[Federal Register Volume 68, Number 43 (Wednesday, March 5, 2003)]
[Proposed Rules]
[Pages 10420-10429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-5121]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1243-P]
RIN 0938-AM41


Medicare Program; Proposed Change in Methodology for Determining 
Payment for Extraordinarily High-Cost Cases (Cost Outliers) Under the 
Acute Care Hospital Inpatient Prospective Payment System

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

ACTION: Proposed rule.

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SUMMARY: In this proposed rule, we are proposing to change the 
methodology for determining payments for extraordinarily high-cost 
cases (cost outliers) made to Medicare-participating hospitals under 
the acute care hospital inpatient prospective payment system.
    Under the existing outlier methodology, the cost-to-charge ratios 
from hospitals' latest settled cost reports are used in determining a 
fixed-loss amount cost outlier threshold. We have become aware that, in 
some cases, hospitals' recent rates of charge

[[Page 10421]]

increases greatly exceed their rates of cost increases. This disparity 
results in their cost-to-charge ratios being set too high, which in 
turn results in an overestimation of their current costs per case. 
Therefore, we need to make revisions to our outlier payment methodology 
to correct those situations in which hospitals would otherwise receive 
overpayments for outlier cases due to excessive charge increases.

DATES: Comments will be considered if we receive them at the 
appropriate address, as provided below, no later than 5 p.m. on April 
4, 2003.

ADDRESSES: Mail written comments (one original and three copies) to the 
following address ONLY: Centers for Medicare & Medicaid Services, 
Department of Health and Human Services, Attention: CMS-1243-P, PO Box 
8010, Baltimore, MD 21244-8010.
    Please allow sufficient time for mailed comments to be timely 
received in the event of delivery delays.
    If you prefer, you may deliver (by hand or courier) your written 
comments (one original and three copies) to one of the following 
addresses: Room 445-G, Hubert H. Humphrey Building, 200 Independence 
Avenue, SW., Washington, DC 20201, or Room C5-14-03, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building.
    A stamp-in clock is available for commenters wishing to retain a 
proof of filing by stamping in and retaining an extra copy of the 
comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and could be considered late.
    In commenting, please refer to file code CMS-1243-P. Because of 
staff and resource limitations, we cannot accept comments by facsimile 
(FAX) transmission or e-mail.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.
    For comments that relate to information collection requirements, 
mail a copy of comments to the following addresses:
    Centers for Medicare & Medicaid Services,
Office of Strategic Operations and Regulatory Affairs, Division of 
Regulations and Issuances, PRA Reports Clearance Office, 7500 Security 
Boulevard, Baltimore, MD 21244-1850, Attn.: Julie Brown, CMS 1243-P; 
and
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 3001, New Executive Office Building, Washington, DC 20503, 
Attn.: Brenda Aguilar, CMS Desk Officer.

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

SUPPLEMENTARY INFORMATION: Inspection of Public Comments: Comments 
received timely will be available for public inspection as they are 
received, generally beginning approximately 3 weeks after publication 
of a document, at the headquarters of the Centers for Medicare & 
Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, 
Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule 
an appointment to view public comments, call telephone number: (410) 
786-9994.

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I. Background

A. Description of the Acute Care Hospital Inpatient Prospective Payment 
System (IPPS)

    Section 1886(d) of the Social Security Act (the Act) sets forth a 
system of payment for the operating costs of acute care hospital 
inpatient stays under Medicare Part A (Hospital Insurance) based on 
prospectively set rates. This payment system is referred to as the 
acute care hospital inpatient prospective payment system (IPPS). Under 
the IPPS, each case is categorized into a diagnosis-related group 
(DRG). Each DRG has a payment weight assigned to it, based on the 
average resources used to treat Medicare patients in that DRG.
    The base payment rate is divided into a labor-related share and a 
nonlabor-related share. The labor-related share is adjusted by the wage 
index applicable to the area where the hospital is located, and if the 
hospital is located in Alaska or Hawaii, the nonlabor-related share is 
adjusted by a cost-of-living adjustment factor. This base payment rate 
is multiplied by the DRG relative weight.
    If the hospital treats a high-percentage of low-income patients, it 
receives a percentage add-on payment applied to the DRG-adjusted base 
payment rate. This add-on payment, known as the disproportionate share 
hospital (DSH) adjustment, provides for a percentage increase in 
Medicare payment for hospitals that qualify under either of two 
statutory formulas designed to identify hospitals that serve a 
disproportionate share of low-income patients. For qualifying 
hospitals, the amount of this adjustment may vary based on the outcome 
of the statutory calculation.
    Also, if the hospital is an approved teaching hospital it receives 
a percentage add-on payment for each case paid through the IPPS. This 
add-on payment, known as the indirect medical education (IME) 
adjustment, varies depending on the ratio of residents-to-beds under 
the IPPS for operating costs and according to the ratio of residents-
to-average daily census under the IPPS for capital costs.
    Additional payments may be made for cases that involve new 
technologies that have been approved for special add-on payments. To 
qualify, a new technology must demonstrate that it is a substantial 
clinical improvement over technologies otherwise available, and that, 
absent an add-on payment, it would be inadequately paid under the 
regular DRG payment.
    Finally, for particular cases that are unusually costly, known as 
outlier cases (discussed below), the IPPS payment is increased. This 
additional payment is designed to protect the hospital from large 
financial losses due to unusually expensive cases. Any outlier payment 
due is added to the DRG-adjusted base payment rate, plus any DSH, IME, 
and new technology add-on adjustments.
    Section 1886(g) of the Act requires the Secretary to pay for the 
capital-related costs of inpatient hospital services ``in accordance 
with a prospective payment system established by the Secretary.'' The 
basic methodology for determining

[[Page 10422]]

capital prospective payments is set forth in our regulations at 
Sec. Sec.  412.308 and 412.312. Under the capital prospective payment 
system, payments are adjusted by the same DRG for the case as they are 
under the operating IPPS. Similar adjustments are also made for IME and 
DSH as under the operating IPPS. Hospitals also may receive an outlier 
payment for those cases that qualify.

