[Federal Register Volume 69, Number 96 (Tuesday, May 18, 2004)]
[Proposed Rules]
[Pages 28196-28817]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-10932]



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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Part 403, et al.



Medicare Program; Proposed Changes to the Hospital Inpatient 
Prospective Payment Systems and Fiscal Year 2005 Rates; Proposed Rule

  Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed 
Rules  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 403, 412, 413, 418, 460, 480, 482, 483, 485, and 489

[CMS-1428-P]
RIN 0938-AM80


Medicare Program; Proposed Changes to the Hospital Inpatient 
Prospective Payment Systems and Fiscal Year 2005 Rates

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

ACTION: Proposed rule.

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SUMMARY: We are proposing to revise the Medicare hospital inpatient 
prospective payment systems (IPPS) for operating and capital-related 
costs to implement changes arising from our continuing experience with 
these systems; and to implement a number of changes made by the 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 
(Pub. L. 108-173), enacted on December 8, 2003. In addition, in the 
Addendum to this proposed rule, we describe the proposed changes to the 
amounts and factors used to determine the rates for Medicare hospital 
inpatient services for operating costs and capital-related costs. These 
proposed changes would be applicable to discharges occurring on or 
after October 1, 2004. We also are setting forth proposed rate-of-
increase limits as well as proposed policy changes for hospitals and 
hospital units excluded from the IPPS that are paid on a reasonable 
cost basis subject to these limits.
    Among the policy changes that we are proposing to make are: Changes 
to the classification of cases to the diagnosis-related groups (DRGs); 
changes to the long-term care (LTC)-DRGs and relative weights; changes 
in the wage data, labor-related share of the wage index, and the 
geographic area designations used to compute the wage index; changes in 
the qualifying threshold criteria for and the proposed approval of new 
technologies and medical services for add-on payments; changes to the 
policies governing postacute care transfers; changes to payments to 
hospitals for the direct and indirect costs of graduate medical 
education; changes to the payment adjustment for disproportionate share 
rural hospitals; changes in requirements and payments to critical 
access hospitals (CAHs); changes to the disclosure of information 
requirements for Quality Improvement Organization (QIOs); and changes 
in the hospital conditions of participation for discharge planning and 
fire safety requirements for certain health care facilities.

DATES: Comments will be considered if received at the appropriate 
address, as provided below, no later than 5 p.m. on July 12, 2004.

ADDRESSES:
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this proposed rule to assist in fully considering 
issues and developing policies. You can assist us by referencing the 
file code CMS-1428-P and the specific ``issue identifier'' that 
precedes the section on which you choose to comment.
    Submit electronic comments to: http://www.accessdata.fda.gov/scripts/oc/dockets/commentdocket.cfm?AGENCY=CMS or www.regulations.gov.
    Mail written comments (an original and three copies) to the 
following address only:
    Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-1428-P, P.O. Box 8010, Baltimore, MD 
21244-1850.
    If you prefer, you may deliver, by hand or courier, your written 
comments (an original and three copies) to one of the following 
addresses:
    Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, 
SW., Washington, DC 20201, or Room C5-14-03, Central Building, 7500 
Security Boulevard, Baltimore, MD 21244-1850.
    (Because access to the interior of the Humphrey Building is not 
readily available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for commenters who wish to retain proof of filing by stamping 
in and keeping an extra copy of the comments being filed.)
    Comments mailed to those addresses specified as appropriate for 
courier delivery may be delayed and could be considered late.
    Because of staffing and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission.
    Inspection of Public Comments: All comments received before the 
close of the comment period will be available for viewing by the 
public, including any personally identifiable or confidential business 
information that is included in a comment. After the close of the 
comment period, CMS will post all electronic comments received before 
the close of the period on its public Web sites. Written comments 
received timely will be available for public inspection as they are 
received, generally beginning approximately 4 weeks after publication 
of a document, in room C5-12-08 of the Centers for Medicare & Medicaid 
Services, 7500 Security Blvd., Baltimore, MD, on Monday through Friday 
of each week from 8:30 a.m. to 5 p.m. Please call (410) 786-7197 to 
schedule an appointment to view public comments.
    For comments that relate to information collection requirements, 
mail a copy of comments to the following addresses:
    Centers for Medicare & Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Security and Standards Group, Office 
of Regulations Development and Issuances, Room C4-24-02, 7500 Security 
Boulevard, Baltimore, Maryland 21244-1850. Attn: Dawn Willinghan, CMS-
1428-P; and
    Office of Information and Regulatory Affairs, Office of Management 
and Budget, Room 3001, New Executive Office Building, Washington, DC 
20503, Attn: Brenda Aguilar, CMS Desk Officer.

FOR FURTHER INFORMATION CONTACT: Jim Hart, (410) 786-9520, Operating 
Prospective Payment, Diagnosis-Related Groups (DRGs), Wage Index, New 
Medical Services and Technology, Standardized Amounts, Hospital 
Geographic Reclassifications, Postacute Care Transfers, and 
Disproportionate Share Hospital Issues.
    Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded 
Hospitals, Graduate Medical Education, Critical Access Hospitals, and 
Long-Term Care (LTC)--DRGs Issues.
    Mary Collins, (410) 786-3189, CAH Bed Limits and Distinct Part Unit 
Issues.
    John Eppinger, (410) 786-4518, CAH Periodic Interim Payment Issues.
    Maria Hammel, (410) 786-1775, Quality Improvement Organization 
Issues.
    Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital 
Demonstration Project Issues.
    Jeannie Miller, (410) 786-3164, Bloodborne Pathogens Standards, 
Hospital Conditions of Participation for Discharge Planning, and Fire 
Safety Requirements Issues.
    Dr. Mark Krushat, (410) 786-6809, and Dr. Anita Bhatia, (410) 786-
7236 Quality Data for Annual Payment Update Issues.

