[Federal Register Volume 68, Number 229 (Friday, November 28, 2003)]
[Proposed Rules]
[Pages 66920-66978]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-29137]



[[Page 66919]]

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

Part II





Department of Health and Human Services





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



Centers for Medicare & Medicaid Services



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



42 CFR Parts 412, 413, and 424



Medicare Program; Prospective Payment System for Inpatient Psychiatric 
Facilities; Proposed Rule

  Federal Register / Vol. 68, No. 229 / Friday, November 28, 2003 / 
Proposed Rules  

[[Page 66920]]


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

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 412, 413, and 424

[CMS-1213-P]
RIN 0938-AL50


Medicare Program; Prospective Payment System for Inpatient 
Psychiatric Facilities

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

ACTION: Proposed rule.

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

SUMMARY: This rule proposes a prospective payment system for Medicare 
payment of inpatient hospital services furnished in psychiatric 
hospitals and psychiatric units of acute care hospitals. This rule 
proposes to implement section 124 of the Medicare, Medicaid, andSCHIP 
Balanced Budget Refinement Act of 1999 (BBRA), which requires the 
implementation of a per diem prospective payment system for hospital 
services of psychiatric hospitals and psychiatric units. The 
prospective payment system described in this proposed rule would 
replace the reasonable cost-based payment system currently in effect.

DATES: We will consider comments if we receive them at the appropriate 
address, as provided below, no later than 5 p.m. on January 27, 2004.

ADDRESSES: In commenting, please refer to file code CMS-1213-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission. 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-1213-P, P.O. Box 8012, Baltimore, MD 21244-8012. Please allow 
sufficient time for mailed comments to be received timely 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: Janet Samen, (410) 786-4533. Philip 
Cotterill, (410) 786-6598, for information regarding the regression 
analysis.

SUPPLEMENTARY INFORMATION:
    Inspection of Public Comments: Comments received timely will be 
available for public inspection as they are received, generally 
beginning approximately 4 weeks after publication of a document, at the 
headquarters of the Centers for Medicare & Medicaid Services, 7500 
Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of 
each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view 
public comments, phone (410) 786-9994.
    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.
    To assist readers in referencing sections contained in this 
document, we are providing the following table of contents.

Table of Contents

I. Background
    A. General and Legislative History
    B. Overview of the Payment System for Psychiatric Hospitals and 
Psychiatric Units before the BBA
    1. Description of the TEFRA Payment Methodology
    2. BBA Amendments to TEFRA
    3. BBRA Amendments to TEFRA
    4. BIPA Amendments to TEFRA
II. Overview of the Proposed IPF Prospective Payment System
    A. Use of Diagnostic Codes for Payment
    1. ICD
    2. DRGs
    B. Limitations of the DRG System for Psychiatric Patients
    C. Proposed DRG Adjustments Under the Proposed IPF Prospective 
Payment System
    D. DRGs not Recognized in the Proposed IPF Prospective Payment 
System
    E. Applicability of the Proposed IPF Prospective Payment System
III. Development of the Proposed IPF Per Diem Payment Amount
    A. Proposed Market Basket
    B. Development of the Proposed Case-Mix Adjustment Regression.
    1. Proposed Patient-Level Characteristics
    a. DRGs
    b. Comorbidities
    c. Patient Age and Gender
    d. Length of Stay
    2. Proposed Facility-Level Characteristics
    a. Rural Location
    b. Teaching Status
    c. Disproportionate Share Hospital Status
    d. Psychiatric Units in General Acute Care Hospitals
    e. Adjustment for Alaska and Hawaii IPFs
    3. Proposed Payment Adjustments
    a. Proposed Outlier Adjustment
    b. Methodology for Proposed Outlier Payments
    c. Proposed Implementation of the Outlier Policy
    1. Statistical Accuracy of Cost-to-Charge Ratio
    2. Adjustment of IPF Outlier Payments
    d. Computation of Proposed Outlier Payments
    e. Interrupted Stays
    C. Development of the Proposed Budget-Neutral Federal Per Diem 
Base Rate
    1. Data Used to Develop the Proposed Federal Per Diem Base Rate
    2. Calculation of the Proposed Per Diem Amount
    3. Determining the Proposed Update Factors for the Budget-
Neutrality Calculation
    a. Cost Report Data for April 1, 2004 through June 30, 2005
    b. Estimate of Total Payments under the TEFRA Payment System
    c. Payments Under the Proposed Prospective Payment System 
without a Budget-Neutrality Adjustment
    d. Calculation of the Proposed Budget-Neutrality Adjustment
    4. The Proposed Behavioral Offset
    5. Proposed Federal Per Diem Base Rate
    6. Proposed Changes to Physician Recertification Requirements
    E. Proposed Area Wage Adjustment
    F. Effect of the Proposed Transition on Budget Neutrality
    G. Calculation of the Proposed Payment
IV. Implementation of the Proposed IPF Prospective Payment System

[[Page 66921]]

    A. Proposed Transition
    B. New Providers
    C. Claims Processing
    D. Periodic Interim Payments (PIP)
    E. Limitation on Beneficiaries Charges
V. Future Updates
    A. Proposed Annual Update Strategy
    B. Update of the ICD Codes and DRGs
    C. Future Refinements
    1. RTI International'' (trade name of Research Triangle 
Institute)
    a. Mode of Practice
    b. Patient Characteristics
    c. Analysis
    2. University of Michigan Research
    3. Case-Mix Tool
VI. Provisions of the Proposed Rule
VII. Collection of Information Requirements
VIII. Response to Comments
IX. Regulatory Impact Statement
    A. Overall Impact
    B. Anticipated Effects
    1. Budgetary Impact
    2. Impact on Providers
    3. Results
    a. Facility Type
    b. Location
    c. Teaching Status
    d. Census Region
    e. Size
    4. Effect on the Medicare Program
    5. Effect on Beneficiaries
    6. Computer Hardware and Software
    C. Alternatives Considered
Regulation Text
Addendum A: Proposed Psychiatric Prospective Payment Adjustment
Addendum B1: Proposed Pre-Reclassified Wage Index for Urban Areas
Addendum B2: Proposed Wage Index for Rural Areas
Addendum C: Proposed Case-Mix Assessment Tool

Acronyms

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

BBA Balanced Budget Act of 1997, (Pub. L. 105-33)
BBRA Medicare, Medicaid and SCHIP [State Children's Health Insurance 
Program] Balanced Budget Refinement Act of 1999, (Pub. L. 106-113)
BIPA Medicare, Medicaid, and SCHIP [State Children's Health Insurance 
Program] Benefits Improvement and Protection Act of 2000, (Pub. L. 106-
554)
CMS Centers for Medicare & Medicaid Services DSM-IV-TR Diagnostic and 
Statistical Manual of Mental Disorders Fourth Edition--Text Revision
DRGs Diagnosis-related groups
FY Federal fiscal year
HCRIS Hospital Cost Report Information System
ICD-9-CM International Classification of Diseases, 9th Revision, 
Clinical Modification
IPFs Inpatient psychiatric facilities
IRFs Inpatient rehabilitation facilities
LTCHs Long-term care hospitals
MedPAR Medicare provider analysis and review file
PIP Periodic interim payments
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, (Pub. L. 97-
248)

I. Background

A. General and Legislative History

    When the Medicare statute was originally enacted in 1965, Medicare 
payment for hospital inpatient services was based on the reasonable 
costs incurred in furnishing services to Medicare beneficiaries. 
Section 223 of the Social Security Act Amendments of 1972 (Pub. L. 92-
603) amended section 1861(v)(1) of the Social Security Act (the Act) to 
set forth limits on reasonable costs for hospital inpatient services. 
The statute was later amended by section 101(a) of the Tax Equity and 
Fiscal Responsibility Act of 1982 (TEFRA) (Pub. L. 97-248) to limit 
payment by placing a limit on allowable costs per discharge.
    The Congress directed implementation of a prospective payment 
system for acute care hospitals in 1983, with the enactment of Pub. L. 
98-21. Section 601 of the Social Security Amendments of 1983 (Pub. L. 
98-21) added a new section 1886(d) to the Act that replaced the 
reasonable cost-based payment system for most hospital inpatient 
services with a prospective payment system.
    Although most hospital inpatient services became subject to the 
prospective payment system, certain specialty hospitals were excluded 
from the prospective payment system and continued to be paid reasonable 
costs subject to limits imposed by TEFRA. These hospitals included 
psychiatric hospitals and psychiatric units in acute care hospitals, 
long-term care hospitals (LTCHs), children's hospitals, and 
rehabilitation hospitals and units. Cancer hospitals were added to the 
list of excluded hospitals by section 6004(a) of the Omnibus Budget 
Reconciliation Act of 1989 (Pub. L. 101-239).
    The Congress enacted various provisions in the Balanced Budget Act 
of 1997 (BBA) (Pub. L. 105-33), the Medicare, Medicaid, and SCHIP 
[State Children's Health Insurance Program] Balanced Budget Refinement 
ACT (BBRA) (Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP 
Benefits Improvement and Protection Act (BIPA) (Pub. L. 106-554) to 
replace the cost-based methods of reimbursement with a prospective 
payment system for the following excluded hospitals:
    [sbull] Rehabilitation hospitals (including units in acute care 
hospitals).
    [sbull] Psychiatric hospitals (including units in acute care 
hospitals.
    [sbull] LTCHs.
    The BBA also imposed national limits (or caps) on hospital-specific 
target amounts (that is, annual per discharge limits) for these 
hospitals until cost reporting periods beginning on or after October 1, 
2002. A detailed description of the TEFRA payment methodology is 
provided in section I.B.1. of this proposed rule.
    Section 124 of the BBRA mandated that the Secretary--(1) develop a 
per diem prospective payment system for inpatient hospital services 
furnished in psychiatric hospitals and psychiatric units; (2) include 
in the prospective payment system an adequate patient classification 
system that reflects the differences in patient resource use and costs 
among psychiatric hospitals and psychiatric units; (3) maintain budget 
neutrality; (4) permit the Secretary to require psychiatric hospitals 
and psychiatric units to submit information necessary for the 
development of the prospective payment system; and (5) submit a report 
to the Congress describing the development of the prospective payment 
system.
    Section 124 also required that the payment system for inpatient 
psychiatric services be implemented for cost reporting periods 
beginning on or after October 1, 2002. The creation of each new payment 
system requires an extraordinary amount of lead-time to develop and 
implement the necessary changes to our existing computerize claims 
processing systems. In order to meet the BBRA requirement to develop an 
adequate patient classification system, we undertook two research 
projects. It became apparent that the two research projects could not 
be completed in time for us to implement an inpatient psychiatric 
facility prospective payment system by October 1, 2002. It was 
impossible for us to analyze our existing administrative data in a 
sufficient amount of time to go through notice and comment rulemaking 
and implementation of the inpatient psychiatric facility prospective 
payment system by the statutory deadline. This delay enabled us to 
analyze our existing administrative data to determine the feasibility 
and validity of using these data to develop the proposed inpatient 
psychiatric facility prospective payment system. We are using a 
combination of available facility and patient specific data for this 
proposed rule. Our research efforts will

[[Page 66922]]

continue and will be used to refine the proposed system.
    In this proposed rule, as required under section 124 of the BBRA, 
we set forth the proposed Medicare prospective payment system for 
psychiatric hospitals and psychiatric units of acute care hospitals. We 
note that many hospitals have ``psychiatric units,'' however; only 
those units that are separately certified from the hospital and meet 
the requirements of Sec.  412.23, Sec.  412.25, and Sec.  412.27 are 
excluded from the hospital inpatient prospective payment system and 
would be subject to this proposed prospective payment system. 
Psychiatric units that are currently paid under the hospital inpatient 
prospective payment system and do not meet the requirements of Sec.  
412.22, Sec.  412.25 and Sec.  412.27 would not be paid under the 
proposed IPF prospective payment system. The proposed system includes 
an adequate patient classification system that would result in higher 
prospective payments to providers treating more costly, resource 
intensive patients using statistically objective criteria.
    We are proposing to establish a base payment rate that would be 
paid to inpatient psychiatric facilities for each day of inpatient 
psychiatric care (the Federal per diem base rate). The proposed base 
rate would be adjusted by certain proposed patient-level and facility-
level characteristics.

B. Overview of the Payment System for Psychiatric Hospitals and 
Psychiatric Units Before the BBA

1. Description of the TEFRA Payment Methodology
    Hospitals and units that are excluded from the hospital inpatient 
prospective payment system under section 1886(d)(1)(B) of the Act are 
paid for their inpatient operating costs under the provisions of Pub. 
L. 97-248 (TEFRA). The TEFRA provisions are found in section 1886(b) of 
the Act and implemented in regulations at 42 CFR Part 413. TEFRA 
established payments based on hospital-specific limits for inpatient 
operating costs. As specified in Sec.  413.40, TEFRA established a 
ceiling on payments for hospitals excluded from the acute care hospital 
inpatient prospective payment system. A ceiling on payments is 
determined by calculating the product of a facility's base year costs 
(the year in which its target reimbursement limit is based) per 
discharge, updated to the current year by a rate-of-increase 
percentage, and multiplied by the number of total current year 
discharges. A detailed discussion of target amount payment limits under 
TEFRA can be found in the final rule concerning the hospital inpatient 
prospective payment system published in the Federal Register on 
September 1, 1983 (48 FR 39746).
    The base year for a facility varied, depending on when the facility 
was initially determined to be a prospective payment system-excluded 
provider. The base year for facilities that were established before the 
implementation of the TEFRA provision was 1982. For facilities 
established after the implementation of the TEFRA provision, facilities 
were allowed to choose which of their first 3 cost-reporting years 
would be used in the future to determine their target limit. In 1992, 
the ``new provider'' period was shortened to 2 full years of cost-
reporting periods (Sec.  413.40(f)(1)).
    Excluded facilities whose costs were below their target amounts 
would receive bonus payments equal to the lesser of half of the 
difference between costs and the target amount, up to a maximum of 5 
percent of the target amount, or the hospital's costs. For excluded 
hospitals whose costs exceeded their target amounts, Medicare provided 
relief payments equal to half of the amount by which the hospital's 
costs exceeded the target amount up to 10 percent of the target amount. 
Excluded facilities that experienced a more significant increase in 
patient acuity could also apply for an additional amount as specified 
in Sec.  413.40(d) for Medicare exception payments.
2. BBA Amendments to TEFRA
    The BBA amendments to section 1886 of the Act significantly altered 
the payment provisions for hospitals and units paid under the TEFRA 
provisions and added other qualifying criteria for certain hospitals 
excluded from the hospital inpatient prospective payment system. A 
complete explanation of these amendments can be found in the final rule 
concerning the hospital inpatient prospective payment system we 
published in the Federal Register on August 29, 1997 (62 FR 45966).
    The BBA made the following changes to section 1886 of the Act for 
TEFRA hospitals:
    [sbull] Section 4411 of the BBA amended section 1886(b)(3)(B) of 
the Act and restricted the rate-of-increase percentages that are 
applied to each provider's target amount so that excluded hospitals and 
units experiencing lower inpatient operating costs relative to their 
target amounts receive lower rates of increase.
    [sbull] Section 4412 of the BBA amended section 1886(g) of the Act 
to establish a 15-percent reduction in capital payments for excluded 
psychiatric and rehabilitation hospitals and units and LTCHs, for 
portions of cost reporting periods occurring during the period of 
October 1, 1997, through September 30, 2002.
    [sbull] Section 4414 of the BBA amended section 1886(b)(3) of the 
Act to establish caps on the target amounts for excluded hospitals and 
units at the 75th percentile of target amounts for similar facilities 
for cost reporting periods beginning on or after October 1, 1997, 
through September 30, 2002. The caps on these target amounts apply only 
to psychiatric and rehabilitation hospitals and units and LTCHs. 
Payments for these excluded hospitals and units are based on the lesser 
of a provider's cost per discharge or its hospital-specific cost per 
discharge, subject to this cap.
    [sbull] Section 4415 of the BBA amended section 1886(b)(1) of the 
Act by revising the percentage factors used to determine the amount of 
bonus and relief payments and establishing continuous improvement bonus 
payments for excluded hospitals and units for cost reporting periods 
beginning on or after October 1, 1997. If a hospital is eligible for 
the continuous improvement bonus, the bonus payment is equal to the 
lesser of: (1) 50 percent of the amount by which operating costs are 
less than expected costs; or (2) 1 percent of the target amount.
    [sbull] Sections 4416 and 4419 of the BBA amended sections 1886(b) 
of the Act to establish a new framework for payments for new excluded 
providers. Section 4416 added a new section 1886(b)(7) to the Act that 
established a new statutory methodology for new psychiatric and 
rehabilitation hospitals and units, and LTCHs. Under section 4416, 
payment to these providers for their first two cost reporting periods 
is limited to the lesser of the operating costs per case, or 110 
percent of the national median of target amounts, as adjusted for 
differences in wage levels, for the same class of hospital for cost 
reporting periods ending during FY 1996, updated to the applicable 
period.
3. BBRA Amendments to TEFRA
    The BBRA of 1999 refined some of the policies mandated by the BBA 
for hospitals and units paid under the TEFRA provisions. The provisions 
of the BBRA, which amended section 1886(b)(3)(H) of the Act, were 
explained in detail and implemented in the hospital inpatient 
prospective payment system interim final rule published in the Federal 
Register on August 1, 2000 (65 FR 47026) and in the hospital inpatient 
prospective payment system

[[Page 66923]]

final rule also published on August 1, 2000 (65 FR 47054).
    With respect to the TEFRA payment methodology, section 4414 of the 
BBA had provided for caps on target amounts for excluded hospitals and 
units for cost reporting periods beginning on or after October 1, 1997. 
Section 121 of the BBRA amended section 1886(b)(3)(H) of the Act to 
provide for an appropriate wage adjustment to these caps on the target 
amounts for certain hospitals and units paid under the TEFRA 
provisions, effective for cost reporting periods beginning on or after 
October 1, 1999 through September 30, 2002.
4. BIPA Amendments to TEFRA
    Section 306 of BIPA amended section 1886 of the Act by increasing 
the incentive payments for psychiatric hospitals and psychiatric units 
to 3 percent for cost reporting periods beginning on or after October 
1, 2000 and before October 1, 2001.

II. Overview of the Proposed IPF Prospective Payment System

    As required by statute, we are proposing a per diem prospective 
payment system for psychiatric hospitals and psychiatric units 
(hereinafter referred to as inpatient psychiatric facilities (IPFs)) 
that would replace the current reasonable cost-based payment system 
under the TEFRA provisions. In this rule, we are proposing to base the 
system on data from the 1999 Medicare Provider Analysis and Review 
(MedPAR) file, which includes patient characteristics (for example, 
patients' diagnoses and age), and data from the 1999 Hospital Cost 
Report Information System (HCRIS), which includes facility 
characteristics (for example, location and teaching status). We are 
using the 1999 MedPAR and HCRIS data because they are the best 
available data.
    Based on our analysis, we are proposing the following methodology 
as the basis of the proposed IPF prospective payment system:
    [sbull] Compute a Federal per diem base rate to be paid to all 
psychiatric hospitals and psychiatric units based on the sum of the 
average routine operating, ancillary, and capital costs for each 
patient day of psychiatric care in an IPF adjusted for budget 
neutrality (see section III.C. of this proposed rule). In computing the 
Federal per diem base rate, our analysis showed that routine operating 
and capital represent approximately 88 percent of total costs and the 
remaining 12 percent of total costs are for ancillary services.
    [sbull] Adjust the Federal per diem base rate to reflect certain 
patient and facility characteristics that were found in the regression 
analysis to be associated with statistically significant cost 
differences (see section III.B. of this proposed rule). The variance 
explained by patient characteristics (19 percent) in the regression 
analysis is limited by the nature of the administrative data used to 
develop this system, which assigns average facility routine costs to 
individual patients. We are conducting research to better understand 
the relationship between individual patient characteristics and average 
facility routine costs that could be incorporated into the payment 
system in future updates. We note that ancillary costs are already 
identifiable at the individual patient level.
    [sbull] Implement an April 1, 2004 effective date and a 3-year 
transition period. As explained in section IV of this proposed rule, it 
ultimately may be necessary to delay implementation beyond April 2004 
as well as to increase the length of the transition period. However, 
the rate development, budget-neutrality adjustment, and impact analysis 
assume an April 1, 2004 effective date and a 3-year transition period.
    [sbull] Include research information for future refinement of the 
proposed patient classification system. Part of this research could 
result in a new patient assessment instrument that could identify 
additional patient level characteristics.
    In addition, we are proposing to make the following types of 
adjustments to appropriately make payments on a per-diem basis:
    [sbull] Patient-level adjustments for age, specified diagnosis-
related groups, and selected high cost comorbidity categories. These 
patient-level characteristics explain approximately 19 percent of the 
variance in the cost of psychiatric care in the administrative data, 
which establishes the empirical basis for this methodology.
    [sbull] Facility adjustments that include a wage index adjustment, 
rural location adjustment, and an indirect teaching adjustment. These 
facility characteristics explain approximately 13 percent of the 
variance in the costs of psychiatric care in the administrative data.
    [sbull] Variable per diem adjustments to recognize the higher costs 
incurred in the early days of a psychiatric stay.
    [sbull] Outlier adjustments to target greater payment to the high 
cost cases.
    We are also proposing the following policies:
    [sbull] Interrupted stay policy for the purpose of applying the 
variable per diem adjustment and the outlier policy.
    [sbull] Coding policy (see section II. A.) that would--(1) require 
IPFs to report patient diagnoses using the International Classification 
of Diseases-9th Revision, Clinical Modification (ICD-9-CM) code set to 
report the psychiatric diagnosis; and (2) select the diagnosis-related 
groups (DRGs) that would be used for payment adjustments in this 
proposed rule.

A. Use of Diagnostic Codes for Payment

    The patient's principal diagnosis of his or her physical or mental 
condition is essential because it typically acts as a guide for 
treatment and validates payment. It is for these reasons that 
diagnostic information is routinely reported on hospital claims and is 
used in other prospective payment systems. In mental health treatment, 
the principal tool recognized and utilized by the psychiatric community 
for diagnostic assessment is the Diagnostic and Statistical Manual of 
Mental Disorders (DSM). The DSM provides a broad and comprehensive 
description of patients through behavioral domains, or ``axes.'' This 
multiaxial system is routinely used by clinical staff to diagnose 
patients and plan treatment. The DSM is currently in its fourth 
revision text revision (DSM-IV-TR). Although, the DSM is used for 
patient assessment by IPFs, the ICD-9-CM coding system is used 
currently for reporting diagnostic information for payment purposes.
1. ICD
    The ICD coding system was designed for the classification of 
morbidity and mortality information for statistical purposes and for 
the indexing of hospital records by disease. Chapter Five of the ICD-9-
CM includes the codes for mental disorders.
    In addition, the following definitions (as described in the 1984 
Revision of the Uniform Hospital Discharge Data Set) are requirements 
of the ICD-9-CM coding system.
    [sbull] Diagnoses include all diagnoses that affect the current 
hospital stay.
    [sbull] Principal diagnosis is defined as the condition 
established, after study, to be chiefly responsible for occasioning the 
admission of the patient to the hospital for care.
    [sbull] Other diagnoses (also called secondary diagnoses or 
additional diagnoses) are defined as all conditions that coexist at the 
time of admission, that develop subsequently, or that affect the 
treatment received or the length of stay or both. Diagnoses that relate 
to an earlier episode of care and have no bearing on the current 
hospital stay are excluded.

[[Page 66924]]

    We are proposing to require IPFs to use the psychiatric diagnosis 
codes in Chapter Five (``Mental Disorder'') of the ICD-9-CM to report 
diagnostic information for the proposed IPF prospective payment system. 
All changes to the ICD coding system that would affect the proposed IPF 
prospective payment system would be addressed annually in the hospital 
inpatient prospective payment system rules. The updated codes are 
effective October 1 of each year and must be used to report diagnostic 
or procedure information. (Additional information regarding updates to 
the ICD-9-CM and DRGs is included in section V.B. of this proposed 
rule). The official version of the ICD-9-CM is available on CD-ROM from 
the U.S. Government Printing Office. The FY 2004 version can be ordered 
by contacting the Superintendent of Documents, U.S. Government Printing 
Office, Department 50, Washington, D.C. 20402-9329, telephone: (202) 
512-1800. The stock number is 017-022-01544-7, and the price is $25.00. 
In addition, private vendors publish the ICD-9-CM.
    Questions and comments concerning the codes should be addressed to: 
Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination and 
Maintenance Committee, CMS, Center for Medicare Management, Purchasing 
Policy Group, Division of Acute Care, Mailstop C4-08-06, 7500 Security 
Boulevard, Baltimore, Maryland 21244-1850. Comments may be sent via e-
mail to: [email protected].
2. DRGs
    DRGs constitute the patient classification system used in the 
hospital inpatient prospective payment system. DRGs provide a means of 
relating the types of patients treated by a hospital to the costs 
incurred by the hospital. While each patient is unique, groups of 
patients have demographic, diagnostic, and therapeutic attributes in 
common that determine their level of resource intensity.
    Currently, IPF claims include ICD-9-CM diagnosis coding 
information. The TEFRA payment methodology does not use the DRG 
classification of IPF cases. Nonetheless, when IPF claims are submitted 
to us, the DRG associated with the patient's principal ICD-9-CM 
diagnosis code is assigned to the claim by the GROUPER software 
program. As a result, our administrative data includes the DRG 
assignments for all IPF cases.
    We are proposing to require IPFs to use the psychiatric diagnosis 
codes in Chapter Five (``Mental Disorders'') of the ICD-9-CM. This 
decision is consistent with the Standards for Electronic Transaction 
final rule published in the Federal Register on August 17, 2000 (65 FR 
50312). The ICD-9-CM coding system is currently designated as the 
standard medical data code set for capturing cause and manifestation of 
injury, disease, impairments, or other health problems. These 
guidelines are available through a number of sources, including the 
following Web site: http://www.cdc.gov/nch/data/icdguide.pdf.
    Current regulations at Sec.  412.27 require that a psychiatric unit 
admit only those patients who have a principal diagnosis that is listed 
in the DSM or classified in Chapter Five (``Mental Disorders'') of the 
ICD-9-CM. The hospital must maintain records that substantiate the 
psychiatric diagnoses of its patients. We specifically request public 
comments on continuing to reference the DSM in light of the proposed 
requirement that IPFs use the ICD-9-CM code set in the proposed IPF 
prospective payment system.

B. Limitations of the DRG System for Psychiatric Patients

    Adopting a patient classification system for IPFs based on 
diagnosis alone may not explain the wide variation in resource use 
among patients in IPFs for several reasons. For instance, the diagnosis 
may not fully capture the reasons for hospitalization. A patient with a 
chronic disorder, like schizophrenia, may be admitted for a variety of 
acute problems (suicide attempt, catatonic withdrawal, or psychotic 
episode) that require very different treatments (Goldman, H.H., Pincus, 
H.A., Taube, C.A., and Reiger, D.A. (1984). Hospital and Community 
Psychiatry, 35(5): 460-464).
    Further, treatment patterns are more variable in psychiatry, with 
multiple clinically accepted methods of care. As a result, resource use 
varies substantially between acute care and chronic care patients, and 
between the facilities that treat predominately one type of patient. 
For example, public psychiatric hospitals tend to treat the chronically 
mentally ill, with substantially longer lengths of stay, compared to 
the patients generally treated in psychiatric units and private 
psychiatric hospitals.
    Predicated on the analysis of the administrative data and pending 
refinements from the research, we believe the DRG is an appropriate 
method to account for certain, although not all, clinical 
characteristics and associated resources. Therefore, under this 
prospective payment system, we are proposing to assign a DRG to each 
case based on the principal diagnosis (ICD-9-CM code) reported by the 
IPF as one adjustment to the Federal per diem base rate.
    In making this decision, we analyzed past research as well as a 
recent study supported by the American Psychiatric Association (APA). 
In the study, APA partnered with the Health Economics and Outcomes 
Research Institute (THEORI), a division of the Greater New York 
Hospital Association, to assess whether our existing administrative 
data could be used to develop a prospective payment system for IPFs. 
This study found that a prospective payment system for IPFs could be 
developed based on existing CMS administrative data, be clinically 
relevant, and limit the administrative burden on providers. The system 
they proposed included an adjustment for DRG assignment.
    In summary, we acknowledge that the psychiatric community uses the 
DSM as a tool to diagnose a patient's mental illness and to aid in 
treatment planning. However, we are proposing to require IPFs to report 
diagnoses in Chapter Five of the ICD-9-CM as required by the 
Administrative Simplification Provisions found in 45 CFR subchapter C. 
In addition, we are proposing to identify specific DRGs for payment 
adjustment under the proposed IPF prospective payment system. The 
rationale for the selection of the proposed DRGs for use in the 
proposed IPF prospective payment system is described below.

C. Proposed DRG Adjustments Under the Proposed IPF Prospective Payment 
System

    As noted above, the principal diagnosis is defined as the 
condition, after study (clinical evaluation), to be chiefly responsible 
for admitting the patient to the hospital for care. Despite this 
longstanding definition, our review of hospital claims data that were 
used to develop the proposed IPF prospective payment system indicates 
that a substantial number of claims have non-psychiatric diagnoses 
identified as the principal diagnosis.
    Medicare regulations as specified in Sec.  412.27(a) require 
psychiatric units of acute care hospitals to admit only those patients 
with a principal diagnosis in the DSM or Chapter Five (``Mental 
Disorders'') in the ICD-9-CM. Therefore, if a patient is admitted to a 
general hospital for a medical condition such as pneumonia, and also 
presents psychiatric symptoms, which necessitates an admission to the 
psychiatric unit, the principal diagnosis for the admission to the 
psychiatric unit should be the psychiatric symptoms

[[Page 66925]]

exhibited by the patient in accordance with Sec.  412.27(a). We note 
that current regulations applicable to psychiatric hospitals (Sec.  
412.23(a)) do not include these requirements, however, historically, 
psychiatric hospitals have limited admissions to psychiatric patients. 
Section 412.27(a) also requires that patients be admitted to the 
psychiatric units for active treatment that is of an intensity that can 
be furnished appropriately only in an inpatient hospital setting. For 
this reason, in order to be paid under the proposed IPF prospective 
payment system, patients must be capable of participating in an active 
treatment program.
    In selecting the proposed DRGs for payment adjustment, we analyzed 
the DRG assignments for ICD-9-CM diagnosis codes in Chapter Five. In 
addition, as noted previously, IPFs use the DSM-IV-TR to establish 
diagnoses and current regulations at Sec.  412.27(a) refer to DSM 
diagnoses. However, most, but not all, DSM codes crosswalk to the codes 
in Chapter Five of the ICD-9-CM. Although, all the DSM codes are 
psychiatric, some of the corresponding ICD-9-CM codes are located in 
other chapters of the ICD-9-CM coding system and are linked to the body 
system affected. For example, the DSM diagnosis, Male Erectile 
Disorder, crosswalks to ICD-9-CM code 607.84, Impotence of Organic 
Nature which is found in Chapter 10, Diseases of the Genitourinary 
Systems. Accordingly, we also analyzed the DRG assignments for certain 
ICD-9-CM codes that are based on DSM diagnoses but are not in Chapter 
Five of the ICD-9-CM. These codes are discussed in the next section of 
this proposed rule.
    As a result of this analysis, we identified 25 DRGs with one or 
more psychiatric diagnoses that are included in Chapter Five of the 
ICD-9-CM as well as those diagnoses that are in other chapters of the 
ICD-9-CM. We are proposing payment adjustments for 15 out of the 25 
DRGs we analyzed. The remaining 10 DRGs include codes for a specific 
range of diseases other than psychiatric, but have a few codes for DSM 
diagnoses that are included in Chapter Five or other body system 
chapters of the ICD-9-CM. The rationale for our decisions regarding 
these 10 codes is provided in section II.D. below.
    Table 1 below lists the DRGs that we are proposing to recognize 
under the proposed IPF prospective payment system and the proposed 
adjustment factors. This information also is presented in Addendum A.

