[Federal Register Volume 68, Number 174 (Tuesday, September 9, 2003)]
[Proposed Rules]
[Pages 53266-53280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-22658]



[[Page 53265]]

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

Part III





Department of Health and Human Services





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



Centers for Medicare & Medicaid Services



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



42 CFR Part 412



Medicare Program; Changes to the Criteria for Being Classified as an 
Inpatient Rehabilitation Facility; Proposed Rule

  Federal Register / Vol. 68, No. 174 / Tuesday, September 9, 2003 / 
Proposed Rules  

[[Page 53266]]


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

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1262-P]
RIN 0938-AM72


Medicare Program; Changes to the Criteria for Being Classified as 
an Inpatient Rehabilitation Facility

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

ACTION: Proposed rule.

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

SUMMARY: This proposed rule would revise the classification criterion, 
commonly known as the ``75 percent rule,'' used to classify a hospital 
as an inpatient rehabilitation facility (IRF). This proposed rule would 
also modify and expand the medical conditions listed in the 75 percent 
rule regulatory requirements as well as lower the percentage of 
patients required to fall within one of the specified list of medical 
criteria.

DATES: We will consider comments if we receive them at the appropriate 
address, as provided below, no later than 5 p.m. on November 3, 2003.

ADDRESSES: In commenting, please refer to file code CMS-1262-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission or e-mail. Mail written comments (one 
original and two copies) to the following address only: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-1262-P, P.O. 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 two 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 persons 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. For 
information on viewing public comments, see the beginning of the 
SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Robert Kuhl, (410) 786-4597; or Pete 
Diaz, (410) 786-1235; or Nora Hoban, (410) 786-0675.

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, P.O. 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 toll-free at 1-888-293-
6498) or by faxing to (202) 512-2250. The cost for each copy is $10. 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.

I. Condition for Classification as an IRF

Background

A. Overview of the Inpatient Rehabilitation Facility Prospective 
Payment System

    Section 1886(j) of the Social Security Act (the Act) provides for 
the implementation of a prospective payment system (PPS) under Medicare 
for inpatient hospital services furnished by a rehabilitation hospital 
or a rehabilitation unit of a hospital (referred to as an inpatient 
rehabilitation facility (IRF)). Sections 1886(d)(1)(B) and 
1886(d)(1)(B)(ii) of the Act give the Secretary the discretion to 
define a rehabilitation hospital and unit. The regulations at 42 CFR 
412.23(b), 412.25, and 412.29, specify the criteria for a provider to 
be classified as a rehabilitation hospital or rehabilitation unit. 
Hospitals and units meeting those criteria are eligible to be paid on a 
prospective payment basis as an IRF under the IRF PPS.
    Payments made under the IRF PPS cover inpatient operating and 
capital costs of furnishing covered intensive rehabilitation services 
(that is, routine, ancillary, and capital costs), but do not cover 
costs of approved educational activities, bad debts, and other services 
or items outside the scope of the IRF PPS. Covered intensive 
rehabilitation services include services for which benefits are 
provided under Medicare Part A (Hospital Insurance).
    Payments under the IRF PPS are made on a per discharge basis. A 
patient classification system is used to assign patients in IRFs into 
case-mix groups (CMGs). The IRF PPS uses Federal prospective payment 
rates across distinct CMGs. We construct a majority of the CMGs using 
rehabilitation impairment categories (RICs), functional status (both 
motor and cognitive), and age (though some CMGs do not use cognitive 
status or age in their definition). We construct special CMGs to 
account for very short stays and for patients who expire during the IRF 
stay.
    For each CMG, we develop relative weighting factors to account for 
a patient's clinical characteristics and expected resource consumption. 
Thus, the weighting factors account for the relative difference in 
resource use across all CMGs. Within each CMG, the weighting factors 
are ``tiered'' based on the estimated effect that the comorbidities 
from appendix C of the August 7, 2001 final rule (66 FR 41414) have on 
resource use.
    The Federal prospective payment rates are established using a 
standard payment amount (also referred to as the budget neutral 
conversion factor). For each of the tiers within a CMG, we apply the 
relative weighting factors to the budget neutral conversion factor to 
compute the unadjusted Federal prospective payment rates.
    Adjustments that account for geographic variations in wages (wage 
index), for the percentage of low-income patients, and for facilities 
located in a rural area are applied to the unadjusted Federal 
prospective payment rates. In addition, adjustments are made for early 
transfers of patients to other facilities, interrupted stays, and high-
cost outliers (cases with usually extraordinarily high costs).
    The regulations implementing the IRF PPS provisions are presently 
in 42 CFR part 412, subpart P. Regulations governing the requirements 
for classification of hospitals as IRFs are located in Sec.  412.22, 
Sec.  412.23, Sec.  412.25, and Sec.  412.29. Section 412.23(b)(2) is 
commonly known as the ``75 percent

[[Page 53267]]

rule'' and specifies one of the criteria Medicare uses for classifying 
a hospital or unit of a hospital as an IRF. This regulation provides 
that during its most recent cost reporting period 75 percent of an 
IRF's total patient population required intensive rehabilitation 
services for treatment of one or more of the medical conditions 
specified in Sec.  412.23(b)(2).
    For a more complete discussion of the development of the IRF PPS 
see our August 7, 2001 final rule (66 FR 41316). We also have 
established a CMS website that contains useful information regarding 
the IRF PPS. The website URL is http://www.cms.hhs.gov/providers/irfpps/default.asp and may be accessed to download or view 
publications, software, and other information pertinent to the IRF PPS.

B. Recent Developments on the 75 Percent Rule

1. May 2003 Proposed Rule
    On May 16, 2003, we published a proposed rule titled ``Medicare 
Program; Changes to the Inpatient Rehabilitation Facility Prospective 
Payment System and Fiscal Year 2004 Rates'' in the Federal Register (68 
FR 26786) to propose updates to the IRF Federal prospective payment 
rates for FY 2004, to be effective for discharges occurring on or after 
October 1, 2003 and before October 1, 2004. We published the final rule 
on August 1, 2003 (68 FR 45674). The final rule specified the comments 
we received in response to our proposed policies and the final 
regulations regarding the proposed update to IRF PPS for FY 2004.
    In the May 16, 2003 proposed rule, we solicited public comments on 
the regulatory requirements in Sec.  412.23(b)(2). As stated previously 
and discussed more fully in section I.B.2. of this preamble, Sec.  
412.23(b)(2) provides that the requirements of 75 percent rule be met 
for a provider to be classified as an IRF. On May 19, 2003, we held a 
Town Hall meeting at our headquarters in Baltimore, MD, in which views 
regarding all aspects of the IRF PPS could be expressed. Hundreds of 
people participated in the Town Hall meeting either by attending at CMS 
headquarters or by a conference call. Most of the participants, 
however, limited their testimony to the 75 percent rule.
    In response to the May 16, 2003 proposed rule, we received over 
6,000 timely public comments regarding the regulatory requirements in 
Sec.  412.23(b)(2). The primary issues discussed during the Town Hall 
meeting and in the public comments are summarized as follows:
    [sbull] The regulatory requirement specifying the 10 medical 
conditions contained in Sec.  412.23(b)(2) should be repealed or 
amended.
    [sbull] The 10 medical conditions specified in Sec.  412.23(b)(2) 
do not adequately reflect current care in IRFs.
    [sbull] The medical conditions specified in Sec.  412.23(b)(2) have 
not been updated in 20 years and should be revised or re-written to 
include other diagnoses.
    [sbull] Some of the medical conditions specified in Sec.  
412.23(b)(2) are vague; they have little clinical relevance; and are 
inconsistently interpreted by our fiscal intermediaries who are charged 
with enforcing the 75 percent rule.
    [sbull] CMS administrative data indicate most IRFs are not in 
compliance with Sec.  412.23(b)(2).
    [sbull] Classification as an IRF should be based on 20 of the 21 
RICs.
    [sbull] Enforcement of the rule could force many IRFs to close.
    [sbull] Enforcement of the rule limits access to care.
    [sbull] Treatment in other rehabilitation treatment settings is 
inferior to treatment furnished in an IRF.
    In the May 16, 2003 proposed rule, we did not propose amending the 
regulatory requirements in Sec.  412.23(b)(2). In this proposed rule, 
we are proposing amending the requirements in Sec.  412.23(b)(2) as 
discussed in section II of the preamble.
2. Classification as an IRF Under the 75 Percent Rule
    As stated in the August 7, 2001 final rule, we did not change the 
survey and certification procedures for classification as an IRF. 
Currently, a hospital or unit of a hospital must first be deemed 
excluded from the diagnosis-related group (DRG)-based acute care 
hospital PPS to be paid under the IRF PPS and must meet the general 
requirements in subpart B of part 412. Secondly, the excluded hospital 
or unit of the hospital must meet the conditions for payment under the 
IRF PPS at Sec.  412.604. As specified at Sec.  412.604(b), a provider, 
among other things, must be in compliance with all the criteria 
specified in Sec.  412.23(b) to be classified as an IRF.
    Under Sec.  412.23(b)(2) of the existing regulations, a facility 
may be classified as an IRF if it can show that, during its most recent 
12-month cost reporting period, it served an inpatient population of 
whom at least 75 percent required intensive rehabilitation services for 
the treatment of one or more of the following conditions:
    [sbull] Stroke.
    [sbull] Spinal cord injury.
    [sbull] Congenital deformity.
    [sbull] Amputation.
    [sbull] Major multiple trauma.
    [sbull] Fracture of femur (hip fracture).
    [sbull] Brain injury.
    [sbull] Polyarthritis, including rheumatoid arthritis.
    [sbull] Neurological disorders, including multiple sclerosis, motor 
neuron diseases, polyneuropathy, muscular dystrophy, and Parkinson's 
disease.
    [sbull] Burns.

