost factor of 55 percent would be used to 
maintain the 8 percent target, the fixed-loss amount would necessarily 
be lowered, allowing for additional, less costly cases to qualify for a 
portion of the 8-percent outlier target. Therefore, we believe that the 
marginal cost factor of 80 percent most appropriately addresses outlier 
cases that are significantly more expensive than nonoutlier cases while 
simultaneously maintaining the integrity of the LTCH prospective 
payment system.
    In addition, we did not vary the outlier target percentage by each 
LTC-DRG in order to allow for Medigap payments in lower-payment LTC-
DRGs, nor did we create ``minimum volume thresholds'' for specific 
cases, because to do so would unnecessarily provide outlier payments 
for all cases, including those that are relatively inexpensive. Varying 
the outlier target by LTC-DRG would inappropriately distribute payment 
for high-cost outliers over all cases, thereby reducing the resources 
available to finance those with truly high costs. Under the aggregate 
outlier target that we proposed, every LTC-DRG is, in effect, 
``funding'' the outlier target, leaving more resources available to 
cover the high-cost outliers. We believe that this is the most 
reasonable method of implementing a stop-loss on the unusually high-
cost cases. Furthermore, the method of using an outlier target that 
applies across all LTC-DRGs is consistent with the method used under 
the acute care hospital inpatient prospective payment system and IRF 
prospective payment system.
    Finally, we are not adopting a policy that accounts for long-stay 
outliers because, according to our analysis, while high-cost outlier 
cases tend to fall in the tracheostomy, ventilator management, and 
respiratory failure DRGs, long-stay outliers are not always 
concentrated in these same categories identified by the high-cost 
outlier methodology. Because we believe it is important to focus on 
mitigating the losses incurred when treating extremely costly cases, we 
do not believe it is necessary to separately account for long-stay 
outliers at this time.
    In summary, while we are not adopting the commenters' 
recommendations concerning high-cost outliers at this time, we do 
intend to reevaluate the possibility of a system based on severity-
adjusted LTC-DRGs as more accurate data become available and may 
propose changes in our policy if they are warranted.
    Comment: One commenter believed that while additional payments for 
outliers are appropriate to help cover the costs of unusually high-cost 
patients, the proposed outlier target of 8 percent is too high and may 
pose a risk of undermining the goals of the LTCH prospective payment 
system. The commenter asserted that an outlier target of 8 percent may 
create an incentive for LTCHs to ``hang on to'' patients that should 
more appropriately be discharged for care in a lower cost setting. The 
commenter noted that the prospective payment system for IRFs 
established an outlier target of 3 percent and the outlier target under 
the acute care hospital inpatient prospective payment system is 
established between 5 and 6 percent of aggregate payments. The 
commenter recommended that a more appropriate outlier target for LTCHs 
would be one that is reduced to 3 percent.
    Response: As we explained in the preamble of the proposed rule (67 
FR 13468-13469), a smaller outlier target within the range of 5 to 6 
percent was evaluated, but statistically, it did not perform as well as 
the higher outlier target of 8 percent, since the payment-to-cost 
ratios were significantly higher with the 8-percent outlier target. In 
addition, an outlier target of only 5 percent would increase the fixed-
loss amount to approximately $45,000, representing a large ``loss'' to 
the LTCH before an outlier payment would be made. Such a high fixed-
loss amount would seem to engender the financial hardship that a high-
cost outlier policy is intended to mitigate. An outlier target of 8 
percent takes a more conservative approach in helping to minimize the 
financial risk across all LTCHs. Further, the IRF prospective payment 
system is not analogous to the LTCH prospective payment system in this 
respect since the cases at IRFs are significantly more homogeneous than 
those treated at LTCHs. However, as with the other payment policies 
under the LTCH prospective payment system, we intend to review the 
high-cost outlier policy when more data on LTCH payments become 
available, and may propose changes in this policy in the future if they 
are warranted.
    Comment: One commenter stated that the outlier payment calculation 
is skewed because of the number of ``new'' facilities involved. The 
commenter took issue with our estimate of outliers based on cost-to-
charge ratios derived from the initial cost reporting periods of the 
``new'' LTCHs, where costs are typically inflated due to the 
establishment of the TEFRA base rates and was concerned that the LTCH 
prospective payment system, including outlier payments, was based on 
those ``inflated'' costs. In order to mitigate the problems that arise 
from reliance on data from ``new'' LTCHs, the commenter recommended 
that we reexamine the relevant data for all LTCHs and devise a 
methodology that takes into account the large number of ``new'' LTCHs 
included in the sample and the abnormally high costs associated with 
``new'' LTCHs.
    Response: Under Sec. 413.40, a hospital that is excluded from the 
inpatient prospective payment system is paid on a reasonable cost basis 
subject to a target amount per discharge. A ``new'' LTCH's target 
amount is based on the costs incurred in the first full 12 month cost 
reporting period. In order to establish higher target amounts under the 
TEFRA payment methodology, ``new'' LTCHs have an incentive to maximize 
their costs in their TEFRA base periods. As a result, as the commenter 
indicated, cost data from the initial years of a ``new'' LTCH may have 
been inflated since those costs are the basis for the hospital's TEFRA 
target amount in subsequent years. While we are aware that there are 
some limitations to the data, the data that we used were the best 
available at that time. In future years, the outlier threshold will be 
reevaluated as more data on LTCHs become available and behaviors 
change. However, the current data show that an outlier target of 8 
percent is statistically and empirically appropriate as a means of 
providing LTCHs with additional protection against unusually costly 
cases.
    Comment: Some commenters explained that when they applied the 
proposed outlier calculation rules to the actual MedPAR 2000 file, the 
total

[[Page 56026]]

amount of payments for high-cost outlier cases appeared to be more than 
8 percent of the total payment amount. The commenters requested that we 
explain the methodology used to calculate the 8 percent outlier target 
and why the commenters' results may differ from those of CMS'. The 
commenters also asked if the 80-percent reduction in high-cost outliers 
was considered in the outlier payment amounts shown in the rate-setting 
file (posted on the CMS website).
    Response: When we simulated the LTC-DRG relative weights and the 
high-cost outlier payments under the LTCH prospective payment system 
for the proposed rule, we used the best data available from a total of 
251 LTCHs for which MedPAR (claims) case-mix data and cost-to-charge 
ratios were available. For the proposed rule, when all 251 LTCHs were 
used, an outlier target of 8 percent (8.00007) resulted. However, for 
the proposed rule, we only had reliable data to estimate total TEFRA 
payments for 211 LTCHs. Therefore, in calculating a base rate that 
would result in total LTCH prospective payment system payments being 
budget neutral to total payments under the TEFRA methodology, in the 
proposed rule, we used only 211 LTCHs (as shown in the rate-setting 
file on the CMS website).
    As we discuss in greater detail in section X.K.2.a. of this 
preamble, for this final rule, we used the data from all LTCHs (except 
for LTCHs that are also all-inclusive rate providers or reimbursed in 
accordance with demonstration projects (see section X.K.2.a. of this 
preamble)) for which we had claims data and cost-to-charge ratios to 
determine the high cost outlier threshold. Therefore, from the data 
that we had available for this final rule, we used data from 246 LTCHs 
in determining the final FY 2003 fixed-loss amount of $24,450. However, 
as explained above and in further detail in section X.K.2.a. of this 
preamble, for this final rule, we could only use the data from 194 
LTCHs for which we had data available to estimate total TEFRA payments 
in the determination of the final budget neutral base rate.
    There may be numerous reasons why the commenters' payment 
simulation differed from our simulations, and without knowing exactly 
how the commenters simulated the payments or what data were included, 
we cannot pinpoint a cause of the variation. If the commenters used the 
rate-setting file posted on our website as the basis for their 
simulations, their results should have matched the results from CMS. We 
note, however, that a simulation of outlier payments using only 211 
LTCHs would result in an outlier target of approximately 7.8 percent. 
In addition, the 80-percent marginal cost factor was also included in 
the outlier payment amounts shown in the rate-setting file.
    Comment: One commenter stated that the proposed fixed-loss amount 
of $29,852 is unfair to LTCHs since short-term acute care hospitals 
only have to reach a loss of around $19,000 in order to qualify for an 
additional outlier payment.
    Response: The commenter has mistakenly attributed a fixed-loss 
amount of approximately $19,000 to acute care (short-term) hospitals. 
For FY 2001, under the acute care hospital inpatient prospective 
payment system, the fixed-loss amount was $17,550; for FY 2002, the 
fixed-loss amount is $21,025. However, the fixed-loss amount for FY 
2003 for acute care hospitals is $33,560 (67 FR 50124, August 1, 2002), 
which is actually higher than the proposed fixed-loss amount of $29,852 
($24,450 in this final rule) for FY 2003 for LTCHs. Thus, contrary to 
the commenter's assertion that the fixed-loss amount for LTCHs is 
unfair relative to the outlier fixed-loss amount for acute care 
hospitals, LTCHs would incur less cost than acute care hospitals before 
qualifying for additional outlier payments.
    Comment: One commenter requested that we revise proposed 
Sec. 412.525 to specifically state that payments made for high-cost 
outliers are not subject to retroactive adjustments for changes made to 
a provider's hospital-specific cost-to-charge ratio.
    Response: Under the proposed Sec. 412.525, the additional outlier 
payment equals 80 percent of the difference between the estimated cost 
of the patient case and the sum of the adjusted Federal prospective 
payment for the LTC-DRG and the fixed-loss amount. The estimated cost 
of a case is calculated by multiplying the overall hospital cost-to-
charge ratio by the Medicare allowable covered charge. As implied by 
the commenter, although the outlier payment is based, in part, on the 
estimated cost of a case, no retroactive adjustments are made to the 
outlier payments upon cost report settlement to account for the 
differences between the estimated cost-to-charge ratios and the actual 
cost-to-charge ratios. This is standard operating policy for fiscal 
intermediaries for all prospective payment systems because adjustments 
for individual high-cost outliers would be costly to Medicare as well 
as administratively burdensome. We are adding this clarification as 
Sec. 412.525(a) in this final rule. In addition, we are modifying 
Sec. 412.525(a) to clarify that the estimated cost of a patient's care 
is determined by multiplying the hospital-specific cost-to-charge ratio 
by the Medicare allowable covered charge.
    Provisions of the final rule. After analysis of public comments on 
our proposed policy on additional payments for high-cost outlier cases 
(Sec. 412.525(a)), we have found that the proposed policy continues to 
be supported by appropriate data and are, therefore, adopting it as 
final. Therefore, we will make additional outlier payments to LTCHs for 
any discharges where the estimated cost for a patient case exceeds the 
sum of adjusted LTCH prospective payment for the LTC-DRG and a fixed-
loss amount. We have set the outlier target at 8 percent of total 
Medicare payments to LTCHs using a total of 246 LTCHs for which we have 
MedPAR data. The final fixed-loss amount for FY 2003 is $24,450. For 
each fiscal year we will determine a fixed-loss amount, that is, the 
maximum loss that a LTCH can incur under the prospective payment system 
for a case with unusually high costs before the hospital will receive 
any additional payments. The fixed loss amount will result in estimated 
total outlier payments being equal to 8 percent of projected total LTCH 
prospective payment system payments. We will pay outlier cases 80 
percent of the difference between the estimated cost of the patient 
case and the outlier threshold (the sum of the adjusted Federal 
prospective payment for the LTC-DRG prospective payment and the fixed-
loss amount). In response to a comment, we are revising Sec. 412.525(a) 
to clarify that no retroactive adjustment will be made to the outlier 
payment upon cost report settlement to account for differences between 
the estimated cost-to-charge ratios and the actual cost-to-charge 
ratios for outlier cases. We are also modifying Sec. 412.525(a) to 
clarify that the estimated cost of a patient case is determined by 
multiplying the hospital-specific cost-to-charge ratio by the Medicare 
allowable covered charge.
    In addition, while we were developing the final short-stay outlier 
policy as described in section X.C. of this preamble, we became aware 
that, under some rare circumstances, a LTCH discharge could qualify as 
a short-stay outlier case and also as a high-cost outlier case. In such 
a scenario, a patient could be hospitalized for less than five-sixths 
of the geometric average length of stay for the specific LTC-DRG, and 
yet incur extraordinarily high treatment costs. If the costs exceeded 
the outlier threshold (that is, the short-stay outlier payment plus the 
fixed-loss amount), the discharge would be eligible for payment as a 
high-cost outlier. The

[[Page 56027]]

payment would be based on 80 percent of the difference between the 
estimated cost of the case plus the outlier threshold (the sum of the 
fixed-loss amount of $24,450 for FY 2003 and the amount paid under the 
short stay outlier policy).

K. Calculation of the Standard Federal Payment Rate

1. Overview of the Development of the Standard Payment Rate
    Section 123(a)(1) of Public Law 106-113 requires that the 
prospective payment system for LTCHs maintain budget neutrality. 
Therefore, we will calculate the standard Federal rate by setting total 
estimated prospective payment system payments equal to estimated 
payments that would have been made under the TEFRA methodology if the 
prospective payment system for LTCH were not implemented as described 
in this final rule. In accordance with section 307(a)(2) of the BIPA, 
the increases to the hospital-specific target amounts and cap on the 
target amounts for LTCHs for FY 2002 provided for by section 307(a)(1) 
of the BIPA and the enhanced bonus payments for LTCHs for FY 2001 and 
FY 2002 provided for by section 122 of the BBRA were not taken into 
account in the development of the prospective payment system for LTCHs.
    The methodology for determining the standard Federal payment rate 
under the LTCH prospective payment system is described in further 
detail below.
2. Development of the Standard Federal Payment Rate
a. Data Sources
    In this final rule, the data sources that we used to calculate the 
final unadjusted standard Federal payment rate include cost report data 
from FYs 1996 through 1999 and FY 2001 Medicare claims data from the 
March 2002 update of the MedPAR files since these data were the most 
recently available complete data for LTCHs. We used data from 194 LTCHs 
in this final rule to calculate the final standard Federal payment 
rate. We updated the cost report data for each LTCH to the midpoint of 
FY 2003 using an inflation factor based on the historical relationship 
of each hospital's costs and their target amounts (see section X.K.2.b. 
of this preamble). The FY 1996 cost report data were used to determine 
each LTCH's update for FY 1999, and the FY 1997 cost report data were 
used to determine the update for FY 2000. The FY 1998 cost report data 
were used to determine the update for FY 2001, and the FY 1999 cost 
report data were used to determine the update for FY 2002. For this 
final rule, we were unable to estimate payments under the current 
payment system for some LTCHs because cost report data were 
unavailable.
    For this final rule, we obtained the most recent available payment 
amounts for hospitals and have used these data to construct the 
standard Federal payment rates in this final rule, as explained below. 
As we indicated in the proposed rule, we examined the extent to which 
certain LTCHs (new LTCHs, for example) were not included in the data 
used to determine the proposed standard Federal payment rate, but were 
unable to determine an appropriate adjustment to better reflect total 
estimated payments for those LTCHs under the TEFRA payments system. As 
described above, for this final rule, we used the most recently 
available complete data for LTCHs, that is, cost report data from the 
March 2002 update of HCRIS and claims data from the March 2002 update 
of the MedPAR files. As we explain below, based on concerns with the 
data used to develop the proposed LTCH prospective payment system, we 
have excluded the data from 17 all-inclusive rate providers in the 
development of the final LTCH payment rates.
    Comment: Several commenters expressed concern about the quality of 
the data behind policy choices for the prospective payment system and 
urged CMS to revisit these policies once better data has been gathered.
    Response: In designing the LTCH prospective payment system, we were 
required by BIPA to use ``the most recently available hospital 
discharge data'' for our policy determinations. The particular data 
sets we used are detailed in this section and additional factors that 
influenced our choices are noted in our discussion in section X.K.2. of 
this final rule. As we state previously, we used the best available 
data and we have confidence that our policies effectively satisfy the 
statutory mandates under Public Law 106-113 and Public Law 106-554. We 
will be monitoring and evaluating the new system and are prepared to 
revisit and revise these policies in the future, if warranted.
    Comment: One commenter stated that we used cost report and MedPAR 
data from only 222 LTCHs to set the proposed rates, while as of 
November 2001, there were 270 LTCHs in existence. The commenter also 
stated that it was unclear how many LTCHs we used in our analysis since 
211 LTCHs were included in the rate-setting file posted on the our 
website, and there were 222 LTCHs included in the adjustment 
(regression) file. The commenter contended that if we did in fact use 
the data from all 222 LTCHs, this means that we have improperly denied 
the public access to the data we used in setting the proposed rates.
    Response: The data we used for the proposed rates were the best 
data available to us at that time as required by section 307 of Public 
Law 106-554. All of the data we used to calculate the proposed rates 
and to analyze proposed adjustments were posted on our website and were 
accessible to the public. The number of LTCHs that we included in each 
file was dependent upon the amount of data that we had available for 
each hospital and the data needed for the specific calculation. Many 
LTCHs had incomplete records in either the MedPAR or HCRIS files, or 
both. When we calculated the relative weights and estimated high cost 
outlier payments under the LTCH prospective payment system for the 
proposed rule, we used the best available data at that time from a 
total of 251 LTCHs, since we had MedPAR (claims) data and cost-to-
charge ratios available for these 251 LTCHs. However, we only had 
complete data for 211 LTCHs to estimate total payments under the TEFRA 
payment system. Therefore, in calculating a proposed budget neutral 
Federal rate, which would result in total LTCH prospective payment 
system payments estimated to equal total payments that would have been 
made under the TEFRA payment system, we were only able to use data from 
211 LTCHs. Thus, the rate-setting file posted on our website includes 
only 211 LTCHs. Because total TEFRA payments are not a factor used in 
the regression analysis used to examine potential payment system 
adjustments in the proposed rule, we were able to include data from 11 
more hospitals (for a total of 222) in the adjustment file posted on 
our website.
    Based on the concern expressed by a number of commenters regarding 
the data used to develop the proposed LTCH prospective payment system, 
we reviewed the LTCH data that we used in our proposed rule and have 
reevaluated the inclusion of data from certain types of LTCHs. 
Specifically, in this final rule, we have not included data from LTCHs 
that are also all-inclusive rate providers (AIRPs) and LTCHs that are 
reimbursed in accordance with demonstration projects authorized under 
section 402(a) of Public Law 90-248 (42 U.S.C. 1395b-1) or section 
222(a) of Public Law 92-603 (42 U.S.C. 395b-1).
    Patient charges and costs reported by AIRPs are computed 
differently from those of other providers. Hospitals with

[[Page 56028]]

an ``all-inclusive rate'' charge structure combine routine, ancillary, 
and capital costs into one global patient per diem charge and do not 
report Medicare patient charges on their cost reports. The absence of a 
charge structure precludes the normal allocation of costs to the 
Medicare program for ancillary services, because Medicare patients' 
charges cannot be accumulated. Thus, the charge data from the MedPAR 
files and the cost data from the cost reports do not reflect Medicare 
costs and related resource use in the same manner as it does for the 
majority of other Medicare providers.
    We do not believe that either the charges or the costs reported by 
LTCHS that are also AIRPs are at all comparable to the data reported 
for other LTCHs and, therefore, have the potential to inappropriately 
skew relative weight determinations, regression analyses, and rate 
calculations for the entire LTCH prospective payment system. As a 
result, in order to prevent potential distortion to the LTCH 
prospective payment system, we have decided to exclude the data from 
the 17 AIRPs in the development of the LTCH prospective payment system 
in this final rule. Thus, only data from LTCHs with more detailed 
charge and cost data were used in assessing the validity of potential 
payment adjustments and in the determination of the final LTC-DRG 
relative weights and Federal rate that appear in this final rule. 
Furthermore, excluding the AIRPs' data is consistent with the 
methodology used in establishing the IRF prospective payment system 
(see 66 FR 41351 (August 7, 2001)).
    We have also excluded the data from the 3 LTCHs that are reimbursed 
in accordance with demonstration projects authorized under section 
402(a) of Public Law 90-248 (42 U.S.C. 1395b--1) or section 222(a) of 
Public Law 92-603 (42 U.S.C. 1395b-1), since these LTCHs are not 
subject to the LTCH prospective payment system.
    After considering the commenters' concern that, currently, there 
are significantly more LTCHs in existence than were used in the 
development of the proposed LTCH prospective payment system, for this 
final rule, we are clarifying that for both the proposed and final 
rules, we used all LTCHs for which we had MedPAR (claims) data and 
cost-to-charge ratios available (except for this final rule we excluded 
LTCHs that are AIRPs or reimbursed in accordance with demonstration 
projects), for a total of 246 LTCHs, to calculate the relative weights. 
For this final rule, we used the most recently available claims data 
from the March 2002 update of the FY 2001 MedPAR files and updated LTCH 
cost and TEFRA payment information from the March 2002 update of HCRIS. 
Accordingly, we included the data for 198 LTCHs in the regression 
analyses and the data for 194 LTCHs in calculating the final FY 2003 
Federal rate. These are fewer than the number of LTCHs that were used 
in the proposed rule since we have excluded for this final rule LTCHs 
that are AIRPs or reimbursed in accordance with demonstration projects.
    Comment: One commenter indicated that five of its LTCHs were not 
included in the rate-setting file posted on our website. The commenter 
wanted to know why these facilities were excluded and what the impact 
of excluding them was on the proposed weights and total payment 
calculations.
    Response: The LTCHs indicated by the commenter were omitted from 
the rate-setting file on the website because they did not have 
sufficient cost report information in HCRIS to estimate payments under 
the TEFRA payment system, and consequently, we could not include them 
in the calculation of a budget neutral rate. Since we had claims data 
for these 5 providers and since the relative weights were determined 
using claims data from the MedPAR files, these LTCHs were included in 
the determination of the relative weights. However, since we needed 
specific cost report data to estimate TEFRA payments and since we did 
not have specific cost report information available for these 
providers, we are not able to determine the effect this information 
would have had on the proposed or final payment calculations.
    Comment: One commenter noticed that 39 facilities observed in the 
MedPAR FY 2000 files were excluded from the analysis used to create the 
rate-setting file posted on our website. The commenter assumed these 
facilities are excluded from the summation of total payments in the 
rate-setting file, and asked what the impact would be on budget 
neutrality and total payments if these additional hospitals would be 
included.
    Response: As we explained above, we were only able to include those 
LTCHs in our analysis from which we had sufficient cost report data to 
estimate payments under the TEFRA payment system. Since publication of 
the proposed rule, we have received some additional cost reports, which 
we have included in our analysis for this final rule. Since we cannot 
determine what the costs and payments were under the TEFRA payment 
system without cost report data for the LTCHs for which we do not have 
sufficient cost data, we also cannot determine what the impact would be 
on the standard Federal rate if these facilities would have been 
included in our analysis.
    Comment: Some commenters wanted to know why their hospitals' 
internal cost report data did not match the data in our rate-setting 
file.
    Response: The commenters did not provide specific information about 
their hospitals' internal cost report data that did not match the data 
posted on our website. Therefore, we cannot determine a particular 
reason for the variation between our cost report data in HCRIS and the 
commenters' internal cost report data. We accessed our cost report 
information from the June 2001 update of HCRIS for the most recent 
available cost reporting period (either FYs 1998 or 1999). The 
commenters might have been using settled cost report data, while the 
data in the cost reports that were available to us at the time of our 
calculations for the proposed rule were data from as-filed cost 
reports. We also note that although the cost report data on the rate-
setting file were from FYs 1998 or 1999, the data were updated to FY 
2003 using the excluded hospital market basket.
    Comment: One commenter requested that we provide detailed 
computations, by patient, in the rate-setting file. Another commenter 
suggested that the rate-setting file should show the impact of the 
proposed interrupted stay policy.
    Response: In order to show patient-specific computations and the 
impact of the proposed interrupted stay policy, we would have needed 
patient-specific cost data. Since the Medicare cost reports do not 
provide patient-specific statistics, we are not able to demonstrate the 
impact of the interrupted stay policy.
    Comment: One commenter wanted to know which rate-setting file 
variables reflect updated cost report information beyond FY 1998 and FY 
1999 and how this updated cost report information was applied in the 
rate-setting formulas.
    Response: As we stated in the March 22, 2002 proposed rule (67 FR 
13470), all cost and payment information is inflated to FY 2003. Thus, 
the following variables are already inflated to FY 2003: ``Operating 
Cost Per Case'', ``Capital Cost Per Case'', ``TEFRA Payment Per Case'', 
``Total TEFRA Payment'', ``PPS Payments (Excluding Outlier Payments)'', 
``Outlier Payments'', and ``Total PPS Payments.'' These cost and 
payment variables were used to estimate TEFRA payments used to 
calculate a budget neutral rate.
    Comment: A commenter asked if the ``outlier payments'' variable in 
the rate-setting file refers to high-cost outlier

[[Page 56029]]

payments only. The commenter also asked if the cost-to-charge ratio 
applied to charges from the MedPAR data and if the outlier costs were 
determined per case.
    Response: The ``outlier payments'' variable in the rate-setting 
file refers to high-cost outlier payments only (as described in section 
X.J.6. of this preamble). We applied the cost-to-charge ratio to the 
charges for each case from the MedPAR data to determine the outlier 
costs for each case.
    As we discussed in the March 22, 2002 proposed rule (67 FR 13469), 
in determining the prospective payment rates for LTCHs, we had 
significant concerns about the integrity of some of the cost report 
data in HCRIS. Specifically, we were concerned about data from cost 
reports submitted by a hospital chain that is the owner of 
approximately 20 percent of LTCHs nationwide that arose from a ``qui 
tam'' action filed by the U.S. Department of Justice (DOJ) in July 
1999. This action alleged, among other claims, that the hospitals 
inflated both cost and charge data on Medicare hospital cost reports 
filed from FYs 1994 through 1999. On March 16, 2001, the hospital chain 
agreed to pay approximately $339 million to settle claims arising from 
11 separate actions. Based upon audits and projections performed by 
Medicare's fiscal intermediary under the direction of our Office of 
Financial Management, the Medicare LTCH action was allocated $178 
million of this settlement.
    Under the terms of the agreement, Medicare cost reports from the 
years in question were not reopened and audited. However, the fiscal 
intermediary was able to estimate the effect on the Medicare cost 
reports for 1995, 1996, and 1997. Then a random sample of Medicare cost 
reports from 1998 and 1999 were reviewed to verify the projected impact 
for those years and a settlement figure was determined for FY 1995 
through FY 1999. Therefore, in order to avoid the negative impact those 
providers' data may otherwise have on the integrity of the data, as we 
did in the proposed rule, we are basing our final standard Federal rate 
on a factor determined by our Office of the Actuary to adjust the costs 
reported in those affected FY 1998 and FY 1999 cost reports. This 
factor was derived by determining the ratio of the portion of the 
settlement amount described above attributable to each affected LTCH to 
the Medicare payments received by each affected LTCH during the period 
covered by the settlement.
    Comment: Some commenters asked how the qui tam adjustment was 
calculated.
    Response: If the affected LTCH had a cost report for a period after 
the settlement, no adjustment was made. An adjustment was made only if 
that LTCH's latest cost report was for a period covered by the 
settlement. The adjustment for that LTCH was equal to the amount of the 
adjustment attributable to that LTCH, divided by the amount of payments 
that LTCH received for that period according to the cost report. This 
ratio was then used to reduce payments in FY 2003 to be included in the 
calculation of the Federal rate and budget neutrality. When the ratio 
was calculated for the proposed rule, it was possible that a particular 
hospital may have had settlement data for a cost reporting period after 
FY 1999. However, cost report data for such a LTCH were not available 
to us because we did not have HCRIS files for any fiscal year after FY 
1999 at that time. Thus, such a LTCH's payments under the TEFRA system 
could not be calculated with data more recent than FY 1999. In 
maintaining budget neutrality, we used the most recent year's data 
available (either FY 1998 or FY 1999). Thus, since the cost report data 
was overstated as specified in the qui tam settlement, we modified the 
cost report data to correct for the effects of the settlement.
    Comment: A commenter stated that the settlement amount allocated to 
Medicare LTCH action peaked in FY 1998 at $47 million and decreased to 
$27 million in FY 1999 and $0 in FY 2000 and going forward. The 
commenter stated that it appears from the ratesetting file that a 
downward $47 million adjustment was applied to the updated FY 2003 
payment amount for the affected hospitals. The commenter believed a 
better methodology would be to apply a $27 million reduction to the FY 
1999 actual costs for the affected hospitals and trend the actual 
adjusted amounts forward rather than making an adjustment to the 
updated amount in FY 2003.
    Response: For the proposed rule, if we did not have cost report 
data for a period after the settlement, the qui tam adjustment was 
applied since the most recent cost report that we had available to use 
for estimating FY 2003 payments under the TEFRA payment system was for 
a period covered by the settlement. The amount paid was adjusted by a 
factor equal to the amount of the settlement attributable to that LTCH 
during that specific cost reporting period divided by the total 
payments received by that LTCH during that cost reporting period. Since 
the latest available cost report data (either FY 1998 or FY 1999) was 
used as a base to project future costs and payments under the TEFRA 
payment system, we believe that only the payment information for those 
affected LTCHs for which we had to use questionable cost report data 
should be adjusted. As we stated in proposed rule (67 FR 13470), where 
the latest available cost report for a LTCH was for FY 1999, we 
adjusted the costs reported in the affected LTCH's FY 1999 cost report. 
Thus, as the commenter stated, the adjustment was limited to the $27 
million reduction and that adjusted FY 1999 data was trended forward to 
FY 2003 to estimate payments under the TEFRA payment system for FY 2003 
used in the budget-neutrality calculations.
    b. Update the latest cost report data to the midpoint of FY 2003.
    For both the proposed rule and this final rule, and consistent with 
the methodology used under the IRF prospective payment system 
(Sec. 412.624(c)), we are updating (Sec. 412.523(c)(2)), each LTCH's 
cost per discharge to the midpoint of FY 2003, using the weighted 
average of the applicable percentage increases to the TEFRA target 
amounts for FYs 1999 through 2002 (in accordance with 
Sec. 413.40(c)(3)(vii)) and the full market basket percentage increase 
for FY 2003. For FYs 1999 through 2002, in this final rule, we 
determined the appropriate update factor for each hospital by using the 
methodology described below:
     For hospitals with costs that equal or exceed their target 
amounts by 10 percent or more for the most recent cost reporting period 
for which information is available, the update factor is the market 
basket percentage increase.
     For hospitals that exceed their target amounts by less 
than 10 percent, the update factor is equal to the market basket minus 
0.25 percentage points for each percentage point by which operating 
costs are less than 10 percent over the target (but in no case less 
than 0).
     For hospitals that are at or below their target amounts, 
but exceed two-thirds of the target amounts, the update factor is the 
market basket minus 2.5 percentage points (but in no case less than 0).
     For hospitals that do not exceed two-thirds of their 
target amounts, the update factor is 0 percent.
    For FY 2003, we used the most recent estimate of the percentage 
increase projected by the excluded hospital market basket index.
    Comment: Some commenters questioned CMS's methodology for applying 
the market basket percentage to update the cost report data from FY 
1996 through FY 1999 to the midpoint

[[Page 56030]]

of FY 2003. Specifically, the commenters were concerned that the bonus 
and penalty payments under the TEFRA payment system methodology 
(Sec. 413.40(d)(2) and (3)) were not accounted for when applying the 
market basket update. The commenters requested that CMS explain how it 
accounts for cost growth for hospitals whose costs are below the TEFRA 
caps.
    Response: We proposed to update each LTCH's cost per discharge to 
the midpoint of FY 2003, using the weighted average of the applicable 
percentage increases to the TEFRA target amounts for FYs 1999 through 
2002 (in accordance with Sec. 413.40(c)(3)(vii)) and the full market 
basket percentage increase for FY 2003. We also updated each LTCH's 
target amount using the rate-of-increase percentage as described in 
Sec. 413.40(b)(3). However, within each year from FY 1999 through FY 
2003, we compared each LTCH's costs to its respective target amount in 
order to determine the payment to each LTCH considering the rules for 
bonus and penalty payments under Sec. 413.40(d)(2) and (3). Therefore, 
although we did not state this explicitly in the proposed rule, we did 
account for the bonus and penalty payments under the TEFRA payment 
system methodology at Sec. 413.40(d)(2) and (3) and have done so in our 
analysis for this final rule, as well. We note that this was the same 
methodology that was applied under the IRF prospective payment system.
    Comment: Some commenters stated that there should be annual market 
basket updates after the first year, and calculated in the first year.
    Response: In the March 22, 2002 proposed rule, we proposed to 
update each LTCH's cost per discharge to the midpoint of FY 2003, using 
the weighted average of the applicable percentage increases to the 
TEFRA target amounts for FYs 1999 through 2002 (in accordance with 
Sec. 413.40(c)(3)(vii)) and the full market basket percentage increase 
for FY 2003. We updated each LTCH's target amount using the rate-of-
increase percentage as described in Sec. 413.40(b)(3). In accordance 
with Sec. 412.523(c)(3)(ii), and as we proposed, for fiscal years after 
FY 2003 the LTCH prospective payment system Federal rate will be the 
previous fiscal year's Federal rate updated by the most recent estimate 
of the LTCH prospective payment system market basket (that is, the 
excluded hospital with capital market basket).
    c. Estimate total payments under the current (TEFRA) payment 
system.
    We estimated payments for inpatient operating services under the 
TEFRA system using the following methodology:

Step 1: Determine each LTCH's hospital-specific target amount.

    The hospital-specific target amount for a LTCH is calculated based 
on the hospital's allowable inpatient operating cost per discharge for 
the hospital's base period, excluding capital-related, nonphysician 
anesthetist, and medical education costs. This target amount is then 
updated using a rate-of-increase percentage as described in 
Sec. 413.40(b)(3). For FYs 1998 through 2002, there are two national 
caps on the payment amounts for LTCHs. Under Sec. 413.40(c)(4)(iii), a 
LTCH's hospital-specific target is the lower of its net allowable base-
year costs per discharge increased by the applicable update factors or 
the cap for the applicable cost reporting period. In determining each 
LTCH's hospital-specific target amount, we use the FY 2002 cap amounts 
published in the hospital inpatient prospective payment system August 
1, 2001 final rule (66 FR 39915-39916), adjusted in accordance with 
section 307(a)(2) of Public Law 106-554 by removing the 2-percent 
increase in the cap for existing LTCHs required by section 307(a)(1) of 
Public Law 106-554. For existing hospitals (that is, LTCHs paid as an 
excluded hospital before October 1, 1997), the applicable cap amount 
for FY 2002 is $30,783 for the labor-related share adjusted by the 
applicable geographic wage index and added to $12,238 for the nonlabor-
related share. For current ``new'' hospitals (that is, LTCHs first paid 
as an excluded hospital on or after October 1, 1997), the cap amount 
applicable for FY 2002 is $16,701 for the labor-related share adjusted 
by the applicable geographic wage index and added to $6,640 for the 
nonlabor-related share. These capped amounts are inflated to the 
midpoint of FY 2003 by applying the excluded hospital operating market 
basket.
    As explained above, we note that, in accordance with section 
307(a)(2) of the BIPA, in estimating total payments to LTCHs under the 
current payment system, the increase to the hospital target amounts and 
caps on the target amounts for LTCHs effective from October 1, 2001 
through September 30, 2002, provided for under section 307(a)(1) of the 
BIPA were not to be taken into account. Furthermore, as we discussed 
previously in this section, as a result of a qui tam action involving 
some LTCHs, we adjusted such affected LTCHs' cost report data by a 
factor equal to the amount of the settlement attributable to that LTCH 
during that specific cost reporting period divided by the total 
payments received by that LTCH during that cost reporting period.

Step 2: Determine each LTCH's payment amount for inpatient operating 
services.

    Under the TEFRA system, a LTCH's payment amount for inpatient 
operating services is the lower of--
     The hospital-specific target amount (subject to the 
application of the cap as determined in Step 1) times the number of 
Medicare discharges (the ceiling); or
     The hospital average inpatient operating cost per case 
times the number of Medicare discharges.
    In addition, under the TEFRA system, payments may include a bonus 
or relief payment, as follows:
     For LTCHs whose net inpatient operating costs are lower 
than or equal to the ceiling, payment is the lower of either the net 
inpatient operating costs plus 15 percent of the difference between the 
inpatient operating costs and the ceiling or the net inpatient 
operating costs plus 2 percent of the ceiling.
     For LTCHs whose net inpatient operating costs are greater 
than the ceiling, but less than 110 percent of the ceiling, payment is 
the ceiling.
     For LTCHs whose net inpatient operating costs are greater 
than 110 percent of the ceiling, payment is the ceiling plus the lower 
of 50 percent of the difference between the 110 percent of the ceiling 
and the net inpatient operating costs or 10 percent of the ceiling.
    Comment: A commenter asked how the average operating costs per case 
were calculated from the cost report variables.
    Response: Using data from the cost report, we determined the 
average operating cost per case by dividing total Medicare inpatient 
operating costs for the cost reporting period from worksheet D-1, 
adjusted by the qui tam factor, if applicable, by the total number of 
Medicare discharges for the same cost reporting period from worksheet 
S-3.
    Comment: A commenter noted that operating costs are described as 
being ``estimated operating cost per case based on cost report data 
trended forward to FY 2003 using historical cost report data,'' and 
asked for an explanation of the term ``trended forward''. The commenter 
also asked what calculation was used to ``trend forward,'' and whether 
the operating costs calculated using total operating cost from the FY 
1998 and FY 1999 cost reports were multiplied by the inflation factor 
of 3.6 percent.
    Response: The term ``trended forward'' means that the FY 1998 or FY

[[Page 56031]]

1999 costs were multiplied by the market basket update of 3.6 percent 
to inflate those costs to FY 2003.
    Further, under the TEFRA system, excluded hospitals and units, 
including LTCHs, may be eligible for continuous improvement bonus 
payments as described under Sec. 413.40(d)(4). As explained above, in 
accordance with section 307(a)(2) of Public Law 106-554, the 
enhancement of continuous improvement bonus payments for LTCHs, 
effective for cost reporting periods beginning on or after October 1, 
2000 and before September 30, 2002, and provided for under section 122 
of Public Law 106-113, were not to be taken into account in estimating 
total payments to LTCHs under the current TEFRA system.
    Comment: A commenter questioned the exclusion of the continuous 
improvement bonus payments when computing budget neutrality since these 
bonus payments have been a part of the TEFRA payment methodology.
    Response: Under section 1886(b)(2) of the Act, a hospital that has 
been excluded from the inpatient prospective payment system for at 
least three full cost reporting periods prior to the subject period and 
whose operating costs per discharge for the subject period are below 
the lower of its target amount, trended costs, or expected costs for 
the subject period, is eligible for a continuous improvement bonus 
payment. The statute defines expected costs as the lesser of the 
operating costs or the target amount for the previous cost reporting 
period updated by the market basket. The amount of the continuous 
improvement bonus payment is equal to the lesser of--(1) 50 percent of 
the amount by which operating costs were less than the expected costs 
for the period, or (2) one percent of the ceiling.
    In the determination of continuous improvement bonus payments in 
accordance with Sec. 413.40(d)(5), we compare actual operating costs 
incurred in the current period with the expected costs that are based 
on cost incurred in the prior period. Since the latest cost report 
information available is from FY 1999 (and in some cases FY 1998), it 
was necessary for us to use those reported costs and the applicable 
market basket increases to estimate both the costs incurred in the 
current period (FY 2003) and the costs incurred in the prior period (FY 
2002). We used the same cost data and market basket increases to 
estimate current year (FY 2003) operating costs and expected costs 
updated to FY 2003. Therefore, the operating costs in FY 2003 would 
always be equal to (never less than) the expected costs for FY 2003. In 
the continuous improvement bonus calculation, we subtract current 
operating costs from expected costs and multiply this difference by a 
percentage as specified in Sec. 413.40(d)(5). Accordingly, this would 
result in no continuous improvement bonus for these hospitals in FY 
2003. Therefore, continuous improvement bonus payments are not 
considered in determining budget neutrality.