B. Payment for Outlier Cases

1. General
    Section 1886(d)(5)(A) of the Act provides for payments in addition 
to the basic prospective payments for cases incurring extraordinarily 
high costs. To qualify for outlier payments, a case must have costs 
above a fixed-loss cost threshold amount (a dollar amount by which the 
costs of a case must exceed payments in order to qualify for outliers).
    Hospital-specific cost-to-charge ratios are applied to the covered 
charges for the case to determine whether the costs of the case exceed 
the fixed-loss outlier threshold. Payments for eligible cases are then 
made based on a marginal cost factor, which is a percentage of the 
costs above the threshold. For Federal fiscal year (FY) 2003, the 
existing fixed-loss outlier threshold is $33,560.
    The actual determination of whether a case qualifies for outlier 
payments takes into account both operating and capital costs and DRG 
payments. That is, the combined operating and capital costs of a case 
must exceed the fixed-loss outlier threshold to qualify for an outlier 
payment. The operating and capital costs are computed separately by 
multiplying the total covered charges by the operating and capital 
cost-to-charge ratios. The estimated operating and capital costs are 
compared with the fixed-loss threshold after dividing that threshold 
into an operating portion and a capital portion (by summing the 
operating and capital ratios and determining the proportion of that 
total comprised by the operating and capital ratios, and then applying 
these percentages to the fixed-loss threshold). The thresholds are also 
adjusted by the area wage index (and capital geographic adjustment 
factor) before being compared to the operating and capital costs of the 
case. Finally, the outlier payment is equal to 80 percent of the 
combined operating and capital costs in excess of the fixed-loss 
threshold (90 percent for burn DRGs).
    The following example simulates the outlier payment for a case at a 
generic hospital that receives IME and DSH payments in San Francisco, 
California (a large urban area). The patient was discharged after 
October 1, 2002, and the hospital incurred Medicare-covered charges of 
$150,000. The DRG assigned to the case was DRG 286, Adrenal and 
Pituitary Procedures, with a FY 2003 relative weight of 2.0937. There 
is no new technology add-on payment for the case.
    Step 1: Determine the Federal operating and capital payment with 
IME and DSH adjustment based on the following values:

------------------------------------------------------------------------
                  Operating Portion
------------------------------------------------------
      National Large Urban Standardized Amounts
------------------------------------------------------------------------
Labor-related........................................       $3,022.60
Nonlabor-related.....................................        1,228.60
    San Francisco MSA Wage Index.....................            1.4142
    IME Operating Adjustment Factor..................            0.0744
    DSH Operating Adjustment Factor..................            0.1413
    DRG 286 Relative Weight..........................            2.0937
    Labor-Related Portion............................            0.711
    Nonlabor-Related Portion.........................            0.289
------------------------------------------------------------------------

Federal Payment for Operating Costs = DRG Relative Weight x [(Labor-
Related Large Urban Standardized Amount x San Francisco MSA Wage Index) 
+ Nonlabor-Related National Large Urban Standardized Amount] x (1 + IME 
+ DSH): 2.0937 x [($3,022.60 x 1.4142) + $1,228.60] x (1 + 0.0744 + 
0.1413) = $14,007.26

------------------------------------------------------------------------
                      Capital Portion
------------------------------------------------------------------------
Federal Capital Rate......................................    $407.01
Large Urban Add-On........................................       1.03
San Francisco MSA Geographic Adjustment Factor............       1.2679
IME Capital Adjustment Factor.............................       0.0243
DSH Capital Adjustment Factor.............................       0.0631
------------------------------------------------------------------------

Federal Payment for Capital Costs = DRG Relative Weight x Federal 
Capital Rate x Large Urban Add-On x Geographic Adjustment Factor x (1 + 
IME + DSH): 2.0937 x $407.01 x 1.03 x 1.2679 x (1 + 0.0243 + 0.0631) = 
$1,210.12.
    Step 2: Determine operating and capital costs from billed charges 
by applying the respective cost-to-charge ratios.

Billed Charges...............................................   $150,000
Operating Cost-to-Charge Ratio...............................       0.50
Operating Costs = (Billed Charges x Operating Cost-to-Charge      75,000
 Ratio) ($150,000 x .50).....................................
Capital Cost-to-Charge Ratio.................................       0.06
Capital Costs = (Billed Charges x Capital Cost-to-Charge           9,000
 Ratio) ($150,000 x .06).....................................
 

    Step 3: Determine outlier threshold.

Fixed Loss Threshold.........................................    $33,560
Operating Cost-to-Charge Ratio to Total Cost-to-Charge Ratio.
    (Operating Cost-to-Charge Ratio) / (Operating Cost-to-        0.8929
     Charge Ratio + Capital Cost-to-Charge Ratio) (.50)/(.50
     + .06)..................................................
 

Operating Outlier Threshold = {[Fixed Loss Threshold x ((Labor-Related 
portion x San Francisco MSA Wage Index) + Nonlabor-Related portion)] x 
Operating Cost-to-Charge Ratio to Total Cost-to-Charge Ratio] + Federal 
Payment with IME and DSH: [lsqbb]$33,560 x [(0.711 x 1.4142) + 0.289] x 
0.8929{time}  + $14,007.26 = $52,797.78
Capital Cost-to-Charge-Ratio to Total Cost-to-Charge Ratio = [(Capital 
Cost-to-Charge Ratio)/(Operating Cost-to-Charge Ratio + Capital Cost-
to-Charge Ratio)]:{(.06)/(.50 + .06){time}  = 0.1071
Capital Outlier Threshold = (Fixed Loss Threshold x Geographic 
Adjustment Factor x Large Urban Add-On x Capital CCR to Total CCR) + 
Federal Payment with IME and DSH: ($33,560 x 1.2679 x 1.03 x 0.1071) + 
$1,210.12 = $5,904.02

    Step 4: Determine outlier payment.

Marginal Cost Factor = 0.80
Outlier Payment = (Costs--Outlier Threshold) x Marginal Cost Factor
Operating Outlier Payment = ($75,000--$52,797.78) x 0.80 = $17,761.78
Capital Outlier Payment = ($9,000--$5,904.02) x 0.80 = $2,476.78
2. Cost-to-Charge Ratios
    Under existing regulations at Sec.  412.84(h), the operating cost-
to-charge