C. Statutory and Regulatory Background on the 75 Percent Rule

    We initially stipulated the ``75 percent'' requirement in the 
September 1, 1983, interim final rule with comment period entitled 
``Medicare Program; Prospective Payments for Medicare Inpatient 
Hospital Services'' (48 FR 39752). That interim final rule implemented 
the Social Security Amendments of 1983 (Pub. L. 98-21), changing the 
method of payment for inpatient hospital services from a cost-based, 
retrospective reimbursement system to a diagnosis-specific inpatient 
PPS. However, the rule stipulated that, in accordance with sections 
1886(d)(1)(B) and 1886(d)(1)(B)(ii) of the Act, both a rehabilitation 
unit, which is a distinct part of a hospital, and a rehabilitation 
hospital would be excluded from the IPPS. We noted that sections 
1886(d)(1)(B) and 1886(d)(1)(B)(ii) of the Act also gave the Secretary 
broad discretion to define a ``rehabilitation unit'' and a 
``rehabilitation hospital.''
    We consulted with the Joint Commission on Accreditation of 
Hospitals (JCAH), and other accrediting organizations (JCAH is 
currently known as the Joint Commission on Accreditation of Healthcare 
Organizations (JCAHO)) to define a rehabilitation hospital. The 
criteria we included in our definition of a rehabilitation hospital 
incorporated some of the accreditation requirements of these 
organizations. The definition also included other criteria, which we 
believed distinguished a rehabilitation hospital from a hospital that 
furnished general medical and surgical services as well as some 
rehabilitation services. One criterion was that ``The hospital must be 
primarily engaged in furnishing intensive rehabilitation services as 
demonstrated by patient medical records showing that, during the 
hospital's most recently completed 12-month cost reporting period, at 
least 75 percent of the hospital's inpatients were treated for one or 
more conditions specified in these regulations that typically require 
intensive inpatient rehabilitation'' (48 FR 39756). This requirement 
was originally specified in

[[Page 53268]]

Sec.  405.471(c)(2)(ii). We included this requirement, as a defining 
feature of a rehabilitation hospital, because we believed ``that 
examining the types of conditions for which a hospital's inpatients are 
treated, and the proportion of patients treated for conditions that 
typically require intensive inpatient rehabilitation, will help 
distinguish those hospitals in which the provisions of rehabilitation 
services is a primary, rather than a secondary, goal'' (48 FR 39756). 
Likewise, the 75 percent rule was a criterion for a rehabilitation 
unit.
    The original medical conditions specified in Sec.  
405.471(c)(2)(ii) were stroke, spinal cord injury, congenital 
deformity, amputation, major multiple trauma, fracture of femur (hip 
fracture), brain injury, and polyarthritis, including rheumatoid 
arthritis. This list of eight medical conditions was partly based upon 
the information contained in a document entitled ``Sample Screening 
Criteria for Review of Admissions to Comprehensive Medical 
Rehabilitation Hospitals/Units.'' This document was a product of the 
Committee on Rehabilitation Criteria for the Professional Standards 
Review Organization of the American Academy of Physical Medicine and 
Rehabilitation and the American Congress of Rehabilitation Medicine. In 
addition, we received input from the National Association of 
Rehabilitation Facilities and the American Hospital Association. The 
requirement that 75 percent of an IRF's patient population must have 
one or more of the medical conditions listed in the regulation was due 
to the finding that the listed medical conditions accounted for 
approximately 75 percent of the admissions to IRFs at the time.
    On January 3, 1984, we published a final rule entitled ``Medicare 
Program; Prospective Payment for Medicare Inpatient Hospital Services'' 
(49 FR 234). On page 240 of that final rule, we summarized comments 
that requested inclusion of neurological disorders, burns, chronic 
pain, pulmonary disorders, and cardiac disorders in the list of medical 
conditions under the 75 percent rule. Our analysis of these comments 
led us to agree that neurological disorders (including multiple 
sclerosis, motor neuron diseases, polyneuropathy, muscular dystrophy, 
and Parkinson's disease) and burns should be added to the original list 
of eight medical conditions under the 75 percent rule (49 FR 240). We 
did not agree with comments that we lower from 75 to 60 the percentage 
of patients that must meet one of the medical conditions. Nor did we 
agree with comments urging us to use IRF resource consumption, instead 
of a percentage of patients that must have one or more of the specified 
medical conditions, to help define what is an IRF (49 FR 239-240). We 
also rejected suggestions that when an IRF could not meet the 75 
percent rule, the facility should still be defined as an IRF based on 
the types of services it furnished.
    On August 31, 1984, we published a final rule entitled ``Medicare 
Program; Changes to the Inpatient Hospital Prospective Payment System 
and Fiscal Year 1985 Rates'' (49 FR 34728). In that rule, we explained 
how the 75 percent rule applied to a new rehabilitation unit or 
rehabilitation hospital or to an increase in beds of an existing 
rehabilitation unit.
    On March 29, 1985, we published a final rule entitled ``Medicare 
Program; Prospective Payment System for Hospital Inpatient Services; 
Redesignation of Rules'' (50 FR 12740). That rule redesignated 
provisions of Sec.  405.471 that addressed the 75 percent rule as 
provisions under Sec.  412.23.
    On August 30, 1991, we published a final rule entitled ``Medicare 
Program; Changes to the Inpatient Hospital Prospective Payment System 
and Fiscal Year 1992 Rates'' (56 FR 43196). Since October 1, 1983, the 
regulations allowed a new rehabilitation hospital or a new 
rehabilitation unit, or an existing excluded rehabilitation unit that 
was to be expanded by the addition of new beds, to be excluded from the 
hospital inpatient PPS if, in addition to meeting other requirements, 
it submitted a written certification that during its first cost 
reporting period it would be in compliance with the 75 percent rule. 
The August 30, 1991, rule specified that, if these facilities were 
later found to have not complied with the 75 percent rule, we would 
determine the amount of actual payment under the exclusion, compute 
what we would have paid for the facility's services to Medicare 
patients under the IPPS, and recover any difference in accordance with 
the rules on the recoupment of overpayments.
    On September 1, 1992, we published a final rule entitled ``Medicare 
Program; Changes to Hospital Inpatient Prospective Payment Systems and 
Fiscal Year 1993 Rates'' (57 FR 39746). In the rule, we acknowledged 
that, for various reasons, a new rehabilitation hospital or a new 
rehabilitation unit might need to begin operations at some time other 
than at the start of its regular cost reporting period. Therefore, we 
specified that an IRF could submit a written certification that it 
would comply with the 75 percent rule for both a partial cost reporting 
period of up to 11 months and the subsequent full 12-month cost 
reporting period.
    On September 1, 1994, we published a final rule entitled ``Medicare 
Program; Changes to the Hospital Inpatient Prospective Payment Systems 
and FY 1995 Rates'' (59 FR 45330). In that final rule, we stated that 
we had miscellaneous comments requesting that oncology cases, pulmonary 
disorders, cardiac disorders, and chronic pain be added to the list of 
medical conditions under the 75 percent rule (59 FR 45393). We 
responded that, although the 75 percent rule had not been addressed in 
the associated May 27, 1994, proposed rule, we would take these 
miscellaneous comments into consideration if we decided to make changes 
to the 75 percent rule.
    When we published the August 7, 2001 final rule (66 FR 41316), we 
acknowledged we had received comments requesting that we update the 
list of medical conditions specified in Sec.  412.23(b)(2) or eliminate 
the regulation (66 FR 41321). We responded that in the November 3, 2000 
IRF PPS proposed rule, we had not proposed amending the requirements in 
Sec.  412.23(b)(2), and we believed the existing regulation was 
appropriate and, therefore, we would not be revising the requirements 
in Sec.  412.23(b)(2). However, we also stated that data obtained after 
we implemented the IRF PPS could lead us to reconsider amending the 
requirements in Sec.  412.23(b)(2).

D. CMS Evaluation of Compliance With the 75 Percent Rule Regulatory 
Requirements in Sec.  412.23(b)(2)

    In the spring of 2002, we surveyed the Medicare fiscal 
intermediaries (FIs) in order to ascertain what methods were being used 
to verify whether IRFs were complying with the requirements in Sec.  
412.23(b)(2). Analysis of the survey data made us aware that 
inconsistent methods were being used to determine whether an IRF was in 
compliance with the regulation. Also, some IRFs were not being reviewed 
to determine whether they were in compliance with the regulation. These 
survey results led us to become concerned that some IRFs may be out of 
compliance with the regulation and inappropriately classified as an 
IRF. In addition, we were concerned that some FIs might be using 
different methods to verify compliance with the requirements in Sec.  
412.23(b)(2). This practice may have resulted in an IRF being 
incorrectly considered out of compliance with the regulation. Thus, 
this practice had the potential to cause an IRF to inappropriately lose 
its classification as

[[Page 53269]]

an IRF. Therefore, on June 7, 2002, we suspended enforcement of the 
regulatory requirements Sec.  412.23(b)(2) until we conducted a careful 
examination of this area and determined whether the regulation should 
be changed and the operating procedures to verify compliance with the 
regulation.
    In addition to our review of the administrative procedures used by 
our FIs, we conducted an analysis of CMS administrative data to attempt 
to estimate overall compliance with the regulation. We examined both 
the inpatient rehabilitation facility-patient assessment instrument 
(IRF-PAI) data and claims from the years 1998, 1999, and 2002. The 
patient assessment data was from January to August of 2002. We 
estimated that the percent of facilities with 75 percent of cases 
falling into the 10 conditions was 13.35 percent. We note that the 
analysis has a number of limitations. For example, it is not possible 
to discern from the diagnosis data on IRF-PAI or the claim whether 
there was a medical need to furnish the patient ``intensive 
rehabilitation.'' The diagnosis describes only some aspects of a 
patient's clinical status, but the diagnosis alone does not determine 
the medical necessity of treating a patient in an IRF as opposed to 
another type of treatment setting. In addition, all the information 
necessary to classify a case under 1 of the 10 conditions may not be 
present on the claim (for example, polyarthritis).
    In the May 16, 2003 proposed rule, we indicated that we would be 
instructing FIs to re-institute appropriate enforcement action if they 
were to determine that an IRF has not complied with the requirements in 
Sec.  412.23(b)(2). We realize that an IRF may need time to come into 
compliance with the regulation. An IRF's cost reporting period is the 
time period used to ascertain compliance with the requirements in Sec.  
412.23(b)(2). Therefore, we indicated that we were instructing the FIs 
that they must use cost reporting periods that begin on or after 
October 1, 2003, as the time period to ascertain an IRF's compliance 
with the requirements in Sec.  412.23(b)(2). While in the May 16, 2003 
proposed rule, we did not propose changes to Sec.  412.23(b)(2), we 
indicated that we expect that improved enforcement and compliance with 
the existing rule will have varying impacts on providers and 
beneficiaries.
    In the May 16, 2003 proposed rule, we indicated that while it is 
difficult to predict the aggregate impact of improved compliance on 
provider payments, we expect that IRFs or their parent hospitals, or 
both (80 percent of IRFs are units of acute care hospitals), will 
change their behavior in a variety of ways. IRFs may change admission 
practices to alter their case-mix, either Medicare or total patient 
population, by admitting patients with more intensive rehabilitative 
needs that fall into the 10 conditions. This practice could have the 
effect of elevating the facility's revenues because cases requiring 
more intensive rehabilitation care generally receive higher Medicare 
payments than less complex cases. On the other hand, enforcement of the 
75 percent rule may cause some IRFs to reduce the number of beds and/or 
reduce the number of admissions that may result in a reduction of the 
facility's revenues.
    The existing regulation reflects the fact that up to 25 percent of 
medically necessary admissions may fall outside of the 10 conditions. 
These cases can continue to be admitted and treated under the 
regulation. Other cases may appropriately receive rehabilitative care 
in alternative settings. For certain medically complex cases, it may be 
appropriate to lengthen the patient's stay in an acute care setting in 
order to stabilize his or her condition to prepare the patient to 
participate in rehabilitation. Alternative settings for rehabilitative 
care could include the acute care hospital, skilled nursing facilities, 
long-term care hospitals, outpatient rehabilitation facilities, and 
home health care. For this reason, we did not expect to see reduced 
access to care for Medicare beneficiaries as a result of improved 
compliance. In addition, because many hospitals having a Medicare 
certified IRF unit also have one or more other subunits that provide 
rehabilitation, revenues from these cases may be generated elsewhere 
within the same hospital.
    As noted above, on June 7, 2002, we suspended enforcement of the 75 
percent rule under Sec.  412.23(b)(2). We accomplished the suspension 
of enforcement by the issuance of instructions to the FIs and, 
therefore, it was a method that was administrative and operational. The 
suspension of enforcement was communicated to the IRFs by CMS Regional 
Offices, the FIs, or other means such as regular telephone conferences 
between CMS and providers. Although the May 16, 2003 proposed rule 
stated that we would be re-instituting enforcement of Sec.  
412.23(b)(2) for cost reporting periods that start on or after October 
1, 2003, we decided to revisit this issue due to the extensive public 
comments received on this issue. We are now proposing to amend Sec.  
412.23(b)(2) in this proposed rule. Therefore, we will not be re-
instituting enforcement of the regulation for cost reporting periods 
beginning on or after October 1, 2003 as stated in the May 16, 2003 
proposed rule. Instead, we are now proposing that the proposed 
amendments in Sec.  412.23(b)(2) would be applicable to cost reporting 
periods that start on or after the effective date specified in the 
final rule that will be published subsequent to this proposed rule. We 
anticipate that the effective date of the final rule would be January 
1, 2004.
    The intent of the policy specified at Sec.  412.23(b)(2), and of 
other policy criteria for IRFs, is to ensure that these facilities are 
unique compared to other hospitals in that they provide intensive 
rehabilitative services in an inpatient setting. The uniqueness of 
these facilities is the justification for paying them under a separate 
payment system rather than paying them with the same payment system for 
acute care inpatient PPS. We believe it is crucial that Medicare 
maintain criteria to ensure that only facilities providing intensive 
rehabilitation are identified as IRFs so that services are paid 
appropriately under the IRF PPS. In addition, we believe it is 
imperative to identify conditions that would ``typically require 
intensive inpatient rehabilitation'' in IRFs because rehabilitation in 
general can be delivered in a variety of settings such as acute care 
hospitals, skilled nursing facilities, and outpatient settings.