SUPPLEMENTARY INFORMATION: 

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Acronyms

ACGME--Accreditation Council on Graduate Medical Education
AHIMA--American Health Information Management Association
AHA--American Hospital Association
AOA--American Osteopathic Association
ASC--Ambulatory Surgical Center
BBA--Balanced Budget Act of 1997, Public Law 105-33
BIPA--Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Benefits Improvement and Protection Act of 2000, 
Public Law 106-554
BLS--Bureau of Labor Statistics
CAH--Critical access hospital
CART--CMS Abstraction & Reporting Tool
CBSAs--Core-Based Statistical Areas
CC--Complication or comorbidity
CMS--Centers for Medicare & Medicaid Services
CMSA--Consolidated Metropolitan Statistical Area
COBRA--Consolidated Omnibus Reconciliation Act of 1985, Public Law 
99-272
CoP--Condition of Participation
CPI--Consumer Price Index
CRNA--Certified registered nurse anesthetist
DRG--Diagnosis-related group
DSH--Disproportionate share hospital
ESRD--End-stage renal disease
FDA--Food and Drug Administration
FQHC--Federally qualified health center
FSES--Fire Safety Evaluation System
FTE--Full-time equivalent
FY--Federal fiscal year
GME--Graduate medical education
HCRIS--Hospital Cost Report Information System
HIPC--Health Information Policy Council
HIPAA--Health Insurance Portability and Accountability Act of 1996, 
Public Law 104-191
HHA--Home health agency
HPSA--Health Professions Shortage Area
ICD-9-CM--International Classification of Diseases, Ninth Revision, 
Clinical Modification
ICD-10-PCS--International Classification of Diseases, Tenth Edition, 
Procedure Coding System
ICF/MRs--Intermediate care facilities for the mentally retarded
IME--Indirect medical education
IPPS--Acute care hospital inpatient prospective payment system
IPF--Inpatient psychiatric facility
IRF--Inpatient rehabilitation facility
JCAHO--Joint Commission on the Accreditation of Healthcare 
Organizations
LAMA--Left Against Medical Advice
LTC-DRG--Long-term care diagnosis-related group
LTCH--Long-term care hospital
LSC--Life Safety Code
MCE--Medicare Code Editor
MCO--Managed care organization
MDC--Major diagnostic category
MDH--Medicare-dependent small rural hospital
MedPAC--Medicare Payment Advisory Commission
MedPAR--Medicare Provider Analysis and Review File
MEI--Medicare Economic Index
MGCRB--Medicare Geographic Classification Review Board
MMA--Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, Public Law 108-173
MPFS--Medicare Physician Fee Schedule
MSA--Metropolitan Statistical Area
NECMA--New England County Metropolitan Areas
NCHS--National Center for Health Statistics
NCVHS--National Committee on Vital and Health Statistics
NFPA--National Fire Protection Association
NPR--Notice of Program Reimbursement
NQF--National Quality Forum
NVHRI--National Voluntary Hospital Reporting Initiative
OES--Occupational Employment Statistics
OIG--Office of the Inspector General
OMB--Executive Office of Management and Budget
O.R.--Operating room
OSCAR--Online Survey Certification and Reporting (System)
OSHA--Occupational Safety and Health Act
PACE--Programs of All-Inclusive Care for the Elderly
PIP--Periodic interim payment
PMS--Performance Measurement System
PMSAs--Primary Metropolitan Statistical Areas
PPS--Prospective payment system
PRA--Per resident amount
ProPAC--Prospective Payment Assessment Commission
PRRB--Provider Reimbursement Review Board
PS&R--Provider Statistical and Reimbursement System
QIO--Utilization and Quality Control Quality Improvement 
Organization
RHC--Rural health clinic
RHQDAPU--Reporting Hospital Quality Data for Annual Payment Update
RRC--Rural referral center
SCH--Sole community hospital
SNF--Skilled nursing facility
SOCs--Standard occupational classifications
SOM--State Operations Manual
SSA--Social Security Administration
SSI--Supplemental Security Income
TEFRA--Tax Equity and Fiscal Responsibility Act of 1982, Public Law 
97-248
UHDDS--Uniform Hospital Discharge Data Set

Table of Contents

I. Background
    A. Summary
    1. Acute Care Hospital Inpatient Prospective Payment System 
(IPPS)
    2. Hospitals and Hospital Units Excluded from the IPPS
    a. IRFs
    b. LTCH
    c. IPFs
    3. Critical Access Hospitals (CAHs)
    4. Payments for Graduate Medical Education (GME)
    B. Provisions of the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003
    C. Major Contents of this Proposed Rule
    1. Proposed Changes to the DRG Reclassifications and 
Recalibrations of Relative Weights
    2. Proposed Changes to the Hospital Wage Index
    3. Other Decisions and Proposed Changes to the PPS for Inpatient 
Operating and GME Costs
    4. Proposed Changes to the PPS for Capital-Related Costs
    5. Proposed Changes for Hospitals and Hospital Units Excluded 
from the IPPS
    6. Proposed Changes to QIO Disclosure of Information 
Requirements
    7. Proposed Changes Relating to Medicare Provider Agreements: 
Bloodborne Pathogens Standards, Hospital Conditions of Participation 
for Discharge Planning, and Fire Safety Requirements for Certain 
Health Care Facilities
    8. Determining Prospective Payment Operating and Capital Rates 
and Rate-of-Increase Limits
    9. Impact Analysis
    10. Recommendation of Update Factor for Hospital Inpatient 
Operating Costs
    11. Discussion of Medicare Payment Advisory Commission 
Recommendations
II. Proposed Changes to DRG Classifications and Relative Weights