         Table 1.--Proposed IPF Prospective Payment System DRGs
------------------------------------------------------------------------
                                                              Adjustment
             DRG                        Description             Factor
------------------------------------------------------------------------
 12..........................  Degenerative Nervous System          1.07
                                Disorders.
 23..........................  Nontraumatic Stupor and Coma         1.10
 424*........................  O.R. Procedure with                  1.22
                                Principal Diagnosis of
                                Mental Illness.
 425.........................  Acute Adjustment Reaction            1.08
                                and Psychosocial
                                Dysfunction.
 426.........................  Depressive Neurosis.........         1.00
 427.........................  Neurosis Except Depressive..         1.01
 428.........................  Disorders of Personality and         1.03
                                Impulse Control.
429..........................  Organic Disturbances and             1.02
                                Mental Retardation.
430..........................  Psychosis...................         1.00
431..........................  Childhood Mental Disorders..         1.02
 432.........................  Other Mental Disorder                0.96
                                Diagnoses.
 433**.......................  Alcohol/Drug Abuse or                0.88
                                Dependence, Left Against
                                Medical Advice.
 521.........................  Alcohol/Drug Abuse or                1.02
                                Dependence with
                                Complication or Comorbidity.
 522.........................  Alcohol/Drug Abuse or                0.97
                                Dependence with
                                Rehabilitation Therapy
                                without Complication or
                                Comorbidity.
 523.........................  Alcohol/Drug Abuse or               0.88
                                Dependence without
                                Rehabilitation Therapy
                                without Complication or
                                Comorbidity.
------------------------------------------------------------------------
* DRG 424--is an O.R. procedure code that must be billed with a
  principal diagnosis of mental disorder.
** DRG 433--is used when providers indicate a patient left against
  medical advice (discharge status code 07).

D. DRGs Not Recognized in the Proposed IPF Prospective Payment System

    We are proposing not to recognize the following 10 DRGs in the 
proposed IPF prospective payment system. They were determined not to be 
clinically significant because the principal diagnoses did not result 
in enough admissions to IPFs in order to establish an adjustment to the 
payment rate:
    [sbull] DRGs 34 and 35 include a range of cases for disorders of 
the nervous system. The diagnoses in these DRGs also include five ICD-
9-CM codes for DSM diagnoses: Codes 333.1 (Tremor not elsewhere 
classified), code 333.82 (Orofacial Dyskinesia), code 333.92 
(Neuroleptic Malignant Syndrome), code 347 (Cataplexy and Narcolepsy), 
and code 307.23 (Gilles de La Tourette's Disorder). In the 1999 MedPAR 
records for admissions to IPFs, only one patient was grouped in these 
DRGs. In addition, patients with these diagnoses generally do not 
require management in an IPF unless there is a concomitant psychiatric 
disorder.
    [sbull] DRGs 182, 183, and 184 include a range of gastrointestinal 
conditions, including esophagitis, gastroenteritis, and other digestive 
system diseases. The diagnoses in these DRGs include one that is listed 
in Chapter Five of the ICD-9-CM, code 306.4 (Psychogenic GI Disease). 
In the 1999 MedPAR records for admissions to IPFs, we found that only a 
few patients with this ICD-9-CM diagnosis were grouped in these DRGs.
    [sbull] DRG 352 includes a range of diagnoses affecting the testes, 
prostate, and male external genitalia. This DRG includes DSM diagnoses 
that are not in Chapter Five of the ICD-9-CM: code 607.84 (Impotence of 
an Organic Origin), and code 608.89 (Male Genital Diseases, not 
elsewhere classified). In the 1999 MedPAR records for admissions to 
IPFs, we were able to identify only one patient grouped in DRG 352.
    [sbull] DRGs 358, 359, and 369 include a range of cases in which 
procedures have been performed on the uterus and fallopian tubes 
(Adnexa). These DRGs include two diagnoses that are in Chapter Five of 
the ICD-9-CM: code 306.51 (Psychogenic Vaginismus), and code 306.52 
(Psychogenic Dysmenorrhea). In the 1999 MedPAR records for admissions 
to IPFs, we were able to identify only 11 patients grouped into DRGs 
358, 359, and 369, and there were no patients diagnosed with codes 
306.51 or 306.52.

[[Page 66926]]

    [sbull] DRG 467 includes a range of cases in which other factors 
influence health status. This DRG contains only one diagnosis code 
listed in Chapter Five of the ICD-9-CM, code 305.1 (tobacco use 
disorder). Patients with this diagnosis do not require inpatient 
treatment in an IPF unless there is a concomitant psychiatric disorder.
    We are proposing not to recognize these 10 DRGs for payment 
adjustments (34, 35, 182, 183, 184, 352, 358, 359, 369, and 467) 
because they generally do not include a psychiatric diagnosis. We 
believe that failure to recognize these DRGs will not affect the care 
of Medicare beneficiaries because our analysis shows few, if any, of 
the patients with these diagnoses are admitted or treated in an IPF.
    In addition, we believe that these cases would be classified into 
one of the selected DRGs and grouped with other beneficiaries with 
similar symptoms and requiring similar care. This approach would avoid 
creating case-mix groups based on small numbers of cases.
    We believe there is value in selecting only those DRGs that contain 
a large enough number of psychiatric cases to ensure that individual 
variability can be averaged. We specifically invite public comments on 
this issue.

E. Applicability of the Proposed IPF Prospective Payment System

    The following psychiatric hospitals and psychiatric units, 
currently paid under section 1886(b) of the Act, would be paid under 
the proposed IPF prospective payment system for cost reporting periods 
beginning on or after April 1, 2004. We are proposing that the IPF 
prospective payment system would apply to inpatient hospital services 
furnished by Medicare participating entities that are classified as 
psychiatric hospitals or psychiatric units as specified in Sec.  
412.22, Sec.  412.23, Sec.  412.25, and Sec.  412.27. We note that 
psychiatric units that are currently paid under the hospital inpatient 
prospective payment system and do not meet the requirements of Sec.  
412.25 and Sec.  412.27 would not be paid under the proposed IPF 
prospective payment system.
    As specified in Sec.  400.200, the United States means the fifty 
States, the District of Columbia, the Commonwealth of Puerto Rico, the 
Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands. 
Therefore, IPFs located within the United States would be subject to 
the proposed IPF prospective payment system. However, the following 
hospitals are paid under special payment provisions specified in Sec.  
412.22(c) and, therefore, would not be paid under the proposed IPF 
prospective payment system:
    [sbull] Veterans Administration hospitals.
    [sbull] Hospitals that are reimbursed under State cost control 
systems approved under 42 CFR part 403.
    [sbull] Hospitals that are reimbursed in accordance with 
demonstration projects specified in section 402(a) of Pub. L. 90-248 
(42 U.S.C. 1395b-1) or section 222(a) of Pub. L. 92-603 (42 U.S.C. 
1395b-1(note)).
    [sbull] Non-participating hospitals furnishing emergency services 
to Medicare beneficiaries.
    This proposed rule would not change the basic criteria for a 
hospital or hospital unit to be classified as a psychiatric hospital or 
psychiatric unit that is excluded from the hospital prospective payment 
systems under sections 1886(d) and 1886(g) of the Act, nor would it 
revise the survey and certification procedures applicable to entities 
seeking this classification.
    We note that we are proposing a technical change to Sec.  
412.27(a). We are proposing to replace the Third Edition with the 
Fourth Edition, Text Revision, of the DSM so that our rules reflect the 
most current edition of the DSM.
    As noted previously, we are requesting public comments on 
continuing to require a DSM diagnosis for patients admitted to a 
psychiatric unit in light of the proposed requirement that IPFs use the 
ICD-9-CM code set in the proposed IPF prospective payment system.

III. Development of the Proposed IPF Per Diem Payment Amount

    The primary goal in developing the proposed IPF prospective payment 
system is to pay each IPF an appropriate amount for the efficient 
delivery of care to Medicare beneficiaries. The system must be able to 
account adequately for each IPF's case-mix in order to ensure both fair 
distribution of Medicare payments and access to adequate care for those 
beneficiaries who require more costly care.
    The proposed IPF prospective payment system would establish a 
standard per diem payment amount for inpatient psychiatric services 
provided to Medicare beneficiaries. The proposed per diem amount would 
reflect the average daily cost of inpatient psychiatric care in an IPF, 
including capital-related costs. This proposed per diem payment amount, 
after adjustment for budget neutrality, is then modified by factors for 
patient and facility characteristics that account for variation in 
patient resource use. The proposed IPF prospective payment system would 
also include an outlier policy and account for interrupted stays. This 
section includes a discussion of how the proposed Federal per diem base 
rate was created, the factors that we considered to adjust the proposed 
Federal per diem base rate, and how the proposed per diem payment 
amount is calculated.

A. Proposed Market Basket

    We are proposing to use a 1997-based excluded hospital with capital 
market basket. We periodically revise and rebase the market basket to 
reflect more current cost data. Rebasing means moving the base year for 
the structure of costs (in this case from 1992 to 1997), while revising 
means changing data sources, cost categories, or price proxies used. 
The proposed updated market basket would replace the 1992-based 
excluded hospital with capital market basket. This rebased (1997-base 
year) and revised market basket would be used to update FY 1999 IPF 
costs to the proposed 15-month period beginning April 1, 2004, the 
first year under the IPF prospective payment system.
    The operating portion of the 1997-based excluded hospital with 
capital market basket is derived from the 1997-based excluded hospital 
market basket. The methodology used to develop the operating portion 
was described in the hospital inpatient prospective payment system 
final rule published in the Federal Register on August 1, 2002 (67 FR 
50042 through 50044). In brief, the operating cost category weights in 
the 1997-based excluded hospital market basket were determined from the 
Medicare cost reports, the 1997 Business Expenditure Survey, and the 
1997 Annual Input-Output data from the Bureau of the Census. As 
explained in that August 1, 2002 final rule, we revised the market 
basket by making two methodological revisions to the 1997-based 
excluded hospital market basket: (1) Changing the wage and benefit 
price proxies to use the Employment Cost Index (ECI) wage and benefit 
data for hospital workers; and (2) adding a cost category for blood and 
blood products.
    When we add the weight for capital costs to the excluded hospital 
market basket, the sum of the operating and capital weights must still 
equal 100.0. Because capital costs account for 8.968 percent of total 
costs for excluded hospitals in 1997, it holds that operating costs 
must account for 91.032 percent. Each operating cost category weight in 
the 1997-based excluded hospital market basket was multiplied by 
0.91032 to determine its weight in the 1997-based excluded hospital 
with capital market basket.

[[Page 66927]]

    The aggregate capital component of the 1997-based excluded hospital 
market basket (8.968 percent) was determined from the same set of 
Medicare cost reports used to derive the operating component. The 
detailed capital cost categories of depreciation, interest, and other 
capital expenses were also determined using the Medicare cost reports. 
Two sets of weights for the capital portion of the revised and rebased 
market basket needed to be determined. The first set of weights 
identifies the proportion of capital expenditures attributable to each 
capital cost category, while the second set represents relative vintage 
weights for depreciation and interest. The vintage weights identify the 
proportion of capital expenditures that is attributable to each year 
over the useful life of capital assets within a cost category (see the 
hospital inpatient prospective payment final rule published in the 
Federal Register on August 1, 2002 (67 FR 50045 through 50047), for a 
discussion of how vintage weights are determined).
    The cost categories, price proxies, and base-year FY 1992 and 
proposed FY 1997 weights for the excluded hospital with capital market 
basket are presented in Table 2 below. The vintage weights for the 
proposed 1997-based excluded hospital with capital market basket is 
presented in Table 2(A) below.

TABLE 2.--Proposed Excluded Hospital With Capital Input Price IndeX (FY 1992 and Proposed FY 1997) Structure and
                                                     Weights
----------------------------------------------------------------------------------------------------------------
                                                                                                    Proposed
              Cost category                       Price wage variable            Weights (%)       weights (%)
                                                                               base-year 1992    base-year 1997
----------------------------------------------------------------------------------------------------------------
TOTAL....................................  .................................           100.000           100.000
    Compensation.........................  .................................            57.935            57.579
    Wages and Salaries...................  ECI--Wages and Salaries, Civilian            47.417            47.355
                                            Hospital Workers.
    Employee Benefits....................  ECI--Benefits, Civilian Hospital             10.519            10.244
                                            Workers to capture total costs
                                            (operating and capital), In
                                            order to capture total costs
                                            (operating and capital), HCFA
                                            Occupational Benefit Proxy.
Professional fees: Non-Medical...........  ECI--Compensation: Prof. &                    1.908             4.423
                                            Technical.
Utilities................................  .................................             1.524             1.180
    Electricity..........................  WPI--Commercial Electric Power...             0.916             0.726
    Fuel Oil, Coal, etc..................  WPI--Commercial Natural Gas......             0.365             0.248
    Water and Sewerage...................  CPI-U--Water & Sewage............             0.243             0.206
Professional Liability Insurance.........  HCFA--Professional Liability                  0.983             0.733
                                            Premiums.
All Other Products and Services..........  .................................            28.571            27.117
    All Other Products...................  .................................            22.027            17.914
    Pharmaceuticals......................  WPI--Prescription Drugs..........             2.791             6.318
    Food: Direct Purchase................  WPI--Processed Foods.............             2.155             1.122
    Food: Contract Service...............  CPI-U--Food Away from Home.......             0.998             1.043
    Chemicals............................  WPI--Industrial Chemicals........             3.413             2.133
    Blood and Blood Products.............  WPI--Blood and Derivatives.......  ................             0.748
    Medical Instruments..................  WPI--Med. Inst. & Equipment......             2.868             1.795
    Photographic Supplies................  WPI--Photo Supplies..............             0.364             0.167
    Rubber and Plastics..................  WPI--Rubber & Plastic Products...             4.423             1.366
    Paper Products.......................  WPI--Convert. Paper and                       1.984             1.110
                                            Paperboard.
    Apparel..............................  WPI--Apparel.....................             0.809             0.478
    Machinery and Equipment..............  WPI--Machinery & Equipment.......             0.193             0.852
    Miscellaneous Products...............  WPI--Finished Goods excluding                 2.029             0.783
                                            Food and Energy.
All Other Services.......................  .................................             6.544             9.203
    Telephone............................  CPI-U--Telephone Services........             0.574             0.348
    Postage..............................  CPI-U--Postage...................             0.268             0.702
    All Other: Labor.....................  ECI--Compensation: Service                    4.945             4.453
                                            Workers.
    All Other: Non-Labor Intensive.......  CPI-U--All Items (Urban).........             0.757             3.700
Capital-Related Costs....................  .................................             9.080             8.968
    Depreciation.........................  .................................             5.611             5.586
    Fixed Assets.........................  Boeckh-Institutional                          3.570             3.503
                                            Construction: 23 Year Useful
                                            Life.
                                           Life Y--y--YYF e.................
    Movable Equipment....................  WPI--Machinery & Equipment: 11                2.041             2.083
                                            Year Useful life.
    Interest Costs.......................  .................................             3.212             2.682
    Non-profit...........................  Avg. Yield Municipal Bonds: 23                2.730             2.280
                                            Year Useful Life.
    For-profit...........................  Avg. Yield AAA Bonds: 23 Year                 0.482             0.402
                                            Useful Life.
    Other Capital Related Costs..........  CPI-U--Residential Rent..........             0.257            0.699
----------------------------------------------------------------------------------------------------------------
Note: The operating cost category weights in the proposed excluded hospital market basket add to 100.0. When we
  add an additional set of cost category weights (total capital weight = 8.968 percent) to this original group,
  the sum of the weights in the new index must still add to 100.0. Because capital costs account for 8.968
  percent of the market basket, then operating costs account for 91.032 percent. Each weight in the proposed
  1997-based excluded hospital market basket was multiplied by 0.91032 to determine its weight in the proposed
  1997-based excluded hospital with capital market basket.
Note: Weights may not sum to 100.0 due to rounding.


[[Page 66928]]


 Table 2(A).--Proposed Excluded Hospital With Capital Input Price Index
                        (FY 1997) Vintage Weights
------------------------------------------------------------------------
                                                               Interest:
                                           Fixed     Movable    capital-
   Year from farthest to most recent       assets     assets    related
                                          (23-year   (11-year   (23-year
                                          weights)   weights)   weights)
------------------------------------------------------------------------
1......................................      0.018      0.063      0.007
2......................................      0.021      0.068      0.009
3......................................      0.023      0.074      0.011
4......................................      0.025      0.080      0.012
5......................................      0.026      0.085      0.014
6......................................      0.028      0.091      0.016
7......................................      0.030      0.096      0.019
8......................................      0.032      0.101      0.022
9......................................      0.035      0.108      0.026
10.....................................      0.039      0.114      0.030
11.....................................      0.042      0.119      0.035
12.....................................      0.044  .........      0.039
13.....................................      0.047  .........      0.045
14.....................................      0.049  .........      0.049
15.....................................      0.051  .........      0.053
16.....................................      0.053  .........      0.059
17.....................................      0.057  .........      0.065
18.....................................      0.060  .........      0.072
19.....................................      0.062  .........      0.077
20.....................................      0.063  .........      0.081
21.....................................      0.065  .........      0.085
22.....................................      0.064  .........      0.087
23.....................................      0.065  .........      0.090
                                        ------------
    Total..............................     1.0000     1.0000    1.0000
------------------------------------------------------------------------
Note: Weights may not sum to 1.000 due to rounding.

    Table 2(B) below compares the 1992-based excluded hospital with 
capital market basket to the proposed 1997-based excluded hospital with 
capital market basket. As shown below, the rebased and revised market 
basket grows slightly faster over the 1999 through 2001 period than the 
1992-based market basket. The main reason for this growth is the 
switching of the wage and benefit proxy to the ECI for hospital workers 
from the previous occupational blend. This revision had a similar 
impact on the hospital inpatient prospective payment system and 
excluded hospital market baskets, as described in the final rule 
published in the Federal Register on August 1, 2002 (67 FR 50032 
through 50041).

 Table 2(B).--Percent Changes in the 1992-Based and Proposed 1997-Based
  Excluded Hospital With Capital Market Baskets, FYs 1999 Through 2004
------------------------------------------------------------------------
                                                               Percent
                                                  Percent      change,
                                                  change,      proposed
                  Fiscal year                    1992-based   1997-based
                                                   market       market
                                                   basket       basket
------------------------------------------------------------------------
    1999......................................          2.3          2.7
    2000......................................          3.4          3.1
    2001......................................          3.9          4.0
    Average historical:.......................          3.2          3.3
    2002......................................          2.7          3.6
    2003......................................          3.0          3.5
    2004......................................          3.0          3.3
    Average forecast:.........................          2.9         3.5
------------------------------------------------------------------------
Source: Global Insights, Inc, 4th Qtr 2002,@USMARCO.MODTREND@CISSIM/
  TL1102.SIM. Historical data through 3rd Qtr 2002.

    Based upon the analysis mentioned below, we believe the excluded 
hospital with capital market basket provides a reasonable measure of 
the price changes facing IPFs. However, we have also been researching 
the feasibility of developing a market basket specific to IPF services. 
This research includes analyzing data sources for cost category 
weights, specifically the Medicare cost reports, and investigating 
other data sources on cost, expenditure, and price information specific 
to IPFs.
    Our analysis of the Medicare cost reports indicates that the 
distribution of costs among major cost report categories (wages, 
pharmaceuticals, and capital) for IPFs is not substantially different 
from the 1997-based excluded hospital with capital market basket we 
propose to use. In addition, the only data available to us for these 
cost categories (wages, pharmaceuticals, and capital) presented a 
potential problem since no other major cost category weights would be 
based on IPF data. Based on the research discussed below, at this time, 
we are not proposing to develop a market basket specific to IPF 
services.
    We conducted an analysis of annual percent changes in the market 
basket when the weights for wages, pharmaceuticals, and capital in IPFs 
were substituted into the excluded hospital with capital market basket. 
Other cost categories were recalibrated using ratios available from the 
hospital inpatient prospective payment system hospital market basket. 
On average, between 1995 and 2002, the excluded hospital with capital 
market basket increased at nearly the same average annual rate (3.4 
percent) as the market basket with IPF weights for wages, 
pharmaceuticals, and capital (3.5 percent). This difference is less 
than the 0.25 percentage point criterion that determines whether a 
forecast error adjustment is warranted under the hospital inpatient 
prospective payment system update framework.
    Based upon this analysis, we believe that the excluded hospital 
with capital market basket is doing an adequate job of reflecting the 
price changes facing IPFs. We will continue to solicit comments about 
issues particular to IPFs that should be considered in our development 
of the proposed 1997-based excluded hospital with capital market 
basket, as well as encourage suggestions for additional data sources 
that may be available. Our hope is that the additional cost data being 
collected under the proposed IPF prospective payment system will 
eventually allow for the development of a market basket based primarily 
on IPF data. We welcome comments on issues particular to IPFs that 
should be considered in our use of the proposed 1997-based excluded 
hospital with capital market basket, as well as on suggestions for 
additional data sources that may be readily available on the cost 
structure of IPFs.
    As discussed more fully in section IV of this proposed rule, we are 
proposing to implement the proposed IPF prospective payment system for 
IPF cost reporting periods that begin on or after April 1, 2004. The 
first update, however, would not be until July 1, 2005. This extends 
the first year for 3 additional months in order to adjust the update 
cycle for this proposed payment system. As a result, the effective 
period for this proposed rule is April 1, 2004 through June 30, 2005. 
To update payments between FY 2003 and the effective period, the update 
must reflect the market basket increase over this period, which is 
currently estimated at 5.3 percent. This would represent the proposed 
increase in the excluded hospital with capital market basket for FY 
2004 and the first 9 months of FY 2005.

B. Development of the Proposed Case-Mix Adjustment Regression

    In order to ensure that the proposed IPF prospective payment system 
would be able to account adequately for each IPF's case-mix, we 
performed an extensive regression analysis of the relationship between 
the per diem costs and both patient and facility characteristics to 
determine those characteristics associated with statistically 
significant cost differences. For characteristics with statistically

[[Page 66929]]

significant cost differences, we used the regression coefficients of 
those variables to determine the size of the corresponding payment 
adjustments. Based on the regression analysis, we are proposing to 
adjust the per diem payment for differences in the patient's DRG, age, 
comorbidities, and the day of the stay. Also, we are proposing 
adjustments for area wage levels, rural IPFs, and teaching IPFs.
    We computed a per diem cost for each Medicare inpatient psychiatric 
stay, including routine operating, ancillary, and capital components 
using information from the 1999 MedPAR file and data from the 1999 
Medicare cost reports. The method described below that was used to 
construct the proposed per diem cost for IPFs is a standard method that 
has been used to construct a Medicare cost per discharge for inpatient 
acute care (Newhouse, J.P., S. Cretin, and C. Witsberger. Predicting 
Hospital Accounting Costs, Health Care Financing Review, V.11, No. 1. 
Fall 1989). We believe that this method provides a full account of 
IPF's per diem costs.
    To calculate the cost per day for each inpatient psychiatric stay, 
routine costs were estimated by multiplying the routine cost per day 
from the IPF's 1999 Medicare cost report by the number of Medicare 
covered days on the 1999 MedPAR stay record. Ancillary costs were 
estimated by multiplying each departmental cost-to-charge ratio by the 
corresponding ancillary charges on the MedPAR stay record. The total 
cost per day was calculated by summing routine and ancillary costs for 
the stay and dividing it by the number of Medicare covered days for 
each day of the stay. We used the best available data and methods for 
this proposed IPF prospective payment system. However, the data are 
potentially limited for the purpose of determining the extent to which 
differences in patient characteristics influence the per diem cost of 
inpatient psychiatric care.
    This potential limitation results from Medicare cost accounting 
practices in which routine per diem costs are calculated as an average 
and, therefore, do not vary among patients within a facility (that is, 
a patient requiring intensive staff attention is assigned the same 
routine cost as a patient requiring little staff attention). This 
potential limitation assumes heightened importance for IPFs because 
routine costs represent about 88 percent of total costs. As a result, 
our cost measure may not capture the degree of variation in routine 
cost attributable to differences in patient characteristics. Patient 
differences are reflected in our measure of routine cost only to the 
extent that facilities tend on average to treat different proportions 
of patients with differing routine resource needs. For example, one IPF 
may have higher routine per diem costs because it treats a higher 
proportion of older patients (or patients who require continuous 
monitoring) than another IPF. However, our cost variable will not 
measure the extent to which older patients within the same IPF are more 
costly than younger patients. We are currently conducting a research 
study with the RTI International[reg] (trade name of 
Research Triangle Institute) that will provide information as to the 
effects of this data limitation. As a result, we expect to have more 
information about the extent to which routine costs vary by certain 
patient characteristics. We solicit suggestions on other data sets or 
studies that could provide additional information on the relationship 
between individual patients and average facility routine costs.
    This routine cost limitation does not apply to ancillary costs 
because they can be measured at the patient level using Medicare claims 
as reported in the MedPAR file. However, there are differences in 
charging practices between psychiatric hospitals and psychiatric units 
that affect our measurement of ancillary costs. For example, there are 
approximately 100 hospitals in our MedPAR data file that do not bill 
ancillary charges; the majority of these providers are State 
psychiatric hospitals who bill a single average per diem rate that 
includes routine, ancillary, and other costs.
    The proposed payment adjustors were derived from regression 
analysis of 100 percent of the 1999 MedPAR data file. The MedPAR data 
file used for the final regression contains 467,372 cases although the 
complete file contains 476,541 cases. We deleted 5,822 cases (1.24 
percent) from this file because routine cost data for certain IPFs was 
not available. In order to include as many IPFs as possible in the 
regression, we substituted the 1998 Medicare cost report data for 
routine cost and ancillary cost to charge ratios (using the 1998 
Medicare cost report data).
    For the remaining 470,719 cases, we used the following method to 
trim extraordinarily high or low cost values that most likely contained 
data errors, in order to improve the accuracy of our results. The means 
and standard deviations of the logged per diem total cost were computed 
separately for cases from psychiatric hospitals and psychiatric units. 
Separate statistics were computed for the groups of IPFs, because we 
did not want to systematically exclude a larger proportion of cases 
from the higher cost psychiatric units. Before calculating the means of 
the logged per diem total cost, we trimmed cases from the file when 
covered days were zero, or routine costs were less than $100 or greater 
than $3,000, (because we believe this range captured the grossly 
aberrant cases), so that the means would not be distorted. We trimmed 
cases when the logged per diem cost was outside the standard and 
generally used statistical trim points of plus or minus 3 standard 
deviations from the respective means for hospitals and psychiatric 
units. These criteria eliminated another 3,347 cases, leaving 467,372 
cases that were used in the final regression.
    The log of per diem cost, like most health care cost measures, 
appears to be normally distributed. Therefore, the natural logarithm of 
the per diem cost was the dependent variable in the regression 
analysis. To control for psychiatric hospitals that do not bill 
ancillary costs, we included a categorical variable that identified 
them.
    The proposed per diem cost was adjusted for differences in labor 
cost across geographic areas using the FY 1999 hospital wage index 
unadjusted for geographic reclassifications, in order to be consistent 
with our use of the market basket labor share in applying the wage 
index adjustment.
    We computed a proposed wage adjustment factor for each case by 
multiplying the Medicare hospital wage index for each facility by the 
proposed labor-related share (.72828) and adding the proposed non-labor 
share (.27172). We used the proposed excluded hospital with capital 
market basket to determine the labor-related share (see section III.A. 
of this proposed rule). The per diem cost for each case was divided by 
this factor before taking the natural logarithm (that is, a standard 
mathematical practice accepted by the scientific community). The 
payment adjustment for the wage index was computed consistently with 
the wage adjustment factor, which is equivalent to separating the per 
diem cost into a labor portion and a non-labor portion and adjusting 
the labor portion by the wage index.
    With the exception of the proposed payment adjustment for teaching 
facilities, the independent variables were specified as one or more 
categorical variables. Once the regression model was finalized based on 
the log normal variables, the regression coefficients for these 
variables were converted to payment adjustment factors by treating each 
coefficient as an exponent of the base e for natural

[[Page 66930]]

logarithms, which is approximately equal to 2.718. The proposed payment 
adjustment factors represent the proportional effect of each variable 
relative to a reference variable.
1. Proposed Patient-Level Characteristics
    Subject to the limitations of the proposed cost variable described 
above and the availability of patient characteristic information 
contained in the administrative data, we attempted to use patient 
characteristics to explain the cost variation amongst IPFs. By 
adjusting for DRGs, comorbidities, age, and day of the stay, we were 
able to explain approximately 19 percent of the variation in the per 
diem cost. This result is comparable to that obtained by THEORI in the 
analysis they conducted for the APA. The study is described in section 
II.B. of this proposed rule.
a. DRGs
    The principal diagnosis ICD code listed on the claim is used to 
assign each case to one of the 15 DRGs that we are proposing to 
recognize in this IPF prospective payment system (see section II.C of 
this proposed rule). The coefficients of these DRGs from the cost 
regression analysis were used to determine the magnitude of the payment 
adjustment for each of the proposed 15 DRGs. The payment adjustments 
are expressed relative to the most frequently assigned DRG (DRG 430, 
Psychoses). That is, the proposed adjustment factor for DRG 430 would 
be 1.00, and the proposed adjustment factors for the other 14 DRGs 
would vary above and below 1.00. For 8 DRGs, the proposed adjustments 
would be relatively small (between .96 and 1.04, that is, between 4 
percent lower to 4 percent higher). The following 4 DRGs would receive 
relatively large payment adjustments:
    [sbull] DRG 424 (Surgical procedure with Principal Diagnosis of 
Mental Illness) would have the largest payment adjustment of 
approximately 1.22.
    [sbull] DRG 023 (Non-traumatic stupor and coma) would receive an 
adjustment of approximately 1.10.
    [sbull] DRG 425 (Acute Adjustment Reaction and Psychosocial
Dysfunction) would receive an adjustment of approximately 1.08.
    [sbull] DRG 12 (Degenerative Nervous System Disorders) would 
receive an adjustment of approximately 1.07.
    Both of the following two DRGs would be paid substantially less 
than DRG 430 with payment adjustments of approximately 0.88:
    [sbull] DRG 433 (Alcohol/Drug Abuse or Dependence, left against 
medical advice).
    [sbull] DRG 523 (Alcohol/Drug Abuse or Dependence, without 
Complications and/or Comorbidity and without Rehabilitation Therapy).
    Cases in our MedPAR data file whose principal diagnosis classified 
them in DRGs other than one of the 15 DRGs that we are proposing to 
recognize in this proposed IPF prospective payment system were grouped 
into a single ``other'' category.
b. Comorbidities
    Our analysis of the data indicates that patients who have certain 
comorbid conditions in addition to their psychiatric condition 
generally require more expensive care while they are hospitalized. 
After a thorough review of the ICD-9-CM codes, some comorbid conditions 
were identified as being more costly on a per diem basis. Groups of 
similar diagnosis codes were created to describe these conditions, 
which tend to be chronic illnesses that require additional medications, 
supplies, laboratory, or diagnostic testing in addition to the care 
provided for their psychiatric condition. Conditions in which the 
patient is acutely ill requiring care in a general hospital, for 
example, myocardial infarction, were not included in our analysis.
    Based upon this analysis, we are proposing payment adjustments for 
17 comorbidity categories that we would recognize for payment 
adjustments under the proposed IPF prospective payment system. Table 3 
below provides a listing of the proposed comorbidity categories, the 
ICD-9-CM diagnostic codes comprising each category, and the payment 
adjustment factors. The adjustment factors are also in Addendum A.
    As in the case of the DRGs, the cost regression analysis was used 
to determine the magnitude of the proposed payment adjustments for the 
comorbidity groups. Of the 17 comorbidity categories, the following 4 
groups would have proposed payment adjustment factors ranging from 1.11 
to 1.17 more than a case that did not have any of the 17 comorbid 
conditions: (1) Coagulation factor deficits; (2) renal failure, 
chronic; (3) chronic cardiac conditions; and (4) atherosclerosis of 
extremity with gangrene. Seven categories would be paid payment 
adjustments from 1.08 to 1.14: (1) Tracheotomy; (2) renal failure, 
acute; (3) malignant neoplasms; (4) severe protein calorie 
malnutrition; (5) chronic obstructive pulmonary disease; (6) poisoning; 
and (7) severe musculoskeletal and connective tissue diseases. The 
remaining 6 comorbidity categories would receive payment adjustments 
ranging from 1.03 to 1.10: (1) HIV; (2) infectious diseases; (3) 
uncontrolled type I diabetes mellitus; (4) artificial openings 
digestive and urinary; (5) drug and/or alcohol induced mental 
disorders; and (6) eating and conduct disorders.
    Other potential conditions were considered as potentially more 
expensive, but the small number of cases in the MedPAR data file made 
it impossible to propose an appropriate adjustment for those 
conditions. We solicit comments suggesting other conditions that may be 
expected to increase the per diem cost of care in IPFs. In addition, we 
expect that as facilities become aware of the importance of providing 
accurate information on the diagnoses of patients, we will have more 
data to use as a basis for refinements to the list of proposed comorbid 
conditions affecting the per diem cost of care.