II. Provisions of the Proposed Rule

    For the reasons set forth in the preamble, in section II.A., we are 
proposing in Sec.  412.23(b)(2) ``Excluded hospitals: 
Classifications,'' to remove the reference to ``75 percent.'' We are 
proposing a new Sec.  412.23(b)(2)(i) that specifies for cost reporting 
periods beginning on or after January 1, 2004 and before January 1, 
2007, the hospital has served an inpatient population of whom at least 
65 percent required intensive rehabilitative services for treatment of 
one or more of the conditions specified at paragraph (b)(2)(iii) of 
this section. A patient with a comorbidity, as defined at Sec.  
412.602, may be included in the inpatient population that counts 
towards the required 65 percent if--
    [sbull] The patient is admitted for inpatient rehabilitation for a 
condition that is not one of the conditions specified at paragraph 
(b)(2)(iii) of this section;
    [sbull] The patient has a comorbidity that falls in one of the 
conditions specified at paragraph (b)(2)(iii) of this section; and

[[Page 53270]]

    [sbull] The comorbidity has caused significant functional ability 
decline in the individual such that, even in the absence of the 
admitting condition, the individual would require the intensive 
rehabilitation treatment that is unique to inpatient rehabilitation 
facilities paid under subpart P of this part and which cannot be 
appropriately performed in another care setting covered under this 
title.
    We are also proposing a new Sec.  412.23(b)(2)(ii) that specifies 
for cost reporting periods beginning on or after January 1, 2007, the 
hospital has served an inpatient population of whom at least 75 percent 
required intensive rehabilitative services for treatment of one or more 
of the conditions specified at paragraph (b)(2)(iii) of this section.
    In proposed Sec.  412.23(b)(2)(iii), we are proposing to retain the 
existing conditions except for polyarthritis, which we are proposing to 
replace with the following three new conditions:
    [sbull] Active, polyarticular rheumatoid arthritis, psoriatic 
arthritis, and seronegative arthropathies resulting in significant 
functional impairment of ambulation and other activities of daily 
living, which has not improved after an appropriate, aggressive, and 
sustained course of outpatient therapy services or services in other 
less intensive rehabilitation settings immediately preceding the 
inpatient rehabilitation admission or which results from a systemic 
disease activation immediately before admission, but has the potential 
to improve with more intensive rehabilitation.
    [sbull] Systemic vasculidities with joint inflammation, resulting 
in significant functional impairment of ambulation and other activities 
of daily living, which has not improved after an appropriate, 
aggressive, and sustained course of outpatient therapy services or 
services in other less intensive rehabilitation settings immediately 
preceding the inpatient rehabilitation admission or which results from 
a systemic disease activation immediately before admission, but has the 
potential to improve with more intensive rehabilitation.
    [sbull] Severe or advanced osteoarthritis (osteoarthrosis or 
degenerative joint disease) involving three or more major joints 
(elbow, shoulders, hips, or knees) with joint deformity and substantial 
loss of range of motion, atrophy, significant functional impairment of 
ambulation and other activities of daily living, which has not improved 
after an appropriate, aggressive, and sustained course of outpatient 
therapy services or services in other less intensive rehabilitation 
settings immediately preceding the inpatient rehabilitation admission 
but has the potential to improve with more intensive rehabilitation. (A 
joint replaced by a prosthesis no longer is considered to have 
osteoarthritis, or other arthritis, even though this condition was the 
reason for the joint replacement.)
    Furthermore, in section II.C., we are proposing the possible use of 
comorbidities to verify compliance with proposed Sec.  412.23(b)(2).
    We are also proposing to phase-out the reduction from 75 percent to 
65 percent and the use of commorbities to verify compliance, as 
discussed in section II.D., on January 1, 2007 with the intention of 
using data acquired and analysis performed during this period to revise 
the rule, if necessary, prior to the phase-out date. Lastly, in section 
II.E., we are proposing to change the time period used to determine 
compliance with the proposed 65 percent rule.

A. Change of the Percentage of the Inpatient Population

    Under proposed Sec.  412.23(b)(2)(i), we are proposing, starting 
with the effective date of the final rule and subject to the proposed 
phase-out provision discussed in section II.D., to change the 
percentage of the total IRF patient population used as a criterion to 
distinguish an IRF from an acute care hospital from 75 percent to 65 
percent.
    We recognize that rehabilitation practice may have changed since we 
developed the original list of conditions. We are, however, concerned 
that in some cases, patients may have been transferred inappropriately 
from the inpatient setting and, thus, these inappropriate responses may 
be responsible for some of these changes in rehabilitation practice 
rather than medical advances.
    We believe that the list of medical conditions we are proposing in 
this rule identifies patients who typically can benefit from the type 
of intensive inpatient rehabilitation services provided by IRFs. We do, 
however, recognize that there may be certain atypical patients admitted 
for other conditions who may be appropriate for care in an IRF. As a 
precaution to mitigate any unintended effects on access to care while 
we perform the analysis discussed in section II.D, we are proposing to 
lower the percentage of cases to 65 percent. We welcome the development 
and presentation of objective evidence that shows the type of patients 
most appropriately treated in the IRF setting, compared to other 
settings.
    As reflected in both the present and now proposed policies, we do 
not believe it is necessary that an IRF must treat patients only with 
the medical conditions listed in proposed Sec.  412.23(b)(2)(iii) to 
distinguish it from other inpatient settings as an inpatient hospital 
setting that is primarily engaged in furnishing intensive 
rehabilitation services. Patients may have a variety of medical 
conditions that require rehabilitation treatment and the rehabilitation 
treatment may be furnished by a variety of rehabilitation programs. 
However, while an IRF is one of the settings that is available to 
furnish rehabilitation, it may not be the most appropriate setting to 
treat a medical condition not listed in proposed Sec.  
412.23(b)(2)(iii).
    Patients with the medical conditions not listed in proposed Sec.  
412.23(b)(2)(iii) have always had, and will continue to have, 
rehabilitation programs in IRFs and other settings available to them 
that we believe can furnish the type of treatment that is commensurate 
to the need they have for rehabilitation. While being a prudent 
purchaser of health care services for Medicare beneficiaries is an 
important factor, the most important determination is which 
rehabilitation program is the most appropriate in relation to the 
patient's medical condition and rehabilitation needs, that is, the 
rehabilitation services furnished by the most appropriate 
rehabilitation program.
    Although the previous analysis of impairment group and diagnoses 
data from the IRF-PAI suggests that IRFs are treating a patient 
population with more than 35 percent of cases with medical conditions 
other than those specified in proposed Sec.  412.23(b)(2)(iii), this 
does not in and of itself provide evidence that the IRF is the most 
appropriate rehabilitation treatment modality for these patients. We 
welcome evidence or studies demonstrating that patients with medical 
conditions not included in proposed Sec.  412.23(b)(2)(iii) generally 
require intensive inpatient rehabilitation and have better outcomes 
compared to other settings.
    Although there may have been ``medical advances'' in rehabilitation 
or at least changes in practice patterns since the medical conditions 
listed at proposed Sec.  412.23(b)(2)(iii) were developed, it is not 
clear that there is evidence supporting a clinical basis for these 
changes. Instead, in some cases, patients may have been transferred 
inappropriately from the inpatient setting which may have played a 
major role in changing practice patterns and in deciding which patients 
are admitted to IRFs. We note that the general trend has been the 
migration of care from the acute inpatient hospital setting to