[[Page 10423]]

ratio and, effective with cost reporting periods beginning on or after 
October 1, 1991, the capital cost-to-charge ratio used to adjust 
covered charges are computed annually by the intermediary for each 
hospital based on the latest available settled cost report for that 
hospital and charge data for the same time period as that covered by 
the cost report.
    In the September 30, 1988 final rule with comment period published 
in the Federal Register (53 FR 38503), we initiated the use of 
hospital-specific cost-to-charge ratios to determine hospitals' costs 
for assessing whether a case qualifies for payment as a cost outlier. 
Prior to that change, we determined the cost of discharges based on a 
nationwide cost-to-charge ratio of 60 percent. We indicated at the time 
that the use of hospital-specific cost-to-charge ratios is essential to 
ensure that outlier payments are made only for cases that have 
extraordinarily high costs, and not merely high charges.
    Currently, cost-to-charge ratios are determined using the most 
recent settled cost report for each hospital. At the end of the cost 
reporting period, Medicare charges from all claims are accumulated 
through the Provider Statistical and Reimbursement Report (PS&R). The 
PS&R contains data such as the number of discharges and the actual 
charges from each hospital. The hospital also submits a cost report to 
its fiscal intermediary, which is used to determine total allowable 
inpatient Medicare costs. Once all these data are available, the fiscal 
intermediary then determines the cost-to-charge ratio for the hospital 
by using charges from the PS&R and costs from the cost report.
    Statewide average cost-to-charge ratios are used in those instances 
in which a hospital's operating or capital cost-to-charge ratios fall 
outside reasonable parameters. CMS sets forth these parameters and the 
statewide cost-to-charge ratios in the annual notices of prospective 
payment rates that are published by August 1 of each year in accordance 
with Sec.  412.8(b). For FY 2003, those parameters are set at operating 
cost-to-charge ratios lower than 0.194 or greater than 1.258, or 
capital cost-to-charge ratios lower than 0.012 or greater than 0.163. 
These ranges represent 3.0 standard deviations (plus or minus) from the 
geometric mean of cost-to-charge ratios for all hospitals.
    The Congress intended that outlier payments would be made only in 
situations where the cost of care is extraordinarily high in relation 
to the average cost of treating comparable conditions or illnesses. 
Under our existing outlier methodology, if hospitals' charges are not 
sufficiently comparable in magnitude to their costs, the legislative 
purpose underlying the outlier regulations is thwarted.
    Recent analysis indicates that some hospitals have taken advantage 
of two vulnerabilities in our methodology to maximize their outlier 
payments. One vulnerability is the time lag between the current charges 
on a submitted bill and the cost-to-charge ratio taken from the most 
recent settled cost report. The second vulnerability, in some cases, is 
that hospitals may increase their charges so far above costs that their 
cost-to-charge ratios fall below 3 standard deviations from the 
geometric mean of cost-to-charge ratios and a higher statewide average 
cost-to-charge ratio is applied. In this proposed rule, we are 
proposing to implement new regulations to ensure outlier payments are 
paid only for truly high-cost cases.
    Because the fixed-loss threshold is determined based on hospitals' 
historical charge data, hospitals that have been inappropriately 
maximizing their outlier payments have caused the threshold to increase 
dramatically for FY 2003. As illustrated by the table below, the cost 
outlier threshold increased by 80 percent from $9,700 in FY 1997 to 
$17,550 in FY 2001. In addition, the cost outlier threshold increased 
by 91 percent from $17,550 in FY 2001 to $33,560 in FY 2003. The table 
also demonstrates, for the 3 most recent years, the level at which the 
threshold would have to have been set in order to result in outlier 
payments equal to 5.1 percent of total DRG payments (absent further 
behavioral responses by hospitals).

----------------------------------------------------------------------------------------------------------------
                                                                        Payments in
                                                                         excess of                     Threshold
                                                           Outlier       target of        Outlier     that would
                      Fiscal year                         percentage     5.1%* (in       threshold     have paid
                                                                        billions of                    out 5.1%
                                                                         dollars)
----------------------------------------------------------------------------------------------------------------
1997...................................................          5.5             0.3          $9,700        ****
1998...................................................          6.5             1.0          11,050        ****
1999...................................................          7.6             1.8          11,100        ****
2000...................................................          7.6             1.8          14,050     $21,825
2001...................................................          7.7             1.9          17,550      26,200
2002...................................................          6.9             1.6          21,025      30,525
2003...................................................          5.1             N/A          33,560       ****
----------------------------------------------------------------------------------------------------------------
*All payments are estimated and reflect operating payments only (not capital payments).

II. Provisions of this Proposed Rule

A. Updating Cost-to-Charge Ratios

    Currently, we use the most recent settled cost report when 
determining cost-to-charge ratios for hospitals. The covered charges on 
bills submitted for payment during FY 2003 are converted to costs by 
applying a cost-to-charge ratio from cost reports that began in FY 2000 
or, in some cases, FY 1999. These covered charges reflect all of a 
hospital's charge increases to date, in particular those that have 
occurred since FY 2000 and are not reflected in the FY 2000 cost-to-
charge ratios. If the rate-of-charge increases since FY 2000 exceeds 
the rate of the hospital's cost increases during that time, the 
hospital's cost-to-charge ratio based on its FY 2000 cost report will 
be too high, and applying it to current charges will overestimate the 
hospital's costs per case during FY 2003. Overestimating costs may 
result in some cases qualifying for outlier payments that, in 
actuality, are not high cost cases.
    Using the Medicare Provider Analysis and Review (MedPAR) file data 
from FY 1999 to FY 2001, we found 123 hospitals whose percentage of 
outlier payments relative to total DRG payments increased by at least 5 
percentage points over that period, and whose case-mix (the average DRG 
relative weight value for all of a hospital's Medicare cases) adjusted 
charges increased at a rate at or above the 95th percentile rate of 
charge increase for all hospitals (46.63 percent) over the same period. 
We adjusted for case-mix because a hospital's average charges per case 
would be expected to change from one year to the next if the

[[Page 10424]]