      Table 3.--Diagnosis Codes for Proposed Comorbidity Categories
------------------------------------------------------------------------
                                                             Proposed
    Description of proposed           ICD-9-CM code         adjustment
          comorbidity                                         factor
------------------------------------------------------------------------
HIV............................  042....................            1.06
Coagulation Factor Deficits....  2860 through 2864......            1.11
Tracheotomy....................  51900 and V440.........            1.14
Renal Failure, Acute...........  5846 through 5849;                 1.08
                                  7885; 9585; V451;
                                  V560, V561; and V562.
Renal Failure, Chronic.........  40301; 40311; 40391;               1.14
                                  40402; 40412; 40492,
                                  585; and 586.
Malignant Neoplasms............  1400 through 1720; 1740            1.10
                                  through 1840; and 1850
                                  through 2080.

[[Page 66931]]

 
Uncontrolled Type I Diabetes-    25003; 25083; 25013;               1.10
 Mellitus, with or without        25023; 25033; 25093;
 complications.                   25043; 25053; 25063;
                                  and 25073.
Severe Protein Calorie           260 through 262........            1.12
 Malnutrition.
Eating and Conduct Disorders...  3071; 30750; 31203;                1.03
                                  31233; and 31234.
Infectious Diseases............  01000 through 04110;               1.08
                                  04500 through 05319,
                                  05440 through 05449;
                                  0550 through 0770;
                                  0782 through 0789; and
                                  07950 through 07595.
Drug and/or Alcohol Induced      2920; 2922; 2910;                  1.03
 Mental Disorders.                29212; 30300; and
                                  30400.
Cardiac Conditions.............  3910; 3911; 3912;                  1.13
                                  40201; 41403; 4160;
                                  and 4210.
Atherosclerosis of Extremity     44024..................            1.17
 with Gangrene.
Chronic Obstructive Pulmonary    5100; 51883; 51884;                1.12
 Disease.                         4920; 494; 49120
                                  through 49122, and
                                  V461.
Artificial Openings-Digestive    56960; V441 through                1.09
 and Urinary.                     V443; and V4450.
Severe Musculoskeletal and       6960; 7100; 73000                  1.12
 Connective Tissue Diseases.      through73009; 73010
                                  through 73019; 73020
                                  through 73029; and
                                  7854.
Poisoning......................  96500 through 96509;               1.14
                                  and 9654; 9670 through
                                  9700; 9800 through
                                  9809; 9830 through
                                  9839; 986; 9890
                                  through 9897.
------------------------------------------------------------------------

c. Patient Age and Gender
    The cost regressions explored several alternative configurations of 
age and gender variables. The results indicate that the per diem cost 
rises as a patient's age increases, and the per diem cost are higher 
for female patients.
    We examined the variation in the per diem cost for 5-year age 
intervals ranging from age 40 to 80 with open-ended categories ranging 
above age 80 and below 40 and determined that the effect of age was 
statistically significant. We initially ran the regression for three 
age groups consistent with the natural breaks in the distribution of 
age (under 55, 55 to 64, and 65 and over). The distribution showed that 
most Medicare psychiatric patients are under age 55 and over age 65. In 
addition, the distribution showed that the age group between 55 and 65 
years of age increased the predictive power of the model only by a 
factor of .002 percent because there were few patients in that age 
category. For this reason, we are not proposing adjustments reflecting 
the three age groups. Rather, we are proposing to make a single 
adjustment of 13 percent for patients 65 years and over. We are 
proposing two age groups (under 65 and over 65) to correspond with the 
major populations within Medicare: the disabled and the elderly, which 
we believe are largely responsible for the age-related cost differences 
that we observed. In addition, preliminary results from the RTI 
International[reg] research that used estimates of patient-
specific routine cost per day (from a sample of 40 IPFs) found that 
splitting age into two groups (under 65 and over 65) has greater 
explanatory power than alternative age group configurations. The 
research study is described in more detail in section V.C.1. of this 
proposed rule.
    The cost regression implies that female patients are approximately 
3 percent more costly than male patients. However, the explanatory 
power of the equation increases by less than .002 percentage points. 
There is also a small reduction in the age effect for the 65 and over 
age group (less than one percentage point). We also examined the 
alternative of including gender along with the three age groups (under 
55, 55 to 64, and 65 and over) and compared the results to the 
regression without gender and with two age groups (under 65 and 65 and 
over). The fuller specification of age and gender only increased the 
explanatory power by .003 points and had little effect on the size of 
the age effects.
    We know that the elderly and women are more frequently treated in 
psychiatric units than in freestanding psychiatric hospitals. When an 
indicator variable for psychiatric units is included in the cost 
regression, the age and gender effects decrease (the 65 and over age 
effect declines from approximately 13 percent to approximately 9 
percent, and the gender effect decreases from approximately 3 percent 
to 2 percent). We are unable to determine the extent to which this 
interaction of psychiatric unit status with age and gender indicates 
higher direct costs of treating the elderly and women, as opposed to 
other reasons for the higher costs of psychiatric units. However, RTI 
International's[reg] preliminary results, which used a 
better patient-specific cost variable for a sample of 40 hospitals 
found a much stronger effect for age than for gender. This is because 
the evidence currently available to us is limited and we believe we 
cannot identify a direct link between the costs of psychiatric care in 
psychiatric units and treatment of female IPF patients. We are not 
proposing to adjust the per diem payment rate to account for gender. We 
invite comments on the appropriateness of including a gender variable 
as a payment adjustment as well as comments on the age categories used 
to identify variations in costs. We will continue to assess the effects 
of gender and age as we analyze more current data in the development of 
the final rule.
d. Length of Stay
    Cost regressions indicate that the per diem cost declines as the 
length of stay increases. We are proposing adjustments to account for 
ancillary and certain administrative costs that occur 
disproportionately in the first days after being admitted to an IPF 
(the variable per diem adjustments). We examined the per diem cost over 
a range of 1 to 14 days. According to the 1999 MedPAR data file, the 
per diem costs were highest on day 1 and declined for days 2 through 8 
as indicated below. Per diem costs for days 9 and thereafter remained 
relatively consistent with the median length of stay in an IPF for 
Medicare beneficiaries. The cost regression analysis was used to 
determine the following proposed payment adjustments. Relative to a 
stay of 9 or more days, the resulting adjustments for the first 8 days 
of a stay that we are proposing to use in this IPF prospective payment 
system are as follows:
    [sbull] The variable per diem adjustment for day 1 would be an 
increase of approximately 26 percent.

[[Page 66932]]

    [sbull] The variable per diem adjustment for days 2 to 4 would be 
an increase of approximately 12 percent.
    [sbull] The variable per diem adjustment for days 5 to 8 would be 
an increase of approximately 5 percent.
    [sbull] No variable per diem adjustment would be paid after the 8th 
day.
    The higher payments for earlier days are offset through the budget 
neutrality adjustment, which has the effect of lowering the average 
payment to account for the increased payments.
2. Proposed Facility-Level Characteristics
    As noted earlier, we were able to explain 19 percent of the 
variation in wage-adjusted per diem cost using patient characteristics. 
We explored a variety of ways to incorporate facility characteristics 
into the cost regressions in order to raise the explanatory power and 
refine the proposed payment system to better align payments with cost 
differences across facility types.
    Per diem costs are strongly related to facility occupancy, because 
occupancy (as measured by the ratio of actual days to available days) 
measures the extent to which the facility is efficiently utilizing its 
capacity. When occupancy is low, fixed costs must be spread across 
relatively few days of care and the per diem costs are high. Because we 
do not want to pay for inefficiency, we are not proposing that 
occupancy be used as a payment adjuster. However, this variable is 
included in the cost regression to improve the estimates of the effects 
of other factors that may more appropriately be used to adjust 
payments.
    An analysis of the facility-level characteristics we considered 
follows. To summarize the analysis, we are proposing that payments be 
adjusted based on the IPF's wage index, rural location, and teaching 
status. We considered, and explain below, the reasons why we are 
proposing not to provide adjustments for psychiatric units, 
disproportionate share intensity, or IPFs in Alaska or Hawaii.
a. Rural Location
    We found that, controlling for the patient characteristics and 
other facility variables included in our cost regression, facilities 
located in non-metropolitan area counties had per diem costs about 16 
percent higher than facilities located in metropolitan area counties. 
Most of the higher cost of rural IPFs is related to the fact that the 
vast majority are psychiatric units within small general acute care 
hospitals. Small-scale facilities are more costly on a per diem basis 
because there are minimum levels of fixed costs that cannot be avoided. 
Based on this analysis, we are proposing to make an adjustment of 16 
percent for IPFs located in rural areas.
b. Teaching Status
    One option for paying psychiatric teaching facilities for their 
higher costs relies on past experience with the teaching adjustment for 
other Medicare prospective payment systems. As in other inpatient 
prospective payment systems, we measured teaching status as one plus 
the ratio of the number of interns and residents assigned to the 
facility divided by the IPF's average daily census (ADC). Similarly for 
psychiatric units, we used the number of interns and residents assigned 
to the psychiatric unit.
    The advantages of using the ADC rather than the number of beds for 
the denominator of the ratio noted above was discussed in the final 
rule we published in the Federal Register on August 30, 1991 (56 FR 
43380) for putting inpatient hospital capital payments under a 
prospective payment. As described in that rule, the two key advantages 
of the ADC are that it is--(1) easier to define more precisely than 
number of beds; and (2) less subject to understatement in an effort to 
increase the size of the teaching variable. We believe that these 
advantages apply equally to IPFs.
    The teaching variable in our cost regressions, that is, the 
logarithm of one plus the ratio of interns and residents to ADC, has a 
coefficient value of .5215. This cost effect is converted to a payment 
adjustment by treating the regression coefficient as an exponent and 
raising the teaching variable to the .5215 power. Applying this method 
for a facility with a teaching variable of 1.10 would yield a 5.1 
percent increase in the per diem payment; for a facility with a 
teaching variable of 1.25, there would be a 12.3 percent higher 
payment.
    Our impact tables are based on the assumption that we would pay a 
proposed IPF teaching adjustment in this manner and our proposed 
regulatory text is also based on this approach. However, we are 
considering alternatives because we are concerned that this method 
creates incentives for teaching hospitals to add residents and to 
increase their payments under an open-ended formula that pays higher 
teaching payments as teaching intensity, as measured by resident to ADC 
ratios, increases.
    The BBA, sections 4621 and 4623, limited the incentives to add 
residents in hospitals paid under the hospital inpatient prospective 
payment system by adopting caps for both direct and indirect teaching 
payments. The number of residents was capped for the purpose of 
computing both the direct and indirect teaching adjustments and the 
resident to ADC was capped for purposes of computing the indirect 
teaching adjustment. Because IPFs would now be paid on a prospective 
basis similar to acute care hospitals, we are considering extending the 
indirect teaching caps to IPF teaching hospitals. Regulations, as 
specified at Sec.  413.86, already apply the BBA caps to direct medical 
education payments for all teaching hospitals.
    We are also exploring whether there are other alternatives for 
paying IPF teaching hospitals their higher teaching costs. We are 
interested in developing methodologies for estimating these higher 
costs and then, based on the newly available estimates and current 
data, distributing those costs fairly to individual teaching hospitals. 
We invite comments on obtaining the estimates and current data and on 
other approaches to paying psychiatric teaching hospitals for their 
higher medical-education costs based on that data.
c. Disproportionate Share Hospital Status
    We measured the extent to which a facility provides care to low 
income patients using the disproportionate share hospital (DSH) 
variable used in other Medicare prospective payment systems (that is, 
the sum of the proportion of Medicare days of care provided to 
recipients of Supplemental Security Income and the proportion of the 
total days of care provided to Medicaid beneficiaries). For psychiatric 
units, both proportions are specific to the unit and not the entire 
hospital. A limitation of the Medicaid proportion as applied to 
psychiatric hospitals is that Medicaid does not pay for services 
provided to individuals under the age of 65 in an institution for 
mental diseases (IMD), as specified in section 1905(h) of the Act. As a 
result, low-income beneficiaries in IMDs cannot be identified as 
Medicaid beneficiaries, and the Medicaid proportion will be biased 
downwards.
    The DSH variable was highly significant in our cost regressions; 
however, we found that facilities with higher DSH had lower per diem 
costs. We note that the previously cited study for the APA also found 
the same results. The relationship of high DSH with lower costs cannot 
be attributed to downward bias in the Medicaid proportion due to the 
IMD exclusion. This is because public psychiatric

[[Page 66933]]

hospitals already have lower costs on average than other types of IPFs. 
Therefore, if we propose a DSH adjustment based on the regression 
analysis, IPFs with high DSH shares would be paid lower per diem rates.
    We tried a variety of supplemental analyses in an attempt to better 
understand the observed relationship, but did not find a positive 
relationship between the per diem cost and the DSH ratio. Therefore, we 
are not proposing a payment adjustment for DSH intensity but will 
monitor the effect of DSH for possible future adjustments.
d. Psychiatric Units in General Acute Care Hospitals
    On average, psychiatric units have higher per diem costs than 
psychiatric hospitals. According to the 1999 MedPAR file, the average 
per diem cost for psychiatric units was $615, compared to $444 for 
psychiatric hospitals.
    Some of the patient characteristics and facility variables that we 
included in our cost regressions explain part, but not all, of the cost 
difference between hospitals and psychiatric units. Controlling for 
facility size, occupancy, and selected comorbidities reduces the 
magnitude of the estimated cost difference from approximately 37 
percent to 19 percent. Several factors may account for the remaining 19 
percent difference: (1) A large proportion of psychiatric admissions to 
these units enter the hospital through the emergency room (ER), and ER 
charges are included on the inpatient claims used in our analysis (this 
issue will not be relevant to IPF payment in the future because ER 
services have been paid under the outpatient hospital prospective 
payment system since August 2000); (2) some of these admissions have 
medical conditions in addition to psychiatric symptoms and require more 
treatments resulting in higher costs due to more services and 
equipment; (3) psychiatric hospitals and psychiatric units may utilize 
different patterns of care and staffing; and (4) accounting differences 
may account for some of the cost difference.
    We have decided not to propose a specific adjustment for 
psychiatric units. We are concerned about applying such an adjustment 
to all psychiatric units regardless of an individual unit's costs, 
efficiency, or case mix.
    We hope that with further research, we will be able to gain a 
better understanding of the cost differences that would enable us to 
propose even more refined payment adjustments to directly measure the 
differences in patient care needs in psychiatric units.
e. Adjustment for Alaska and Hawaii IPFs
    Some of the prospective payment systems that have been developed 
include a cost-of-living adjustment for the unique circumstances of 
Medicare providers located in Alaska and Hawaii. Therefore, we analyzed 
our data to determine the existence of IPFs located in Alaska and 
Hawaii. Currently, in Alaska, there are only two psychiatric hospitals 
and no psychiatric units. In Hawaii, there is one psychiatric hospital 
and one psychiatric unit. In the absence of a cost-of-living 
adjustment, our analyses indicates that some facilities in Alaska and 
Hawaii would ``profit'' and other facilities would experience a 
``loss.'' Due to the limited number of cases, the results of our 
analysis are inconclusive regarding whether a cost-of-living adjustment 
would improve payment equity for these facilities. Therefore, we are 
not proposing an adjustment for IPFs located in Alaska and Hawaii. We 
will continue to assess the impact of the proposed IPF prospective 
payment system on IPFs located in Alaska and Hawaii as we obtain more 
current data.
3. Proposed Payment Adjustments
a. Proposed Outlier Adjustment
    While we are not statutorily required to provide outlier payments, 
we believe that it is appropriate to propose an outlier payment policy 
in connection with this prospective payment system in order to both 
ensure that IPFs treating unusually costly cases do not incur 
substantial ``losses'' and promote access to IPFs for patients 
requiring expensive care. Providing additional payments for costs that 
are beyond the IPF's control can strongly improve the accuracy of the 
proposed IPF prospective payment system in determining resource costs 
at the patient and facility level.
    Notwithstanding the factors that we are proposing to recognize in 
the IPF prospective payment system as proposed adjustments to the per 
diem payment rate, the cost of care for some psychiatric patients may 
still substantially exceed the otherwise applicable payments during the 
course of a stay. This may occur because of multiple comorbid 
conditions and complications that require a high utilization of 
ancillary services. Since this is a per diem payment system, the extent 
to which length of stay is a factor would be mitigated because payment 
is made for each day of the stay.
    We have determined that it is important to provide some protection 
from financial risk caused by treating patients who require more costly 
care and to reduce the incentives to under serve these patients.
    Therefore, in order to protect IPFs from significant ``losses'' on 
very costly cases, we are proposing to provide outlier payments and set 
outlier numerical criteria prospectively so that outlier payments are 
projected to equal 2 percent of total payments under the proposed IPF 
prospective payment system. Based on the regression analysis and 
payment simulations, we believe that using a 2 percent threshold 
optimizes our ability to protect vulnerable IPFs while providing 
adequate payment for all other cases that are not outlier cases.
    We are proposing, in Sec.  412.424(c), to make an outlier payment 
for any case in which the estimated total cost exceeds an outlier 
threshold amount equal to the total IPF prospective payment system 
payment amount plus a fixed dollar loss amount. The fixed dollar loss 
amount is the amount used to limit the loss that an IPF would incur 
under the proposed outlier policy (see section III.C.3. of this 
proposed rule for an explanation of how the fixed dollar loss amount is 
calculated). Once the cost of a case exceeds the outlier threshold 
amount, an outlier payment would be made. A basic principle of an 
outlier policy is that outlier payments should cover less than the full 
amount of the additional costs above the outlier threshold in order to 
preserve the incentive to contain costs once a case qualifies for 
outlier payments (see Emmett B. Keeler, Grace M. Carter, and Sally 
Trude, ``Insurance Aspects of DRG Outlier Payments,'' The Rand 
Corporation, N-2762-HHS, October 1988). This results in Medicare and 
the IPF sharing financial risk in the treatment of extraordinarily 
costly cases.
b. Methodology for Proposed Outlier Payments
    We are proposing to make outlier payments on a per case basis 
rather than on a per diem basis. Outlier payments would be made for IPF 
cases when the estimated cost of the entire stay exceeds the outlier 
threshold amount. We believe it is appropriate to determine outlier 
status on a per case basis in order to accurately assess the ``losses'' 
associated with the care of a patient for the entire stay. If we 
propose to establish a per diem fixed dollar loss threshold, outlier 
payments could occur for part of an inpatient stay when no ``losses'' 
actually occur. If we review the stay in terms of the resources 
expended each day, the facility may incur a ``loss'' on some days of 
the stay and may experience ``gains'' on other days of the stay. Thus, 
assessing the resources

[[Page 66934]]

expanded over the course of the entire stay provides a fuller picture 
of the actual resources needed to provide care for the complete episode 
of care. After assessing the entire stay, one can determine if a 
``loss'' was actually incurred by the IPF.
    Therefore, we are proposing to define the outlier threshold amount 
as the total IPF prospective payment for an IPF stay, plus a fixed 
dollar loss amount. As explained below, the fixed dollar amount is 
determined to be the dollar amount per stay that achieves a total 
outlier percentage of 2 percent of the proposed prospective payments. 
The proposed outlier payment would be defined as a proportion of the 
estimated cost beyond the outlier threshold. The proportion of 
additional costs paid as outlier payments is referred to as the loss-
sharing ratio. We chose to propose the fixed dollar loss amount and the 
loss-sharing ratios to allow the estimated total outlier payments to be 
2 percent of the total estimated proposed IPF prospective payments.
    In order to determine the most appropriate outlier policy, our goal 
was to analyze the extent to which the various outlier percentages 
reduce financial risk, reduce incentives to under serve costly 
beneficiaries, and improve the overall fairness of the payment system. 
Our analysis showed that the higher the outlier percentage, the more 
cases qualified for outlier payments, and the less payment was made per 
case. Conversely, a low outlier percentage resulted in a higher fixed 
dollar loss threshold and although fewer cases exceeded the threshold, 
the amount paid was more substantial.
    We began our analysis by determining that if approximately 10 
percent of IPF cases received an outlier payment, we would be 
maintaining the basic premise behind establishing an outlier policy, 
that is, to compensate IPFs for their truly high cost cases. Also, this 
percentage of cases, that is 10 percent, is not inconsistent with the 
percentage of total outlier cases paid in other prospective payment 
systems.
    Initially, we believed that a 5 percent outlier policy would result 
in outlier payments for approximately 10 percent of total IPF cases. 
However, our analysis showed that a 5 percent outlier policy resulted 
in outlier payments for approximately 20 percent of IPF cases, paying 
an average of $1,975 per case. Since 20 percent of IPF cases would 
receive an outlier payment, we do not believe that a 5 percent outlier 
policy limits outlier payments to only the truly high cost cases. We 
then reduced the outlier policy to 3 percent and found that 12 percent 
of IPF cases received outlier payments, with an average payment of 
$2,125 per case. Although a 3 percent outlier policy reduced the number 
of cases that would qualify for outlier payments, 12 percent of cases 
still exceeded our target of 10 percent of total IPF cases.
    However, we have determined that an outlier policy of 2 percent of 
the total proposed IPF payments would allow us to achieve a balance of 
the above stated goals. A 2 percent outlier policy would appropriately 
compensate for the truly high cost cases with a much more appropriate 
level of payment and reduced financial risk without causing a 
significant reduction in the per diem base rate. Under a 2 percent 
outlier policy, approximately 7 percent of IPF cases qualify for 
outlier payments with an average payment of $2,350 per case. Providing 
outlier payments to 7 percent of cases meets the 10 percent target and 
would provide outlier payment for only the high cost IPF cases. 
Accordingly, we are proposing the outlier policy to be 2 percent of the 
total proposed IPF payments. The amount of outlier payments would be 
funded by prospectively reducing the non-outlier payment rates in a 
budget-neutral manner.
    Under our proposed outlier policy, we would make outlier payments 
for discharges in which estimated costs exceed an adjusted threshold 
amount ($4,200 multiplied by the IPF's facility adjustments, that is 
wages, rural location, and teaching status) plus the total IPF 
prospective payment system adjusted payment amount for the discharge. 
The estimated cost for a case would be calculated by multiplying the 
overall facility-specific cost-to-charge ratio by the total charges for 
the inpatient stay.
    In establishing the loss-sharing ratio, we considered establishing 
a single ratio consistent with the hospital inpatient prospective 
payment system, which is set at a marginal cost of 80 percent of the 
difference between the cost for the discharge and the adjusted 
threshold amount. However, the proposed IPF prospective payment system 
unlike the hospital inpatient prospective payment system is a per diem 
payment system, we are concerned that a single loss-sharing ratio at 80 
percent might provide an incentive to increase length of stay in order 
to receive additional outlier payments. Therefore, we are proposing to 
reduce the loss-sharing ratio when the length of the stay increases 
beyond the median length of stay. We believe that a reduction to the 
outlier loss-sharing ratio should occur in a similar manner to the 
declining per diem payment. The per diem payment amount under the 
proposed IPF prospective payment system is highest on days 1 through 4, 
declines on days 5 through 8, and declines further for all days beyond 
8. Similarly, we are proposing to establish an 80-percent loss-sharing 
ratio for days 1 through 8 in order to reflect higher costs early in an 
IPF stay and reduce the ratio by 20 percent for days 9 and thereafter. 
This is consistent with the median length of stay for IPFs. Reducing 
the amount Medicare would share in the loss of high cost cases would 
provide an incentive for an IPF to contain costs once a case qualifies 
for outlier payments. We solicit comments on this approach.
c. Proposed Implementation of the Outlier Policy
    The intent of proposing an outlier policy is to adequately pay for 
truly high-cost cases. However, we have become aware that under the 
hospital inpatient prospective payment system, some hospitals have 
taken advantage of two system features in the outlier policy to 
maximize their outlier payments. The first is the time lag between the 
current charges on a submitted claim and the cost-to-charge ratio taken 
from the most recent settled cost report. Second, statewide average 
cost-to-charge ratios are used in those instances in which an acute 
care hospital's operating or capital cost-to-charge ratios fall outside 
reasonable parameters. We set forth these parameters and the statewide 
cost-to-charge ratios for acute care hospitals in the annual 
publication of prospective payment rates that are published by August 1 
of each year in accordance with Sec.  412.8(b)(2). Currently, these 
parameters represent 3.0 standard deviations (plus or minus) from the 
geometric mean of cost-to-charge ratios for all hospitals. Hospitals 
could arbitrarily increase their charges so far above costs that their 
cost-to-charge ratios would fall below 3 standard deviations from the 
geometric mean of the cost-to-charge ratio. Thus, a higher statewide 
average cost-to-charge ratio would be applied to determine if the 
hospital should receive an outlier payment. This disparity results in 
their cost-to-charge ratios being set too high, which in turn results 
in an overestimation of their current costs per case.
    The intention of the outlier policy under both the hospital 
inpatient prospective payment system and the proposed IPF prospective 
payment system is to make payments only when the cost of care is 
extraordinarily high in relation to the average cost of treating 
comparable conditions or illnesses. We

[[Page 66935]]

believe that if hospitals' charges are not sufficiently comparable in 
magnitude to their costs, the legislative purpose underlying payment 
for outliers is thwarted. Thus, on June 9, 2003, we published a final 
rule in the Federal Register (68 FR 34494) to ensure that outlier 
payments are paid for truly high-cost cases under the hospital 
inpatient prospective payment system.
    We believe the use of parameters is appropriate for determining 
cost-to-charge ratios to ensure these values are reasonable and that 
outlier payments can be made in the most equitable manner possible. 
Further, we believe the proposed methodology of computing IPF outlier 
payments is susceptible to the same payment enhancement practices 
identified under the hospital inpatient prospective payment system 
because it depends on the cost-to-charge ratio to determine the IPF's 
cost. Accordingly, as discussed below, we are proposing provisions for 
implementing the outlier policy to ensure the statistical accuracy of 
cost-to-charge ratios and appropriate adjustment of IPF outlier 
payments.
1. Statistical Accuracy of Cost-to-Charge Ratios
    We believe that there is a need to ensure that the cost-to-charge 
ratio used to compute an IPF's estimated costs should be subject to a 
statistical measure of accuracy. Removing aberrant data from the 
calculation of outlier payments will allow us to enhance the extent to 
which outlier payments are equitably distributed and continue to reduce 
incentives for IPFs to under serve patients who require more costly 
care. Further, using a statistical measure of accuracy to address 
aberrant cost-to-charge ratios would also allow us to be consistent 
with the outlier policy under the hospital inpatient prospective 
payment system. Therefore, we are making the following two proposals:
    [sbull] We will calculate two national ceilings, one for IPFs 
located in rural areas and one for facilities located in urban areas. 
We propose to compute this ceiling by first calculating the national 
average and the standard deviation of the cost-to-charge ratios for 
both urban and rural IPFs.
    To determine the rural and urban ceilings, we propose to multiply 
each of the standard deviations by 3 and add the result to the 
appropriate national cost-to-charge ratio average (either rural or 
urban). We believe that the method explained above results in 
statistically valid ceilings. If an IPF's cost-to-charge ratio is above 
the applicable ceiling, the ratio is considered to be statistically 
inaccurate. Therefore, we are proposing to assign the national (either 
rural or urban) median cost-to-charge ratio to the IPF. Due to the 
small number of IPFs compared to the number of acute care hospitals, we 
believe that statewide averages used in the hospital inpatient 
prospective payment system, would not be statistically valid in the IPF 
context.
    In addition, the distribution of cost-to-charge ratios for IPFs is 
not normally distributed and there is no limit to the upper ceiling of 
the ratio. For these reasons, the average value tends to be overstated 
due to the higher values on the upper tail of the distribution of cost-
to-charge ratios. Therefore, we are proposing to use the national 
median by urban and rural type as the substitution value when the 
facility's actual cost-to-charge ratio is outside the trim values. 
Cost-to-charge ratios above this ceiling are probably due to faulty 
data reporting or entry, and, therefore, should not be used to identify 
and make payments for outlier cases because these data are clearly 
erroneous and should not be relied upon. In addition, we propose to 
update and announce the ceiling and averages using this methodology 
every year.
    [sbull] We will not apply the applicable national median cost-to-
charge ratio when an IPF's cost-to-charge ratio falls below a floor. We 
are proposing this policy because we believe IPFs could arbitrarily 
increase their charges in order to maximize outlier payments.
    Even though this arbitrary increase in charges should result in a 
lower cost-to-charge ratio in the future (due to the lag time in cost 
report settlement), if we propose a floor on cost-to-charge ratios, we 
would apply the applicable national median for the IPFs actual cost-to-
charge ratio. Using the national median cost-to-charge ratio in place 
of the provider's actual cost-to-charge ratio would estimate the IPF's 
costs higher than they actually are and may allow the IPF to 
inappropriately qualify for outlier payments.
    Accordingly, we are proposing to apply the IPF's actual cost-to-
charge ratio to determine the cost of the case rather than creating and 
applying a floor. In such cases as described above, applying an IPF's 
actual cost-to-charge ratio to charges in the future to determine the 
cost of the case will result in more appropriate outlier payments.
    Consistent with the policy change under the hospital inpatient 
prospective payment system, we are proposing that IPFs would receive 
their actual cost-to-charge ratios no matter how low their ratios fall. 
We are still assessing the procedural changes that would be necessary 
to implement this change.
2. Adjustment of IPF Outlier Payments
    As discussed in the hospital inpatient prospective payment system 
final rule for outliers, we have implemented changes to the outlier 
policy used to determine cost-to-charge ratios for acute care 
hospitals, because we became aware that payment vulnerabilities exist 
in the current outlier policy. Because we believe the IPF outlier 
payment methodology is likewise susceptible to the same payment 
vulnerabilities, we are proposing the following:
    [sbull] Include in proposed Sec.  412.424(c)(2)(v) a cross-
reference to Sec.  412.84(i) that was included in the final rule 
published in the Federal Register on June 9, 2003 (68 FR 34515). 
Through this cross-reference, we are proposing that fiscal 
intermediaries would use more recent data when determining an IPF's 
cost-to-charge ratio. Specifically, as provided in Sec.  412.84(i), we 
are proposing that fiscal intermediaries would use either the most 
recent settled IPF cost report or the most recent tentatively settled 
IPF cost report, whichever is later to obtain the applicable IPF cost-
to-charge ratio. In addition, as provided under Sec.  412.84(i), any 
reconciliation of outlier payments will be based on a ratio of costs to 
charges computed from the relevant cost report and charge data 
determined at the time the cost report coinciding with the discharge is 
settled.
    [sbull] Include in proposed Sec.  412.424(c)(2)(v) a cross 
reference to Sec.  412.84(m) (that was included in the final rule 
published in the Federal Register on June 9, 2003 (68 FR 34415) to 
revise the outlier policy under the hospital inpatient prospective 
payment system). Through this cross-reference, we are proposing that 
IPF outlier payments may be adjusted to account for the time value of 
money during the time period it was inappropriately held by the IPF as 
an ``overpayment.'' We also may adjust outlier payments for the time 
value of money for cases that are ``underpaid'' to the IPF. In these 
cases, the adjustment will result in additional payments to the IPF. We 
are proposing that any adjustment will be based upon a widely available 
index to be established in advance by the Secretary, and will be 
applied from the midpoint of the cost reporting period to the date of 
reconciliation. We are still assessing the procedural changes that 
would be necessary to implement this change.
d. Computation of Proposed Outlier Payments
    In order to illustrate the proposed outlier payment mechanism, we 
present

[[Page 66936]]

the following example of how we would calculate the outlier payment.

    Example: John Smith was hospitalized at a non-teaching IPF 
facility in Richmond, Virginia for 14 days. His total allowable 
billed charges for the 14 days was $20,000. The prospective payment 
amount (per diem payments plus adjustments) was $8,000.

    To determine whether this case qualifies for outlier payments, it 
would be necessary to compute the cost of the case by multiplying the 
facility's overall cost-to-charge ratio of .72 by the allowable charge 
of $20,000. In this case, the total allowable costs for Mr. Smith's 
case is $14,400 ($20,000 x .72). Because the IPF is a non-teaching 
urban facility, the fixed dollar threshold is adjusted by the wage 
index 0.9477.