[[Page 53271]]

another treatment setting. However, we recognize that the conditions 
listed in proposed Sec.  412.23(b)(2)(iii) describe groups of patients 
who typically require intensive inpatient rehabilitation. To allow IRFs 
to care for some atypical patients who require intensive inpatient 
rehabilitation and still maintain their status as an IRF, we would 
allow the percentage of cases in the conditions specified in proposed 
Sec.  412.23(b)(2)(iii) to be lowered to 65 percent. As part of our 
ongoing analysis described in section II.D., we would both periodically 
monitor the literature and analyze the data obtained from assessments 
of beneficiaries to determine whether it would be appropriate to modify 
any of the conditions that are listed in proposed Sec.  
412.23(b)(2)(iii).
    Various commenters have suggested that we add cancer, cardiac, 
pulmonary, and pain to the list of conditions defining IRFs. We note 
that patients with cancer affecting the brain and spinal cord may be 
considered under the proposed clarification of the existing conditions 
to have non-traumatic brain or spinal cord injuries and can be counted 
in defining IRFs.
    As has been commented on in the past, the result of adding cancer, 
cardiac, pulmonary, and pain conditions would be that almost all 
patients admitted to acute hospitals would qualify as being the types 
of patients that would be used to distinguish IRFs from acute care 
hospitals. Furthermore, we have seen no studies that demonstrate that 
patients from these categories have improved outcomes when cared for in 
IRFs as compared to other settings. We have reviewed studies that show 
that cardiac and pulmonary patients improve when treated in IRFs, but 
none of the studies provided evidence that the improvement required the 
unique characteristics of IRFs and compared the improvements of 
equivalent patients in other settings.
    We continue to believe it is the total patient population that 
should determine whether a facility is classified as an IRF. This is 
the best indication that a facility (as a whole) is primarily engaged 
in furnishing intensive rehabilitation services. For a provider to be 
primarily engaged in furnishing intensive rehabilitation services 
implies that it is furnishing these services to its entire patient 
population. Therefore, we believe it is appropriate for Medicare to 
continue to use the entire IRF patient population as one of the 
criteria used to classify a facility as an IRF. This approach is part 
of CMS' existing policy that we plan to maintain.
    In proposing 65 percent of an IRF's total patient population to 
determine compliance with proposed Sec.  412.23(b)(2)(i) we still 
wanted to find methods of verification for the FIs that were not 
difficult operationally to automate. RAND's analysis of IRF compliance 
with existing requirements at Sec.  412.23(b)(2) found that Medicare 
cases were highly predictive of the percentage of an IRF's total 
patient population with respect to the medical conditions specified in 
the regulation. We plan to instruct the FIs to initially utilize a 
presumptive eligibility test that uses Medicare data to assess 
compliance with proposed Sec.  412.23(b)(2)(i). However, if an IRF 
appears to comply with proposed Sec.  412.23(b)(2)(i) using only 
Medicare data, we may still consider other available information before 
making a final compliance determination. If the IRF does not comply 
with proposed Sec.  412.23(b)(2)(i) based on the presumptive 
eligibility test that uses Medicare data, we would consider the IRF's 
total case-mix. In any case, we expect individual IRFs to notify their 
FI if the IRF believes that its Medicare population is not wholly 
representative of the total facility patient population. We believe 
that the compliance verification method described above offers Medicare 
adequate program protection and may reduce the burden on IRFs and the 
FIs related to enforcement of proposed Sec.  412.23(b)(2)(i).

B. Change in the Medical Conditions

    As noted in the May 16, 2003 proposed rule, we were concerned that 
some FIs inappropriately were using methods to verify compliance with 
the 75 percent rule. These inappropriate methods included incorrectly 
interpreting which patient diagnoses met the medical conditions listed 
in the 75 percent rule.
    As in the present policies under the proposed IRF-PPS policies, 
Medicare will pay for the services an IRF furnishes to some patients 
who have a medical need for intensive inpatient rehabilitation services 
but do not have one of the medical conditions specified in proposed 
Sec.  412.23(b)(2)(iii). The medical conditions specified in proposed 
Sec.  412.23(b)(2)(iii) are used to determine whether a facility 
qualifies as an IRF and, thus, may be paid under the IRF PPS. However, 
the criteria for admission of any individual patient is based upon 
medical necessity; as a result, some patients with conditions listed in 
proposed Sec.  412.23(b)(2)(iii) may still not meet the medical 
necessity criteria. Providers also have discretion over which patients 
are admitted, so we believe an IRF can manage its case-mix and, thus, 
ensure that its patient population during a cost reporting period would 
allow it to achieve compliance with proposed Sec.  412.23(b)(2)(i).
    We recognize, however, that one of the listed conditions in the 
existing regulation at Sec.  412.23(b)(2), specifically polyarthritis, 
has been a source of confusion and is acknowledged by many not to 
represent any clearly defined clinical condition. We are proposing to 
remove this term from the list of 10 conditions and substitute instead 
3 more clearly defined arthritis-related conditions, as specified above 
in the introduction to section II of this preamble, that comprise the 
range of diagnoses that the term ``polyarthritis'' was intended to 
encompass. This clarification was developed in part from information 
gathered from experts in rheumatology and rehabilitation as well as a 
review of the literature. We are proposing to adopt in Sec.  
412.23(b)(2)(iii) the other conditions currently listed in Sec.  
412.23(b)(2) because we believe these other conditions are the most 
appropriate conditions for treatment in an IRF. We are limiting the 
conditions to those that are sufficiently severe and in which intensive 
inpatient rehabilitation may be an appropriate modality of treatment. 
Although we acknowledge that ``arthritis'' may affect joints other than 
those specified (shoulders, elbows, hips and knees), such as those in 
the hands or spine, we do not believe these conditions require 
intensive rehabilitation care. Thus, we are limiting the focus to 
conditions that more commonly require intensive inpatient 
rehabilitation treatment. For this reason, conditions other than the 
types specified in this proposed rule are not included in the 
identified conditions to be listed in proposed Sec.  412.23(b)(2)(iii). 
If a patient has a type of ``arthritis'' not included in the proposed 
conditions that we described earlier in this section then that patient 
would be included in the percent of cases that IRFs can admit which are 
not included in the proposed 65 percent of the proposed Sec.  
412.23(b)(2)(iii) conditions (assuming the care is medically 
necessary).
    We acknowledge that the industry has interpreted polyarthritis to 
include hip and knee joint replacement cases and these should be 
included in the conditions counted in existing Sec.  412.23(b)(2). 
Although some joint replacement cases are currently being treated in 
IRFs, we are not aware of any research that identifies the factors 
determining which patients are more appropriately treated in the 
intensive

[[Page 53272]]

inpatient rehabilitation setting provided in an IRF. Although it has 
been asserted that patients at risk for thrombosis, pressure ulcers, or 
infections should be treated in IRFs, all hip and knee joint 
replacement patients are at risk for those conditions. Likewise the 
presence of comorbidities such as diabetes and hypertension are common 
conditions that can generally be managed in the outpatient setting. We 
believe that there have been strong reimbursement incentives to send 
patients to IRFs and that these considerations have influenced the 
choice of setting for patients' care. We welcome data or studies that 
might provide evidence about whether certain patients had better 
outcomes as a result of care in IRFs.
    We are also aware of proposals from the public that Medicare should 
count cases with lower functional status in RICs for joint replacement, 
cardiac, osteoarthritis, and pulmonary as cases that meet proposed 
Sec.  412.23(b)(2)(iii). We are not proposing such a policy because the 
lower score of function on admission does not generally reflect a need 
for intensive inpatient rehabilitation services for patients with these 
medical conditions. Some patients may improve without rehabilitation, 
and others may not have the capability to improve even with 
rehabilitation.
    We believe other conditions listed in proposed Sec.  
412.23(b)(2)(iii) also need to be clarified. The categories of brain 
and spinal cord injuries could appropriately be defined to include 
neoplasms of the brain, spinal cord, or meninges that result in 
substantial functional deficits as non-traumatic brain injuries and 
non-traumatic spinal cord injuries, since the course of rehabilitation 
for these conditions is very similar to the rehabilitation for other 
brain or spinal cord injuries. Although patients presenting with these 
conditions are currently paid under RIC 20, we believe that these 
patients can be counted towards the categories of cases listed in 
proposed Sec.  412.23(b)(2)(iii) and invite comments of our 
interpretation.
    Another category described in proposed Sec.  412.23(b)(2)(iii) that 
requires clarification is major multiple trauma. Our contractors have 
noticed that some patients with relatively minor injuries at times are 
counted as having this condition. To clarify which patients should be 
counted, the IRF can determine if the acute care hospital service for a 
patient at the time of the initial injury was identified by diagnosis-
related groups 484, 485, 486, or 487. We recognize that not all 
patients whose acute hospitalization was classified into DRG 484, 485, 
486, or 487 will be admitted to an IRF immediately after the injury, 
because some may require a period of recuperation and healing before 
beginning the intensive inpatient rehabilitation care. We are 
soliciting comments regarding this methodology.

C. Proposal To Consider Using a Comorbidity To Verify Compliance

    In this section of the proposed rule, we discuss the possible use 
of comorbidities to verify compliance with proposed Sec.  
412.23(b)(2)(i). Under the IRF PPS, we defined a comorbidity at Sec.  
412.602 as a specific patient condition that is secondary to the 
patient's principal diagnosis that is the primary reason for the 
inpatient rehabilitation stay.
    Section II.C.1 below describes a proposed methodology in which 
cases other than those admitted with a principal diagnosis matching one 
or more of the 12 conditions specified in proposed Sec.  
412.23(b)(2)(iii) could be considered to satisfy the proposed 65 
percent rule if certain additional criteria are met. Section II.C.2 
below describes another alternative, in which a case that has a 
comorbidity that matches one of the conditions in proposed Sec.  
412.23(b)(2)(iii) could be considered to satisfy the proposed 65 
percent rule only if the patient is admitted to an IRF for 
postoperative care immediately following a hip or knee replacement. We 
are soliciting comments on both of these proposed methodologies.
1. Proposed Methodology
    Under proposed Sec.  412.23(b)(2)(i), we are proposing that 
starting with the effective date of the final rule and subject to the 
proposed phase-out provision discussed in section II.D., a case with a 
principal diagnosis that does not match one of the proposed 12 
conditions be considered as meeting proposed Sec.  412.23(b)(2)(i) if 
all of the following criteria are met: (1) The patient is admitted for 
rehabilitation for a condition that is not one of the conditions listed 
in proposed Sec.  412.23(b)(2)(iii); (2) The patient also has a 
comorbidity that falls in one of the conditions listed in proposed 
Sec.  412.23(b)(2)(iii); and (3) The comorbidity has caused significant 
functional ability decline in the individual such that, even in the 
absence of the admitting condition, the individual would require 
intensive rehabilitation treatment that is unique to inpatient 
rehabilitation facilities and which cannot be appropriately performed 
in another setting, such as inpatient hospital, skilled nursing 
facility, home health, or outpatient setting.
    The following explanation provides guidance regarding classifying 
the proposed ``arthritis-related'' conditions as comorbidities which 
may be counted as complying with proposed Sec.  412.23(b)(2)(i). If the 
comorbidity is active, polyarticular rheumatoid arthritis, psoriatic 
arthritis, seronegative arthropathies, or systemic vasculidities with 
joint replacement, the patient must have undergone an appropriate, 
aggressive, and sustained course of outpatient therapy immediately 
preceding the inpatient rehabilitation or have experienced a systemic 
disease activation immediately before admission in order for the 
admission to be included in cases complying with proposed Sec.  
412.23(b)(2)(i). If the comorbidity is severe or advanced 
osteoarthritis involving three or more joints, the patient must have 
undergone an appropriate, aggressive, and sustained course of 
outpatient therapy immediately preceding the inpatient rehabilitation 
in order for the admission to be included in cases complying with 
proposed Sec.  412.23(b)(2)(i).
    The following provides clinical examples of diagnoses which 
indicate when a comorbidity would and would not be considered in 
determining compliance with the proposed 65 percent rule. These 
examples are for illustrative purposes only and are not meant to be the 
only scenarios where comorbidities would or would not be considered in 
determining compliance with the proposed 65 percent rule. Furthermore, 
these examples are not intended to represent, define, or establish 
clinical criteria for benefit coverage determinations.