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    A. Background
    B. DRG Reclassification
    1. General
    2. MDC 1 (Diseases and Disorders of the Nervous System): 
Intracranial Hemorrhage and Stroke with Infarction
    3. MDC 5 (Diseases and Disorders of the Circulatory System)
    a. Heart Assist System Transplant
    b. Cardiac Resynchronization Therapy and Heart Failure
    c. Combination Cardiac Pacemaker Devices and Lead Codes
    4. MDC 6 (Diseases and Disorders of the Digestive System): 
Artificial Anal Sphincter
    5. MDC 8 (Diseases and Disorders of the Musculoskeletal System 
and Connective Tissue)
    a. 360 Spinal Fusion
    b. Multiple Level Spinal Fusion
    6. MDC 15 (Newborns and Other Neonates with Conditions 
Originating in the Perinatal Period)
    7. MDC 20 (Alcohol/Drug Use and Alcohol/Drug Induced Organic 
Mental Disorders): Drug-Induced Dementia
    8. MDC 22 (Burns): Burn Patients on Mechanical Ventilation
    9. Pre-MDC: Tracheostomy
    10. Medicare Code Editor (MCE) Changes
    11. Surgical Hierarchies
    12. Refinement of Complications and Comorbidities (CC) List
    13. Review of Procedure Codes in DRGs 468, 476, and 477
    a. Moving Procedure Codes from DRG 468 or DRG 477 to MDCs
    b. Reassignment of Procedures among DRGs 468, 476, and 477
    c. Adding Diagnosis or Procedure Codes to MDCs
    14. Pancreatic Islet Cell Transplantation in Clinical Trials
    15. Changes to the ICD-9-CM Coding System
    16. Other Issues
    a. Craniotomy Procedures
    (1) Unruptured Cerebral Aneurysms
    (2) GLIADEL[reg] Chemotherapy Wafers
    (3) DRG 3 (Craniotomy Age 0-17)
    b. Coronary Stent Procedures
    c. Severe Sepsis
    d. Implantable Cardiac Defibrillators
    C. Recalibration of DRG Weights
    D. Proposed LTC-DRG Reclassifications and Relative Weights for 
LTCHs for FY 2005
    1. Background
    2. Proposed Changes in the LTC-DRG Classifications
    a. Background
    b. Patient Classifications into DRGs
    3. Development of the Proposed FY 2005 LTC-DRG Relative Weights
    a. General Overview of Development of the LTC-DRG Relative 
Weights
    b. Data
    c. Hospital-Specific Relative Value Methodology
    d. Low-Volume LTC-DRGs
    4. Steps for Determining the Proposed FY 2005 LTC-DRG Relative 
Weights
    E. Proposed Add-On Payments for New Services and Technologies
    1. Background
    2. Other Provisions of Section 503 of Public Law 108-173
    3. FY 2005 Status of Technology Approved for FY 2004 Add-On 
Payments
    a. Drotrecogin Alfa (Activated)--Xigris[reg]
    b. InFUSETM (Bone Morphogenetic Proteins (BMPs) for 
Spinal Fusions)
    4. Reevaluation of FY 2004 Applications That Were Not Approved
    5. FY 2005 Applicants for New Technology Add-On Payments
    a. InFUSETM Bone Graft (Bone Morphogenetic Proteins 
(BMPs) for Tibia Fractures)
    b. Norian Skeletal Repair System(SRS)[reg] Bone Void Filler
    c. InSync[reg] Defibrillator System (Cardiac Resynchronization 
Therapy with Defibrillation (CRT-D))
    d. GliaSite[reg] Radiation Therapy System (RTS)
    e. Natrecor[reg]--Human B-Type Natriuretic Peptide (hBNP)
    f. Kinetra[reg] Implantable Neurostimulator for Deep Brain 
Stimulation
    g. Intramedullary Skeletal Kinetic Distractor (ISKD)
    h. ActiconTM Neosphincter
    i. TandemHeartTM Percutaneous Left Ventricular Assist 
System
    j. AquadexTM System 100 Fluid Removal System (System 
100)
III. Proposed Changes to the Hospital Wage Index
    A. Background
    B. Revised OMB Definitions for Geographical Statistical Areas
    1. Current Labor Market Areas Based on MSAs
    2. Core-Based Statistical Areas
    3. Revised Labor Market Areas
    a. New England MSAs
    b. Metropolitan Divisions
    c. Micropolitan Areas
    d. Transition Period
    C. Proposed Occupational Mix Adjustment to Proposed FY 2005 
Index
    1. Development of Data for the Occupational Mix Adjustment
    2. Proposed Calculation of the Occupational Mix Adjustment 
Factor and the Proposed Occupational Mix Adjusted Wage Index
    D. Worksheet S-3 Wage Data for the Proposed FY 2005 Wage Index 
Update
    E. Verification of Worksheet S-3 Wage Data
    F. Computation of the Unadjusted Wage Index
    G. Computation of the Proposed FY 2005 Blended Wage Index
    H. Proposed Revisions to the Wage Index Based on Hospital 
Redesignation
    1. General
    2. Effects of Reclassification
    3. FY 2005 Issues
    a. FY 2005 MGCRB Reclassifications
    b. Implementation of New MSAs
    c. Redesignations under Section 1886(d)(8)(B) of the Act
    d. Reclassifications Under Section 508 of Public Law 108-173
    e. Proposed Wage Index Adjustment Based on Commuting Patterns of 
Hospital Employees
    (1) Data
    (2) Qualifying Counties
    (3) The Adjustment
    (4) Automatic Adjustments
    4. Proposed FY 2005 Reclassifications
    I. Process for Requests for Wage Index Data Corrections
    1. Worksheet S-3 Wage Data
    2. Occupational Mix Data
    3. All FY 2005 Wage Index Data
    J. Proposed Revision of the Labor-Related Share of the Wage 
Index
IV. Other Decisions and Proposed Changes to the IPPS for Operating 
Costs and GME Costs
    A. Postacute Care Transfer Payment Policy
    1. Background
    2. Proposed Changes to DRGs Subject to the Postacute Care 
Transfer Policy
    B. Payments for Inpatient Care in Providers That Change 
Classification Status During a Patient Stay
    C. Geographic Reclassifications--Definitions of Urban and Rural 
Areas
    D. Equalization of Urban and Rural Standardized Amounts
    E. Reporting of Hospital Quality Data for Annual Hospital 
Payment Update
    1. Background
    2. Requirements for Hospital Reporting of Quality Data
    3. Submission of Hospital Data for FYs 2006 and 2007
    4. Proposed Regulation Change
    F. Proposed Revision of the Labor-Related Share of the Hospital 
Wage Index
    G. Wage Index Adjustment for Commuting Patterns of Hospital 
Employees
    H. Additional Payments for New Medical Services and Technology: 
Proposed Policy Changes
    I. Rural Referral Centers
    1. Case-Mix Index
    2. Discharges
    J. Additional Payments to Hospitals with High Percentage of End-
Stage Renal Disease (ESRD) Discharges
    K. Indirect Medical Education (IME) Adjustment
    1. IME Adjustment Factor Formula Multipliers
    2. IME Adjustment Formula Multiplier for Redistributed FTE 
Resident Slots
    3. Technical Changes
    L. Payment to Disproportionate Share Hospitals
    1. Enhanced DSH Adjustment for Rural Hospitals and Urban 
Hospitals with Fewer Than 100 Beds
    2. Proposals Relating to Available Beds and Patient Days for the 
DSH Adjustment
    M. Payment Adjustments for Low-Volume Hospitals
    N. Medicare Geographic Classification Review Board (MGCRB) 
Reclassifications
    1. Background
    2. Standardized Amount Reclassification Provisions
    3. Reclassification of Urban Rural Referral Centers
    4. Special Circumstances of Sole Community Hospitals (SCHs) in 
Low Population Density States
    5. Possible Reclassifications for Dominant Hospitals and 
Hospitals in Single-Hospital MSAs
    6. Special Circumstances of Hospitals in All-Urban States