      Table 4.--Computation Example of the Proposed Outlier Payment
------------------------------------------------------------------------
 
------------------------------------------------------------------------
             Steps to Calculate the Proposed Outlier Payment
------------------------------------------------------------------------
Calculate the Fixed Dollar Loss
 Threshold:
     Fixed Dollar Threshold.............  ..............          $4,200
    Wage adjusted labor share                     $2,899  ..............
     (.72828x4,200)*0.9477..............
    Non Labor Share (0.27172 x $4.200)..           1,141  ..............
    Adjusted Fixed Dollar Threshold                4.040  ..............
     ($2,899+$1,141)....................
Calculate Eligible Outlier Costs:
    Hospital Costs......................          14,400  ..............
    Adjusted Fixed Dollar Threshold.....           4,040
    Prospective Payment System Adjusted            8,000  ..............
     Payment............................
    Eligible for Outlier Costs ($14,400-           2,360
     $4,040-$8,000).....................
 Calculate the Loss Sharing Ratio
 Amount:
    Per Diem Outlier Costs ($2,360/14     ..............             169
     days)..............................
    Loss-sharing Ratio Days 1 through 8            1,079  ..............
     ($169x.80x8 days)..................
    Loss-sharing Ratio Days 9 through 14             607  ..............
     $169x.60 x6 days)..................
The Total Outlier Payment Amount                   1,686  ..............
 $1,079+$607)...........................
------------------------------------------------------------------------

e. Interrupted Stays
    Since per diem payments under the proposed IPF prospective payment 
system would be higher for the first 8 days of a stay (the variable per 
diem adjustment discussed earlier in this section), we are proposing to 
adopt an interrupted stay policy. The policy is intended to reduce 
incentives to move patients among Medicare-covered sites of care in 
order to maximize Medicare payment. We are concerned that IPFs could 
maximize payment by prematurely discharging patients after the 8 days 
during which they receive higher payments (the variable per diem 
adjustments), and then readmitting the same patient. In some cases a 
discharge and subsequent readmission within a short period of time may 
be appropriate. For example, we are concerned, in particular, that when 
there is a psychiatric unit within an acute care hospital, a patient 
could be transferred from the unit after only a few days of care to 
another part of the hospital and then be readmitted to the psychiatric 
unit. In this scenario, the hospital could receive the per diem 
adjustments for both stays in the psychiatric unit as well as receive 
the DRG payment associated with the acute hospital stay.
    In proposed Sec.  412.402, we define an interrupted stay as one in 
which the patient is discharged from an IPF and returns to the same IPF 
within 5 consecutive calendar days. Specifically, we are proposing in 
Sec.  412.424(d) that if a patient is discharged from an IPF and 
returns to the same IPF within 5 consecutive calendar days, we would 
treat both stays as a single stay. Therefore, we would not apply the 
variable per diem adjustment for the second admission and would combine 
the costs of both stays for the purpose of determining whether the case 
qualifies for outlier payments.
    We considered defining an interrupted stay as a readmission within 
8 days of discharge since the variable per diem adjustments are not 
applied after the 8th day of the stay. We are not proposing this 
definition for an interrupted stay because we believe that after an 8-
day absence from the IPF, many of the services that account for 
increased costs early in an inpatient psychiatric stay would need to be 
repeated, for example, assessments and laboratory testing. After a 
shorter absence from the IPF of 1 through 4 days, however, many of 
those admission-related services such as psychiatric evaluations and 
the patient's medical history would not need to be repeated. Therefore, 
we believe the lower end of the last range of payment adjustment, that 
is, 5 days, would provide for appropriate per diem payment adjustment 
as well as provide a disincentive to inappropriately shift patients 
between Medicare-covered sites of care. In addition, we intend to 
monitor the extent and timing of readmissions to IPFs and plan to 
account for changes in practice patterns as we refine the proposed IPF 
prospective payment system. Public comments are welcome on the proposed 
definition of an interrupted stay.
    For the purposes of counting the 5-calendar day time period to 
determine the length of the interrupted stay, the day of discharge 
would be counted as ``day 1'', with midnight of that day serving as the 
end of that calendar day. The 4 calendar days that immediately follow 
day 1 would be days 2 through 5.

C. Development of the Proposed Budget-Neutral Federal Per Diem Base 
Rate

1. Data Used To Develop the Proposed Federal Per Diem Base Rate
    Based on the regression analysis, we are proposing a prospective 
payment system for IPFs based on a per diem payment amount calculated 
from average costs adjusted for budget neutrality. The per diem amount 
would be adjusted by a budget-neutrality factor to arrive at the 
Federal per diem base rate used as the standard payment per day for the 
proposed IPF prospective payment system. The proposed Federal per diem 
base payment would be adjusted by the proposed wage index and the 
proposed patient-level and facility-level characteristics identified in 
the regression analysis. To calculate the proposed per diem amount, we 
would estimate the average cost per day for--(1) routine services from 
the most recent available cost report data (cost reports beginning in 
FY 1999 supplemented with 1998 cost reports if the 1999 cost report is 
missing); and (2) ancillary costs per day using data from the 1999 
Medicare bills and corresponding data from facility cost reports.

[[Page 66937]]

2. Calculation of the Proposed Per Diem Amount
    For routine services, the proposed per diem operating and capital 
costs would be used to develop the base for the psychiatric per diem 
amount. The per diem routine costs were obtained from each facility's 
Medicare cost report. To estimate the costs for routine services 
included in developing the proposed per diem amount, we summed the 
total routine costs (including costs for capital) submitted on the cost 
report for each provider and divided it by the total Medicare days. 
Some average routine costs per day were determined to be aberrant, that 
is, the costs were extraordinarily high or low and most likely 
contained data errors. The following method was used to trim 
extraordinarily high or low cost values in order to improve accuracy of 
our results. First, the average and standard deviations of the total 
per diem cost (routine and ancillary costs) were computed separately 
for cases from psychiatric hospitals and psychiatric units (separate 
statistics were computed for the groups of IPFs, because we did not 
want to systematically exclude a larger proportion of cases from the 
higher cost psychiatric units). Before calculating the means, we 
trimmed cases from the file when covered days were zero or routine 
costs were less than $100 or greater than $3,000. We selected these 
amounts because we believe this range captured the grossly aberrant 
cases. Elimination of the grossly aberrant cases would prevent the 
means from being distorted. Second, we trimmed cases when the 
provider's total cost per day was outside the standard and generally 
used statistical trim points of plus or minus 3 standard deviations 
from the respective means for each facility type (psychiatric hospitals 
and psychiatric units). If the total cost per day was outside the trim 
value, we would delete the data for that provider from the per diem 
rate development file. This method of trimming is consistent with the 
method used for the regression analysis. After trimming the data, the 
average routine cost per day would be $495.
    For the ancillary services, we would calculate the costs by 
converting charges from the 1999 Medicare claims into costs using 
facility-specific, cost-center specific cost-to-charge ratios obtained 
from each provider's applicable cost reports. We matched each 
provider's departmental cost-to-charge ratios from their Medicare cost 
report to each charge on their claims reported in the MedPAR file. 
Multiplying the total charges for each type of ancillary service by the 
corresponding cost-to-charge ratio provided an estimate of the costs 
for all ancillary services received by the patient during the stay. For 
those departmental cost-to-charge ratios that we considered to be 
aberrant because they were outside the statistically valued trim points 
of plus or minus 3.00 standard deviations from the facility-type mean, 
we replaced the individual cost-to-charge ratios for each department 
with the median department cost-to-charge ratio by facility type 
(psychiatric hospital or psychiatric unit). Because the distribution of 
ratios of cost-to-charges is not normally distributed and because there 
is no limit to the upper ceiling of the ratio, the mean value tends to 
be overstated due to the higher values on the upper tail of the bell 
curve. Therefore, we chose the median by facility type as a better 
measure for the substitution value when the facility's actual cost-to-
charge ratio was outside the trim values.
    After computing the estimated costs by applying the cost-to-charge 
ratios to the total ancillary charges for each patient stay, we would 
determine the average ancillary amount per day by dividing the total 
ancillary costs for all stays by the total covered Medicare days. Using 
this methodology, the average ancillary cost per day would be $67.
    Adding the average ancillary costs per day ($67) and the facility's 
average routine costs per day including capital costs ($495) provides 
the base payment amount ($562) for the estimated average per diem 
amount for each patient day of inpatient psychiatric care.
3. Determining the Update Factors for the Budget-Neutrality Calculation
    Section 124(a)(1) of Pub. L. 106-113 requires that the proposed IPF 
prospective payment system be budget neutral. In other words, the 
amount of total payments under the proposed IPF prospective payment 
system, including any payment adjustments, must be projected to be 
equal to the amount of total payments that would have been made if the 
proposed prospective payment system were not implemented. Therefore, we 
are proposing to calculate the budget-neutrality factor for the 
implementation period by setting the total estimated prospective 
payment system payments equal to the total estimated payments that 
would have been made under the TEFRA methodology had the proposed 
prospective payment system not been implemented.
    As discussed in section IV of this proposed rule, the 
implementation date of the proposed IPF prospective payment system is 
cost reporting periods beginning on or after April 1, 2004. In order to 
create a more even and efficient process of updates for the various 
Medicare payment systems, we are recommending that the first Federal 
base rate update occur on July 1, 2005. Therefore, we calculated the 
proposed Federal base rate to be budget neutral for the 15-month period 
April 1, 2004 through June 30, 2005.
    The data sources we used to calculate the budget-neutrality factor 
were the most complete data available for IPFs and included cost report 
data from FY 1999 and the 1999 Medicare claims data from the June 2001 
update of the MedPAR files. We updated the cost report data for each 
IPF to the midpoint of that 15-month period (April 1, 2004 through June 
30, 2005) and used the projected market basket update factors for each 
applicable year.
    We note that the FY 1999 cost report file is not complete because 
of the lag in the filing of cost reports for some providers, therefore, 
a small number of IPFs do not have cost report data for the 1999 cost 
report period. To include as many IPFs in the payment calculation as 
possible, we filled in the missing data using data from the previous 
year for those IPFs. The prospective payment projections were based on 
case level data from the 1999 MedPAR files and the facility level 
characteristics from the 1999 cost reports. These data provide the 
input for the development of the appropriate update factors to be 
applied to the proposed prospective payment model.
a. Cost Report Data for April 1, 2004 Through June 30, 2005
    In order to determine each provider's projected costs for the 
proposed implementation period, we are proposing to update each IPF's 
cost to the midpoint of the period April 1, 2004 through June 30, 2005. 
To calculate operating costs, we would use the applicable percentage 
increases to the TEFRA target amounts for FYs 1999 through 2002 (in 
accordance with Sec.  413.40(c)(3)(vii)) and the full excluded hospital 
market-basket percentage increase for FY 2003 and later. For FYs 1999 
through 2002, we would determine the appropriate update factor for each 
year by using the methodology described below:
    [sbull] For IPFs with costs that equal or exceed their target 
amounts by 10 percent or more for the most recent cost reporting period 
for which information is available, the update factor would be the 
market-basket percentage increase.
    [sbull] For IPFs that exceed their target amounts by less than 10 
percent, the

[[Page 66938]]

update factor would be equal to the market basket minus 0.25 percentage 
points for each percentage point in which operating costs are less than 
10 percent over the target (but in no case less than 0 percent).
    [sbull] For IPFs that are at or below their target amounts but 
exceed 66.7 percent of the target amounts, the update factor would be 
the market basket minus 2.5 percentage points (but in no case less than 
0 percent).
    [sbull] For IPFs that do not exceed 66.7 percent of their target 
amounts, the update factor would be 0 percent.
    [sbull] For FYs 2003 and later, we use the most recent estimate of 
the percentage increase projected by the excluded hospital market-
basket index.
    In addition, since the proposed prospective payment system would 
include both the operating and capital-related costs, we needed to 
project the capital-related cost under the TEFRA system as well. We 
used the excluded capital market basket to project the capital-related 
costs under the TEFRA system. Table 5 below, summarizes the excluded 
hospital market basket and the excluded capital market basket indexes.

 Table 5.--Proposed Excluded Hospital Market Basket and Excluded Capital
                              Market Basket
------------------------------------------------------------------------
                                             Excluded
                                             hospital        Excluded
               Fiscal year                 market basket  capital market
                                              percent     basket percent
------------------------------------------------------------------------
FY 1999.................................             2.9             0.9
FY 2000.................................             3.3             1.2
FY 2001.................................             4.3             1.0
FY 2002.................................             3.9             0.9
FY 2003*................................             3.7             0.8
FY 2004*................................             3.5             1.1
FY 2005*................................             3.2            1.1
------------------------------------------------------------------------
*Note: Projected Percentage.

b. Estimate of Total Payments Under the TEFRA Payment System
    We estimated payments for inpatient operating and capital services 
under the current TEFRA system using the following methodology:

Step 1: IPF's Facility-Specific Target Amount.

    The facility-specific target amount for an IPF would be calculated 
based on the IPF's allowable inpatient operating cost per discharge for 
the base period, excluding capital-related, nonphysician anesthetist, 
and medical education costs. We would update this target amount using a 
rate-of-increase percentage as specified in Sec.  413.40(c)(3)(viii).
    From FYs 1998 through 2002, there were two national caps on the 
payment amounts for IPFs. As specified in Sec.  413.40(c)(4)(iii), an 
IPF's facility-specific target is the lower of its net allowable base-
year costs per discharge increased by the applicable update factors or 
the cap for the applicable cost reporting period. In determining each 
IPF's facility-specific target amount, we would use the labor-related 
and non-labor related shares of the national cap amounts for FY 2002 
that appeared in the hospital inpatient prospective payment system 
final rule published in the Federal Register on August 1, 2001 (66 FR 
39916). For existing IPFs (that is, IPFs paid under TEFRA before 
October 1, 1997), we adjusted the labor-related share ($8,429) by the 
applicable geographic wage index and added that amount to the non-labor 
related share ($3,351). For new IPFs (that is, IPFs first paid under 
TEFRA after October 1, 1997), we adjusted the labor-related share 
($6,815) and added that amount to the non-labor related share ($2,709).

Step 2: IPF's Payment Amount for Inpatient Operating Services

    Under the TEFRA system, an IPF's payment amount for inpatient 
operating services is the lower of--
    [sbull] The hospital-specific target amount (subject to application 
of the cap as determined in Step (1) multiplied by the number of 
Medicare discharges (the ceiling); or
    [sbull] The hospital's average inpatient operating cost per case 
multiplied by the number of Medicare discharges.
    In addition, under the TEFRA system, payments may include a bonus 
or relief payment, as follows:
    [sbull] IPFs whose net inpatient operating costs are lower than or 
equal to the ceiling, would receive the lower payment of either the net 
inpatient operating costs plus 15 percent of the difference between the 
inpatient operating costs and the ceiling; or the net inpatient 
operating costs plus 2 percent of the ceiling.
    [sbull] IPFs whose net inpatient operating costs are greater than 
the ceiling, but less than 110 percent of the ceiling, would receive 
the ceiling payment.
    [sbull] IPFs whose net inpatient operating costs are greater than 
110 percent of the ceiling would receive the ceiling payment plus the 
lower of 50 percent of the difference between the 110 percent of the 
ceiling and the net inpatient operating costs or 10 percent of the 
ceiling payment.

Step 3: IPF's Payment for Capital-Related Costs

    Under the TEFRA system, in accordance with section 1886(g) of the 
Act, Medicare allowable capital-related costs are paid on a reasonable 
cost basis. Each IPF's payment for capital-related costs would be taken 
directly from the cost report and updated for inflation using the 
excluded capital market basket.

Step 4: IPF's Total (Operating and Capital-Related Costs) Payment Under 
the TEFRA Payment System

    Once estimated payments for inpatient operating costs are 
determined (including bonus and relief payments, as appropriate), we 
would add the TEFRA adjusted operating payments and capital-related 
cost payments together to determine each IPF's total payments under the 
TEFRA payment system.
c. Payments Under the Proposed Prospective Payment System Without a 
Budget-Neutrality Adjustment
    Payments under the proposed prospective payment system would be 
estimated without a budget-neutrality adjustment. We used $562 (the 
average cost per day consistent with the average cost per day used in 
the regression model) as the starting point for the Federal per diem 
base rate. By applying the aggregate cost increase factor using the 
applicable market basket increase factors, we updated the base rate to 
the April 1, 2004 through June 30, 2005 period. The updated cost per 
day of $671 was then used in the payment model to project future 
payments under the proposed IPF prospective payment system. The next 
step was to apply the associated proposed wage index and all applicable 
proposed patient-level and facility-level adjustments to determine the 
appropriate proposed prospective payment amount for each stay in the 
final payment model file.
    We note that no separate wage or standardization factors were 
applied to the per diem amount used to derive the total proposed 
prospective payment system payments as these factors would be accounted 
for through the budget-neutrality computation described below. Thus, 
when the total proposed prospective payment system payments are 
compared to projected TEFRA payments, the resulting factor applied to 
the per diem amount would implicitly account for the effects of wage 
and standardization adjustments to the per diem costs.
d. Calculation of the Proposed Budget-Neutral Adjustment
    In determining the proposed budget-neutrality factor, we compared 
the proposed prospective payment system amounts calculated from the 
psychiatric stays in the 1999 MedPAR file to the projected TEFRA 
payments from the

[[Page 66939]]

1999 cost report file (as explained in greater detail in section b. 
above). The proposed budget-neutrality adjustment was calculated by 
dividing total estimated payments under the TEFRA payment system by 
estimated payments under the proposed IPF prospective payment system 
without a budget-neutrality adjustment.
    Since the proposed IPF prospective payment system amount for each 
provider would include applicable outlier amounts, we reduced the 
proposed budget neutral per diem base rate by 2 percent to account for 
the 2 percent of aggregate proposed prospective payments to be made for 
outlier payments. The appropriate proposed outlier amount was 
determined by comparing the adjusted prospective payment amount for the 
entire stay to the computed cost per case. If costs were above the 
prospective payment amount plus the adjusted fixed dollar loss 
threshold, an outlier payment was computed using the applicable risk-
sharing percentages as explained in greater detail in section III.B.3 
of this proposed rule. The outlier amount was computed for all stays 
and the total outlier amount was added to the final proposed 
prospective payment amount. If the total outlier amount for all 
providers was determined to be higher or lower than 2 percent of the 
total payments under the proposed prospective payment system, then the 
fixed dollar loss threshold was adjusted accordingly. The proposed 
fixed dollar loss threshold was determined to be $4,200.
4. Proposed Behavioral Offset
    We would calculate the proposed budget-neutral Federal per diem 
base rate by applying the budget-neutrality factor calculated above and 
the 2 percent adjustment for outlier payments to $671 (the average cost 
per day for the 15-month period, April 1, 2004 through June 30, 2005). 
However, if the proposed IPF prospective payment system is implemented 
as proposed, we would expect that IPFs may experience usage patterns 
that are significantly different from their current usage patterns. Two 
examples are--(1) the proposed IPF prospective payment system is a per-
diem system, therefore, IPFs might have an incentive to keep patients 
in the facility longer to maximize use of their beds or to receive the 
proposed outlier payments; and (2) the current TEFRA payment system 
does not rely on ICD-9-CM coding. Proper comorbidity coding, however, 
will have an impact on the proposed prospective payments under this 
proposed rule. Therefore, we expect that IPFs will have an incentive to 
comprehensively code for the presence of comorbidities, thus, 
ultimately, the coding practice of IPFs should improve once the 
proposed IPF prospective payment system is implemented.
    As a result, Medicare may incur higher payments than assumed in our 
calculation. These effects were taken into account when we calculated 
the proposed budget-neutral Federal per diem base rate. Accounting for 
these effects through an adjustment is commonly known as a behavioral 
offset. Based on accepted actuarial practices and consistent with the 
assumptions made under the inpatient rehabilitation facilities (IRF) 
prospective payment system, in determining this proposed behavioral 
offset, we assumed that the IPFs would regain 15 percent of potential 
``losses'' and augment payment increases by 5 percent. We applied this 
actuarial assumption, which was based on consideration of our 
historical experience with new payment systems, to the estimated 
``losses'' and ``gains'' among the IPFs. We intend to monitor the 
extent to which current practice in IPFs such as the average length of 
stay is affected by implementation of a per diem payment system and may 
propose adjustments to the behavioral assumptions accordingly. The 
above methodology made no behavioral assumptions for changes in the 
number of total psychiatric beds or the shift of utilization among 
types of psychiatric hospitals.
5. Proposed Federal Per Diem Base Rate
    The proposed Federal per diem base rate with an outlier adjustment 
and budget neutrality with a behavioral offset would be $530. This 
proposed dollar amount would include a 2-percent reduction to account 
for outlier payments, and a 19-percent reduction to account for budget 
neutrality and the behavioral offset to the proposed Federal per diem 
base rate otherwise calculated under the proposed methodology as 
described above.
6. Proposed Changes to Physician Recertification Requirements
    In addition to the monitoring efforts mentioned above, we are 
proposing changes in the physician recertification requirements for 
inpatient psychiatric care as specified in Sec.  424.14. This section 
states that Medicare Part A pays for inpatient psychiatric care only if 
a physician certifies and recertifies the need for services. Therefore, 
we are proposing to revise Sec.  424.14(c), regarding the content of 
the physician recertification and Sec.  424.14(d), regarding the timing 
of physician recertification to ensure that a patient's continued stay 
in an IPF is medically necessary.
    As specified in existing Sec.  424.14(c), a physician must 
recertify that inpatient psychiatric services furnished since the 
previous certification were, and continue to be required: (1) For 
treatment that could reasonably be expected to improve the patient's 
condition or for diagnostic study; and (2) the hospital's records show 
that the services furnished were intensive treatment services, 
admission and related services necessary for diagnostic study, or 
equivalent services. We are proposing to add a requirement that the 
physician recertify that the patient continues to need, on a daily 
basis, inpatient psychiatric care (furnished directly by or requiring 
the supervision of inpatient psychiatric facility personnel) or other 
professional services that, as a practical matter can only be provided 
on an inpatient basis.
    Section 424.14(d)(2) requires the first recertification after 
admission to occur as of the 18th day of hospitalization. We are 
proposing to revise the timing of the first recertification to the 10th 
day of hospitalization in order to align the physician recertification 
of the need for continuation of the inpatient stay with the median 
length of stay. As noted previously, according to the 1999 MedPAR data, 
the median length of stay for Medicare beneficiaries was 9 days. These 
proposed changes are intended to ensure that a patient's continued stay 
in an IPF is medically necessary and more closely tied to the median 
length of stay.
    We acknowledge that the additional protections afforded by the 
unique psychiatric hospital conditions of participation (COPs) in 
subpart E of part 482, which create administrative criteria and 
documentation requirements for psychiatric patients, are an additional 
protection in this regard. We believe these requirements provide 
adequate protection against the shift of lower cost nursing home 
patients with similar but less severe diagnoses into psychiatric 
hospitals. However, if we observe a shift of less severe cases into 
psychiatric hospitals, we may perform targeted reviews of admissions to 
assure that the COPs and physician certification requirements are being 
appropriately followed.

E. Proposed Area Wage Adjustment

    Due to the variation in costs, because of the differences in 
geographic wage levels, we are proposing that payment rates under the 
proposed IPF prospective payment system be adjusted by a geographic 
index. In addition, we are proposing to use the inpatient acute care 
hospital wage data to compute the

[[Page 66940]]

IPF wage indices, because there is not an IPF-specific wage index 
available. We believe that the inpatient acute care hospital wage data 
reflects wage levels similar to psychiatric units as well as free-
standing psychiatric hospitals. We also believe that IPFs generally 
compete in the same labor market as inpatient acute care hospitals.
    Furthermore, we are proposing to adjust the labor-related portion 
of the proposed prospective payment rates for area differences in wage 
levels by a factor reflecting the relative facility wage level in the 
geographic area of the IPF compared to the national average wage level 
for these hospitals. We believe that the actual location of the IPF as 
opposed to the location of affiliated providers is most appropriate for 
determining the wage adjustment because the data support the premise 
that the prevailing wages in the area in which the IPF is located 
influence the cost of a case. Thus, we are using the inpatient acute 
care hospital wage data without regard to any approved geographic 
reclassification as specified in section 1886(d)(8) or 1886(d)(10) of 
the Act. We note this policy is consistent with the area wage 
adjustments used in other non-acute care facility prospective payment 
systems.
    To account for wage differences, we first identified the proportion 
of labor and non-labor components of costs. We used our proposed 1997-
based excluded hospital market basket with capital to determine the 
labor-related share. We calculated the proposed labor-related share as 
the sum of the weights for those cost categories contained in the 
proposed 1997-based excluded hospital with capital market basket that 
are influenced by local labor markets. These cost categories include 
wages and salaries, employee benefits, professional fees, labor-
intensive services, and a 46 percent share of capital-related expenses. 
The labor-related share for the base period of the proposed prospective 
payment system (April 1, 2004 through June 30, 2005) is the sum of the 
relative importance of each labor-related cost category for this 
period, and reflects the different rates of price change for these cost 
categories between the base year (FY 1997) and this period. The sum of 
the relative importance for operating costs (wages and salaries, 
employee benefits, professional fees, and labor-intensive services) is 
69.348 percent, as shown below in Table 6. The portion of capital that 
is influenced by local labor markets is estimated to be 46 percent. 
Because the relative importance of capital is 7.566 percent of the 
proposed 1997-based excluded hospital with capital market basket for 
the period April 1, 2004 through June 30, 2005, we would take 46 
percent of 7.566 percent to determine the proposed labor-related share 
of capital. The result, 3.48 percent, is then added to the proposed 
69.348 percent calculated for operating costs to determine the total 
proposed labor-related relative importance. The resulting labor-related 
share that we propose to use for the proposed IPF prospective payment 
system is 72.828 percent. The table below shows that the proposed 
labor-related share would have been 73.570 percent if we had not 
rebased the excluded hospital with capital market basket using more 
recent 1997 data rather than using 1992 data. As shown in Table 6, 
rebasing results in a lowering of the labor-related share by .742 
percent.

       Table 6.--Proposed Labor-Related Share Relative Importance
------------------------------------------------------------------------
                                             Relative        Relative
                                            Importance      Importance
                                            1992-based      1997-based
              Cost Category                Market Basket   Market Basket
                                          (April 2004 to  (April 2004 to
                                            June 2005)      June 2005)
------------------------------------------------------------------------
Wages and salaries......................          50.714          49.158
Employee benefits.......................          11.930          11.077
Professional fees.......................           2.060           4.540
Postage.................................           0.252  ..............
All other labor intensive services......           5.252           4.572
Subtotal................................          70.209          69.348
Labor-related share of capital costs....           3.360           3.480
                                         -----------------
    Total...............................          73.570          72.828
------------------------------------------------------------------------

    A precedent exists for using this method to determine the 
proportion of payments adjusted for geographic differences in labor 
costs. Specifically, the labor-related share for acute care hospitals 
is determined from the prospective payment system hospital operating 
market basket using a similar method.
    We believe that a wage index based on acute care hospital wage data 
is the best and most appropriate wage index to use in adjusting 
payments for IPFs, since both the acute care hospitals and IPFs compete 
in the same labor markets. This wage data includes the following 
categories of data: (1) Salaries and hours from short-term acute care 
hospitals; (2) home office costs and hours; (3) certain contract labor 
costs and hours; and (4) wage-related costs. The wage data excludes 
wages for services provided by teaching physicians, interns and 
residents, and nonphysician anesthetists under Medicare Part B, because 
we would not cover these services under the proposed IPF prospective 
payment system.
    Consistent with the wage index methodologies in other prospective 
payment systems, we are proposing to divide IPFs into labor market 
areas. For the purpose of defining labor market areas, we are proposing 
to define an urban area as a Metropolitan Statistical Area (MSA) or New 
England County Metropolitan Area (NECMA), as defined by the Office of 
Management and Budget (OMB). In addition, we are proposing to define a 
rural area as any area outside an urban area. The proposed IPFs wage 
indices would be computed as follows:
    [sbull] Compute an average hourly wage for each urban and rural 
area.
    [sbull] Compute a national average hourly wage.
    [sbull] Divide the average hourly wage for each urban and rural 
area by the national average hourly wage.
    The result is a proposed wage index for each urban and rural area 
(see Addendum B1 for the proposed wage index for urban areas and 
Addendum B2 for the proposed wage index for rural areas).

[[Page 66941]]

    To calculate the wage-adjusted facility payments, we are proposing 
the following method: (1) Multiply the prospectively determined Federal 
base rate by the labor-related percentage to determine the labor-
related portion; (2) multiply this labor-related portion by the 
applicable IPF wage index; and (3) add the resulting wage-adjusted 
labor-related portion to the nonlabor-related portion, resulting in a 
wage-adjusted base rate.

F. Effect of the Proposed Transition on Budget Neutrality

    Section 124(a)(1) of Pub. L. 106-113 requires that the proposed IPF 
prospective payment system maintain budget neutrality. As discussed in 
further detail in section IV of this proposed rule, we are proposing a 
3-year transition period from the cost-based TEFRA reimbursement to 
payment based on 100-percent prospective payment. During the transition 
period, we are proposing that an IPF would be paid a blend of an 
increasing percentage of the IPF Federal per diem payment amount and a 
decreasing percentage of its TEFRA rate for each discharge. Since the 
estimated prospective payments were calculated in a budget-neutral 
manner, this proposed transition methodology would result in the same 
total estimated payments that are expected under the current rules.

G. Calculation of the Proposed Payment

    Payments under the proposed IPF prospective payment system would be 
determined by adjusting the per diem base amount by the appropriate 
wage index and applicable IPF prospective payment system payment 
adjustments and adding any applicable outlier amounts. An example of 
how to calculate payment under the proposed IPF prospective payment 
system follows.

    Example: Jane Doe, a 78-year-old female, is admitted to a 
psychiatric unit within the Get Well General Hospital located in 
Richmond, Virginia. Ms. Doe presents with signs and symptoms 
indicating a primary diagnosis of Major Depressive Disorder (ICD-
296.33, DRG-430). Her medical history includes Uncontrolled Type 1 
Diabetes with Ophthalmic manifestations (ICD-250.53) and Chronic 
Renal Failure (ICD-585). Ms. Doe remains in the hospital for 5 days.

                  Table 7.--Example of Proposed Payment
------------------------------------------------------------------------
 
------------------------------------------------------------------------
            Steps To Determine the Proposed Per Diem Payment
------------------------------------------------------------------------
Federal Base Prospective Payment Rate:
    Calculate Wage Adjusted Federal Base  ..............            $530
     Rate...............................
    Calculate the labor portion of the    ..............             386
     Federal base rate (.72828 x $530)..
    Apply wage index factor from                    $366  ..............
     Addendum B1 for Richmond Virginia
     (0.9477 x $386)....................
    Calculate the non-labor of the                  $144  ..............
     Federal base rate: (0.27172 x $530)
    Calculate total wage-adjusted                   $510  ..............
     Federal base rate: ($366 + $144)...
Apply Facility Level Adjusters:
    Teaching adjustment (not applicable)  ..............  ..............
    Rural adjustment (not applicable)...  ..............  ..............
Apply Patient Level Adjusters:
    DRG adjustment for DRG 430..........            1.00  ..............
    Age adjustment (over 65)............            1.13  ..............
Comorbidity adjusters:
    Diabetes............................            1.11  ..............
    Chronic renal failure...............            1.12  ..............
    Total prospective payment adjustment           1.405  ..............
     factor: (1.00 x 1.13 x 1.11 x
     1.12):.............................
    Calculate Wage Adjustment and         ..............             716
     Prospective Payment System Adjusted
     Federal Per Diem: ($510 x 1.405)...
Apply Variable Per Diem Adjustments:
    Day 1: (1.26 x $716)................            $902  ..............
    Days 2 to 4: (1.12 x $716 x 3)......          $2,406  ..............
    Day 5: (1.05 x $716)................            $752  ..............
The Total Proposed Prospective Payment            $4,060  ..............
 System Payment for Jane Doe's IPF Stay.
------------------------------------------------------------------------

IV. Implementation of the Proposed IPF Prospective Payment System

    We are proposing that payment to an IPF would convert to the IPF 
prospective payment system at the beginning of its first cost reporting 
period beginning on or after April 1, 2004.