Examples of Clinical Scenarios That Are Likely To Be Included Under 
This Policy

    (1) A patient who has severe arthritis in both shoulders and in his 
right knee has his left hip replaced with a non-cemented total hip 
prosthesis. Although before his joint replacement, he received an 
aggressive and sustained course of outpatient physical and occupational 
therapy, at the time of discharge from the acute care hospital, he 
still has considerable atrophy and weakness in his right quadriceps and 
hamstring muscles such that he is unable to support his entire weight 
on his right lower limb. He also has very restricted forward flexion in 
his right shoulder so that he is limited to 15 degrees of forward 
flexion. He has severe pain with weight-bearing through his upper limbs 
in both shoulders. Since after surgery, he can only have partial 
weight-bearing on his left lower limb, he requires

[[Page 53273]]

inpatient rehabilitation for daily occupational and physical therapy 
sessions to strengthen his right lower limb to bear his entire weight 
and to improve the function of both shoulders as well as therapy for 
his joint replacement.
    (2) A patient undergoes emergency coronary artery bypass graft 
surgery for sudden onset of ischemic chest pain (unstable angina) 
unresponsive to medical management. During the operation she suffers a 
stroke and wakes up after surgery unable to speak, swallow, or move her 
right arm and leg. Over the next several days, she regains some partial 
movements in her leg and arm with minimal speech return. At the time of 
discharge, she still has significant weakness of the right arm and leg 
such that she is unable to walk without a walker and therapist by her 
side and she is unable to make coordinated movements with her right arm 
to feed and dress herself. She also cannot swallow liquids and solid 
food without choking spells. She, therefore, requires inpatient 
rehabilitation of at least 3 hours daily of physical therapy to 
strengthen her leg and arm, occupational therapy to improve right arm 
and hand coordination for activities of daily living (that is, eating, 
dressing, transfer, and bathing), and speech therapy to learn how to 
swallow her meals without choking.

Examples of Clinical Scenarios That Would Not Be Included Under This 
Policy

    (1) A patient with a motor polyneuropathy who wears an ankle foot 
orthosis on the right lower limb elects to undergo a knee replacement 
due to severe osteoarthritis of the knee. Although the rehabilitation 
of the knee replacement may be complicated by the polyneuropathy, this 
patient would not be counted as satisfying the proposed change in Sec.  
412.23(b)(2)(i) because the comorbidity does not, by itself, require 
intensive inpatient rehabilitation.
    (2) A patient had a stroke 5 years ago with residual weakness and 
lack of motor control in the left lower leg and that requires the use 
of a walking cane. She is involved in a car accident and undergoes 
surgery for a broken bone in her right arm (humerus) and a broken bone 
in her right ankle. At the time of discharge 2 days later, her dominant 
arm (right) is immobilized so she still has difficulty feeding herself 
and transferring from bed to chair. Also, she must learn to use a 
rolling walker because she cannot bear weight on her right leg and she 
can't reach the handle on her cane with her immobilized right arm. 
Although the rehabilitation of the right arm and right foot fracture 
may be complicated by the stroke, this patient would not be counted as 
satisfying the proposed change in Sec.  412.23(b)(2)(i) because the 
comorbidity does not, by itself, require intensive inpatient 
rehabilitation. She has no caregiver (family or friend) support person 
at home so she is transferred to a skilled nursing facility where, over 
the next 5 days, she receives a daily physical therapy session to learn 
how to ambulate with a rolling walker and she receives a daily 
occupational therapy session to learn how to feed herself with her non-
dominant left hand. She is then discharged home for follow-up with 
Outpatient Rehabilitation Therapy.
2. Proposed Alternative Methodology
    As stated in the May 16, 2003 proposed rule (68 FR 26794), our 
analysis indicated the largest group of patients treated in IRFs that 
was not considered as matching one of the 10 conditions in the existing 
75 percent rule is patients with major joint replacements, specifically 
knee and hip replacements. Thus, as an alternative to the proposed 
methodology above, we are also proposing an approach that would only 
apply to patients admitted to an IRF after hip or knee replacements. 
Under this alternative approach, only admissions to an IRF that are 
post-operative hip or knee joint replacements cases would be considered 
to count towards meeting the proposed 65 percent rule if the case also 
had a comorbidity that matches one or more of the 12 proposed 
conditions in proposed Sec.  412.23(b)(2)(iii). Specifically, under 
this method we would count a case as meeting the proposed 65 percent 
rule if the patient matched all of the following criteria:
    [sbull] Was postoperative following one or more hip or knee joint 
replacements that immediately preceded the transfer to an IRF.
    [sbull] Had a condition at time of admission to an IRF that was 
complicated by an active comorbidity specified in proposed Sec.  
412.23(b)(2)(iii).
    [sbull] Had an active comorbidity that resulted in a decline in the 
patient's function beyond the decline generally observed for other 
patients in that impairment category.
    [sbull] Had an active comorbidity that substantially complicated 
the patient's rehabilitation to the point that it would improve only 
with the intensive, multidisciplinary rehabilitation treatment that is 
unique to inpatient rehabilitation facilities and that could not be 
performed in another setting (for example, skilled nursing facility, 
inpatient hospital, home health, or outpatient).

D. Ongoing Assessment of Implementing the Proposed Policies and 
Potential Scheduled Phase-Out of the Proposed Policies

    In proposing these changes to the criteria for classifying 
hospitals as IRFs, our intent is to clarify the conditions typically 
requiring intensive inpatient rehabilitation therapy under the IRF PPS. 
These proposals do not represent an expansion of existing coverage 
criteria, but provide clear, clinically meaningful guidance on the 
conditions that are most appropriately treated in IRFs as distinguished 
from care furnished in other settings.
    The policy changes proposed in this rule represent one of the next 
steps in an ongoing process since the May 16, 2003 proposed rule and 
the May 19, 2003 Town Hall meeting to identify potential policy changes 
to enhance the effectiveness of the IRF PPS. We are aware of the 
intricacies of implementing these changes to the IRF compliance 
criteria, both in terms of the time needed for providers to make any 
necessary adjustments to their operations and in the risk of 
unanticipated changes impacting providers, beneficiaries, and the 
Medicare program.
    Comments received on the proposed change to the compliance 
percentage and on the proposed clinical criteria to determine 
compliance will be an important step in our planned ongoing assessment 
of the effect these proposed changes may have on--
    [sbull] The IRF industry; and
    [sbull] The Medicare beneficiaries who require rehabilitative care.
    The final rule will reflect all relevant comments received and 
relevant data obtained through the comment period that may result in us 
adopting the proposed policies or adopting alternative policies.
    As part of the next step in our ongoing assessment, during the 3-
year period after the final rule is effective, we intend to closely 
review both claims and patient assessment data to examine trends in 
admissions and overall utilization in IRFs. These analyses will allow 
us to monitor and evaluate the effect the policies adopted in the final 
rule had on utilization and beneficiary access. Specifically, we will 
use these data to determine the effectiveness that the adopted final 
policies had in achieving the objectives stated in this proposed rule, 
and we will assess the need for any future policy development related 
to provider compliance. Also, we will review whether the adopted

[[Page 53274]]

final policies (including considering comorbidities in determining 
compliance if we adopt that policy) have led to significant shifts in 
the site of treatment of beneficiaries with particular conditions, and 
whether the adopted final policies have led to inadvertent and 
substantial expansions in either the number of IRFs or in aggregate 
utilization and expenditures.
    In addition, we are encouraging rehabilitation professionals, the 
rehabilitation industry, researchers, academia, and other relevant 
sources to consider the 3-year period after the effective date of the 
final rule as an opportunity to conduct literature reviews, clinical 
studies, and other objective analyses so that we may be better informed 
about the situations in which patients require the intensive inpatient 
rehabilitation treatment available in an IRF compared to other 
settings. Furthermore, during this 3-year period, we plan to seek 
information and obtain data from rehabilitation experts, the 
rehabilitation industry, researchers, academia, and other relevant 
sources. The data we plan to obtain include clinical data, data from 
clinical outcomes analyses, and data from well-designed analytical 
studies specific to rehabilitative care. We believe that significant, 
objective data obtained from these sources would be informative as we 
deliberate whether changes to the clinical criteria and/or to the 
compliance percentage adopted in the final rule are justified.
    However, no later than 3 years after the effective date of our 
final rule, in the absence of any significant, objective data as 
described above, we are proposing to change the classification criteria 
under proposed Sec.  412.23(b)(2)(ii) as follows: In place of the 
proposed 65 percent compliance threshold discussed in section II.A., we 
would determine compliance by verifying that 75 percent of all 
inpatients have one of the 12 proposed conditions listed in proposed 
Sec.  412.23(b)(2)(iii), and we would phase-out the use of the proposed 
comorbidity compliance policy discussed in section II.C. If, as we 
anticipate, the effective date of the final rule will apply to cost 
reporting periods that begin on or after January 1, 2004, this proposed 
change to the classification criteria, as noted below, would be 
effective for cost reporting periods beginning on or after January 1, 
2007. Accordingly, the proposed changes specified in proposed Sec.  
412.23(b)(2)(ii) would occur automatically for cost reporting periods 
beginning on or after January 1, 2007 unless before that date we 
propose new criteria to determine compliance or validate the criteria 
as adopted in our final rule for identifying an IRF based on the data 
that CMS has obtained over the preceding 3 years including data from 
rehabilitation experts, the rehabilitation industry, researchers, 
academia, or other relevant sources.
    As a future step in our ongoing assessment, we plan every 3 years 
after the initial 3 year assessment described above, to obtain 
objective updated clinical data from relevant sources and, if 
appropriate and justified, we may propose changes to the clinical 
criteria and/or the compliance percentage based on that updated data.