hospital were treating new or different types of cases.
    Because we use settled cost reports to compute hospitals' cost-to-
charge ratios, the recent dramatic increases in charges for these 
hospitals are not reflected in their cost-to-charge ratios. For 
example, among these 123 hospitals, the mean rate of increase in 
charges was 70 percent. Meanwhile, cost-to-charge ratios for these 
hospitals, which were based upon cost reports from prior periods, 
declined by only 2 percent.
    Because a hospital has the ability to increase its outlier payments 
during this time lag through dramatic charge increases, in this 
proposed rule we are proposing new regulations at Sec.  412.84(i)(1) 
that would allow fiscal intermediaries to use more up-to-date data when 
determining the cost-to-charge ratio for each hospital. As mentioned 
above, currently fiscal intermediaries use the hospital's most recent 
settled cost report. We are proposing to revise our regulations to 
specify that fiscal intermediaries will use either the most recent 
settled or the most recent tentative settled cost report, whichever is 
from the later cost reporting period.
    Hospitals must submit their cost reports within 5 months after the 
end of their fiscal year. CMS makes a decision to accept a cost report 
within 30 days. Once the cost report is accepted, CMS makes a tentative 
settlement of the cost report within 60 days. The tentative settlement 
is a cursory review of the filed cost report to determine the amount of 
payment to be paid to the hospital if an amount is due on the as-filed 
cost report. After the cost report is tentatively settled, it can take 
12 to 24 months, depending on the type of review or audit, before the 
cost report is final-settled. Thus, using cost-to-charge ratios from 
tentative settled cost reports, as we are proposing in this proposed 
rule, would reduce the time lag for updating cost-to-charge ratios by a 
year or more.
    However, even the later ratios calculated from the tentative 
settled cost reports would overestimate costs for hospitals that have 
continued to increase charges much faster than costs during the time 
between the tentative settled cost report period and the time when the 
claim is processed. That is, even though we are proposing to reduce the 
lag in time by proposing to revise the regulations to use the latest 
tentative settled cost report, rather than the latest settled cost 
report, if it is from a later cost reporting period, there would still 
be a lag of 1 to 2 years during which a hospital's charges may still 
increase faster than costs. Therefore, we are proposing to add a new 
provision to the regulations at Sec.  412.84(i). Under this proposed 
provision, in the event more recent charge data indicate that a 
hospital's charges have been increasing at an excessive rate (relative 
to the rate of increase among other hospitals), CMS would have the 
authority to direct the fiscal intermediary to change the hospital's 
operating and capital cost-to-charge ratios to reflect the high charge 
increases evidenced by the later data. In addition, we are proposing to 
allow a hospital to contact its fiscal intermediary to request that its 
cost-to-charge ratios, otherwise applicable under Sec.  412.84(i), be 
changed if the hospital presents substantial evidence that the ratios 
are inaccurate. Any such requests would have to be approved by the CMS 
Regional Office with jurisdiction over that fiscal intermediary.

B. Statewide Averages

    As hospitals raise their charges faster than their costs increase, 
over time their cost-to-charge ratios will decline. If hospitals 
continue to increase charges at a faster rate than their costs increase 
over a long period of time, or if they increase charges at extreme 
rates, their cost-to-charge ratios may fall below the range considered 
reasonable under the regulations (0.194 for operating cost-to-charge 
ratios and 0.012 for capital cost-to-charge ratios in FY 2003 (67 FR 
50125)), and, per current regulations at Sec.  412.84(h), their fiscal 
intermediaries will assign a statewide average cost-to-charge ratio. 
These statewide averages are generally considerably higher than the 
threshold. Therefore, under existing regulations, these hospitals 
benefit from an artificially high ratio being applied to their already 
high charges. Furthermore, hospitals can continue to increase charges 
faster than costs, without any further downward adjustment to their 
cost-to-charge ratios.
    For example, in a 3-year span, one hospital was found to have an 
increase in charges of 60 percent from FY 1999 to FY 2000, 35 percent 
from FY 2000 to FY 2001, and 13 percent from FY 2001 to FY 2002. This 
hospital's actual operating cost-to-charge ratio for FY 2003 was 0.093. 
Because this number is below the threshold of 0.194, the fiscal 
intermediary assigned this urban California hospital the statewide 
average cost-to-charge ratio of 0.328 (from Table 8A of the August 1, 
2002 final rule, 67 FR 50263). In this case, receiving the statewide 
average cost-to-charge ratio increased the hospital's estimated costs 
per case far above the estimate using the actual ratio, leading to 
substantially higher outlier payments to the hospital as a result of 
this policy.
    In December 2002, we issued Program Memorandum A-02-122 requesting 
that fiscal intermediaries identify all hospitals receiving the 
statewide average operating or capital cost-to-charge ratio because 
their cost-to-charge ratios fell below the floor of reasonable 
parameters. We received a list of 43 hospitals that were assigned the 
statewide average operating cost-to-charge ratio and 14 hospitals that 
were receiving the statewide average capital cost-to-charge ratio. 
Three hospitals were found on both lists. Prior to application of the 
statewide average cost-to-charge ratios, the average actual operating 
cost-to-charge ratio for the 43 hospitals was 0.164, and the average 
actual capital cost-to-charge ratio for the 14 listed hospitals was 
0.008. In contrast, the statewide average operating cost-to-charge 
ratio for the 43 hospitals was 0.3425 and the statewide average capital 
cost-to-charge ratio for the 14 hospitals was 0.035.
    Because of hospitals' ability to increase their charges to lower 
their cost-to-charge ratios in order to be assigned the statewide 
average, we are proposing to remove the current requirement in our 
regulations specifying that a fiscal intermediary will assign a 
hospital the statewide average cost-to-charge ratio when the hospital 
has a cost-to-charge ratio that falls below the floor. We are proposing 
that hospitals would receive their actual cost-to-charge ratios, no 
matter how low their ratios fall.
    We are proposing that statewide average cost-to-charge ratios would 
still apply in those instances in which a hospital's operating or 
capital cost-to-charge ratio exceeds the upper threshold. Cost-to-
charge ratios above this range are probably due to faulty data 
reporting or entry, and should not be used to identify and pay for 
outliers. In addition, hospitals that have not yet filed their first 
Medicare cost reports with their fiscal intermediaries would still 
receive the statewide average cost-to-charge ratios.

C. Reconciling Outlier Payments Through Settled Cost Reports

    Under the IPPS, hospitals submit a bill for each Medicare patient 
stay for which they expect a payment from Medicare. The bill includes 
information needed to: (1) Classify the case to a DRG; (2) determine 
whether the case was a transfer; (3) identify whether a new technology 
eligible for add-on payments was involved; and (4) calculate the costs 
of a case to determine whether it is eligible for an outlier