A. Proposed Transition

    We are proposing a 3-year transition to fully implement the IPF 
prospective payment system. During that time, we propose to use two 
payment percentages to determine an IPF's total payment under the 
proposed IPF prospective payment system. In addition, during the 
proposed transition, IPFs would receive a blended payment of the 
Federal per diem payment amount and a hospital-specific amount based on 
the IPF's TEFRA payment. As noted above, we are proposing that the 
system would become effective for cost reporting periods beginning on 
or after April 1, 2004.
    As discussed in section V. of this proposed rule, we are proposing 
that the first year of the transition would continue for 15 months, 
thereby, moving the IPF prospective payment system to a July 1 update 
cycle. As a result, the first year of the transition period would be 
for cost reporting periods beginning on or after April 1, 2004 and 
before July 1, 2005. The total payment for this period would consist of 
75 percent based on the TEFRA payment system and 25 percent based on 
the proposed IPF prospective payment amount. We are also proposing that 
for cost reporting periods beginning on or after July 1, 2005 and 
before July 1, 2006, the total payment would consist of 50 percent 
based on the TEFRA payment system, and 50 percent based on the proposed 
IPF prospective payment amount. In addition, we are also proposing that 
for cost reporting periods beginning on or after July 1, 2006 and 
before July 1, 2007, the total payment would consist of 25 percent 
based on the TEFRA payment system and 75 percent based on the proposed 
IPF prospective payment amount. Thus, we are proposing that payments to 
IPFs would be at 100 percent of the proposed IPF prospective payment 
amount for cost reporting periods beginning on or after July 1, 2007. 
Given the complex and redistributive nature of the

[[Page 66942]]

proposed prospective payment system and in order to thoroughly review 
the anticipated volume of comments we expect to receive on this 
proposed rule, it may ultimately be necessary to delay implementation 
beyond April 2004. In addition, it may be helpful to increase the 
transition period because a longer transition period would allow us to 
adjust the payment system if necessary before the full implementation 
of the IPF prospective payment system. Also, a longer transition period 
may be appropriate if the research designed to refine the payment 
system takes longer than we currently anticipate. We specifically 
request public comments on these implementation issues.
    In order to mitigate the impacts of the prospective payment system, 
we are not proposing to allow an IPF to elect to be paid based on 100 
percent of the Federal per diem payment amount in lieu of the blended 
methodology. In this way, the transition will allow IPFs time to become 
familiar with the prospective payment system and gradually move to the 
full Federal per diem amount over a 3-year period.

B. New Providers

    We believe that we need to propose a definition of a new IPF 
because new IPFs will not participate in the 3-year transition from 
cost-based reimbursement to a prospective payment system (section IV.A. 
of this proposed rule). The transition period described is intended to 
provide currently existing IPFs time to adjust to payment under the new 
system. A new IPF would not have received payment under TEFRA for the 
delivery of IPF services before the effective date of the IPF 
prospective payment system. We do not believe that new IPFs require a 
transition period in order to make adjustments to their operating and 
capital financing, as will IPFs that have been paid under TEFRA, or 
need to otherwise integrate the effects of changing from one payment 
system to another payment system.
    For purposes of Medicare payment under the proposed IPF prospective 
payment system, we are defining a new IPF as a provider of inpatient 
psychiatric hospital services that otherwise meets the qualifying 
criteria for IPFs, set forth in Sec.  412.22, Sec.  412.23, Sec.  
412.25, and Sec.  412.27 under present or previous ownership (or both), 
and its first cost reporting period as an IPF begins on or after April 
1, 2004, the proposed implementation date of the IPF prospective 
payment system.

C. Claims Processing

    With respect to the proposed IPF prospective payment system, we are 
proposing to continue processing claims in a manner similar to the 
current claims processing system. Hospitals would continue to report 
diagnostic information on the claim form and the Medicare fiscal 
intermediaries would continue to enter clinical and demographic 
information in their claims processing systems for review by the 
Medicare Code Editor (MCE). The MCE reviews claims to determine if they 
are improperly coded (for example, diagnosis inappropriate to sex of 
the patient) or require more information (imprecise coding) in order to 
be processed. After screening, each claim would be classified into the 
appropriate DRG by a software program called the ``GROUPER.'' If the 
``GROUPER'' assigns a DRG that is not recognized under the proposed IPF 
prospective payment system, the claim would be returned to the IPF. If 
the ``GROUPER'' assigns a DRG recognized by the system, a ``PRICER'' 
program would calculate the Federal per diem payment amount, including 
the DRG adjustment and other patient-level and facility-level 
adjustments appropriate to the claim.

D. Periodic Interim Payments (PIP)

    Under the TEFRA payment system--(1) a psychiatric hospital may be 
paid using the PIP method as specified in Sec.  413.64(h); (2) 
psychiatric units are paid under the PIP method if the hospital of 
which they are a part is paid as specified in Sec.  412.116(b); and (3) 
an IPF may be eligible to receive accelerated payments as specified in 
Sec.  413.64(g) or for psychiatric units specified in Sec.  412.116(f). 
We are proposing in Sec.  412.432 to continue to allow for PIP and 
accelerated payment methods under the proposed IPF prospective payment 
system.
    In addition, we are proposing that an IPF receiving prospective 
payments, whether or not it received a PIP under cost reimbursement, 
may receive a PIP if it meets the requirements specified in proposed 
Sec.  412.432(b)(1) and receives approval by its intermediary. If an 
intermediary determines that an IPF, which received a PIP under cost 
reimbursement, is no longer entitled to receive a PIP, it will remove 
the IPF from the PIP method. As specified in proposed Sec.  
412.432(b)(1), intermediary approval of a PIP is conditioned upon the 
intermediary's best judgment as to whether payment can be made under 
the PIP method without undue risk of its resulting in an overpayment to 
the provider.
    Excluded from PIP amounts are outlier payments that are paid upon 
the submission of a discharge bill. Also, Part A costs that are not 
paid under the proposed IPF prospective payment system, including 
Medicare bad debts and costs of an approved education program, and 
other costs paid outside the IPF prospective payment system, will be 
subject to the interim payment provisions as specified in Sec.  413.64.
    Under the proposed prospective payment system, if an IPF is not 
paid under the PIP method it may qualify to receive an accelerated 
payment. As specified in proposed Sec.  412.432(e), the IPF must be 
experiencing financial difficulties due to a delay by the intermediary 
in making payment to the IPF, or there is a temporary delay in the IPFs 
preparation and submittal of bills to the intermediary beyond its 
normal billing cycle, because of an exceptional situation. A request 
for an accelerated payment must be made by the IPF and approved by the 
intermediary and us. The amount of an accelerated payment would be 
computed as a percentage of the net payment for unbilled or unpaid 
covered services. Recoupment of an accelerated payment would be made as 
bills are processed or by direct payment by the IPF.

E. Limitation on Beneficiaries Charges

    In accordance with Sec.  409.82 and Sec.  409.83 and consistent 
with other established prospective payment systems policies, we are 
proposing in Sec.  412.404(c) that an IPF may not charge a beneficiary 
for any service for which payment is made by Medicare. This policy will 
apply, even if the IPF's costs of furnishing services to that 
beneficiary are greater than the amount the IPF would be paid under the 
proposed IPF prospective payment system. In addition, we are proposing 
that an IPF receiving a prospective payment for a covered hospital stay 
(that is, a stay that includes at least one covered day) may charge the 
Medicare beneficiary or other person only for the applicable deductible 
and coinsurance amounts as specified in Sec.  409.82, Sec.  409.83, 
Sec.  409.87, and Sec.  489.20.

V. Future Updates

A. Proposed Annual Update Strategy

    Section 124 of Pub. L. 106-113 does not specify an update strategy 
for the proposed IPF prospective payment system and is broadly written 
to give the Secretary a tremendous amount of discretion in proposing an 
update methodology. Therefore, we reviewed the update approach used in 
other hospital prospective payment systems

[[Page 66943]]

(specifically, the IRF and LTCH prospective payment system 
methodologies). As a result of this analysis, we are proposing the 
following strategy for updating the IPF prospective payment system: (1) 
Use the FY 2000 bills and cost report data, and the most current ICD-9-
CM codes and DRGs, when we issue the IPF prospective payment system 
final rule; (2) implement the system effective for cost reporting 
periods beginning on or after April 1, 2004; and (3) update the Federal 
per diem base rate on July 1, 2005, since a July 1 update coincides 
with more hospital cost reporting cycles and would be administratively 
easier to manage. This means that the first year of the proposed 
Federal per diem base rate would be the 15-month period April 1, 2004 
to June 30, 2005.
    We believe it is important to delay updating the adjustment factors 
until the IPF data includes as much information as possible regarding 
the patient-level characteristics of the population that each IPF 
serves. For this reason, we do not intend to update the regression and 
recalculate the proposed Federal per diem base rate until we have 
analyzed 1 complete year of data under the IPF prospective payment 
system, that is, no earlier than July 1, 2007. We note that the ability 
of a regression analysis to appropriately identify variation in costs 
is dependent upon continued submission of claims and cost reports that 
are as accurate and complete as possible. Until that analysis is 
complete, we are proposing to publish a notice each spring that would 
do the following:
    [sbull] Update the Federal per diem base rate using the excluded 
hospital with capital market basket increase in order to reflect the 
price of goods and services used by IPFs.
    [sbull] Apply the most current hospital wage index with an 
adjustment factor to the Federal per diem base rate to ensure that 
aggregate payments to IPFs are not affected by an updated wage index.
    [sbull] Update the fixed dollar loss threshold to maintain an 
outlier percentage that is 2 percent of total estimated IPF payments.
    [sbull] Describe the impact of the ICD-9-CM coding changes 
discussed in the hospital inpatient prospective payment system proposed 
rule that would effect the proposed IPF prospective payment system.
    In the future, we may propose an update methodology for the IPF 
prospective payment system that would be based on the excluded hospital 
with capital market basket index along with other appropriate 
adjustment factors relevant to psychiatric service delivery such as 
productivity, intensity, new technology, and changes in practice 
patterns.

B. Update of the ICD Codes and DRGs

    In the health care industry, annual changes to the ICD-9-CM codes 
and the DRGs used in the hospital inpatient prospective payment system 
are effective for discharges occurring on or after October 1 of each 
year. Changes in ICD-9-CM codes and composition of the DRGs are 
presented in the hospital inpatient prospective payment system proposed 
rule published in the Federal Register in the spring of each year. We 
are proposing that through the hospital inpatient prospective payment 
system proposed rule, we would notify IPFs of any revised ICD-9-CM 
codes or proposed DRG modifications that would become effective on 
October 1 of that year if finalized. As noted earlier, all health care 
providers are required to used the updated ICD-9-CM codes on or after 
October 1 of each year.
    Under the IPF prospective payment system, we are proposing to 
establish a base rate and provide for adjustments to the rate, 
including adjustments to reflect the DRG assigned to the patient's 
principal diagnosis and the comorbidity category for certain secondary 
or tertiary diagnoses. These adjustments would be driven by the ICD-9-
CM codes provided on the IPF's claims.
    For this reason, we urge IPFs to review the hospital inpatient 
prospective payment proposed rule to determine if any changes have been 
made to the ICD-9-CM codes or are being proposed in the composition of 
the 15 DRGs we are proposing to recognize under the IPF prospective 
payment system. In the event that occurs, we would explain in the 
hospital inpatient prospective payment system rules how the change 
would be handled under the IPF prospective payment system for claims on 
or after October 1 of each year.

C. Future Refinements

1. RTI International[reg]
    We have contracted with RTI International[reg] to examine the 
extent to which modes of practice and staffing patterns explain the per 
diem cost differences among the various types of IPF facilities 
(private psychiatric hospitals, psychiatric units, and government 
hospitals). In addition, RTI International[reg] will analyze the extent 
to which the different types of facilities treat different types of 
patients. We anticipate that this study may assist us in proposing 
refinements to the prospective payment system in the future.
    Approximately two-thirds of the direct expense for providing 
inpatient psychiatric services is captured in the routine cost category 
of the Medicare cost report. After the allocation of overhead, this 
category represents 88 percent of the cost presently being reimbursed. 
The RTI International[reg] project will collect patient-level and 
facility-level data from a small sample of psychiatric hospitals and 
psychiatric units nationwide. These data will provide information on 
the extent to which variation in the per diem cost across facilities 
can be explained by the differences in the mix of services and staffing 
that characterize their modes of practice. RTI International[reg] will 
also analyze the links among costs, practice mode, and patient 
characteristics.
a. Mode of Practice
    The mode of practice can be defined by treatment modality (services 
delivered) and by staffing levels. To analyze the mode of practice, RTI 
International[reg] first developed a typology of therapeutic services 
(activities) provided in inpatient settings. The services range from 
labor-intensive activities (one-on-one intake assessments and 
evaluations), to less labor-intensive activities (therapies). In 
addition, RTI International[reg] developed a classification of 
psychiatric labor resources that could be used to depict different 
staffing models. The RTI International[reg] used these typologies to 
organize the collection of service and staffing data within the sampled 
psychiatric facilities. The RTI International[reg] study hypothesized 
that lower cost facilities use lower cost practice modalities that can 
result from either the use of lower cost labor or lower cost treatment 
methods.
b. Patient Characteristics
    To link the mode of practice with patient characteristics, modality 
must be collected at the patient level. Resource usage can be defined 
by estimating the type and cost of staff involved with providing 
patient care. This can be accomplished by linking each patient's 
activity with the time spent by each staffing type for an activity with 
the average wage rate for that staff. Adding the cost of each activity 
over a 24-hour period determines the per diem resource cost for a 
patient. These per diem costs can then be compared and linked with 
patient characteristics in order to explain resource use.
    The RTI International[reg] used patient characteristics that were 
available from claims data (age and diagnoses).

[[Page 66944]]

However, other variables are not collected on claims (Global Assessment 
of Functioning scores and functional deficits, such as, activities of 
daily living). This limited set of candidate variables was selected 
with input from RTI International's[reg] technical evaluation panel. We 
will continue to investigate the functional status, and we are 
soliciting comments specifically on this issue.
c. Analysis
    Using a cluster analysis technique, RTI International[reg] will 
attempt to develop an index that could be highly predictive of resource 
use among the resulting psychiatric patient classification categories.
    The RTI International[reg] is also investigating whether a more 
refined payment model is possible. Such a model might reduce the need 
for a sophisticated psychiatric patient classification system. 
Currently, data are being collected for a 7-day period to analyze the 
change in resources over time. This study will allow a test of a 
hypothesis advocated by Frank, R.G., and Lave, HR. (1986). Journal of 
Human Resources, 21(3): (321-337). They suggested that when using a per 
diem rate that declines with the length of stay, the rate would be 
higher at the beginning of the stay to cover the higher costs 
associated with admission, and decline over time as treatment achieved 
stabilization of the patient's condition.
2. University of Michigan Research
    We are also currently contracting with the University of Michigan's 
Public Health Institute to conduct research to assist us in developing 
a patient classification system based on a standard assessment tool. We 
believe that additional patient level information such as patient 
functioning and patient resource use is necessary to augment our 
administrative data and would result in a more equitable and accurate 
payment system. We are in the early stages of developing a preliminary 
tool, the Case Mix Assessment Tool (CMAT) instrument. We have attached 
a draft copy to this proposed rule for review and comment (see Addendum 
C.).
    We believe that this assessment tool would collect minimal but 
necessary information. The draft instrument contains 36 questions. Each 
item in the draft assessment tool resulted from the University of 
Michigan's evaluation of existing instruments and clinical scales. It 
reflects the input and feedback to the contractor of both the technical 
evaluation panel and mental health associations as well as related 
psychological and psychiatric industry groups. This input included 
mental health professionals with experience in both payment methodology 
and assessment instruments. The tool would collect information on the 
patient characteristics, clinical characteristics, functional status, 
services, and treatments.
    The information that would be collected in the CMAT is available in 
the patient's medical record and treatment plans. We do not believe 
that completing the assessment tool would require additional data 
collection on the part of the clinical staff. We have assumed that in 
addition to the medical record, a team of clinical staff provides 
services and treatment to these patients, including but not limited to 
nurses, psychiatric nurses, physicians, clinical psychologists, social 
workers, psychiatrists, and rehabilitation, physical, and speech 
therapists. To reduce both the complexity of the information collection 
process and the burden, the instrument would be completed at discharge. 
We are requesting comments on the availability of the information to 
complete this instrument.
    In order to collect information in the most efficient manner 
possible, the CMAT would be automated. This approach would shorten the 
time to complete the instrument and simplify the input process. Upon 
completion, the instrument would be transmitted to us. We would develop 
and provide the software to perform the transmission to IPFs at no 
cost. In addition, we would provide training and manuals to facilitate 
both the transmission process and the completion of the assessment 
tool.
    Finally, once the instrument has been pilot-tested and the 
instrument reflects changes resulting from this testing, we would 
pursue clearance by the Office of Management and Budget (OMB). A 
detailed OMB information collection package will be prepared and 
available for public comment. The package will include delineation of 
the technical evaluation panel membership, comments on specific items 
in the instrument, justifications for including selected questions (for 
example, activities of daily living), and the scaling for individual 
items. In addition, the OMB package will contain manuals and training 
material that support the instrument. Any comments on this preliminary 
draft instrument will assist us in developing a potential instrument.
3. Case-Mix Tool
    The Ashcraft study used a patient assessment instrument to develop 
additional variables beyond psychiatric diagnosis to predict 
differences in the length of stay. The study led to a further effort 
(Fries, et al., 1990), which resulted in the development of a 
classification system for long stay Veterans Administration's 
psychiatric patients (length of stay greater than 100 days). This 
research was the first to consider which characteristics could explain 
measured resource use for chronic psychiatric residents. Those 
characteristics included a broad assessment of patients' medical 
conditions, functional status, mental deficits, treatments, as well as 
the direct measurement of daily staff time spent with each patient. 
Using only six patient categories developed from these variables, the 
resulting long-stay classification system (PPCs) explained 11.4 percent 
of the variability in per diem resource use. While this number seems 
low, the Ashcraft and Fries Veterans Administration's studies were the 
first to offer a patient assessment instrument approach for the 
construction of case mix measures potentially useful in an IPF 
prospective payment system.

VI. Provisions of the Proposed Rule

    We are proposing to make a number of revisions to the regulations 
in order to implement the proposed prospective payment system for IPFs. 
Specifically, we are proposing to make conforming changes in 42 CFR 
parts 412 and 413. We would establish a new subpart N in part 412, 
``Prospective Payment System for Hospital Inpatient Services of 
Psychiatric Facilities.'' This subpart would implement section 124 of 
the BBRA, which requires the implementation of a per diem prospective 
payment system for IPFs. This subpart would set forth the framework for 
the proposed IPF prospective payment system, including the methodology 
used for the development of the payment rates and related rules. These 
proposed revisions and others are discussed in detail below.

Section 412.1 Scope of Part

    We propose to revise Sec.  412.1 by redesignating paragraphs (a)(2) 
and (a)(3) as paragraphs (a)(3) and (a)(4).
    We propose to add a new paragraph (a)(2) that would specify that 
this part implements section 124 of Pub. L. 106-113 by establishing a 
per diem based prospective payment system for inpatient operating and 
capital costs of hospital inpatient services furnished to Medicare 
beneficiaries by a psychiatric facility that meets the conditions of 
subpart N.

[[Page 66945]]

    We propose to revise Sec.  412.1 by redesignating paragraphs 
(b)(12) and (b)(13) as paragraphs (b)(13) and (b)(14).
    We propose to add a new paragraph (b)(12) that would summarize the 
content of the new subpart N which sets forth the general methodology 
for paying operating and capital costs for inpatient psychiatric 
facilities effective with cost reporting periods beginning on or after 
April 1, 2004.

Section 412.20 Hospital Services Subject to the Prospective Payment 
Systems

    We propose to amend Sec.  412.20(a) by adding a reference to IPFs.
    We propose to revise Sec.  412.20 by redesignating paragraphs (b), 
(c), and (d), as paragraphs (c), (d), and (e).
    We propose to add a new paragraph (b) that would indicate that 
effective for cost reporting periods beginning on or after April 1, 
2004, covered hospital inpatient services furnished by a psychiatric 
facility as specified in Sec.  412.404 of subpart N are paid under the 
prospective payment system.

Section 412.22 Excluded Hospitals and Hospital Units: General Rules

    We propose to amend Sec.  412.22(b) by revising paragraph (b) to 
state that except for those hospitals specified in paragraph (c) of 
this section, and Sec.  412.20(b), (c), and (d), all excluded hospitals 
(and excluded hospital units, as described in Sec.  412.23 through 
Sec.  412.29) are reimbursed under the cost reimbursement rules set 
forth in part 413 of this chapter, and are subject to the ceiling on 
the rate of hospital cost increases as specified in Sec.  413.40.

Section 412.23 Excluded Hospitals: Classifications

    We propose to revise Sec.  412.23 by redesignating paragraphs 
(a)(1) and (a)(2) as paragraphs (a)(2) and (a)(3).
    We propose to add a new paragraph (a)(1) that would specify the 
requirements a psychiatric hospital must meet in order to be excluded 
from reimbursement under the prospective payment system as specified in 
Sec.  412.1(a)(1) and to be paid under the IPF prospective payment 
system as specified in Sec.  412.1(a)(2).

Section 412.25 Excluded Hospital Units: Common Requirements

    We propose to amend Sec.  412.25(a) by adding a reference to Sec.  
412.1(a)(2).

Section 412.27 Excluded Psychiatric Units: Additional Requirements

    We propose to amend the introductory text of Sec.  412.27 by adding 
the reference to Sec.  412.1(a)(1) and (a)(2).
    We propose to amend Sec.  412.27(a) by removing the words the 
``Third Edition,'' and adding in its place, ``Fourth Edition, Text 
Revision.''

Section 412.116 Method of Payment

    We propose to revise Sec.  412.116 by redesignating paragraphs 
(a)(3) and (a)(4) as paragraphs (a)(4) and (a)(5).
    We propose to add a new paragraph (a)(3) that would specify the 
cost reporting period to which the proposed IPF prospective payment 
system applies and how payments for inpatient psychiatric services are 
made to a qualified IPF.

Subpart N--Prospective Payment System for Hospital Inpatient Services 
of Psychiatric Facilities

    We propose to add a new subpart N as follows:

Section 412.400 Basis and Scope of Subpart

    We are proposing to add a new section Sec.  412.400. In Sec.  
412.400(a), we would provide the requirements for the implementation of 
a prospective payment system for IPFs.
    In proposed Sec.  412.400(b), we would specify that this subpart 
sets forth the framework for the prospective payment system, including 
the methodology used for the development of payment rates and 
associated adjustments, the application of a transition period, and the 
related rules for IPFs for cost reporting periods beginning on or after 
April 1, 2004.

Section 412.402 Definitions

    In Sec.  412.402, we are proposing to define the following terms 
for purposes of this new subpart:

    [sbull] Comorbidity.
    [sbull] Fixed dollar loss threshold.
    [sbull] Inpatient psychiatric facilities.
    [sbull] Interrupted stay.
    [sbull] Outlier payment.
    [sbull] Per diem payment amount.
    [sbull] Principal diagnosis.
    [sbull] Rural area.
    [sbull] Urban area.

Section 412.404 Conditions for Payment Under the Prospective Payment 
System for Hospital Inpatient Services of Psychiatric Facilities

    In proposed Sec.  412.404(a), we would specify that IPFs must meet 
the following general requirements to receive payment under the IPF 
prospective payment system:

    [sbull] The IPF must meet the conditions as specified in this 
subpart.
    [sbull] If the IPF fails to comply fully with the provisions of 
this part then the following are applicable--
    ++ Withhold (in full or in part) or reduce payment to the IPF until 
the facility provides adequate assurances of compliance; or
    ++ Classify the IPF as an hospital subject to the hospital 
inpatient prospective payment system.
    In proposed paragraph (b), we would specify that, subject to the 
special payment provisions of Sec.  412.22(c), an inpatient psychiatric 
facility must meet the general criteria set forth in Sec.  412.22. For 
exclusion from the hospital inpatient prospective payment system as 
specified in Sec.  412.1(a)(1), a psychiatric hospital must meet the 
criteria set forth in Sec.  412.23(a) and psychiatric units must meet 
the criteria set forth in Sec.  412.25 and Sec.  412.27.
    In proposed paragraph (c), we would specify the prohibited and 
permitted charges that may be imposed on Medicare beneficiaries.
    In proposed paragraph (c)(1), we would specify that an IPF may not 
charge the beneficiary for any services which payment is made by 
Medicare, even if the IPFs costs are greater than the amount the 
facility is paid under the IPF prospective payment system.
    In proposed paragraph (c)(2), we would specify that an IPF 
receiving payment for a covered stay may charge the Medicare 
beneficiary or other person for only the applicable deductible and 
coinsurance amounts under Sec.  409.82, Sec.  409.83, and Sec.  409.87.
    In proposed paragraph (d), we would specify the following 
provisions for furnishing IPF services directly or under arrangement:
    [sbull] Applicable payments made under the IPF prospective payment 
system are considered payment in full for all hospital inpatient 
services (as defined in Sec.  409.10) other than physicians' services 
to individual patients (as specified in Sec.  415.102(a)) that are 
reimbursed on a fee schedule basis.
    [sbull] Hospital inpatient services do not include physician, 
physician assistant, nurse practitioner, clinical nurse specialist, 
certified nurse midwives, qualified psychologist, and certified 
registered nurse anesthetist services.
    [sbull] Payment is not made to a provider or supplier other than 
the IPF, except for services provided by a physician, physician 
assistant, nurse practitioner, clinical nurse specialist, certified 
nurse midwives, qualified psychologist, and certified registered nurse 
anesthetist.
    [sbull] The IPF must furnish all necessary covered services to the 
Medicare beneficiary directly or under arrangement (as defined in Sec.  
409.3).
    In proposed paragraph (e), we would specify that IPFs must meet the 
recordkeeping and cost reporting

[[Page 66946]]

requirements of Sec.  412.27(c), Sec.  413.20, and Sec.  413.24.

Section 412.422 Basis of Payment

    In proposed Sec.  412.422(a), we would specify that under the 
prospective payment system, IPFs would receive a predetermined per diem 
amount, adjusted for patient characteristics and facility 
characteristics, for inpatient services furnished to Medicare 
beneficiaries. In addition, we would specify that during the transition 
period, payment would be based on a blend of the Federal per diem 
payment amount and the facility-specific payment rate.
    In proposed Sec.  412.422(b), we would specify that payments made 
under the prospective payment system represent payment in full for 
inpatient operating and capital-related costs associated with services 
furnished in an IPF but not for the cost of an approved medical 
education program described in Sec.  413.85 and Sec.  413.86 and for 
bad debts of Medicare beneficiaries as specified in Sec.  413.80.

Section 412.424 Methodology for Calculating the Federal Per Diem 
Payment Rate

    In proposed Sec.  412.424, we would specify the methodology for 
calculating the Federal per diem payment rate for IPFs.
    In proposed paragraph (a), we would specify the data sources used 
to calculate the prospective payment rate.
    In proposed paragraph (b), we would specify that the methodology 
used for determining the Federal per diem base rate would include the 
following:
    [sbull] The updated average per diem amount.
    [sbull] The budget-neutrality adjustment factor.
    In proposed paragraph (c), we would specify that the Federal per 
diem payment amount for IPFs would be the product of the Federal per 
diem base rate, the facility-level adjustments, and the patient-level 
adjustments applicable to the case as described below:
    [sbull] Facility-level adjustments include:
    [sbull] Adjustment for wages
    [sbull] Location in rural areas
    [sbull] Teaching status
    [sbull] Patient-level adjustments include:
    [sbull] Age
    [sbull] Principal diagnosis
    [sbull] Comorbodities
    [sbull] Variable per diem adjustments
    [sbull] Adjustment for high-cost outlier cases
    In proposed paragraph (d), we would specify the special payment 
provisions for interrupted stays.

Section 412.426 Transition Period

    In proposed Sec.  412.426(a), we would specify the duration of the 
transition period to the IPF prospective payment system. In addition, 
we would specify that IPFs would receive a payment that is a blend of 
the Federal per diem payment amount and the facility-specific payment 
amount the IPF would receive under the TEFRA payment methodology.
    In proposed paragraph (b), we would specify how the facility-
specific payment amount is calculated.
    In proposed paragraph (c), we would specify that new IPFs, that is, 
facilities that under present or previous ownership, or both, have its 
first cost reporting period as an IPF beginning on or after April 1, 
2004, are paid the full Federal per diem rate.

Section 412.428 Publication of the Federal Per Diem Payment Rates

    In proposed Sec.  412.428, we would specify how we plan to publish 
information each year in the Federal Register to update the IPF 
prospective payment system.

Section 412.432 Method of Payment Under the Inpatient Psychiatric 
Facility Prospective Payment System

    In proposed Sec.  412.432, we would specify the following method of 
payment used under the IPF prospective payment system:

[sbull] General rules for receiving payment.
[sbull] Periodic interim payments including--
    [sbull] Criteria for receiving periodic interim payments
    [sbull] Frequency of payments
    [sbull] Termination of periodic interim payments
[sbull] Interim payment for Medicare bad debts and for costs not paid 
under the prospective payment system and other costs paid outside the 
prospective payment system.
[sbull] Outlier payments.
[sbull] Accelerated payments including--
    [sbull] General rule for requesting accelerated payments
    [sbull] Approval of accelerated payments
    [sbull] Amount of the accelerated payment
    [sbull] Recovery of the accelerated payment

Section 413.1 Introduction

    We propose to amend Sec.  413.1(d)(2)(ii) by removing the words 
``psychiatric hospitals (as well as separate psychiatric units 
(distinct parts) of short-term general hospitals).''
    We propose to revise Sec.  413.1 by redesignating paragraphs 
(d)(2)(iv), (d)(2)(v), (d)(2)(vi), and (d)(2)(vii) as paragraphs 
(d)(2)(vi), (d)(2)(vii), (d)(2)(viii), and (d)(2)(ix).
    We propose to add a new paragraph (iv) that would specify that for 
cost reporting periods beginning before April 1, 2004, payment to 
psychiatric hospitals (as well as separate psychiatric units of short-
term general hospitals) that are excluded under subpart B of part 412 
of this chapter from the prospective payment system is on a reasonable 
cost basis, subject to the provisions of Sec.  413.40.
    We propose to add a new paragraph (v) that would specify that for 
cost reporting periods beginning on or after April 1, 2004, payment to 
psychiatric hospitals (as well as separate psychiatric units of short-
term general hospitals) that meet the conditions of Sec.  412.404 of 
this chapter is based on prospectively determined rates under subpart N 
of part 412.

Section 413.40 Ceiling on the Rate of Increase in Hospital Costs

    Section 413.40(a)(2)(i) specifies the types of facilities to which 
the ceiling on the rate of increase in hospital inpatient costs is not 
applicable.
    We propose to revise Sec.  413.40(a)(2)(i) by redesignating 
paragraphs (a)(2)(i)(C) and (a)(2)(i)(D) as paragraphs (a)(2)(i)(D) and 
(a)(2)(i)(E).
    We propose to add a new paragraph (C) to Sec.  413.40 to clarify 
that Sec.  413.40 is not applicable to psychiatric hospitals and 
psychiatric units under subpart N of part 412 of this chapter for cost 
reporting periods beginning on or after April 1, 2004.
    We propose to revise paragraph (a)(2)(ii)(B) to specify the 
facilities to which the ceiling applies for cost reporting periods 
beginning on or after October 1, 1983 through March 31, 2004.
    We propose to revise paragraph (a)(2)(iii) by redesignating 
paragraphs (a)(2)(iii) and (a)(2)(iv) as paragraphs (a)(2)(iv) and 
(a)(2)(v).
    We propose to add a new paragraph (a)(2)(iii) that would specify 
psychiatric facilities are excluded from the prospective payment system 
as specified in Sec.  412.1(a)(1) and paid under Sec.  412.1(a)(2) for 
cost reporting periods beginning on or after April 1, 2004.

Section 413.64 Payment to Providers: Special Rules

    We propose to amend Sec.  413.64(h)(2)(i) by adding a reference to 
hospitals paid under the IPF prospective payment system.