E. Proposed Change to the Time Period To Determine Compliance

    Except for new IRFs, Sec.  412.23(b)(2) for freestanding IRFs and 
Sec.  412.30 for IRF converted/expanded units would require the use of 
the most recent 12-month cost reporting period to determine if the IRF 
was compliant with existing Sec.  412.23(b)(2). In addition, existing 
Sec.  412.23(i) and Sec.  412.25(f) state that the classification of a 
hospital or unit, respectively, is effective for the hospital's or 
unit's entire cost reporting period and that any changes in the 
classification of a hospital or unit are made only at the start of a 
cost reporting period. We believe that the application of both of these 
regulations has resulted in much confusion as to the data used to 
determine compliance with existing Sec.  412.23(b)(2). For example, if 
an IRF's cost reporting period begins January 1, 2005 and ends December 
31, 2005, this period would represent the most recent 12-month cost 
reporting period used to determine if the classification of the IRF is 
correct for the next cost reporting period that begins on January 1, 
2006 in accordance with existing Sec.  412.23(b)(2) and Sec.  412.23(i) 
or Sec.  412.25(f). However, the process of reviewing the data, making 
a determination of compliance with existing Sec.  412.23(b)(2), and 
notifying the IRF of its non-compliance (and de-certification as an 
IRF) may take at least 3 to 4 months. Therefore, in order to make a 
determination of compliance and implement any changes before the start 
of the January 1, 2006 cost reporting period, data for only the first 8 
to 9 months from the most recent 12-month cost reporting period would 
be available.
    In order to have the proposed regulation more precisely reflect the 
necessary operational procedures of our FIs, we are proposing to change 
Sec.  412.23(b)(2), Sec.  412.30(c), and Sec.  412.30(d)(2)(ii) to 
specify that data from the most recent, consecutive, and appropriate 
12-month period of time be used to determine compliance with the 
proposed policies set forth in this proposed rule. Accordingly, using 
the example above, the last 3 to 4 months of data from the cost 
reporting period ending December 31, 2004, and the first 8 to 9 months 
of data from the cost reporting period ending December 31, 2005, could 
be used (for a total of 12-months of data from the most recent, 
consecutive, and appropriate period of time) to determine compliance 
with the proposed policies set forth in this proposed rule. These time 
periods may be different depending on the workload of the FIs and CMS 
Regional Offices. We believe that this change will give FIs and CMS 
Regional Offices the flexibility to make a determination and give the 
IRF sufficient time to adjust to any Medicare de-certification action. 
We are not proposing to make a similar change to the regulatory 
policies for new freestanding IRFs or new IRF units, because they can 
provide written certification for the first full 12-month cost 
reporting period after Medicare certification that they intend to meet 
the requirements of proposed Sec.  412.23(b)(2).
    The intent of this proposed change is to ensure that the patient 
data used to determine compliance with the requirements of proposed 
Sec.  412.23(b)(2) are from the most recent, consecutive, and 
appropriate 12-month period of time. However, we recognize that 12 
months of patient data for the initial cost reporting periods affected 
by these proposed changes will be from a period that is before the 
effective date of the final rule. Therefore, it will be necessary to 
institute a transition period for those cost reporting periods where 
the most recent 12-month period of time includes admissions that occur 
before the effective date of the final rule. Accordingly, to ensure 
that admissions that occur before the effective date of the final rule 
are not counted in an IRF's compliance percentage, the FIs and affected 
IRFs will be given the specific procedures regarding what time period 
the FIs will use to verify compliance during the transition from the 
existing requirements at Sec.  412.23(b)(2) to the proposed changes 
specified in proposed Sec.  412.23(b)(2).

F. General FI Operational Instructions

    We will take the necessary action to ensure that the proposed 
compliance policies are consistently enforced on IRFs across all FIs. 
We will issue instructions to the FIs and provide guidance to the 
clinical/medical FI personnel responsible for performing the compliance 
reviews to ensure that they use a method that consistently counts only 
cases with a diagnosis that both serves as the basis for the intensive 
rehabilitation services that the IRF

[[Page 53275]]

would furnish, and meets one of the medical conditions specified in 
proposed Sec.  412.23(b)(2)(iii). In addition, as discussed in section 
II.A, we plan to instruct the FIs in the use of a presumptive 
eligibility test for verifying compliance with proposed Sec.  
412.23(b)(2)(i) that includes only Medicare cases determined to be 
``reasonable and necessary.''

G. Conclusion

    We believe that the changes we are proposing to Sec.  412.23(b)(2) 
will help ensure the following:
    [sbull] The incentives are appropriate for IRFs to admit patients 
that need and would benefit the most from intensive inpatient 
rehabilitation.
    [sbull] The preservation of access to intensive inpatient 
rehabilitation services.
    [sbull] IRFs provide distinct services and continue to be 
compensated with payment rates appropriate for their type of facility.
    [sbull] The most prudent use of Medicare funds.
    [sbull] More consistent implementation and enforcement by 
specifying more clearly what conditions are included in proposed Sec.  
412.23(b)(2).

III. Collection of Information Requirements

    This document does not impose information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995.

IV. 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, if we proceed with a subsequent 
document, we will respond to the major comments in the preamble to that 
document.

V. Regulatory Impact Analysis

A. Introduction

    In this proposed rule, we are proposing changes to the 75 percent 
rule for IRFs. Specifically, we are proposing that 65 percent of all 
patients treated in an IRF meet one of the proposed specified 
conditions, as discussed earlier in this preamble. We are also 
proposing to count comorbidities under certain conditions, as specified 
in this preamble, towards meeting the proposed 65 percent rule.
    We have examined the impacts of this proposed rule as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review), 
the Regulatory Flexibility Act (RFA), (September 16, 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 this proposed rule, we are proposing changes to the 75 percent 
rule as described above. We estimate the savings to the Medicare 
program would be greater than $100 million. Therefore, this proposed 
rule would be considered a major rule.

C. Regulatory Flexibility Act (RFA) and Impact on Small Hospitals

    The RFA requires agencies to analyze the economic impact of our 
regulations on small entities. If we determine that the regulation will 
impose a significant burden on a substantial number of small entities, 
we must examine options for reducing the burden. For purposes of the 
RFA, small entities include small businesses, nonprofit organizations, 
and governmental agencies. Most hospitals are considered small 
entities, either by nonprofit status or by having receipts of $6 
million to $29 million in any 1 year. (For details, see the Small 
Business Administration's regulation, at 65 FR 69432, that set forth 
size standards for health care industries.) Because we lack data on 
individual hospital receipts, we cannot determine the number of small 
proprietary IRFs. Therefore, we assume that all IRFs are considered 
small entities for the purpose of the analysis that follows. Medicare 
fiscal intermediaries and carriers are not considered to be small 
entities. Individuals and States are not included in the definition of 
a small entity. Accordingly, we have determined that this proposed rule 
would have a significant impact on a substantial number of small 
entities.
    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis for any rule that will 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. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area (MSA) and has fewer than 100 beds. This proposed rule 
would have a significant impact on the operations of small rural 
hospitals.

D. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in an expenditure in any 1 year by 
State, local, or tribal governments, in the aggregate, or by the 
private sector, of at least $110 million. This proposed rule would not 
have a substantial effect on the governments mentioned, or on private 
sector costs.

E. Executive Order 13132

    We examined this proposed rule in accordance with Executive Order 
13132 and determined that it would not have a substantial impact on the 
rights, roles, or responsibilities of State, local, or tribal 
governments.

F. Overall Impact

    For the reasons stated above, we have prepared an analysis under 
the RFA and section 1102(b) of the Act because we have determined that 
this proposed rule is a major rule and the proposed policies set forth 
in this proposed rule would have a significant impact on all IRFs 
(small entities and small rural hospitals).

G. Anticipated Effects of the Proposed Rule

    One of the primary purposes of the regulatory impact analysis is to 
understand the effects policies would have on facilities. As we analyze 
the impacts of our proposed policies, we assess the extent to which 
these policies may unduly harm facilities. If there is evidence that we 
are unduly harming facilities, we make attempts to mitigate these 
effects, while ensuring that the proposed policies are fair and achieve 
the intended policy objectives. The intent of the policy objective of 
proposed Sec.  412.23(b)(2) and of other policy criteria for IRFs is to 
ensure the distinctiveness of facilities providing intensive 
rehabilitative services in an inpatient setting. The distinctiveness of 
these facilities is what justifies paying them under a separate payment 
system

[[Page 53276]]

as opposed to under another payment system, such as the acute care 
IPPS, which may not adequately compensate these facilities for the 
intensive rehabilitative services they are to provide. We believe it is 
crucial to ensure that IRFs are indeed providing intensive 
rehabilitation so that we pay for these services appropriately under 
the IRF PPS. In addition, we believe it is imperative to identify 
conditions that would ``typically require intensive inpatient 
rehabilitation'' in IRFs because rehabilitation in general can be 
delivered in a variety of settings such as acute care hospitals, 
skilled nursing facilities, outpatient or home health.
    This policy objective is not new. However, the manner in which the 
existing regulations have been implemented and enforced may not have 
enabled CMS to accomplish these objectives to the extent we hoped. The 
policies set forth in this proposed rule are intended to accomplish 
these same policy objectives, clarify interpretational issues that have 
led to inconsistent implementation, and improve the extent to which 
IRFs can admit patients that would need and benefit from intensive 
inpatient rehabilitative services. Therefore, although the impacts of 
the proposed policy changes shown below illustrate that IRFs may 
experience reduced Medicare payments from these proposed policies, we 
believe the impacts would show a greater reduction in Medicare payments 
to IRFs if the existing policies were more effectively enforced.
    We discuss below the Medicare impact of this proposed rule on IRFs. 
We used the following data and assumptions to estimate the impacts of 
the proposed policies set forth in this preamble.
    [sbull] As stated in section I.D. of this proposed rule, we used 
patient assessment data from January to August 2002 to estimate 
compliance with the 75 percent rule in the May 16, 2003 proposed rule. 
We are using the same patient assessment data to construct the impact 
analysis set forth in this proposed rule.
    [sbull] We used data described in the report titled Case Mix 
Certification Rule for Inpatient Rehabilitation Facilities'', published 
in May 2003, developed by the Rand Corporation. This report states, on 
page XIV, that 70 percent of all cases treated in IRFs are those of 
Medicare beneficiaries.
    [sbull] In addition to Medicare patients, this proposed rule may 
have an effect on the 30 percent, or approximately 200,000, of the 
cases in IRFS that are non-Medicare. While there are numerous 
approaches a facility might take, and it is impossible to predict 
either the specific course of treatment or the financial impact, the 
facility could change both its Medicare and non-Medicare case mix in 
order to remain an IRF.
    [sbull] We used regression results from page 25 of the Rand report 
to estimate that the percentage of total cases that meet the specified 
conditions for each IRF will be approximately 5 percent more than the 
percentage of Medicare cases that meet the specified conditions. 
However, other than an estimate of the size of the non-Medicare 
population in this proposed rule may affect, CMS does not have enough 
information to quantitatively estimate the impact to non-Medicare IRF 
cases, and encourages comments on this issue.
    [sbull] 10 percent of the cases that did not meet the proposed 
criteria would meet the proposed criteria due to more accurate coding 
and removing the moratorium of the classification rule.
    [sbull] 10 percent of the cases that did not meet the proposed 
criteria with the limited Medicare administrative data used in our 
analysis would meet the proposed criteria using more extensive medical 
record data.
    [sbull] The diagnosis listed in Appendix A in the ``Case Mix 
Certification Rule for Inpatient Rehabilitation Facilities'' report, 
published in May 2003, developed by Rand identified cases that would 
meet the 75 percent rule. The report showed that a large number of 
cases with possible arthritis-related joint replacements did not meet 
the 75 percent rule. We believe that the proposed changes to the 
conditions related to arthritis in this proposed rule may increase the 
number of these cases that would count towards meeting the proposed 75 
percent rule over those cases shown in the RAND report. However, it is 
difficult to determine the exact number of joint replacement cases that 
would meet the proposed criteria without extensive medical record data. 
Therefore, to estimate the impacts on the various classifications of 
IRFs shown in Chart 1, we chose the assumption that 35 percent of the 
joint replacement cases would meet the proposed clinical criteria as 
set forth in this proposed rule.
    [sbull] We assume that a percentage of Medicare cases being 
admitted under the current practices would not be admitted to an IRF 
under the proposed criteria. We believe that these cases would be 
admitted or treated in extended hospital inpatient stays, outpatient 
departments, or other post acute care settings. We estimated that it 
would be equally possible that the cases not admitted to IRFs may be 
treated in inpatient hospitals, outpatient departments, or home health 
care settings. We found that approximately 80 percent of IRFs are units 
within a hospital complex and that approximately 60 percent of these 
hospital complexes include a skilled nursing facility. Accordingly, we 
estimated that skilled nursing facilities will have a higher 
possibility than other settings to absorb the cases not admitted to 
IRFs. Since long term care hospitals need to meet the average 25-day 
length of stay requirement and the average IRF length of stay is 14 
Days, we estimated that long term care hospitals will absorb a smaller 
portion of the cases not admitted to IRFs.
    Based on the above assumptions and the average payments for their 
respective settings, we have estimated that the average payment for 
these hospital inpatient, outpatient, and other post acute care 
settings to be approximately $7,000 per case. Thus, for Medicare 
patients, the difference between the IRF standardized payment per case 
($12,525) and the estimated average per case amount for hospital 
inpatient, outpatient, and other post acute care settings ($7,000) 
results in a net savings to the Medicare program of approximately 
$5,525 per case.
    Note that this result also depends on the assumption that all IRFs 
will continue to want to be classified as an IRF and admit those 
patients that will allow them to meet the proposed changes set forth in 
this proposed rule.
1. Impact Summary
    Dependent on the range of assumptions related to joint replacement 
cases described above, we project a proposed net savings to the 
Medicare program between $42 million and $161 million. Specifically, 
the estimated net savings would be $161 million if we assume that 20 
percent of joint replacement cases meet the proposed criteria, $98 
million if 35 percent of joint replacement cases meet the proposed 
criteria, and $42 million if 60 percent of joint replacement cases meet 
the proposed criteria. This net savings to Medicare would be a net loss 
of Medicare payments to IRFs or facilities that contain both an IRF and 
an alternative treatment facility. Some alternative treatment 
facilities, however, would experience an increase in Medicare payments 
if they experience a net increase in cases.
2. Calculation of Impacts
    To determine the estimated effects of implementing the policies in 
this proposed rule, we have developed Chart 1 to show the estimated 
impact on the