[[Page 10425]]

payment or a new technology add-on payment. This latter calculation is 
based on the covered charges reported on the bill, which, as discussed 
above, are also used to estimate the covered costs of the case by 
applying the cost-to-charge ratio.
    The information from the bill is processed through the fiscal 
intermediary's claims processing system to determine the payment amount 
for each case. Unless a hospital qualifies for periodic interim 
payments under Sec.  412.116(b), payment is made on the basis of the 
actual amount determined for each bill processed. For hospitals that 
qualify for periodic interim payments, the fiscal intermediary 
estimates a hospital's IPPS payments and makes biweekly payments equal 
to \1/26\ of the total estimated amount of payment for the year. 
However, outlier payments are not made on an interim basis, but are 
made on a claim-by-claim basis (even for hospitals that qualify for 
interim payments under Sec.  412.116(b)), and generally represent final 
payment (Sec.  412.116(e)).
    An exception to this finality is the provision for medical review 
of a sample of outlier cases and for adjustments to be made to covered 
charges for any services that are found to be noncovered (Sec.  
412.84(d)). In situations where a pattern of inappropriate utilization 
by a hospital is found, all outlier cases from that hospital may be 
subject to prepayment medical review (Sec.  412.84(e)).
    CMS has generally limited the situations in which outlier payments 
may be reopened. This is in contrast to payments under the IME 
adjustment and the DSH adjustment, both of which are routinely adjusted 
when hospitals' cost reports are settled to reflect updated data such 
as the number of residents or patient days during the actual cost 
reporting period. With respect to outliers, it has been CMS's policy 
that payment determinations are made on the basis of the best 
information available at the time a claim is processed and are not 
revised, upward or downward, based upon updated data.
    As stated earlier in this preamble, we are increasingly aware that 
some hospitals have taken advantage of the current outlier policy by 
increasing their charges at extremely high rates, knowing that there 
would be a time lag before their cost-to-charge ratios would be 
adjusted to reflect the higher charges. The steps we are proposing in 
this proposed rule to direct fiscal intermediaries to update cost-to-
charge ratios using the most recent tentative settled cost reports (and 
in some cases, even later data) and using actual rather than statewide 
average ratios for hospitals that have cost-to-charge ratios that are 
more than 3.0 standard deviations below the geometric mean cost-to-
charge ratio, would greatly reduce the opportunity for hospitals to 
manipulate the system to maximize outlier payments. However, they would 
not completely eliminate all such opportunity. A hospital would still 
be able to dramatically increase its charges by far above the rate of 
increase in costs during any given year. This possibility is of great 
concern, given the recent findings that some hospitals that have been 
able to receive large outlier payments by doing just that.
    Therefore, we are proposing to add a provision to our regulations 
to provide that outlier payments will become subject to adjustment when 
hospitals' cost reports are settled (proposed Sec.  412.84(i)(2)). 
Payments would be processed throughout the year using operating and 
capital cost-to-charge ratios based on the best information available 
at that time. When the cost report is settled, any reconciliation of 
outlier payments by fiscal intermediaries would be based on operating 
and capital cost-to-charge ratios calculated based on a ratio of costs 
to charges computed from the cost report and charge data determined at 
the time the cost report coinciding with the discharge is settled.
    This process would require some degree of recalculating outlier 
payments for individual claims. It is not possible to distinguish, on 
an aggregate basis, how much a hospital's outlier payments would change 
due to a change in its cost-to-charge ratios. This is because, in the 
event of a decline in a ratio, some cases would no longer qualify for 
any outlier payments while other cases would qualify for lower outlier 
payments. Therefore, the only way to accurately determine the net 
effect of a decrease in cost-to-charge ratios on a hospital's total 
outlier payments is to assess the impact on a claim-by-claim basis. We 
are still assessing the procedural changes that would be necessary to 
implement this change.
    Because, under our proposal, outlier payments would now be based on 
the relationship between the hospital's costs and charges at the time a 
discharge occurred, the proposed methodology would ensure that when 
final outlier payments are made they would reflect an accurate 
assessment of the actual costs the hospital incurred. Nevertheless, a 
final vulnerability remains. Even though the final payment would 
reflect a hospital's true cost experience, there would still be the 
opportunity for a hospital to manipulate its outlier payments by 
dramatically increasing charges during the year in which the discharge 
occurs. In this situation, the hospital would receive excessive outlier 
payments, which, although the hospital would incur an overpayment and 
have to pay the money back when the cost report is settled, would allow 
the hospital to obtain excess payments from the Medicare Trust Fund on 
a short-term basis.
    Under section 1886(d)(5)(A)(iii) of the Act, the amount of any 
outlier payment should ``approximate the marginal cost of care'' in 
excess of the DRG payment and the fixed-loss threshold. Accordingly, 
because a hospital would have had access to any excess outlier payments 
until they are repaid to the Trust Fund (or, in the case of an 
underpayment, would not have had access to the appropriate amount 
during the same period), it may be necessary to adjust the amount of 
the final outlier payment to reflect the time value of the funds for 
that time period. Therefore, we are proposing to add Sec.  412.84(m) to 
provide that when the cost report is settled, outlier payments would be 
subject to an adjustment to account for the value of the money during 
the time period it was inappropriately held by the hospital. This 
adjustment would also apply in cases where outlier payments were 
underpaid to the hospital. In those cases, the adjustment would result 
in additional payments to hospitals. Any adjustment would be based upon 
a widely available index to be established in advance by the Secretary, 
and would be applied from the midpoint of the cost reporting period to 
the date of reconciliation (or when additional payments are issued, in 
the case of underpayments). This adjustment to reflect the time value 
of a hospital's outlier payments would ensure that the outlier payment 
received by the hospital at the time its cost report is settled 
appropriately reflects the hospital's true costs of providing the care.
    This adjustment is also intended to account for the unique 
susceptibility of outlier payments to manipulation. Hospitals set their 
own level of charges and are able to change their charges, without 
review by their fiscal intermediaries. As outlined above, changes in 
charges directly affect the level of outlier payments. This lack of 
fiscal intermediary review of a factor affecting a hospital's payments 
is in contrast to other IPPS adjustments, such as the IME adjustment or 
the DSH adjustment, where the fiscal intermediary must agree to a 
change to the determining factor (the resident-to-

[[Page 10426]]