[[Page 66947]]

Section 424.14 Requirements for Inpatient Services of Psychiatric 
Hospitals

    We propose to amend Sec.  424.14 by adding a new paragraph (c)(3) 
to state that for recertification a physician must indicate that the 
patient continues to need, on a daily basis, inpatient psychiatric care 
(furnished directly by or requiring the supervision of inpatient 
psychiatric facility personnel) or other professional services that, as 
a practical matter, can be provided only on a inpatient basis.
    We propose to amend Sec.  424.14(d)(2) by removing the word ``18th 
day of hospitalization'' and replacing it with ``10th day of 
hospitalization.''

VII. Collection of Information Requirements

    These regulations do not impose any new information collection 
requirements. The burden of the requirements in Sec.  412.404(e), 
reporting and recordkeeping requirements, are captured in the burden 
for the cross-referenced Sec.  412.27(c), Sec.  413.20, and Sec.  
413.24 under OMB approval numbers 0938-0301, 0938-0500, 0938-0358, and 
0938-0600.

VIII. Response to Comments

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

IX. Regulatory Impact Statement

A. Overall Impact

    We have examined the impact 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 Act, the Unfunded Mandates Reform Act of 
1995 (UMRA) (Pub. L. 104-4), and Executive Order 13132).
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely reassigns responsibility of duties) directs agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year). 
Based on analysis of the aggregate dollar impacts for each of the 
different facility types, we have determined that the re-distributive 
impact among facility types is $78 million. In addition, our analysis 
showed that a payment reduction of $40 million would occur for 
psychiatric units and a payment increase of $10 million would occur 
for-profit hospitals, $26 million for government hospitals, and $2 
million for non-profit hospitals. Therefore, we have determined that 
this proposed rule would not be a major rule within the meaning of 
Executive Order 12866 because the redistributive effects do not 
constitute a shift of $100 million in any 1 year. In addition, because 
the proposed IPF prospective payment system must be budget neutral in 
accordance with section 124(a)(1) of Pub. L. 106-113, we estimate that 
there will be no budgetary impact for the Medicare program (section 
IX.B.6. of this proposed rule).
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and government agencies. 
Most hospitals and most other providers and suppliers are small 
entities, either by nonprofit status or by having revenues of $29 
million or less in any 1 year. Medicare fiscal intermediaries are not 
considered to be small entities. Individuals and States are not 
included in the definition of a small entity.
    HHS considers that a substantial number of entities are affected if 
the rule impacts more than 5 percent of the total number of small 
entities as it does in this rule. We included all freestanding 
psychiatric hospitals (88 are nonprofit hospitals) in the analysis 
since their total revenues do not exceed the $29 million threshold. We 
also included small psychiatric units as well as psychiatric units of 
small hospitals, that is, fewer than 100 beds. We did not include 
psychiatric units within larger hospitals in the analysis because we 
believe this proposed rule would not significantly impact total 
revenues of the entire hospital that supports the unit. We have 
provided the following RFA analysis in section B, to emphasize that 
although the proposed rule would impact a substantial number of IPFs 
that were identified as small entities, we do not believe it would have 
a significant economic impact. Based on the analysis of the 917 
psychiatric facilities that were classified as small entities by the 
definitions described above, we estimate the combined impact of the 
proposed rule would be a 1-percent increase in payments relative to 
their payments under TEFRA. This estimated impact does not meet the 
threshold established by HHS to be considered a significant impact. 
Nonetheless, we have prepared the following analysis to describe the 
impact of the proposed rule.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 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 an MSA and has fewer 
than 100 beds. We have determined that this proposed rule would have a 
substantial impact on hospitals classified as located in rural areas. 
As discussed earlier in this preamble, we are proposing to adjust 
payments by 16 percent for IPFs located in rural areas. In addition, we 
are proposing a 3-year transition to the new system to allow IPFs an 
opportunity to adjust to the new system. Therefore, the impacts shown 
in Table 8 below reflect the adjustments that are designed to minimize 
or eliminate the negative impact that the proposed IPF prospective 
payment may otherwise have on small rural IPFs.
    Section 202 of the UMRA also requires that agencies assess 
anticipated costs and benefits before issuing any proposed rule that 
may result in expenditures in any 1 year by State, local, or tribal 
governments, in the aggregate, or by the private sector, of $110 
million or more. This proposed rule does not mandate any requirements 
for State, local, or tribal governments nor would it result in 
expenditures by the private sector of $110 million or more in any 1 
year.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications.
    We have examined this proposed rule under the criteria set forth in 
Executive Order 13132 and have determined that this proposed rule will 
not have any negative impact on the rights, roles, and responsibilities 
of State, local, or tribal governments or preempt State law.

[[Page 66948]]

B. Anticipated Effects

    Below, we discuss the impact of this proposed rule on the Federal 
Medicare budget and on IPFs.
1. Budgetary Impact
    Section 124(a)(1) of Pub. L. 106-113 requires us to set the payment 
rates contained in this proposed rule to ensure that total payments 
under the IPF prospective payment system are projected to equal the 
amount that would have been paid if this proposed prospective payment 
system had not been implemented. As a result of this analysis, which is 
discussed in section III of this proposed rule, we are proposing a 
budget-neutrality adjustment to the Federal per diem base rate. Thus, 
there will be no budgetary impact to the Medicare program by 
implementation of the proposed IPF prospective payment system.
2. Impacts on Providers
    To understand the impact of the proposed IPF prospective payment 
system on providers, it is necessary to estimate payments that would be 
made under the current TEFRA payment methodology (current payments) and 
payments under the proposed IPF prospective payment system. The IPFs 
were grouped into the categories listed below based on characteristics 
provided in the Online Survey and Certification and Reporting (OSCAR) 
file and the 1999 cost report data from HCRIS:

[sbull] Facility Type
[sbull] Location
[sbull] Teaching Status
[sbull] Census Region
[sbull] Size

    To estimate the impacts among the various categories of IPFs, we 
had to compare estimated future payments that would have been made 
under the TEFRA payment methodology to estimated payments under the 
proposed IPF prospective payment system. We estimated the impacts using 
the same set of providers (1,975 IPFs) that was used for the regression 
analysis to calculate the budget-neutral Federal per diem base rate, 
and to determine the appropriateness of various adjustments to the 
Federal per diem base rate. A detailed explanation of the methods we 
used to simulate TEFRA payments and estimated payments under the 
proposed IPF prospective payment system is provided in section III.C. 
of this proposed rule.
    The impacts reflect the estimated ``losses'' or ``gains'' among the 
various classifications of IPF providers for the first year of the 
proposed IPF prospective payment system. Proposed prospective payments 
were based on the proposed budget-neutral Federal per diem base rate of 
$530 adjusted by the IPFs' estimated patient-level, facility-level 
adjustments, and simulated outlier amounts. This payment was compared 
to the IPF's payments based on its cost from the cost report inflated 
to the midpoint of the effective period (April 1, 2004 through June 30, 
2005) and subject to the updated per discharge target amount.
    Table 8 below illustrates the aggregate impact of the proposed IPF 
prospective payment system on various classifications of IPFs. The 
first column identifies the type of IPF, the second column indicates 
the number of IPFs for each type of IPF, and the third column indicates 
the ratio of the proposed IPF prospective payment system payments to 
the current TEFRA payments in the first year of the transition.

                       Table 8.--Aggregate Impact
------------------------------------------------------------------------
                                                             Ratio of
                                                             proposed
                                                            prospective
            Facility by type                 Number of    payment amount
                                            facilities       to TEFRA
                                                           payment with
                                                            transition
------------------------------------------------------------------------
All Facilities..........................            1975            1.00
    By Type of Ownership:
        Psychiatric Hospitals
            Government..................             181            1.14
            Non-profit..................              88            1.01
            For-profit..................             236            1.02
        Psychiatric Units...............            1470            0.99
All Facilities..........................            1975            1.00
        Rural...........................             445            0.99
        Urban...........................            1530            1.00
    By Urban or Rural Classification:
        Urban by Facility Type..........
        Psychiatric Hospitals:
            Government..................             138            1.14
            Non-profit..................              80            1.01
            For-profit..................             221            1.02
        Psychiatric Units...............            1091            0.99
    Rural by Facility Type:
        Psychiatric Hospitals:
            Government..................              43            1.14
            Non-profit..................               8            0.99
            For-profit..................              15            1.02
        Psychiatric Units...............             379            0.98
    By Teaching Status:
        Non-teaching....................            1676            0.99
        Less than 10% interns and                    163            1.02
         residents to beds..............
        10% to 30% interns and residents              80            1.02
         to beds........................
        More than 30% interns and                     56            1.03
         residents to beds..............
    By Region:
        New England.....................             128            0.99
        Mid-Atlantic....................             316            1.04

[[Page 66949]]

 
        South Atlantic..................             283            1.00
        East North Central..............             369            0.98
        East South Central..............             161            0.99
        West North Central..............             174            0.99
        West South Central..............             270            0.97
        Mountain........................              88            1.00
        Pacific.........................             181            1.00
    By Bed Size:
        Psychiatric Hospitals:
            Under 10 beds...............               2            0.99
            10 to 25 beds...............              36            0.99
            25 to 50 beds...............              71            1.01
            50 to 100 beds..............             199            1.02
            100 to 200 beds.............             127            1.05
            200 to 400 beds.............              49            1.10
            Over 400 beds...............              21            1.19
        Psychiatric Units...............
            Under 10 beds...............              55            0.96
            10 to 25 beds...............             749            0.97
            25 to 50 beds...............             443            0.98
            50 to 100 beds..............             184            1.00
            100 to 200 beds.............              32            1.02
            200 to beds 400.............               6            1.07
            Over 400 beds...............               1            1.12
------------------------------------------------------------------------

3. Results
    We measured the impact of the proposed IPF prospective payment 
system by comparing proposed payments under the IPF prospective payment 
system relative to current TEFRA payments. This was computed as a ratio 
of the proposed prospective payment to the current TEFRA payment for 
each classification of IPF. We have prepared the following summary of 
the impact of the proposed IPF prospective payment system set forth in 
this proposed rule.

a. Facility type

    We grouped the IPFs into the following four categories: (1) 
Psychiatric units; (2) government hospitals; (3) for-profit hospitals; 
and (4) non-profit hospitals. Roughly 75 percent of all IPFs are 
psychiatric units. The impact analysis in Table 8 indicates that under 
the proposed IPF prospective payment system, freestanding psychiatric 
hospitals would receive an increase relative to the current payment. 
The psychiatric units would have a proposed prospective payment to the 
current TEFRA payment ratio of 0.99, the government hospitals would 
have a proposed prospective payment to the current TEFRA payment ratio 
of 1.14, and the non-profit and for-profit hospitals would have a 
proposed prospective payment to the current TEFRA payment ratio of 1.01 
and 1.02, respectively.
b. Location
    Approximately 23 percent of all IPFs are located in rural areas. 
The impact analysis in Table 8 indicates that under the proposed IPF 
prospective payment system, the proposed prospective payment to the 
current TEFRA payment ratio would be approximately 0.99 for rural IPFs 
and 1.00 for urban IPFs. If we grouped all of the IPFs by facility type 
within urban and rural locations, the impact analysis would indicate 
that the estimated proposed prospective payment to current TEFRA 
payment ratios would be between approximately 0.98 and 1.02 for all 
IPFs except government hospitals. Under the proposed IPF prospective 
payment system, the payment ratios for rural and urban government 
hospitals are both estimated to be approximately 1.14.
c. Teaching Status
    Using the ratio of interns and residents to the average daily 
census for each facility as a measure of the magnitude of the teaching 
status, we grouped facilities into the following four major categories: 
(1) non teaching; (2) less than 10 percent ratio of interns and 
residents to average daily census; (3) 10 to 30 percent ratio of 
interns and residents to average daily census; and (4) more than 30 
percent of interns and residents to average daily census. Facilities 
that are classified with a teaching ratio greater than 0 percent would 
benefit under the proposed IPF prospective payment system.
d. Census Region
    Under the proposed IPF prospective payment system, IPFs in the Mid-
Atlantic region would receive a higher payment ratio of approximately 
1.04. IPFs in other regions would receive payment ratios between 
approximately 0.97 and 1.00. Specifically, the South Atlantic States, 
the Mountain States, and the Pacific States would receive payment 
ratios of 1.00. The New England States, East South Central States, and 
the West North Central States, would receive payment ratios of 
approximately 0.99. The proposed IPF prospective payments would be 
slightly lower than 0.99 for IPFs in the West South Central and East 
North Central States.
e. Size
    We grouped the IPFs into 7 categories for each group of psychiatric 
facilities based on bed size: (1) Under 10 beds; (2) 10 to 25 beds; (3) 
25 to 50 beds; (4) 50 to 100 beds; (5) 100 to 200 beds; (6) 200 to 400 
beds; and (7) over 400 beds. Under the proposed IPF prospective

[[Page 66950]]

payment system, the payment ratios for all bed size categories would be 
greater than 0.96. The majority of IPFs' bed sizes were categories in 
which the payment ratio would be greater than 0.98. Under the proposed 
IPF prospective payment system, large IPFs with over 400 beds would 
receive the highest payment ratio (1.19 percent for psychiatric 
hospitals and 1.12 for psychiatric units), while psychiatric units with 
less than 10 beds would receive the lowest payment ratio of 0.96.
4. Effect on the Medicare Program
    Based on actuarial projections resulting from our experience with 
other prospective payment systems, we estimate that Medicare spending 
(total Medicare program payments) for IPF services over the next 5 
years would be as follows:

                      Table 9.--Estimated Payments
------------------------------------------------------------------------
                                                              Dollars in
                    Fiscal time periods                        millions
------------------------------------------------------------------------
April 1, 2004 to June 30, 2005.............................        5,311
July 1, 2005 to June 30, 2006..............................        4,531
July 1, 2006 to June 30, 2007..............................        4,788
July 1, 2007 to June 30, 2008..............................        5,053
July 1, 2008 to June 30, 2009..............................        5,328
------------------------------------------------------------------------

    These estimates are based on the current estimate of increases in 
the proposed excluded hospitals with capital market basket as follows:
    [sbull] 3.3 percent for FY 2004;
    [sbull] 3.1 percent for FY 2005;
    [sbull] 3.0 percent for FY 2006;
    [sbull] 2.9 percent for FY 2007;
    [sbull] 3.0 percent for FY 2008; and
    [sbull] 3.0 percent for FY 2009.
    We estimate that there would be an increase in fee-for-service 
Medicare beneficiary enrollment as follows:
    [sbull] 1.8 percent in FY 2004;
    [sbull] 1.5 percent in FY 2005;
    [sbull] 1.5 percent in FY 2006;
    [sbull] 1.9 percent in FY 2007;
    [sbull] 2.0 percent in FY 2008; and
    [sbull] 1.9 percent in FY 2009.
    Consistent with the statutory requirement for budget neutrality in 
the initial year of implementation, we intend for estimated aggregate 
payments under the proposed IPF prospective payment system to equal the 
estimated aggregate payments that would be made if the IPF prospective 
payment system were not implemented. Our methodology for estimating 
payments for purposes of the budget-neutrality calculations uses the 
best available data. After the proposed IPF prospective payment system 
is implemented, we will evaluate the accuracy of the assumptions used 
to compute the budget-neutrality calculation. We intend to analyze 
claims and cost report data from the first year of the prospective 
payment system to determine whether the factors used to develop the 
Federal per diem base rate are not significantly different from the 
actual results experienced in that year. We are planning to compare 
payments under the final Federal per diem rate (which relies on an 
estimate of cost-base TEFRA payments using historical data from a base 
year and assumptions that trend the data to the initial year of 
implementation) to estimated cost-based TEFRA payments based on actual 
data from the first year of the IPF prospective payment system. The 
percent difference (either positive or negative) would be applied 
prospectively to the established prospective payment rates to ensure 
the rates accurately reflect the payment levels intended by the 
statute. We intend to perform this analysis within the first 5 years of 
the implementation of the prospective payment system.
    Section 124 of Pub. L. 106-113 provides the Secretary broad 
authority in developing the proposed IPF prospective payment system, 
including the authority for appropriate adjustments. In accordance with 
this authority, we may make a one-time prospective adjustment to the 
Federal per diem base rate in an effort to ensure that the best 
historical data available forms the foundation of the prospective 
payment rates in future years.
5. Effect on Beneficiaries
    Under the proposed IPF prospective payment system, IPFs would 
receive payment based on the average resources consumed by patients for 
each day. We do not expect changes in the quality of care or access to 
services for Medicare beneficiaries under the proposed IPF prospective 
payment system. In fact, we believe that access to IPF services would 
be enhanced due to the proposed adjustment factors for comorbid 
conditions and the proposed outlier policy, which are intended to 
adequately reimburse IPFs for expensive cases. In addition, we expect 
that paying prospectively for IPF services will enhance the efficiency 
of the Medicare program.
6. Computer Hardware and Software
    We do not anticipate that IPFs will incur additional systems 
operating costs in order to effectively participate in the proposed IPF 
prospective payment system. We believe that IPFs possess the computer 
hardware capability to handle the billing requirements under the 
proposed IPF prospective payment system. Our belief is based on 
indications that approximately 99 percent of hospital inpatient claims 
are submitted electronically. In addition, we are not proposing any 
significant changes in claims processing (see section IVC. of this 
proposed rule).

C. Alternatives Considered

    We considered the following alternatives in developing the proposed 
IPF prospective payment system:
    [sbull] One option we considered incorporated not only the patient-
level and facility-level variables described previously, but also a 
site-of-service distinction. Under this approach, psychiatric units 
would have received a higher per diem payment, all other factors being 
equal, based on the assumption that psychiatric units on average treat 
a more complex and costly case-mix. A psychiatric unit adjustment to 
the otherwise applicable per diem payment rate would reflect the 
absence of a more sophisticated patient classification system 
specifically linked to resource use. Our analysis of the 1999 cost 
report and billing data used to develop this proposed rule reveals that 
an adjustment would have increased the otherwise applicable per diem 
payment to psychiatric units by approximately 33 percent.
    The average 1999 inpatient psychiatric per diem cost were $615 for 
psychiatric units, $534 for non-profit hospitals, $448 for proprietary 
providers, and $378 for governmental facilities. While some of the 
higher than average per diem cost in psychiatric units may be due to a 
greater medical and surgical acuity among patients treated in 
psychiatric units, part of the difference is undoubtedly attributable 
to economy of scale inefficiencies associated with operating small 
units, including higher overhead expenses, and generally lower 
occupancy rates. A psychiatric unit site-of-service distinction in 
payment rates would represent a proxy adjuster in lieu of a more 
refined classification system. Therefore, we are concerned about 
applying such an adjustment to all psychiatric units regardless of 
cost, efficiency, or case-mix. In addition, no other Medicare 
prospective payment system has a distinction in payments solely based 
on the site of service.
    We strongly believe that payments on behalf of Medicare 
beneficiaries should reflect the resource needs of patients, not simply 
where patients are treated. A higher per diem payment to psychiatric 
units compared to psychiatric hospitals may create powerful incentives 
to increase the number of psychiatric units without regard to patient 
need or acuity. Pending the development of a more refined facility-
specific case-mix

[[Page 66951]]

system, we believe that the proposed payment system appropriately 
accommodates the higher costs of those psychiatric units with a more 
complex case-mix. The proposed DRG and comorbidity payment adjustments, 
the proposed 3-year transition period that would allow a gradual phase-
in of the proposed IPF prospective payment system, and the proposed 
outlier payment policy would ensure that those psychiatric units with 
more costly, resource-intensive cases are not unfairly disadvantaged.
    Although the use of a psychiatric unit adjustment in connection 
with the proposed IPF prospective payment system was described in our 
August 21, 2002 Report to the Congress as a potential payment option, 
as discussed in section III.B.2. of this proposed rule, we have not 
adopted this approach.
    [sbull] Another option we considered was a facility model based on 
the IPF's historical payment and patient mix.
    In order to address the limitation of routine cost data that is 
discussed in section III.B. of this proposed rule, we considered a 
model based on facility-level routine costs and patient-level ancillary 
costs separately. Under this model, the variables in the facility 
routine cost regression are defined differently than in the ancillary 
cost and proposed rule regressions. For example, in the ancillary cost 
regression, length of stay is each patient's length of stay, but in the 
routine cost regression it is the facility's average length of stay. 
Similarly, in the ancillary cost regression, the age variable indicates 
whether an individual patient is over 65 years of age, but in the 
routine cost regression it indicates the percentage of the facility's 
patients who are over 65 years of age. This difference in the routine 
and ancillary cost regressions also applies to the comorbidity and DRG 
variables. These differences in measurement mean that the coefficient 
values of these variables are not directly comparable between the 
facility-level routine cost regression and the patient-level regression 
for ancillary cost or total cost. In addition, operationalizing this 
model would present claims processing and systems issues to keep the 
facility-level data up to date. Therefore, we rejected this approach.
    In accordance with the provisions of Executive Order 12866, this 
proposed rule was reviewed by the Office of Management and Budget.

List of Subjects

42 CFR Part 412

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

42 CFR Part 413

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

42 CFR Part 424

    Emergency medical services, Health facilities, Health professions, 
Medicare, Reporting and recordkeeping.
    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services proposes to amend 42 CFR chapter IV as follows:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT PSYCHIATRIC 
SERVICES

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

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

Subpart A--General Provisions

    2. Section 412.1 is amended as follows:
    a. Redesignating paragraphs (a)(2) and (a)(3) as paragraphs (a)(3) 
and (a)(4).
    b. Adding a new paragraph (a)(2).
    c. Redesignating paragraphs (b)(12) and (b)(13) as paragraphs 
(b)(13) and (b)(14).
    d. Adding a new paragraph (b)(12).
    The additions read as follows:


Sec.  412.1  Scope of part.

    (a) * * *
    (2) This part implements section 124 of Public Law 106-113 by 
establishing a per diem prospective payment system for the inpatient 
operating and capital costs of hospital inpatient services furnished to 
Medicare beneficiaries by a psychiatric facility that meets the 
conditions of subpart N of this part.
* * * * *
    (b) * * *
    (12) Subpart N describes the prospective payment system specified 
in paragraph (a)(2) of this section for inpatient psychiatric 
facilities and sets forth the general methodology for paying the 
operating and capital-related costs of hospital inpatient services 
furnished by inpatient psychiatric facilities effective with cost 
reporting periods beginning on or after April 1, 2004.
* * * * *

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

    3. Section 412.20 is amended as follows:
    a. Revising paragraph (a).
    b. Redesignating paragraphs (b), (c), and (d) as paragraphs (c), 
(d), and (e).
    c. Adding a new paragraph (b).
    The revision and addition read as follows:


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

    (a) Except for services described in paragraphs (b), (c), (d), and 
(e) of this section, all covered hospital inpatient services furnished 
to beneficiaries during the subject cost reporting periods are paid 
under the prospective payment system as specified in Sec.  412.1(a)(1).
    (b) Effective for cost reporting periods beginning on or after 
April 1, 2004, covered hospital inpatient services furnished to 
Medicare beneficiaries by an inpatient psychiatric facility that meets 
the conditions of Sec.  412.404 are paid under the prospective payment 
system described in subpart N of this part.
* * * * *
    4. Section 412.22 is amended by revising paragraph (b).


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

* * * * *
    (b) Cost reimbursement. Except for those hospitals specified in 
paragraph (c) of this section, and Sec.  412.20(b), (c), and (d), all 
excluded hospitals (and excluded hospital units, as described in Sec.  
412.23 through Sec.  412.29) are reimbursed under the cost 
reimbursement rules set forth in part 413 of this chapter, and are 
subject to the ceiling on the rate of hospital cost increases as 
specified in Sec.  413.40 of this chapter.
* * * * *
    5. Section 412.23 is amended as follows:
    a. Republishing paragraph (a) introductory text.
    b. Redesignating paragraphs (a)(1) and (a)(2) as paragraphs (a)(2) 
and (a)(3).
    c. Adding a new paragraph (a)(1).
    The republication and addition read as follows:


Sec.  412.23  Excluded hospitals: Classifications.

* * * * *
    (a) Psychiatric hospitals. A psychiatric hospital must--
    (1) Meet the following requirements to be excluded from the 
prospective

[[Page 66952]]

payment system as specified in Sec.  412.1(a)(1) and to be paid under 
the prospective payment system as specified in Sec.  412.1(a)(2) and in 
subpart N of this part;
* * * * *
    6. Section 412.25 is amended by revising the paragraph (a) 
introductory text to read as follows:


Sec.  412.25  Excluded hospital units: Common requirements.

    (a) Basis for exclusion. In order to be excluded from the 
prospective payment systems as specified in Sec.  412.1(a)(1) and to be 
paid under the inpatient prospective payment system as specified in 
412.1(a)(2), a psychiatric unit must meet the following requirements.
* * * * *


Sec.  412.27  [Amended]

    7. Section 412.27 is amended as follows:
    a. Revising the introductory text.
    b. Amending paragraph (a) by removing the words ``Third Edition'', 
and adding in its place, ``Fourth Edition, Text Revision''.
    The revision reads as follows:


Sec.  412.27  Excluded psychiatric units: Additional requirements.

    In order to be excluded from the prospective payment system as 
specified in Sec.  412.1(a)(1), and paid under the inpatient 
psychiatric prospective payment system as specified in Sec.  
412.1(a)(2), a psychiatric unit must meet the following requirements:
* * * * *
    8. Section 412.116 is amended as follows:
    a. Redesignating paragraphs (a)(3) and (a)(4) as paragraphs (a)(4) 
and (a)(5).
    b. Adding a new paragraph (a)(3).
    The addition reads as follows:


Sec.  412.116  Method of payment.

    (a) * * *
    (3) For cost reporting periods beginning on or after April 1, 2004, 
payments for hospital inpatient services furnished by a psychiatric 
hospital and psychiatric unit that meet the conditions of Sec.  412.404 
are made as described in Sec.  412.432.
* * * * *
    9. A new subpart N is added to read as follows:
Subpart N--Prospective Payment System for Hospital Inpatient Services 
of Psychiatric Facilities.
Sec.
412.400 Basis and scope of subpart.
412.402 Definitions.
412.404 Conditions for payment under the prospective payment system 
for hospital inpatient services of psychiatric facilities.
412.422 Basis of payment.
412.424 Methodology for calculating the Federal per diem payment 
rates.
412.426 Transition period.
412.428 Publication of the Federal per diem payment rates.
412.432 Method of payment under the inpatient psychiatric facility 
prospective payment system.

Subpart N--Prospective Payment System for Hospital Inpatient 
Services of Psychiatric Facilities.


Sec.  412.400  Basis and scope of subpart.

    (a) Basis. This subpart implements section 124 of Public Law 106-
113, which provides for the implementation of a per diem based 
prospective payment system for inpatient psychiatric hospitals and 
psychiatric units (inpatient psychiatric facilities).
    (b) Scope. This subpart sets forth the framework for the 
prospective payment system for inpatient psychiatric facilities, 
including the methodology used for the development of the per diem rate 
and associated adjustments, the application of a transition period, and 
the related rules. Under this system, for cost reporting periods 
beginning on or after April 1, 2004, payment for the operating and 
capital-related costs of hospital inpatient services furnished by 
inpatient psychiatric facilities is made on the basis of prospectively 
determined rates and applied on a per diem basis.


Sec.  412.402  Definitions.

    As used in this subpart--
    Comorbidity means all specific patient conditions that are 
secondary to the patient's primary diagnosis and that coexists at the 
time of admission, develop subsequently, or that affect the treatment 
received or the length of stay or both. Diagnoses that relate to an 
earlier episode of care that have no bearing on the current hospital 
stay are excluded.
    Fixed dollar loss threshold means a dollar amount by which the 
costs of a case exceed payment in order to qualify for an outlier 
payment.
    Inpatient psychiatric facilities means hospitals that meet the 
requirements as specified in Sec.  412.22, Sec.  412.23(a) and units 
that meet the requirements as specified in Sec.  412.22, Sec.  412.25, 
and Sec.  412.27.
    Interrupted stay means a Medicare inpatient is discharged from the 
inpatient psychiatric facility and returns to the same inpatient 
psychiatric facility within 5 consecutive calendar days. The 5 
consecutive calendar days begin with the day of discharge.
    Outlier payment means an additional payment beyond the Federal 
prospective payment amount for cases with unusually high costs.
    Per diem payment amount means payment based on the average cost of 
1 day of inpatient psychiatric services.
    Principal diagnosis means the condition established after study to 
be chiefly responsible for occasioning the admission of the patient to 
the inpatient psychiatric facility.
    Rural area means an area as defined in Sec.  412.62(f)(1)(iii).
    Urban area means an area as defined in Sec.  412.62(f)(1)(ii).


Sec.  412.404  Conditions for payment under the prospective payment 
system for hospital inpatient services of psychiatric facilities.

    (a) General requirements. (1) Effective for cost reporting periods 
beginning on or after April 1, 2004, an inpatient psychiatric facility 
must meet the conditions of this section to receive payment under the 
prospective payment system described in this subpart for hospital 
inpatient services furnished in psychiatric facilities to Medicare 
beneficiaries.
    (2) If an inpatient psychiatric facility fails to comply fully with 
these conditions, CMS may, as appropriate--
    (i) Withhold (in full or in part) or reduce Medicare payment to the 
inpatient psychiatric facility until the facility provides adequate 
assurances of compliance; or
    (ii) Classify the inpatient psychiatric facility as a hospital that 
is subject to the conditions of subpart C of this part and is paid 
under the prospective payment system as specified in Sec.  412.1(a)(1).
    (b) Inpatient psychiatric facilities subject to the prospective 
payment system. Subject to the special payment provisions of Sec.  
412.22(c), an inpatient psychiatric facility must meet the general 
criteria set forth in Sec.  412.22. For exclusion from the hospital 
inpatient prospective payment system as specified in Sec.  412.1(a)(1), 
a psychiatric hospital must meet the criteria set forth in Sec.  
412.23(a) and psychiatric units must meet the criteria set forth in 
Sec.  412.25 and Sec.  412.27.
    (c) Limitations on charges to beneficiaries--(1) Prohibited 
charges. Except as permitted in paragraph (c)(2) of this section, an 
inpatient psychiatric facility may not charge a beneficiary for any 
services for which payment is made by Medicare, even if the facility's 
cost of furnishing services to that beneficiary are greater than the 
amount the facility is paid under the prospective payment system.
    (2) Permitted charges. An inpatient psychiatric facility receiving 
payment

[[Page 66953]]

under this subpart for a covered hospital stay (that is, a stay that 
included at least one covered day) may charge the Medicare beneficiary 
or other person only the applicable deductible and coinsurance amounts 
under Sec.  409.82, Sec.  409.83, and Sec.  409.87 of this chapter and 
for items or services as specified under Sec.  489.20(a) of this 
chapter.
    (d) Furnishing of hospital inpatient services directly or under 
arrangement. (1) Subject to the provisions of Sec.  412.422, the 
applicable payments made under this subpart are payment in full for all 
hospital inpatient services, as specified in Sec.  409.10 of this 
chapter. Hospital inpatient services do not include the following:
    (i) Physicians' services that meet the requirements of Sec.  
415.102(a) of this chapter for payment on a fee schedule basis.
    (ii) Physician assistant services, as specified in section 
1861(s)(2)(K)(i) of the Act.
    (iii) Nurse practitioners and clinical nurse specialist services, 
as specified in section 1861(s)(2)(K)(ii) of the Act.
    (iv) Certified nurse midwife services, as specified in section 
1861(gg) of the Act.
    (v) Qualified psychologist services, as specified in section 
1861(ii) of the Act.
    (vi) Services of a certified registered nurse anesthetist, as 
specified in section 1861(bb) of the Act.
    (2) CMS does not pay providers or suppliers other than inpatient 
psychiatric facilities for services furnished to a Medicare beneficiary 
who is an inpatient of the inpatient psychiatric facility, except for 
services described in paragraphs (d)(1)(i) through (d)(1)(vi) of this 
section.
    (3) The inpatient psychiatric facility must furnish all necessary 
covered services to the Medicare beneficiary who is an inpatient of the 
inpatient psychiatric facility, either directly or under arrangements 
(as specified in Sec.  409.3 of this chapter).
    (e) Reporting and recordkeeping requirements. All inpatient 
psychiatric facilities participating in the prospective payment system 
under this subpart must meet the recordkeeping and cost reporting 
requirements as specified in Sec.  412.27(c), Sec.  413.20, and Sec.  
413.24 of this chapter.