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    O. Payment for Direct Graduate Medical Education
    1. Background
    2. Reductions of and Increases in Hospitals' FTE Resident Caps 
for GME Payment Purposes under Section 422 of Public Law 108-173
    a. General Background on Methodology for Determining the FTE 
Resident Count
    b. Reduction of Hospitals' FTE Resident Caps under the 
Provisions of Section 422 of Public Law 108-173
    c. Hospitals Subject to the FTE Resident Cap Reduction
    d. Exemption from FTE Resident Cap Reduction for Certain Rural 
Hospitals
    e. Determining the Estimated Number of FTE Resident Slots 
Available for Redistribution
    f. Determining the Possible Reduction to a Hospital's FTE 
Resident Cap
    (1) Reference Resident Level--General
    (2) Expansion of an Existing Program
    (3) Audits of the Reference Cost Reporting Periods
    (4) Expansions Under Newly Approved Programs
    (5) Affiliations
    g. Criteria for Determining Hospitals That Will Receive 
Increases in Their FTE Resident Caps
    h. Application Process for the Increases in Hospitals' FTE 
Resident Caps
    i. CMS Evaluation of Applications for Increases in FTE Resident 
Caps
    j. Application of Locality-Adjusted National Average Per 
Resident Amount (PRA)
    k. Application of Section 422 to Hospitals That Participate in 
Demonstration Projects or Voluntary Reduction Programs
    l. Application of Section 422 to Hospitals That File Low 
Utilization Medicare Cost Reports
    m. Specific Solicitation for Public Comment on the Proposals
    n. CMS Evaluation Form
    o. CMS Central and CMS Regional Office Mailing Addresses for 
Applications for Increases in FTE Resident Caps
    3. Direct GME Initial Residency Period
    a. Background
    b. Direct GME Initial Residency Period Limitation: Simultaneous 
Match Issue
    c. Exception to Initial Residency Period for Geriatric Residency 
or Fellowship Programs
    4. Per Resident Amount: Extension of Update Limitation on High-
Cost Programs
    5. Residents Training in Nonhospital Settings
    a. Background
    b. Moratorium on Disallowances of Allopathic or Osteopathic 
Family Practice Residents Training Time in Nonhospital Settings
    (1) Cost Reports That Are Settled Between January 1, 2004 and 
December 31, 2004
    (2) Family Practice Residents That Are Training in Nonhospital 
Settings Between January 1, 2004 and December 31, 2004
    c. Requirements for Written Agreements for Residency Training in 
Nonhospital Settings
    P. Rural Community Hospital Demonstration Program
    Q. Special Circumstances of Hospitals Facing High Malpractice 
Insurance Rate Increases
V. Proposed Changes to the PPS for Capital-Related Costs
    A. Background
    B. Payments to Hospitals Located in Puerto Rico
    C. Exception Payment for Extraordinary Circumstances
    A. Treatment of Hospitals Previously Reclassified for the 
Operating PPS
    E. Definition of Large Urban Area Standardized Amounts
VI. Proposed Changes for Hospitals and Hospital Units Excluded from 
the IPPS
    A. Payments to Excluded Hospitals and Hospital Units
    1. Payments to Existing Excluded Hospitals and Hospital Units
    2. Updated Caps for New Excluded Hospitals and Units
    3. Implementation of a PPS for IRFs
    4. Implementation of a PPS for LTCHs
    5. Development of a PPS for IPFs
    6. Technical Changes Related to Establishment of Payments for 
Excluded Hospitals
    B. Criteria for Classification of Hospitals-Within-Hospitals
    C. Critical Access Hospitals (CAHs)
    1. Background
    2. Payment Amounts for Inpatient CAH Services
    3. Condition for Application of Special Professional Service 
Payment Adjustment
    4. Coverage of Costs for Certain Emergency Room On-Call 
Providers
    5. Authorization of Periodic Interim Payments for CAHs
    6. Revision of the Bed Limit for CAHs
    7. Authority to Establish Psychiatric and Rehabilitation 
Distinct Part Units of CAHs
    8. Waiver Authority for Designation of a CAH as a Necessary 
Provider
    9. Payment for Clinical Diagnostic Laboratory Tests
    10. Proposed Technical Changes in Part 489
VII. Proposed Changes to the Disclosure of Information Requirements 
for Quality Improvement Organizations (QIOs)
    A. Background
    B. Provisions of the Proposed Regulations
    C. Technical Changes
VIII. Proposed Policy Changes Relating to Medicare Provider 
Agreements for Compliance with Bloodborne Pathogens Standards, 
Hospital Conditions of Participation for Discharge Planning, and 
Fire Safety Requirements for Certain Health Care Facilities
    A. Conditions of Participation for Discharge Planning
    1. Background
    2. Implementation
    B. Compliance with Bloodborne Pathogens Standards
    C. Fire Safety Requirements for Certain Health Care Facilities
    1. Background
    2. Proposed Changes to the Regulations
IX. MedPAC Recommendations
X. Other Required Information
    A. Requests for Data from the Public
    1. CMS Wage Data
    2. CMS Hospital Wage Indices (Formerly: Urban and Rural Wage 
Index Values Only)
    3. PPS SSA/FIPS MSA State and County Crosswalk
    4. Reclassified Hospitals New Wage Index (Formerly: Reclassified 
Hospitals by Provider Only)
    5. PPS-IV to PPS-XII Minimum Data Set
    6. PPS-IX to PPS-XII Capital Data Set
    7. PPS-XIII to PPS-XIX Hospital Data Set
    8. Provider-Specific File
    9. CMS Medicare Case-Mix Index File
    10. DRG Relative Weights (Formerly Table 5 DRG)
    11. PPS Payment Impact File
    12. AOR/BOR Tables
    13. Prospective Payment System (PPS) Standardizing File
    B. Collection of Information Requirements
    C. Public Comments

Regulation Text

Addendum--Proposed Schedule of Standardized Amounts Effective with 
Discharges Occurring On or After October 1, 2004 and Update Factors 
and Rate-of-Increase Percentages Effective With Cost Reporting 
Periods Beginning On or After October 1, 2004