[[Page 53277]]

Medicare program among various classifications of IRFs. Chart 1 assumes 
the middle estimate that 35 percent of joint replacement cases meet the 
proposed criteria. The columns in Chart 1--Projected Impact of the 
Proposed Changes to the 75 percent Rule on the Medicare Program are 
defined as follows:
    [sbull] The first column, Facility Classification, identifies the 
type of facility. Where data were not available to classify an IRF into 
a category, the IRF was identified as ``missing'' in the first column.
    [sbull] The second column identifies the number of facilities for 
each classification type.
    [sbull] The third column lists the estimated number of Medicare 
cases admitted to IRFs under the existing policies. We estimated the 
number of Medicare cases from 8 months worth of post-IRF PPS data (the 
available data at the time the analysis was done) to represent an 
annual number of Medicare cases.
    [sbull] The fourth column, Ratio of Medicare Cases Not Admitted, 
represents an estimate of the percentage of Medicare cases that would 
no longer be treated in an IRF due to the proposed policies set forth 
in this proposed rule.
    [sbull] The fifth column represents the Ratio of All Setting Cost/
Savings to IRF Medicare Payments. To estimate this amount we divide the 
All Setting Cost/Saving in Millions in column six by the Current IRF 
Medicare Payments in Millions in column eight.
    [sbull] The sixth column, All Setting Cost/Saving in Millions, 
indicates the savings impact to the Medicare program. To estimate the 
savings, we consider that some Medicare cases would possibly be treated 
in other settings and those settings would be paid accordingly. The 
following steps illustrate how we estimate this amount.
    [sbull] Step 1--First we estimate the number of Medicare cases that 
may not be admitted to IRFs by multiplying the percentage in column 
four, Ratio of Medicare Cases Not Admitted, by the Total Medicare Cases 
reflected in column three.
    [sbull] Step 2--We then take the number of cases calculated in the 
Step 1 and multiply these cases by $12,525 (the standardized FY 2004 
payment amount) to determine the estimated Medicare impact to IRFs.
    [sbull] Step 3--Then we estimate the amount of Medicare payments 
that these cases may generate in other settings. Specifically, we 
multiply $7,000 by the number of Medicare cases estimate in the Step 1 
(the number of Medicare cases that may not be admitted to IRFs).
    [sbull] Step 4--Then we subtract the total amount calculated in 
Step 3 by the total amount calculated in Step 2 in order to estimate 
the total savings to the Medicare program.
    [sbull] The seventh column, IRF Medicare Payment Impact in 
Millions, shows the estimated Medicare impact specific to IRFs. We 
calculate this estimate by multiplying the percentage of Medicare cases 
that will not be admitted shown in column four by the Total Medicare 
Cases shown in Column three and determine the number of Medicare cases 
that will not be admitted to IRFs. We then take the total number of 
Medicare cases that will not be admitted to IRFs and multiply it by 
$12,525 to estimate column seven, IRF Medicare Payment Impact in 
Millions.
    [sbull] The eighth column, Current IRF Medicare Payments in 
Millions, is the number of Medicare cases reflected in column three 
multiplied by $12,525.
    [sbull] The ninth column, Projected IRF Medicare Payments in 
Millions, reflects the estimate of the total Medicare payments IRFs may 
receive as a result of the policies set forth in this proposed rule. 
This amount is calculated by subtracting the estimate of the IRF 
Medicare Payment Impact in Millions (column seven) from the estimate of 
the Current IRF Medicare Payments in Millions (column eight).

                            Chart 1.--Projected Impact of the Proposed Changes to the 75 Percent Rule on the Medicare Program
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                          In millions
                                                                          Ratio of     Ratio of all  ---------------------------------------------------
                                                  Total       Total       Medicare    setting cost/                    IRF                    Projected
            Facility classification             number of    Medicare    cases not    saving to IRF   All setting    Medicare   Current IRF      IRF
                                                   IRF        cases       admitted       Medicare     cost/saving    payment      Medicare     Medicare
                                                                                         payments                     impact      payments     payments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Column 1                                         Column 2     Column 3     Column 4         Column 5     Column 6     Column 7     Column 8     Column 9
-----------------------------------------------
      Total...................................      1,170      459,682           4%              -2%          -98         -223        5,758        5,534
                                               ------------
Census:
    1: New England............................         38       20,133           6%              -3%           -7          -16          252          236
    2: Middle Atlantic........................        170       87,639           7%              -3%          -35          -80        1,098        1,018
    3: South Atlantic.........................        143       75,808           2%              -1%          -10          -23          949          926
    4: East North Central.....................        220       74,361           3%              -1%          -13          -29          931          903
    5: East South Central.....................         66       35,764           3%              -1%           -6          -13          448          435
    6: West North Central.....................         99       26,672           2%              -1%           -2           -6          334          328
    7: West South Central.....................        235       87,206           4%              -2%          -17          -39        1,092        1,054
    8: Mountain...............................         78       24,522           5%              -2%           -7          -17          307          290
    9: Pacific................................        121       27,577           0%              -0%            0           -1          345          344
                                               ============
Free Standing/Unit Facility:
    Free......................................        214      165,593           5%              -2%          -49         -111        2,074        1,963
    Unit......................................        956      294,089           3%              -1%          -50         -113        3,683        3,571
Teaching Status:
    Missing...................................        180       37,039           3%              -2%           -7          -16          464          448
    Non-teaching..............................        845      344,216           4%              -2%          -70         -158        4,311        4,154
    Teaching..................................        145       78,427           5%              -2%          -22          -50          982          933
DSH:
    <0.05.....................................        226       80,921           5%              -2%          -23          -51        1,014          962
    =0.2...........................        145       45,549           2%              -1%           -4           -9          571          562
    0.05-0.1..................................        339      161,550           5%              -2%          -41          -92        2,023        1,932
    0.1-0.2...................................        313      143,173           3%              -1%          -26          -60        1,793        1,734
    Missing...................................        147       28,489           3%              -1%           -5          -12          357          345
Facility Control:
    Government................................        135       38,942           2%              -1%           -4           -9          488          478
    Missing...................................         76       10,264           4%              -2%           -2           -5          129          123
    Proprietary...............................        259      140,311           5%              -2%          -40          -90        1,757        1,667
    Voluntary.................................        700      270,165           3%              -2%          -52         -118        3,384        3,266

[[Page 53278]]

 
Urban/Rural:
    Large Urban...............................        493      209,489           4%              -2%          -48         -109        2,624        2,515
    Missing...................................        103       18,881           4%              -2%           -4          -10          236          227
    Other Urban...............................        404      188,494           4%              -2%          -42          -95        2,361        2,266
    Rural.....................................        170       42,818           2%              -1%           -4           -9          536          527
Size:
    Large.....................................        201      172,951           5%              -2%          -43          -99        2,166        2,068
    Medium....................................        502      198,451           4%              -2%          -41          -93        2,486        2,393
    Missing...................................        158       31,400           3%              -1%           -5          -12          393          381
    Small.....................................        309       56,880           3%              -1%           -9          -20          712          693
Size by Free Standing/Unit Facility:
    Free:
      Large...................................         74       91,409           6%              -2%          -28          -64        1,145        1,081
      Medium..................................         71       53,640           6%              -3%          -17          -38          672          633
      Missing.................................         38       10,817           4%              -2%           -3           -6          135          130
      Small...................................         31        9,727           2%              -1%           -1           -2          122          120
    Unit:
      Large...................................        127       81,542           3%              -1%          -15          -34        1,021          987
      Medium..................................        431      144,811           3%              -1%          -24          -54        1,814        1,759
      Missing.................................        120       20,583           2%              -1%           -3           -6          258          252
      Small...................................        278       47,153           3%              -1%           -8          -18          591          573