bed ratio or the share of low-income patients, respectively).
    Under section 1886(d)(5)(A)(iv) of the Act, outlier payments for 
any year must be projected to be not less then 5 percent nor more than 
6 percent of the total estimated operating DRG payments plus outlier 
payments. Section 1886(d)(3)(B) of the Act requires the Secretary to 
reduce the average standardized amounts by a factor to account for the 
estimated proportion of total DRG payments made to outlier cases. 
Despite the fact that each individual hospital's outlier payments may 
be subject to adjustment when the cost report is settled, we continue 
to believe that the fixed-loss outlier threshold should be based on 
projected payments using the latest available historical data without 
retroactive adjustments, either mid-year or at the end of the year, to 
ensure that actual outlier payments are equal to 5.1 percent of total 
DRG payments. That is, the above proposed change is intended only to 
allow for use of the actual cost-to-charge ratio from the cost 
reporting period that corresponds to the discharges for which the 
outlier payments are made. This adjustment would be made irrespective 
of whether the nationwide percentage of outlier payments relative to 
total operating DRG payments is equal to the outlier offset that is 
applied to the average standardized amounts (generally, 5.1 percent).
    Outlier payments are intended to recognize the fact that hospitals 
occasionally treat cases that are extraordinarily costly and otherwise 
not adequately compensated under an average-based payment system. 
However, we can only estimate actual costs based on the charges for a 
case because charges are the only data available that indicate the 
resource usage for an individual case. Therefore, our ability to 
identify true outlier cases is dependent on the accuracy of the cost-
to-charge ratios. To the extent some hospitals may be motivated to 
maximize outlier payments by taking advantage of the lag in updating 
the cost-to-charge ratios, the payment system remains vulnerable to 
overpayments to individual hospitals. Therefore, we believe the only 
way to eliminate the potential for such overpayments is to provide a 
mechanism for final settlement of outlier payments using actual cost-
to-charge ratios from final, settled cost reports.
    However, the fixed-loss outlier threshold is an important aspect of 
the prospective nature of the IPPS. The outlier payment policy is 
designed to alleviate any financial disincentive hospitals may have 
against providing any medically necessary care their patients may 
require, even those patients who become very sick and require 
extraordinary resources. The preestablished threshold allows hospitals 
to approximate their Medicare payment for an individual patient while 
that patient is still in the hospital. Because we are proposing to base 
outlier payments on the hospital's actual cost-to-charge ratios during 
the contemporaneous cost reporting period, the hospital should still be 
in a position to make this approximation. Hospitals have immediate 
access to the information needed to determine what their cost-to-charge 
ratio will be when their cost report is settled. Even if the final 
cost-to-charge ratio is likely to be different from the ratio used 
initially to process and pay the claim, as noted above, hospitals not 
only have the information available to estimate their cost-to-charge 
ratio, but also have the ability to control it, through the structure 
and levels of their charges.
    If we were to make retroactive adjustments to outlier payments to 
ensure total payments are 5.1 percent of DRG payments (by retroactively 
adjusting outlier payments), we would be removing this important aspect 
of the prospective nature of the IPPS. Because such an across-the-board 
adjustment would either lead to more or less outlier payments for all 
hospitals, hospitals would no longer be able to reliably approximate 
their payment for a patient, while the patient is still hospitalized. 
We believe it would be neither necessary nor appropriate to make such 
an aggregate retroactive adjustment.
    Furthermore, we do not believe it would be consistent with the 
intent of the language at section 1886(d)(5)(A)(iv) of the Act to do 
so. This section calls for the Secretary to ensure that outlier 
payments are equal to or greater than 5 percent and less than or equal 
to 6 percent of projected or estimated (not actual) DRG payments. We 
believe this language reflects Congress's intent regarding the 
prospectivity of the IPPS. However, we do not believe it prevents 
settling outlier payments based on hospitals' actual cost-to-charge 
ratios during the period when the discharge occurs.

D. Fixed-loss Outlier Threshold

    As noted above, under section 1886(d)(5)(A)(iv) of the Act, outlier 
payments for any year must be projected to be not less than 5 percent 
nor more than 6 percent of total estimated operating DRG payments plus 
outlier payments; and section 1886(d)(3)(B) of the Act requires the 
Secretary to reduce the average standardized amounts by a factor to 
account for the estimated proportion of total DRG payments made to 
outlier cases. Similarly, section 1886(d)(9)(B)(iv) of the Act requires 
the Secretary to reduce the average standardized amounts applicable to 
hospitals in Puerto Rico to account for the estimated proportion of 
total DRG payments made to outlier cases.
    In the August 1, 2002 final rule, we established the FY 2003 
outlier fixed-loss threshold at $33,560 (67 FR 50122). This was a 
nearly 60 percent increase over the FY 2002 threshold of $21,025. The 
primary reason for this dramatic increase was a change in our 
methodology to use the rate of increase in charges rather than the rate 
of increase in costs to determine the threshold. That is, because we 
use FY 2001 cases to project the threshold for FY 2003, it is necessary 
to inflate the charges on the FY 2001 bills to approximate the charges 
on a similar claim for FY 2003. Prior to the calculation of the FY 2003 
outlier threshold, we used the rate-of-cost increase from the most 
recent cost reports available to inflate actual charges on the prior 
year's bills to estimate what the charges would be in the upcoming 
year.
    Our analysis indicated hospitals' charges were increasing at a much 
faster rate than costs. Therefore, in the August 1, 2002 final rule, we 
changed our methodology to inflate charges (67 FR 50122). Rather than 
using the observed rate of increase in costs from the cost reports, we 
inflated the FY 2001 charges by a 2-year average annual rate of change 
in actual charges per case from FY 1999 to FY 2000, and from FY 2000 to 
FY 2001, to estimate what the charges would be in FY 2003 for a similar 
claim.
    This proposed rule would make several changes to better target 
outlier payments to the most costly cases. As a result, if our present 
proposals are implemented as part of our final policy, outlier payments 
to the hospitals that have been most aggressively increasing their 
charges to maximize outlier payments would be dramatically reduced. 
However, we are concerned that unrestrained charge increases may 
continue to occur during FY 2003 prior to the implementation of these 
proposed changes as final, and possibly may result in outlier payments 
in excess of the 5.1 percent offset established by the August 1, 2002 
final rule. For example, hospitals intending to maximize outlier 
payments during FY 2003 could continue to do so by increasing charges 
enough to outpace the increase in the threshold. In fact, given the 
public attention on this behavior over the past

[[Page 10427]]

few months and the potential for other hospitals to begin to 
aggressively increase their charges, and consequently their outlier 
payments, it is possible this type of aggressive gaming of the outlier 
policy has become more widespread in recent months.
    Because of the extreme uncertainty regarding the effects of 
aggressive hospital charging practices on FY 2003 outlier payments to 
date, we are proposing no change to the FY 2003 fixed-loss threshold at 
this time. The threshold would remain at $33,560. However, we note that 
data for the first quarter of FY 2003 inpatient claims will be 
available soon, and these data may allow us to evaluate the current 
threshold and whether outlier payments to date appear to be 
approximately 5.1 percent of the total DRG payments.