Tables

Table 1A--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor (71.1 Percent Labor Share/28.9 Percent Nonlabor Share If 
Wage Index Is Greater Than 1)
Table 1B--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If Wage 
Index Is Less Than or Equal to 1)
Table 1C--Adjusted Operating Standardized Amounts for Puerto Rico, 
Labor/Nonlabor
Table 1D--Capital Standard Federal Payment Rate
Table 2--Hospital Case-Mix Indexes for Discharges Occurring in 
Federal Fiscal Year 2003; Hospital Average Hourly Wage for Federal 
Fiscal Years 2003 (1999 Wage Data), 2004 (2000 Wage Data), and 2005 
(2001 Wage Data) Wage Indexes and 3-Year Average of Hospital Average 
Hourly Wages
Table 3A--3-Year Average Hourly Wage for Urban Areas
Table 3B--3-Year Average Hourly Wage for Rural Areas
Table 4A--Wage Index and Capital Geographic Adjustment Factor for 
Urban Areas
Table 4B--Wage Index and Capital Geographic Adjustment Factor for 
Rural Areas
Table 4C--Wage Index and Capital Geographic Adjustment Factor for 
Hospitals That Are Reclassified
Table 4F--Puerto Rico Wage Index and Capital Geographic Adjustment 
Factor
Table 4G--Pre-Reclassified Wage Index for Urban Areas

[[Page 28200]]

Table 4H--Pre-Reclassified Wage Index for Rural Areas
Table 4J--Wage Index Adjustment for Commuting Hospital Employees 
(Out-Migration) In Qualifying Counties--FY 2005
Table 5--List of Diagnosis-Related Groups (DRGs), Relative Weighting 
Factors, and Geometric and Arithmetic Mean Length of Stay (LOS)
Table 6A--New Diagnosis Codes
Table 6B--New Procedure Codes
Table 6C--Invalid Diagnosis Codes
Table 6D--Invalid Procedure Codes
Table 6E--Revised Diagnosis Code Titles
Table 6F--Revised Procedure Code Titles
Table 6G--Additions to the CC Exclusions List
Table 6H--Deletions from the CC Exclusions List
Table 7A--Medicare Prospective Payment System Selected Percentile 
Lengths of Stay: FY 2003 MedPAR Update December 2003 GROUPER V21.0
Table 7B--Medicare Prospective Payment System Selected Percentile 
Lengths of Stay: FY 2003 MedPAR Update December 2003 GROUPER V22.0
Table 8A--Statewide Average Operating Cost-to-Charge Ratios for 
Urban and Rural Hospitals (Case-Weighted)
Table 8B--Statewide Average Capital Cost-to-Charge Ratios (Case-
Weighted)
Table 9A--Hospital Reclassifications and Redesignations by 
Individual Hospital--FY 2004
Table 9B--Hospital Reclassifications and Redesignation by Individual 
Hospital Under Section 508 of Public Law 108-173--FY 2004
Table 10--Geometric Mean Plus the Lesser of .75 of the National 
Adjusted Operating Standardized Payment Amount (Increased to Reflect 
the Difference Between Costs and Charges) or .75 of One Standard 
Deviation of Mean Charges by Diagnosis-Related Groups (DRGs)--March 
2004
Table 11--Proposed FY 2005 LTC-DRGs, Relative Weights, Geometric 
Average Length of Stay, and 5/6ths of the Geometric Average Length 
of Stay
Appendix A--Regulatory Impact Analysis
Appendix B--Recommendation of Update Factors for Operating Cost 
Rates of Payment for Inpatient Hospital Services

I. Background

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)
    Section 1886(d) of the Social Security Act (the Act) sets forth a 
system of payment for the operating costs of acute care hospital 
inpatient stays under Medicare Part A (Hospital Insurance) based on 
prospectively set rates. Section 1886(g) of the Act requires the 
Secretary to pay for the capital-related costs of hospital inpatient 
stays under a prospective payment system (PPS). Under these PPSs, 
Medicare payment for hospital inpatient operating and capital-related 
costs is made at predetermined, specific rates for each hospital 
discharge. Discharges are classified according to a list of diagnosis-
related groups (DRGs).
    The base payment rate is comprised of a standardized amount that is 
divided into a labor-related share and a nonlabor-related share. The 
labor-related share is adjusted by the wage index applicable to the 
area where the hospital is located; and if the hospital is located in 
Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of-
living adjustment factor. This base payment rate is multiplied by the 
DRG relative weight.
    If the hospital treats a high percentage of low-income patients, it 
receives a percentage add-on payment applied to the DRG-adjusted base 
payment rate. This add-on payment, known as the disproportionate share 
hospital (DSH) adjustment, provides for a percentage increase in 
Medicare payments to hospitals that qualify under either of two 
statutory formulas designed to identify hospitals that serve a 
disproportionate share of low-income patients. For qualifying 
hospitals, the amount of this adjustment may vary based on the outcome 
of the statutory calculations.
    If the hospital is an approved teaching hospital, it receives a 
percentage add-on payment for each case paid under the IPPS (known as 
the indirect medical education (IME) adjustment). This percentage 
varies, depending on the ratio of residents to beds.
    Additional payments may be made for cases that involve new 
technologies or medical services that have been approved for special 
add-on payments. To qualify, a new technology or medical service must 
demonstrate that it is a substantial clinical improvement over 
technologies or services otherwise available, and that, absent an add-
on payment, it would be inadequately paid under the regular DRG 
payment.
    The costs incurred by the hospital for a case are evaluated to 
determine whether the hospital is eligible for an additional payment as 
an outlier case. This additional payment is designed to protect the 
hospital from large financial losses due to unusually expensive cases. 
Any outlier payment due is added to the DRG-adjusted base payment rate, 
plus any DSH, IME, and new technology or medical service add-on 
adjustments.
    Although payments to most hospitals under the IPPS are made on the 
basis of the standardized amounts, some categories of hospitals are 
paid the higher of a hospital-specific rate based on their costs in a 
base year (the higher of FY 1982, FY 1987, or FY 1996) or the IPPS rate 
based on the standardized amount. For example, sole community hospitals 
(SCHs) are the sole source of care in their areas, and Medicare-
dependent, small rural hospitals (MDHs) are a major source of care for 
Medicare beneficiaries in their areas. Both of these categories of 
hospitals are afforded this special payment protection in order to 
maintain access to services for beneficiaries (although MDHs receive 
only 50 percent of the difference between the IPPS rate and their 
hospital-specific rates if the hospital-specific rate is higher than 
the IPPS rate).
    Section 1886(g) of the Act requires the Secretary to pay for the 
capital-related costs of inpatient hospital services ``in accordance 
with a prospective payment system established by the Secretary.'' The 
basic methodology for determining capital prospective payments is set 
forth in our regulations at 42 CFR 412.308 and 412.312. Under the 
capital PPS, payments are adjusted by the same DRG for the case as they 
are under the operating IPPS. Similar adjustments are also made for IME 
and DSH as under the operating IPPS. In addition, hospitals may receive 
an outlier payment for those cases that have unusually high costs.
    The existing regulations governing payments to hospitals under the 
IPPS are located in 42 CFR Part 412, Subparts A through M.
2. Hospitals and Hospital Units Excluded From the IPPS
    Under section 1886(d)(1)(B) of the Act, as amended, certain 
specialty hospitals and hospital units are excluded from the IPPS. 
These hospitals and units are: psychiatric hospitals and units; 
rehabilitation hospitals and units; long-term care hospitals (LTCHs); 
children's hospitals; and cancer hospitals. Various sections of the 
Balanced Budget Act of 1997 (Pub. L. 105-33), the Medicare, Medicaid 
and SCHIP [State Children's Health Insurance Program] Balanced Budget 
Refinement Act of 1999 (Pub. L. 106-113), and the Medicare, Medicaid, 
and SCHIP Benefits Improvement and Protection Act of 2000 (Pub. L. 106-
554) provide for the implementation of PPSs for rehabilitation 
hospitals and units (referred to as inpatient rehabilitation facilities 
(IRFs)), psychiatric hospitals and units (referred to as inpatient 
psychiatric facilities (IPFs)), and LTCHs, as discussed below. 
Children's hospitals and cancer hospitals continue to be paid under 
reasonable cost-based reimbursement.
    The existing regulations governing payments to excluded hospitals 
and