Step 3: Determine each LTCH's payment for capital-related costs.

    Under the TEFRA system, in accordance with section 1886(g) of the 
Act, Medicare allowable capital costs are paid on a reasonable cost 
basis. Thus, each LTCH's payment for capital-related costs will be 
taken directly from the cost report and updated for inflation using the 
excluded hospital market basket, consistent with the methodology used 
under the IRF prospective payment system. As we discussed previously in 
this section, as a result of the qui tam action involving some LTCHs, 
we adjusted those affected LTCHs' cost report data by a factor equal to 
the amount of the settlement attributable to that LTCH during that 
specific cost reporting period divided by the total payments received 
by that LTCH during that cost reporting period.
    Comment: Some commenters stated that there is a discrepancy between 
the capital-related costs per discharge reported in the LTCH rate-
setting files posted on the CMS website, and the capital costs reported 
on the Medicare cost reports that were used to develop the proposed 
payment rates. The commenters asserted that while we have stated in 
Part 8.2 of the ``Questions and Answers'' posted on the website that 
the capital-related costs were identified from the Minimum Data Sets 
(MDS) using worksheet D, Part I for routine capital costs, and 
worksheet D, Part II for ancillary capital costs, some hospitals' 
capital-related routine service costs were instead reported on 
worksheet D-1, Part II (column 1, lines 50, 51, and 52). Since none of 
these hospitals had teaching programs and none were subject to the qui 
tam adjustment, these costs were entirely capital-related. The 
commenter stated that this discrepancy on the MDS seems to have 
understated capital-related costs for 64 of the 211 LTCHs used in the 
proposed rule in the calculation of the proposed standard Federal rate 
by approximately 2 percent (resulting in an estimated increase in base 
payments of $40 million).
    Response: We have reviewed the lines on Worksheet D, Parts I and 
II, and Worksheet D-1, Part II on the HCRIS MDS and have found that, in 
fact, there are a number of LTCHs that have not reported capital-
related costs on Worksheets D, Parts I and II, but have reported these 
costs on Worksheet D-1, Part II, column 1, lines 50, 51, and 52. 
Therefore, the commenter is correct in assuming that since only 
capital-related costs from Worksheets D, Parts I and II were identified 
in our base rate calculations, capital-related costs were 
underestimated in the calculation of the standard Federal rate. These 
costs were originally excluded from our calculations because these 
hospitals did not properly report these costs on their cost reports. 
The cost report instructions direct hospitals, including hospitals 
excluded from the acute care hospital inpatient prospective payment 
system, to report their capital-related costs, not only on Worksheet D-
1, Part II, but also on Worksheets D, Parts I and II. However, because 
we have been made aware that LTCHs have reported capital-related costs 
on Worksheet D-1, Part II, we have revised our rate calculations to 
account for these costs. Thus, for this final rule, we determined 
capital-related costs using data from Worksheets D, Parts I and II and 
Worksheet D-1, Part II.
    Comment: A commenter asked how the average capital costs per case 
were calculated from the cost report variables for the proposed rule.
    Response: Similar to the calculation of average operating costs per 
case discussed in step 2 above, we determined the average capital cost 
per case by dividing total Medicare inpatient capital costs for the 
same cost reporting period from worksheets D, Part I and Part II and 
Worksheet D-1, Part II by the total number of Medicare discharges for 
the cost reporting period from worksheet S-3.

Step 4: Determine each LTCH's average total (operating and capital) 
payment per case under the current (TEFRA) payment system.

    In the proposed rule and for this final rule, once estimated 
payments for inpatient operating costs are determined (including bonus 
and relief payments, as appropriate), we added the operating payments 
and capital payments together to determine each LTCH's estimated total 
payments under the current (TEFRA) payment system. We then divide each 
LTCH's estimated total TEFRA payments by the corresponding number of 
Medicare discharges from the cost report to determine what each LTCH's 
average total payment per case would be under the current (TEFRA) 
payment system.

[[Page 56032]]

Step 5: Determine a case weighted average payment under the current 
(TEFRA) payment system.

    For both the proposed rule and this final rule, we determined each 
LTCH's average payment under the current (TEFRA) system weighted for 
its number of cases in the March 2002 update of the FY 2001 MedPAR file 
by multiplying its average total payment per case from step 4 by its 
number of cases in the FY 2001 MedPAR file.

Step 6: Estimate total (MedPAR) weighted payments under the current 
(TEFRA) payment system.

    In the proposed rule and for this final rule, we estimated total 
weighted payments under the current (TEFRA) payment system by summing 
each LTCH's (MedPAR) weighted payments under the current (TEFRA) 
payment system (from step 5). In addition, we adjusted the estimated 
total weighted payments to reflect the estimated portion of additional 
outlier payments under Sec. 412.525(a). (This is consistent with not 
including outlier payments in estimating payments under the prospective 
payment system in Step e. below.) This total is the numerator in the 
calculation of a budget neutrality adjustment.
    d. Calculate the average weighted payment per discharge amount.
    Once estimated total payments under the current payment system are 
calculated, we calculated an average per discharge payment amount 
weighted by the number of Medicare discharges under the current payment 
system. This is done by first determining the average payment per 
discharge amount under the current payment system for each LTCH. Cost 
report data is used to calculate each LTCH's average payment per 
discharge by dividing the number of discharges into the total payments. 
As explained in section X.K.2.a. of this final rule, if applicable, the 
LTCH's payment per discharge is adjusted consistent with the terms of 
the DOJ settlement agreement.
    Next, we determined the weighted average per discharge payment 
amount by multiplying each LTCH's average payment per discharge amount 
from the cost report by the number of discharges from the Medicare 
claims data in the FY 2001 MedPAR files. Then we added the amounts for 
all LTCHs and divided by the total number of discharges from the 
Medicare claims in the FY 2001 MedPAR files to derive a weighted 
average payment per discharge.
    e. Estimate payments under the prospective payment system without a 
budget neutrality adjustment.
    Payments under the payment system are then estimated without a 
budget neutrality adjustment. In the proposed rule (67 FR 13471), we 
stated that to do this, we would multiply each LTCH's case-mix index 
adjusted for short-stay outliers by the number of discharges from the 
Medicare claims in MedPAR files adjusted for short-stay outliers and 
the weighted average per discharge payment amount computed above. As we 
clarify below, this statement did not reflect the actual methodology 
used in either the proposed or final rules.
    Comment: One commenter asked about the variable ``Prospective 
Payment System Payments (Excluding Outlier Payments)'' used in the 
rate-setting file posted on the website. This variable is described as 
``Estimate of payments under the proposed LTCH prospective payment 
system for cases in the FY 2000 MedPAR by applying the proposed payment 
methodologies for very short-stay discharges and short-stay outliers, 
but excluding outlier payments.'' The commenter wanted to know whether 
the method used to determine this variable was--(1) applied to proposed 
payment methodologies for very short-stay discharges and short-stay 
outliers or (2) used the variable ``Number of Equivalent MedPAR Cases'' 
and the variable ``Case Mix Index''.
    Response: In the rate-setting file and in Step e. described in the 
proposed rule (67 FR 13471), we actually estimated prospective payment 
system payments for each provider by simulating payments on a case-by-
case basis by applying the proposed payment methodologies for very 
short-stay discharges and short-stay outliers to the case-specific 
discharge information from the MedPAR files. Thus, the variable 
``Prospective Payment System Payments (Excluding Outlier Payments)'' in 
the rate-setting file was determined by applying proposed payment 
methodologies for proposed very short-stay discharges and short-stay 
outliers. However, a reasonable estimate of prospective payment system 
payments under the proposed LTCH prospective payment system can be 
determined by using the variable ``Number of Equivalent MedPAR Cases'' 
and the variable ``Case-Mix Index'' in the rate-setting file, which was 
adjusted for short-stay outliers by counting them as a fraction of a 
discharge based on the ratio of the length of stay of the case to the 
average length of stay of the LTC-DRG for nonshort-stay outlier cases. 
This ``proxy'' using the fractional adjustment for short-stay outliers 
was not used to determine the payment for those cases in determining 
estimated total prospective payment system payments in the rate-setting 
file or in the determination of the proposed standard Federal rate 
since, as we explained above, we actually estimated prospective payment 
system payments on a case-by-case basis.
    For this final rule, as we explained above for the proposed rule, 
we estimated prospective payment system payments for each provider by 
simulating payments on a case-by-case basis by applying the final 
payment policy for short-stay outliers (as described in section X.C. of 
this preamble) and the final adjustments for differences in area wages 
(as described in section X.J.1. of this preamble) and cost-of-living 
for Alaska and Hawaii (as described in section X.J.5. of this preamble) 
to the case-specific discharge information from the FY 2001 MedPAR 
files.
    For purposes of this calculation, we simulated case-by-case 
payments for each LTCH as if it were paid based on 100 percent of the 
standard Federal rate in FY 2003 rather than the transition blend 
methodology described in section X.K.2.h. of this final rule. Total 
payments for each LTCH are summed for all LTCHs. This total is the 
denominator in the calculation of the budget neutral adjustment.
    f. Determine the budget neutrality adjustment.
    For this final rule and as we discussed in the proposed rule, the 
budget neutrality adjustment is calculated by dividing total adjusted 
payments under the current payment system (the total amount calculated 
in section X.K.2.c. of this preamble) by estimated payments under the 
prospective payment system, without a budget neutrality adjustment (the 
total amount calculated in section X.K.2.e. of this preamble).
    g. Determine the standard Federal payment rate.
    For this final rule and as we explained in the proposed rule, the 
resulting budget neutrality adjustment (determined in section X.K.2.f. 
of this preamble) is then multiplied by the average weighted per 
discharge payment amount under the current payment system and we 
adjusted the result further to include a behavioral offset. As 
previously stated, to calculate the standard Federal payment rate, we 
estimated what would have been paid under the current payment system. 
However, we expect that as a result of the implementation of the new 
prospective payment system, LTCHs may experience usage patterns that 
are significantly different from their current usage patterns. Since 
there is a fixed payment based on diagnosis in a per discharge 
prospective payment system

[[Page 56033]]

regardless of the length of stay (except for additional outlier 
payments), there will be an incentive to discharge a patient (to home 
or to another site of care) as early in the stay as possible in order 
to minimize cost and maximize profit. As a result, discharges may occur 
earlier in the LTCH stay. This will result in lower payments under the 
current prospective payment system for this care that must be taken 
into account when computing the budget neutral payment rate. 
Furthermore, as explained in sections X.A.2. and K. of this preamble, 
we expect the LTCH's coding practice of LTCHs to improve once the 
prospective payment system is implemented, which has a significant 
potential of resulting in a case-mix that will be higher than what 
would be used to determine the budget-neutral standard Federal rate.
    As was the case when the hospital inpatient prospective payment 
system was implemented, improved coding could result in a higher case-
mix because hospitals will code secondary diagnoses more completely and 
accurately, now that these diagnoses are factored into the LTC-DRG 
assignment and, ultimately, their payment. The inclusion of appropriate 
secondary diagnoses could result in the case being grouped into a 
higher weighted LTC-DRG. This is especially true for LTCHs since they 
generally treat more medically complex patients who are more likely to 
have many secondary diagnoses. Thus, if the same cases that were used 
to develop the standard Federal rate are grouped into higher weighted 
LTC-DRGs as a result of improved coding, this higher case-mix will 
result in higher payments under the payment system for this care. This 
effect must also be taken into account when computing the budget 
neutral standard Federal rate. Accounting for these effects through an 
adjustment is commonly known as a behavioral offset.
    The proposed standard Federal payment rate with a behavioral offset 
was $27,649.02, which included the proposed 0.27 percent reduction for 
the behavioral offset. As we explained in the proposed rule, consistent 
with the assumptions made under the IRF prospective payment system, in 
determining the proposed (and final) behavioral offset adjustment, we 
assumed that the LTCHs would regain 15 percent of potential losses and 
augment payment increases by 5 percent through transfers occurring at 
or beyond the mean length of stay associated with the LTC-DRG at any 
point.
    Comment: One commenter was concerned about the proposed 0.27 
percent reduction for the behavioral offset to the proposed standard 
Federal rate. The commenter stated that no credible data was identified 
to support this number. The commenter contended that CMS should 
consider the budgetary impact of the migration of patients from the IRF 
setting to the LTCH setting, given the growing number of rehabilitation 
cases admitted to LTCHs and the significant increase in the 
reimbursement for these services in LTCH settings as compared to IRF 
settings. The commenter also recommended that the behavioral offset 
used for LTCHs should be adjusted to be consistent with the behavioral 
offset of the IRF prospective payment system (1.16 percent), and that 
the budget neutrality adjustment should be recalculated. The commenter 
suggested that this would serve to ensure that there is no improper 
payment incentive for treating rehabilitation patients in a LTCH rather 
than at lower cost in an IRF.
    Response: We believe that we utilized the best data available to 
develop the proposed behavioral offset. Consistent with the IRF 
prospective payment system, and as we explained in the proposed rule, 
in our actuarial model we assumed that LTCHs would regain 15 percent of 
potential losses and augment payment increases by 5 percent through 
transfers occurring at or beyond the mean length of stay associated 
with the LTC-DRG at any point. In an effort to be as consistent as 
possible with the IRF prospective payment system, we used the same 
assumptions (described above) that we used to calculate the behavioral 
offset for the IRF prospective payment system. We used the same 
assumptions because, as the commenter noted, there are parallels 
between IRFs and LTCHs, and, absent any convincing data to the 
contrary, we believe these hospitals would react similarly to similar 
incentives. The difference in the behavioral offsets (that is, 1.16 
percent for IRF prospective payment system and the proposed 0.27 
percent for the proposed LTCH prospective payment system) is due to the 
different numbers of LTCHs and IRFs and the differences in the 
distribution of losses and gains for the respective hospitals under 
each prospective payment system.
    Based on the commenter's recommendation to reevaluate the 
methodology we used to determine behavioral offset, we took into 
consideration the increases to the hospital-specific target amounts and 
cap on the target amounts for LTCHs provided for by section 307(a)(1) 
of the BIPA and the enhanced bonus payments for LTCHs for FY 2001 and 
FY 2002 provided for by section 122 of the BBRA. As a result, based on 
updated data, the standard Federal payment rate in this final rule 
includes a behavioral offset of 0.34 percent. As we explained in the 
proposed rule, consistent with the methodology used under the IRF 
prospective payment system, in determining the behavioral offset, we 
assumed that LTCHs would regain 15 percent of potential losses and 
augment payment increases by 5 percent through transfers occurring at 
or beyond the mean length of stay associated with the LTC-DRG at any 
point. The final standard Federal payment rate is $34,956.15 for FY 
2003. This dollar amount includes a 0.34 percent (that is, thirty-four 
hundredths of one percent) reduction for the behavioral offset in the 
standard Federal payment rate otherwise calculated under the 
methodology described above.
    h. Determine a budget neutrality offset to account for the 
transition methodology.
    Section 123(a)(1) of the BBRA requires that the LTCH prospective 
payment system maintain budget neutrality. As discussed in further 
detail in section X.N. of this preamble, we are implementing a 5-year 
transition period from cost-based TEFRA reimbursement to prospective 
payment, during which a LTCH will be paid an increasing percentage of 
the LTCH prospective payment system rate and a decreasing percentage of 
its TEFRA rate for each discharge. Furthermore, we will allow a LTCH to 
elect to be paid based on 100 percent of the standard Federal rate in 
lieu of the blend methodology.
    Based on a comparison of the estimated FY 2003 payments to each 
LTCH based on 100 percent of the proposed standard Federal rate and the 
proposed transition blend methodology, in the proposed rule (67 FR 
13472), we projected that approximately 58 percent of LTCHs would elect 
to be paid based on 100 percent of the proposed standard Federal rate 
since they would receive higher payments than under the proposed 
transition blend methodology. We also projected that the remaining 42 
percent of LTCHs would choose to be paid based on the proposed 
transition blend methodology (80 percent of TEFRA; and 20 percent of 
the prospective payment system) in FY 2003 since they would receive 
higher payments than if they were paid based on 100 percent of the 
proposed Federal rate.
    Comment: One commenter observed that since many of its hospitals 
included in the rate-setting file posted on CMS' website are projected 
to have total LTCH prospective payments in excess of total TEFRA 
payments for FY 2003, these

[[Page 56034]]

LTCHs would be included in the 58 percent of LTCHs that CMS expects 
would elect to be paid immediately based on 100 percent of the proposed 
standard Federal rate in the first year of the proposed transition 
period. The commenter noted that its LTCHs have cost reporting periods 
that run from September to August, and concluded that hospitals would 
be able to transition to the full Federal rate regardless of when their 
cost reporting period begins. The commenter stated that otherwise, its 
hospitals would not be able to elect payment based on to the full 
Federal rate until September 1, 2003, thereby making the 58-percent 
assumption too high. The commenter added that, since CMS specified in 
the proposed rule that one of CMS's ``goals is to transition hospitals 
to full prospective payments as soon as appropriate'' (67 FR 13474), 
this supports the conclusion that hospitals would be able to elect 
payment based on the full Federal rate during the proposed transition 
period regardless of their cost reporting years.
    Response: The commenter is incorrect that LTCHs would be able to 
transition immediately on October 1, 2002, to payment based on the full 
Federal rate, regardless of when their next cost reporting period 
begins. As we stated in the proposed rule (67 FR 13473), ``the 
transition period for all hospitals subject to the proposed LTCH 
prospective payment system would begin with the hospitals' first cost 
reporting period beginning on or after October 1, 2002 and extend 
through the hospitals' last cost reporting period beginning before 
October 1, 2007'' (emphasis added). In addition, in the proposed rule 
(67 FR 13474), we stated, ``In implementing the proposed prospective 
payment system for LTCHs, one of our goals is to transition hospitals 
for full prospective payments as soon as appropriate. Therefore, we are 
proposing under Sec. 412.533(b), to allow a LTCH to elect payment based 
on 100 percent of the Federal rate at the start of any of its cost 
reporting periods during the 5-year transition period rather than 
incrementally shifting from cost-based payments to prospective 
payments' (emphasis added). Thus, a LTCH must wait until its cost 
reporting period that begins during FY 2003 to elect payment based on 
the full Federal rate. This means that the commenter's LTCHs, many of 
which have cost reporting periods that begin on September 1, would have 
to wait until September 1, 2003, to transition to payments based on the 
full Federal rate. Before their cost reporting period that begins 
during FY 2003, the LTCHs would continue to receive payment under the 
TEFRA methodology. Accordingly, in the proposed rule when we estimated 
that 58 percent of all LTCHs would elect to be paid based on 100 
percent during FY 2003, we accounted for our proposed policy that would 
require a LTCH to wait until the beginning of its cost reporting period 
beginning on or after October 1, 2002, to elect payment based on the 
full proposed Federal rate.
    In this final rule, for FY 2003, using the same methodology 
described in the proposed rule, based on updated data, we project that 
approximately 49 percent of LTCHs will elect to be paid based on 100 
percent of the standard Federal rate rather than receive payment on the 
transition blend methodology. Using the same methodology described in 
the proposed rule, this projection, which uses updated data and 
inflation factors, is based on our estimate that LTCHs would receive 
higher payments based on 100 percent of the standard Federal rate 
compared to the payments they would receive under the transition blend 
methodology. Similarly, we project that the remaining 51 percent of 
LTCHs will choose to be paid based on the transition blend methodology 
(80 percent of TEFRA; and 20 percent of the prospective payment system) 
in FY 2003 since they would receive higher payments than if they were 
paid based on 100 percent of the standard Federal rate.
    As we discuss in section X.K.2.g. of this preamble, the standard 
Federal rate ($34,956.15) is determined as if all LTCHs will be paid 
based on 100 percent of the standard Federal rate in FY 2003. Since we 
are implementing a 5-year transition period (section X.N. of this 
preamble) in order to maintain budget neutrality, as we described in 
the proposed rule, we will reduce all LTCH Medicare payments during the 
transition period by a factor, which is equal to 1 minus the ratio of 
the estimated TEFRA reasonable cost-based payments that would have been 
made if the LTCH prospective payment system had not been implemented, 
to the projected total Medicare program prospective payment system 
payments (that is, payments made under the transition methodology and 
the option to elect payment based on 100 percent of the Federal rate as 
described in section X.N. of this preamble).
    In the March 22, 2002 proposed rule, we projected that the full 
effect of the 5-year transition period and the election option would 
result in a cost to the Medicare program of $230 million as follows: 
For FY 2003, $50 million; for FY 2004, $80 million; for FY 2005, $60 
million; for FY 2006, $30 million; for FY 2007, $10 million.
    Thus, in order to maintain budget neutrality, we proposed to apply 
a 5.1 percent reduction (0.949) to all LTCHs' payments in FY 2003 to 
account for the estimated cost of $50 million for FY 2003. Furthermore, 
in order to maintain budget neutrality, we indicated that in the future 
we would propose a budget neutrality offset for each of the remaining 
years of the transition period to account for the estimated costs for 
the respective fiscal year.
    In this final rule, based on the latest available data, the policy 
revisions described, and the effect of the increase to the hospital 
target amounts and caps on the target amounts provided for under 
section 307(a)(1) of BIPA, we project that the full-effect of the 5-
year transition period and the election option will result in a cost to 
the Medicare program of $240 million as follows:

------------------------------------------------------------------------
                                                              Estimated
                        Fiscal year                           cost  (in
                                                              millions)
------------------------------------------------------------------------
2003.......................................................          $50
2004.......................................................           80
2005.......................................................           60
2006.......................................................           40
2007.......................................................           10
------------------------------------------------------------------------

    Therefore, in this final rule, we are applying a 6.6 percent 
reduction (0.934) to all LTCHs' payments in FY 2003 to account for the 
estimated cost of the $50 million for FY 2003.
    Comment: Some commenters were concerned that CMS' projected costs 
of LTCHs transitioning to payment based on 100 percent of the standard 
Federal rate in FY 2003 are incorrect and need to be clarified. The 
commenters stated that their calculations indicated that if the 
proposed 5.1 percent reduction were applied to all FY 2003 LTCH 
payments, it would result in a reduction of more than $90 million, 
which is more than double what is required to maintain budget 
neutrality. Other commenters similarly stated that they calculated that 
CMS will actually reduce payments by approximately $94 million, rather 
than the estimated $50 million. These commenters proposed that Medicare 
ensure budget neutrality by neither underpaying nor overpaying LTCHs. 
Specifically, the commenters asked that CMS clarify how a $50 million 
cost to the Medicare program equates with the proposed 5.1 percent 
reduction to maintain budget neutrality at $1.8 billion. The commenters 
also inquired as to whether both the LTCH prospective payments system 
and the cost-based portions of the proposed transition blend 
methodology payments

[[Page 56035]]

in FY 2003 are to be reduced by the proposed 5.1 percent.
    Response: In the March 22, 2002 proposed rule, based on a 
comparison of the estimated FY 2003 payment to each LTCH based on 100 
percent of the proposed standard Federal rate versus the proposed 
transition blend methodology, we projected that approximately 58 
percent of LTCHs would elect to be paid based on 100 percent of the 
proposed standard Federal rate since they would receive higher payments 
than under the proposed transition blend methodology. We projected that 
the cost of 58 percent of LTCHs transitioning during FY 2003 to 100 
percent of the proposed standard Federal rate would be $50 million. 
Since the proposed standard Federal rate of $27,649.02 was calculated 
as if all LTCHs would be paid based on 100 percent of the proposed 
standard Federal rate in FY 2003, in order to maintain budget 
neutrality, we proposed to reduce all LTCH Medicare payments by 5.1 
percent (that is, both the prospective payment portion and the cost-
based portion of the proposed transition blend methodology). Thus the 
proposed 5.1 percent reduction would be applied to all LTCH payments, 
regardless of whether the LTCH is being paid based on 100 percent of 
the proposed standard Federal rate or the transition blend methodology. 
The proposed reduction in payments to all LTCHs was considered in 
maintaining budget neutrality at $1.8 billion.
    The commenters expressed concern that our projected costs of LTCHs 
transitioning to payment based on 100 percent of the proposed standard 
Federal rate in FY 2003 are incorrect and need to be clarified. In the 
proposed rule, program payments for LTCH services were estimated to be 
$1.8 billion in FY 2003. Since the proposed standard Federal rate was 
calculated as if all LTCHs would be paid based on 100 percent of the 
proposed standard Federal rate in FY 2003, without the proposed 5.1 
percent reduction, payments would increase from $1.800 billion to 
$1.892 billion because of those LTCHs that in FY 2003 would be paid 
based on the transition blend methodology (that includes 80 percent of 
TEFRA payments) rather than receive payments based on 100 percent of 
the proposed standard Federal rate.
    As stated above, since a LTCH must wait until the start of its cost 
reporting period that begins in FY 2003 before transitioning to payment 
based on 100 percent of the standard Federal rate, the actual amount of 
projected LTCH payments for all cost reporting periods that begin 
during FY 2003 (that is, for complete 12-month periods) is $92 million. 
Dividing $92 million by $1.8 billion yields 5.1 percent. This was the 
percent reduction that we proposed to apply to all LTCH payments made 
in cost reporting periods beginning during FY 2003. However, since the 
$92 million includes payments made for portions of cost reporting 
periods extending beyond FY 2003, it was reduced to represent only the 
portion of LTCH prospective payments made during FY 2003 (that is, 
payments between October 1, 2002 and September 30, 2003). Accordingly, 
to account for the portion of LTCH payments that were estimated to be 
made based on 100 percent of the Federal rate during FY 2003, the 
projected cost of $92 million based on complete cost reporting periods 
was reduced to $60 million based on an analysis of LTCH costs incurred 
by each LTCH for the portion of its cost reporting period that will 
occur during FY 2003. For example, for a LTCH with a July 1st cost 
report begin date, only the projected costs for July 1, 2003 through 
September 30, 2003 were used.
    Finally, since LTCH payments for some services provided during FY 
2003 may not be made until FY 2004 (for example, a patient may be 
treated in a LTCH in September 2003, but payment may not be made by 
Medicare under the LTCH prospective payment system until October 2003, 
which is during FY 2004), the cost of $60 million was further reduced 
to $50 million based on an analysis of LTCH discharges occurring in 
each LTCH for the portion of its cost reporting period that will occur 
during FY 2003. For example, for a LTCH with a July 1st cost report 
begin date, only those discharges projected to occur from July 1, 2003 
through September 30, 2003 were considered. Thus, in the proposed rule, 
$50 million represented the estimated costs that the Medicare program 
was projected to incur for LTCH prospective payments (based on 100 
percent of the proposed standard Federal rate) made during FY 2003 
(that is, payments between October 1, 2002 and September 30, 2003). We 
note that the same methodology was also employed in this final rule to 
determine the 6.6 percent reduction to all LTCH payments in FY 2003.
    Comment: One commenter was ``troubled'' by our assumption that all 
hospitals whose payments would increase based on 100 percent of the 
Federal rate would in fact act appropriately and notify their fiscal 
intermediary prior to the commencement of the prospective payment 
system in order to qualify for payment at 100 percent of the Federal 
rate. The commenter asserted that in order for this to happen, more 
than 150 (58 percent of 270) LTCHs would, without exception, accurately 
analyze the financial impact of the LTCH prospective payment system, 
take appropriate action to make the election to 100 percent of the 
Federal rate, and do so prior to 30 days of the onset of the LTCH 
prospective payment system. The commenter believed that the number of 
hospitals that elect payment based on the Federal rate would be far 
fewer than anticipated. The commenter added that there may be other 
reasons why a LTCH which may have been projected to gain reimbursement 
by moving immediately to the full prospective payment system may choose 
not to make the election.
    Response: Our estimate in the proposed rule that 58 percent of 
LTCHs will choose to be paid based on 100 percent of the proposed 
standard Federal rate beginning in FY 2003 was based on the best data 
that we had available at that time. We note that, as we move through 
the initial years of implementation, we will make any necessary 
adjustments to maintain budget neutrality. In addition, just as a LTCH 
that is projected to gain reimbursement by opting for payment based on 
100 percent of the Federal rate may have reasons why it would not make 
this election, the same may be true for LTCHs that are projected to do 
better under the transition blend, yet for some reason choose to be 
paid 100 percent under the LTCH prospective payment system. We have 
also clarified in section X.N. of this preamble that to elect to be 
paid based on 100 percent of the Federal rate for cost reporting 
periods that begin on or after October 1, 2002 through November 30, 
2002, a LTCH must notify its fiscal intermediary in writing of this 
election by before November 1, 2002, not 30 days prior to the start of 
its next cost reporting period.
    Comment: One commenter recommended that the proposed 5.1 percent 
reduction be applied only to those LTCHs that choose to be paid on the 
proposed transition blend methodology. Another commenter suggested 
that, instead of applying the proposed 5.1 percent reduction to all 
LTCH prospective payment system payments based solely on the assumption 
that 58 percent of all existing LTCHs will opt to go immediately to 
payment based on 100 percent of the proposed standard Federal rate, CMS 
should make annual adjustments to account for actual experience.
    Response: Under section 123 of Public Law 106-113 and section 307 
of Public Law 106-554, the Secretary has broad

[[Page 56036]]

authority to develop the LTCH prospective payment system. Under this 
authority, as we discuss in section X.N. of this preamble, effective 
for cost reporting periods beginning on or after October 1, 2002, and 
before October 1, 2006, we are providing LTCHs with the option to be 
paid either under the transition blend methodology or under the LTCH 
prospective payment system. In other words, a LTCH may elect to be paid 
on 100 percent of the unadjusted standard Federal rate at the start of 
its cost reporting period during the 5-year transition period specified 
in Sec. 412.533(a). We do not believe that it is appropriate for LTCHs 
in either category (that is, LTCHs that elect to receive payment based 
on 100 percent of the Federal rate or LTCHs that are paid under the 
transition blend) to solely bear the costs of the 5-year transition 
methodology. Rather, we believe that it is more equitable for all LTCHs 
to fund the costs of transitioning to the new LTCH prospective payment 
system. Therefore, we proposed to apply the 5.1 percent reduction to 
all LTCHs for cost reporting periods beginning during FY 2003. 
Accordingly, for this final rule, we are applying the revised percent 
reduction of 6.6 percent (1 - 0.934) to all LTCH payments for cost 
reporting periods beginning during FY 2003. This adjustment is being 
made based on an estimate of the number of LTCHs that will elect to be 
paid at 100 percent of the Federal rate. Since this is a prospective 
payment system with prospectively determined payment rates, we do not 
agree with the commenter that it would be appropriate to make the 
adjustment based on subsequent actual data on the number of hospitals 
that make the election.
    As we explained in the proposed rule (67 FR 13472), based on the 
data available at that time, we stated in the proposed rule that we 
would propose the following budget neutrality offsets to LTCH payments 
during the transition period: 3.9 percent (0.961) in FY 2004; 2.6 
percent (0.974) in FY 2005; and 1.3 percent (0.987) in FY 2006. Based 
on the updated data available at this time, using the same methodology 
described in the proposed rule, we estimate the budget neutrality 
offsets to LTCH payments during the remainder of the transition period 
would be 5.0 percent (0.950) in FY 2004; 3.4 percent (0.996) in FY 
2005; and 1.7 percent (0.983) in FY 2006. No budget neutrality offset 
is necessary in the 5th year of the transition period (FY 2007) because 
under the transition methodology (described in section X.N. of this 
preamble), all LTCHs will be paid based on 100 percent of the standard 
Federal rate and zero percent of payments under TEFRA. These estimates 
are based on the inflation factors and projected Medicare spending for 
LTCHs discussed in section XII.6. of this final rule, and that an 
estimated 49 percent of LTCHs will elect to be paid based on 100 
percent of the standard Federal rate rather than the transition blend.
    As we discussed in the proposed rule, consistent with the statutory 
requirement for budget neutrality, we intend for estimated aggregate 
payments under the LTCH prospective payment system to equal the 
estimated aggregate payments that would be made if the LTCH prospective 
payment system would not be implemented. Our methodology for estimating 
payments for purposes of the budget neutrality calculations uses the 
best available data and necessarily reflects assumptions. When the LTCH 
prospective payment system is implemented, we will monitor payment data 
and evaluate the ultimate accuracy of the assumptions used to calculate 
the budget neutrality calculations (for example, inflation factors, 
intensity of services provided, or behavioral response to the 
implementation of the LTCH prospective payment system, as discussed in 
section X.K. of this final rule). To the extent these assumptions 
significantly differ from actual experience, the aggregate amount of 
actual payments may turn out to be significantly higher or lower than 
the estimates on which the budget neutrality calculations are based.
    As we discussed in the proposed rule, section 123 of Public Law 
106-113 and section 307 of Public Law 106-554 provide the Secretary 
broad authority in developing the LTCH prospective payment system, 
including the authority for appropriate adjustments. Under this broad 
authority, in this final rule at Sec. 412.523(d)(3), we have provided 
for the possibility of making a one-time prospective adjustment to the 
LTCH prospective payment system rates by October 1, 2006, so that the 
effect of any significant difference between actual payments and 
estimated payments for the first year of the LTCH prospective payment 
system would not be perpetuated in the prospective payment system rates 
for future years. (We note that in other contexts (for example, outlier 
payments under the hospital inpatient prospective payment system) 
differences between estimated payments and actual payments for a given 
year are not built into the prospective payment system rates for 
subsequent years. However, the statutory ratesetting scheme under the 
LTCH prospective payment system is very different than in other 
contexts.)
    Comment: Some commenters questioned our proposal to make a one-time 
prospective adjustment to the LTCH prospective payment system rates for 
unanticipated costs incurred in the first year of implementation in 
order to maintain budget neutrality. The commenters believed that such 
a retrospective reconciliation would undermine predictability and 
stability of the LTCH prospective payment system, and does not appear 
to have been used by CMS previously or authorized by the Congress. The 
commenters also stated that we had not outlined any procedures for 
differentiating spending increases that are warranted and in the best 
interest of Medicare patients from increases that resulted from 
mistaken assumptions made by our actuaries. The commenters asked that 
we abandon this proposal, or at a minimum, provide that it will adjust 
payments upward if post-prospective payment system LTCH expenditures do 
not meet the levels projected.
    Other commenters opposed our proposal to use a one-time 
reconciliation. They believed that we should be able to predict, with 
reasonable certainty, the number of LTCHs that will elect to move 
directly to the full Federal rate since it would be rational for any 
lower costs LTCHs to forego this option. The commenters recommended 
that we go through normal rulemaking prior to making any downward 
adjustments to any rates, ``because any such adjustment would be 
vulnerable to budgetary pressures of the moment.''
    Response: We understand the commenters' concerns, but we note that 
section 123 of Public Law 106-113 and section 307 of Public Law 106-554 
provide the Secretary broad authority to develop the LTCH prospective 
payment system, including the authority for appropriate adjustments. 
Under this authority, we proposed a possible one-time prospective 
adjustment to the LTCH prospective payment system rates by October 1, 
2006, so that the effect of any significant difference between actual 
payments and estimated payments for the first year of the LTCH 
prospective payments system is not perpetuated in the prospective 
payment rates for future years. We believe this provision acts to limit 
either unintended Medicare program savings or unintended spending 
increases under the LTCH prospective payment system.
    When estimating payments for purposes of the budget neutrality 
calculations, we use the best available

[[Page 56037]]

data and any appropriate assumptions. Payment data from the LTCH 
prospective payment system will be monitored to ensure the ultimate 
accuracy of the assumptions used to calculate the budget neutrality 
calculations (for example, inflation factors, intensity of services 
provided, or behavioral response to the implementation of the LTCH 
prospective payment system). To the extent that these assumptions 
significantly differ from actual experience, the aggregate amount of 
actual payments may turn out to be significantly higher or lower than 
the estimates on which the budget neutrality calculations are based. 
Finally, if we determine that changes to the calculation of the rates 
or budget neutrality are warranted, we will comply with the 
Administrative Procedure Act in making a one-time adjustment so that 
the effects of any significant differences between actual payments and 
estimated payments for the first year of the LTCH prospective payment 
system are not perpetuated in future years.
    In the proposed rule, we estimated that total Medicare program 
payments for LTCH services over the next 5 years would be $1.80 billion 
for FY 2003; $1.91 billion for FY 2004; $2.02 billion for FY 2005; 
$2.14 billion for FY 2006; and $2.26 billion for FY 2007. These 
estimates were based on most recent estimate of the excluded hospital 
market basket at that time of 3.6 percent for FYs 2003 through 2005, 
3.5 percent for FY 2006, and 3.4 percent for FY 2007, that 58 percent 
of LTCHs would elect to be paid based on 100 percent of the proposed 
standard Federal rate rather than the proposed transition blend, and 
that there would be an increase in Medicare beneficiary enrollment of 
2.2 percent in FY 2003, 2.3 percent in FYs 2004 and 2005, 2.4 percent 
in FY 2006, and 2.3 percent in FY 2007.
    In this final rule, based on updated data, we estimate that total 
Medicare program payments for LTCH services over the next 5 years will 
be:

------------------------------------------------------------------------
                                                              Estimated
                                                               payments
                        Fiscal  year                            ($ in
                                                               billion)
------------------------------------------------------------------------
2003.......................................................        $1.59
2004.......................................................         1.69
2005.......................................................         1.79
2006.......................................................         1.90
2007.......................................................         2.00
------------------------------------------------------------------------

    These estimates are based on an update of our estimate of FY 2003 
payments to LTCHs using our Office of the Actuary's most recent 
estimate of the excluded hospital market basket of 3.4 percent for FY 
2004, 3.5 percent for FY 2005, 3.2 percent for FY 2006, and 2.9 percent 
for FY 2007, and our Office of the Actuary's projection that there will 
be an increase in Medicare beneficiary enrollment of 1.8 percent in FY 
2004, 1.5 percent in FYs 2005 and 2006, and 1.9 percent in FY 2007.
    Comment: One commenter stated that the TEFRA caps for nearly 50 
percent of the LTCHs are lower than the proposed standard Federal rate, 
which may possibly violate budget neutrality. Specifically, the 
commenter stated that, under the TEFRA system, since the ``new'' 
provider cap for LTCHs in FY 2002 and the maximum amount of 
reimbursement that a new LTCH could receive is approximately $24,000, 
as compared to the proposed standard Federal rate, higher costs may be 
incurred by the Medicare program under the proposed LTCH prospective 
payment system. The commenter stated that since it is difficult to 
accurately project the costs under the LTCH prospective payment system 
given the limitations of the data, it is not unlikely that budget 
neutrality will be violated. The commenter recommended that CMS 
reexamine the relevant data for all LTCHs (including those not included 
in the rate-setting file) and devise a methodology that takes into 
account the large number of ``new'' LTCHs and the abnormally high costs 
associated with ``new'' LTCHs.
    Response: We disagree with the commenter that budget neutrality 
will be violated. We believe the commenter is inappropriately equating 
the TEFRA target amount to the standard Federal rate. Because the TEFRA 
payment methodology and the LTCH prospective payment system are 
fundamentally different systems, budget neutrality must be maintained 
in the aggregate at total payment levels, not among the various 
components of the respective systems. Thus, the fact that the TEFRA 
target amount of $24,000 for new providers is less than the proposed 
standard Federal rate of $27,649.02 is irrelevant.
    While we are aware that there are some limitations to the data, the 
data that we used were the best data available at the time. As the 
commenter recommended, we intend to reexamine the LTCH prospective 
payment system as more data becomes available. However, we want to 
emphasize that the statute requires that the LTCH prospective payment 
system must ultimately be budget neutral to total TEFRA payments.