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 (PRA) requires that we solicit comment on the following issues:
    [sbull] The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
    [sbull] The accuracy of our estimate of the information collection 
burden.
    [sbull] The quality, utility, and clarity of the information to be 
collected.
    [sbull] Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    As discussed below, we are soliciting comment on the recordkeeping 
requirements, as referenced in the proposed amendments to Sec.  412.84 
discussed in this proposed rule. Under the proposed amendments to Sec.  
412.84(h), a hospital may request that its fiscal intermediary use a 
different (higher or lower) cost-to-charge ratio based on substantial 
evidence presented by the hospital. The burden imposed by this section 
is the time it takes to write the request. We estimate that 120 
hospitals would make this request per year and that it would take each 
one 8 hours for a total annual burden of 960 hours.
    If you comment on these information collection and recordkeeping 
requirements, please mail copies directly to the following:

Centers for Medicare and Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Division of Regulations Development 
and Issuances, Attn: Reports Clearance Officer, 7500 Security 
Boulevard, Baltimore, MD 21244-1850, Attn: Julie Brown, CMS-1243-P; and
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: Brenda Aguilar, CMS Desk Officer.

IV. Impact Analysis

A. Introduction

    We have examined the impacts of this proposed rule as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review) 
and the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 
96-354), section 1102(b) of the Social Security Act, the Unfunded 
Mandates Reform Act of 1995 Pub. L. 104-4), and Executive Order 13132.

B. 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 major rules with economically 
significant effects ($100 million or more in any 1 year).
    We have determined that this proposed rule is a major rule as 
defined in 5 U.S.C. 804(2). Therefore, we have prepared the 
quantitative analysis presented in section IV.G. of this preamble.

C. Regulatory Flexibility Analysis

    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. 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 based on their nonprofit status or by having revenues 
of $5 million to $25 million in any 1 year. For purposes of the RFA, 
all hospitals and other providers and suppliers are considered to be 
small entities. Individuals and States are not included in the 
definition of a small entity. As stated above, we are presenting a 
quantitative analysis at section IV.G. of this preamble.

D. Effects on Rural Hospitals

    Section 1102(b) of the Social Security Act requires us to prepare a 
regulatory impact analysis for any proposed rule (and subsequent final 
rule) that may have a significant impact on the operations of a 
substantial number of small rural hospitals. This analysis must conform 
to the provisions of section 603 of the RFA. With the exception of 
hospitals located in certain New England counties, for purposes of 
section 1102(b) of the Act, we define a small rural hospital as a 
hospital with fewer than 100 beds that is located outside of a 
Metropolitan Statistical Area (MSA) or New England County Metropolitan 
Area (NECMA). Section 601(g) of the Social Security Amendments of 1983 
(Pub. L. 98-21) designated hospitals in certain New England counties as 
belonging to the adjacent NECMA. Thus, for purposes of the IPPS, we 
classify these hospitals as urban hospitals.
    It is clear that the changes being proposed in this proposed rule 
would affect both a substantial number of small rural hospitals as well 
as other classes of hospitals, and that the effects on some hospitals 
might be significant. Therefore, the discussion in section IV.G. of 
this preamble, in combination with the rest of this proposed rule, 
constitutes a combined regulatory impact analysis and regulatory 
flexibility analysis.

E. Unfunded Mandates

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

F. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. We have reviewed this proposed rule in light of Executive 
Order 13132 and have

[[Page 10428]]

determined that it would not have any negative impact on the rights, 
roles, and responsibilities of State, local, or tribal governments.

G. Quantitative Analysis

    As described above, the changes we are proposing would better 
target outlier payments to the most costly cases. First, by proposing 
to use the cost-to-charge ratios from the latest tentative settled cost 
reports at the time the claim is processed, instead of the latest 
settled cost reports, the lag time between the cost-to-charge ratio 
used to adjust charges to costs and the charges on the claim will be 
reduced by a year or more. Second, we are proposing that fiscal 
intermediaries would no longer assign the statewide average cost-to-
charge ratio in place of the actual cost-to-charge ratio when the 
hospital's actual ratio is more than 3 standard deviations below the 
geometric mean cost-to-charge ratio. Finally, we are proposing that 
outlier payments may be subject to reconciliation when the cost report 
corresponding with the outlier cases is settled, using the actual cost-
to-charge ratio calculated from the final settled cost report rather 
than the cost-to-charge ratio from the latest tentative settled cost 
report at the time the claim is processed.
    We anticipate these proposed changes will redistribute outlier 
payments away from hospitals that have been aggressively gaming the 
existing outlier payment methodology by manipulating their charges 
toward those hospitals with truly high-cost cases. For some hospitals, 
the effects of this redistribution may be quite dramatic. For example, 
as noted previously, we have identified 123 hospitals that appear to 
have been most aggressively gaming the current policy. On average, 
current outlier payments for these hospitals comprise 24 percent of 
their total DRG payments. The changes we are proposing would be likely 
to greatly reduce the level of outlier payments for these hospitals.
    However, as we also noted above, it is not currently possible to 
assess the extent to which other hospitals may have begun to engage in 
similar practices, particularly given the public attention that has 
focused on this problem. Therefore, hospitals that may not previously 
have been aggressively gaming the policy, and that would otherwise 
appear to benefit from the redistribution of outlier payments, may in 
fact also be negatively impacted by these proposed changes. At this 
time, however, data are not available to assess fully the degree to 
which other hospitals began this practice during FY 2002, and no data 
are yet available for FY 2003.
    Therefore, we are unable to quantify the likely impacts of these 
proposed changes. We anticipate that by the time we prepare the final 
rule, more data will be available to better assess the winners and 
losers of these proposed changes. If so, we will include a quantitative 
impact analysis at that time.

H. Alternatives Considered

    For purposes of analysis, we considered several alternatives to the 
proposed changes discussed above. One alternative would be to not make 
any changes to the current outlier policy. However, we believe that in 
light of the evidence that hospitals have been manipulating our current 
outlier policy, it is important to change the current policy to ensure 
these payments go to truly expensive cases. Therefore, we do not 
believe that retaining our current policy is a viable option.
    We also considered establishing a policy that hospitals' cost-to-
charge ratios would be based on their rates of increase in charges as 
an alternative to reconciling outlier payments on the cost reports. 
However, we believe this approach would be extremely complex. In 
addition, this approach would require us to make assumptions about the 
relationship between costs and charges that may not apply in particular 
circumstances. Therefore, this alternative would be likely to lead to 
inequitable treatment of some hospitals.
    We considered eliminating the application of statewide average 
cost-to-charge ratios altogether. However, it is necessary to have some 
ratio to assign to new hospitals that have not yet filed their first 
cost report. Also, we believe it remains appropriate to assign the 
statewide average cost-to-charge ratio in cases where a hospital's 
cost-to-charge ratio exceeds 3 standard deviations from the geometric 
mean.