[[Page 28201]]

hospital units are located in 42 CFR Parts 412 and 413.
a. IRFs
    Under section 1886(j) of the Act, as amended, rehabilitation 
hospitals and units (IRFs) have been transitioned from payment based on 
a blend of reasonable cost reimbursement subject to a hospital-specific 
annual limit under section 1886(b) of the Act and prospective payments 
for cost reporting periods beginning January 1, 2002 through September 
30, 2002, to payment on a full prospective payment system basis 
effective for cost reporting periods beginning on or after October 1, 
2002 (66 FR 41316, August 7, 2001; 67 FR 49982, August 1, 2002; and 68 
FR 45674, August 1, 2003). The existing regulations governing payments 
under the IRF PPS are located in 42 CFR Part 412, Subpart P.
b. LTCHs
    Under the authority of sections 123(a) and (c) of Public Law 106-
113 and section 307(b)(1) of Public Law 106-554, LTCHs are being 
transitioned from being paid for inpatient hospital services based on a 
blend of reasonable cost-based reimbursement under section 1886(b) of 
the Act to fully Federal prospective rates during a 5-year period, 
beginning with cost reporting periods that start on or after October 1, 
2002. For cost reporting periods beginning on or after October 1, 2006, 
LTCHs will be paid under the fully Federal prospective payment rate 
(the June 6, 2003 LTCH PPS final rule (68 FR 34122)). LTCHs may elect 
to be paid based on full PPS payments instead of a blended payment in 
any year during the 5-year transition period. The existing regulations 
governing payment under the LTCH PPS are located in 42 CFR part 412, 
Subpart O.
c. IPFs
    Sections 124(a) and (c) of Public Law 106-113 provide for the 
development of a per diem PPS for payment for inpatient hospital 
services furnished in IPFs under the Medicare program, effective for 
cost reporting periods beginning on or after October 1, 2002. This 
system must include an adequate patient classification system that 
reflects the differences in patient resource use and costs among these 
hospitals and maintains budget neutrality. We published a proposed rule 
to implement the PPS for IPFs on November 28, 2003 (68 FR 66920). The 
November 28, 2003 proposed rule proposed an April 1, 2004 effective 
date for purposes of ratesetting and calculating impacts. However, the 
proposed rule was unusually complex because it proposed a completely 
new payment system for inpatient hospital services furnished by 
psychiatric hospitals and units and the public requested additional 
time to comment. As a result, we extended the comment period for the 
proposed rule. Thus, we are still in the process of analyzing public 
comments and developing a final rule for publication. Consequently, an 
April 1, 2004 effective date for the IPF PPS is no longer possible.
3. Critical Access Hospitals (CAHs)
    Under sections 1814, 1820, and 1834(g) of the Act, payments are 
made to critical access hospitals (CAHs) (that is, rural hospitals or 
facilities that meet certain statutory requirements) for inpatient and 
outpatient services on a reasonable cost basis. Reasonable cost is 
determined under the provisions of section 1861(v)(1)(A) of the Act and 
existing regulations under 42 CFR Parts 413 and 415.
4. Payments for Graduate Medical Education (GME)
    Under section 1886(a)(4) of the Act, costs of approved educational 
activities are excluded from the operating costs of inpatient hospital 
services. Hospitals with approved graduate medical education (GME) 
programs are paid for the direct costs of GME in accordance with 
section 1886(h) of the Act; the amount of payment for direct GME costs 
for a cost reporting period is based on the hospital's number of 
residents in that period and the hospital's costs per resident in a 
base year. The existing regulations governing payments to the various 
types of hospitals are located in 42 CFR part 413.
    On August 1, 2003, we published a final rule in the Federal 
Register (68 FR 45346) that implemented changes to the Medicare 
hospital inpatient prospective payment systems for both operating cost 
and capital-related costs, as well as changes addressing payments for 
excluded hospitals and payments for GME costs. Generally these changes 
were effective for discharges occurring on or after October 1, 2003. On 
October 6, 2003, we published a document in the Federal Register (68 FR 
57731) that corrected technical errors made in the August 1, 2003 final 
rule.