Sec.  412.422  Basis of payment.

    (a) Method of Payment. (1) Under the prospective payment system, 
inpatient psychiatric facilities receive a predetermined per diem 
payment amount for inpatient services furnished to Medicare Part A fee-
for-service beneficiaries.
    (2) Payment under the prospective payment system is based on the 
Federal per diem payment rate that includes adjustments as specified in 
Sec.  412.424.
    (3) During the transition period, payment is based on a blend of 
the Federal per diem payment amount and the facility-specific payment 
rate as specified in Sec.  412.426.
    (b) Payment in full. (1) The payment made under this subpart 
represents payment in full (subject to applicable deductibles and 
coinsurance as specified in subpart G of part 409 of this chapter) for 
inpatient operating and capital-related costs associated with 
furnishing Medicare covered services in an inpatient psychiatric 
facility, but not the cost of an approved medical education program as 
specified in Sec.  413.85 and Sec.  413.86 of this chapter.
    (2) In addition to the payments based on the prospective payment 
rates, inpatient psychiatric facilities receive payment for bad debts 
of Medicare beneficiaries, as specified in Sec.  413.80 of this 
chapter.


Sec.  412.424  Methodology for calculating the Federal per diem payment 
rates.

    (a) Data sources. To calculate the Federal per diem payment rate 
for inpatient psychiatric facilities, CMS uses the following data 
sources:
    (1) The best Medicare data available to estimate the average per 
diem payment amount for inpatient operating and capital-related costs 
made as specified in part 413 of this chapter.
    (2) Patient and facility cost report data capturing routine and 
ancillary costs.
    (3) An appropriate wage index to adjust for wage differences.
    (4) An increase factor to adjust for the most recent estimate of 
increases in the prices of an appropriate market basket of goods and 
services provided by inpatient psychiatric facilities.
    (b) Determining the Federal per diem base amount. The Federal per 
diem base rate is the product of the updated average per diem rate and 
the budget-neutrality adjustment factor as described in paragraphs 
(b)(1) and (b)(2) of this section.
    (1) Determining the average per diem rate. CMS determines the 
average inpatient operating and capital per diem cost for inpatient 
psychiatric facilities by using the best available data as specified in 
paragraph (a) of this section. CMS applies the increase factor 
described in paragraph (a)(4) of this section to update the rate to the 
midpoint of the first 15 months under the system.
    (2) Budget-neutrality factor. (i) CMS adjusts the average per diem 
amount to ensure that the aggregate payments under the prospective 
payment system are estimated to equal the amount that would have been 
made to inpatient psychiatric facilities if the prospective payment 
system described in this subpart was not implemented.
    (ii) CMS evaluates the accuracy of the budget-neutrality adjustment 
within the first 5 years after implementation of the inpatient 
prospective payment system. CMS may make a one-time prospective 
adjustment to the Federal per diem base rate to account for significant 
differences between the historical data on cost-based TEFRA payments 
(the basis of the budget-neutrality adjustment at the time of 
implementation) and estimates of TEFRA payments based on actual data 
from the first year of the prospective payment system.
    (c) Determining the Federal per diem amount. The Federal per diem 
payment amount is the product of the Federal per diem base rate, the 
facility-level adjustments applicable to the inpatient psychiatric 
facility, and the patient-level characteristics applicable to the case 
as described in paragraphs (c)(1) and (c)(2) of this section.
    (1) Facility-level adjustments. (i) Adjustment for wages. The labor 
portion of the Federal per diem base rate is adjusted to account for 
geographic differences in the area wage levels using an appropriate 
wage index. The application of the wage index is made on the basis of 
the location of the inpatient psychiatric facility in an urban or rural 
area as specified in Sec.  412.402.
    (ii) Location in rural areas. CMS adjusts the Federal per diem base 
rate by a factor for facilities located in rural areas as specified in 
Sec.  412.62(f)(1)(iii).
    (iii) Teaching status. CMS adjusts the Federal per diem base rate 
by a factor to account for a facility's teaching status based on the 
ratio of the number of interns and residents assigned to the facility 
divided by the facility's average daily census.
    (2) Patient-level adjustments. (i) Age. CMS adjusts the Federal per 
diem base rate by a factor for patients age 65 and older.
    (ii) Principal diagnosis. The inpatient psychiatric facility must 
identify a psychiatric diagnosis for each patient. CMS adjusts the 
wage-adjusted Federal per diem base rate by a factor to account for the 
diagnosis-related group assignment associated with the principal 
diagnosis, as specified by CMS.
    (iii) Comorbidities. CMS adjusts the Federal per diem base rate by 
a factor to account for certain comorbidities as specified by CMS.

[[Page 66954]]

    (iv) Variable per diem adjustments. CMS adjusts the Federal per 
diem base rate by declining factors for day 1, days 2 through 4, and 
days 5 through 8 of the inpatient stay. The variable per diem 
adjustment does not apply after day 8.
    (v) Adjustment for high-cost cases. CMS provides for an additional 
payment if the estimated total cost for a case exceeds a fixed dollar 
loss threshold plus the total per diem payment amount for the case.
    (A) The fixed dollar loss threshold is adjusted for area wage 
levels, teaching status, and rural location.
    (B) The additional payment equals 80 percent of the difference 
between the estimated cost of the case and the per diem payment amount 
for days 1 through 8, 60 percent for days 9 and beyond.
    (C) Additional payments made under this section would be subject to 
the adjustments at Sec.  412.84(i), except that the national urban and 
rural medians would be used instead of statewide averages, and at Sec.  
412.84(m) of this part.
    (d) Special payment provision for interrupted stays. If a patient 
is discharged from an inpatient psychiatric facility and returns to the 
same facility before midnight of the 5th consecutive day, the case is 
considered to be continuous for purposes:
    (1) Determining the appropriate variable per diem adjustment, as 
specified in paragraph (c)(2)(iv) of this section, applicable to the 
case.
    (2) Determining whether the total cost for a case exceeds the fixed 
dollar loss threshold and qualifies for outlier payments as specified 
in paragraph (c)(2)(v) of this section.


Sec.  412.426  Transition period.

    (a) Duration of transition period and proportion of the blended 
transition rate. Except as provided in paragraph (c) of this section, 
for cost reporting periods beginning on or after April 1, 2004 through 
June 30, 2007, an inpatient psychiatric facility receives a payment 
comprised of a blend of the Federal per diem payment amount, as 
specified in Sec.  412.424(c) and a facility-specific payment as 
specified under paragraph (b) of this section.
    (1) For cost reporting periods beginning on or after April 1, 2004 
and before June 30, 2005, payment is based on 75 percent of the 
facility-specific payment and 25 percent of the Federal per diem 
payment amount.
    (2) For cost reporting periods beginning on or after July 1, 2005 
and before June 30, 2006, payment is based on 50 percent of the 
facility-specific payment and 50 percent of the Federal per diem 
payment amount.
    (3) For cost reporting periods beginning on or after July 1, 2006 
and before June 30, 2007, payment is based on 25 percent of the 
facility-specific payment and 75 percent of the Federal per diem 
payment amount.
    (4) For cost reporting periods beginning on or after July 1, 2007, 
payment is based entirely on the Federal per diem payment amount.
    (b) Calculation of the facility-specific payment. The facility-
specific payment is equal to the payment for each cost reporting period 
in the transition period that would have been made without regard to 
this subpart. The facility's Medicare fiscal intermediary calculates 
the facility-specific payment for inpatient operating costs and capital 
costs in accordance with part 413 of this chapter.
    (c) Treatment of new inpatient psychiatric facilities.
    New inpatient psychiatric facilities, that is, facilities that 
under present or previous ownership or both have their first cost 
reporting period as an IPF beginning on or after April 1, 2004, are 
paid based entirely on the Federal per diem payment system.


Sec.  412.428  Publication of the Federal per diem payment rates.

    CMS will publish annually in the Federal Register information 
pertaining to the inpatient psychiatric facility prospective payment 
system. This information includes the Federal per diem payment rates, 
the area wage index, and a description of the methodology and data used 
to calculate the payment rates.


Sec.  412.432  Method of payment under the inpatient psychiatric 
facility prospective payment system.

    (a) General rule. Subject to the exceptions in paragraphs (b) and 
(c) of this section, an inpatient psychiatric facility receives payment 
under this subpart for inpatient operating cost and capital-related 
costs for each inpatient stay following submission of a bill.
    (b) Periodic interim payments (PIP). (1) Criteria for receiving 
PIP.
    (i) An inpatient psychiatric facility receiving payment under this 
subpart may receive PIP for Part A services under the PIP method 
subject to the provisions of Sec.  413.64(h) of this chapter.
    (ii) To be approved for PIP, the inpatient psychiatric facility 
must meet the qualifying requirements in Sec.  413.64(h)(3) of this 
chapter.
    (iii) Payments to a psychiatric unit are made under the same method 
of payment as the hospital of which it is a part as specified in Sec.  
412.116.
    (iv) As provided in Sec.  413.64(h)(5) of this chapter, 
intermediary approval is conditioned upon the intermediary's best 
judgment as to whether payment can be made under the PIP method without 
undue risk of resulting in an overpayment to the provider.
    (2) Frequency of payment. For facilities approved for PIP, the 
intermediary estimates the annual inpatient psychiatric facility's 
Federal per diem prospective payments, net of estimated beneficiary 
deductibles and coinsurance, and makes biweekly payments equal to \1/
26\ of the total estimated amount of payment for the year. If the 
inpatient psychiatric facility has payment experience under the 
prospective payment system, the intermediary estimates PIP based on 
that payment experience, adjusted for projected changes supported by 
substantiated information for the current year. Each payment is made 2 
weeks after the end of a biweekly period of service as specified in 
Sec.  413.64(h)(6) of this chapter. The interim payments are reviewed 
at least twice during the reporting period and adjusted if necessary. 
Fewer reviews may be necessary if an inpatient psychiatric facility 
receives interim payments for less than a full reporting period. These 
payments are subject to final settlement.
    (3) Termination of PIP. (i) Request by the inpatient psychiatric 
facility. Subject to the provisions of paragraph (b)(1)(iii) of this 
section, an inpatient psychiatric facility receiving PIP may convert to 
receiving prospective payments on a non-PIP basis at any time.
    (ii) Removal by the intermediary. An intermediary terminates PIP if 
the inpatient psychiatric facility no longer meets the requirements of 
Sec.  413.64(h) of this chapter.
    (c) Interim payments for Medicare bad debts and for costs of an 
approved education program and other costs paid outside the prospective 
payment system. The intermediary determines the interim payments by 
estimating the reimbursable amount for the year based on the previous 
year's experience, adjusted for projected changes supported by 
substantiated information for the current year, and makes biweekly 
payments equal to \1/26\ of the total estimated amount. Each payment is 
made 2 weeks after the end of the biweekly period of service as 
specified in Sec.  413.64(h)(6) of this chapter. The interim payments 
are reviewed at least twice during the reporting period and adjusted if 
necessary. Fewer reviews may be necessary if an inpatient psychiatric 
facility receives interim payments for less than a full reporting 
period. These payments are subject to final cost settlement.

[[Page 66955]]

    (d) Outlier payments. Additional payments for outliers are not made 
on an interim basis. The outlier payments are made based on the 
submission of a discharge bill and represent final payment.
    (e) Accelerated payments. (1) General rule. Upon request, an 
accelerated payment may be made to an inpatient psychiatric facility 
that is receiving payment under this subpart and is not receiving PIP 
under paragraph (b) of this section if the inpatient psychiatric 
facility is experiencing financial difficulties because of the 
following:
    (i) There is a delay by the intermediary in making payment to the 
inpatient psychiatric facility.
    (ii) Due to an exceptional situation, there is a temporary delay in 
the inpatient psychiatric facility's preparation and submittal of bills 
to the intermediary beyond the normal billing cycle.
    (2) Approval of payment. An inpatient psychiatric facility's 
request for an accelerated payment must be approved by the intermediary 
and CMS.
    (3) Amount of payment. The amount of the accelerated payment is 
computed as a percent of the net payment for unbilled or unpaid covered 
services.
    (4) Recovery of payment. Recovery of the accelerated payment is 
made by recoupment as inpatient psychiatric facility bills are 
processed or by direct payment by the inpatient psychiatric facility.

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

    1. The authority citation for part 413 is revised to read as 
follows:

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

    2. Section 413.1 is amended as follows:

    a. Revising paragraph (d)(2)(ii).
    b. Redesignating paragraphs (d)(2)(iv),(d)(2)(v), (d)(2)(vi), and 
(d)(2)(vii) as paragraphs (d)(2)(vi), (d)(2)(vii), (d)(2)(viii), and 
(d)(2)(ix).
    (c) Adding new paragraphs (d)(2)(iv) and (d)(2)(v).
    The revision and additions read as follows:


Sec.  413.1  Introduction.

* * * * *
    (d) * * *
    (2) * * *
    (ii) Payment to children's hospitals that are excluded from the 
prospective payment systems under subpart B of part 412 of this 
chapter, and hospitals outside the 50 States and the District of 
Columbia is on a reasonable cost basis, subject to the provisions of 
Sec.  413.40.
* * * * *
    (iv) For cost reporting periods beginning before April 1, 2004, 
payment to psychiatric hospitals (as well as separate psychiatric units 
(distinct parts) of short-term general hospitals) that are excluded 
under subpart B of part 412 of this chapter from the prospective 
payment system is on a reasonable cost basis, subject to the provisions 
of Sec.  413.40.
    (v) For cost reporting periods beginning on or after April 1, 2004, 
payment to psychiatric hospitals (as well as separate psychiatric units 
(distinct parts) of short-term general hospitals) that meet the 
conditions of Sec.  412.404 of this chapter is based on prospectively 
determined rates under subpart N of part 412 of this chapter.
* * * * *
    3. Section 413.40 is amended as follows:
    a. Redesignating paragraphs (a)(2)(i)(C) and (a)(2)(i)(D) as 
paragraphs (a)(2)(i)(D) and (a)(2)(i)(E).
    b. Adding a new paragraph (a)(2)(i)(C).
    c. Republishing paragraphs (a)(2)(ii) introductory text.
    d. Revising paragraph (a)(2)(ii)(B).
    e. Redesignating paragraphs (a)(2)(iii) and (a)(2)(iv) as 
paragraphs (a)(2)(iv) and (a)(2)(v).
    f. Adding a new paragraph (a)(2)(iii).
    The revision and additions read as follows:


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

    (a) * * *
    (2) * * *
    (i) * * *
    (C) Psychiatric hospitals and psychiatric units that are paid under 
the prospective payment system for hospital inpatient services under 
subpart N of part 412 of this chapter for cost reporting periods 
beginning on or after April 1, 2004.
* * * * *
    (ii) For cost reporting periods beginning on or after October 1, 
1983 through March 31, 2004, this section applies to--
* * * * *
    (B) Psychiatric and rehabilitation units excluded from the 
prospective payment systems, as specified in Sec.  412.1(a)(1) of this 
chapter and in accordance with Sec.  412.25 through Sec.  412.30 of 
this chapter, except as limited by paragraphs (a)(2)(iii) and 
(a)(2)(iv) of this section with respect to psychiatric and 
rehabilitation hospitals and psychiatric and rehabilitation units as 
specified in Sec.  412.22, Sec.  412.23, Sec.  412.25, Sec.  412.27, 
Sec.  412.29 and Sec.  412.30 of this chapter.
* * * * *
    (iii) For cost reporting periods beginning on or after April 1, 
2004 this section applies to psychiatric hospitals and psychiatric 
units that are excluded from the prospective payment systems as 
specified in Sec.  412.1(a)(1) of this chapter and paid under the 
prospective payment system as specified in Sec.  412.1(a)(2) of this 
chapter.
* * * * *
    4. Section 413.64 is amended by revising paragraph (h)(2)(i) to 
read as follows:


Sec.  413.64  Payment to providers: Specific rules.

* * * * *
    (h) * * *
    (2) * * *
    (i) Part A inpatient services furnished in hospitals that are 
excluded from the prospective payment systems, as specified in Sec.  
412.1(a)(1) of this chapter, and are paid under the prospective payment 
system as specified in subpart N of part 412 of this chapter.
* * * * *

PART 424--CONDITIONS OF MEDICARE PAYMENT

    1. The authority citation for part 424 continues to read as 
follows:

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

    2. Section 424.14 is amended as follows:
    a. Adding paragraph (c)(3).
    b. Revising paragraph (d)(2).
    The addition and revision read as follows:


Sec.  424.14  Requirements for inpatient services of psychiatric 
hospitals.

* * * * *
    (c) * * *
    (3) The patient continues to need, on a daily basis, inpatient 
psychiatric care (furnished directly by or requiring the supervision of 
inpatient psychiatric facility personnel) or other professional 
services that, as a practical matter can only be provided on an 
inpatient basis.
    (d) * * *
    (2) The first recertification is required as of the 10th day of 
hospitalization. Subsequent recertifications are required

[[Page 66956]]

at intervals established by the UR committee (on a case-by-case basis 
if it so chooses), but no less frequently than every 30 days.
* * * * *

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: April 17, 2003.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.

    Approved: April 29, 2003.
Tommy G. Thompson,
Secretary.
    Editorial Note: This document was received at the Office of the 
Federal Register on November 18, 2003.
    [The following addenda will not appear in the Code of Federal 
Regulations.]

Addendum A--Proposed Psychiatric Prospective Payment Adjustment

Rate and Adjustment Factors

                  Proposed Rate and Adjustment Factors
------------------------------------------------------------------------
 
------------------------------------------------------------------------
                         Proposed Per Diem Rate
------------------------------------------------------------------------
Proposed Per Diem Rate.....................................         $530
Labor-Share................................................         $386
Non-Labor-Share............................................         $144
------------------------------------------------------------
                      Proposed Facility Adjustments
------------------------------------------------------------------------
Rural Location.............................................         1.16
Wage Area Adjustment.......................................          (1)
Teaching Adjustment........................................          (2)
------------------------------------------------------------
                 Proposed Variable Per Diem Adjustments
------------------------------------------------------------------------
Day 1......................................................         1.26
Days 2 through 4...........................................         1.12
Days 5 through 8...........................................         1.05
------------------------------------------------------------
                        Proposed Age Adjustments
------------------------------------------------------------------------
65 Years of Age and Over...................................         1.13
------------------------------------------------------------
                        Proposed DRG Adjustments
------------------------------------------------------------------------
DRG 12.....................................................         1.07
DRG 23.....................................................         1.10
DRG 424....................................................         1.22
DRG 425....................................................         1.08
DRG 426....................................................         1.00
DRG 427....................................................         1.01
DRG 428....................................................         1.03
DRG 429....................................................         1.02
DRG 430....................................................         1.00
DRG 431....................................................         1.02
DRG 432....................................................         0.96
DRG 433....................................................         0.88
DRG 521....................................................         1.02
DRG 522....................................................         0.97
DRG 523....................................................         0.88
------------------------------------------------------------
                    Proposed Comorbidity Adjustments
------------------------------------------------------------------------
HIV........................................................         1.06
Coagulation Factor Deficits................................         1.11
Tracheotomy................................................         1.14
Eating and Conduct Disorders...............................         1.03
Infectious Diseases........................................         1.08
Renal Failure, Acute.......................................         1.08
Rental Failure, Chronic....................................         1.14
Malignant Neoplasm's.......................................         1.10
Uncontrolled Diabetes Mellitus with or without                      1.10
 complications.............................................
Sever Protein Calorie Malnutrition.........................         1.12
Drug and Alcohol Induce Mental Disorders...................         1.03
Cardiac Conditions.........................................         1.13
Arteriosclerosis of the Extremity with Gangrene............         1.17
Chronic Obstructed Pulmonary Disease.......................         1.12
Artificial Openings-Digestive and Urinary..................         1.09
Severe Musculoskeletal and Connective Tissue Diseases......         1.12
Poisoning..................................................        1.14
------------------------------------------------------------------------
\1\ See Addendum B.
\2\ See section III.B.2.b.


   Addendum B1.--Proposed Pre-Reclassified Wage Index for Urban Areas
------------------------------------------------------------------------
                    Urban area (constituent counties or
       MSA                  county equivalents)             Wage index
------------------------------------------------------------------------
0040.............  Abilene, TX..........................          0.7792
                   Taylor, TX
0060.............  Aguadilla, PR........................          0.4587
                   Aguada, PR
                   Aguadilla, PR
                   Moca, PR
0080.............  Akron, OH............................          0.9600
                   Portage, OH
                   Summit, OH
0120.............  Albany, GA...........................          1.0594
                   Dougherty, GA
                   Lee, GA
0160.............  Albany-Schenectady-Troy, NY..........          0.8384
                   Albany, NY
                   Montgomery, NY
                   Rensselaer, NY
                   Saratoga, NY
                   Schenectady, NY
                   Schoharie, NY
0200.............  Albuquerque, NM......................          0.9315
                   Bernalillo, NM
                   Sandoval, NM
                   Valencia, NM
0220.............  Alexandria, LA.......................          0.7859
                   Rapides, LA
0240.............  Allentown-Bethlehem-Easton, PA.......          0.9735
                   Carbon, PA
                   Lehigh, PA
                   Northampton, PA
0280.............  Altoona, PA..........................          0.9225
                   Blair, PA
0320.............  Amarillo, TX.........................          0.9034
                   Potter, TX

[[Page 66957]]

 
                   Randall, TX
0380.............  Anchorage, AK........................          1.2358
                   Anchorage, AK
0440.............  Ann Arbor, MI........................          1.1103
                   Lenawee, MI
                   Livingston, MI
                   Washtenaw, MI
0450.............  Anniston,AL..........................          0.8044
                   Calhoun, AL
0460.............  Appleton-Oshkosh-Neenah, WI..........          0.8997
                   Calumet, WI
                   Outagamie, WI
                   Winnebago, WI
0470.............  Arecibo, PR..........................          0.4337
                   Arecibo, PR
                   Camuy, PR
                   Hatillo, PR
0480.............  Asheville, NC........................          0.9876
                   Buncombe, NC
                   Madison, NC
0500.............  Athens, GA...........................          1.0211
                   Clarke, GA
                   Madison, GA
                   Oconee, GA
0520.............  Atlanta, GA..........................          0.9991
                   Barrow, GA
                   Bartow, GA
                   Carroll, GA
                   Cherokee, GA
                   Clayton, GA
                   Cobb, GA
                   Coweta, GA
                   De Kalb, GA
                   Douglas, GA
                   Fayette, GA
                   Forsyth, GA
                   Fulton, GA
                   Gwinnett, GA
                   Henry, GA
                   Newton, GA
                   Paulding, GA
                   Pickens, GA
                   Rockdale, GA
                   Spalding, GA
                   Walton, GA
0560.............  Atlantic City-Cape May, NJ...........          1.1017
                   Atlantic City, NJ
                   Cape May, NJ
0580.............  Auburn-Opelika, AL...................          0.8325
                   Lee, AL
0600.............  Augusta-Aiken, GA-SC.................          1.0264
                   Columbia, GA
                   McDuffie, GA
                   Richmond, GA
                   Aiken, SC
                   Edgefield, SC
0640.............  Austin-San Marcos, TX................          0.9637
                   Bastrop, TX
                   Caldwell, TX
                   Hays, TX
                   Travis, TX
                   Williamson, TX
0680.............  Bakersfield, CA......................          0.9899
                   Kern, CA
0720.............  Baltimore, MD........................          0.9929
                   Anne Arundel, MD
                   Baltimore, MD
                   Baltimore City, MD
                   Carroll, MD
                   Harford, MD
                   Howard, MD
                   Queen Annes, MD

[[Page 66958]]

 
0733.............  Bangor, ME...........................          0.9664
                   Penobscot, ME
0743.............  Barnstable-Yarmouth, MA..............          1.3202
                   Barnstable, MA
0760.............  Baton Rouge, LA......................          0.8294
                   Ascension, LA
                   East Baton Rouge
                   Livingston, LA
                   West Baton Rouge, LA
0840.............  Beaumont-Port Arthur, TX.............          0.8324
                   Hardin, TX
                   Jefferson, TX
                   Orange, TX
0860.............  Bellingham, WA.......................          1.2282
                   Whatcom, WA
0870.............  Benton Harbor, MI....................          0.9042
                   Berrien, MI
0875.............  Bergen-Passaic, NJ...................          1.2150
                   Bergen, NJ
                   Passaic, NJ
0880.............  Billings, MT.........................          0.9022
                   Yellowstone, MT
0920.............  Biloxi-Gulfport-Pascagoula, MS.......          0.8757
                   Hancock, MS
                   Harrison, MS
                   Jackson, MS
0960.............  Binghamton, NY.......................          0.8341
                   Broome, NY
                   Tioga, NY
1000.............  Birmingham, AL.......................          0.9222
                   Blount, AL
                   Jefferson, AL
                   St. Clair, AL
                   Shelby, AL
1010.............  Bismarck, ND.........................          0.7972
                   Burleigh, ND
                   Morton, ND
1020.............  Bloomington, IN......................          0.8907
                   Monroe, IN
1040.............  Bloomington-Normal, IL...............          0.9109
                   McLean, IL
1080.............  Boise City, ID.......................          0.9310
                   Ada, ID
                   Canyon, ID
1123.............  Boston-Worcester-Lawrence-Lowell-              1.1235
                    Brockton, MA-NH.
                   Bristol, MA
                   Essex, MA
                   Middlesex, MA
                   Norfolk, MA
                   Plymouth, MA
                   Suffolk, MA
                   Worcester, MA
                   Hillsborough, NH
                   Merrimack, NH
                   Rockingham, NH
                   Strafford, NH
1125.............  Boulder-Longmont, CO.................          0.9689
                   Boulder, CO
1145.............  Brazoria, TX.........................          0.8535
                   Brazoria, TX
1150.............  Bremerton, WA........................          1.0944
                    Kitsap, WA
1240.............  Brownsville-Harlingen-San Benito, TX.          0.8880
                   Cameron, TX
1260.............  Bryan-College Station, TX............          0.8821
                   Brazos, TX
1280.............  Buffalo-Niagara Falls, NY............          0.9365
                   Erie, NY
                   Niagara, NY
1303.............  Burlington, VT.......................          1.0052
                   Chittenden, VT
                   Franklin, VT

[[Page 66959]]

 
                   Grand Isle, VT
1310.............  Caguas, PR...........................          0.4371
                   Caguas, PR
                   Cayey, PR
                   Cidra, PR
                   Gurabo, PR
                   San Lorenzo, PR
1320.............  Canton-Massillon, OH.................          0.8932
                   Carroll, OH
                   Stark, OH
1350.............  Casper, WY...........................          0.9690
                    Natrona, WY
1360.............  Cedar Rapids, IA.....................          0.9056
                   Linn, IA
1400.............  Champaign-Urbana, IL.................          1.0635
                   Champaign, IL
1440.............  Charleston-North Charleston, SC......          0.9235
                   Berkeley, SC
                   Charleston, SC
                   Dorchester, SC
1480.............  Charleston, WV.......................          0.8898
                   Kanawha, WV
                   Putnam, WV
1520.............  Charlotte-Gastonia-Rock Hill, NC-SC..          0.9850
                   Cabarrus, NC
                   Gaston, NC
                   Lincoln, NC
                   Mecklenburg, NC
                   Rowan, NC
                   Stanly, NC
                   Union, NC
                   York, SC
1540.............  Charlottesville, VA..................          1.0438
                   Albemarle, VA
                   Charlottesville City, VA
                   Fluvanna, VA
                   Greene, VA
1560.............  Chattanooga, TN-GA...................          0.8976
                   Catoosa, GA
                   Dade, GA
                   Walker, GA
                   Hamilton, TN
                   Marion, TN
1580.............  Cheyenne, WY.........................          0.8628
                   Laramie, WY
1600.............  Chicago, IL..........................          1.1044
                   Cook, IL
                   De Kalb, IL
                   Du Page, IL
                   Grundy, IL
                   Kane, IL
                   Kendall, IL
                   Lake, IL
                   McHenry, IL
                   Will, IL
1620.............  Chico-Paradise, CA...................          0.9745
                    Butte, CA
1640.............  Cincinnati, OH-KY-IN.................          0.9381
                   Dearborn, IN
                   Ohio, IN
                   Boone, KY
                   Campbell, KY
                   Gallatin, KY
                   Grant, KY
                   Kenton, KY
                   Pendleton, KY
                   Brown, OH
                   Clermont, OH
                   Hamilton, OH
                   Warren, OH
1660.............  Clarksville-Hopkinsville, TN-KY......          0.8406
                   Christian, KY

[[Page 66960]]

 
                   Montgomery, TN
1680.............  Cleveland-Lorain-Elyria, OH..........          0.9670
                    Ashtabula, OH
                   Geauga, OH
                   Cuyahoga, OH
                   Lake, OH
                   Lorain, OH
                   Medina, OH
1720.............  Colorado Springs, CO.................          0.9916
                    El Paso, CO
1740.............  Columbia MO..........................          0.8496
                    Boone, MO
1760.............  Columbia, SC.........................          0.9307
                    Lexington, SC
                   Richland, SC
1800.............  Columbus, GA-AL......................          0.8374
                    Russell, AL
                   Chattahoochee, GA
                   Harris, GA
                   Muscogee, GA
1840.............  Columbus, OH.........................          0.9751
                    Delaware, OH
                   Fairfield, OH
                   Franklin, OH
                   Licking, OH
                   Madison, OH
                   Pickaway, OH
1880.............  Corpus Christi, TX...................          0.8729
                    Nueces, TX
                   San Patricio, TX
1890.............  Corvallis, OR........................          1.1453
                   Benton, OR
1900.............  Cumberland, MD-WV....................          0.7847
                   Allegany, MD
                   Mineral, WV
1920.............  Dallas, TX...........................          0.9998
                   Collin, TX
                   Dallas, TX
                   Denton, TX
                   Ellis, TX
                   Henderson, TX
                   Hunt, TX
                   Kaufman, TX
                   Rockwall, TX
1950.............  Danville, VA.........................          0.8859
                   Danville City, VA
                   Pittsylvania, VA
1960.............  Davenport-Moline-Rock Island, IA-IL..          0.8835
                   Scott, IA
                   Henry, IL
                   Rock Island, IL
2000.............  Dayton-Springfield, OH...............          0.9282
                   Clark, OH
                   Greene, OH
                   Miami, OH
                   Montgomery, OH
2020.............  Daytona Beach, FL....................          0.9062
                   Flagler, FL
                   Volusia, FL
2030.............  Decatur, AL..........................          0.8973
                   Lawrence, AL
                   Morgan, AL
2040.............  Decatur, IL..........................          0.8055
                    Macon, IL
2080.............  Denver, CO...........................          1.0601
                   Adams, CO
                   Arapahoe, CO
                   Broomfield, CO
                   Denver, CO
                   Douglas, CO
                   Jefferson, CO
2120.............  Des Moines, IA.......................          0.8791

[[Page 66961]]

 
                   Dallas, IA
                   Polk, IA
                   Warren, IA
2160.............  Detroit, MI..........................          1.0448
                   Lapeer, MI
                   Macomb, MI
                   Monroe, MI
                   Oakland, MI
                   St. Clair, MI
                   Wayne, MI
2180.............  Dothan, AL...........................          0.8137
                   Dale, AL
                   Houston, AL
2190.............  Dover, DE............................          0.9356
                   Kent, DE
2200.............  Dubuque, IA..........................          0.8795
                   Dubuque, IA
2240.............  Duluth-Superior, MN-WI...............          1.0368
                   St. Louis, MN
                   Douglas, WI
2281.............  Dutchess County, NY..................          1.0684
                   Dutchess, NY
2290.............  Eau Claire, WI.......................          0.8952
                   Chippewa, WI
                   Eau Clair, WI
2320.............  El Paso, TX..........................          0.9265
                   El Paso, TX
2330.............  Elkhart-Goshen, IN...................          0.9722
                   Elkhart, IN
2335.............  Elmira, NY...........................          0.8416
                   Chemung, NY
2340.............  Enid, OK.............................          0.8376
                   Garfield, OK
2360.............  Erie, PA.............................          0.8925
                   Erie, PA
2400.............  Eugene-Springfield, OR...............          1.0944
                   Lane, OR
2440.............  Evansville-Henderson, IN-KY..........          0.8177
                   Posey, IN
                   Vanderburgh, IN
                   Warrick, IN
                   Henderson, KY
2520.............  Fargo-Moorhead, ND-MN................          0.9684
                   Clay, MN
                   Cass, ND
2560.............  Fayetteville, NC.....................          0.8889
                   Cumberland, NC
2580.............  Fayettevile-Springdale-Rogers, AR....          0.8100
                   Benton, AR
                   Washington, AR
2620.............  Flagstaff, AZ-UT.....................          1.0682
                   Coconino, AZ
                   Kane, UT
2640.............  Flint, MI............................          1.1135
                   Genesee, MI
2650.............  Florence, AL.........................          0.7792
                   Colbert, AL
                   Lauderdale, AL
2655.............  Florence, SC.........................          0.8780
                   Florence, SC
2670.............  Fort Collins-Loveland, CO............          1.0066
                   Larimer, CO
2680.............  Ft. Lauderdale, FL...................          1.0297
                   Broward, FL
2700.............  Fort Myers-Cape Coral, FL............          0.9680
                   Lee, FL
2710.............  Fort Pierce-Port St. Lucie, FL.......          0.9823
                   Martin, FL
                   St. Lucie, FL
2720.............  Fort Smith, AR-OK....................          0.7895
                   Crawford, AR
                   Sebastian, AR