L. Development of the Federal Prospective Payments

    Once the relative weights for each LTC-DRG and the standard Federal 
payment rate are calculated, the Federal prospective payments can be 
determined. As provided for in this final rule, in accordance with 
Sec. 412.523(c)(4), a LTC-DRG payment is calculated by multiplying the 
standard Federal payment rate by the appropriate LTC-DRG relative 
weight. The equation is as follows:
    Federal Prospective Payment = LTC-DRG Relative Weight *Standard 
Federal Payment Rate

M. Computing the Adjusted Federal Prospective Payments

    The Federal prospective payments described in section X.L. of this 
preamble will be adjusted to account for differences in area wages by 
multiplying the labor-related share of the unadjusted Federal 
prospective payment amount (LTC-DRG relative weight x standard Federal 
rate) by the appropriate LTCH wage index (see section X.J.1. of this 
preamble). The Federal prospective payments described in section X.L. 
of this preamble will also be adjusted to account for the higher costs 
of hospitals in Alaska and Hawaii by multiplying the unadjusted Federal 
prospective payment amount by the appropriate adjustment factor shown 
in the table in section X.J.5. of this final rule. To illustrate the 
methodology we are using to adjust the Federal prospective payments, we 
are providing the following example:
    In FY 2003, a Medicare patient is in a LTCH located in Chicago, 
Illinois (MSA 1600) with a one-fifth wage index value of 1.0202 (see 
Table 1 in the Addendum to this final rule). The Medicare patient is 
classified into LTC-DRG 4 (Spinal Procedures), which has a relative 
weight of 1.2493 (see Table 3 of the Addendum to this final rule). To 
calculate the LTCH's total adjusted Federal prospective payment for 
this Medicare patient, we compute the wage-adjusted Federal prospective 
payment amount by multiplying the unadjusted standard Federal rate 
($34,956.15) by the labor-related share (72.885 percent) and the wage 
index (1.0202). This wage-adjusted amount is then added to the 
nonlabor-related portion of the standard Federal rate (27.115 percent) 
to determine the wage-adjusted Federal rate, which is multiplied by the 
LTC-DRG relative weight to calculate the total adjusted Federal 
prospective payment for FY 2003 ($44,313.67). The following illustrates 
the components of the calculations in this example:

[[Page 56038]]



Unadjusted Federal Prospective Payment Rate.............      $34,956.15
Labor-Related Share.....................................       x 0.72885
                                                         ---------------
Labor-Related Portion of the Federal Rate...............    = $25,477.79
Wage Index (MSA 1600)...................................        x 1.0202
                                                         ---------------
Wage-Adjusted Amount....................................    = $25,992.44
Nonlabor-Related Portion of the Federal Rate............    + $ 9,478.36
                                                         ---------------
Wage-Adjusted Federal Rate..............................    = $35,470.80
LTC-DRG 4 Relative Weight...............................        x 1.2493
                                                         ---------------
Total (Wage) Adjusted Federal Prospective Payment.......    = $44,313.67
 

N. Transition Period

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

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

    For a cost reporting period beginning on or after October 1, 2002, 
and before October 1, 2003, the total payment for a LTCH is 80 percent 
of the amount calculated under the current (TEFRA) payment system for 
that specific LTCH and 20 percent of the Federal prospective payment 
amount. The percentage of payment based on the LTCH prospective payment 
system Federal rate will increase by 20 percentage points each year, 
while the TEFRA rate percentage will decrease by 20 percentage points 
each year, for the next 4 fiscal years. For cost reporting periods 
beginning on or after October 1, 2006, Medicare payment to LTCHs will 
be determined entirely under the Federal prospective payment system 
methodology. The TEFRA rate percentage is a LTCH specific amount that 
is based on the amount that the LTCH would have been paid (under TEFRA) 
if the prospective payment system were not implemented.
    Medicare fiscal intermediaries will continue to compute the LTCH 
TEFRA payment amount according to Sec. 412.22(b) of the regulations and 
sections 1886(d) and (g) of the Act. We note that several TEFRA payment 
system provisions that currently are in effect will no longer be 
effective for cost reporting periods beginning in FY 2003. For 
instance, the caps on the target amounts for ``existing'' LTCHs 
provided for under section 4414 of the BBA (see Sec. 413.40(c)(4)(iii)) 
for FYs 1998 through 2002 will no longer be applicable for cost 
reporting periods beginning in FY 2003. For purposes of the LTCH 
prospective payment system, a LTCH's target amount for FY 2003 will be 
determined by updating its FY 2002 target amount, which was subject to 
the FY 2002 cap. In addition, the 15-percent reduction to payments to 
LTCHs for capital-related costs provided for under section 4412 of the 
BBA (Sec. 413.40(j)) is only applicable for portions of cost reporting 
periods occurring in FYs 1998 through FY 2002. This reduction is no 
longer applicable for cost reporting periods beginning in FY 2003. 
Therefore, the TEFRA portion of a LTCH's payment for capital-related 
costs during the LTCH prospective payment system transition period is 
based on 100 percent of its Medicare allowable capital costs.
    In implementing the prospective payment system for LTCHs, one of 
our goals is to transition hospitals to full prospective payments as 
soon as appropriate. Therefore, under Sec. 412.533(c), we will allow a 
LTCH to elect payment based on 100 percent of the Federal rate at the 
start of any of its cost reporting periods during the 5-year transition 
period rather than incrementally shifting from cost-based payments to 
prospective payments. However, a LTCH must wait until its cost 
reporting period that begins during FY 2003 to make the election to by-
pass the transition blend methodology to begin receiving payment based 
on 100 percent of the Federal rate. Furthermore, once a LTCH elects to 
be paid based on 100 percent of the Federal rate, it will not be able 
to revert to the transition blend.

[[Page 56039]]

    The purpose of the transition period is to allow for a smooth 
transition from cost-based reimbursement to prospective payment. We 
believe that it is not appropriate to allow a LTCH to revert back to 
the blended transition methodology once it elects payment based on 100 
percent of the Federal rate because allowing LTCHs to switch back 
undermines the purpose of transitioning to a fully Federal prospective 
payment system, as well as being administratively burdensome to our 
fiscal intermediaries.
    In the proposed rule, we stated that, consistent with transition 
methodology policies under the IRF prospective payment system, in order 
to elect payment based on 100 percent of the Federal rate, a LTCH must 
notify the fiscal intermediary of the election no later than 30 days 
before the beginning of the cost reporting period in the applicable 
fiscal year beginning on or after October 1, 2003 and before October 1, 
2007 (Sec. 412.533(b)).
    Comment: Some commenters are concerned that there will be 
insufficient time for the submission of notification to elect to be 
paid on a full Federal rate instead of the transition blend method. 
Under the proposed rule, the election had to be made no later than 30 
days before the beginning of the hospital's cost reporting period in 
each applicable fiscal year beginning on or after October 1, 2002. 
Several commenters were concerned that this could prove to be an 
impossibility depending on the date that this final rule is published. 
One commenter recommended that the notification should be within a 45-
day period of the publication of the final rule, providing a LTCH with 
sufficient time to notify the fiscal intermediary, as well as to ensure 
that the hospital is aware of the published LTCH provisions. Another 
commenter requested a grace period to allow hospitals that have fiscal 
years beginning at or close to October 1, 2002 additional time to give 
notice to the fiscal intermediary. One commenter requested 
clarification regarding when the election to be paid under the full 
Federal rate may be made. Another commenter pointed out that the use of 
October 1, 2003 in proposed Sec. 412.533(b)(1) rather than October 1, 
2002 in the regulation causes confusion. Apparently, it is not clear if 
LTCHs may elect to be paid at 100 percent of the Federal rate for cost 
reporting periods beginning on or after October 1, 2002, but before 
October 1, 2003.
    Response: In response to the comment concerning the ability of a 
LTCH with a cost reporting period that begins on October 1 to elect 
payment based on 100 percent of the Federal rate 30 days prior to 
October 1, 2002, we acknowledge that we inadvertently did not explain 
the steps a LTCH would undertake in order to elect immediate transition 
to the full prospective payment system. Specifically, those LTCHs with 
cost reporting periods that begin on October 1, 2002, and that want to 
elect to be paid immediately based on 100 percent of the Federal rate 
may not have sufficient time to notify their fiscal intermediary of 
their election 30 days prior to October 1, 2002. In this final rule, we 
are clarifying that LTCHs will have at least 60 days from the 
publication of this final rule to notify their fiscal intermediary of 
that election. Accordingly, we are revising Sec. 412.533(c)(2)(ii) to 
state that for cost reporting periods that begin on or after October 1, 
2002 and through November 30, 2002, a LTCH must notify its fiscal 
intermediary of this election in writing before November 1, 2002. For 
cost reporting periods beginning on or after December 1, 2002 and for 
the remainder of the 5-year transition period, the notification of this 
election must be received by the fiscal intermediary in writing within 
30 days prior to the start of the LTCH's next cost reporting period. 
For example, a LTCH with a cost report period beginning on October 15, 
2002, must notify its fiscal intermediary in writing of this election 
before November 1, 2002, while a LTCH with a cost reporting period 
beginning on January 1, 2003 must notify its fiscal intermediary in 
writing of this election before December 2, 2002.
    The notification by the LTCH to make the election must be made in 
writing to the Medicare fiscal intermediary. The intermediary must 
receive the request on or before the specified date (that is before 
November 1, 2002 for cost reporting periods that begin on or after 
October 1, 2002 through November 30, 2002 or before the 30th day before 
the applicable cost reporting period begins for cost reporting periods 
beginning on or after December 1, 2002) regardless of any postmarks or 
anticipated delivery dates. Notifications received, postmarked, or 
delivered by other means after the specified date will not be accepted. 
If the specified date falls on a day that the postal service or other 
delivery sources are not open for business, the LTCH will be 
responsible for allowing sufficient time for the delivery of the 
request before the deadline. If a LTCH's notification is not received, 
payment will be based on the transition period rates.
    Comment: Some commenters urged us to allow a LTCH to elect payment 
based on 100 percent of the Federal rate beginning with discharges 
occurring on or after October 1, 2002 without regard to the beginning 
of the hospital's cost-reporting year if its TEFRA limit is below the 
75th percentile cap established for pre-1997 LTCHs. In other words, the 
commenter requests that we allow a LTCH that has a TEFRA limit below 
the 75th percentile cap established for pre-1997 LTCHs to elect to 
receive payment based on 100 percent of the Federal rate for the part 
of its cost reporting period that begins before October 1, 2002.
    Response: In accordance with section 123 of Public Law 106-113, the 
LTCH prospective payment system will be effective beginning with a 
hospital's first cost reporting period that begins on or after October 
1, 2002. Therefore, we are not adopting the commenters' suggestion to 
allow a LTCH that has a TEFRA limit below the 75th percentile cap for 
pre-1997 LTCHs to elect payment based on 100 percent of Federal rate 
beginning with discharges occurring on or after October 1, 2002. In 
accordance with Sec. 412.500(b), LTCHs must wait until their first cost 
reporting period that begins on or after October 1, 2002 to start 
receiving payments under the LTCH prospective payment system, including 
the election of payments based on 100 percent of the Federal rate as 
provided for in Sec. 412.533(c).
    Comment: Several commenters requested that, even though BIPA 
mandates that a default LTCH prospective payment system based on 
existing DRGs be implemented if the Secretary is unable to implement by 
October 1, 2002, the proposed rule should be modified and become 
effective by October 1, 2002. The commenters argued that the system 
should be ``deemed'' as implemented on that date with appropriate 
retroactive payment adjustments and that a default system should not be 
implemented as an interim step.
    Response: With the publication of this final rule, we are meeting 
the statutory October 1, 2002 effective date of the LTCH prospective 
payment system. Therefore, the comment will not be addressed in this 
final rule.
    Comment: One commenter requested clarification of whether a 
provider that is being transitioned into the LTCH prospective payment 
system would be paid a percentage of ``the cost-based reimbursement 
rate'' or would the cost-based percentage be paid on an interim basis 
subject to cost report reconciliation.
    Response: The cost-based percentage of a provider's total Medicare 
payment under the TEFRA payment system will be subject to cost report 
reconciliation.

[[Page 56040]]

We are revising the regulation text at Sec. 412.533 to reflect this 
clarification.
    In addition, it is now evident that the standard systems changes 
that are necessary to accommodate claims processing and payment under 
the new LTCH prospective payment system may not be in place by October 
1, 2002. However, in order to comply with the statutory mandate to 
implement the LTCH prospective payment system no later than October 1, 
2002, we are requiring that from October 1, 2002 until the systems 
changes are completed, all LTCHs, including those that elect to be paid 
based on 100 percent of the Federal rate, continue to submit their 
claims to and receive payment from their fiscal intermediaries as they 
otherwise would if the TEFRA payment system was still in effect. (We 
note that unless a LTCH that is required to comply with the HIPAA 
Administrative Simplification Standards obtains an extension in 
compliance with the Administrative Compliance Act, it must submit an 
electronic claim in compliance with 42 CFR 162.1002 and 42 CFR 1102 
beginning October 16, 2002. Once the standard claims processing systems 
have been changed, the intermediary will ultimately reconcile any 
discrepancies between what LTCHs were paid and the payment amount 
determined under the LTCH prospective payment system. However, since 
the LTCH prospective payment system is in effect as of October 1, 2002, 
we would expect all bills submitted during this interim period to 
conform to the coding and billing guidelines as described in section 
VIII.H. of this preamble.
    In proposed Sec. 412.535, we proposed a schedule for publishing 
information on the LTCH prospective payment system for each fiscal year 
in the Federal Register, prior to the start of each fiscal year, on or 
before August 1. This cycle coincides with the statutorily mandated 
publication schedule for the inpatient acute care prospective payment 
system. Section 1886(e)(5) of the Act requires that for the acute care 
prospective payment system, the proposed rule be published in the 
Federal Register not later than ``the April 1 before each fiscal 
year''; and the final rule, not later than ``the August 1 before such 
fiscal year.'' The Act imposes no such requirement for the LTCH 
prospective payment system. Therefore, to avoid concurrent publications 
for these two systems, for purposes of administrative feasibility and 
efficiency, we will be considering a change in the schedule for 
updating the LTCH prospective payment system to be effective July 1 of 
each year. We will address this issue in the future.

O. Payments to New LTCHs

    In the March 22, 2002 proposed rule, for the purposes of defining a 
new LTCH, we proposed under Sec. 412.23(e)(4) to define a new LTCH as a 
provider of inpatient hospital services that (1) meets the revised 
qualifying classification criteria (described in section VIII.B. of 
this preamble and in Sec. 412.23(e)(1)); and (2) under present or 
previous ownership (or both), has not received payment as a LTCH for 
discharges prior to October 1, 2002 (the effective date of the 
prospective payment system for LTCHs). We also proposed in Sec. 412.500 
that the LTCH prospective payment system applies to hospitals with a 
cost reporting period beginning on or after October 1, 2002.
    We believe that these two statements are inconsistent because 
proposed Sec. 412.23(e)(4) ties the status of a LTCH (that is, existing 
or new) to whether or not the hospital has received payment as a LTCH 
prior to the effective date of the LTCH prospective payment system, as 
opposed to focusing on whether the hospitals first cost reporting 
period begins on or after October 1, 2002 (the effective date of the 
statute). We believe the most appropriate focus in the instant case 
should be linked to the statute's emphasis of cost reporting periods 
beginning on or after October 1, 2002. In this final rule, we are 
revising the regulation so that the definition of a new LTCH more 
closely mirrors the statutory provision. Accordingly, for purposes of 
Medicare payment under the prospective payment system, we are defining 
a new LTCH as a provider of inpatient hospital services that otherwise 
meets the qualifying criteria for LTCHs, set forth in Sec. 412.23(e)(1) 
and (e)(2) and, under present or previous ownership (or both), and its 
first cost reporting period as a LTCH begins on or after October 1, 
2002. We are revising Sec. 412.23(e)(4) to reflect this correction.
    As noted above, new LTCHs will not participate in the 5-year 
transition from cost-based reimbursement to prospective payment (see 
section X.N. of this preamble). The transition period described in 
section X.N. of this preamble is intended to provide existing LTCHs 
time to adjust to payment under the new system. Since these new LTCHs 
with cost reporting periods beginning on or after October 1, 2002 would 
not have received payment under TEFRA for the delivery of LTCH services 
prior to the effective date of the LTCH prospective payment system, we 
do not believe that those new LTCHs require a transition period in 
order to make adjustments to their operations and capital financing, as 
will LTCHs that have been paid under TEFRA.
    This definition of new LTCHs should not be confused with those 
LTCHs first paid under the TEFRA payment system for discharges 
occurring on or after October 1, 1997, described in section 
1886(b)(7)(A) of the Act, added by section 4416 of Public Law 105-33. 
As stated in Sec. 413.40(f)(2)(ii), for cost reporting periods 
beginning on or after October 1, 1997, the payment amount for a ``new'' 
(post-FY 1998) LTCH is the lower of the hospital's net inpatient 
operating cost per case or 110 percent of the national median target 
amount payment limit for hospitals in the same class for cost reporting 
periods ending during FY 1996, updated to the applicable cost reporting 
period (see 62 FR 46019, August 29, 1997). Under the prospective 
payment system for LTCHs, those ``new'' LTCHs that meet the definition 
of ``new'' under Sec. 413.40(f)(2)(ii) and that have first cost 
reporting periods prior to October 1, 2002 will be paid under the 
transition methodology described in section X.N. of this preamble.
    For example, a ``new'' LTCH (post-FY 1998) that first began 
receiving payment as a LTCH on October 1, 2001, will be subject to the 
110 percent of the median target amount payment limit for LTCHs (in 
accordance with Sec. 413.40(f)(2)(ii)) for both its FY 2002 (October 1, 
2001 through September 30, 2002) and FY 2003 (October 1, 2002 through 
September 30, 2003) cost reporting periods. Assuming the hospital has 
not elected to be paid 100 percent of the Federal rate for its cost 
reporting period beginning on October 1, 2002 (the first cost reporting 
period when the LTCH will be subject to the prospective payment 
system), the hospital would be paid under the transition methodology 
whereby the LTCH's TEFRA portion of its payment for operating costs (80 
percent) is limited by the 110 percent of the median target amount 
payment limit for LTCHs under Sec. 413.40(f)(2)(ii). For its cost 
reporting period beginning on October 1, 2003 (which is the hospital's 
third cost reporting period), under the transition methodology, that 
LTCH's TEFRA portion of its payment for operating costs (60 percent) 
will be limited to its target amount as determined under 
Sec. 413.40(c)(4)(v). Furthermore, if a hospital is designated as a 
LTCH on September 1, 2002, it would not be considered a new LTCH under 
Sec. 412.23(e)(4), even if it had not discharged any patients or 
received any payments as of the implementation date of the LTCH 
prospective payment system on October 1, 2002, because its first cost 
reporting period didn't begin

[[Page 56041]]

on or after October 1, 2002. Thus, it would be paid according to 
Sec. 413.40(f)(2)(ii) from September 1, 2002 through August 30, 2003. 
This LTCH would not be subject to payments under the LTCH prospective 
payment system until the start of its next cost reporting period on 
September 1, 2003. At the beginning of its second cost reporting period 
as a LTCH (that is, September 1, 2003), this LTCH would be subject to 
the transition period in Sec. 412.533(a)(1), because this provision 
applies to cost reporting periods beginning on or after October 1, 2002 
and before October 1, 2003. Under the blended payments of the 
transition period in Sec. 412.533(a)(1), 80 percent of payments for 
operating costs would be paid under the TEFRA system, as described in 
Sec. 413.40(f)(2)(ii). (This hospital could also elect to be paid 100 
percent of the Federal rate for its cost reporting period beginning 
September 1, 2003.) We did not receive any comments on this proposal.

P. Method of Payment

    As discussed earlier, a Medicare patient will be classified into a 
LTC-DRG based on the principal diagnosis, up to eight additional 
(secondary) diagnoses, and up to six procedures performed during the 
stay, as well as age, sex, and discharge status of the patient. The 
LTC-DRG will be used to determine the Federal prospective payment that 
the LTCH will receive for the Medicare-covered Part A services the LTCH 
furnished during the Medicare patient's stay. Under Sec. 412.541(a), 
the payment is based on the submission of the discharge bill since 
section 123(a) of Public Law 106-113 requires that the LTCH prospective 
payment system be a per discharge based system. The discharge bill 
provides data to allow for reclassifying the stay from payment at the 
full LTC-DRG rate to payment for a case as a short-stay outlier (under 
Sec. 412.529) or as a interrupted stay (under Sec. 412.531), or to 
determine if the case will qualify for a high-cost outlier payment 
(under Sec. 412.525(a)).
    Accordingly, the ICD-9-CM codes and other information used to 
determine if an adjustment to the full LTC-DRG payment is necessary 
(for example, length of stay or interrupted stay status) is recorded by 
the LTCH on the Medicare patient's discharge bill and submitted to the 
Medicare fiscal intermediary for processing. The payment made 
represents payment in full, under Sec. 412.521(b), for inpatient 
operating and capital-related costs, but not the costs of an approved 
medical education program, bad debts, blood clotting factors, 
anesthesia services by hospital-employed nonphysician anesthetists or 
obtained under arrangement, or the costs of photocopying and mailing 
medical records requested by a QIO, which are costs paid outside the 
LTCH prospective payment system. We note that in this final rule, under 
Sec. 412.521(b)(2)(i), we have added a reference to Sec. 413.87 to 
indicate that payments for Medicare+Choice nursing and allied health 
education costs are made separate from payments under the LTCH 
prospective payment system.
    Under the current payment system, a LTCH may elect to be paid using 
the periodic interim payment (PIP) method described in Sec. 413.64(h), 
and may be eligible to receive accelerated payments as described in 
Sec. 413.64(g). As we discussed in the proposed rule, with the 
implementation of a prospective payment system for LTCHs, we will 
continue to allow the PIPs method of payment as provided for under 
Sec. 413.64(h) and accelerated payments as provided for under 
Sec. 413.64(g) for qualified LTCHs.
    We are adopting, as final, the proposed provisions for the methods 
of payment available to LTCHs. In addition, based on a commenter's 
concern, we wish to clarify a provision that for those LTCHs that 
choose not to elect to receive payments under the PIP method or that 
are not qualified to receive payment under the PIP method may continue 
to bill on an interim basis. Consistent with the interim payment 
provision under acute care hospital inpatient prospective payment 
system we are including a new subsection (d) at Sec. 412.541 stating 
that LTCHs with unusually long lengths of stay, not receiving payment 
under the PIP method may bill on an interim basis. Consistent with the 
interim payment provisions under the acute care hospital inpatient 
prospective payment system at Sec. 412.116(d), we believe that to allow 
those LTCHs experiencing unusually long stays to receive interim 
payments 60 days after an admission and every 60 days thereafter would 
help to alleviate any financial hardship that could result otherwise. 
We believe that this is both a fair and equitable solution. We are also 
including some technical changes to the language under Sec. 413.64 to 
correct regulations citations to reflect the availability of the PIP 
method for LTCHs under the prospective payment systems.
    For those LTCHs that are paid during the 5-year transition based on 
the blended transition methodology in Sec. 412.533 for cost reporting 
periods beginning on or after October 1, 2002 and before October 1, 
2006, the PIP amount is based on the transition blend. For those LTCHs 
that are paid based on 100 percent of the standard Federal rate, the 
PIP amount is based on the estimated prospective payment for the year 
rather than on the estimated cost reimbursement. In this final rule, as 
in the proposed rule, we are clarifying that we are excluding outlier 
payments that are paid upon submission of a discharge bill from the PIP 
amounts. In addition, in this final rule, as in the proposed rule, Part 
A costs that are not paid for under the LTCH prospective payment 
system, including Medicare costs of an approved medical education 
program, bad debts, blood clotting factors, anesthesia services by 
hospital-employed nonphysician anesthetists or obtained under 
arrangement, and the costs of photocopying and mailing medical records 
requested by a QIO is subject to the interim payment provisions.
    Comment: Several commenters explained that LTCHs could experience 
financing difficulties because of the potentially lengthy period 
between the time a LTCH incurs costs to provide care and the date on 
which it receives payment following claims submission. One commenter 
stated that their provider bills on a cyclical basis, thus, allowing 
for more prompt receipt of payment from Medicare and more timely 
billing of deductibles and coinsurance to second insurers. Another 
commenter pointed out that some LTCHs do not qualify for the PIP method 
of payment. The commenter asked whether LTCHs that are currently 
receiving interim payments may switch to the PIP method. The commenter 
recommended that in order to avoid the heavy financial burden for 
LTCHs, these hospitals should be allowed to obtain interim payments 
similar to the method currently available to cost-based providers under 
the present regulations. In addition, some commenters expressed concern 
that Medicare fiscal intermediaries may not have the most current data 
upon which to base interim payments while others had questions 
regarding the timeliness and accuracy of the process used to determine 
PIP payments.
    Response: As we stated above, we are revising the current 
regulations at Sec. 412.541 to include a subsection (d) that allows 
LTCHs that are not receiving payments under the PIP method and that are 
experiencing unusually long stays to bill 60 days after an admission 
and every 60 days thereafter. Existing Sec. 412.116(d) permits special 
interim payments for ``unusually long lengths of stay'' that it further 
describes as ``after a Medicare beneficiary has been in the hospital at 
least 60 days.'' LTCHs that

[[Page 56042]]

are presently receiving interim payments and would like to switch to 
the PIP method should contact their fiscal intermediary to determine 
whether they qualify under regulations at Sec. 413.64(h) for such 
payments.
    Since the comments regarding the accuracy of data and the 
timeliness of PIP determinations do not address issues that were 
specifically in the proposed rule, we are not responding to these 
comments in this final rule.
    Comment: One commenter expressed concern with the definition of 
``discharge bill'' under the proposed regulations. Specifically, the 
proposed regulation includes a definition recognizes a ``discharge'' 
when a patient exhausts Part A benefits during the inpatient stay. The 
commenter believes that this will create problems for business offices 
as most current billing systems are not designed to bill in the middle 
of a patient stay. This will necessitate additional spending on 
computer programming to properly submit bills.
    Response: For LTCH prospective payment purposes, we have clarified 
the definition of discharge in Sec. 412.503. For payment purposes, a 
Medicare patient in a LTCH is considered discharged when the patient 
has exhausted their Medicare Part A benefits (including lifetime 
reserve days) during a spell of illness (Sec. 413.40(a)). While we 
understand the commenter's concerns, our definition of ``discharge'' 
should not present new problems for LTCHs since under TEFRA, patients 
who have exhausted their Medicare Part A benefits are also considered 
to be discharged for Medicare payment purposes.

XI. Provisions of the Final Rule

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

XII. Regulatory Impact Analysis

A. Introduction

    We have examined the impact of this final rule as required by 
Executive Order 12866. We also have examined the impacts of this final 
rule under the criteria of the Regulatory Flexibility Act (RFA) (Public 
Law 96-354), section 1102(b) of the Social Security Act (the Act), the 
Unfunded Mandates Reform Act of 1995 (UMRA) (Public Law 104-4), and 
Executive Order 13132 (Federalism).
1. Executive Order 12866
    Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). A regulatory impact 
analysis (RIA) must be prepared for final rules that constitute 
significant regulatory action, including rules that have an economic 
effect of $100 million or more in any one year (major rules). We have 
determined that this final rule would not be a major rule within the 
meaning of Executive Order 12866 because the redistributive effects do 
not constitute a shift of $100 million in any one year. Because the 
LTCH prospective payment system must be budget neutral in accordance 
with section 123(a)(1) of Public Law 106-113, we estimate that there 
will be no budgetary impact for the Medicare program. (Section XII.B.6. 
of this preamble includes an estimate of Medicare program payments for 
LTCH services.)
2. Regulatory Flexibility Act (RFA)
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses in issuing a final rule. For purposes of the RFA, 
small entities include small businesses, nonprofit organizations, and 
government agencies. Most hospitals and most other providers and 
suppliers are small entities, either by nonprofit status or by having 
revenues of $25 million or less annually. For purposes of the RFA, all 
hospitals are considered small entities. Medicare fiscal intermediaries 
are not considered to be small entities. Individuals and States are not 
included in the definition of a small entity. Therefore, we certify 
that this final rule will not have a significant impact on a 
substantial number of small entities, in accordance with RFA.
3. Impact on Rural Hospitals
    Section 1102(b) of the Social Security Act requires us to prepare a 
regulatory impact analysis if a final rule may have a significant 
impact on the operations of a substantial number of small rural 
hospitals. This analysis must conform to the provisions of section 604 
of the RFA. For purposes of section 1102(b) of the Act, we define a 
small rural hospital as a hospital that is located outside of an MSA 
and has fewer than 100 beds. As discussed in detail in section XII.B. 
of this preamble, this final rule will not have a substantial impact on 
hospitals classified as located in rural areas that have fewer than 100 
beds.
4. Unfunded Mandates
    Section 202 of the UMRA requires that agencies assess anticipated 
costs and benefits before issuing any proposed rule or any final rule 
preceded by a rule that may result in expenditures in any one year by 
State, local, or tribal governments, in the aggregate, or by the 
private sector, of $110 million or more. This final rule will not 
mandate any requirements for State, local, or tribal governments nor 
would it result in expenditures by the private sector of $110 million 
or more in any one year.
5. Federalism
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications.
    We have examined this final rule under the criteria set forth in 
Executive Order 13132 and have determined that this final rule will not 
have any negative impact on the rights, roles, and responsibilities of 
State, local, or tribal governments or preempt State law.

B. Anticipated Effects

    We discuss the impact of this final rule below in terms of its 
fiscal impact on the Federal Medicare budget and on LTCHs.
1. Budgetary Impact
    Section 123(a)(1) of Public Law 106-113 requires us to set the 
payment rates contained in this final rule such that total payments 
under the LTCH prospective payment system are projected to equal the 
amount that would have been paid if this prospective payment system had 
not been implemented. However, the final unadjusted standard Federal 
rate ($34,956.15) was calculated as if all LTCHs will be paid based on 
100 percent of the standard Federal rate in FY 2003. As discussed in 
section X.K.2.h. of this final rule, we are implementing a budget 
neutrality offset to payments (in addition to the budget neutrality 
adjustment reflected in the standard Federal rate) to account for the 
monetary effect of the 5-year transition period and the policy to 
permit LTCHs to elect to be paid based on 100 percent

[[Page 56043]]

of the standard Federal prospective payment rate rather than a blend of 
Federal prospective payments and reasonable cost-based payments during 
the transition. The amount of the offset is equal to 1 minus the ratio 
of the estimated TEFRA reasonable cost-based payments that would have 
been made if the LTCH prospective payment system had not been 
implemented, to the projected total Medicare program payments that 
would be made under the transition methodology and the option to elect 
payment based on 100 percent of the Federal prospective payment rate. 
Thus, in accordance with section 123(a)(1) Public Law 106-113, there 
will be no budgetary impact to the Medicare program by implementation 
of the LTCH prospective payment system. (Section XII.B.6. of this 
preamble includes an estimate of Medicare program payments for LTCH 
services.)
2. Impacts on Providers
    In order to understand the impact of the new prospective payment 
system on different categories of LTCHs, it is necessary to estimate 
payments that will be made under the current (TEFRA) payment 
methodology (current payments) and payments under the prospective 
payment system (prospective payments). We also evaluated the ratio of 
estimated prospective payments to estimated costs for each category of 
LTCHs.
    Hospital groups were based on characteristics provided in OSCAR 
data and 1999 cost report data from HCRIS. Hospitals with incomplete 
characteristics were grouped into the ``unknown'' category. Hospital 
groups include:

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

    To estimate the impacts among the various categories of providers, 
it is imperative that current payments and prospective payments contain 
similar inputs. More specifically, we estimated prospective payments 
only for those providers that we are able to calculate current payment. 
For example, if we did not have FYs 1996 through 1999 cost data for a 
LTCH, we were unable to determine an update to the LTCH's target amount 
as described in section X.K. of this final rule to estimate payment 
under the TEFRA system.
    As previously stated in section X.J. of this final rule, after 
excluding the data from those LTCHs that are all-inclusive rate 
providers or that are reimbursed in accordance with demonstration 
projects (section X.K.2.a. of this final rule), we have both case-mix 
and cost data for 198 LTCHs. Thus, those 198 providers were used in the 
regression analyses to determine the appropriateness of various 
adjustments to the final standard Federal payment rate. However, for 
the determination of the final unadjusted standard Federal rate 
($34,956.15), we only had both Medicare claims data from the FY 2001 
MedPAR file and cost data to estimate TEFRA payments for 194 providers. 
Thus, for the impact analyses shown in the following tables, we 
simulate payments for 194 LTCHs. The methodology used to update payment 
data to the midpoint of FY 2003 was based on the use of historical cost 
report data to determine the relationship between the LTCH's costs and 
the target amount. Thus, the number of providers reflects only those 
providers for which we had cost report data available from FYs 1996, 
1997, 1998, and 1999 (see discussion in section X.K. of this final 
rule). We believe these hospitals provide sufficient data to determine 
appropriate LTC-DRG relative weights. Therefore, we believe the 
discharges of these 194 LTCHs are representative of the complete LTCH 
universe.
    These impacts reflect the estimated losses or gains among the 
various classifications of providers for FY 2003. Prospective payments 
were based on the final standard Federal rate of $34,956.15 and the 
hospital's estimated case-mix based on FY 2001 claims data. These 
hospital payments were compared to the hospital's payments based on its 
cost from the cost report inflated to FY 2003 and subject to the 
updated per discharge target amount.
3. Calculation of Current Payments
    To calculate current costs, cost report data are trended forward 
from the midpoint of the cost reporting period to the midpoint of FY 
2003 using the methodology set forth in section X.K.2.b. of this final 
rule. To estimate current payments, we determined payments for 
operating costs for each LTCH in accordance with the methodology in 
section 1886(b) of the Act. In addition, for the purposes of these 
impact analyses, in estimating current payments, we took into 
consideration the increases to the hospital-specific target amounts and 
the cap on the target amounts for LTCHs provided for by section 
307(a)(1) of Public Law 106-554, and the enhanced bonus payments for 
LTCHs provided for by section 122 of Public Law 106-113. However, as we 
discuss in section X.K. of this final rule, in accordance with section 
307(a)(2) of Public Law 106-554, the increases to the hospital-specific 
target amounts and the cap on the target amounts for LTCHs provided for 
by section 307(a)(1) of Public Law 106-554, and the enhanced bonus 
payments for LTCHs provided for by section 122 of Public Law 106-113, 
were not taken into account in the development of the budget neutral 
standard Federal rate in the prospective payment system for LTCHs. 
Further, we compute payments for capital-related costs consistent with 
section 1886(g)(4) of the Act. To determine each LTCH's average per 
discharge payment amount under the current payment system, operating 
and capital-related payments are added together, and then the total 
payment is divided by the number of Medicare discharges from the cost 
reports. Total payments for each LTCH are then computed by multiplying 
the number of discharges from the FY 2001 MedPAR claims data by the 
average per discharge payment amount.
4. Calculation of Prospective Payments
    To estimate payments under the LTCH prospective payment system, we 
simulated payments on a case-by-case basis by applying the final 
payment policy for short-stay outliers (as described in section X.C. of 
this final rule) and the adjustments for area wage differences (as 
described in section X.J.1. of this final rule) and for the cost-of-
living for Alaska and Hawaii (as described in section X.J.5. of this 
final rule). Additional payments will also be made for high-cost 
outlier cases (as described in section X.J.6. of this final rule). As 
noted in section X.J. of this final rule, we will not make adjustments 
for geographic reclassification, indirect medical education costs, or a 
disproportionate share of low-income patients.
    Next, we calculated payments using the transition blend percentages 
for FY 2003 (80 percent of current reasonable cost-based (TEFRA) 
payments and 20 percent of payments under the LTCH prospective payment 
system) and compared that estimated blended payment to the LTCH's 
estimated payment if it would elect payment based on 100 percent of the 
Federal rate (section X.N. of this final rule). If we estimated that a 
LTCH would be paid more based on 100 percent of the Federal rate, we 
assumed that it would elect to bypass the transition methodology and 
transition immediately to prospective payments.
    Then we applied the 6.6 percent reduction to payment to account for 
the effect of the 5-year transition methodology and election of payment

[[Page 56044]]

based on 100 percent of the Federal rate on Medicare program payments 
to each LTCH's estimated payments under the prospective payment system 
(section X.K.2.h. of this final rule). The impact based on our 
projection of whether a LTCH will be paid based on the transition blend 
methodology or will elect payment based on 100 percent of the Federal 
rate for cost reporting periods beginning during FY 2003 is shown below 
in Table I.
    In Table II below, we also show the impact if the LTCH prospective 
payment system were fully implemented in FY 2003; that is, as if there 
were an immediate transition to fully Federal prospective payments 
under the LTCH prospective payment system for FY 2003. Accordingly, the 
6.6 percent reduction to account for the 5-year transition methodology 
on LTCHs' Medicare program payments was not applied to LTCHs' estimated 
payments under the prospective payment system. Furthermore, starting 
with cost reporting periods that begin during FY 2007, the 5-year 
transition period would have ended, and all LTCHs would be paid based 
on 100 percent of the standard Federal rate. All payment simulations 
reflect data trended to the midpoint FY 2003.
    Tables I and II below illustrate the aggregate impact of the 
payment system among various classifications of LTCHs. The first 
column, LTCH Classification, identifies the type of LTCH. The second 
column lists the number of LTCHs of each classification type; the third 
column identifies the number of long-term care cases; and the fourth 
column shows the ratio of prospective payments to current payments.
    As we discuss in section X.K. of this final rule, in accordance 
with section 307(a)(2) of Public Law 106-554, the increases to the 
hospital-specific target amounts and the cap on the target amounts for 
LTCHs provided for by section 307(a)(1) of Public Law 106-554, and the 
enhanced bonus payments for LTCHs provided for by section 122 of Public 
Law 106-113, were not taken into account in the development of the 
budget neutral standard Federal rate in the prospective payment system 
for LTCHs. However, as we noted above, for the purposes of these impact 
analyses, in estimating current payments under the TEFRA payment 
system, we took into consideration the increases to the hospital-
specific target amounts and cap on the target amounts for LTCHs 
provided for by section 307(a)(1) of Public Law 106-554, and the 
enhanced bonus payments for LTCHs provided for by section 122 of Public 
Law 106-113. Including these provisions in our estimate of current 
payments to LTCHs under the TEFRA payment system increases payments to 
LTCHs' under the TEFRA payment system in the aggregate by approximately 
3 percent. Since payments made to LTCHs under the LTCH prospective 
payment system must be budget neutral to payments made to LTCHs under 
the TEFRA payment system without the increases provided for by those 
provisions, the ``New Payment to Current Payment Ratio'' for all 
providers shown in Tables I and II below equals approximately 0.97 
instead of 1.00.