B. Provisions of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003

    On December 8, 2003, the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 (MMA), Public Law 108-173, was enacted. 
Public Law 108-173 made a number of changes to the Act relating to 
prospective payments to hospitals for inpatient services, payments to 
excluded hospitals and units, and payments to CAHs. This proposed rule 
would implement amendments made by the following sections of Public Law 
108-173:
    Section 401, which provides that, for discharges occurring in a 
fiscal year beginning with FY 2004 under the IPPS, Medicare will pay 
hospitals in rural and small urban areas in the 50 States using the 
standardized amount (computed for the previous fiscal year) that would 
be used to pay hospitals in large urban areas (or beginning with FY 
2005, for all hospitals in the previous fiscal year), increased by the 
appropriate market basket percentage increase. One standardized amount 
for hospitals in Puerto Rico would be established that would equal the 
amount for hospitals in large urban areas in Puerto Rico.
    Section 402, which provides that for discharges occurring on or 
after April 1, 2004, the DSH payment adjustment for a hospital that is 
not a large urban or large rural hospital will be calculated using the 
current DSH adjustment formula for large urban hospitals, subject to a 
limit of 12 percent for any of these hospitals that are not rural 
referral centers. (There is no limit on the DSH payment percentage for 
rural referral centers.)
    Section 403, which provides that, for discharges occurring on or 
after October 1, 2004, a hospital's labor-related share to which the 
wage index is applied will be decreased to 62 percent of the 
standardized amount when such a change will result in higher total 
payments to the hospital. This provision also applies to the labor-
related share of the standardized amount for hospitals in Puerto Rico.
    Section 405(a), which provides that inpatient, outpatient, and 
covered SNF services provided by a CAH will be reimbursed at 101 
percent of reasonable costs for services furnished to Medicare 
beneficiaries. This provision is applicable to payments for services 
furnished during cost reporting periods beginning on or after January 
1, 2004.
    Section 405(b), which expands coverage of the costs associated with 
covered Medicare services furnished by on-call emergency room providers 
in CAHs to include services furnished by physician assistants, nurse 
practitioners, and clinical nurse specialists, effective for costs 
incurred for services furnished on or after January 1, 2005.
    Section 405(c), which provides that eligible CAHs may receive 
payments for their inpatient services on a periodic interim payment 
(PIP) basis, effective

[[Page 28202]]

with payments made on or after July 1, 2004.
    Section 405(d), which allows CAHs to elect to receive payments 
under the optional payment method (a payment encompassing both 
inpatient CAH services and physician and practitioner services to 
outpatients) even if some practitioners do not reassign to the CAH 
their rights to bill for professional services to CAH outpatients. This 
provision applies to cost reporting periods occurring on or after July 
1, 2004, except that in the case of a CAH that made an election of the 
optional payment method before November 1, 2003, the provision applies 
to cost reporting periods beginning on or after July 1, 2001.
    Section 405(e), which increases the limit on the number of beds 
that a CAH may have for acute care from 15 to 25 beds. This provision 
applies to CAH designations made before, on, or after January 1, 2004. 
Any election made in accordance to the regulations promulgated to 
implement this provision will only apply prospectively.
    Section 405(g), which provides that a CAH may establish psychiatric 
and rehabilitation distinct part units and limits the number of beds in 
each unit to no more than 10. Services in these distinct part units 
will be paid under the reasonable cost-based methodology. This 
provision applies to cost reporting periods beginning on or after 
October 1, 2004.
    Section 405(h), which terminates a State's authority to waive the 
location requirement for a CAH by designating the CAH as the necessary 
provider, effective January 1, 2006. A grandfathering provision is 
included for CAHs that are certified as necessary providers prior to 
January 1, 2006, which allows any CAH that is designated as a necessary 
provider in its State's rural health plan prior to January 1, 2006, to 
maintain its necessary provider designation.
    Section 406, which provides for a graduated adjustment to the 
inpatient prospective payment rates to account for the higher costs 
associated with hospitals described under section 1886(d) of the Act 
that are located more than 25 road miles from another subsection (d) 
hospital and that have less than 800 discharges during a fiscal year, 
effective for discharges occurring on or after October 1, 2004. The 
increase in these payments may not be greater than 25 percent and the 
determination of the percentage payment increase is not subject to 
administrative or judicial review.
    Section 410A, which authorizes the Secretary to establish a 
demonstration program to test the feasibility and advisability of the 
establishment of rural community hospitals to furnish covered inpatient 
hospital services to Medicare beneficiaries. The Secretary must select 
up to 15 rural community hospitals to participate in the demonstration. 
The Secretary must implement the demonstration program not later than 
January 1, 2005, but may not implement the program before October 1, 
2004.
    Section 422(a), which provides that a hospital's GME FTE resident 
cap will be reduced, and the reduction will be redistributed among 
other hospitals if the hospital's resident count is less than its 
resident cap (rural hospitals with less than 250 acute care inpatient 
beds will be exempt) in a particular reference period. This provision 
is effective for cost reporting periods occurring on or after July 1, 
2005.
    Section 422(b), which specifies that the formula multiplier for the 
IME adjustment is 0.66 for FTE residents attributable to redistributed 
resident positions, effective for discharges occurring on or after July 
1, 2005.
    Section 501, which provides the update factor for payments for the 
hospital inpatient operating costs for FY 2005 and subsequent fiscal 
years is the market basket percentage increase. For FYs 2005 through 
2007, the update factor will be the market basket percentage increase 
minus 0.4 percentage points for any ``subsection (d) hospital'' that 
does not submit hospital quality data on 10 measures as specified by 
the Secretary.
    Section 502, which modifies the IME formula multiplier to be used 
in the calculation of the IME adjustment for midway through FY 2004 and 
provides a new schedule of formula multipliers for FYs 2005 and 
thereafter.
    Section 503(a), which includes a requirement for updating the ICD-
9-CM diagnosis and procedure codes in April 1 of each year, in addition 
to the current process of annual updates on October 1 of each year. 
This change will not affect Medicare payments or DRG classifications 
until the fiscal year that begins after that date.
    Section 503(b), which provides for changes to the threshold amount 
for determining eligibility of new technologies or medical services for 
add-on payments; provides for public input on applications for new 
technology or medical service add-on payments prior to the publication 
of a proposed rule; provides for reconsideration of applications 
received for FY 2004 that were denied; provides for preference in the 
use of DRG adjustments; and provides that new technology or medical 
service payments shall not be budget neutral. This provision is 
effective for fiscal years beginning in FY 2005.
    Section 504, which increases the national portion of the operating 
PPS payment rate for hospitals in Puerto Rico from 50 percent of the 
Federal rate to 75 percent of the Federal rate and decreases the Puerto 
Rico portion of the operating PPS payment from 50 percent to 25 
percent, effective for discharges occurring on or after October 1, 
2004. For the period of April 1, 2004 through September 30, 2004, 
payments for hospitals in Puerto Rico will be based on 62.5 percent 
Federal rate and 37.5 percent of the Puerto Rico rate.
    Section 505, which provides for an increase in a hospital's wage 
index value to take into consideration a commuter wage adjustment for 
hospital employees who reside in a county and work in a different area 
with a higher wage index.
    Section 508, which provides for the establishment of a one-time 
process for a hospital to appeal its geographic classification for wage 
index purposes. By law, any reclassification resulting from this one-
time appeal applies for a 3-year period to discharges occurring on or 
after April 1, 2004.
    Section 711, which freezes the annual CPI-U updates to hospital-
specific per resident amount (PRAs) for GME payments for those PRAs 
that exceed the ceiling, effective for cost reporting periods beginning 
FY 2004 through FY 2013.
    Section 712, which provides for an exception to the initial 
residency period for purposes of direct GME payments for geriatric 
residency or fellowship programs that allows the 2 years spent in an 
approved geriatric program to be counted as part of the resident's 
initial training period, but not to count against any limitation on the 
initial residency period. This provision is effective for cost 
reporting periods beginning on or after October 1, 2003.
    Section 713, which, during a 1-year moratorium period of January 1, 
2004 through December 31, 2004, allows hospitals to count allopathic or 
osteopathic family practice residents training in nonhospital settings 
for IME and direct GME purposes, without regard to the financial 
arrangement between the hospital and the teaching physician practicing 
in the nonhospital setting to which the resident is assigned.
    Section 733, which provides for the Medicare payment of routine 
costs, as well as costs relating to the transplantation and appropriate 
related items and services, for Medicare beneficiaries participating in 
a clinical trial involving pancreatic islet cell