[[Page 66962]]

 
                   Sequoyah, OK
2750.............  Fort Walton Beach, FL................          0.9693
                   Okaloosa, FL
2760.............  Fort Wayne, IN.......................          0.9457
                   Adams, IN
                   Allen, IN
                   De Kalb, IN
                   Huntington, IN
                   Wells, IN
                   Whitley, IN
2800.............  Fort Worth-Arlington, TX.............          0.9446
                   Hood, TX
                   Johnson, TX
                   Parker, TX
                   Tarrant, TX
2840.............  Fresno, CA...........................          1.0216
                   Fresno, CA
                   Madera, CA
2880.............  Gadsden AL...........................          0.8505
                   Etowah, AL
2900.............  Gainesville, FL......................          0.9871
                   Alachua, FL
2920.............  Galveston-Texas City, TX.............          0.9465
                   Galveston, TX
2960.............  Gary, IN.............................          0.9584
                   Lake, IN
                   Porter, IN
2975.............  Glens Falls, NY......................          0.8281
                   Warren, NY
                   Washington, NY
2980.............  Goldsboro, NC........................          0.8892
                   Wayne, NC
2985.............  Grand Forks, ND-MN...................          0.8897
                   Polk, MN
                   Grand Forks, ND
2995.............  Grand Junction, CO...................          0.9456
                   Mesa, CO
3000.............  Grand Rapids-Muskegon-Holland, MI....          0.9525
                   Allegan, MI
                   Kent, MI
                   Muskegon, MI
                   Ottawa, MI
3040.............  Great Falls, MT......................          0.8950
                   Cascade, MT
3060.............  Greeley, CO..........................          0.9237
                   Weld, CO
3080.............  Green Bay, WI........................          0.9502
                   Brown, WI
3120.............  Greensboro-Winston-Salem-High Point,           0.9282
                    NC.
                   Alamance, NC
                   Davidson, NC
                   Davie, NC
                   Forsyth, NC
                   Guilford, NC
                   Randolph, NC
                   Stokes, NC
                   Yadkin, NC
3150.............  Greenville, NC.......................          0.9100
                   Pitt, NC
3160.............  Greenville-Spartanburg-Anderson, SC..          0.9122
                   Anderson, SC
                   Cherokee, SC
                   Greenville, SC
                   Pickens, SC
                   Spartanburg, SC
3180.............  Hagerstown, MD.......................          0.9268
                   Washington, MD
3200.............  Hamilton-Middletown, OH..............          0.9418
                   Butler, OH
3240.............  Harrisburg-Lebanon-Carlisle, PA......          0.9223
                   Cumberland, PA
                   Dauphin, PA

[[Page 66963]]

 
                   Lebanon, PA
                   Perry, PA
3283.............  Hartford, CT.........................          1.1549
                   Hartford, CT
                   Litchfield, CT
                   Middlesex, CT
                   Tolland, CT
3285.............  Hattiesburg, MS......................          0.7659
                   Forrest, MS
                   Lamar, MS
3290.............  Hickory-Morganton-Lenoir, NC.........          0.9028
                   Alexander, NC
                   Burke, NC
                   Caldwell, NC
                   Catawba, NC
3320.............  Honolulu, HI.........................          1.1457
                   Honolulu, HI
3350.............  Houma, LA............................          0.8385
                   Lafourche, LA
                   Terrebonne, LA
3360.............  Houston, TX..........................          0.9892
                   Chambers, TX
                   Fort Bend, TX
                   Harris, TX
                   Liberty, TX
                   Montgomery, TX
                   Waller, TX
3400.............  Huntington-Ashland, WV-KY-OH.........          0.9636
                   Boyd, KY
                   Carter, KY
                   Greenup, KY
                   Lawrence, OH
                   Cabell, WV
                   Wayne, WV
3440.............  Huntsville, AL.......................          0.8903
                   Limestone, AL
                   Madison, AL
3480.............  Indianapolis, IN.....................          0.9717
                   Boone, IN
                   Hamilton, IN
                   Hancock, IN
                   Hendricks, IN
                   Johnson, IN
                   Madison, IN
                   Marion, IN
                   Morgan, IN
                   Shelby, IN
3500.............  Iowa City, IA........................          0.9587
                   Johnson, IA
3520.............  Jackson, MI..........................          0.9532
                   Jackson, MI
3560.............  Jackson, MS..........................          0.8607
                   Hinds, MS
                   Madison, MS
                   Rankin, MS
3580.............  Jackson, TN..........................          0.9275
                   Chester, TN
                   Madison, TN
3600.............  Jacksonville, FL.....................          0.9281
                   Clay, FL
                   Duval, FL
                   Nassau, FL
                   St. Johns, FL
3605.............  Jacksonville, NC.....................          0.8239
                   Onslow, NC
3610.............  Jamestown, NY........................          0.7976
                   Chautaqua, NY
3620.............  Janesville-Beloit, WI................          0.9849
                   Rock, WI
3640.............  Jersey City, NJ......................          1.1190
                   Hudson, NJ
3660.............  Johnson City-Kingsport-Bristol, TN-VA          0.8268

[[Page 66964]]

 
                   Carter, TN
                   Hawkins, TN
                   Sullivan, TN
                   Unicoi, TN
                   Washington, TN
                   Bristol City, VA
                   Scott, VA
                   Washington, VA
3680.............  Johnstown, PA........................          0.8329
                   Cambria, PA
                   Somerset, PA
3700.............  Jonesboro, AR........................          0.7749
                   Craighead, AR
3710.............  Joplin, MO...........................          0.8613
                   Jasper, MO
                   Newton, MO
3720.............  Kalamazoo-Battlecreek, MI............          1.0595
                   Calhoun, MI
                   Kalamazoo, MI
                   Van Buren, MI
3740.............  Kankakee, IL.........................          1.0790
                   Kankakee, IL
3760.............  Kansas City, KS-MO...................          0.9736
                   Johnson, KS
                   Leavenworth, KS
                   Miami, KS
                   Wyandotte, KS
                   Cass, MO
                   Clay, MO
                   Clinton, MO
                   Jackson, MO
                   Lafayette, MO
                   Platte, MO
                   Ray, MO
3800.............  Kenosha, WI..........................          0.9686
                   Kenosha, WI
3810.............  Killeen-Temple, TX...................          1.0399
                   Bell, TX
                   Coryell, TX
3840.............  Knoxville, TN........................          0.8970
                   Anderson, TN
                   Blount, TN
                   Knox, TN
                   Loudon, TN
                   Sevier, TN
                   Union, TN
3850.............  Kokomo, IN...........................          0.8971
                   Howard, IN
                   Tipton, IN
3870.............  La Crosse, WI-MN.....................          0.9400
                   Houston, MN
                   La Crosse, WI
3880.............  Lafayette, LA........................          0.8475
                   Acadia, LA
                   Lafayette, LA
                   St. Landry, LA
                   St. Martin, LA
3920.............  Lafayette, IN........................          0.9278
                   Clinton, IN
                   Tippecanoe, IN
3960.............  Lake Charles, LA.....................          0.7965
                   Calcasieu, LA
3980.............  Lakeland-Winter Haven, FL............          0.9357
                   Polk, FL
4000.............  Lancaster, PA........................          0.9078
                   Lancaster, PA
4040.............  Lansing-East Lansing, MI.............          0.9726
                   Clinton, MI
                   Eaton, MI
                   Ingham, MI
4080.............  Laredo, TX...........................          0.8472
                   Webb, TX

[[Page 66965]]

 
4100.............  Las Cruces, NM.......................          0.8745
                   Dona Ana, NM
4120.............  Las Vegas, NV-AZ.....................          1.1521
                   Mohave, AZ
                   Clark, NV
                   Nye, NV
4150.............  Lawrence, KS.........................          0.7923
                   Douglas, KS
4200.............  Lawton, OK...........................          0.8315
                   Comanche, OK
4243.............  Lewiston-Auburn, ME..................          0.9179
                   Androscoggin, ME
4280.............  Lexington, KY........................          0.8581
                   Bourbon, KY
                   Clark, KY
                   Fayette, KY
                   Jessamine, KY
                   Madison, KY
                   Scott, KY
                   Woodford, KY
4320.............  Lima, OH.............................          0.9483
                   Allen, OH
                   Auglaize, OH
4360.............  Lincoln, NE..........................          0.9892
                   Lancaster, NE
4400.............  Little Rock-North Little, AR.........          0.9097
                   Faulkner, AR
                   Lonoke, AR
                   Pulaski, AR
                   Saline, AR
4420.............  Longview-Marshall, TX................          0.8629
                   Gregg, TX
                   Harrison, TX
                   Upshur, TX
4480.............  Los Angeles-Long Beach, CA...........          1.2001
                   Los Angeles, CA
4520.............  Louisville, KY-IN....................          0.9276
                   Clark, IN
                   Floyd, IN
                   Harrison, IN
                   Scott, IN
                   Bullitt, KY
                   Jefferson, KY
                   Oldham, KY
4600.............  Lubbock, TX..........................          0.9646
                   Lubbock, TX
4640.............  Lynchburg, VA........................          0.9219
                   Amherst, VA
                   Bedford City, VA
                   Bedford, VA
                   Campbell, VA
                   Lynchburg City, VA
4680.............  Macon, GA............................          0.9204
                   Bibb, GA
                   Houston, GA
                   Jones, GA
                   Peach, GA
                   Twiggs, GA
4720.............  Madison, WI..........................          1.0467
                   Dane, WI
4800.............  Mansfield, OH........................          0.8900
                   Crawford, OH
                   Richland, OH
4840.............  Mayaguez, PR.........................          0.4914
                   Anasco, PR
                   Cabo Rojo, PR
                   Hormigueros, PR
                   Mayaguez, PR
                   Sabana Grande, PR
                   San German, PR
4880.............  McAllen-Edinburg-Mission, TX.........          0.8428
                   Hidalgo, TX

[[Page 66966]]

 
4890.............  Medford-Ashland, OR..................          1.0498
                   Jackson, OR
4900.............  Melbourne-Titusville-Palm Bay, FL....          1.0253
                   Brevard, FL
4920.............  Memphis, TN-AR-MS....................          0.8920
                   Crittenden, AR
                   De Soto, MS
                   Fayette, TN
                   Shelby, TN
                   Tipton, TN
4940.............  Merced, CA...........................          0.9837
                   Merced, CA
5000.............  Miami, FL............................          0.9802
                   Dade, FL
5015.............  Middlesex-Somerset-Hunterdon, NJ.....          1.2313
                   Hunterdon, NJ
                   Middlesex, NJ
                   Somerset, NJ
5080.............  Milwaukee-Waukesha, WI...............          0.9893
                   Milwaukee, WI
                   Ozaukee, WI
                   Washington, WI
                   Waukesha, WI
5120.............  Minneapolis-St. Paul, MN-WI..........          1.0903
                   Anoka, MN
                   Carver, MN
                   Chisago, MN
                   Dakota, MN
                   Hennepin, MN
                   Isanti, MN
                   Ramsey, MN
                   Scott, MN
                   Sherburne, MN
                   Washington, MN
                   Wright, MN
                   Pierce, WI
                   St. Croix, WI
5140.............  Missoula, MT.........................          0.9157
                   Missoula, MT
5160.............  Mobile, AL...........................          0.8108
                   Baldwin, AL
                   Mobile, AL
5170.............  Modesto, CA..........................          1.0498
                   Stanislaus, CA
5190.............  Monmouth-Ocean, NJ...................          1.0674
                   Monmouth, NJ
                   Ocean, NJ
5200.............  Monroe, LA...........................          0.8137
                   Ouachita, LA
5240.............  Montgomery, AL.......................          0.7734
                   Autauga, AL
                   Elmore, AL
                   Montgomery, AL
5280.............  Muncie, IN...........................          0.9284
                   Delaware, IN
5330.............  Myrtle Beach, SC.....................          0.8976
                   Horry, SC
5345.............  Naples, FL...........................          0.9754
                   Collier, FL
5360.............  Nashville, TN........................          0.9578
                   Cheatham, TN
                   Davidson, TN
                   Dickson, TN
                   Robertson, TN
                   Rutherford, TN
                   Sumner, TN
                   Williamson, TN
                   Wilson, TN
5380.............  Nassau-Suffolk, NY...................          1.3357
                   Nassau, NY
                   Suffolk, NY
5483.............  New Haven-Bridgeport-Stamford-                 1.2408
                    Waterbury-Danbury, CT.

[[Page 66967]]

 
                   Fairfield, CT
                   New Haven, CT
5523.............  New London-Norwich, CT...............          1.1767
                   New London, CT
5560.............  New Orleans, LA......................          0.9046
                   Jefferson, LA
                   Orleans, LA
                   Plaquemines, LA
                   St. Bernard, LA
                   St. Charles, LA
                   St. James, LA
                   St. John The Baptist, LA
                   St. Tammany, LA
5600.............  New York, NY.........................          1.4414
                   Bronx, NY
                   Kings, NY
                   New York, NY
                   Putnam, NY
                   Queens, NY
                   Richmond, NY
                   Rockland, NY
                   Westchester, NY
5640.............  Newark, NJ...........................          1.1381
                   Essex, NJ
                   Morris, NJ
                   Sussex, NJ
                   Union, NJ
                   Warren, NJ
5660.............  Newburgh, NY-PA......................          1.1387
                   Orange, NY
                   Pike, PA
5720.............  Norfolk-Virginia Beach-Newport News,           0.8574
                    VA-NC.
                   Currituck, NC
                   Chesapeake City, VA
                   Gloucester, VA
                   Hampton City, VA
                   Isle of Wight, VA
                   James City, VA
                   Mathews, VA
                   Newport News City, VA
                   Norfolk City, VA
                   Poquoson City, VA
                   Portsmouth City, VA
                   Suffolk City, VA
                   Virginia Beach City, VA
                   Williamsburg City, VA
                   York, VA
5775.............  Oakland, CA..........................          1.5072
                   Alameda, CA
                   Contra Costa, CA
5790.............  Ocala, FL............................          0.9402
                   Marion, FL
5800.............  Odessa-Midland, TX...................          0.9397
                   Ector, TX
                   Midland, TX
5800.............  Oklahoma City, OK....................          0.8900
                   Canadian, OK
                   Cleveland, OK
                   Logan, OK
                   McClain, OK
                   Oklahoma, OK
                   Pottawatomie, OK
5910.............  Olympia, WA..........................          1.0960
                   Thurston, WA
5920.............  Omaha, NE-IA.........................          0.9978
                   Pottawattamie, IA
                   Cass, NE
                   Douglas, NE
                   Sarpy, NE
                   Washington, NE
5945.............  Orange County, CA....................          1.1474
                   Orange, CA

[[Page 66968]]

 
5960.............  Orlando, FL..........................          0.9640
                   Lake, FL
                   Orange, FL
                   Osceola, FL
                   Seminole, FL
5990.............  Owensboro, KY........................          0.8344
                   Daviess, KY
6015.............  Panama City, FL......................          0.8865
                   Bay, FL
6020.............  Parkersburg-Marietta, WV-OH..........          0.8127
                   Washington, OH
                   Wood, WV
6080.............  Pensacola, FL........................          0.8645
                   Escambia, FL
                   Santa Rosa, FL
6120.............  Peoria-Pekin, IL.....................          0.8739
                   Peoria, IL
                   Tazewell, IL
                   Woodford, IL
6160.............  Philadelphia, PA-NJ..................          1.0713
                   Burlington, NJ
                   Camden, NJ
                   Gloucester, NJ
                   Salem, NJ
                   Bucks, PA
                   Chester, PA
                   Delaware, PA
                   Montgomery, PA
                   Philadelphia, PA
6200.............  Phoenix-Mesa, AZ.....................          0.9820
                   Maricopa, AZ
                   Pinal, AZ
6240.............  Pine Bluff, AR.......................          0.7962
                   Jefferson, AR
6280.............  Pittsburgh, PA.......................          0.9365
                   Allegheny, PA
                   Beaver, PA
                   Butler, PA
                   Fayette, PA
                   Washington, PA
                   Westmoreland, PA
6323.............  Pittsfield, MA.......................          1.0235
                   Berkshire, MA
6340.............  Pocatello, ID........................          0.9372
                   Bannock, ID
6360.............  Ponce, PR............................          0.5169
                   Guayanilla, PR
                   Juana Diaz, PR
                   Penuelas, PR
                   Ponce, PR
                   Villalba, PR
                   Yauco, PR
6403.............  Portland, ME.........................          0.9794
                   Cumberland, ME
                   Sagadahoc, ME
                   York, ME
6440.............  Portland-Vancouver, OR-WA............          1.0667
                   Clackamas, OR
                   Columbia, OR
                   Multnomah, OR
                   Washington, OR
                   Yamhill, OR
                   Clark, WA
6483.............  Providence-Warwick-Pawtucket, RI.....          1.0854
                   Bristol, RI
                   Kent, RI
                   Newport, RI
                   Providence, RI
                   Washington, RI
6520.............  Provo-Orem, UT.......................          0.9984
                   Utah, UT
6560.............  Pueblo, CO...........................          0.8820

[[Page 66969]]

 
                   Pueblo, CO
6580.............  Punta Gorda, FL......................          0.9218
                   Charlotte, FL
6600.............  Racine, WI...........................          0.9334
                   Racine, WI
6640.............  Raleigh-Durham-Chapel Hill, NC.......          0.9990
                   Chatham, NC
                   Durham, NC
                   Franklin, NC
                   Johnston, NC
                   Orange, NC
                   Wake, NC
6660.............  Rapid City, SD.......................          0.8846
                   Pennington, SD
6680.............  Reading, PA..........................          0.9295
                   Berks, PA
6690.............  Redding, CA..........................          1.1135
                   Shasta, CA
6720.............  Reno, NV.............................          1.0648
                   Washoe. NV
6740.............  Richland-Kennewick-Pasco, WA.........          1.1491
                   Benton, WA
                   Franklin, WA
6760.............  Richmond-Petersburg, VA..............          0.9477
                   Charles City County, VA
                   Chesterfield, VA
                   Colonial Heights City, VA
                   Dinwiddie, VA
                   Goochland, VA
                   Hanover, VA
                   Henrico, VA
                   Hopewell City, VA
                   New Kent, VA
                   Petersburg City, VA
                   Powhatan, VA
                   Prince George, VA
                   Richmond City, VA
6780.............  Riverside-San Bernardino, CA.........          1.1365
                   Riverside, CA
                   San Bernardino, CA
6800.............  Roanoke, VA..........................          0.8614
                   Botetourt, VA
                   Roanoke, VA
                   Roanoke City, VA
                   Salem City, VA
6820.............  Rochester, MN........................          1.2139
                   Olmsted, MN
6840.............  Rochester, NY........................          0.9194
                   Genesee, NY
                   Livingston, NY
                   Monroe, NY
                   Ontario, NY
                   Orleans, NY
                   Wayne, NY
6880.............  Rockford, IL.........................          0.9625
                   Boone, IL
                   Ogle, IL
                   Winnebago, IL
6895.............  Rocky Mount, NC......................          0.9228
                   Edgecombe, NC
                   Nash, NC
6920.............  Sacramento, CA.......................          1.1500
                   El Dorado, CA
                   Placer, CA
                   Sacramento, CA
6960.............  Saginaw-Bay City-Midland, MI.........          0.9650
                   Bay, MI
                   Midland, MI
                   Saginaw, MI
6980.............  St. Cloud, MN........................          0.9700
                   Benton, MN
                   Stearns, MN

[[Page 66970]]

 
7000.............  St. Joseph, MO.......................          0.8021
                   Andrews, MO
                   Buchanan, MO
7040.............  St. Louis, MO-IL.....................          0.8855
                   Clinton, IL
                   Jersey, IL
                   Madison, IL
                   Monroe, IL
                   St. Clair, IL
                   Franklin, MO
                   Jefferson, MO
                   Lincoln, MO
                   St. Charles, MO
                   St. Louis, MO
                   St. Louis City, MO
                   Warren, MO
                   Sullivan City, MO
7080.............  Salem, OR............................          1.0367
                   Marion, OR
                   Polk, OR
7120.............  Salinas, CA..........................          1.4623
                   Monterey, CA
7160.............  Salt Lake City-Ogden, UT.............          0.9945
                   Davis, UT
                   Salt Lake, UT
                   Weber, UT
7200.............  San Angelo, TX.......................          0.8374
                   Tom Green, TX
7240.............  San Antonio, TX......................          0.8753
                   Bexar, TX
                   Comal, TX
                   Guadalupe, TX
                   Wilson, TX
7320.............  San Diego, CA........................          1.1131
                   San Diego, CA
7360.............  San Francisco, CA....................          1.4142
                   Marin, CA
                   San Francisco, CA
                   San Mateo, CA
7400.............  San Jose, CA.........................          1.4145
                   Santa Clara, CA
7440.............  San Juan-Bayamon, PR.................          0.4741
                   Aguas Buenas, PR
                   Barceloneta, PR
                   Bayamon, PR
                   Canovanas, PR
                   Carolina, PR
                   Catano, PR
                   Ceiba, PR
                   Comerio, PR
                   Corozal, PR
                   Dorado, PR
                   Fajardo, PR
                   Florida, PR
                   Guaynabo, PR
                   Humacao, PR
                   Juncos, PR
                   Los Piedras, PR
                   Loiza, PR
                   Luguillo, PR
                   Manati, PR
                   Morovis, PR
                   Naguabo, PR
                   Naranjito, PR
                   Rio Grande, PR
                   San Juan, PR
                   Toa Alta, PR
                   Toa Baja, PR
                   Trujillo Alto, PR
                   Vega Alta, PR
                   Vega Baja, PR
                   Yabucoa, PR

[[Page 66971]]

 
7460.............  San Luis Obispo-Atascadero-Paso                1.1271
                    Robles, CA.
                   San Luis Obispo, CA
7480.............  Santa Barbara-Santa Maria-Lompoc, CA.          1.0481
                   Santa Barbara, CA
7485.............  Santa Cruz-Watsonville, CA...........          1.3646
                   Santa Cruz, CA
7490.............  Santa Fe, NM.........................          1.0712
                   Los Alamos, NM
                   Santa Fe, NM
7500.............  Santa Rosa, CA.......................          1.3046
                   Sonoma, CA
7510.............  Sarasota-Bradenton, FL...............          0.9425
                    Manatee, FL
                   Sarasota, FL
7520.............  Savannah, GA.........................          0.9376
                   Bryan, GA
                   Chatham, GA
                   Effingham, GA
7560.............  Scranton-Wilkes-Barre-Hazleton, PA...          0.8599
                   Columbia, PA
                   Lackawanna, PA
                   Luzerne, PA
                   Wyoming, PA
7600.............  Seattle-Bellevue-Everett, WA.........          1.1474
                    Island, WA
                   King, WA
                   Snohomish, WA
7610.............  Sharon, PA...........................          0.7869
                    Mercer, PA
7620.............  Sheboygan, WI........................          0.8697
                   Sheboygan, WI
7640.............  Sherman-Denison, TX..................          0.9255
                   Grayson, TX
7680.............  Shreveport-Bossier City, LA..........          0.8987
                   Bossier, LA
                   Caddo, LA
                   Webster, LA
7720.............  Sioux City, IA-NE....................          0.9046
                   Woodbury, IA
                   Dakota, NE
7760.............  Sioux Falls, SD......................          0.9257
                   Lincoln, SD
                   Minnehaha, SD
7800.............  South Bend, IN.......................          0.9802
                   St. Joseph, IN
7840.............  Spokane, WA..........................          1.0852
                   Spokane, WA
7880.............  Springfield, IL......................          0.8659
                    Menard, IL
                   Sangamon, IL
7920.............  Springfield, MO......................          0.8424
                   Christian, MO
                   Greene, MO
                   Webster, MO
8003.............  Springfield, MA......................          1.0927
                   Hampden, MA
                   Hampshire, MA
8050.............  State College, PA....................          0.8941
                   Centre, PA
8080.............  Steubenville-Weirton, OH-WV..........          0.8804
                   Jefferson, OH
                   Brooke, WV
                   Hancock, WV
8120.............  Stockton-Lodi, CA....................          1.0506
                    San Joaquin, CA
8140.............  Sumter, SC...........................          0.8273
                    Sumter, SC
8160.............  Syracuse, NY.........................          0.9714
                   Cayuga, NY
                   Madison, NY
                   Onondaga, NY
                   Oswego, NY

[[Page 66972]]

 
8200.............  Tacoma, WA...........................          1.0940
                    Pierce, WA
8240.............  Tallahassee, FL......................          0.8504
                    Gadsden, FL
                   Leon, FL
8280.............  Tampa-St. Petersburg-Clearwater, FL..          0.9065
                   Hernando, FL
                   Hillsborough, FL
                   Pasco, FL
                   Pinellas, FL
8320.............  Terre Haute, IN......................          0.8599
                    Clay, IN
                   Vermillion, IN
                   Vigo, IN
8360.............  Texarkana, AR-Texarkana, TX..........          0.8088
                    Miller, AR
                   Bowie, TX
8400.............  Toledo, OH...........................          0.9810
                    Fulton, OH
                   Lucas, OH
                   Wood, OH
8440.............  Topeka, KS...........................          0.9199
                    Shawnee, KS
8480.............  Trenton, NJ..........................          1.0432
                    Mercer, NJ
8520.............  Tucson, AZ...........................           .8911
                   Pima, AZ
8560.............  Tulsa, OK............................          0.8332
                   Creek, OK
                   Osage, OK
                   Rogers, OK
                   Tulsa, OK
                   Wagoner, OK
8600.............  Tuscaloosa, AL.......................          0.8130
                    Tuscaloosa, AL
8640.............  Tyler, TX............................          0.9521
                    Smith, TX
8680.............  Utica-Rome, NY.......................          0.8465
                    Herkimer, NY
                   Oneida, NY
8720.............  Vallejo-Fairfield-Napa, CA...........          1.3354
                    Napa, CA
                   Solano, CA
8735.............  Ventura, CA..........................          1.1096
                    Ventura, CA
8750.............  Victoria, TX.........................          0.8756
                    Victoria, TX
8760.............  Vineland-Millville-Bridgeton, NJ.....          1.0031
                    Cumberland, NJ
8780.............  Visalia-Tulare-Porterville, CA.......          0.9429
                    Tulare, CA
8800.............  Waco, TX.............................          0.8073
                    McLennan, TX
8840.............  Washington, DC-MD-VA-WV..............          1.0851
                   District of Columbia, DC
                   Calvert, MD
                   Charles, MD
                   Frederick, MD
                   Montgomery, MD
                   Prince Georges, MD
                   Alexandria City, VA
                   Arlington, VA
                   Clarke, VA
                   Culpepper, VA
                   Fairfax, VA
                   Fairfax City, VA
                   Falls Church City, VA
                   Fauquier, VA
                   Fredericksburg City, VA
                   King George, VA
                   Loudoun, VA
                   Manassas City, VA

[[Page 66973]]

 
                   Manassas Park City, VA
                   Prince William, VA
                   Spotsylvania, VA
                   Stafford, VA
                   Warren, VA
                   Berkeley, WV
                   Jefferson, WV
8920.............  Waterloo-Cedar Falls, IA.............          0.8069
                   Black Hawk, IA
8940.............  Wausau, WI...........................          0.9782
                   Marathon, WI
8960.............  West Palm Beach-Boca Raton, FL.......          0.9939
                   Palm Beach, FL
9000.............  Wheeling, OH-WV......................          0.7670
                   Belmont, OH
                   Marshall, WV
                   Ohio, WV
9040.............  Wichita, KS..........................          0.9520
                   Butler, KS
                   Harvey, KS
                   Sedgwick, KS
9080.............  Wichita Falls, TX....................          0.8498
                   Archer, TX
                   Wichita, TX
9140.............  Williamsport, PA.....................          0.8544
                   Lycoming, PA
9160.............  Wilmington-Newark, DE-MD.............          1.1173
                   New Castle, DE
                   Cecil, MD
9200.............  Wilmington, NC.......................          0.9640
                   New Hanover, NC
                   Brunswick, NC
9260.............  Yakima, WA...........................          1.0569
                   Yakima, WA
9270.............  Yolo, CA.............................          0.9434
                   Yolo, CA
9280.............  York, PA.............................          0.9026
                   York, PA
9320.............  Youngstown-Warren, OH................          0.9358
                   Columbiana, OH
                   Mahoning, OH
                   Trumbull, OH
9340.............  Yuba City, CA........................          1.0276
                   Sutter, CA
                   Yuba, CA
9360.............  Yuma, AZ.............................          0.8589
                   Yuma, AZ
------------------------------------------------------------------------


                Addendum B2.--Wage Index for Rural Areas
------------------------------------------------------------------------
                       Nonurban area                          Wage index
------------------------------------------------------------------------
Alabama....................................................       0.7660
Alaska.....................................................       1.2293
Arizona....................................................       0.8493
Arkansas...................................................       0.7666
California.................................................       0.9840
Colorado...................................................       0.9015
Connecticut................................................       1.2394
Delaware...................................................       0.9128
Florida....................................................       0.8814
Georgia....................................................       0.8230
Guam.......................................................       0.9611
Hawaii.....................................................       1.0255
Idaho......................................................       0.8747
Illinois...................................................       0.8204
Indiana....................................................       0.8755
Iowa.......................................................       0.8315
Kansas.....................................................       0.7923
Kentucky...................................................       0.8079
Louisiana..................................................       0.7567
Maine......................................................       0.8874
Maryland...................................................       0.8946
Massachusetts..............................................       1.1288
Michigan...................................................       0.9000
Minnesota..................................................       0.9151
Mississippi................................................       0.7680
Missouri...................................................       0.8021
Montana....................................................       0.8481
Nebraska...................................................       0.8204
Nevada.....................................................       0.9577
New Hampshire..............................................       0.9796
New Jersey \1\.............................................  ...........
New Mexico.................................................       0.8872
New York...................................................       0.8542
North Carolina.............................................       0.8666
North Dakota...............................................       0.7788
Ohio.......................................................       0.8613
Oklahoma...................................................       0.7590
Oregon.....................................................       1.0303
Pennsylvania...............................................       0.8462
Puerto Rico................................................       0.4356
Rhode Island \1\...........................................  ...........
South Carolina.............................................       0.8607
South Dakota...............................................       0.7815
Tennessee..................................................       0.7877
Texas......................................................       0.7821
Utah.......................................................       0.9312
Vermont....................................................       0.9345
Virginia...................................................       0.8504
Virgin Islands.............................................       0.7845
Washington.................................................       1.0179
West Virginia..............................................       0.7975
Wisconsin..................................................       0.9162

[[Page 66974]]

 
Wyoming....................................................      0.9007
------------------------------------------------------------------------
\1\ All counties within the State are classified urban.

BILLING CODE 4120-01-P

[[Page 66975]]

[GRAPHIC] [TIFF OMITTED] TP28NO03.000


[[Page 66976]]


[GRAPHIC] [TIFF OMITTED] TP28NO03.001


[[Page 66977]]


[GRAPHIC] [TIFF OMITTED] TP28NO03.002


[[Page 66978]]


[GRAPHIC] [TIFF OMITTED] TP28NO03.003

[FR Doc. 03-29137 Filed 11-19-03; 8:45 am]
BILLING CODE 4120-01-C