Table I.--Projected Impact Reflecting 20 Percent of Prospective Payments
 and 80 Percent of Current (TEFRA) Payments and Option To Elect Payment
                Based on 100 Percent of the Federal Rate
------------------------------------------------------------------------
                                                             New payment
                                    Number of    Number of    to current
       LTCH classification            LTCHs      LTCH cases    payment
                                                                ratio
------------------------------------------------------------------------
All Providers....................          194       72,149       0.9762
By Location:
    Rural........................            6        2,189       1.0539
    Urban........................          188       69,960       0.9754
        Large....................          121       50,296       0.9814
        Other....................           67       19,664       0.9569
By participation date:
    After October 1993...........          125       42,617       0.9632
    Before October 1983..........           17        7,841       1.0200
    October 1983-September 1993..           48       20,795       0.9908
    Unknown......................            4          896       1.0261
By ownership control:
    Voluntary....................           49       19,073       0.9634
    Proprietary..................          134       50,616       0.9769
    Government...................           11        2,460       1.0633
By census region:
    New England..................           14        9,487       1.0289
    Middle Atlantic..............            9        3,276       1.0405
    South Atlantic...............           18        6,265       1.0067
    East North Central...........           33        9,245       0.9994
    East South Central...........           11        3,314       0.9860
    West North Central...........           11        2,898       1.0006
    West South Central...........           71       30,248       0.9415
    Mountain.....................           15        2,491       0.9647
    Pacific......................           12        4,925       0.9729
By bed size:
    Beds: 0-24...................           20        3,119       0.9926
    Beds: 25-49..................           81       20,659       0.9756
    Beds: 50-74..................           19        7,433       0.9593
    Beds: 75-124.................           27       13,248       0.9768
    Beds: 125-199................           23       13,035       0.9739
    Beds: 200 +..................           24       14,655       0.9839
------------------------------------------------------------------------


[[Page 56045]]


 Table II.--Projected Impact Reflecting the Fully Phased-In Prospective
                                Payments
------------------------------------------------------------------------
                                                             New payment
                                    Number of    Number of    to current
       LTCH classification            LTCHs      LTCH cases    payment
                                                                ratio
------------------------------------------------------------------------
All Providers....................          194       72,149       0.9767
By Location:
    Rural........................            6        2,189       1.0963
    Urban........................          188       69,960       0.9740
        Large....................          121       50,296       0.9833
        Other....................           67       19,664       0.9505
By participation date:
    After October 1993...........          125       42,617       0.9566
    Before October 1983..........           17        7,841       1.0560
    October 1983-September 1993..           48       20,795       0.9955
    Unknown......................            4          896       0.9502
By ownership control:
    Voluntary....................           49       19,073       0.9641
    Proprietary..................          134       50,616       0.9780
    Government...................           11        2,460       1.0447
By census region:
    New England..................           14        9,487       1.0676
    Middle Atlantic..............            9        3,276       1.0918
    South Atlantic...............           18        6,265       1.0018
    East North Central...........           33        9,245       1.0212
    East South Central...........           11        3,314       1.0175
    West North Central...........           11        2,898       1.0187
    West South Central...........           71       30,248       0.9213
    Mountain.....................           15        2,491       0.9323
    Pacific......................           12        4,925       0.9676
By bed size:
    Beds: 0-24...................           20        3,119       0.9827
    Beds: 25-49..................           81       20,659       0.9838
    Beds: 50-74..................           19        7,433       0.9125
    Beds: 75-124.................           27       13,248       0.9687
    Beds: 125-199................           23       13,035       0.9955
    Beds: 200 +..................           24       14,655       0.9909
------------------------------------------------------------------------

5. Results
    We have prepared the following summary of the impact (as shown in 
Table I) of the LTCH prospective payment system set forth in this final 
rule.
a. Location
    The majority of LTCHs are in urban areas. Approximately 3 percent 
of the LTCHs are identified as being located in a rural area, and 
approximately 3 percent of all LTCH cases are treated in these rural 
hospitals. Impact analysis in Table I shows that the new payment to 
current payment ratio is estimated to be 1.0539 for rural LTCHs, and 
0.9754 for urban LTCHs. About 70 percent of the LTCH cases are in LTCHs 
located in large urban areas. Large urban LTCHs have a new payment to 
current payment ratio of 0.9814, while other urban LTCHs have a new 
payment to current payment ratio of 0.9569. (Table I)
b. Participation Date
    LTCHs are grouped by participation date into three categories: (1) 
Before October 1983; (2) between October 1983 and September 1993; and 
(3) after October 1993. We did not have sufficient OSCAR data on four 
LTCHs, which we labeled as an ``Unknown'' category. The majority, 
approximately 59 percent, of the LTCH cases are in hospitals that began 
participating after October 1993 and have a new payment to current 
payment ratio of 0.9632 and approximately 11 percent of the cases are 
in LTCHs that began participating in Medicare before October 1983 with 
a new payment to current payment ratio of 1.0200. (Table I)
c. Ownership Control
    LTCHs are grouped into three categories based on ownership control 
type: (1) Voluntary; (2) proprietary; and (3) government. We expect 
that government LTCHs will gain the most from the payment system with 
an estimated new payment to current payment ratio of 1.0633, although 
only approximately 6 percent of LTCHs are government run. Voluntary and 
proprietary LTCHs have a new payment to current payment ratio of 0.9634 
and 0.9769, respectively. (Table I)
d. Census Region
    LTCHs located in most regions are expected to have a new payment to 
current payment ratio of greater than 0.97 percent. Of the nine census 
regions, we expect that LTCHs in the Middle Atlantic Region will have 
the highest new payment to current payment ratio (1.0405). We expect 
only LTCHs in the West South Central and Mountain Regions will have a 
new payment to current payment ratio of less than 0.97 percent (0.9415 
and 0.9647, respectively). (Table I)
e. Bed Size
    LTCHs were grouped into six categories based on bed size: 0-24 
beds, 25-49 beds, 50-74 beds, 75-124 beds, 125-199 beds, and 200+ beds. 
The new payment to current payment ratios for all bed size categories 
is expected to be greater than 0.95 percent. The majority of LTCHs were 
in bed size categories where the new payment to current payment ratio 
is estimated to be greater than 0.97 percent. LTCHs with between 0-24 
beds have the highest estimated new payment to current payment ratio 
(0.9926), while LTCHs with between 50-74 beds have the lowest estimated 
new payment to current payment ratio (0.9593). (Table I)

[[Page 56046]]

6. Effect on the Medicare Program
    Based on actuarial projections resulting from our experience with 
other prospective payment systems, we estimate that Medicare spending 
(total Medicare program payments) for LTCH services over the next 5 
years would be:

------------------------------------------------------------------------
                                                              Estimated
                                                               payments
                        Fiscal year                             ($ in
                                                              millions)
------------------------------------------------------------------------
2003.......................................................       $1,590
2004.......................................................        1,690
2005.......................................................        1,790
2006.......................................................        1,900
2007.......................................................        2,000
------------------------------------------------------------------------

    These estimates are based on the current estimate of increase in 
the excluded hospital market basket of 3.5 percent for FY 2003, 3.4 
percent for FY 2004, 3.5 percent for FY 2005, 3.2 percent for FY 2006, 
and 2.9 percent for FY 2007. We estimate that there would be an 
increase in Medicare beneficiary enrollment of 1.7 percent in FY 2003, 
1.8 percent in FY 2004, 1.5 percent in FYs 2005 and 2006, and 1.9 
percent in FY 2007, and an estimated increase in the total number of 
LTCHs.
    Consistent with the statutory requirement for budget neutrality, we 
intend for estimated aggregate payments under the LTCH prospective 
payment system to equal the estimated aggregate payments that would be 
made if the LTCH prospective payment system were not implemented. Our 
methodology for estimating payments for purposes of the budget 
neutrality calculations uses the best available data and necessarily 
reflects assumptions. When the LTCH prospective payment system is 
implemented, we will monitor payment data and evaluate the ultimate 
accuracy of the assumptions used to calculate the budget neutrality 
calculations (for example, inflation factors, intensity of services 
provided, or behavioral response to the implementation of the LTCH 
prospective payment system, as discussed in section X.K. of this final 
rule). To the extent the assumptions significantly differ from actual 
experience, the aggregate amount of actual payments may turn out to be 
significantly higher or lower than the estimates on which the budget 
neutrality calculations are based.
    Section 123 of Public Law 106-113 and section 307 of Public Law 
106-554 provide the Secretary extremely broad authority in developing 
the LTCH prospective payment system, including the authority for 
appropriate adjustments. In accordance with this broad authority, we 
plan to discuss in a future proposed rule a possible one-time 
prospective adjustment to the LTCH prospective payment system rates so 
that the effect of the difference between actual payments and estimated 
payments for the first year of LTCH prospective payment system is not 
perpetuated in the prospective payment system rates for future years. 
(We note that in other contexts (for example, outlier payments under 
the acute care hospital inpatient prospective payment system) 
differences between estimated payments and actual payments for a given 
year are not built into the prospective payment system rates for 
subsequent years. However, the statutory ratesetting scheme under the 
LTCH prospective payment system is very different than in other 
contexts.)
7. Effect on Medicare Beneficiaries
    Under the LTCH prospective payment system, hospitals will receive 
payment based on the average resources consumed by patients for each 
diagnosis. We do not expect any changes in the quality of care or 
access to services for Medicare beneficiaries under the LTCH 
prospective payment system, but we expect that paying prospectively for 
LTCH services will enhance the efficiency of the Medicare program.
8. Computer Hardware and Software
    We do not anticipate that hospitals will incur additional systems 
operating costs in order to effectively participate in the prospective 
payment system for LTCHs. We believe that LTCHs possess the computer 
hardware capability to handle the LTC-DRGs, computerization, data 
transmission, and GROUPER software requirements. Our belief is based 
upon indications that approximately 99 percent of hospital inpatient 
claims currently are submitted electronically. Moreover, LTCHs have the 
option of purchasing data collection software that can be used to 
support other clinical or operational needs (for example, care 
planning, quality assurance, or billing) or other regulatory 
requirements for reporting patient information.

C. Alternatives Considered

    Section 123 of Public Law 106-113 specifies that the case-mix 
adjusted prospective payment system must be a per discharge system 
based on DRGs, and section 307(b) of Public Law 106-554 directs the 
Secretary to examine the ``feasibility and the impact of basing payment 
under such a system on the use of existing (or refined) hospital 
diagnosis-related groups (DRGs) that have been modified to account for 
different resource use of LTCH patients as well as the use of the most 
recently available hospital discharge data.'' Section 307(b) further 
requires the Secretary to ``examine'' appropriate adjustments to the 
system such as adjustments to DRG weights, area wage adjustments, 
geographic reclassification, outliers, updates, and a disproportionate 
share adjustment consistent with section 1886(d)(5)(F) of the Act. 
Generally, the statute confers broad authority on the Secretary in 
designing the key elements of the system. Our considerations of the 
patient classification systems are explained in detail in section IX.G. 
of this final rule. Our evaluation of alternative features and 
adjustment factors for the LTCH prospective payment system are set 
forth in section X.J. of this final rule. In the March 22, 2002 
proposed rule, we solicited public comments regarding our proposed 
policies and system design. Those public comments and our responses are 
located in the appropriate subject sections.

D. Executive Order 12866

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

XIII. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 30-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    In the March 22, 2002 proposed rule, we solicited and received no 
public comments on each of these issues for the following proposed 
sections that contain information collection requirements:

[[Page 56047]]

Secs. 412.116(a)(4) and 412.541(b) and (e)  Method of payment: periodic 
interim payments and accelerated payments.

    Under Sec. 412.116(a)(4), for cost reporting periods beginning on 
or after October 1, 2002, payments to a LTCH for inpatient hospital 
services under the prospective payment system would be made as 
described in Sec. 412.541. Section 412.541(b) provides that a LTCH may 
receive periodic interim payments for Part A services, subject to the 
provisions of Sec. 413.64(h). Section 413.64(h) specifies that the 
request for periodic interim payments must be made to the fiscal 
intermediary. Section 412.541(e) states that, upon request, an 
accelerated payment may be made to a LTCH that is not receiving a 
periodic interim payment if the LTCH is experiencing financial 
difficulties.
    We estimate that the burden associated with this provision is the 
time it takes a LTCH to prepare and submit its request for periodic 
interim payments or accelerated payments. We estimate that 
approximately three LTCHs would request periodic interim payments under 
the prospective payment system and that it would take each hospital 1 
hour to prepare and make the request. We estimate that approximately 
two LTCHs would request accelerated payments and that it would take 
them approximately 30 minutes each to prepare and submit their written 
request, for a total estimated annual burden of 1 hour.
    Both of these sections of the regulations are exempt from the PRA 
since the two requirements would affect less than 10 LTCHs per year 
(see 5 CFR Part 1320.3(c)(4)).


Sec. 412.508(b)(1) and (b)(2)  Content of physician acknowledgement 
statement and completion of acknowledgement.

    Section 412.508(b) provides that a physician must complete an 
acknowledgement statement that each patient's principal and secondary 
diagnoses and major procedures performed are documented by the 
physician's entries in the patient's medical record. Section 
412.508(b)(1) specifies that when a claim is submitted, the LTCH must 
have a signed and dated acknowledgement from the attending physician 
that the physician has received notice of the required acknowledgement 
of entries in the patient's medical record and that anyone who 
misrepresents, falsifies, or conceals essential information required 
for payment of Federal funds may be subject to fine, imprisonment, or 
civil penalty under applicable laws. Section 412.508(b)(2) specifies 
that the acknowledgement must be completed by the physician at the time 
the physician is granted admitting privileges at the hospital or before 
or at the time the physician admits his or her first patient. In 
addition, under this section, there is a requirement for LTCHs to enter 
into an agreement with a QIO.
    As stipulated under section 4202(b) ``Waiver of Paperwork 
Reduction,'' of Public Law 100-203, these collection requirements are 
exempt from the PRA.


Sec. 412.511  Reporting and recordkeeping requirements.

    Under Sec. 412.511, a LTCH subject to the prospective payment 
system described in this final rule must meet the recordkeeping and 
cost reporting requirements of Secs. 413.20 and 413.24. While 
Secs. 413.20 and 413.24 are subject to the PRA, the burden associated 
with these requirements are currently captured in approved collections 
0938-0463, expiration date of May 31, 2004; 0938-0758, expiration date 
of February 28, 2005; 0938-0037, expiration date of February 28, 2005; 
and 0938-0050 expiration date of May 31, 2004.


Sec. 412.533(b)  Transition payments: Election not to be paid under the 
transitional period methodology.

    Under Sec. 412.533(b), a LTCH may elect to be paid based on 100 
percent of the Federal prospective payment rate at the start of any of 
its cost reporting periods during a 5-year transition period beginning 
on or after October 1, 2002, and before October 1, 2007, without regard 
to the transitional percentages. Section 412.533(b) specifies that the 
request to make the election must be made in writing to the Medicare 
intermediary by the LTCH and received no later than November 1, 2002 
for cost reporting periods beginning on or after October 1, 2002 
through November 30, 2002 and no later than 30 days before the 
beginning of the cost reporting period for cost reporting periods 
beginning on or after December 1, 2002.
    We estimate that 94 LTCHs would make a request to elect to receive 
the full Federal prospective payment rate and that it would take each 
LTCH approximately 15 minutes each to prepare and submit their written 
request, for a total estimated annual burden of 24 hours.
    Based on comments received and our analysis of planned monitoring 
activities, in this final rule we have added an additional requirement 
regarding collection of information at Sec. 412.22 concerning a LTCH's 
(or a LTCH satellite's) notification to its Medicare fiscal 
intermediary and CMS of its co-located status. Under Secs. 412.22(e)(6) 
and (h)(5), a LTCH or a satellite of a LTCH that occupies space in a 
building used by another hospital, or in one or more entire buildings 
located on the same campus as buildings used by another hospital must 
notify its fiscal intermediary and CMS in writing of its co-location 
within 60 days of its first cost reporting period that begins on or 
after October 1, 2002.
    We estimate that the burden associated with this provision is the 
time it would take for a LTCH or a satellite of a LTCH to prepare and 
submit its notification to its fiscal intermediary and CMS. At this 
time, we estimate that 100 LTCHs and satellites of LTCHs will take 15 
minutes each to comply with these provisions for a total burden of 25 
hours. The total burden associated with the collection requirements 
referenced in this rule is 49 annual hours.
    We have submitted the information collection requirements under 
Secs. 412.22 and 412.533 to the Office of Management and Budget (OMB) 
for review under the authority of PRA. These requirements are not 
effective until they are approved by OMB.
    If you have any comments on the information collection requirements 
of Secs. 412.22(e)(6) and (h)(5), please mail one original and three 
copies directly to the following:

Centers for Medicare & Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Standards and Security Group, Office 
of Regulations Development and Issuances, 7500 Security Boulevard, Room 
N2-14-26, Baltimore, MD 21244-1850, Attn: John Burke, CMS-1177-F; and
Office of Information and Regulatory Affairs, Office of Management and 
Budget, New Executive Office Building, Room 10235, Washington, DC 20503 
Attn: Brenda Aguilar, CMS Desk Officer

List of Subjects

42 CFR Part 412

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

42 CFR Part 413

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

42 CFR Part 476

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


[[Page 56048]]



    42 CFR Chapter IV is amended as set forth below:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

    1. The authority citation for part 412 continues to read as 
follows:

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

Subpart A--General Provisions

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


Sec. 412.1  Scope of part.

    (a) Purpose. * * *
    (3) This part implements section 123 of Public Law 106-113, which 
provides for the establishment of a prospective payment system for the 
costs of inpatient hospital services furnished to Medicare 
beneficiaries by long-term care hospitals described in section 
1886(d)(1)(B)(iv) of the Act, for cost reporting periods beginning on 
or after October 1, 2002. This part also reflects the provisions of 
section 307 of Public Law 106-554, which state that the Secretary shall 
examine and may provide for appropriate adjustments to the long-term 
care hospital prospective payment system, including adjustments to 
diagnosis-related group (DRG) weights, area wage adjustments, 
geographic reclassification, outlier adjustments, updates, and 
disproportionate share adjustments consistent with section 
1886(d)(5)(F) of the Act.
    (b) Summary of content. * * *
    (12) Subpart O of this part describes the prospective payment 
system specified in paragraph (a)(3) of this section for long-term care 
hospitals and sets forth the general methodology for paying for the 
operating and capital-related costs of inpatient hospital services 
furnished by long-term care hospitals, effective with cost reporting 
periods beginning on or after October 1, 2002.
* * * * *

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

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


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

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

    4. Section 412.22 is amended by revising paragraph (b) and adding a 
new paragraph (e)(6) and (h)(5) to read as follows:


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

* * * * *
    (b) Cost reimbursement. Except for those hospitals specified in 
paragraph (c) of this section and Secs. 412.20(b) and (c), all excluded 
hospitals (and excluded hospital units, as described in Secs. 412.23 
through 412.29) are reimbursed under the cost reimbursement rules set 
forth in part 413 of this subchapter, and are subject to the ceiling on 
the rate of hospital cost increases described in Sec. 413.40 of this 
subchapter.
* * * * *
    (e) Hospitals-within-hospitals. * * *
    (6) Notification of co-located status. A long-term care hospital 
that occupies space in a building used by another hospital, or in one 
or more entire buildings located on the same campus as buildings used 
by another hospital and that meets the criteria of paragraphs (e)(1) 
through (e)(5) of this section must notify its fiscal intermediary and 
CMS in writing of its co-location within 60 days of its first cost 
reporting period that begins on or after October 1, 2002.
* * * * *
    (h) Satellite facilities. * * *
    (5) Notification of co-located status. A satellite of a long-term 
care hospital that occupies space in a building used by another 
hospital, or in one or more entire buildings located on the same campus 
as buildings used by another hospital and that meets the criteria of 
paragraphs (h)(1) through (h)(4) of this section must notify its fiscal 
intermediary and CMS in writing of its co-location within 60 days of 
its first cost reporting period beginning on or after October 1, 2002.

    5. Section 412.23 is amended by revising paragraph (e) to read as 
follows:


Sec. 412.23  Excluded hospitals: Classifications.

* * * * *
    (e) Long-term care hospitals. A long-term care hospital must meet 
the requirements of paragraph (e)(1) and (e)(2) of this section and, 
where applicable, the additional requirements of Sec. 412.22(e), to be 
excluded from the prospective payment systems specified in 
Sec. 412.1(a)(1) and to be paid under the prospective payment system 
specified in Sec. 412.1(a)(3) and in Subpart O of this part.
    (1) Provider agreements. The hospital must have a provider 
agreement under Part 489 of this chapter to participate as a hospital; 
and
    (2) Average length of stay. (i) The hospital must have an average 
Medicare inpatient length of stay of greater than 25 days (which 
includes all covered and noncovered days of stay of Medicare patients) 
as calculated under paragraph (e)(3) of this section; or
    (ii) For cost reporting periods beginning on or after August 5, 
1997, a hospital that was first excluded from the prospective payment 
system under this section in 1986 meets the length of stay criterion if 
it has an average inpatient length of stay for all patients, including 
both Medicare and non-Medicare inpatients, of greater than 20 days and 
demonstrates that at least 80 percent of its annual Medicare inpatient 
discharges in the 12-month cost reporting period ending in fiscal year 
1997 have a principal diagnosis that reflects a finding of neoplastic 
disease as defined in paragraph (f)(1)(iv) of this section.
    (3) Calculation of average length of stay. (i) Subject to the 
provisions of paragraphs (e)(3)(ii) and (e)(3)(iii) of this section, 
the average Medicare inpatient length of stay is calculated by dividing 
the total number of covered and noncovered days of stay of Medicare 
inpatients (less leave or pass days) by the number of total Medicare 
discharges for the hospital's most recent complete cost reporting 
period.
    (ii) If a change in the hospital's Medicare average length of stay 
is indicated, the calculation is made by the same method for the 
immediately preceding 6-month period.
    (iii) If a hospital has undergone a change of ownership (as 
described in Sec. 489.18 of this chapter) at the start of a cost 
reporting period or at any time within the preceding 6 months, the 
hospital may be excluded from the prospective payment system as a long-

[[Page 56049]]

term care hospital for a cost reporting period if, for the 6 months 
immediately preceding the start of the period (including time before 
the change of ownership), the hospital has the required Medicare 
average length of stay, continuously operated as a hospital, and 
continuously participated as a hospital in Medicare.
    (4) Definition of new long-term care hospital. For purposes of 
payment under the long-term care hospital prospective payment system 
under Subpart O of this part, a new long-term care hospital is a 
provider of inpatient hospital services that meets the qualifying 
criteria in paragraphs (e)(1) and (e)(2) of this section and, under 
present or previous ownership (or both), its first cost reporting 
period as a LTCH begins on or after October 1, 2002.
* * * * *

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

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


Sec. 412.116  Method of payment.

    (a) General rules. * * *
    (4) For cost reporting periods beginning on or after October 1, 
2002, payments for inpatient hospital services furnished by a long-term 
care hospital that meets the conditions for payment of Secs. 412.505 
through 412.511 are made as described in Sec. 412.521.
* * * * *

    7. A new subpart O is added to read as follows:

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

Sec.
412.500   Basis and scope of subpart.
412.503   Definitions.
412.505   Conditions for payment under the prospective payment 
system for long-term care hospitals.
412.507   Limitation on charges to beneficiaries.
412.508   Medical review requirements.
412.509   Furnishing of inpatient hospital services directly or 
under arrangement.
412.511   Reporting and recordkeeping requirements.
412.513   Patient classification system.
412.515   LTC-DRG weighting factors.
412.517   Revision of LTC-DRG group classifications and weighting 
factors.
412.521   Basis of payment.
412.523   Methodology for calculating the Federal prospective 
payment rates.
412.525   Adjustments to the Federal prospective payment.
412.529   Special payment provisions for short-stay outliers.
412.531   Special payment provisions when an interruption of a stay 
occurs in a long-term care hospital.
412.532   Special payment provisions for patients who are 
transferred to onsite providers and readmitted to a long-term care 
hospital.
412.533   Transition payments.
412.535   Publication of the Federal prospective payment rates.
412.541   Method of payment under the long-term care hospital 
prospective payment system.

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


Sec. 412.500  Basis and scope of subpart.

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


Sec. 412.503  Definitions.

    As used in this subpart--
    CMS stands for the Centers for Medicare & Medicaid Services.
    Discharge. A Medicare patient in a long-term care hospital is 
considered discharged when--
    (1) For purposes of the long-term care hospital qualification 
calculation, as described in Sec. 412.23(e)(3), the patient is formally 
released;
    (2) For purposes of payment, as described in Sec. 412.521(b), the 
patient stops receiving Medicare-covered long-term care services; or
    (3) The patient dies in the long-term care facility.
    LTC-DRG stands for the diagnosis-related group used to classify 
patient discharges from a long-term care hospital based on clinical 
characteristics and average resource use, for prospective payment 
purposes.
    Outlier payment means an additional payment beyond the standard 
Federal prospective payment for cases with unusually high costs.
    QIO (formerly PRO or Peer Review Organization) stands for the 
Quality Improvement Organization.


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

    (a) Long-term care hospitals subject to the prospective payment 
system. To be eligible to receive payment under the prospective payment 
system specified in this subpart, a long-term care hospital must meet 
the criteria to be classified as a long-term care hospital set forth in 
Sec. 412.23(e) for exclusion from the acute care hospital inpatient 
prospective payment systems specified in Sec. 412.1(a)(1). This 
condition is subject to the special payment provisions of 
Sec. 412.22(c), the provisions on change in hospital status of 
Sec. 412.22(d), the provisions related to hospitals-within-hospitals 
under Sec. 412.22(e), and the provisions related to satellite 
facilities under Sec. 412.22(h).
    (b) General requirements. (1) Effective for cost reporting periods 
beginning on or after October 1, 2002, a long-term care hospital must 
meet the conditions for payment of this section, Sec. 412.22(e)(6) and 
(h)(5), and Secs. 412.507 through Sec. 412.511 to receive payment under 
the prospective payment system described in this subpart for inpatient 
hospital services furnished to Medicare beneficiaries.
    (2) If a long-term care hospital fails to comply fully with these 
conditions for payment with respect to inpatient hospital services 
furnished to one or more Medicare beneficiaries, CMS may withhold (in 
full or in part) or reduce Medicare payment to the hospital.


Sec. 412.507  Limitation on charges to beneficiaries.

    (a) Prohibited charges. Except as provided in paragraph (b) of this 
section, a long-term care hospital may not charge a beneficiary for any 
covered services for which payment is made by Medicare, even if the 
hospital's costs of furnishing services to that beneficiary are greater 
than the amount the hospital is paid under the prospective payment 
system. If Medicare has paid the full LTC-DRG payment, that payment 
applies to the hospital's costs for services furnished until the high-
cost outlier threshold is met. If Medicare pays less than the full LTC-
DRG payment, that payment only applies to the hospital's costs for 
those costs or

[[Page 56050]]

days used to calculate the Medicare payment.
    (b) Permitted charges. (1) A long-term care hospital that receives 
a full LTC-DRG payment under this subpart for covered days in a 
hospital stay may charge the Medicare beneficiary only for the 
applicable deductible and coinsurance amounts under Secs. 409.82, 
409.83, and 409.87 of this subchapter, and for items and services as 
specified under Sec. 489.20(a) of this chapter.
    (2) A long-term care hospital that receives less than the full LTC-
DRG payment for a short-stay case, in accordance with Sec. 412.529, may 
only charge the Medicare beneficiary for the applicable deductible and 
coinsurance under Secs. 409.82, 409.83, and 409.87 of this subchapter, 
for items and services as specified under Sec. 489.20(a) of this 
chapter, and for services provided during the stay that were not the 
basis for the short-stay payment.


Sec. 412.508  Medical review requirements.

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

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

    (2) Completion of acknowledgement. The acknowledgement must be 
completed by the physician at the time that the physician is granted 
admitting privileges at the hospital, or before or at the time the 
physician admits his or her first patient. Existing acknowledgements 
signed by physicians already on staff remain in effect as long as the 
physician has admitting privileges at the hospital.
    (c) Denial of payment as a result of admissions and quality review.
    (1) If CMS determines, on the basis of information supplied by a 
QIO, that a hospital has misrepresented admissions, discharges, or 
billing information, or has taken an action that results in the 
unnecessary admission or unnecessary multiple admissions of an 
individual entitled to benefits under Part A, or other inappropriate 
medical or other practices with respect to beneficiaries or billing for 
services furnished to beneficiaries, CMS may, as appropriate--
    (i) Deny payment (in whole or in part) under Part A with respect to 
inpatient hospital services provided for an unnecessary admission or 
subsequent readmission of an individual; or
    (ii) Require the hospital to take other corrective action necessary 
to prevent or correct the inappropriate practice.
    (2) When payment with respect to admission of an individual patient 
is denied by a QIO under paragraph (c)(1) of this section, and 
liability is not waived in accordance with Secs. 411.400 through 
411.402 of this chapter, notice and appeals are provided under 
procedures established by CMS to implement the provisions of section 
1155 of the Act, Right to Hearing and Judicial Review.
    (3) A determination under paragraph (c)(1) of this section, if it 
is related to a pattern of inappropriate admissions and billing 
practices that has the effect of circumventing the prospective payment 
system, is referred to the Department's Office of Inspector General for 
handling in accordance with Sec. 1001.301 of this title.


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

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


Sec. 412.511  Reporting and recordkeeping requirements.

    A long-term care hospital participating in the prospective payment 
system under this subpart must meet the recordkeeping and cost 
reporting requirements of Secs. 412.22(e)(6), 412.22(h)(5), 413.20, and 
413.24 of this subchapter.


Sec. 412.513  Patient classification system.

    (a) Classification methodology. CMS classifies specific inpatient 
hospital discharges from long-term care hospitals by long-term care 
diagnosis-related groups (LTC-DRGs) to ensure that each hospital 
discharge is appropriately assigned based on essential data abstracted 
from the inpatient bill for that discharge.
    (b) Assignment of discharges to LTC-DRGs.
    (1) The classification of a particular discharge is based, as 
appropriate, on the patient's age, sex, principal diagnosis (that is, 
the diagnosis established after study to be chiefly responsible for 
causing the patient's admission to the hospital), secondary diagnoses, 
procedures performed, and the patient's discharge status.
    (2) Each discharge from a long-term care hospital is assigned to 
only one LTC-DRG (related, except as provided in paragraph (b)(3) of 
this section, to the

[[Page 56051]]

patient's principal diagnosis), regardless of the number of conditions 
treated or services furnished during the patient's stay.
    (3) When the discharge data submitted by a hospital show a surgical 
procedure unrelated to a patient's principal diagnosis, the bill is 
returned to the hospital for validation and reverification. The LTC-DRG 
classification system provides a LTC-DRG, and an appropriate weighting 
factor, for those cases for which none of the surgical procedures 
performed are related to the principal diagnosis.
    (c) Review of LTC-DRG assignment.
    (1) A hospital has 60 days after the date of the notice of the 
initial assignment of a discharge to a LTC-DRG to request a review of 
that assignment. The hospital may submit additional information as a 
part of its request.
    (2) The intermediary reviews that hospital's request and any 
additional information and decides whether a change in the LTC-DRG 
assignment is appropriate. If the intermediary decides that a different 
LTC-DRG should be assigned, the case will be reviewed by the 
appropriate QIO as specified in Sec. 476.71(c)(2) of this chapter.
    (3) Following the 60-day period described in paragraph (c)(1) of 
this section, the hospital may not submit additional information with 
respect to the DRG assignment or otherwise revise its claim.


Sec. 412.515  LTC-DRG weighting factors.

    For each LTC-DRG, CMS assigns an appropriate weight that reflects 
the estimated relative cost of hospital resources used within that 
group compared to discharges classified within other groups.


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

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


Sec. 412.521  Basis of payment.

    (a) Method of payment.
    (1) Under the prospective payment system, long-term care hospitals 
receive a predetermined payment amount per discharge for inpatient 
services furnished to Medicare beneficiaries.
    (2) The amount of payment under the prospective payment system is 
based on the Federal payment rate established in accordance with 
Sec. 412.523, including adjustments described in Sec. 412.525, and, if 
applicable during a transition period, on a blend of the Federal 
payment rate and the cost-based reimbursement rate described in 
Sec. 412.533.
    (b) Payment in full.
    (1) The payment made under this subpart represents payment in full 
(subject to applicable deductibles and coinsurance described in subpart 
G of part 409 of this subchapter) for covered inpatient operating costs 
as described in Sec. 412.2(c) and capital-related costs described in 
subpart G of part 413 of this subchapter associated with furnishing 
Medicare covered services in long-term care hospitals.
    (2) In addition to payment based on prospective payment rates, 
long-term care hospitals may receive payments separate from payments 
under the prospective payment system for the following:
    (i) The costs of approved medical education programs described in 
Secs. 413.85, 413.86, and 413.87 of this subchapter.
    (ii) Bad debts of Medicare beneficiaries, as provided in 
Sec. 413.80 of this subchapter.
    (iii) A payment amount per unit for blood clotting factor provided 
to Medicare inpatients who have hemophilia.
    (iv) Anesthesia services furnished by hospital employed 
nonphysician anesthetists or obtained under arrangements, as specified 
in Sec. 412.113(c)(2).
    (v) The costs of photocopying and mailing medical records requested 
by a QIO, in accordance with Sec. 476.78(c) of this chapter.
    (c) Payment by workers' compensation, automobile medical, no-fault 
or liability insurance or an employer group health plan primary to 
Medicare. If workers' compensation, automobile medical, no-fault, or 
liability insurance or an employer group health plan that is primary to 
Medicare pays in full or in part, payment is determined in accordance 
with the guidelines specified in Sec. 412.120(b).
    (d) Effect of change of ownership on payments under the prospective 
payment system. When a hospital's ownership changes, as described in 
Sec. 489.18 of this chapter, the following rules apply:
    (1) Payment for the operating and capital-related costs of 
inpatient hospital services for each patient, including outlier 
payments as provided in Sec. 412.525 and payments for hemophilia 
clotting factor costs as provided in paragraph (b)(2)(iii) of this 
section, are made to the entity that is the legal owner on the date of 
discharge. Payments are not prorated between the buyer and seller.
    (i) The owner on the date of discharge is entitled to submit a bill 
for all inpatient hospital services furnished to a beneficiary 
regardless of when the beneficiary's coverage began or ended during a 
stay, or of how long the stay lasted.
    (ii) Each bill submitted must include all information necessary for 
the intermediary to compute the payment amount, whether or not some of 
that information is attributable to a period during which a different 
party legally owned the hospital.
    (2) Other payments for the direct costs of approved medical 
education programs, bad debts, anesthesia services furnished by 
hospital employed nonphysician anesthetists, and costs of photocopying 
and mailing medical records to the QIO as provided for under paragraphs 
(b)(2)(i), (ii), (iv), and (v) of this section are made to each owner 
or operator of the hospital (buyer and seller) in accordance with the 
principles of reasonable cost reimbursement.