    Chart 1 breaks down the Medicare impacts into many categories that 
should serve to inform the public and interested parties of the 
different types of impacts of the changes in this proposed rule. As 
column seven in Chart 1 shows, IRFs are expected to experience a 
reduction in Medicare payments from the proposed rule of approximately 
$223 million, with a net savings to Medicare of approximately $98 
million for all Medicare providers. Applying the different assumptions 
regarding qualifying joint replacement cases yields a Medicare impact 
range of $42 million (60 percent qualifying) to $161 million (20 
percent qualifying).
    For the purposes of the RFA analysis, the next few paragraphs 
discuss IRF impacts in more detail, and regulatory alternatives 
considered by CMS to explore the impact of different options on IRFs. 
There are distributional impacts among various IRFs due to existing 
levels of compliance. The expected Medicare savings is due to the 
percentage of patients admitted to IRFs that fall outside the 
identified conditions in relation to what IRFs would be paid in FY 2004 
for all Medicare discharges assuming status quo (varying levels of 
compliance to the existing 75 percent rule). As we previously stated in 
this proposed rule, although the impacts of the proposed policy changes 
illustrate IRFs may experience a reduction in payments, we believe the 
impacts would show a greater reduction in payments to IRFs if the 
existing policies were more effectively enforced. Further, we believe 
this reduction in Medicare payments is appropriate given the existing 
policy objectives described above.
    Because this rule is likely to have a significant impact on all 
IRFs based on the RFA guidelines, we will discuss the alternative 
changes to the 75 percent rule that we considered.
    One option (Option A) would have been to consider all cases in 
rehabilitation impairment categories (RICs) 1-19 and 21 as cases that 
could be counted towards the 75 percent rule. This would leave only 
miscellaneous cases (RIC 20) as cases that would not be considered to 
satisfy the requirements in proposed Sec.  412.23(b)(2). The result 
would have been that all existing IRFs would not only meet the 
standard, but that they would have almost no restrictions on the type 
of cases that they would admit. The intent of the policy specified in 
proposed Sec.  412.23(b)(2) is to ensure that IRFs are unique compared 
to other hospitals in that they provide intensive rehabilitative 
services in an inpatient setting. The uniqueness of these facilities 
justifies paying them under a separate payment system rather than 
paying them with the same payment system for acute care inpatient PPS. 
Thus, we believe it is crucial to Medicare to maintain criteria 
ensuring that only facilities providing intensive rehabilitation are 
identified as IRFs. In addition, we believe that it is imperative to 
identify conditions that would typically require intensive inpatient 
rehabilitation in IRFs because rehabilitation, in general, can be 
delivered in a variety of other settings.
    We have estimated that the average occupancy rate of all IRFs is 
approximately 70 percent. If we were to implement option A, we believe 
that IRFs with available capacity would increase their occupancy rate 
because, as stated above, IRFs would have almost no restrictions on the 
type of cases that they would admit. The following estimated effects of 
implementing option A on the Medicare program assumes that IRFs would 
increase their Medicare cases using the present ratio of 70 percent 
Medicare beneficiaries to total patients. Thus, we estimate that in the 
first year of implementing option A it would cause an increase in IRF 
Medicare payments, and would cost the Medicare program, an additional 
$2.7 billion dollars if occupancy increased to 100 percent, $1.9 
billion if occupancy increased to 90 percent, and $1.2 billion if 
occupancy increased to 80 percent. This range of additional costs to 
the Medicare program represents up to 50 percent more than the current 
total IRF Medicare expenditures.
    A variant of option A is option B which would add joint 
replacements, cardiac, pulmonary, pain, and cancer patients to the list 
of conditions, as discussed previously in this preamble in section 
II.A., which would also result in a significant impact on Medicare

[[Page 53279]]

expenditures and IRF Medicare payments. If we were to implement option 
B, using the same assumptions described in option A, we estimate it 
would have cost the Medicare program approximately $940 million dollars 
in the first year.
    Another option (Option C) would be to retain the compliance 
percentage requirement at 75 percent, rather than lowering it to 65 
percent, but recognize the comorbidities as proposed in section II.C. 
of this proposed rule. This option is similar to enforcement of the 
current policy and, thus, would further reduce Medicare payments to all 
IRFs over the policies proposed in this rule. Specifically, total 
estimated savings to Medicare from all IRFs would be increased from the 
range of $42 to $161 million (under the proposed policies) to the range 
of $154 to $357 million if we proposed 75 percent.
    Another option (Option D) that we considered, similar to option C, 
was to allow a comorbidity to count only for hip and joint replacement 
patients as discussed previously in section II.C. of this proposed 
rule. If the compliance requirement were to be held at 75 percent along 
with this policy, the estimated reduction in Medicare payments for IRFs 
and savings to Medicare would be approximately the same as in option C.
    We believe that the proposed changes to the clinical criteria are 
adequate to make the distinction of the intensive inpatient 
rehabilitation provided in IRFs from rehabilitation services provided 
in other settings, unlike the first alternative described above. In 
addition, while the proposed changes to the clinical criteria and the 
reduction in the compliance percentage to 65 percent do have a 
significant impact on Medicare payments to IRFs ($42 to $161 million), 
they are not as significant as the impact of the other alternatives 
described above. It is also important to note, as previously mentioned 
in section V.G., that approximately 80 percent of IRFs are units within 
a hospital complex and that approximately 60 percent of these hospital 
complexes include a skilled nursing facility. Thus, a majority of 
hospital complexes (including rural hospitals) that maintain an IRF 
unit may experience an increase in Medicare payments from the proposed 
changes in this proposed rule in other settings within the complex.
    In accordance with the provisions of Executive Order 12866, this 
proposed rule was reviewed by the Office of Management and Budget 
(OMB).

List of Subjects in 42 CFR Part 412

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

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services proposes to amend 42 CFR chapter IV, part 412 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 B--Hospital Services Subject to and Excluded From the 
Prospective Payment Systems for Inpatient Operating Costs and 
Inpatient Capital-Related Costs

    2. In Sec.  412.23, paragraph (b)(2) is revised to read as follows:


Sec.  412.23  Excluded hospitals: Classifications.

* * * * *
    (b) * * *
    (2) Except in the case of a newly participating hospital seeking 
classification under this paragraph as a rehabilitation hospital for 
its first 12-month cost reporting period, as described in paragraph 
(b)(8) of this section, a hospital must show that during its most 
recent, consecutive, and appropriate 12-month time period (as defined 
by CMS or the fiscal intermediary), it served an inpatient population 
that meets the criteria under paragraph (b)(2)(i) or (b)(2)(ii) of this 
section.
    (i) For cost reporting periods beginning on or after January 1, 
2004 and before January 1, 2007, the hospital has served an inpatient 
population of whom at least 65 percent required intensive 
rehabilitative services for treatment of one or more of the conditions 
specified at paragraph (b)(2)(iii) of this section. A patient with a 
comorbidity, as defined at Sec.  412.602, may be included in the 
inpatient population that counts towards the required 65 percent if--
    (A) The patient is admitted for inpatient rehabilitation for a 
condition that is not one of the conditions specified at paragraph 
(b)(2)(iii) of this section;
    (B) The patient has a comorbidity that falls in one of the 
conditions specified at paragraph (b)(2)(iii) of this section; and
    (C) The comorbidity has caused significant functional ability 
decline in the individual such that, even in the absence of the 
admitting condition, the individual would require the intensive 
rehabilitation treatment that is unique to inpatient rehabilitation 
facilities paid under subpart P of this part and which cannot be 
appropriately performed in another care setting covered under this 
title.
    (ii) For cost reporting periods beginning on or after January 1, 
2007, the hospital has served an inpatient population of whom at least 
75 percent required intensive rehabilitative services for treatment of 
one or more of the conditions specified at paragraph (b)(2)(iii) of 
this section.
    (iii) List of conditions.
    (A) Stroke.
    (B) Spinal cord injury.
    (C) Congenital deformity.
    (D) Amputation.
    (E) Major multiple trauma.
    (F) Fracture of femur (hip fracture).
    (G) Brain injury.
    (H) Neurological disorders, including multiple sclerosis, motor 
neuron diseases, polyneuropathy, muscular dystrophy, and Parkinson's 
disease.
    (I) Burns.
    (J) Active, polyarticular rheumatoid arthritis, psoriatic 
arthritis, and seronegative arthropathies resulting in significant 
functional impairment of ambulation and other activities of daily 
living, which have not improved after an appropriate, aggressive, and 
sustained course of outpatient therapy services or services in other 
less intensive rehabilitation settings immediately preceding the 
inpatient rehabilitation admission or which result from a systemic 
disease activation immediately before admission, but have the potential 
to improve with more intensive rehabilitation.
    (K) Systemic vasculidities with joint inflammation, resulting in 
significant functional impairment of ambulation and other activities of 
daily living, which have not improved after an appropriate, aggressive, 
and sustained course of outpatient therapy services or services in 
other less intensive rehabilitation settings immediately preceding the 
inpatient rehabilitation admission or which result from a systemic 
disease activation immediately before admission, but have the potential 
to improve with more intensive rehabilitation.
    (L) Severe or advanced osteoarthritis (osteoarthrosis or 
degenerative joint disease) involving three or more major joints 
(elbow, shoulders, hips, or knees) with joint deformity and substantial 
loss of range of motion, atrophy, significant

[[Page 53280]]

functional impairment of ambulation and other activities of daily 
living, which have not improved after an appropriate, aggressive, and 
sustained course of outpatient therapy services or services in other 
less intensive rehabilitation settings immediately preceding the 
inpatient rehabilitation admission but have the potential to improve 
with more intensive rehabilitation. (A joint replaced by a prosthesis 
no longer is considered to have osteoarthritis, or other arthritis, 
even though this condition was the reason for the joint replacement.)
* * * * *
    3. Section 412.30 is amended by--
    A. Revising paragraph (c).
    B. Revising paragraph (d)(2)(ii).
    The revisions read as follows:


Sec.  412.30  Exclusion of new rehabilitation units and expansion of 
units already excluded.

* * * * *
    (c) Converted units. A hospital unit is considered a converted unit 
if it does not qualify as a new unit under paragraph (a) of this 
section. A converted unit must have treated, for the hospital's most 
recent, consecutive, and appropriate 12-month time period (as defined 
by CMS or the fiscal intermediary), an inpatient population meeting the 
requirements of Sec.  412.23(b)(2).
* * * * *
    (d) * * *
    (2) * * *
    (ii) A hospital may increase the size of its excluded 
rehabilitation unit through the conversion of existing bed capacity 
only if it shows that, for the hospital's most recent, consecutive, and 
appropriate 12-month time period (as defined by CMS or the fiscal 
intermediary), the beds have been used to treat an inpatient population 
meeting the requirements of Sec.  412.23(b)(2).
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance)


    Dated: July 16, 2003.
Thomas A Scully,
Administrator, Centers for Medicare & Medicaid Services.

    Approved: July 22, 2003.
Tommy G. Thompson,
Secretary.
[FR Doc. 03-22658 Filed 9-2-03; 3:37 pm]
BILLING CODE 4120-01-P