I. Executive Order 12866

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

V. Response to Comments

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

VI. Change of the Required 60-Day Comment Period to a 30-Day Comment 
Period

    Section 1871 of the Social Security Act provides that the Secretary 
shall provide for notice of any proposed regulation in the Federal 
Register and a period of not less than 60 days for public comment 
before issuing a regulation in final form. However, this notice-and-
comment procedure may be waived if the agency, for good cause, finds 
that the notice-and-comment procedure is impracticable, unnecessary, or 
contrary to the public interest and incorporates a statement of the 
finding and the reasons for it into the notice issued.
    We believe there is good cause to waive the 60-day comment period. 
In light of the importance of the outlier issue and the extensive 
changes being proposed, however, we believe it is also important to 
provide a public comment period on the proposed policies, not because 
it is required, but as a matter of good public policy. Accordingly, in 
order to balance these competing interests, we are voluntarily 
providing a 30-day period for the submission of public comments.
    The Congress intended that outlier payments would be made only in 
situations where the cost of care is extraordinarily high in relation 
to the average cost of treating comparable conditions or illnesses. 
Under our existing outlier methodology, if hospitals' charges are not 
sufficiently comparable in magnitude to their costs, the legislative 
purpose underlying the outlier regulations is thwarted. In addition, if 
these proposed changes are not implemented expeditiously, additional 
hospitals will likely begin to increase their charges to take advantage 
of the vulnerabilities of the current system, and those hospitals that 
already have engaged in this activity will continue to do so. This has 
the undesirable impact not only of further distorting the distribution 
of outlier payments, but it also has negative impacts on other insurers 
and the public. In the case of other insurers, Medicare's payments 
often serve as a benchmark for establishing their payments to 
individual hospitals. To the extent Medicare continues to pay excessive 
outlier payments to some hospitals, this may have spillover effects to 
private insurance companies. In the case of the public, particularly 
those without health insurance, they face the prospect of being 
expected to pay these exorbitant hospital charges when they

[[Page 10429]]

become hospitalized at an institution that has engaged in these 
practices. Extending the duration of these payment inequities would be 
contrary to the public interest and could adversely affect the 
provision of services to Medicare beneficiaries.
    We believe that providing a 30-day comment period for the proposed 
policies in this document allows hospitals and the general public 
sufficient opportunity to address any concerns or issues that they may 
have, and at the same time, allows CMS to address the issue of 
excessive outlier payments within the current fiscal year (FY 2003). 
Hospitals are already familiar with the existing outlier payment 
policies and should be able to readily assess the impact that the 
proposed changes may have on their programs and respond to the proposed 
changes in the outlier payment methodology.

List of Subjects in 42 CFR Part 412

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

    For the reasons stated in the preamble of this proposed rule, the 
Centers for Medicare & Medicaid Services proposes to amend 42 CFR part 
412 as follows:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

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

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

    2. Section 412.84 is amended by--
    A. Revising paragraph (h).
    B. Redesignating paragraphs (i), (j), and (k) as paragraphs (j), 
(k), and (l), respectively.
    C. Adding a new paragraph (i).
    D. In redesignated paragraph (k), removing the phrase ``paragraph 
(k) of this section'' and adding in its place ``paragraph (l) of this 
section.''
    E. In redesignated paragraph (l), removing the phrase ``paragraph 
(j) of this section'' and adding in its place ``paragraph (k) of this 
section.''
    F. Adding a new paragraph (m).
    The revisions read as follows:


Sec.  412.84  Payment for extraordinarily high-cost cases (cost 
outliers).

* * * * *
    (h) For discharges occurring before the effective date of the final 
rule, the operating and capital cost-to-charge ratios used to adjust 
covered charges are computed annually by the intermediary for each 
hospital based on the latest available settled cost report for that 
hospital and charge data for the same time period as that covered by 
the cost report. Statewide cost-to-charge ratios are used in those 
instances in which a hospital's operating or capital cost-to-charge 
ratios fall outside reasonable parameters. CMS sets forth the 
reasonable parameters and the statewide cost-to-charge ratios in each 
year's annual notice of prospective payment rates published under Sec.  
412.8(b).
    (i)(1) For discharges occurring on or after the effective date of 
the final rule, the operating and capital cost-to-charge ratios applied 
at the time a claim is processed are based on either the most recent 
settled or the most recent tentative settled cost report, whichever is 
from the latest cost reporting period (unless otherwise specified by 
CMS based on later available data). A hospital may also request that 
its fiscal intermediary use a different (higher or lower) cost-to-
charge ratio based on substantial evidence presented by the hospital. 
Such a request must be approved by the CMS Regional Office. If a fiscal 
intermediary is unable to determine an accurate operating or capital 
cost-to-charge ratio for a hospital in one of the following 
circumstances, it may use a statewide average cost-to-charge ratio:
    (i) New hospitals that have not yet submitted their first Medicare 
cost report. (For this purpose, a new hospital is defined as an entity 
that has not accepted assignment of an existing hospital's provider 
agreement in accordance with Sec.  489.18 of this chapter.)
    (ii) Hospitals whose operating or capital cost-to-charge ratio is 
in excess of three standard deviations above the corresponding national 
geometric mean. This mean is recalculated annually by CMS and published 
in the annual notice of prospective payment rates published under Sec.  
412.8(b).
    (iii) Other hospitals for whom the fiscal intermediary determines 
accurate data upon which to calculate either an operating or capital 
cost-to-charge ratio (or both) are not available.
    (2) For discharges occurring on or after the effective date of the 
final rule, any reconciliation of outlier payments will be based on 
operating and capital cost-to-charge ratios calculated based on a ratio 
of costs to charges computed from the relevant cost report and charge 
data determined at the time the cost report coinciding with the 
discharge is settled.
* * * * *
    (m) Effective for discharges occurring on or after the effective 
date of the final rule, at the time the cost report is settled, outlier 
payments may be adjusted to account for the time value of any 
underpayments or overpayments. Any adjustment will be based upon a 
widely available index to be established in advance by the Secretary, 
and will be applied from the midpoint of the cost reporting period to 
the date of reconciliation.


Sec.  412.116  [Amended]

    3. In Sec.  412.116(e), the second sentence is removed.

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance)
    Dated: January 24, 2003.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: February 6, 2003.
Tommy G. Thompson,
Secretary.
[FR Doc. 03-5121 Filed 2-28-03; 12:03 pm]
BILLING CODE 4120-01-P