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

    (a) Data used. To calculate the initial prospective payment rates 
for inpatient hospital services furnished by long-term care hospitals, 
CMS uses--
    (1) The best Medicare data available; and
    (2) A rate of increase factor to adjust for the most recent 
estimate of increases in the prices of an appropriate market basket of 
goods and services included in covered inpatient long-term care 
hospital services.
    (b) Determining the average costs per discharge for FY 2003. CMS 
determines the average inpatient operating and capital-related costs 
per discharge for which payment is made to each inpatient long-term 
care hospital using the available data under paragraph (a)(1) of this 
section. The cost per discharge is adjusted to FY 2003 by a rate of 
increase factor, described in paragraph (a)(2) of this section, under 
the update methodology described in section 1886(b)(3)(B)(ii) of the 
Act for each year.
    (c) Determining the Federal prospective payment rates.
    (1) General. The Federal prospective payment rates will be 
established using a standard payment amount referred to as the standard 
Federal rate. The standard Federal rate is a standardized payment 
amount based on average costs from a base year that reflects the 
combined aggregate effects of the weighting factors and other 
adjustments.
    (2) Update the cost per discharge. CMS applies the increase factor

[[Page 56052]]

described in paragraph (a)(2) of this section to each hospital's cost 
per discharge determined under paragraph (b) of this section to compute 
the cost per discharge for FY 2003. Based on the updated cost per 
discharge, CMS estimates the payments that would have been made to each 
hospital for FY 2003 under Part 413 of this chapter without regard to 
the prospective payment system implemented under this subpart.
    (3) Computation of the standard Federal rate. The standard Federal 
rate is computed as follows:
    (i) For FY 2003. Based on the updated costs per discharge and 
estimated payments for FY 2003 determined in paragraph (c)(2) of this 
section, CMS computes a standard Federal rate for FY 2003 that 
reflects, as appropriate, the adjustments described in paragraph (d) of 
this section.
    (ii) For fiscal years after FY 2003. The standard Federal rate for 
fiscal years after FY 2003 will be the standard Federal rate for the 
previous fiscal year, updated by the increase factor described in 
paragraph (a)(2) of this section, and adjusted as appropriate as 
described in paragraph (d) of this section.
    (4) Determining the Federal prospective payment rate for each LTC-
DRG. The Federal prospective payment rate for each LTC-DRG is the 
product of the weighting factors described in Sec. 412.515 and the 
standard Federal rate described in paragraph (c)(3) of this section.
    (d) Adjustments to the standard Federal rate. The standard Federal 
rate described in paragraph (c)(3) of this section will be adjusted 
for--
    (1) Outlier payments. CMS adjusts the standard Federal rate by a 
reduction factor of 8 percent, the estimated proportion of outlier 
payments under the long-term care hospital prospective payment system, 
as described in Sec. 412.525(a).
    (2) Budget neutrality. CMS adjusts the Federal prospective payment 
rates for FY 2003 so that aggregate payments under the prospective 
payment system are estimated to equal the amount that would have been 
paid to long-term care hospitals under Part 413 of this subchapter 
without regard to the prospective payment system implemented under this 
subpart, excluding the effects of sections 1886(b)(2) and (b)(3) of the 
Act.
    (3) The Secretary will review payments under this prospective 
payment system and may make a one-time prospective adjustment to the 
LTCH prospective payment system rates by October 1, 2006, so that the 
effect of any significant difference between actual payments and 
estimated payments for the first year of the LTCH prospective payment 
system is not perpetuated in the prospective payment rates for future 
years.
    (e) Calculation of the adjusted Federal prospective payment. For 
each discharge, a long-term care hospital's Federal prospective payment 
is computed on the basis of the Federal prospective payment rate 
multiplied by the relative weight of the LTC-DRG assigned for that 
discharge. A hospital's Federal prospective payment rate will be 
adjusted, as appropriate, to account for outliers and other factors as 
specified in Sec. 412.525.


Sec. 412.525  Adjustments to the Federal prospective payment.

    (a) Adjustments for high-cost outliers. CMS provides for an 
additional payment to a long-term care hospital if its estimated costs 
for a patient exceed the adjusted LTC-DRG payment plus a fixed-loss 
amount. For each fiscal year, CMS determines a fix-loss amount that is 
the maximum loss that a hospital can incur under the prospective 
payment system for a case with unusually high costs. The additional 
payment equals 80 percent of the difference between the estimated cost 
of the patient case (determined by multiplying the hospital-specific 
cost-to-charge ratio by the Medicare allowable covered charge) and the 
sum of the adjusted Federal prospective payment for the LTC-DRG 
prospective payment system payment and the fixed-loss amount. No 
retroactive adjustments will be made to the outlier payments upon cost 
report settlement to account for differences between the estimated 
cost-to-charge-ratios and the actual cost-to-charge-ratios of the case.
    (b) Adjustments for Alaska and Hawaii. CMS adjusts the Federal 
prospective payment for the effects of a higher cost of living for 
hospitals located in Alaska and Hawaii.
    (c) Adjustments for area levels. The labor portion of a facility's 
Federal prospective payment is adjusted to account for geographical 
differences in the area wage levels using an appropriate wage index. 
The application of the wage index is made on the basis of the location 
of the facility in an urban or rural area as defined in 
Sec. 412.62(f)(1)(ii) and (f)(1)(iii), respectively.
    (d) Special payment provisions. CMS adjusts the Federal prospective 
payment to account for--
    (1) Short-stay outliers, as provided for in Sec. 412.529; and
    (2) Interruption of a stay, as provided for in Sec. 412.531.


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

    (a) Short-stay outlier defined. ``Short-stay outlier'' means a 
discharge with a length of stay in a long-term care hospital that is up 
to and including five-sixths of the geometric average length of stay 
for each LTC-DRG.
    (b) Adjustment to payment. CMS adjusts the hospital's Federal 
prospective payment to account for any case that is determined to be a 
short-stay outlier, as defined in paragraph (a) of this section, under 
the methodology specified in paragraph (c) of this section.
    (c) Method for determining the payment amount.
    (1) The adjusted payment amount for a short-stay outlier is the 
least of the following amounts:
    (i) 120 percent of the LTC-DRG specific per diem amount determined 
under paragraph (c)(2) of this section multiplied by the length of stay 
of the discharge;
    (ii) 120 percent of the cost of the case determined under paragraph 
(c)(3) of this section; or
    (iii) The Federal prospective payment for the LTC-DRG.
    (2) CMS calculates a per diem amount for short-stay outliers for 
each LTC-DRG by dividing the product of the standard Federal payment 
rate and the LTC-DRG weight by the geometric mean length of stay of the 
specific LTC-DRG.
    (3) To determine the cost of a case, CMS uses the hospital-specific 
cost-to-charge ratio and the Medicare allowable charges for the case.
    (4) CMS will not make any retroactive adjustments to the payments 
for short-stay outliers to account for changes made to the LTCH's 
hospital-specific cost-to-charge ratio.


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

    (a) Interruption of a stay defined. ``Interruption of a stay'' 
means a stay at a long-term care hospital during which a Medicare 
inpatient is transferred upon discharge to an acute care hospital, an 
IRF, or a SNF for treatment or services that are not available in the 
long-term care hospital and returns to the same long-term care hospital 
within the applicable fixed day period specified in paragraphs (a)(1) 
through (a)(3) of this section.
    (1) For a discharge to an acute care hospital, the applicable fixed 
day period is 9 days. The counting of the days begins on the day of 
discharge from the long-term care hospital and ends on the 9th day 
after the discharge.
    (2) For a discharge to an IRF, the applicable fixed day period is 
27 days.

[[Page 56053]]

The counting of the days begins on the day of discharge from the long-
term care hospital and ends on the 27th day after the discharge.
    (3) For a discharge to a SNF, the applicable fixed day period is 45 
days. The counting of the days begins on the day of discharge from the 
long-term care hospital and ends on the 45th day after the discharge.
    (b) Methods of determining payments.
    (1) For purposes of determining a Federal prospective payment, any 
stay in a long-term care hospital that involves an interruption of the 
stay will be paid as a single discharge from the long-term care 
hospital. The number of days that a beneficiary spends in an acute care 
hospital, an IRF, or a SNF during an interruption of stay at a long-
term care hospital is not included in determining the length of stay of 
the patient at the long-term care hospital. CMS will make only one LTC-
DRG payment for all portions of a long-term care stay that involves an 
interruption of a stay. In accordance with Sec. 412.513(b), payment 
will be based on the patient's LTC-DRG that would be determined by the 
principal diagnosis, which is the condition established after study to 
be chiefly responsible for occasioning the first admission of the 
patient to the hospital for care.
    (2) If the total number of days of a patient's length of stay in a 
long-term care hospital prior to and following an interruption of a 
stay is up to and including five-sixths of the geometric average length 
of stay of the LTC-DRG, CMS will make a Federal prospective payment for 
a short-stay outlier in accordance with Sec. 412.529(c).
    (3) If the total number of days of a patient's length of stay in a 
long-term care hospital prior to and following an interruption of a 
stay exceeds five-sixths of the geometric average length of stay for 
the LTC-DRG, CMS will make one full Federal LTC-DRG prospective payment 
for the case. An additional payment will be made if the patient's stay 
qualifies as a high-cost outlier, as set forth in Sec. 412.525(a).
    (4) Notwithstanding the provisions of paragraph (a) of this 
section, if a patient who has been discharged from a long-term care 
hospital to another facility and is readmitted to the long-term care 
hospital for additional treatment or services in the long-term care 
hospital following the stay at the other facility, the subsequent 
admission to the long-term care hospital is considered a new stay, even 
if the case is determined to fall into the same LTC-DRG, and the long-
term care hospital will receive two separate Federal prospective 
payments if one of the following conditions are met:
    (i) The patient has a length of stay in the acute care hospital 
that exceeds 9 days from the day of discharge from the long-term care 
hospital;
    (ii) The patient has a length of stay in the IRF that exceeds 27 
days from the day of discharge from the long-term care hospital; or
    (iii) The patient has a length of stay in the SNF that exceeds 45 
days from the day of discharge from the long-term care hospital.
    (c) Payments to an acute care hospital, an IRF, or a SNF during an 
interruption of a stay.
    (1) Payment to the acute care hospital for the acute care hospital 
stay following discharge from the long-term care hospital will be paid 
in accordance with the acute care hospital inpatient prospective 
payment systems specified in Sec. 412.1(a)(1).
    (2) Payment to an IRF for the IRF stay following a discharge from 
the long-term care hospital will be paid in accordance with the IRF 
prospective payment system specified in Sec. 412.624 of Subpart P of 
this part.
    (3) Payment to a SNF for the SNF stay following a discharge from 
the long-term care hospital will be paid in accordance with the SNF 
prospective payment system specified in subpart J of Part 413 of this 
subchapter.


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

    (a) The policies set forth in this section apply in the following 
situations:
    (1) A long-term care hospital (including a satellite facility) that 
is co-located within an onsite acute care hospital, an onsite IRF, or 
an onsite psychiatric facility or unit that meets the definition of a 
hospital-within-a-hospital under Sec. 412.22(e).
    (2) A satellite facility, as defined in Sec. 412.22(f), that is co-
located with the long-term care hospital.
    (3) A SNF, as defined in section 1819(a) of the Act, that is co-
located with the long-term care hospital.
    (b) As used in this section, ``co-located'' or ``onsite'' facility 
means a hospital or unit that occupies space in a building also used by 
another hospital or unit or in one or more buildings on the same 
campus, as defined in Sec. 413.65(a)(2) of this subchapter, as 
buildings used by another hospital or unit.
    (c) If, during a cost reporting period, a long-term care hospital 
(including a satellite facility) discharges patients to an acute care 
hospital co-located with the long-term care hospital, as described in 
paragraph (a) of this section, and subsequently directly readmits more 
than 5 percent (that is, in excess of 5.0 percent) of the total number 
of its Medicare inpatients discharged from that acute care hospital, 
all such discharges to the co-located acute care hospital and the 
readmissions to the long-term care hospital will be treated as one 
discharge for that cost reporting period and one LTC-DRG payment will 
be made on the basis of each patient's initial principal diagnosis.
    (d) If, during a cost reporting period, a long-term care hospital 
(including a satellite facility) discharges patients to an onsite IRF, 
an onsite psychiatric hospital or unit, or an onsite SNF, as described 
in paragraph (a) of this section, and subsequently directly readmits 
more than 5 percent (that is, in excess of 5.0 percent) of the total 
number of its Medicare inpatients discharged from the onsite IRF, the 
onsite psychiatric hospital or unit, or the onsite SNF, all such 
discharges to any of these providers and the readmissions to the LTCH 
will be treated as one discharge for that cost reporting period and one 
LTC-DRG payment will be made on the basis of the patient's initial 
principal diagnosis.
    (e) For purposes of calculating the payment per discharge, payment 
for the entire stay at the long-term care hospital will be paid as a 
full LTC-DRG payment under Sec. 412.523 or a short-stay outlier under 
Sec. 412.529, depending on the duration of the entire stay.
    (f) If the long-term care hospital does not meet the 5-percent 
thresholds specified under paragraph (c) or (d) of this section for 
discharges to the specified onsite providers and readmissions to the 
long-term care hospital during a cost reporting period, payment under 
the long-term care prospective payment system will be made, where 
applicable, under the policies on interruption of a stay as specified 
in Sec. 412.531.
    (g) Payment to the onsite acute care hospital, the onsite IRF, the 
onsite psychiatric hospital or unit, and the onsite SNF for a 
beneficiary's stay in the specified onsite providers is subject to the 
applicable payment policies, including outliers and transfers, under 
the acute care hospital inpatient prospective payment system, the IRF 
prospective payment system, the SNF prospective payment system, or the 
excluded psychiatric hospital or unit cost-based reimbursement payment 
system, as appropriate.
    (h) In determining whether a patient has previously been discharged 
and

[[Page 56054]]

then admitted, all prior discharges are considered, even if the 
discharge occurs late in one cost reporting period and the readmission 
occurs late in next cost reporting period.
    (i) A long-term care hospital or a satellite of a long-term care 
hospital that occupies space in a building used by another hospital, or 
in one or more entire buildings located on the same campus as buildings 
used by another hospital and that meets the criteria of paragraphs 
(h)(1) through (h)(4) of this section must notify its fiscal 
intermediary and CMS in writing of its co-location within 60 days 
following the effective date of these regulations and within 60 days of 
a change in this co-located status.


Sec. 412.533  Transition payments.

    (a) Duration of transition periods. Except for a long-term care 
hospital that makes an election under paragraph (c) of this section or 
for a long-term care hospital that is defined as new under 
Sec. 412.23(e)(4), for cost reporting periods beginning on or after 
October 1, 2002, and before October 1, 2006, a long-term care hospital 
receives a payment comprised of a blend of the adjusted Federal 
prospective payment as determined under Sec. 412.523, and the payment 
determined under the cost-based reimbursement rules under Part 413 of 
this subchapter.
    (1) For cost reporting periods beginning on or after October 1, 
2002 and before October 1, 2003, payment is based on 20 percent of the 
Federal prospective payment rate and 80 percent of the cost-based 
reimbursement rate.
    (2) For cost reporting periods beginning on or after October 1, 
2003 and before October 1, 2004, payment is based on 40 percent of the 
Federal prospective payment rate and 60 percent of the cost-based 
reimbursement rate.
    (3) For cost reporting periods beginning on or after October 1, 
2004 and before October 1, 2005, payment is based on 60 percent of the 
Federal prospective payment rate and 40 percent of the cost-based 
reimbursement rate.
    (4) For cost reporting periods beginning on or after October 1, 
2005 and before October 1, 2006, payment is based on 80 percent of the 
Federal prospective payment rate and 20 percent of the cost-based 
reimbursement rate.
    (5) For cost reporting periods beginning on or after October 1, 
2006, payment is based entirely on the adjusted Federal prospective 
payment rate.
    (b) Adjustments based on reconciliation of cost reports. The cost-
based percentage of the provider's total Medicare payment under 
paragraphs (a)(1) through (a)(4) of this section are subject to 
adjustments based on reconciliation of cost reports.
    (c) Election not to be paid under the transition period 
methodology. A long-term care hospital may elect to be paid based on 
100 percent of the Federal prospective rate at the start of any of its 
cost reporting periods during the 5-year transition periods specified 
in paragraph (a) of this section. Once a long-term care hospital elects 
to be paid based on 100 percent of the Federal prospective payment 
rate, it may not revert to the transition blend.
    (1) General requirement. A long-term care hospital must notify its 
fiscal intermediary of its intent to elect to be paid based on 100 
percent of the Federal prospective rate at the start of any of its cost 
reporting periods during the 5-year transition period specified in 
paragraph (a) of this section.
    (2) Notification requirement to make election.
    (i) The request by the long-term care hospital to make the election 
under paragraph (c)(1) of this section must be made in writing to the 
Medicare fiscal intermediary.
    (ii) For cost reporting periods that begin on or after October 1, 
2002 through November 30, 2002, the fiscal intermediary must receive 
the notification of the election before November 1, 2002.
    (iii) For cost reporting periods that begin on or after December 1, 
2002 through September 30, 2006, the fiscal intermediary must receive 
the notification of the election on or before the 30th day before the 
applicable cost reporting period begins.
    (iv) The fiscal intermediary must receive the notification by the 
dates specified in paragraphs (c)(2)(ii) and (c)(2)(iii) of this 
section, regardless of any postmarks or anticipated delivery dates. 
Requests received, postmarked, or delivered by other means after the 
dates specified in paragraphs (c)(2)(ii) and (c)(2)(iii) of this 
section will not be accepted. If the date specified in paragraphs 
(c)(2)(ii) and (c)(2)(iii) of this section falls on a day that the 
postal service or other delivery sources are not open for business, the 
long-term care hospital is responsible for allowing sufficient time for 
the delivery of the notification before the deadline.
    (v) If a long-term care hospital's notification is not received by 
the dates specified in paragraphs (c)(2)(ii) and (c)(2)(iii) of this 
section, payment will be based on the transition period rates specified 
in paragraphs (a)(1) through (a)(5) of this section.
    (d) Payments to new long-term care hospitals. A new long-term care 
hospital, as defined in Sec. 412.23(e)(4), will be paid based on 100 
percent of the standard Federal rate, as described in Sec. 412.523, 
with no transition payments, as described in Sec. 412.533(a)(1) through 
(a)(5).


Sec. 412.535  Publication of the Federal prospective payment rates.

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


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

    (a) General rule. Subject to the exceptions in paragraphs (b) and 
(c) of this section, long-term care hospitals receive payment under 
this subpart for inpatient operating costs and capital-related costs 
for each discharge only following submission of a discharge bill.
    (b) Periodic interim payments.
    (1) Criteria for receiving periodic interim payments.
    (i) A long-term care hospital receiving payment under this subpart 
may receive periodic interim payments (PIP) for Part A services under 
the PIP method subject to the provisions of Sec. 413.64(h) of this 
subchapter.
    (ii) To be approved for PIP, the long-term care hospital must meet 
the qualifying requirements in Sec. 413.64(h)(3) of this subchapter.
    (iii) As provided in Sec. 413.64(h)(5) of this subchapter, 
intermediary approval is conditioned upon the intermediary's best 
judgment as to whether payment can be made under the PIP method without 
undue risk of the PIP resulting in an overpayment to the provider.
    (2) Frequency of payment.
    (i) For long-term care hospitals approved for PIP and paid solely 
under Federal prospective payment system rates under Sec. 412.533(b), 
the intermediary estimates the long-term care hospital's Federal 
prospective payments net after estimated beneficiary deductibles and 
coinsurance and makes biweekly payments equal to \1/26\ of the total 
estimated amount of payment for the year.

[[Page 56055]]

    (ii) For long-term care hospitals approved for PIP and paid using 
the blended payment schedule specified in Sec. 412.533(a) for cost 
reporting periods beginning on or after October 1, 2002, and before 
October 1, 2006, the intermediary estimates the hospital's portion of 
the Federal prospective payments net and the hospital's portion of the 
reasonable cost-based reimbursement payments net, after beneficiary 
deductibles and coinsurance, in accordance with the blended transition 
percentages specified in Sec. 412.533(a), and makes biweekly payments 
equal to \1/26\ of the total estimated amount of both portions of 
payments for the year.
    (iii) If the long-term care hospital has payment experience under 
the long-term care hospital prospective payment system, the 
intermediary estimates PIP based on that payment experience, adjusted 
for projected changes supported by substantiated information for the 
current year.
    (iv) Each payment is made 2 weeks after the end of a biweekly 
period of service as described in Sec. 413.64(h)(6) of this subchapter.
    (v) The interim payments are reviewed at least twice during the 
reporting period and adjusted if necessary. Fewer reviews may be 
necessary if a hospital receives interim payments for less than a full 
reporting period. These payments are subject to final settlement.
    (3) Termination of PIP. (i) Request by the hospital. Subject to 
paragraph (b)(1)(iii) of this section, a long-term care hospital 
receiving PIP may convert to receiving prospective payments on a non-
PIP basis at any time.
    (ii) Removal by the intermediary. An intermediary terminates PIP if 
the long-term care hospital no longer meets the requirements of 
Sec. 413.64(h) of this subchapter.
    (c) Interim payments for Medicare bad debts and for Part A costs 
not paid under the prospective payment system. For Medicare bad debts 
and for the costs of an approved education program, blood clotting 
factors, anesthesia services furnished by hospital-employed 
nonphysician anesthetists or obtained under arrangement, and 
photocopying and mailing medical records to a QIO, which are costs paid 
outside the prospective payment system, the intermediary determines the 
interim payments by estimating the reimbursable amount for the year 
based on the previous year's experience, adjusted for projected changes 
supported by substantiated information for the current year, and makes 
biweekly payments equal to \1/26\ of the total estimated amount. Each 
payment is made 2 weeks after the end of the biweekly period of service 
as described in Sec. 413.64(h)(6) of this subchapter. The interim 
payments are reviewed at least twice during the reporting period and 
adjusted if necessary. Fewer reviews may be necessary if a long-term 
care hospital receives interim payments for less than a full reporting 
period. These payments are subject to final cost settlement.
    (d) Special interim payment for unusually long lengths of stay.
    (1) First interim payment. A hospital that is not receiving 
periodic interim payments under paragraph (b) of this section may 
request an interim payment 60 days after a Medicare beneficiary has 
been admitted to the hospital. Payment for the interim bill is 
determined as if the bill were a final discharge bill.
    (2) Additional interim payments. A hospital may request additional 
interim payments at intervals of at least 60 days after the date of the 
first interim bill submitted under paragraph (d)(1) of this section. 
Payment for these additional interim bills, as well as the final bill, 
is determined as if the bill were the final bill with appropriate 
adjustments made to the payment amount to reflect any previous interim 
payment made under the provisions of this paragraph.
    (e) Outlier payments. Additional payments for outliers are not made 
on an interim basis. The outlier payments are made based on the 
submission of a discharge bill and represent final payment.
    (f) Accelerated payments. (1) General rule. Upon request, an 
accelerated payment may be made to a long-term care hospital that is 
receiving payment under this subpart and is not receiving PIP under 
paragraph (b) of this section if the hospital is experiencing financial 
difficulties because of the following:
    (i) There is a delay by the intermediary in making payment to the 
long-term care hospital.
    (ii) Due to an exceptional situation, there is a temporary delay in 
the hospital's preparation and submittal of bills to the intermediary 
beyond its normal billing cycle.
    (2) Approval of payment. A request by a long-term care hospital for 
an accelerated payment must be approved by the intermediary and by CMS.
    (3) Amount of payment. The amount of the accelerated payment is 
computed as a percentage of the net payment for unbilled or unpaid 
covered services.
    (4) Recovery of payment. Recovery of the accelerated payment is 
made by recoupment as long-term care hospital bills are processed or by 
direct payment by the long-term care hospital.

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

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

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

Subpart A--Introduction and General Rules

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


Sec. 413.1  Introduction.

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

Subpart C--Limits on Cost Reimbursement

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

[[Page 56056]]

adding ``; and'' at the end of paragraph (a)(2)(ii)(B), and adding a 
new paragraph (a)(2)(ii)(C).
    d. Adding a new paragraph (a)(2)(iv).


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

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

Subpart E--Payments to Providers

    4. Section Sec. 413.64 is amended as follows:
    a. The introductory text of paragraph (h)(2) is republished.
    b. Paragraph (h)(2)(i) and the introductory text of paragraph 
(h)(3) are revised.


Sec. 413.64  Payment to providers: Specific rules.

* * * * *
    (h) Periodic interim payment method of reimbursement-- * * *
    (2) Covered services furnished on or after July 1, 1987. Effective 
with claims received on or after July 1, 1987, the periodic interim 
payment (PIP) method is available for the following:
    (i) Part A inpatient services furnished in hospitals that are 
excluded from the prospective payment systems described in 
Sec. 412.1(a)(1) of this chapter, under subpart B of Part 412 of this 
subchapter or are paid under the prospective payment systems described 
in subparts O and P of Part 412 of this subchapter.
* * * * *
    (3) Any participating provider furnishing the services described in 
paragraphs (h)(1) and (h)(2) of this section that establishes to the 
satisfaction of the intermediary that it meets the following 
requirements may elect to be reimbursed under the PIP method, beginning 
with the first month after its request that the intermediary finds 
administratively feasible:
* * * * *

PART 476--UTILIZATION AND QUALITY CONTROL REVIEW

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

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

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


Sec. 476.71  QIO review requirements.

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

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

    Dated: August 21, 2002.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.

    Dated: August 21, 2002.
Tommy G. Thompson,
Secretary.

[[Page 56057]]


[[Page 56057]]



Addendum

    This addendum contains the tables referred to throughout the 
preamble to this final rule. The tables presented below are as follows:
    Table 1.--Long-Term Care Hospital Wage Index for Urban Areas
    Table 2.--Long-Term Care Hospital Wage Index for Rural Areas
    Table 3.--LTC-DRG Relative Weights and Arithmetic Mean Length of 
Stay

      Table 1.--Long-Term Care Hospital Wage Index for Urban Areas
------------------------------------------------------------------------
                 Urban area
   MSA          (constituent        Full wage index    \1/5\ wage index
                 counties)                \1\                 \2\
------------------------------------------------------------------------
     0040  Abilene, TX..........              0.7965              0.9593
             Taylor, TX
     0060  Aguadilla, PR........              0.4683              0.8937
             Aguada, PR
             Aguadilla, PR
             Moca, PR
     0080  Akron, OH............              0.9739              0.9948
             Portage, OH
             Summit, OH
     0120  Albany, GA...........              1.0606              1.0121
             Dougherty, GA
             Lee, GA
     0160  Albany-Schenectady-                0.8452              0.9690
            Troy, NY............
             Albany, NY
             Montgomery, NY
             Rensselaer, NY
             Saratoga, NY
             Schenectady, NY
             Schoharie, NY
     0200  Albuquerque, NM......              0.9723              0.9945
             Bernalillo, NM
             Sandoval, NM
             Valencia, NM
     0220  Alexandria, LA.......              0.8015              0.9603
             Rapides, LA
     0240  Allentown-Bethlehem-               1.0014              1.0003
            Easton, PA..........
             Carbon, PA
             Lehigh, PA
             Northampton, PA
     0280  Altoona, PA..........              0.9100              0.9820
             Blair, PA
     0320  Amarillo, TX.........              0.8671              0.9734
             Potter, TX
             Randall, TX
     0380  Anchorage, AK........              1.2569              1.0514
             Anchorage, AK
     0440  Ann Arbor, MI........              1.0959              1.0192
             Lenawee, MI
             Livingston, MI
             Washtenaw, MI
     0450  Anniston, AL.........              0.8276              0.9655
             Calhoun, AL
     0460  Appleton-Oshkosh-                  0.9241              0.9848
            Neenah, WI..........
             Calumet, WI
             Outagamie, WI
             Winnebago, WI
     0470  Arecibo, PR..........              0.4630              0.8926
             Arecibo, PR
             Camuy, PR
             Hatillo, PR
     0480  Asheville, NC........              0.9174              0.9835
             Buncombe, NC
             Madison, NC
     0500  Athens, GA...........              0.9842              0.9968
             Clarke, GA
             Madison, GA
             Oconee, GA
     0520  Atlanta, GA..........              1.0043              1.0009
             Barrow, GA
             Bartow, GA
             Carroll, GA
             Cherokee, GA
             Clayton, GA
             Cobb, GA

[[Page 56058]]

 
             Coweta, GA
             DeKalb, GA
             Douglas, GA
             Fayette, GA
             Forsyth, GA
             Fulton, GA
             Gwinnett, GA
             Henry, GA
             Newton, GA
             Paulding, GA
             Pickens, GA
             Rockdale, GA
             Spalding, GA
             Walton, GA
     0560  Atlantic-Cape May, NJ              1.1297              1.0259
             Atlantic, NJ
             Cape May, NJ
     0580  Auburn-Opelika, AL...              0.8230              0.9646
             Lee, AL
     0600  Augusta-Aiken, GA-SC.              0.9975              0.9995
             Columbia, GA
             McDuffie, GA
             Richmond, GA
             Aiken, SC
             Edgefield, SC
     0640  Austin-San Marcos, TX              0.9597              0.9919
             Bastrop, TX
             Caldwell, TX
             Hays, TX
             Travis, TX
             Williamson, TX
     0680  Bakersfield, CA......              0.9406              0.9881
             Kern, CA
     0720  Baltimore, MD........              0.9805              0.9961
             Anne Arundel, MD
             Baltimore, MD
             Baltimore City, MD
             Carroll, MD
             Harford, MD
             Howard, MD
             Queen Anne's, MD
     0733  Bangor, ME...........              0.9580              0.9916
             Penobscot, ME
     0743  Barnstable-Yarmouth,               1.3626              1.0725
            MA..................
             Barnstable, MA
     0760  Baton Rouge, LA......              0.8136              0.9627
             Ascension, LA
             East Baton Rouge,
            LA
             Livingston, LA
             West Baton Rouge,
            LA
     0840  Beaumont-Port Arthur,              0.8428              0.9686
            TX..................
             Hardin, TX
             Jefferson, TX
             Orange, TX
     0860  Bellingham, WA.......              1.1826              1.0365
             Whatcom, WA
     0870  Benton Harbor, MI....              0.8810              0.9762
             Berrien, MI
     0875  Bergen-Passaic, NJ...              1.1681              1.0336
             Bergen, NJ
             Passaic, NJ
     0880  Billings, MT.........              0.9365              0.9873
             Yellowstone, MT
     0920  Biloxi-Gulfport-                   0.8440              0.9688
            Pascagoula, MS......
             Hancock, MS
             Harrison, MS
             Jackson, MS
     0960  Binghamton, NY.......              0.8404              0.9681
             Broome, NY
             Tioga, NY
     1000  Birmingham, AL.......              0.8775              0.9755
             Blount, AL

[[Page 56059]]

 
             Jefferson, AL
             St. Clair, AL
             Shelby, AL
     1010  Bismarck, ND.........              0.7984              0.9597
             Burleigh, ND
             Morton, ND
     1020  Bloomington, IN......              0.8842              0.9768
             Monroe, IN
     1040  Bloomington-Normal,                0.9038              0.9808
            IL..................
             McLean, IL
     1080  Boise City, ID.......              0.9051              0.9810
             Ada, ID
             Canyon, ID
     1123  Boston-Worcester-                  1.1349              1.0270
            Lawrence-Lowell-
            Brockton, MA-NH (NH
            Hospitals)..........
             Bristol, MA
             Essex, MA
             Middlesex, MA
             Norfolk, MA
             Plymouth, MA
             Suffolk, MA
             Worcester, MA
             Hillsborough, NH
             Merrimack, NH
             Rockingham, NH
             Strafford, NH
     1125  Boulder-Longmont, CO.              0.9798              0.9960
             Boulder, CO
     1145  Brazoria, TX.........              0.8209              0.9642
             Brazoria, TX
     1150  Bremerton, WA........              1.0758              1.0152
             Kitsap, WA
     1240  Brownsville-Harlingen-             0.9004              0.9801
            San Benito, TX......
             Cameron, TX
     1260  Bryan-College                      0.9328              0.9866
            Station, TX.........
             Brazos, TX
     1280  Buffalo-Niagara                    0.9392              0.9878
            Falls, NY...........
             Erie, NY
             Niagara, NY
     1303  Burlington, VT.......              0.9914              0.9983
             Chittenden, VT
             Franklin, VT
             Grand Isle, VT
     1310  Caguas, PR...........              0.4705              0.8941
             Caguas, PR
             Cayey, PR
             Cidra, PR
             Gurabo, PR
             San Lorenzo, PR
     1320  Canton-Massillon, OH.              0.8904              0.9781
             Carroll, OH
             Stark, OH
     1350  Casper, WY...........              0.9496              0.9899
             Natrona, WY
     1360  Cedar Rapids, IA.....              0.8699              0.9740
             Linn, IA
     1400  Champaign-Urbana, IL.              0.9295              0.9859
             Champaign, IL
     1440  Charleston-North                   0.9204              0.9841
            Charleston, SC......
             Berkeley, SC
             Charleston, SC
             Dorchester, SC
     1480  Charleston, WV.......              0.9264              0.9853
             Kanawha, WV
             Putnam, WV
     1520  Charlotte-Gastonia-                0.9312              0.9862
            Rock Hill, NC-SC....
             Cabarrus, NC
             Gaston, NC
             Lincoln, NC
             Mecklenburg, NC
             Rowan, NC
             Stanly, NC
             Union, NC

[[Page 56060]]

 
             York, SC
     1540  Charlottesville, VA..              1.0501              1.0100
             Albemarle, VA
             Charlottesville
            City, VA
             Fluvanna, VA
             Greene, VA
     1560  Chattanooga, TN-GA...              0.9333              0.9867
             Catoosa, GA
             Dade, GA
             Walker, GA
             Hamilton, TN
             Marion, TN
     1580  Cheyenne, WY.........              0.8288              0.9658
             Laramie, WY
     1600  Chicago, IL..........              1.1008              1.0202
             Cook, IL
             DeKalb, IL
             DuPage, IL
             Grundy, IL
             Kane, IL
             Kendall, IL
             Lake, IL
             McHenry, IL
             Will, IL
     1620  Chico-Paradise, CA...              0.9856              0.9971
             Butte, CA
     1640  Cincinnati, OH-KY-IN.              0.9444              0.9889
             Dearborn, IN
             Ohio, IN
             Boone, KY
             Campbell, KY
             Gallatin, KY
             Grant, KY
             Kenton, KY
             Pendleton, KY
             Brown, OH
             Clermont, OH
             Hamilton, OH
             Warren, OH
     1660  Clarksville-                       0.8306              0.9661
            Hopkinsville, TN-KY.
             Christian, KY
             Montgomery, TN
     1680  Cleveland-Lorain-                  0.9429              0.9886
            Elyria, OH..........
             Ashtabula, OH
             Cuyahoga, OH
             Geauga, OH
             Lake, OH
             Lorain, OH
             Medina, OH
     1720  Colorado Springs, CO.              0.9745              0.9949
             El Paso, CO
     1740  Columbia, MO.........              0.8674              0.9735
             Boone, MO
     1760  Columbia, SC.........              0.9474              0.9895
             Lexington, SC
             Richland, SC
     1800  Columbus, GA-AL......              0.8382              0.9676
             Russell, AL
             Chattahoochee, GA
             Harris, GA
             Muscogee, GA
     1840  Columbus, OH.........              0.9543              0.9909
             Delaware, OH
             Fairfield, OH
             Franklin, OH
             Licking, OH
             Madison, OH
             Pickaway, OH
     1880  Corpus Christi, TX...              0.8337              0.9667
             Nueces, TX
             San Patricio, TX
     1890  Corvallis, OR........              1.1646              1.0329

[[Page 56061]]

 
             Benton, OR
     1900  Cumberland, MD-WV (WV              0.8321              0.9664
            Hospital)...........
             Allegany, MD
             Mineral, WV
     1920  Dallas, TX...........              0.9855              0.9971
             Collin, TX
             Dallas, TX
             Denton, TX
             Ellis, TX
             Henderson, TX
             Hunt, TX
             Kaufman, TX
             Rockwall, TX
     1950  Danville, VA.........              0.8613              0.9723
             Danville City, VA
             Pittsylvania, VA
     1960  Davenport-Moline-Rock              0.8638              0.9728
            Island, IA-IL.......
             Scott, IA
             Henry, IL
             Rock Island, IL
     2000  Dayton-Springfield,                0.9151              0.9830
            OH..................
             Clark, OH
             Greene, OH
             Miami, OH
             Montgomery, OH
     2020  Daytona Beach, FL....              0.8952              0.9790
             Flagler, FL
             Volusia, FL
     2030  Decatur, AL..........              0.8775              0.9755
             Lawrence, AL
             Morgan, AL
     2040  Decatur, IL..........              0.7974              0.9595
             Macon, IL
     2080  Denver, CO...........              1.0280              1.0056
             Adams, CO
             Arapahoe, CO
             Denver, CO
             Douglas, CO
             Jefferson, CO
     2120  Des Moines, IA.......              0.8735              0.9747
             Dallas, IA
             Polk, IA
             Warren, IA
     2160  Detroit, MI..........              1.0413              1.0083
             Lapeer, MI
             Macomb, MI
             Monroe, MI
             Oakland, MI
             St. Clair, MI
             Wayne, MI
     2180  Dothan, AL...........              0.7948              0.9590
             Dale, AL
             Houston, AL
     2190  Dover, DE............              1.0296              1.0059
             Kent, DE
     2200  Dubuque, IA..........              0.8519              0.9704
             Dubuque, IA
     2240  Duluth-Superior, MN-               1.0284              1.0057
            WI..................
             St. Louis, MN
             Douglas, WI
     2281  Dutchess County, NY..              1.0514              1.0103
             Dutchess, NY
     2290  Eau Claire, WI.......              0.8814              0.9763
             Chippewa, WI
             Eau Claire, WI
     2320  El Paso, TX..........              0.9207              0.9841
             El Paso, TX
     2330  Elkhart-Goshen, IN...              0.9638              0.9928
             Elkhart, IN
     2335  Elmira, NY...........              0.8415              0.9683
             Chemung, NY
     2340  Enid, OK.............              0.8357              0.9671

[[Page 56062]]

 
             Garfield, OK
     2360  Erie, PA.............              0.8633              0.9727
             Erie, PA
     2400  Eugene-Springfield,                1.1471              1.0294
            OR..................
             Lane, OR
     2440  Evansville-Henderson,              0.8489              0.9698
            IN-KY (IN Hospitals)
             Posey, IN
             Vanderburgh, IN
             Warrick, IN
             Henderson, KY
     2520  Fargo-Moorhead, ND-MN              0.9268              0.9854
             Clay, MN
             Cass, ND
     2560  Fayetteville, NC.....              0.9027              0.9805
             Cumberland, NC
     2580  Fayetteville-                      0.8445              0.9689
            Springdale-Rogers,
            AR..................
             Benton, AR
             Washington, AR
     2620  Flagstaff, AZ-UT.....              1.0553              1.0111
             Coconino, AZ
             Kane, UT
     2640  Flint, MI............              1.0844              1.0169
             Genesee, MI
     2650  Florence, AL.........              0.7845              0.9569
             Colbert, AL
             Lauderdale, AL
     2655  Florence, SC.........              0.8693              0.9739
             Florence, SC
     2670  Fort Collins-                      1.0018              1.0004
            Loveland, CO........
             Larimer, CO
     2680  Ft. Lauderdale, FL...              1.0293              1.0059
             Broward, FL
     2700  Fort Myers-Cape                    0.9374              0.9875
            Coral, FL...........
             Lee, FL
     2710  Fort Pierce-Port St.               1.0214              1.0043
            Lucie, FL...........
             Martin, FL
             St. Lucie, FL
     2720  Fort Smith, AR-OK....              0.8052              0.9610
             Crawford, AR
             Sebastian, AR
             Sequoyah, OK
     2750  Fort Walton Beach, FL              0.9002              0.9800
             Okaloosa, FL
     2760  Fort Wayne, IN.......              0.9197              0.9839
             Adams, IN
             Allen, IN
             De Kalb, IN
             Huntington, IN
             Wells, IN
             Whitley, IN
     2800  Forth Worth-                       0.9357              0.9871
            Arlington, TX.......
             Hood, TX
             Johnson, TX
             Parker, TX
             Tarrant, TX
     2840  Fresno, CA...........              0.9856              0.9971
             Fresno, CA
             Madera, CA
     2880  Gadsden, AL..........              0.8792              0.9758
             Etowah, AL
     2900  Gainesville, FL......              0.9255              0.9851
             Alachua, FL
     2920  Galveston-Texas City,              1.0262              1.0052
            TX..................
             Galveston, TX
     2960  Gary, IN.............              0.9529              0.9906
             Lake, IN
             Porter, IN
     2975  Glens Falls, NY......              0.8336              0.9667
             Warren, NY
             Washington, NY
     2980  Goldsboro, NC........              0.8709              0.9742
             Wayne, NC

[[Page 56063]]

 
     2985  Grand Forks, ND-MN...              0.9069              0.9814
             Polk, MN
             Grand Forks, ND
     2995  Grand Junction, CO...              0.9529              0.9906
             Mesa, CO
     3000  Grand Rapids-Muskegon-             0.9933              0.9987
            Holland, MI.........
             Allegan, MI
             Kent, MI
             Muskegon, MI
             Ottawa, MI
     3040  Great Falls, MT......              0.8870              0.9774
             Cascade, MT
     3060  Greeley, CO..........              0.9254              0.9851
             Weld, CO
     3080  Green Bay, WI........              0.9208              0.9842
             Brown, WI
     3120  Greensboro-Winston-                0.9537              0.9907
            Salem-High Point, NC
             Alamance, NC
             Davidson, NC
             Davie, NC
             Forsyth, NC
             Guilford, NC
             Randolph, NC
             Stokes, NC
             Yadkin, NC
     3150  Greenville, NC.......              0.9153              0.9831
             Pitt, NC
     3160  Greenville-                        0.9151              0.9830
            Spartanburg-
            Anderson, SC........
             Anderson, SC
             Cherokee, SC
             Greenville, SC
             Pickens, SC
             Spartanburg, SC
     3180  Hagerstown, MD.......              0.8365              0.9673
             Washington, MD
     3200  Hamilton-Middletown,               0.9287              0.9857
            OH..................
             Butler, OH
     3240  Harrisburg-Lebanon-                0.9285              0.9857
            Carlisle, PA........
             Cumberland, PA
             Dauphin, PA
             Lebanon, PA
             Perry, PA
     3283  Hartford, CT.........              1.1504              1.0301
             Hartford, CT
             Litchfield, CT
             Middlesex, CT
             Tolland, CT
     3285  Hattiesburg, MS \2\..              0.7476              0.9495
             Forrest, MS
             Lamar, MS
     3290  Hickory-Morganton-                 0.9367              0.9873
            Lenoir, NC..........
             Alexander, NC
             Burke, NC
             Caldwell, NC
             Catawba, NC
     3320  Honolulu, HI.........              1.1538              1.0308
             Honolulu, HI
     3350  Houma, LA............              0.7949              0.9590
             Lafourche, LA
             Terrebonne, LA
     3360  Houston, TX..........              0.9623              0.9925
             Chambers, TX
             Fort Bend, TX
             Harris, TX
             Liberty, TX
             Montgomery, TX
             Waller, TX
     3400  Huntington-Ashland,                0.9613              0.9923
            WV-KY-OH............
             Boyd, KY
             Carter, KY
             Greenup, KY
             Lawrence, OH

[[Page 56064]]

 
             Cabell, WV
             Wayne, WV
     3440  Huntsville, AL.......              0.8883              0.9777
             Limestone, AL
             Madison, AL
     3480  Indianapolis, IN.....              0.9676              0.9935
             Boone, IN
             Hamilton, IN
             Hancock, IN
             Hendricks, IN
             Johnson, IN
             Madison, IN
             Marion, IN
             Morgan, IN
             Shelby, IN
     3500  Iowa City, IA........              0.9824              0.9965
             Johnson, IA
     3520  Jackson, MI..........              0.9257              0.9851
             Jackson, MI
     3560  Jackson, MS..........              0.8435              0.9687
             Hinds, MS
             Madison, MS
             Rankin, MS
     3580  Jackson, TN..........              0.9013              0.9803
             Madison, TN
             Chester, TN
     3600  Jacksonville, FL.....              0.9213              0.9843
             Clay, FL
             Duval, FL
             Nassau, FL
             St. Johns, FL
     3605  Jacksonville, NC.....              0.7622              0.9524
             Onslow, NC
     3610  Jamestown, NY........              0.8050              0.9610
             Chautauqua, NY
     3620  Janesville-Beloit, WI              0.9739              0.9948
             Rock, WI
     3640  Jersey City, NJ......              1.1162              1.0232
             Hudson, NJ
     3660  Johnson City-                      0.8617              0.9723
            Kingsport-Bristol,
            TN-VA...............
             Carter, TN
             Hawkins, TN
             Sullivan, TN
             Unicoi, TN
             Washington, TN
             Bristol City, VA
             Scott, VA
             Washington, VA
     3680  Johnstown, PA........              0.8668              0.9734
             Cambria, PA
             Somerset, PA
     3700  Jonesboro, AR........              0.8439              0.9688
             Craighead, AR
     3710  Joplin, MO...........              0.8729              0.9746
             Jasper, MO
             Newton, MO
     3720  Kalamazoo-                         1.0639              1.0128
            Battlecreek, MI.....
             Calhoun, MI
             Kalamazoo, MI
             Van Buren, MI
     3740  Kankakee, IL.........              0.9889              0.9978
             Kankakee, IL
     3760  Kansas City, KS-MO...              0.9501              0.9900
             Johnson, KS
             Leavenworth, KS
             Miami, KS
             Wyandotte, KS
             Cass, MO
             Clay, MO
             Clinton, MO
             Jackson, MO
             Lafayette, MO

[[Page 56065]]

 
             Platte, MO
             Ray, MO
     3800  Kenosha, WI..........              0.9568              0.9914
             Kenosha, WI
     3810  Killeen-Temple, TX...              0.8513              0.9703
             Bell, TX
             Coryell, TX
     3840  Knoxville, TN........              0.8873              0.9775
             Anderson, TN
             Blount, TN
             Knox, TN
             Loudon, TN
             Sevier, TN
             Union, TN
     3850  Kokomo, IN...........              0.9126              0.9825
             Howard, IN
             Tipton, IN
     3870  La Crosse, WI-MN.....              0.9244              0.9849
             Houston, MN
             La Crosse, WI
     3880  Lafayette, LA........              0.8499              0.9700
             Acadia, LA
             Lafayette, LA
             St. Landry, LA
             St. Martin, LA
     3920  Lafayette, IN........              0.9121              0.9824
             Clinton, IN
             Tippecanoe, IN
     3960  Lake Charles, LA.....              0.7766              0.9553
             Calcasieu, LA
     3980  Lakeland-Winter                    0.9067              0.9813
            Haven, FL...........
             Polk, FL
     4000  Lancaster, PA........              0.9286              0.9857
             Lancaster, PA
     4040  Lansing-East Lansing,              0.9639              0.9928
            MI..................
             Clinton, MI
             Eaton, MI
             Ingham, MI
     4080  Laredo, TX...........              0.7849              0.9570
             Webb, TX
     4100  Las Cruces, NM.......              0.8619              0.9724
             Dona Ana, NM
     4120  Las Vegas, NV-AZ.....              1.1179              1.0236
             Mohave, AZ
             Clark, NV
             Nye, NV
     4150  Lawrence, KS.........              0.8656              0.9731
             Douglas, KS
     4200  Lawton, OK...........              0.8682              0.9736
             Comanche, OK
     4243  Lewiston-Auburn, ME..              0.9267              0.9853
             Androscoggin, ME
     4280  Lexington, KY........              0.8743              0.9749
             Bourbon, KY
             Clark, KY
             Fayette, KY
             Jessamine, KY
             Madison, KY
             Scott, KY
             Woodford, KY
     4320  Lima, OH.............              0.9470              0.9894
             Allen, OH
             Auglaize, OH
     4360  Lincoln, NE..........              1.0168              1.0034
             Lancaster, NE
     4400  Little Rock-North                  0.8957              0.9791
            Little Rock, AR.....
             Faulkner, AR
             Lonoke, AR
             Pulaski, AR
             Saline, AR
     4420  Longview-Marshall, TX              0.8571              0.9714
             Gregg, TX

[[Page 56066]]

 
             Harrison, TX
             Upshur, TX
     4480  Los Angeles-Long                   1.1946              1.0389
            Beach, CA...........
             Los Angeles, CA
     4520  Louisville, KY-IN \1\              0.9457              0.9891
             Clark, IN
             Floyd, IN
             Harrison, IN
             Scott, IN
             Bullitt, KY
             Jefferson, KY
             Oldham, KY
     4600  Lubbock, TX..........              0.8432              0.9686
             Lubbock, TX
     4640  Lynchburg, VA........              0.9104              0.9821
             Amherst, VA
             Bedford, VA
             Bedford City, VA
             Campbell, VA
             Lynchburg City, VA
     4680  Macon, GA............              0.8839              0.9768
             Bibb, GA
             Houston, GA
             Jones, GA
             Peach, GA
             Twiggs, GA
     4720  Madison, WI..........              1.0360              1.0072
             Dane, WI
     4800  Mansfield, OH........              0.8708              0.9742
             Crawford, OH
             Richland, OH
     4840  Mayaguez, PR.........              0.4853              0.8971
             Anasco, PR
             Cabo Rojo, PR
             Hormigueros, PR
             Mayaguez, PR
             Sabana Grande, PR
             San German, PR
     4880  McAllen-Edinburg-                  0.8378              0.9676
            Mission, TX.........
             Hidalgo, TX
     4890  Medford-Ashland, OR..              1.0314              1.0063
             Jackson, OR
     4900  Melbourne-Titusville-              0.9913              0.9983
            Palm Bay, FL........
             Brevard, FL
     4920  Memphis, TN-AR-MS....              0.8962              0.9792
             Crittenden, AR
             DeSoto, MS
             Fayette, TN
             Shelby, TN
             Tipton, TN
     4940  Merced, CA...........              0.9721              0.9944
             Merced, CA
     5000  Miami, FL............              0.9967              0.9993
             Dade, FL
     5015  Middlesex-Somerset-                1.1407              1.0281
            Hunterdon, NJ.......
             Hunterdon, NJ
             Middlesex, NJ
             Somerset, NJ
     5080  Milwaukee-Waukesha,                0.9894              0.9979
            WI..................
             Milwaukee, WI
             Ozaukee, WI
             Washington, WI
             Waukesha, WI
     5120  Minneapolis-St. Paul,              1.0909              1.0182
            MN-WI...............
             Anoka, MN
             Carver, MN
             Chisago, MN
             Dakota, MN
             Hennepin, MN
             Isanti, MN
             Ramsey, MN
             Scott, MN

[[Page 56067]]

 
             Sherburne, MN
             Washington, MN
             Wright, MN
             Pierce, WI
             St. Croix, WI
     5140  Missoula, MT.........              0.9364              0.9873
             Missoula, MT
     5160  Mobile, AL...........              0.8027              0.9605
             Baldwin, AL
             Mobile, AL
     5170  Modesto, CA..........              1.0820              1.0164
             Stanislaus, CA
     5190  Monmouth-Ocean, NJ...              1.0863              1.0173
             Monmouth, NJ
             Ocean, NJ
     5200  Monroe, LA...........              0.8149              0.9630
             Ouachita, LA
     5240  Montgomery, AL.......              0.7349              0.9470
             Autauga, AL
             Elmore, AL
             Montgomery, AL
     5280  Muncie, IN...........              0.9760              0.9952
             Delaware, IN
     5330  Myrtle Beach, SC.....              0.8759              0.9752
             Horry, SC
     5345  Naples, FL...........              0.9699              0.9940
             Collier, FL
     5360  Nashville, TN........              0.9690              0.9938
             Cheatham, TN
             Davidson, TN
             Dickson, TN
             Robertson, TN
             Rutherford TN
             Sumner, TN
             Williamson, TN
             Wilson, TN
     5380  Nassau-Suffolk, NY...              1.3461              1.0692
             Nassau, NY
             Suffolk, NY
     5483  New Haven-Bridgeport-              1.2178              1.0436
            Stamford-Waterbury-
            Danbury, CT.........
             Fairfield, CT
             New Haven, CT
     5523  New London-Norwich,                1.1525              1.0305
            CT..................
             New London, CT
     5560  New Orleans, LA......              0.8995              0.9799
             Jefferson, LA
             Orleans, LA
             Plaquemines, LA
             St. Bernard, LA
             St. Charles, LA
             St. James, LA
             St. John The
            Baptist, LA
             St. Tammany, LA
     5600  New York, NY.........              1.4305              1.0861
             Bronx, NY
             Kings, NY
             New York, NY
             Putnam, NY
             Queens, NY
             Richmond, NY
             Rockland, NY
             Westchester, NY
     5640  Newark, NJ...........              1.1618              1.0324
             Essex, NJ
             Morris, NJ
             Sussex, NJ
             Union, NJ
             Warren, NJ
     5660  Newburgh, NY-PA......              1.1113              1.0223
             Orange, NY
             Pike, PA
     5720  Norfolk-Virginia                   0.8538              0.9708
            Beach-Newport News,
            VA-NC...............

[[Page 56068]]

 
             Currituck, NC
             Chesapeake City, VA
             Gloucester, VA
             Hampton City, VA
             Isle of Wight, VA
             James City, VA
             Mathews, VA
             Newport News City,
            VA
             Norfolk City, VA
             Poquoson City, VA
             Portsmouth City, VA
             Suffolk City, VA
             Virginia Beach City
            VA
             Williamsburg City,
            VA
             York, VA
     5775  Oakland, CA..........              1.5332              1.1066
             Alameda, CA
             Contra Costa, CA
     5790  Ocala, FL............              0.9556              0.9911
             Marion, FL
     5800  Odessa-Midland, TX...              1.0105              1.0021
             Ector, TX
             Midland, TX
     5880  Oklahoma City, OK....              0.8655              0.9731
             Canadian, OK
             Cleveland, OK
             Logan, OK
             McClain, OK
             Oklahoma, OK
             Pottawatomie, OK
     5910  Olympia, WA..........              1.1362              1.0272
             Thurston, WA
     5920  Omaha, NE-IA.........              0.9677              0.9935
             Pottawattamie, IA
             Cass, NE
             Douglas, NE
             Sarpy, NE
             Washington, NE
     5945  Orange County, CA....              1.1108              1.0222
             Orange, CA
     5960  Orlando, FL..........              0.9603              0.9921
             Lake, FL
             Orange, FL
             Osceola, FL
             Seminole, FL
     5990  Owensboro, KY........              0.8333              0.9667
             Daviess, KY
     6015  Panama City, FL......              0.9061              0.9812
             Bay, FL
     6020  Parkersburg-Marietta,              0.8128              0.9626
            WV-OH...............
             Washington, OH
             Wood, WV
     6080  Pensacola, FL........              0.8331              0.9666
             Escambia, FL
             Santa Rosa, FL
     6120  Peoria-Pekin, IL.....              0.8635              0.9727
             Peoria, IL
             Tazewell, IL
             Woodford, IL
     6160  Philadelphia, PA-NJ..              1.0829              1.0166
             Burlington, NJ
             Camden, NJ
             Gloucester, NJ
             Salem, NJ
             Bucks, PA
             Chester, PA
             Delaware, PA
             Montgomery, PA
             Philadelphia, PA
     6200  Phoenix-Mesa, AZ.....              0.9610              0.9922
             Maricopa, AZ
             Pinal, AZ

[[Page 56069]]

 
     6240  Pine Bluff, AR.......              0.7925              0.9585
             Jefferson, AR
     6280  Pittsburgh, PA.......              0.9464              0.9893
             Allegheny, PA
             Beaver, PA
             Butler, PA
             Fayette, PA
             Washington, PA
             Westmoreland, PA
     6323  Pittsfield, MA.......              1.0171              1.0034
             Berkshire, MA
     6340  Pocatello, ID........              0.9448              0.9890
             Bannock, ID
     6360  Ponce, PR............              0.5218              0.9044
             Guayanilla, PR
             Juana Diaz, PR
             Penuelas, PR
             Ponce, PR
             Villalba, PR
             Yauco, PR
     6403  Portland, ME.........              0.9367              0.9873
             Cumberland, ME
             Sagadahoc, ME
             York, ME
     6440  Portland-Vancouver,                1.1107              1.0221
            OR-WA...............
             Clackamas, OR
             Columbia, OR
             Multnomah, OR
             Washington, OR
             Yamhill, OR
             Clark, WA
     6483  Providence-Warwick-                1.0768              1.0154
            Pawtucket, RI.......
             Bristol, RI
             Kent, RI
             Newport, RI
             Providence, RI
             Washington, RI
     6520  Provo-Orem, UT.......              0.9836              0.9967
             Utah, UT
     6560  Pueblo, CO...........              0.8582              0.9716
             Pueblo, CO
     6580  Punta Gorda, FL......              0.9014              0.9803
             Charlotte, FL
     6600  Racine, WI...........              0.9323              0.9865
             Racine, WI
     6640  Raleigh-Durham-Chapel              0.9774              0.9955
            Hill, NC............
             Chatham, NC
             Durham, NC
             Franklin, NC
             Johnston, NC
             Orange, NC
             Wake, NC
     6660  Rapid City, SD.......              0.8843              0.9769
             Pennington, SD
     6680  Reading, PA..........              0.9564              0.9913
             Berks, PA
     6690  Redding, CA..........              1.1136              1.0227
             Shasta, CA
     6720  Reno, NV.............              1.0369              1.0074
             Washoe, NV
     6740  Richland-Kennewick-                1.0960              1.0192
            Pasco, WA...........
             Benton, WA
             Franklin, WA
     6760  Richmond-Petersburg,               0.9624              0.9925
            VA..................
             Charles City
            County, VA
             Chesterfield, VA
             Colonial Heights
            City, VA
             Dinwiddie, VA
             Goochland, VA
             Hanover, VA
             Henrico, VA
             Hopewell City, VA

[[Page 56070]]

 
             New Kent, VA
             Petersburg City, VA
             Powhatan, VA
             Prince George, VA
             Richmond City, VA
     6780  Riverside-San                      1.1104              1.0221
            Bernardino, CA......
             Riverside, CA
             San Bernardino, CA
     6800  Roanoke, VA..........              0.8286              0.9657
             Botetourt, VA
             Roanoke, VA
             Roanoke City, VA
             Salem City, VA
     6820  Rochester, MN........              1.1474              1.0295
             Olmsted, MN
     6840  Rochester, NY........              0.9200              0.9840
             Genesee, NY
             Livingston, NY
             Monroe, NY
             Ontario, NY
             Orleans, NY
             Wayne, NY
     6880  Rockford, IL.........              0.9189              0.9838
             Boone, IL
             Ogle, IL
             Winnebago, IL
     6895  Rocky Mount, NC......              0.9109              0.9822
             Edgecombe, NC
             Nash, NC
     6920  Sacramento, CA.......              1.1769              1.0354
             El Dorado, CA
             Placer, CA
             Sacramento, CA
     6960  Saginaw-Bay City-                  0.9526              0.9905
            Midland, MI.........
             Bay, MI
             Midland, MI
             Saginaw, MI
     6980  St. Cloud, MN........              0.9844              0.9969
             Benton, MN
             Stearns, MN
     7000  St. Joseph, MO.......              0.9009              0.9802
             Andrew, MO
             Buchanan, MO
     7040  St. Louis, MO-IL.....              0.8882              0.9776
             Clinton, IL
             Jersey, IL
             Madison, IL
             Monroe, IL
             St. Clair, IL
             Franklin, MO
             Jefferson, MO
             Lincoln, MO
             St. Charles, MO
             St. Louis, MO
             St. Louis City, MO
             Warren, MO
     7080  Salem, OR............              1.0011              1.0002
             Marion, OR
             Polk, OR
     7120  Salinas, CA..........              1.4674              1.0935
             Monterey, CA
     7160  Salt Lake City-Ogden,              0.9861              0.9972
            UT..................
             Davis, UT
             Salt Lake, UT
             Weber, UT
     7200  San Angelo, TX.......              0.8193              0.9639
             Tom Green, TX
     7240  San Antonio, TX......              0.8547              0.9709
             Bexar, TX
             Comal, TX
             Guadalupe, TX
             Wilson, TX

[[Page 56071]]

 
     7320  San Diego, CA........              1.1283              1.0257
             San Diego, CA
     7360  San Francisco, CA....              1.4170              1.0834
             Marin, CA
             San Francisco, CA
             San Mateo, CA
     7400  San Jose, CA.........              1.4222              1.0844
             Santa Clara, CA
     7440  San Juan-Bayamon, PR.              0.4748              0.8950
             Aguas Buenas, PR
             Barceloneta, PR
             Bayamon, PR
             Canovanas, PR
             Carolina, PR
             Catano, PR
             Ceiba, PR
             Comerio, PR
             Corozal, PR
             Dorado, PR
             Fajardo, PR
             Florida, PR
             Guaynabo, PR
             Humacao, PR
             Juncos, PR
             Los Piedras, PR
             Loiza, PR
             Luguillo, PR
             Manati, PR
             Morovis, PR
             Naguabo, PR
             Naranjito, PR
             Rio Grande, PR
             San Juan, PR
             Toa Alta, PR
             Toa Baja, PR
             Trujillo Alto, PR
             Vega Alta, PR
             Vega Baja, PR
             Yabucoa, PR
     7460  San Luis Obispo-                   1.0990              1.0198
            Atascadero-Paso
            Robles, CA..........
             San Luis Obispo, CA
     7480  Santa Barbara-Santa                1.0794              1.0159
            Maria-Lompoc, CA....
             Santa Barbara, CA
     7485  Santa Cruz-                        1.3970              1.0794
            Watsonville, CA.....
             Santa Cruz, CA
     7490  Santa Fe, NM.........              1.0196              1.0039
             Los Alamos, NM
             Santa Fe, NM
     7500  Santa Rosa, CA.......              1.3004              1.0601
             Sonoma, CA
     7510  Sarasota-Bradenton,                1.0090              1.0018
            FL..................
             Manatee, FL
             Sarasota, FL
     7520  Savannah, GA.........              0.9974              0.9995
             Bryan, GA
             Chatham, GA
             Effingham, GA
     7560  Scranton--Wilkes-                  0.8682              0.9736
            Barre--Hazleton, PA.
             Columbia, PA
             Lackawanna, PA
             Luzerne, PA
             Wyoming, PA
     7600  Seattle-Bellevue-                  1.1324              1.0265
            Everett, WA.........
             Island, WA
             King, WA
             Snohomish, WA
     7610  Sharon, PA...........              0.7924              0.9585
             Mercer, PA
     7620  Sheboygan, WI........              0.8427              0.9685
             Sheboygan, WI
     7640  Sherman-Denison, TX..              0.9373              0.9875
             Grayson, TX

[[Page 56072]]

 
     7680  Shreveport-Bossier                 0.9014              0.9803
            City, LA............
             Bossier, LA
             Caddo, LA
             Webster, LA
     7720  Sioux City, IA-NE....              0.8735              0.9747
             Woodbury, IA
             Dakota, NE
     7760  Sioux Falls, SD......              0.9095              0.9819
             Lincoln, SD
             Minnehaha, SD
     7800  South Bend, IN.......              0.9929              0.9986
             St. Joseph, IN
     7840  Spokane, WA..........              1.0653              1.0131
             Spokane, WA
     7880  Springfield, IL......              0.8654              0.9731
             Menard, IL
             Sangamon, IL
     7920  Springfield, MO......              0.8555              0.9711
             Christian, MO
             Greene, MO
             Webster, MO
     8003  Springfield, MA......              1.0806              1.0161
             Hampden, MA
             Hampshire, MA
     8050  State College, PA....              0.9122              0.9824
             Centre, PA
     8080  Steubenville-Weirton,              0.8637              0.9727
            OH-WV (WV Hospitals)
             Jefferson, OH
             Brooke, WV
             Hancock, WV
     8120  Stockton-Lodi, CA....              1.0785              1.0157
             San Joaquin, CA
     8140  Sumter, SC...........              0.7794              0.9559
             Sumter, SC
     8160  Syracuse, NY.........              0.9491              0.9898
             Cayuga, NY
             Madison, NY
             Onondaga, NY
             Oswego, NY
     8200  Tacoma, WA...........              1.1611              1.0322
             Pierce, WA
     8240  Tallahassee, FL......              0.8483              0.9697
             Gadsden, FL
             Leon, FL
     8280  Tampa-St. Petersburg-              0.8908              0.9782
            Clearwater, FL......
             Hernando, FL
             Hillsborough, FL
             Pasco, FL
             Pinellas, FL
     8320  Terre Haute, IN......              0.8498              0.9700
             Clay, IN
             Vermillion, IN
             Vigo, IN
     8360  Texarkana, AR-                     0.8319              0.9664
            Texarkana, TX.......
             Miller, AR
             Bowie, TX
     8400  Toledo, OH...........              0.9738              0.9948
             Fulton, OH
             Lucas, OH
             Wood, OH
     8440  Topeka, KS...........              0.8914              0.9783
             Shawnee, KS
     8480  Trenton, NJ..........              1.0383              1.0077
             Mercer, NJ
     8520  Tucson, AZ...........              0.8967              0.9793
             Pima, AZ
     8560  Tulsa, OK............              0.8924              0.9785
             Creek, OK
             Osage, OK
             Rogers, OK
             Tulsa, OK
             Wagoner, OK

[[Page 56073]]

 
     8600  Tuscaloosa, AL.......              0.8171              0.9634
             Tuscaloosa, AL
     8640  Tyler, TX............              0.9609              0.9922
             Smith, TX
     8680  Utica-Rome, NY.......              0.8311              0.9662
             Herkimer, NY
             Oneida, NY
     8720  Vallejo-Fairfield-                 1.3563              1.0713
            Napa, CA............
             Napa, CA
             Solano, CA
     8735  Ventura, CA..........              1.0996              1.0199
             Ventura, CA
     8750  Victoria, TX.........              0.8328              0.9666
             Victoria, TX
     8760  Vineland-Millville-                1.0441              1.0088
            Bridgeton, NJ.......
             Cumberland, NJ
     8780  Visalia-Tulare-                    0.9610              0.9922
            Porterville, CA.....
             Tulare, CA
     8800  Waco, TX.............              0.8110              0.9622
             McLennan, TX
     8840  Washington, DC-MD-VA-              1.0962              1.0192
            WV..................
             District of
            Columbia, DC
             Calvert, MD
             Charles, MD
             Frederick, MD
             Montgomery, MD
             Prince Georges, MD
             Alexandria City, VA
             Arlington, VA
             Clarke, VA
             Culpeper, VA
             Fairfax, VA
             Fairfax City, VA
             Falls Church City,
            VA
             Fauquier, VA
             Fredericksburg
            City, VA
             King George, VA
             Loudoun, VA
             Manassas City, VA
             Manassas Park City,
            VA
             Prince William, VA
             Spotsylvania, VA
             Stafford, VA
             Warren, VA
             Berkeley, WV
             Jefferson, WV
     8920  Waterloo-Cedar Falls,              0.7980              0.9596
            IA..................
             Black Hawk, IA
     8940  Wausau, WI...........              0.9702              0.9940
             Marathon, WI
     8960  West Palm Beach-Boca               0.9778              0.9956
            Raton, FL...........
             Palm Beach, FL
     9000  Wheeling, WV-OH......              0.7940              0.9588
             Belmont, OH
             Marshall, WV
             Ohio, WV
     9040  Wichita, KS..........              0.9545              0.9909
             Butler, KS
             Harvey, KS
             Sedgwick, KS
     9080  Wichita Falls, TX....              0.7867              0.9573
             Archer, TX
             Wichita, TX
     9140  Williamsport, PA.....              0.8497              0.9699
             Lycoming, PA
     9160  Wilmington-Newark, DE-             1.0804              1.0161
            MD..................
             New Castle, DE
             Cecil, MD
     9200  Wilmington, NC.......              0.9408              0.9882
             New Hanover, NC
             Brunswick, NC
     9260  Yakima, WA...........              1.0575              1.0115

[[Page 56074]]

 
             Yakima, WA
     9270  Yolo, CA.............              0.9696              0.9939
             Yolo, CA
     9280  York, PA.............              0.9372              0.9874
             York, PA
     9320  Youngstown-Warren, OH              0.9549              0.9910
             Columbiana, OH
             Mahoning, OH
             Trumbull, OH
     9340  Yuba City, CA........              1.0359              1.0072
             Sutter, CA
             Yuba, CA
     9360  Yuma, AZ.............              0.8989              0.9798
             Yuma, AZ
------------------------------------------------------------------------
\1\ Pre-reclassification wage index from FY 2002 based on fiscal year
  1998 audited inpatient acute-care hospital wage data that excludes
  wages for services provided by teaching physicians, interns and
  residents, and non-physician anesthetists under Part B of the Medicare
  program.
\2\ One-fifth of the full wage index value. For example, for a LTCH
  located in Chicago, Illinois (MSA 1600) in FY 2003, the \1/5\ of the
  wage index is computed as 5.1008/5 = 1.0202. For further details, see
  section X.J.1. of this final rule.


[[Page 56075]]


      Table 2.--Long-Term Care Hospital Wage Index for Rural Areas
------------------------------------------------------------------------
                                                   Full wage  \1/5\ wage
                  Nonurban area                    index \1\   index \2\
------------------------------------------------------------------------
Alabama.........................................      0.7332      0.9466
Alaska..........................................      1.1853      1.0371
Arizona.........................................      0.8675      0.9735
Arkansas........................................      0.7488      0.9498
California......................................      0.9772      0.9954
Colorado........................................      0.8807      0.9761
Connecticut.....................................      1.2077      1.0415
Delaware........................................      0.9581      0.9916
Florida.........................................      0.8812      0.9762
Georgia.........................................      0.8288      0.9658
Hawaii..........................................      1.1110      1.0222
Idaho...........................................      0.8702      0.9740
Illinois........................................      0.8049      0.9610
Indiana.........................................      0.8720      0.9744
Iowa............................................      0.8124      0.9625
Kansas..........................................      0.7754      0.9551
Kentucky........................................      0.7958      0.9592
Louisiana.......................................      0.7596      0.9519
Maine...........................................      0.8716      0.9743
Maryland........................................      0.8859      0.9772
Massachusetts...................................      1.1454      1.0291
Michigan........................................      0.9004      0.9801
Minnesota.......................................      0.9017      0.9803
Mississippi.....................................      0.7522      0.9504
Missouri........................................      0.7772      0.9554
Montana.........................................      0.8649      0.9730
Nebraska........................................      0.8111      0.9622
Nevada..........................................      0.9671      0.9934
New Hampshire...................................      0.9736      0.9947
New Jersey \3\..................................  ..........  ..........
New Mexico......................................      0.8673      0.9735
New York........................................      0.8515      0.9703
North Carolina..................................      0.8536      0.9707
North Dakota....................................      0.7856      0.9571
Ohio............................................      0.8664      0.9733
Oklahoma........................................      0.7565      0.9513
Oregon..........................................      1.0014      1.0003
Pennsylvania....................................      0.8587      0.9717
Puerto Rico.....................................      0.4797      0.8959
Rhode Island \3\................................  ..........  ..........
South Carolina..................................      0.8510      0.9702
South Dakota....................................      0.7845      0.9569
Tennessee.......................................      0.7928      0.9586
Texas...........................................      0.7705      0.9541
Utah............................................      0.9041      0.9808
Vermont.........................................      0.9462      0.9892
Virginia........................................      0.8236      0.9647
Washington......................................      1.0200      1.0040
West Virginia...................................      0.8047      0.9609
Wisconsin.......................................      0.9069      0.9814
Wyoming.........................................      0.8736     0.9747
------------------------------------------------------------------------
\1\ Pre-reclassification wage index from FY 2002 based on fiscal year
  1998 audited inpatient acute-care hospital wage data that excludes
  wages for services provided by teaching physicians, interns and
  residents, and non-physician anesthetists under Part B of the Medicare
  program.
\2\ One-fifth of the full wage index value. For example, for a LTCH
  located in rural Arizona in FY 2003, the \1/5\ of the wage index is
  computed as 4.8675/5 = 0.9735. For further details, see section X.J.1
  of this final rule.
\3\ All counties within the State are classified as urban.


[[Page 56076]]


                      Table 3.--LTC-DRG Relative Weights and Arithmetic Mean Length of Stay
----------------------------------------------------------------------------------------------------------------
                                                                                    Geo-metric
            LTC-DRG                        Description               Relative     mean length of   FY 2001 LTCH
                                                                      weight           stay            cases
----------------------------------------------------------------------------------------------------------------
1.............................  CRANIOTOMY AGE 17 W            1.8783            46.3               8
                                 CC \5\.
2.............................  CRANIOTOMY AGE 17 W/O          1.8783            46.3               1
                                 CC \5\.
3.............................  CRANIOTOMY AGE 0-17 *...........          1.8783            46.3               0
4.............................  SPINAL PROCEDURES \4\...........          1.2493            31.3              16
5.............................  EXTRACRANIAL VASCULAR PROCEDURES          1.2493            31.3               5
                                 \4\.
6.............................  CARPAL TUNNEL RELEASE *.........          0.4055            16.8               0
7.............................  PERIPH & CRANIAL NERVE & OTHER            1.7829            43.8              97
                                 NERV SYST PROC W CC.
8.............................  PERIPH & CRANIAL NERVE & OTHER            1.2493            31.3               5
                                 NERV SYST PROC W/O CC \4\.
9.............................  SPINAL DISORDERS & INJURIES.....          1.4118            34.6             130
10............................  NERVOUS SYSTEM NEOPLASMS W CC             0.8537            24.5             102
                                 \7\.
11............................  NERVOUS SYSTEM NEOPLASMS W/O CC           0.8537            24.5              26
                                 \7\.
12............................  DEGENERATIVE NERVOUS SYSTEM               0.7773            27.1           1,577
                                 DISORDERS.
13............................  MULTIPLE SCLEROSIS & CEREBELLAR           0.7207            25.6              89
                                 ATAXIA.
14............................  INTERCRANIAL HEMORRHAGE & STROKE          0.8816            26.6           1,198
                                 W INFARCT.
15............................  NONSPECIFIC CVA & PRECEREBRAL             0.9053            29.4           1,627
                                 OCCULUSION W/O INFARCT.
16............................  NONSPECIFIC CEREBROVASCULAR               0.8864            27.0             120
                                 DISORDERS W CC.
17............................  NONSPECIFIC CEREBROVASCULAR               0.6655            21.9              21
                                 DISORDERS W/O CC \2\.
18............................  CRANIAL & PERIPHERAL NERVE                0.7770            24.9             133
                                 DISORDERS W CC.
19............................  CRANIAL & PERIPHERAL NERVE                0.5486            22.0              43
                                 DISORDERS W/O CC.
20............................  NERVOUS SYSTEM INFECTION EXCEPT           1.2331            29.3             163
                                 VIRAL MENINGITIS.
21............................  VIRAL MENINGITIS \1\............          0.4055            16.8               7
22............................  HYPERTENSIVE ENCEPHALOPATHY \2\.          0.6655            21.9               4
23............................  NONTRAUMATIC STUPOR & COMA......          0.9623            27.2              85
24............................  SEIZURE & HEADACHE AGE            0.8831            24.8             123
                                 17 W CC.
25............................  SEIZURE & HEADACHE AGE            0.4830            20.4              47
                                 17 W/O CC.
26............................  SEIZURE & HEADACHE AGE 0-17 *...          0.4055            16.8               0
27............................  TRAUMATIC STUPOR & COMA, COMA             1.1126            31.6              31
                                 1 HR.
28............................  TRAUMATIC STUPOR & COMA, COMA <1          1.1507            29.0             134
                                 HR AGE 17 W CC.
29............................  TRAUMATIC STUPOR & COMA, COMA <1          0.9268            27.2              65
                                 HR AGE 17 W/O CC.
30............................  TRAUMATIC STUPOR & COMA, COMA <1          0.8284            23.3               0
                                 HR AGE 0-17 *.
31............................  CONCUSSION AGE 17 W            0.6655            21.9               4
                                 CC \2\.
32............................  CONCUSSION AGE 17 W/O          0.4055            16.8               0
                                 CC *.
33............................  CONCUSSION AGE 0-17 *...........          0.4055            16.8               0
34............................  OTHER DISORDERS OF NERVOUS                0.8385            25.1             394
                                 SYSTEM W CC.
35............................  OTHER DISORDERS OF NERVOUS                0.6561            25.3             189
                                 SYSTEM W/O CC.
36............................  RETINAL PROCEDURES *............          0.4055            16.8               0
37............................  ORBITAL PROCEDURES *............          0.4055            16.8               0
38............................  PRIMARY IRIS PROCEDURES *.......          0.4055            16.8               0
39............................  LENS PROCEDURES WITH OR WITHOUT           0.4055            16.8               0
                                 VITRECTOMY *.
40............................  EXTRAOCULAR PROCEDURES EXCEPT             0.4055            16.8               0
                                 ORBIT AGE 17 *.
41............................  EXTRAOCULAR PROCEDURES EXCEPT             0.4055            16.8               0
                                 ORBIT AGE 0-17 *.
42............................  INTRAOCULAR PROCEDURES EXCEPT             0.4055            16.8               0
                                 RETINA, IRIS & LENS *.
43............................  HYPHEMA \3\.....................          0.8284            23.3               2
44............................  ACUTE MAJOR EYE INFECTIONS \2\..          0.6655            21.9               5
45............................  NEUROLOGICAL EYE DISORDERS \1\..          0.4055            16.8               2
46............................  OTHER DISORDERS OF THE EYE AGE            0.6655            21.9              14
                                 17 W CC \2\.
47............................  OTHER DISORDERS OF THE EYE AGE            0.4055            16.8               3
                                 17 W/O CC \1\.
48............................  OTHER DISORDERS OF THE EYE AGE 0-         0.4055            16.8               0
                                 17 *.
49............................  MAJOR HEAD & NECK PROCEDURES *..          1.8783            46.3               0
50............................  SIALOADENECTOMY *...............          0.6655            21.9               0
51............................  *...............................          0.6655            21.9               0
52............................  CLEFT LIP & PALATE REPAIR *.....          0.6655            21.9               0
53............................  SINUS & MASTOID PROCEDURES AGE            0.6655            21.9               0
                                 17 *.
54............................  SINUS & MASTOID PROCEDURES AGE 0-         0.6655            21.9               0
                                 17 *.
55............................  MISCELLANEOUS EAR, NOSE, MOUTH &          0.6655            21.9               1
                                 THROAT PROCEDURES \2\.
56............................  RHINOPLASTY *...................          0.6655            21.9               0
57............................  T&A PROC, EXCEPT TONSILLECTOMY &/         0.6655            21.9               0
                                 OR ADENOIDECTOMY ONLY, AGE 
17 *.
58............................  T&A PROC, EXCEPT TONSILLECTOMY &/         0.6655            21.9               0
                                 OR ADENOIDECTOMY ONLY, AGE 0-17
                                 *.
59............................  TONSILLECTOMY &/OR ADENOIDECTOMY          0.6655            21.9               0
                                 ONLY, AGE 17 *.
60............................  TONSILLECTOMY &/OR ADENOIDECTOMY          0.6655            21.9               0
                                 ONLY, AGE 0-17 *.
61............................  MYRINGOTOMY W TUBE INSERTION AGE          1.8783            46.3               1
                                 17 \5\.
62............................  MYRINGOTOMY W TUBE INSERTION AGE          0.6655            21.9               0
                                 0-17 *.
63............................  OTHER EAR, NOSE, MOUTH & THROAT           1.8783            46.3               1
                                 O.R. PROCEDURES \5\.
64............................  EAR, NOSE, MOUTH & THROAT                 1.0447            25.5             111
                                 MALIGNANCY.
65............................  DYSEQUILIBRIUM..................          0.5056            19.8              25
66............................  EPISTAXIS \1\...................          0.4055            16.8               3
67............................  EPIGLOTTITIS \1\................          0.4055            16.8               1
68............................  OTITIS MEDIA & URI AGE >17 W           0.8284            23.3              14
                                 CC \3\.

[[Page 56077]]

 
69............................  OTITIS MEDIA & URI AGE >17 W/          0.8284            23.3               8
                                 O CC \3\.
70............................  OTITIS MEDIA & URI AGE 0-17 *...          0.4055            16.8               0
71............................  LARYNGOTRACHEITIS *.............          0.4055            16.8               0
72............................  NASAL TRAUMA & DEFORMITY \1\....          0.4055            16.8               2
73............................  OTHER EAR, NOSE, MOUTH & THROAT           0.8097            23.7              29
                                 DIAGNOSES AGE 17.
74............................  OTHER EAR, NOSE, MOUTH & THROAT           0.4055            16.8               0
                                 DIAGNOSES AGE 0-17 *.
75............................  MAJOR CHEST PROCEDURES \5\......          1.8783            46.3              13
76............................  OTHER RESP SYSTEM O.R.                    2.7674            50.6             522
                                 PROCEDURES W CC.
77............................  OTHER RESP SYSTEM O.R.                    1.8783            46.3              14
                                 PROCEDURES W/O CC \5\.
78............................  PULMONARY EMBOLISM..............          0.6348            20.5              96
79............................  RESPIRATORY INFECTIONS &                  0.8916            22.2           1,134
                                 INFLAMMATIONS AGE 17
                                 W CC.
80............................  RESPIRATORY INFECTIONS &                  0.7947            22.8             123
                                 INFLAMMATIONS AGE 17
                                 W/O CC.
81............................  RESPIRATORY INFECTIONS &                  0.4055            16.8               0
                                 INFLAMMATIONS AGE 0-17 *.
82............................  RESPIRATORY NEOPLASMS...........          0.7976            20.9             402
83............................  MAJOR CHEST TRAUMA W CC.........          0.7384            24.8              25
84............................  MAJOR CHEST TRAUMA W/O CC \1\...          0.4055            16.8               6
85............................  PLEURAL EFFUSION W CC...........          0.8207            23.6             163
86............................  PLEURAL EFFUSION W/O CC.........          0.6194            21.1              23
87............................  PULMONARY EDEMA & RESPIRATORY             1.6597            32.3           3,875
                                 FAILURE.
88............................  CHRONIC OBSTRUCTIVE PULMONARY             0.7532            20.9           3,412
                                 DISEASE.
89............................  SIMPLE PNEUMONIA & PLEURISY AGE           0.8533            23.6           2,654
                                 17 W CC.
90............................  SIMPLE PNEUMONIA & PLEURISY AGE           0.7921            23.0             318
                                 17 W/O CC.
91............................  SIMPLE PNEUMONIA & PLEURISY AGE           0.8284            23.3               0
                                 0-17 *.
92............................  INTERSTITIAL LUNG DISEASE W CC..          0.7251            19.1             135
93............................  INTERSTITIAL LUNG DISEASE W/O CC          0.5573            18.5              29
94............................  PNEUMOTHORAX W CC...............          0.7885            22.7              41
95............................  PNEUMOTHORAX W/O CC \1\.........          0.4055            16.8               7
96............................  BRONCHITIS & ASTHMA AGE           0.8173            24.2             147
                                 17 W CC.
97............................  BRONCHITIS & ASTHMA AGE           0.5940            17.9              23
                                 17 W/O CC.
98............................  BRONCHITIS & ASTHMA AGE 0-17 *..          0.4055            16.8               0
99............................  RESPIRATORY SIGNS & SYMPTOMS W            1.1164            27.3             705
                                 CC.
100...........................  RESPIRATORY SIGNS & SYMPTOMS W/O          1.0015            25.4              77
                                 CC.
101...........................  OTHER RESPIRATORY SYSTEM                  0.9763            23.4             177
                                 DIAGNOSES W CC.
102...........................  OTHER RESPIRATORY SYSTEM                  0.9313            24.5              28
                                 DIAGNOSES W/O CC.
103...........................  HEART TRANSPLANT \6\............          0.0000             0.0               0
104...........................  CARDIAC VALVE & OTHER MAJOR               1.8783            46.3               0
                                 CARDIOTHORACIC PROC W CARDIAC
                                 CATH *.
105...........................  CARDIAC VALVE & OTHER MAJOR               1.8783            46.3               0
                                 CARDIOTHORACIC PROC W/O CARDIAC
                                 CATH *.
106...........................  CORONARY BYPASS W PTCA *........          1.8783            46.3               0
107...........................  CORONARY BYPASS W CARDIAC CATH *          1.8783            46.3               0
108...........................  OTHER CARDIOTHORACIC PROCEDURES           0.6655            21.9               1
                                 \2\.
109...........................  CORONARY BYPASS W/O PTCA OR               1.8783            46.3               0
                                 CARDIAC CATH *.
110...........................  MAJOR CARDIOVASCULAR PROCEDURES           1.8783            46.3               5
                                 W CC \5\.
111...........................  MAJOR CARDIOVASCULAR PROCEDURES           1.8783            46.3               1
                                 W/O CC \5\.
113...........................  AMPUTATION FOR CIRC SYSTEM                1.4103            36.9              92
                                 DISORDERS EXCEPT UPPER LIMB &
                                 TOE.
114...........................  UPPER LIMB & TOE AMPUTATION FOR           1.3377            40.2              32
                                 CIRC SYSTEM DISORDERS.
115...........................  PRM CARD PACEM IMPL W AMI,HRT             1.8783            46.3               3
                                 FAIL OR SHK,OR AICD LEAD OR
                                 GNRTR P \5\.
116...........................  OTH PERM CARD PACEMAK IMPL OR             0.8284            23.3               4
                                 PTCA W CORONARY ARTERY STENT
                                 IMPLNT \3\.
117...........................  CARDIAC PACEMAKER REVISION                0.4055            16.8               0
                                 EXCEPT DEVICE REPLACEMENT *.
118...........................  CARDIAC PACEMAKER DEVICE                  0.4055            16.8               2
                                 REPLACEMENT \1\.
119...........................  VEIN LIGATION & STRIPPING *.....          0.6655            21.9               0
120...........................  OTHER CIRCULATORY SYSTEM O.R.             1.4091            36.4             174
                                 PROCEDURES.
121...........................  CIRCULATORY DISORDERS W AMI &             0.7167            21.6             196
                                 MAJOR COMP, DISCHARGED ALIVE.
122...........................  CIRCULATORY DISORDERS W AMI W/O           0.5144            19.0              51
                                 MAJOR COMP, DISCHARGED ALIVE.
123...........................  CIRCULATORY DISORDERS W AMI,              0.9412            20.9              36
                                 EXPIRED.
124...........................  CIRCULATORY DISORDERS EXCEPT              0.8284            23.3               5
                                 AMI, W CARD CATH & COMPLEX DIAG
                                 \3\.
125...........................  CIRCULATORY DISORDERS EXCEPT              1.8783            46.3               3
                                 AMI, W CARD CATH W/O COMPLEX
                                 DIAG \5\.
126...........................  ACUTE & SUBACUTE ENDOCARDITIS...          0.7689            24.8             148
127...........................  HEART FAILURE & SHOCK...........          0.7616            22.4           2,324
128...........................  DEEP VEIN THROMBOPHLEBITIS......          0.6042            20.8              29
129...........................  CARDIAC ARREST, UNEXPLAINED.....          1.0534            20.9              22
130...........................  PERIPHERAL VASCULAR DISORDERS W           0.7914            24.8           1,061
                                 CC.
131...........................  PERIPHERAL VASCULAR DISORDERS W/          0.7081            23.7             178
                                 O CC.

[[Page 56078]]

 
132...........................  ATHEROSCLEROSIS W CC............          0.8183            21.8             645
133...........................  ATHEROSCLEROSIS W/O CC..........          0.5484            18.5             126
134...........................  HYPERTENSION....................          0.6985            24.0             123
135...........................  CARDIAC CONGENITAL & VALVULAR             0.7331            20.3             169
                                 DISORDERS AGE 17 W
                                 CC.
136...........................  CARDIAC CONGENITAL & VALVULAR             0.7075            21.0              24
                                 DISORDERS AGE 17 W/O
                                 CC.
137...........................  CARDIAC CONGENITAL & VALVULAR             0.6655            21.9               0
                                 DISORDERS AGE 0-17 *.
138...........................  CARDIAC ARRHYTHMIA & CONDUCTION           0.7187            23.4             295
                                 DISORDERS W CC.
139...........................  CARDIAC ARRHYTHMIA & CONDUCTION           0.6482            20.4              54
                                 DISORDERS W/O CC.
140...........................  ANGINA PECTORIS.................          0.7690            20.1              52
141...........................  SYNCOPE & COLLAPSE W CC.........          0.6252            23.2             101
142...........................  SYNCOPE & COLLAPSE W/O CC.......          0.5452            21.5              41
143...........................  CHEST PAIN......................          0.7316            22.7              41
144...........................  OTHER CIRCULATORY SYSTEM                  0.7870            21.9             551
                                 DIAGNOSES W CC.
145...........................  OTHER CIRCULATORY SYSTEM                  0.7637            25.0              66
                                 DIAGNOSES W/O CC.
146...........................  RECTAL RESECTION W CC \4\.......          1.2493            31.3               1
147...........................  RECTAL RESECTION W/O CC *.......          1.2493            31.3               0
148...........................  MAJOR SMALL & LARGE BOWEL                 2.8488            47.6              20
                                 PROCEDURES W CC.
149...........................  MAJOR SMALL & LARGE BOWEL                 0.6655            21.9               3
                                 PROCEDURES W/O CC \2\.
150...........................  PERITONEAL ADHESIOLYSIS W CC \1\          0.4055            16.8               1
151...........................  PERITONEAL ADHESIOLYSIS W/O CC *          0.4055            16.8               0
152...........................  MINOR SMALL & LARGE BOWEL                 1.2493            31.3               1
                                 PROCEDURES W CC \4\.
153...........................  MINOR SMALL & LARGE BOWEL                 0.8284            23.3               0
                                 PROCEDURES W/O CC *.
154...........................  STOMACH, ESOPHAGEAL & DUODENAL            1.2493            31.3               7
                                 PROCEDURES AGE 17 W
                                 CC \4\.
155...........................  STOMACH, ESOPHAGEAL & DUODENAL            0.8284            23.3               0
                                 PROCEDURES AGE 17 W/
                                 O CC *.
156...........................  STOMACH, ESOPHAGEAL & DUODENAL            0.8284            23.3               0
                                 PROCEDURES AGE 0-17 *.
157...........................  ANAL & STOMAL PROCEDURES W CC             0.4055            16.8               1
                                 \1\.
158...........................  ANAL & STOMAL PROCEDURES W/O CC           0.4055            16.8               0
                                 *.
159...........................  HERNIA PROCEDURES EXCEPT                  1.2493            31.3               2
                                 INGUINAL & FEMORAL AGE 
                                 17 W CC \4\.
160...........................  HERNIA PROCEDURES EXCEPT                  0.6655            21.9               0
                                 INGUINAL & FEMORAL AGE 
17 W/O CC *.
161...........................  INGUINAL & FEMORAL HERNIA                 0.6655            21.9               0
                                 PROCEDURES AGE 17 W
                                 CC *.
162...........................  INGUINAL & FEMORAL HERNIA                 0.6655            21.9               0
                                 PROCEDURES AGE 17 W/
                                 O CC *.
163...........................  HERNIA PROCEDURES AGE 0-17 *....          0.6655            21.9               0
164...........................  APPENDECTOMY W COMPLICATED                0.8284            23.3               0
                                 PRINCIPAL DIAG W CC *.
165...........................  APPENDECTOMY W COMPLICATED                0.8284            23.3               0
                                 PRINCIPAL DIAG W/O CC *.
166...........................  APPENDECTOMY W/O COMPLICATED              0.6655            21.9               0
                                 PRINCIPAL DIAG W CC *.
167...........................  APPENDECTOMY W/O COMPLICATED              0.6655            21.9               0
                                 PRINCIPAL DIAG W/O CC *.
168...........................  MOUTH PROCEDURES W CC \3\.......          0.8284            23.3               1
169...........................  MOUTH PROCEDURES W/O CC *.......          0.6655            21.9               0
170...........................  OTHER DIGESTIVE SYSTEM O.R.               1.5543            35.0              40
                                 PROCEDURES W CC.
171...........................  OTHER DIGESTIVE SYSTEM O.R.               0.8284            23.3               1
                                 PROCEDURES W/O CC \3\.
172...........................  DIGESTIVE MALIGNANCY W CC.......          0.8553            24.2             335
173...........................  DIGESTIVE MALIGNANCY W/O CC.....          0.5513            18.9              55
174...........................  G.I. HEMORRHAGE W CC............          0.8741            23.6             258
175...........................  G.I. HEMORRHAGE W/O CC..........          0.8359            25.6              35
176...........................  COMPLICATED PEPTIC ULCER........          0.7661            24.4              37
177...........................  UNCOMPLICATED PEPTIC ULCER W CC           0.8284            23.3              14
                                 \3\.
178...........................  UNCOMPLICATED PEPTIC ULCER W/O            0.6655            21.9               6
                                 CC \2\.
179...........................  INFLAMMATORY BOWEL DISEASE......          1.0975            23.4              45
180...........................  G.I. OBSTRUCTION W CC...........          0.8457            22.8             193
181...........................  G.I. OBSTRUCTION W/O CC.........          0.5638            19.5              20
182...........................  ESOPHAGITIS, GASTROENT & MISC             0.8829            25.9             436
                                 DIGEST DISORDERS AGE                                  17 W CC.
183...........................  ESOPHAGITIS, GASTROENT & MISC             0.6913            21.5              66
                                 DIGEST DISORDERS AGE                                  17 W/O CC.
184...........................  ESOPHAGITIS, GASTROENT & MISC             0.6655            21.9               0
                                 DIGEST DISORDERS AGE 0-17 *.
185...........................  DENTAL & ORAL DIS EXCEPT                  0.8284            23.3              20
                                 EXTRACTIONS & RESTORATIONS, AGE
                                 17 \3\.
186...........................  DENTAL & ORAL DIS EXCEPT                  0.8284            23.3               0
                                 EXTRACTIONS & RESTORATIONS, AGE
                                 0-17 *.
187...........................  DENTAL EXTRACTIONS &                      0.8284            23.3               0
                                 RESTORATIONS *.
188...........................  OTHER DIGESTIVE SYSTEM DIAGNOSES          1.0490            24.2             481
                                 AGE 17 W CC.
189...........................  OTHER DIGESTIVE SYSTEM DIAGNOSES          0.5852            17.4              48
                                 AGE 17 W/O CC.
190...........................  OTHER DIGESTIVE SYSTEM DIAGNOSES          0.6655            21.9               0
                                 AGE 0-17 *.
191...........................  PANCREAS, LIVER & SHUNT                   1.8783            46.3               5
                                 PROCEDURES W CC \5\.
192...........................  PANCREAS, LIVER & SHUNT                   1.2493            31.3               0
                                 PROCEDURES W/O CC *.
193...........................  BILIARY TRACT PROC EXCEPT ONLY            1.2493            31.3               1
                                 CHOLECYST W OR W/O C.D.E. W CC
                                 \4\.
194...........................  BILIARY TRACT PROC EXCEPT ONLY            0.8284            23.3               0
                                 CHOLECYST W OR W/O C.D.E. W/O
                                 CC *.

[[Page 56079]]

 
195...........................  CHOLECYSTECTOMY W C.D.E. W CC *.          0.8284            23.3               0
196...........................  CHOLECYSTECTOMY W C.D.E. W/O CC           0.8284            23.3               0
                                 *.
197...........................  CHOLECYSTECTOMY EXCEPT BY                 1.8783            46.3               2
                                 LAPAROSCOPE W/O C.D.E. W CC \5\.
198...........................  CHOLECYSTECTOMY EXCEPT BY                 1.8783            46.3               2
                                 LAPAROSCOPE W/O C.D.E. W/O CC
                                 \5\.
199...........................  HEPATOBILIARY DIAGNOSTIC                  0.8284            23.3               1
                                 PROCEDURE FOR MALIGNANCY \3\.
200...........................  HEPATOBILIARY DIAGNOSTIC                  1.2493            31.3               3
                                 PROCEDURE FOR NON-MALIGNANCY
                                 \4\.
201...........................  OTHER HEPATOBILIARY OR PANCREAS           1.8783            46.3               5
                                 O.R. PROCEDURES \5\.
202...........................  CIRRHOSIS & ALCOHOLIC HEPATITIS.          0.5736            18.4              64
203...........................  MALIGNANCY OF HEPATOBILIARY               0.5897            18.2              88
                                 SYSTEM OR PANCREAS.
204...........................  DISORDERS OF PANCREAS EXCEPT              0.9444            22.1             169
                                 MALIGNANCY.
205...........................  DISORDERS OF LIVER EXCEPT                 0.6825            21.5              85
                                 MALIG,CIRR,ALC HEPA W CC.
206...........................  DISORDERS OF LIVER EXCEPT                 0.6655            21.9              13
                                 MALIG,CIRR,ALC HEPA W/O CC \2\.
207...........................  DISORDERS OF THE BILIARY TRACT W          0.6979            21.5              78
                                 CC.
208...........................  DISORDERS OF THE BILIARY TRACT W/         0.4055            16.8              20
                                 O CC \1\.
209...........................  MAJOR JOINT & LIMB REATTACHMENT           1.8783            46.3               4
                                 PROCEDURES OF LOWER EXTREMITY
                                 \5\.
210...........................  HIP & FEMUR PROCEDURES EXCEPT             1.2493            31.3              12
                                 MAJOR JOINT AGE 17 W
                                 CC \4\.
211...........................  HIP & FEMUR PROCEDURES EXCEPT             0.8284            23.3               0
                                 MAJOR JOINT AGE 17 W/
                                 O CC *.
212...........................  HIP & FEMUR PROCEDURES EXCEPT             0.8284            23.3               0
                                 MAJOR JOINT AGE 0-17 *.
213...........................  AMPUTATION FOR MUSCULOSKELETAL            1.2591            33.0              32
                                 SYSTEM & CONN TISSUE DISORDERS.
216...........................  BIOPSIES OF MUSCULOSKELETAL               1.2493            31.3               8
                                 SYSTEM & CONNECTIVE TISSUE \4\.
217...........................  WND DEBRID & SKN GRFT EXCEPT              1.3602            38.8             203
                                 HAND,FOR MUSCSKELET & CONN TISS
                                 DIS.
218...........................  LOWER EXTREM & HUMER PROC EXCEPT          0.8284            23.3               4
                                 HIP,FOOT,FEMUR AGE                                 17 W CC \3\.
219...........................  LOWER EXTREM & HUMER PROC EXCEPT          0.8284            23.3               0
                                 HIP,FOOT,FEMUR AGE                                  17 W/O CC *.
220...........................  LOWER EXTREM & HUMER PROC EXCEPT          0.8284            23.3               0
                                 HIP,FOOT,FEMUR AGE 0-17 *.
223...........................  MAJOR SHOULDER/ELBOW PROC, OR             1.2493            31.3               1
                                 OTHER UPPER EXTREMITY PROC W CC
                                 \4\.
224...........................  SHOULDER,ELBOW OR FOREARM                 0.4055            16.8               1
                                 PROC,EXC MAJOR JOINT PROC, W/O
                                 CC \1\.
225...........................  FOOT PROCEDURES \4\.............          1.2493            31.3              23
226...........................  SOFT TISSUE PROCEDURES W CC \4\.          1.2493            31.3               8
227...........................  SOFT TISSUE PROCEDURES W/O CC             0.8284            23.3               2
                                 \3\.
228...........................  MAJOR THUMB OR JOINT PROC,OR OTH          0.6655            21.9               0
                                 HAND OR WRIST PROC W CC *.
229...........................  HAND OR WRIST PROC, EXCEPT MAJOR          0.6655            21.9               1
                                 JOINT PROC, W/O CC \2\.
230...........................  LOCAL EXCISION & REMOVAL OF INT           0.4055            16.8               1
                                 FIX DEVICES OF HIP & FEMUR \1\.
231...........................  LOCAL EXCISION & REMOVAL OF INT           1.8783            46.3               9
                                 FIX DEVICES EXCEPT HIP & FEMUR
                                 \5\.
232...........................  ARTHROSCOPY *...................          0.4055            16.8               0
233...........................  OTHER MUSCULOSKELET SYS & CONN            1.2493            31.3              23
                                 TISS O.R. PROC W CC \4\.
234...........................  OTHER MUSCULOSKELET SYS & CONN            0.4055            16.8               2
                                 TISS O.R. PROC W/O CC \1\.
235...........................  FRACTURES OF FEMUR..............          0.7540            28.5             167
236...........................  FRACTURES OF HIP & PELVIS.......          0.7381            27.2           1,451
237...........................  SPRAINS, STRAINS, & DISLOCATIONS          0.6655            21.9              15
                                 OF HIP, PELVIS & THIGH \2\.
238...........................  OSTEOMYELITIS...................          0.8275            27.5             947
239...........................  PATHOLOGICAL FRACTURES &                  0.6689            21.9             199
                                 MUSCULOSKELETAL & CONN TISS
                                 MALIGNANCY.
240...........................  CONNECTIVE TISSUE DISORDERS W CC          0.9260            26.0             100
241...........................  CONNECTIVE TISSUE DISORDERS W/O           0.5805            22.7              40
                                 CC.
242...........................  SEPTIC ARTHRITIS................          0.7725            26.3             174
243...........................  MEDICAL BACK PROBLEMS...........          0.6596            23.4             765
244...........................  BONE DISEASES & SPECIFIC                  0.5756            20.6             337
                                 ARTHROPATHIES W CC.
245...........................  BONE DISEASES & SPECIFIC                  0.4426            17.5             376
                                 ARTHROPATHIES W/O CC.
246...........................  NON-SPECIFIC ARTHROPATHIES......          0.6053            21.4              45
247...........................  SIGNS & SYMPTOMS OF                       0.5590            20.4             324
                                 MUSCULOSKELETAL SYSTEM & CONN
                                 TISSUE.
248...........................  TENDONITIS, MYOSITIS & BURSITIS.          0.7288            23.9             277
249...........................  AFTERCARE, MUSCULOSKELETAL                0.8005            27.1             348
                                 SYSTEM & CONNECTIVE TISSUE.
250...........................  FX, SPRN, STRN & DISL OF                  0.8373            31.8             120
                                 FOREARM, HAND, FOOT AGE                                  17 W CC.
251...........................  FX, SPRN, STRN & DISL OF                  0.6904            26.0              55
                                 FOREARM, HAND, FOOT AGE                                  17 W/O CC.
252...........................  FX, SPRN, STRN & DISL OF                  0.4055            16.8               0
                                 FOREARM, HAND, FOOT AGE 0-17 *.
253...........................  FX, SPRN, STRN & DISL OF                  0.8054            28.0             225
                                 UPARM,LOWLEG EX FOOT AGE                                  17 W CC.
254...........................  FX, SPRN, STRN & DISL OF                  0.6999            26.4             118
                                 UPARM,LOWLEG EX FOOT AGE                                  17 W/O CC.
255...........................  FX, SPRN, STRN & DISL OF                  0.4055            16.8               0
                                 UPARM,LOWLEG EX FOOT AGE 0-17 *.
256...........................  OTHER MUSCULOSKELETAL SYSTEM &            0.8002            25.1             240
                                 CONNECTIVE TISSUE DIAGNOSES.
257...........................  TOTAL MASTECTOMY FOR MALIGNANCY           0.6655            21.9               3
                                 W CC \2\.
258...........................  TOTAL MASTECTOMY FOR MALIGNANCY           0.6655            21.9               0
                                 W/O CC *.

[[Page 56080]]

 
259...........................  SUBTOTAL MASTECTOMY FOR                   0.6655            21.9               0
                                 MALIGNANCY W CC *.
260...........................  SUBTOTAL MASTECTOMY FOR                   0.6655            21.9               0
                                 MALIGNANCY W/O CC *.
261...........................  BREAST PROC FOR NON-MALIGNANCY            0.4055            16.8               0
                                 EXCEPT BIOPSY & LOCAL EXCISION
                                 *.
262...........................  BREAST BIOPSY & LOCAL EXCISION            0.4055            16.8               1
                                 FOR NON-MALIGNANCY \1\.
263...........................  SKIN GRAFT &/OR DEBRID FOR SKN            1.5388            45.0           1,093
                                 ULCER OR CELLULITIS W CC.
264...........................  SKIN GRAFT &/OR DEBRID FOR SKN            1.1645            38.8             115
                                 ULCER OR CELLULITIS W/O CC.
265...........................  SKIN GRAFT &/OR DEBRID EXCEPT             1.6569            45.6              29
                                 FOR SKIN ULCER OR CELLULITIS W
                                 CC.
266...........................  SKIN GRAFT &/OR DEBRID EXCEPT             0.8284            23.3               5
                                 FOR SKIN ULCER OR CELLULITIS W/
                                 O CC \3\.
267...........................  PERIANAL & PILONIDAL PROCEDURES           0.4055            16.8               0
                                 *.
268...........................  SKIN, SUBCUTANEOUS TISSUE &               1.2493            31.3               5
                                 BREAST PLASTIC PROCEDURES \4\.
269...........................  OTHER SKIN, SUBCUT TISS & BREAST          1.3915            41.7             209
                                 PROC W CC.
270...........................  OTHER SKIN, SUBCUT TISS & BREAST          1.3879            41.6              22
                                 PROC W/O CC.
271...........................  SKIN ULCERS.....................          0.9714            31.1           4,059
272...........................  MAJOR SKIN DISORDERS W CC.......          0.6846            21.0              33
273...........................  MAJOR SKIN DISORDERS W/O CC \2\.          0.6655            21.9              11
274...........................  MALIGNANT BREAST DISORDERS W CC           0.7872            22.0              50
                                 \7\.
275...........................  MALIGNANT BREAST DISORDERS W/O            0.7872            22.0              11
                                 CC \7\.
276...........................  NON-MALIGANT BREAST DISORDERS             0.6655            21.9               8
                                 \2\.
277...........................  CELLULITIS AGE 17 W            0.7704            24.4             985
                                 CC.
278...........................  CELLULITIS AGE 17 W/O          0.6353            22.4             247
                                 CC.
279...........................  CELLULITIS AGE 0-17 *...........          0.6655            21.9               0
280...........................  TRAUMA TO THE SKIN, SUBCUT TISS           1.0097            30.9             161
                                 & BREAST AGE 17 W CC.
281...........................  TRAUMA TO THE SKIN, SUBCUT TISS           0.7363            27.4              55
                                 & BREAST AGE 17 W/O
                                 CC.
282...........................  TRAUMA TO THE SKIN, SUBCUT TISS           0.6655            21.9               0
                                 & BREAST AGE 0-17 *.
283...........................  MINOR SKIN DISORDERS W CC.......          0.8574            24.8              43
284...........................  MINOR SKIN DISORDERS W/O CC \1\.          0.4055            16.8              16
285...........................  AMPUTAT OF LOWER LIMB FOR                 1.3692            31.7              25
                                 ENDOCRINE,NUTRIT,& METABOL
                                 DISORDERS.
286...........................  ADRENAL & PITUITARY PROCEDURES *          1.2493            31.3               0
287...........................  SKIN GRAFTS & WOUND DEBRID FOR            1.3195            39.6              52
                                 ENDOC, NUTRIT & METAB DISORDERS.
288...........................  O.R. PROCEDURES FOR OBESITY \5\.          1.8783            46.3               3
289...........................  PARATHYROID PROCEDURES *........          0.4055            16.8               0
290...........................  THYROID PROCEDURES \1\..........          0.4055            16.8               1
291...........................  THYROGLOSSAL PROCEDURES *.......          0.4055            16.8               0
292...........................  OTHER ENDOCRINE, NUTRIT & METAB           1.2493            31.3              17
                                 O.R. PROC W CC \4\.
293...........................  OTHER ENDOCRINE, NUTRIT & METAB           0.6655            21.9               0
                                 O.R. PROC W/O CC *.
294...........................  DIABETES AGE 35......          0.7678            25.1             400
295...........................  DIABETES AGE 0-35 \3\...........          0.8284            23.3               6
296...........................  NUTRITIONAL & MISC METABOLIC              0.7710            24.3             648
                                 DISORDERS AGE 17 W
                                 CC.
297...........................  NUTRITIONAL & MISC METABOLIC              0.6321            21.1             144
                                 DISORDERS AGE 17 W/O
                                 CC.
298...........................  NUTRITIONAL & MISC METABOLIC              0.6655            21.9               0
                                 DISORDERS AGE 0-17 *.
299...........................  INBORN ERRORS OF METABOLISM \3\.          0.8284            23.3              12
300...........................  ENDOCRINE DISORDERS W CC........          0.8670            23.3              58
301...........................  ENDOCRINE DISORDERS W/O CC \1\..          0.4055            16.8              15
302...........................  KIDNEY TRANSPLANT \6\...........          0.0000             0.0               0
303...........................  KIDNEY,URETER & MAJOR BLADDER             1.8783            46.3               2
                                 PROCEDURES FOR NEOPLASM \5\.
304...........................  KIDNEY,URETER & MAJOR BLADDER             1.2493            31.3              10
                                 PROC FOR NON-NEOPL W CC \4\.
305...........................  KIDNEY,URETER & MAJOR BLADDER             0.6655            21.9               2
                                 PROC FOR NON-NEOPL W/O CC \2\.
306...........................  PROSTATECTOMY W CC \3\..........          0.8284            23.3               3
307...........................  PROSTATECTOMY W/O CC \1\........          0.4055            16.8               1
308...........................  MINOR BLADDER PROCEDURES W CC             0.8284            23.3               5
                                 \3\.
309...........................  MINOR BLADDER PROCEDURES W/O CC           0.4055            16.8               0
                                 *.
310...........................  TRANSURETHRAL PROCEDURES W CC             1.2493            31.3               6
                                 \4\.
311...........................  TRANSURETHRAL PROCEDURES W/O CC           0.4055            16.8               1
                                 \1\.
312...........................  URETHRAL PROCEDURES, AGE          1.8783            46.3               1
                                 17 W CC \5\.
313...........................  URETHRAL PROCEDURES, AGE          0.4055            16.8               0
                                 17 W/O CC *.
314...........................  URETHRAL PROCEDURES, AGE 0-17 *.          0.4055            16.8               0
315...........................  OTHER KIDNEY & URINARY TRACT              1.5800            39.5             221
                                 O.R. PROCEDURES.
316...........................  RENAL FAILURE...................          0.9308            24.1           1,568
317...........................  ADMIT FOR RENAL DIALYSIS \4\....          1.2493            31.3               4
318...........................  KIDNEY & URINARY TRACT NEOPLASMS          0.8075            21.5              69
                                 W CC.
319...........................  KIDNEY & URINARY TRACT NEOPLASMS          0.6655            21.9              12
                                 W/O CC \2\.
320...........................  KIDNEY & URINARY TRACT                    0.7424            23.9             718
                                 INFECTIONS AGE 17 W
                                 CC.
321...........................  KIDNEY & URINARY TRACT                    0.6123            20.4             111
                                 INFECTIONS AGE 17 W/
                                 O CC.
322...........................  KIDNEY & URINARY TRACT                    0.6655            21.9               0
                                 INFECTIONS AGE 0-17 *.
323...........................  URINARY STONES W CC, &/OR ESW             0.6655            21.9              11
                                 LITHOTRIPSY \2\.

[[Page 56081]]

 
324...........................  URINARY STONES W/O CC \2\.......          0.6655            21.9               4
325...........................  KIDNEY & URINARY TRACT SIGNS &            0.8123            26.7              24
                                 SYMPTOMS AGE 17 W CC.
326...........................  KIDNEY & URINARY TRACT SIGNS &            0.6655            21.9              11
                                 SYMPTOMS AGE 17 W/O
                                 CC \2\.
327...........................  KIDNEY & URINARY TRACT SIGNS &            0.4055            16.8               0
                                 SYMPTOMS AGE 0-17 *.
328...........................  URETHRAL STRICTURE AGE            0.6655            21.9               0
                                 17 W CC *.
329...........................  URETHRAL STRICTURE AGE            0.4055            16.8               1
                                 17 W/O CC \1\.
330...........................  URETHRAL STRICTURE AGE 0-17 *...          0.4055            16.8               0
331...........................  OTHER KIDNEY & URINARY TRACT              0.9267            24.6             292
                                 DIAGNOSES AGE 17 W
                                 CC.
332...........................  OTHER KIDNEY & URINARY TRACT              0.6393            20.9              47
                                 DIAGNOSES AGE 17 W/O
                                 CC.
333...........................  OTHER KIDNEY & URINARY TRACT              0.4055            16.8               0
                                 DIAGNOSES AGE 0-17 *.
334...........................  MAJOR MALE PELVIC PROCEDURES W            1.2493            31.3               0
                                 CC *.
335...........................  MAJOR MALE PELVIC PROCEDURES W/O          0.8284            23.3               0
                                 CC *.
336...........................  TRANSURETHRAL PROSTATECTOMY W CC          0.8284            23.3               2
                                 \3\.
337...........................  TRANSURETHRAL PROSTATECTOMY W/O           0.6655            21.9               0
                                 CC *.
338...........................  TESTES PROCEDURES, FOR                    0.6655            21.9               0
                                 MALIGNANCY *.
339...........................  TESTES PROCEDURES, NON-                   0.4055            16.8               1
                                 MALIGNANCY AGE 17
                                 \1\.
340...........................  TESTES PROCEDURES, NON-                   0.4055            16.8               0
                                 MALIGNANCY AGE 0-17 *.
341...........................  PENIS PROCEDURES \2\............          0.6655            21.9               1
342...........................  CIRCUMCISION AGE 174           1.2493            31.3               1
                                 \4\.
343...........................  CIRCUMCISION AGE 0-17 *.........          0.4055            16.8               0
344...........................  OTHER MALE REPRODUCTIVE SYSTEM            1.2493            31.3               1
                                 O.R. PROCEDURES FOR MALIGNANCY
                                 \4\.
345...........................  OTHER MALE REPRODUCTIVE SYSTEM            0.8284            23.3               2
                                 O.R. PROC EXCEPT FOR MALIGNANCY
                                 \3\.
346...........................  MALIGNANCY, MALE REPRODUCTIVE             0.7070            21.6              51
                                 SYSTEM, W CC.
347...........................  MALIGNANCY, MALE REPRODUCTIVE             0.6655            21.9              10
                                 SYSTEM, W/O CC \2\.
348...........................  BENIGN PROSTATIC HYPERTROPHY W            0.4055            16.8               3
                                 CC \1\.
349...........................  BENIGN PROSTATIC HYPERTROPHY W/O          0.4055            16.8               0
                                 CC *.
350...........................  INFLAMMATION OF THE MALE                  0.6058            19.9              25
                                 REPRODUCTIVE SYSTEM.
351...........................  STERILIZATION, MALE *...........          0.4055            16.8               0
352...........................  OTHER MALE REPRODUCTIVE SYSTEM            0.8284            23.3               9
                                 DIAGNOSES \3\.
353...........................  PELVIC EVISCERATION, RADICAL              1.8783            46.3               0
                                 HYSTERECTOMY & RADICAL
                                 VULVECTOMY *.
354...........................  UTERINE,ADNEXA PROC FOR NON-              1.2493            31.3               0
                                 OVARIAN/ADNEXAL MALIG W CC *.
355...........................  UTERINE,ADNEXA PROC FOR NON-              1.2493            31.3               0
                                 OVARIAN/ADNEXAL MALIG W/O CC *.
356...........................  FEMALE REPRODUCTIVE SYSTEM                1.2493            31.3               0
                                 RECONSTRUCTIVE PROCEDURES *.
357...........................  UTERINE & ADNEXA PROC FOR                 1.2493            31.3               0
                                 OVARIAN OR ADNEXAL MALIGNANCY *.
358...........................  UTERINE & ADNEXA PROC FOR NON-            1.8783            46.3               1
                                 MALIGNANCY W CC \5\.
359...........................  UTERINE & ADNEXA PROC FOR NON-            0.4055            16.8               2
                                 MALIGNANCY W/O CC \1\.
360...........................  VAGINA, CERVIX & VULVA                    0.4055            16.8               2
                                 PROCEDURES \1\.
361...........................  LAPAROSCOPY & INCISIONAL TUBAL            0.6655            21.9               0
                                 INTERRUPTION *.
362...........................  ENDOSCOPIC TUBAL INTERRUPTION *.          0.6655            21.9               0
363...........................  D&C, CONIZATION & RADIO-IMPLANT,          0.8284            23.3               0
                                 FOR MALIGNANCY *.
364...........................  D&C, CONIZATION EXCEPT FOR                0.6655            21.9               0
                                 MALIGNANCY *.
365...........................  OTHER FEMALE REPRODUCTIVE SYSTEM          1.8783            46.3               2
                                 O.R. PROCEDURES \5\.
366...........................  MALIGNANCY, FEMALE REPRODUCTIVE           0.9654            23.9              71
                                 SYSTEM W CC.
367...........................  MALIGNANCY, FEMALE REPRODUCTIVE           0.8284            23.3              19
                                 SYSTEM W/O CC \3\.
368...........................  INFECTIONS, FEMALE REPRODUCTIVE           1.2493            31.3              13
                                 SYSTEM \4\.
369...........................  MENSTRUAL & OTHER FEMALE                  0.6655            21.9              20
                                 REPRODUCTIVE SYSTEM DISORDERS
                                 \2\.
370...........................  CESAREAN SECTION W CC *.........          0.8284            23.3               0
371...........................  CESAREAN SECTION W/O CC *.......          0.6655            21.9               0
372...........................  VAGINAL DELIVERY W COMPLICATING           0.6655            21.9               0
                                 DIAGNOSES *.
373...........................  VAGINAL DELIVERY W/O                      0.4055            16.8               0
                                 COMPLICATING DIAGNOSES *.
374...........................  VAGINAL DELIVERY W STERILIZATION          0.4055            16.8               0
                                 &/OR D&C *.
375...........................  VAGINAL DELIVERY W O.R. PROC              0.4055            16.8               0
                                 EXCEPT STERIL &/OR D&C *.
376...........................  POSTPARTUM & POST ABORTION                0.4055            16.8               0
                                 DIAGNOSES W/O O.R. PROCEDURE *.
377...........................  POSTPARTUM & POST ABORTION                0.4055            16.8               0
                                 DIAGNOSES W O.R. PROCEDURE *.
378...........................  ECTOPIC PREGNANCY *.............          0.6655            21.9               0
379...........................  THREATENED ABORTION *...........          0.4055            16.8               0
380...........................  ABORTION W/O D&C *..............          0.4055            16.8               0
381...........................  ABORTION W D&C, ASPIRATION                0.4055            16.8               0
                                 CURETTAGE OR HYSTEROTOMY *.
382...........................  FALSE LABOR *...................          0.4055            16.8               0
383...........................  OTHER ANTEPARTUM DIAGNOSES W              0.4055            16.8               0
                                 MEDICAL COMPLICATIONS *.
384...........................  OTHER ANTEPARTUM DIAGNOSES W/O            0.4055            16.8               0
                                 MEDICAL COMPLICATIONS *.
385...........................  NEONATES, DIED OR TRANSFERRED TO          0.4055            16.8               0
                                 ANOTHER ACUTE CARE FACILITY *.
386...........................  EXTREME IMMATURITY *............          0.6655            21.9               0
387...........................  PREMATURITY W MAJOR PROBLEMS *..          0.6655            21.9               0
388...........................  PREMATURITY W/O MAJOR PROBLEMS *          0.4055            16.8               0
389...........................  FULL TERM NEONATE W MAJOR                 1.2493            31.3               1
                                 PROBLEMS \4\.

[[Page 56082]]

 
390...........................  NEONATE W OTHER SIGNIFICANT               0.6655            21.9               0
                                 PROBLEMS *.
391...........................  NORMAL NEWBORN *................          0.4055            16.8               0
392...........................  SPLENECTOMY AGE 17 *.          0.8284            23.3               0
393...........................  SPLENECTOMY AGE 0-17 *..........          0.6655            21.9               0
394...........................  OTHER O.R. PROCEDURES OF THE              1.8783            46.3               4
                                 BLOOD AND BLOOD FORMING ORGANS
                                 \5\.
395...........................  RED BLOOD CELL DISORDERS AGE          0.8584            25.1             131
                                 17.
396...........................  RED BLOOD CELL DISORDERS AGE 0-           0.4055            16.8               0
                                 17 *.
397...........................  COAGULATION DISORDERS...........          0.7567            19.4              24
398...........................  RETICULOENDOTHELIAL & IMMUNITY            0.9008            23.4              49
                                 DISORDERS W CC.
399...........................  RETICULOENDOTHELIAL & IMMUNITY            0.4055            16.8               5
                                 DISORDERS W/O CC \1\.
400...........................  LYMPHOMA & LEUKEMIA W MAJOR O.R.          0.8284            23.3               1
                                 PROCEDURE \3\.
401...........................  LYMPHOMA & NON-ACUTE LEUKEMIA W           1.2493            31.3               7
                                 OTHER O.R. PROC W CC \4\.
402...........................  LYMPHOMA & NON-ACUTE LEUKEMIA W           0.8284            23.3               0
                                 OTHER O.R. PROC W/O CC *.
403...........................  LYMPHOMA & NON-ACUTE LEUKEMIA W           0.9651            23.9             185
                                 CC.
404...........................  LYMPHOMA & NON-ACUTE LEUKEMIA W/          0.8980            19.1              23
                                 O CC.
405...........................  ACUTE LEUKEMIA W/O MAJOR O.R.             0.6655            21.9               0
                                 PROCEDURE AGE 0-17 *.
406...........................  MYELOPROLIF DISORD OR POORLY              1.8783            46.3               1
                                 DIFF NEOPL W MAJ O.R.PROC W CC
                                 \5\.
407...........................  MYELOPROLIF DISORD OR POORLY              0.8284            23.3               0
                                 DIFF NEOPL W MAJ O.R.PROC W/O
                                 CC *.
408...........................  MYELOPROLIF DISORD OR POORLY              1.2493            31.3               5
                                 DIFF NEOPL W OTHER O.R.PROC \4\.
409...........................  RADIOTHERAPY....................          0.5220            19.5              22
410...........................  CHEMOTHERAPY W/O ACUTE LEUKEMIA           0.4055            16.8              11
                                 AS SECONDARY DIAGNOSIS \1\.
411...........................  HISTORY OF MALIGNANCY W/O                 0.4055            16.8               0
                                 ENDOSCOPY *.
412...........................  HISTORY OF MALIGNANCY W                   0.4055            16.8               0
                                 ENDOSCOPY *.
413...........................  OTHER MYELOPROLIF DIS OR POORLY           0.9061            23.7              63
                                 DIFF NEOPL DIAG W CC \7\.
414...........................  OTHER MYELOPROLIF DIS OR POORLY           0.9061            23.7               8
                                 DIFF NEOPL DIAG W/O CC \7\.
415...........................  O.R. PROCEDURE FOR INFECTIOUS &           1.4933            38.7             262
                                 PARASITIC DISEASES.
416...........................  SEPTICEMIA AGE 17....          0.9612            25.9           1,722
417...........................  SEPTICEMIA AGE 0-17 *...........          0.8284            23.3               0
418...........................  POSTOPERATIVE & POST-TRAUMATIC            0.8771            25.8             564
                                 INFECTIONS.
419...........................  FEVER OF UNKNOWN ORIGIN AGE           0.5948            20.5              20
                                 17 W CC.
420...........................  FEVER OF UNKNOWN ORIGIN AGE           0.4055            16.8               9
                                 17 W/O CC \1\.
421...........................  VIRAL ILLNESS AGE 17           1.2493            31.3              15
                                 \4\.
422...........................  VIRAL ILLNESS & FEVER OF UNKNOWN          0.4055            16.8               0
                                 ORIGIN AGE 0-17 *.
423...........................  OTHER INFECTIOUS & PARASITIC              0.8701            24.7             190
                                 DISEASES DIAGNOSES.
424...........................  O.R. PROCEDURE W PRINCIPAL                1.8783            46.3              11
                                 DIAGNOSES OF MENTAL ILLNESS \5\.
425...........................  ACUTE ADJUSTMENT REACTION &               0.6177            26.0              54
                                 PSYCHOLOGICAL DYSFUNCTION.
426...........................  DEPRESSIVE NEUROSES.............          0.5739            26.9              74
427...........................  NEUROSES EXCEPT DEPRESSIVE \2\..          0.6655            21.9              12
428...........................  DISORDERS OF PERSONALITY &                1.2493            31.3              17
                                 IMPULSE CONTROL \4\.
429...........................  ORGANIC DISTURBANCES & MENTAL             0.5466            25.0             535
                                 RETARDATION.
430...........................  PSYCHOSES.......................          0.4479            22.9           1,667
431...........................  CHILDHOOD MENTAL DISORDERS......          0.4345            22.7              27
432...........................  OTHER MENTAL DISORDER DIAGNOSES           0.6655            21.9               4
                                 \2\.
433...........................  ALCOHOL/DRUG ABUSE OR                     0.2489            13.1              10
                                 DEPENDENCE, LEFT AMA.
439...........................  SKIN GRAFTS FOR INJURIES........          1.3200            42.5              28
440...........................  WOUND DEBRIDEMENTS FOR INJURIES.          1.3567            40.1              90
441...........................  HAND PROCEDURES FOR INJURIES *..          0.6655            21.9               0
442...........................  OTHER O.R. PROCEDURES FOR                 1.6442            39.7              37
                                 INJURIES W CC.
443...........................  OTHER O.R. PROCEDURES FOR                 0.6655            21.9               4
                                 INJURIES W/O CC \2\.
444...........................  TRAUMATIC INJURY AGE              0.9614            30.7             363
                                 17 W CC.
445...........................  TRAUMATIC INJURY AGE              0.8448            27.3              80
                                 17 W/O CC.
446...........................  TRAUMATIC INJURY AGE 0-17 *.....          0.8284            23.3               0
447...........................  ALLERGIC REACTIONS AGE            0.6655            21.9               4
                                 17 \2\.
448...........................  ALLERGIC REACTIONS AGE 0-17 *...          0.4055            16.8               0
449...........................  POISONING & TOXIC EFFECTS OF              0.8284            23.3              16
                                 DRUGS AGE 17 W CC
                                 \3\.
450...........................  POISONING & TOXIC EFFECTS OF              0.6655            21.9               7
                                 DRUGS AGE 17 W/O CC
                                 \2\.
451...........................  POISONING & TOXIC EFFECTS OF              0.4055            16.8               0
                                 DRUGS AGE 0-17 *.
452...........................  COMPLICATIONS OF TREATMENT W CC.          0.9596            25.5             356
453...........................  COMPLICATIONS OF TREATMENT W/O            0.6666            23.1              52
                                 CC.
454...........................  OTHER INJURY, POISONING & TOXIC           0.8284            23.3              15
                                 EFFECT DIAG W CC \3\.
455...........................  OTHER INJURY, POISONING & TOXIC           0.4055            16.8               4
                                 EFFECT DIAG W/O CC \1\.
461...........................  O.R. PROC W DIAGNOSES OF OTHER            1.3383            38.0             253
                                 CONTACT W HEALTH SERVICES.
462...........................  REHABILITATION..................          0.6469            23.5           7,016
463...........................  SIGNS & SYMPTOMS W CC...........          0.7618            26.8           1,318
464...........................  SIGNS & SYMPTOMS W/O CC.........          0.6234            24.3             570
465...........................  AFTERCARE W HISTORY OF                    0.8284            23.3              18
                                 MALIGNANCY AS SECONDARY
                                 DIAGNOSIS \3\.
466...........................  AFTERCARE W/O HISTORY OF                  0.8119            23.9             160
                                 MALIGNANCY AS SECONDARY
                                 DIAGNOSIS.

[[Page 56083]]

 
467...........................  OTHER FACTORS INFLUENCING HEALTH          0.6655            21.9               7
                                 STATUS \2\.
468...........................  EXTENSIVE O.R. PROCEDURE                  2.2177            45.5             555
                                 UNRELATED TO PRINCIPAL
                                 DIAGNOSIS.
469...........................  PRINCIPAL DIAGNOSIS INVALID AS            0.0000             0.0               0
                                 DISCHARGE DIAGNOSIS \6\.
470...........................  UNGROUPABLE \6\.................          0.0000             0.0               0
471...........................  BILATERAL OR MULTIPLE MAJOR               1.8783            46.3               0
                                 JOINT PROCS OF LOWER EXTREMITY
                                 *.
473...........................  ACUTE LEUKEMIA W/O MAJOR O.R.             0.8047            17.1              18
                                 PROCEDURE AGE 17.
475...........................  RESPIRATORY SYSTEM DIAGNOSIS              2.0906            35.5           5,224
                                 WITH VENTILATOR SUPPORT.
476...........................  PROSTATIC O.R. PROCEDURE                  1.8783            46.3              21
                                 UNRELATED TO PRINCIPAL
                                 DIAGNOSIS \5\.
477...........................  NON-EXTENSIVE O.R. PROCEDURE              1.6791            39.7             189
                                 UNRELATED TO PRINCIPAL
                                 DIAGNOSIS.
478...........................  OTHER VASCULAR PROCEDURES W CC..          1.6244            37.8              45
479...........................  OTHER VASCULAR PROCEDURES W/O CC          0.6655            21.9               2
                                 \2\.
480...........................  LIVER TRANSPLANT \6\............          0.0000             0.0               0
481...........................  BONE MARROW TRANSPLANT *........          1.8783            46.3               0
482...........................  TRACHEOSTOMY FOR FACE,MOUTH &             0.6655            21.9               0
                                 NECK DIAGNOSES *.
483...........................  TRACH W MECH VENT 96+ HRS OR PDX          3.2319            54.6             403
                                 EXCEPT FACE,MOUTH & NECK DIAG.
484...........................  CRANIOTOMY FOR MULTIPLE                   1.8783            46.3               0
                                 SIGNIFICANT TRAUMA *.
485...........................  LIMB REATTACHMENT, HIP AND FEMUR          1.8783            46.3               0
                                 PROC FOR MULTIPLE SIGNIFICANT
                                 TR *.
486...........................  OTHER O.R. PROCEDURES FOR                 0.8284            23.3               3
                                 MULTIPLE SIGNIFICANT TRAUMA \3\.
487...........................  OTHER MULTIPLE SIGNIFICANT                1.0885            29.5              94
                                 TRAUMA.
488...........................  HIV W EXTENSIVE O.R. PROCEDURE            1.8783            46.3               6
                                 \5\.
489...........................  HIV W MAJOR RELATED CONDITION...          0.8846            22.9             100
490...........................  HIV W OR W/O OTHER RELATED                0.6952            20.4              20
                                 CONDITION.
491...........................  MAJOR JOINT & LIMB REATTACHMENT           1.8783            46.3               0
                                 PROCEDURES OF UPPER EXTREMITY *.
492...........................  CHEMOTHERAPY W ACUTE LEUKEMIA AS          0.8284            23.3               1
                                 SECONDARY DIAGNOSIS \3\.
493...........................  LAPAROSCOPIC CHOLECYSTECTOMY W/O          0.8284            23.3               4
                                 C.D.E. W CC \3\.
494...........................  LAPAROSCOPIC CHOLECYSTECTOMY W/O          0.4055            16.8               1
                                 C.D.E. W/O CC \1\.
495...........................  LUNG TRANSPLANT \6\.............          0.0000             0.0               0
496...........................  COMBINED ANTERIOR/POSTERIOR               1.2493            31.3               0
                                 SPINAL FUSION *.
497...........................  SPINAL FUSION W CC \5\..........          1.8783            46.3               3
498...........................  SPINAL FUSION W/O CC \3\........          0.8284            23.3               1
499...........................  BACK & NECK PROCEDURES EXCEPT             1.8783            46.3               2
                                 SPINAL FUSION W CC \5\.
500...........................  BACK & NECK PROCEDURES EXCEPT             0.8284            23.3               0
                                 SPINAL FUSION W/O CC *.
501...........................  KNEE PROCEDURES W PDX OF                  1.8783            46.3               3
                                 INFECTION W CC \5\.
502...........................  KNEE PROCEDURES W PDX OF                  0.8284            23.3               0
                                 INFECTION W/O CC *.
503...........................  KNEE PROCEDURES W/O PDX OF                1.8783            46.3               3
                                 INFECTION \5\.
504...........................  EXTENSIVE 3RD DEGREE BURNS W              1.8783            46.3               0
                                 SKIN GRAFT *.
505...........................  EXTENSIVE 3RD DEGREE BURNS W/O            1.2493            31.3               6
                                 SKIN GRAFT \4\.
506...........................  FULL THICKNESS BURN W SKIN GRAFT          1.8783            46.3               9
                                 OR INHAL INJ W CC OR SIG TRAUMA
                                 \5\.
507...........................  FULL THICKNESS BURN W SKIN GRFT           0.8284            23.3               0
                                 OR INHAL INJ W/O CC OR SIG
                                 TRAUMA *.
508...........................  FULL THICKNESS BURN W/O SKIN              0.8284            23.3              20
                                 GRFT OR INHAL INJ W CC OR SIG
                                 TRAUMA \3\.
509...........................  FULL THICKNESS BURN W/O SKIN              0.8284            23.3              10
                                 GRFT OR INH INJ W/O CC OR SIG
                                 TRAUMA \3\.
510...........................  NON-EXTENSIVE BURNS W CC OR               1.0734            32.2              31
                                 SIGNIFICANT TRAUMA.
511...........................  NON-EXTENSIVE BURNS W/O CC OR             0.8284            23.3               8
                                 SIGNIFICANT TRAUMA \3\.
512...........................  SIMULTANEOUS PANCREAS/KIDNEY              0.0000             0.0               0
                                 TRANSPLANT \6\.
513...........................  PANCREAS TRANSPLANT \6\.........          0.0000             0.0               0
514...........................  CARDIAC DEFIBRILATOR IMPLANT W            0.8284            23.3               0
                                 CARDIAC CATH *.
515...........................  CARDIAC DEFIBRILATOR IMPLANT W/O          1.2493            31.3               4
                                 CARDIAC CATH \4\.
516...........................  PERCUTANEOUS CARDIVASCULAR                0.8284            23.3               0
                                 PROCEDURE W AMI *.
517...........................  PERCUTANEOUS CARDIVASCULAR PROC           1.8783            46.3               1
                                 W NON-DRUG ELUTING STENT W/O
                                 AMI \5\.
518...........................  PERCUTANEOUS CARDIVASCULAR PROC           1.2493            31.3               1
                                 W/O CORONARY ARTERY STENT OR
                                 AMI \4\.
519...........................  CERVICAL SPINAL FUSION W CC \3\.          0.8284            23.3               2
520...........................  CERVICAL SPINAL FUSION W/O CC             0.6655            21.9               1
                                 \2\.
521...........................  ALCOHOL/DRUG ABUSE OR DEPENDENCE          0.3755            18.6             133
                                 W CC.
522...........................  ALCOHOL/DRUG ABUSE OR DEPENDENCE          0.4055            16.8              22
                                 W REHABILITATION THERAPY W/O CC
                                 \1\.
523...........................  ALCOHOL/DRUG ABUSE OR DEPENDENCE          0.3860            21.2              72
                                 W/O REHABILITATION THERAPY W/O
                                 CC.
524...........................  TRANSIENT ISCHEMIA..............          0.6250            23.1             124
525...........................  HEART ASSIST SYSTEM IMPLANT *...          1.8783            46.3               0

[[Page 56084]]

 
526...........................  PERCUTANEOUS CARVIOVASCULAR PROC          0.8284            23.3               0
                                 W DRUG-ELUTING STENT W AMI *.
527...........................  PERCUTANEOUS CARVIOVASCULAR PROC          0.8284            23.3              0
                                 W DRUG-ELUTING STENT W/O AMI *.
----------------------------------------------------------------------------------------------------------------
* Relative weights for these LTC-DRGs were determined by assigning these cases to the appropriate low volume
  quintile because they had no LTCH cases in the FY 2001 MedPAR.
\1\ Relative weights for these LTC-DRGs were determined by assigning these cases to low volume quintile 1.
\2\ Relative weights for these LTC-DRGs were determined by assigning these cases to low volume quintile 2.
\3\ Relative weights for these LTC-DRGs were determined by assigning these cases to low volume quintile 3.
\4\ Relative weights for these LTC-DRGs were determined by assigning these cases to low volume quintile 4.
\5\ Relative weights for these LTC-DRGs were determined by assigning these cases to low volume quintile 5.
\6\ Relative weights for these LTC-DRGs were assigned a value of 0.0.
\7\ Relative weights for these LTC-DRGs were determined after adjusting to account for nonmonotonically (see
  step 5 above).



[[Page 56085]]

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

Appendix A--Market Basket for LTCHs

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

  Table 1.--Excluded Hospital With Capital Input Price Index (FY 1992)
                          Structure and Weights
------------------------------------------------------------------------
                                                            Weights (%)
         Cost category             Price/Wage  Variable     Base-Year:
                                                               1992
------------------------------------------------------------------------
Total..........................  .......................         100.000
Compensation...................  .......................          57.935
    Wages and Salaries.........  CMS Occupational Wage            47.417
                                  Proxy.
    Employee Benefits..........  CMS Occupational                 10.519
                                  Benefit Proxy.
Professional fees: Non-Medical.  ECI--Compensation:                1.908
                                  Prof. & Technical.
Utilities......................  .......................           1.524
    Electricity................  WPI--Commercial                   0.916
                                  Electric Power.

[[Page 56086]]

 
    Fuel Oil, Coal etc.........  WPI--Commercial Natural           0.365
                                  Gas.
    Water and Sewerage.........  CPI-U--Water & Sewage..           0.243
Professional Liability           CMS--Professional                 0.983
 Insurance.                       Liability Premiums.
All Other Products and Services  .......................          28.571
    All Other Products.........  .......................          22.027
      Pharmaceuticals..........  WPI--Prescription Drugs           2.791
      Food: Direct Purchase....  WPI--Processed Foods...           2.155
      Food: Contract Service...  CPI-U--Food Away from             0.998
                                  Home.
      Chemicals................  WPI--Industrial                   3.413
                                  Chemicals.
      Medical Instruments......  WPI--Med. Inst. &                 2.868
                                  Equipment.
      Photographic Supplies....  WPI--Photo Supplies....           0.364
      Rubber and Plastics......  WPI--Rubber & Plastic             4.423
                                  Products.
      Paper Products...........  WPI--Convert. Paper and           1.984
                                  Paperboard.
      Apparel..................  WPI--Apparel...........           0.809
      Machinery and Equipment..  WPI--Machinery &                  0.193
                                  Equipment.
      Miscellaneous Products...  WPI--Finished Goods....           2.029
    All Other Services.........    .....................           6.544
      Telephone................  CPI-U--Telephone                  0.574
                                  Services.
      Postage..................  CPI-U--Postage.........           0.268
    All Other: Labor...........  ECI--Compensation:                4.945
                                  Service Workers.
    All Other: Non-Labor         CPI-U--All Items                  0.757
     Intensive.                   (Urban).
Capital-Related Costs..........    .....................           9.080
    Depreciation...............    .....................           5.611
    Fixed Assets...............  Boeckh-Institutional              3.570
                                  Construction: 21 Year
                                  Useful Life.
    Movable Equipment..........  WPI--Machinery &                  2.041
                                  Equipment: 13 Year
                                  Useful Life.
Interest Costs.................    .....................           3.212
    Non-profit.................  Avg. Yield Municipal              2.730
                                  Bonds: 22 Year Useful
                                  Life.
    For-profit.................  Avg. Yield AAA Bonds:             0.482
                                  22 Year Useful Life.
Other Capital-Related Costs....  CPI-U--Residential Rent          0.257
------------------------------------------------------------------------
\*\ The wage and benefit proxies are a blend of 10 employment cost
  indices (ECI). A detailed discussion of the price proxies can be found
  in the August 30, 1996 and August 29, 1997 Federal Register final
  rules (61 FR 46197 and 62 FR 45993). The operating cost categories in
  the excluded market basket described in August 29, 1997 Federal
  Register (62 FR 45993 through 45996) had weights that added to 100.0.
  When we add an additional set of cost category weights (capital weight
  = 9.08 percent) to this original group, the sum of the weights in the
  new index must still add to 100.0. If capital cost category weights
  sum to 9.08, then operating cost category weights must add to 90.92
  percent. Each weight in the excluded hospital market basket from the
  August 29, 1997 Federal Register (62 FR 45996 through 45997) was
  multiplied by 0.9092 to determine its weight in the excluded hospital
  with capital market basket.


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

    We further analyzed the extent to which the weights in the 
excluded hospital with capital market basket reflect the cost 
weights in LTCHs, particularly since more than 50 percent of 
excluded hospitals are psychiatric hospitals. For this purpose, we 
conducted an analysis comparing the major cost weights for LTCHs to 
the same set of cost weights for excluded hospitals. We analyzed the 
variations of wages, drugs, and capital. This analysis showed that 
these weights differed only slightly between the different types of 
hospitals. When the LTCH weights were substituted into the market 
basket structure for sensitivity analysis, the effect was less than 
0.2 percentage points in any given year. This difference is less 
than the 0.25 percentage point criterion that determines whether a 
forecast error adjustment under the acute care hospital inpatient 
prospective payment system is warranted. In addition, many LTCHs 
specialize in rehabilitation or psychiatric services. Thus, it would 
be anticipated that the cost shares would not differ significantly 
from these other types of excluded hospitals. Based on this 
analysis, we believe that using the excluded hospital with capital 
market basket for the LTCH prospective payment system provides a 
reasonable measure of the price changes facing LTCHs. In the March 
22, 2002 proposed rule, we requested comments on any other data 
sources that may be available to provide detailed cost category 
information on LTCHs. We received no comments in response to this 
request.

 Appendix B--Update Framework

    Section 307(b) of Public Law 106-554 requires that the Secretary 
examine the appropriateness of certain adjustments to the LTCH 
prospective payment, including updates. Updates are necessary to 
appropriately account for changes in the prices of goods and 
services used by a provider in furnishing care to patients. A market 
basket has historically been used under the Medicare program in 
setting update factors for services furnished by providers. 
Beginning in FY 2004, the annual update to the standard Federal rate 
for the LTCH prospective payment system

[[Page 56087]]

(described in section X.K.2. of this final rule) will be equal to 
the percentage change in the excluded hospital with capital market 
basket index described in Appendix A of this final rule. However, in 
the future we may propose to develop an update framework to update 
payments to LTCHs that will account for other appropriate factors 
that affect the efficient delivery of services and care provided to 
Medicare patients. The update framework would be proposed in 
accordance with the notice and comment rulemaking process. While we 
are not implementing a specific update framework for the LTCH 
prospective payment system at this time in this final rule, we are 
providing a conceptual basis for developing such an update 
framework.

A. Need for an Update Framework

    Under the LTCH prospective payment system, Medicare payments to 
LTCHs are based on a predetermined national payment amount per 
discharge. Under section 123 of the BBRA and section 307(b) of the 
BIPA, the Secretary has broad authority to make appropriate 
adjustments to the LTCH payment system, including updates to the 
payment rates. Our goal is to develop a method for analyzing and 
comparing expected trends in the underlying cost per discharge to 
use in establishing these updates. However, as stated earlier, until 
an appropriate update framework is developed, future updates will be 
based only on the increase in the excluded hospital with capital 
market basket.
    The market basket for the LTCH prospective payment system (the 
excluded hospital with capital market basket), developed by our 
Office of the Actuary (OACT), represents only one component in the 
measure of growth in LTCHs' costs per discharge. It captures only 
the pure price change of inputs (labor, materials, and capital) used 
by the hospital to produce a constant quantity and quality of care. 
However, other factors also contribute to the change in costs per 
discharge, including changes in case-mix, intensity, and 
productivity.
    Under the acute care hospital inpatient prospective payment 
system, we use an update framework to account for these other 
factors and to make annual recommendations to the Congress 
concerning the magnitude of the update. We are currently examining 
these factors and exploring ways that they could be measured and 
incorporated into an update framework for the LTCH prospective 
payment system. We are also examining additional conceptual and data 
issues that must be considered when the framework is constructed and 
applied.
    At this time, we have established a future annual update that is 
equal to the excluded hospital with capital market basket used under 
the LTCH prospective payment system described in Appendix A of this 
final rule. We believe an annual update based on the market basket 
described in this final rule will provide for a reasonable update 
until a more comprehensive update framework can be developed. 
Currently, under the TEFRA system, the excluded hospital market 
basket is used as the basis for updates to LTCHs' target amounts for 
inpatient operating costs. While our experience in developing other 
update frameworks, such as the acute care hospital inpatient 
(operating and capital) and SNF prospective payment systems, could 
provide us with the conceptual framework, we are not applying an 
update framework at this time.
    In the March 22, 2002 proposed rule, we pointed out that it is 
important to develop successively more refined models of an update 
framework based on our evaluation of public comments and 
recommendations submitted to us on this issue. We would then further 
study the potential adjustments using the best available data. To 
actively pursue the development of an analytical framework that 
would support the continued appropriateness and relevance of the 
payment rates for services provided to beneficiaries in LTCHs, in 
the proposed rule, we requested comments concerning the use and 
feasibility of the conceptual approach outlined in section B of this 
Appendix. In the proposed rule, we specifically requested comments 
concerning which factors are appropriate and should be accounted for 
in the framework, and suggestions concerning potential data sources 
and analysis to support the model. As with the existing methodology 
used under the acute care hospital inpatient prospective payment 
system, the features of a LTCH-specific update framework would need 
to be based on sound policy and methodology. While we received no 
comments in response to this request, we continue to be interested 
in comments concerning the potential development of an update 
framework for the LTCH prospective payment system.

B. Factors Inherent in LTCH Payments Per Discharge

    In order to understand the factors that determine LTCH costs per 
discharge, it is first necessary to understand the factors that 
determine LTCH payments per discharge. Payments per discharge under 
the LTCH prospective payment system are based on the cost and an 
implicit normal profit margin to the LTCH in providing an efficient 
level of care. We have developed a methodology to identify a 
mutually exclusive and exhaustive set of factors included in LTCH 
payments per discharge. The discussion here details a set of 
equations to identify these factors.
    In its simplest form, the average payment per discharge to a 
LTCH can be separated into a cost term and a profit term as shown in 
equation (1):
[GRAPHIC] [TIFF OMITTED] TR30AU02.000

This equation can be made multiplicative by converting profit per 
discharge into a profit rate as shown in equation (2):
[GRAPHIC] [TIFF OMITTED] TR30AU02.001

    An output price term can be introduced into the equation by 
multiplying and dividing through by input prices and productivity. 
As shown in equation (3), the term inside the brackets represents 
the output price, since an output price reflects the input price and 
profit margin adjusted for productivity:
[GRAPHIC] [TIFF OMITTED] TR30AU02.002

    The cost per discharge term can be further separated by 
accounting for real case-mix. Under the LTCH prospective payment 
system, LTC-DRGs are used to classify patients. Based on accurate 
DRG classification data, average real case-mix per discharge can be 
incorporated, as shown in equation (4):
[GRAPHIC] [TIFF OMITTED] TR30AU02.003

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

[[Page 56088]]

[GRAPHIC] [TIFF OMITTED] TR30AU02.004

    The term in brackets can be analyzed in two steps. First, 
excluding the productivity term results in case-mix adjusted real 
cost per discharge, which is input intensity per discharge. Second, 
multiplying input intensity by productivity results in case-mix 
adjusted real payment per discharge, or output intensity per 
discharge. The rationale behind this step is explained in detail in 
section C below.
    The result of this exercise is that LTCH payment per discharge 
can be determined from the following factors:
[GRAPHIC] [TIFF OMITTED] TR30AU02.005

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

C. Defining Each Factor Inherent in LTCH Costs Per Discharge

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

1. Input Prices

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

2. Productivity

    Productivity measures the efficiency of the LTCH in producing 
outputs. It is the amount of real outputs, or real payments, that 
can be produced from a given amount of real inputs or real costs. 
For LTCHs, these inputs are in the form of both labor and capital; 
thus, they represent multifactor productivity, as not just labor 
productivity is reflected. The following set of equations shows how 
multifactor productivity can be measured in terms of available data, 
such as payments, costs, and input prices:
[GRAPHIC] [TIFF OMITTED] TR30AU02.006

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

3. Real Case Mix Per Discharge

    Real case mix per discharge is the average overall mix of care 
provided by the LTCH, as measured using the LTC-DRG classification 
system. Over time, a measure of real case mix will change as care is 
given in more or less complex LTC-DRGs. Changes in the level of care 
within a LTC-DRG classification group would not be reflected in a 
case-mix measure based on LTC-DRGs, but instead should be captured 
in the intensity factor of equation (6). The important distinction 
here is the difference between real and nominal case mix. Under the 
LTCH prospective payment system, LTCHs will submit claims using the 
LTC-DRG classification system. The case-mix reflected by the claims 
is considered ``nominal''. However, the reported classification can 
reflect the true level of care provided or improper coding behavior. 
An example of improper coding behavior would be the upcoding, or 
case-mix ``creep,'' that took place when the acute care hospital 
inpatient prospective payment system was implemented. (For further 
details, see ProPAC's March 1, 1994 Report and Recommendations to 
Congress (pp. 73-74).) Any change in case-mix that is not associated 
with the actual level of care or a true change in the level of care 
provided must be excluded in order to determine real case-mix.

4. Case-Mix Constant Real Output Intensity Per Discharge

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

[[Page 56089]]

[GRAPHIC] [TIFF OMITTED] TR30AU02.007

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

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

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

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

    Table I below shows the payment update framework for the current 
acute care hospital inpatient prospective payment system and an 
illustrative update framework for the LTCH prospective payment 
system. Some of the factors in the acute care hospital inpatient 
prospective payment system framework are computed using Medicare 
cost report data, while others are determined based on policy 
considerations. The details of calculating each factor for the acute 
care hospital inpatient prospective payment system framework can be 
found in the May 9, 2002 proposed rule (67 FR 31686) that set forth 
proposed updates to the payment rates used under the acute care 
hospital inpatient prospective payment system for FY 2003. This 
design for a LTCH update framework is for illustrative purposes 
only, as much more work needs to be done to determine the 
appropriate level of detail for each factor. The numbers provided 
for the hospital update are only intended to serve as examples of 
prior updates recommended for the acute care hospital inpatient 
prospective payment system.
    The appropriateness of this framework for updating inpatient 
hospital payments was discussed in the Health Care Financing Review, 
Winter 1992, in an article entitled, ``Are PPS Payments Adequate? 
Issues for Updating and Assessing Rates.'' A similar framework would 
be useful for analyzing updates to LTCH payments.

[[Page 56090]]



 Table I.--Current CMS Acute Care Hospital Inpatient Prospective Payment
     System and Illustrative LTCH Prospective Payment System Update
                               Frameworks
------------------------------------------------------------------------
                                     FY 2003         Illustrative LTCH
    CMS Hospital Inpatient          Calculated      Prospective Payment
  Prospective Payment System     Hospital Update       System Update
  Update  (Percent change in)    (Percent change)   (Percent change in)
------------------------------------------------------------------------
CMS Prospective Payment System  3.5..............  CMS Excluded Hospital
 Hospital Market Basket..                           with Capital Market
                                                    Basket.
Forecast Error................  0.7..............  Forecast Error.
Productivity..................  -0.9 to -0.7.....  Productivity.
Output Intensity:.............  1.0..............  Output Intensity:
Science and Technology........    ...............  Science and
                                                    Technology.
Practice Patterns.............    ...............  Real Within-DRG
                                                    Change.
Real Within-DRG Change........    ...............  Utilization of
                                                    Inputs.
Site of Service...............    ...............  Site of Service.
Case-mix Adjustment Factors:..    ...............  Case-mix. Adjustment
                                                    Factors:
Projected Case-Mix............  1.0..............  Nominal Across-DRG
                                                    Case-Mix.
Real Across-DRG Change........  -1.0.............  Real Across-DRG
                                                    Change.
Total Cost Per Discharge......  4.3 to 4.5.......  Total Cost Per
                                                    Discharge.
Other Policy Factors:.........    ...............  Other Policy Factors:
Reclassification and            -0.3.............  None.
 Recalibration.
Total Calculated Update.......  4.0 to 4.2.......  Total Calculated
                                                    Update.
------------------------------------------------------------------------
 Table data derived from the May 9, 2002 Federal Register, Medicare
  Program; Changes to the Hospital Inpatient Prospective Payment System
  and Fiscal Year 2003 Rates; Proposed Rule (67 FR 31686-31688).

F. Additional Conceptual and Data Issues

    Additional conceptual issues specific to the LTCH prospective 
payment system include the relevance of a site-of-service 
substitution adjustment, the necessity of an adjustment for LTC-DRG 
reclassification, the handling of one-time factors, and consistency 
with other types of hospital updates since LTCHs are similar in 
structure to these other types of hospitals.
    Under the acute care hospital inpatient prospective payment 
system, a site-of-service substitution factor (captured as part of 
intensity) was necessary because of the incentive to shift care from 
inpatient hospital to other settings such as hospital outpatient 
departments, SNFs, or HHAs. For the LTCH prospective payment system, 
it is not clear without additional research whether there is an 
incentive to shift care either into or out of the LTCH because of 
the changes in behavior created by the different Medicare payment 
systems.
    A reclassification and recalibration adjustment under the acute 
care hospital inpatient prospective payment system is necessary to 
account for changes in the case-mix or the types of patients treated 
by hospitals resulting from the annual reclassification and 
recalibration of the DRGs. This adjustment for case-mix is applied 
to the current fiscal year update, but reflects the effect of 
revisions in the fiscal year that is 2 years before that fiscal 
year. Whether a LTC-DRG reclassification adjustment would be 
necessary in the update framework would depend on the data 
availability and the likelihood of revisions to LTC-DRG 
classifications on a periodic basis.
    There is also a question about how to handle one-time factors 
(an example of these could be those increased costs of converting 
computer systems to Year 2000 compliance). An update framework might 
be an appropriate mechanism to account for these items, but because 
of uncertainty surrounding their impact on costs, determining an 
appropriate adjustment amount may be difficult.
    LTCHs are heterogeneous and are designated as a separate payment 
category only because their patients have longer average lengths of 
stay. This raises the question of whether certain factors in an 
update framework for LTCHs should be consistent with the factors in 
an update framework for other types of hospitals since they face 
similar cost pressures. Additional research in this area would need 
to be conducted to determine the reasonableness of having consistent 
updates.
    The purpose of this conceptual discussion is not to determine 
how the identified factors of the update framework would be 
measured. We recognize that there are significant measurement issues 
in accurately determining the factors that would account for growth 
in costs per discharge for efficiently providing care. This is 
driven, in part, by the shift from a cost-based payment system with 
an upper payment limit to a prospective payment system. Significant 
research and data collection will be necessary to accurately measure 
these factors over the historical period. One example of this would 
be to measure the distinction between real and nominal case-mix 
change. However, many of these same concerns were also encountered 
and successfully addressed in the hospital inpatient prospective 
payment system update framework.
    The discussion here provides the conceptual basis for developing 
an update framework for the LTCH prospective payment system that 
reflects changes in the underlying costs of efficiently providing 
services. It is important to note that the framework would not 
handle distribution issues such as geographic wage variations. Due 
to some variations in technical methodologies for measuring the 
factors of an update framework, and because of some of the data 
concerns mentioned earlier, implementing an update framework for the 
LTCH prospective payment system would involve making significant 
policy decisions on issues similar to those made for the hospital 
inpatient prospective payment system update framework.
    In the March 22, 2002 proposed rule, we invited comments on the 
type of data sources to use, what other factors (if any) we should 
consider in an update framework, and any additional comments 
concerning the issues discussed in the proposed rule regarding the 
update framework. We receive no comments in response to this 
request. However, we continue to be interested in any comments 
regarding the development of an update framework for the LTCH 
prospective payment system.

[FR Doc. 02-22016 Filed 8-29-02; 8:45 am]
BILLING CODE 4120-01-P