[[Page 28203]]

transplantation, beginning no earlier than October 1, 2004.
    Section 926, which requires the Secretary to make information 
publicly available that enables hospital discharge planners, Medicare 
beneficiaries, and the public to identify skilled nursing facilities 
(SNFs) that are participating in the Medicare program, and requires a 
hospital, as part of its discharge planning, to evaluate a patient's 
need for SNF care.
    Section 947, which requires that, by July 1, 2004, hospitals not 
otherwise subject to the Occupational Safety and Health Act (OSHA) (or 
a State occupational safety and health plan that is approved under 
section 18(b) of that Act) must comply with the OSHA bloodborne 
pathogens (BBP) standard as part of their Medicare provider agreements.

C. Major Contents of This Proposed Rule

    In this proposed rule, we are setting forth proposed changes to the 
Medicare IPPS for operating costs and for capital-related costs under 
the IPPS for FY 2005. We also are setting forth proposed changes 
relating to payments for GME costs, payments to certain hospitals and 
units that continue to be excluded from the IPPS and paid on a 
reasonable cost basis, payments for DSH, requirements and payments for 
CAHs, conditions of participation for hospitals relating to discharge 
planning and fire safety requirements, requirements for Medicare 
provider agreements relating to bloodborne pathogen standards, and QIO 
disclosure of information requirements. The changes being proposed 
would be effective for discharges occurring on or after October 1, 
2004, unless otherwise noted.
    The following is a summary of the major changes that we are 
proposing to make:
1. Proposed Changes to the DRG Reclassifications and Recalibrations of 
Relative Weights
    As required by section 1886(d)(4)(C) of the Act, we are proposing 
annual adjustments to the DRG classifications and relative weights. 
Based on analyses of Medicare claims data, in section II. of this 
preamble, we are proposing to establish a number of new DRGs and make 
changes to the designation of diagnosis and procedure codes under other 
existing DRGs. Our proposed changes for FY 2005 are set forth in 
section II. of this preamble.
    Among the proposed changes discussed are:
     Restructuring and retitling of several DRGs to reflect 
expanded coverage of heart assist systems such as ventricular assist 
devices (VAD) or left ventricular assist devices (LVAD) as destination 
(or permanent) therapy for end-stage heart failure patients who are not 
candidates for heart transplantation: DRG 103 (Heart Transplant or 
Implant of Heart Assist System) (proposed title change), DRG 104 
(Cardiac Valve and Other Major Cardiothoracic Procedures with Cardiac 
Catheterization) and DRG 105 (Cardiac Valve and Other Major 
Cardiothoracic Procedures Without Cardiac Catheterization), and DRG 525 
(Other Heart Assist System Implant) (proposed title change).
     Addition of pacemaker device and lead procedure code 
combinations that could lead to the assignment of DRG 115 (Permanent 
Cardiac Pacemaker Implant with Acute Myocardial Infarction, Heart 
Failure, or Shock or ACID Lead or Generator Procedures) and DRG 116 
(Other Permanent Cardiac Pacemaker Implant).
     Movement of the procedure code for 360 spinal fusion from 
DRG 496 (Combined Anterior/Posterior Spinal Fusion) to DRG 497 (Spinal 
Fusion Except Cervical With CC) and DRG 498 (Spinal Fusion Except 
Cervical Without CC).
     Addition of combination codes, which also include heart 
failure, to the list of major problems under DRG 387 (Prematurity With 
Major Problems) and DRG 389 (Full-Term Neonate With Major Problems).
     Modification of DRGs 504 through 509 under MDC 22 (Burns) 
to recognize the impact of long-term mechanical ventilation on burn 
cases and renaming DRG 504 as proposed title ``Extensive Burns or Full 
Thickness Burns With Mechanical Ventilation 96+ Hours With Skin Graft'' 
and DRG 505 as proposed title ``Extensive Burns or Full Thickness Burns 
With Mechanical Ventilation 96+ Hours Without Skin Graft.''
     Deletion of DRG 483 (Tracheostomy for Face, Mouth, and 
Neck Diagnoses) and splitting the assignment of cases to two proposed 
new DRGs on the basis of the performance of a major operating room 
procedure: proposed new DRGs 541 and 542 (Tracheostomy With Mechanical 
Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth, and 
Neck Diagnosis With and Without Major Operating Room Procedure, 
respectively).
    We also are presenting our reevaluation of FY 2004 applicants for 
add-on payments for high-cost new medical services and technologies, 
and our analysis of FY 2005 applicants (including public input, as 
directed by Public Law 108-173, obtained in a town meeting).
    We are proposing the annual update of the long-term care diagnosis-
related group (LTC-DRG) classifications and relative weights for use 
under the LTCH PPS for FY 2005.
2. Proposed Changes to the Hospital Wage Index
    In section III. of this preamble, we are proposing revisions to the 
wage index and the annual update of the wage data. Specific issues 
addressed in this section included the following:
     The proposed FY 2005 wage index update, using wage data 
from cost reporting periods that began during FY 2001.
     Proposed revised labor market areas as a result of OMB 
revised definitions of geographical statistical areas.
     A discussion of the collection of occupational mix data 
and the proposed occupational mix adjustment to the wage index that we 
are proposing to apply beginning October 1, 2004.
     The proposed revisions to the wage index based on hospital 
redesignations and reclassifications, including changes that reflect 
the new OMB standards for assignment of hospitals to geographic areas.
     The proposed adjustment to the wage index based on 
commuting patterns of hospital employees who reside in a county and 
work in a different area with a higher wage index, to implement section 
505 of Public Law 108-173.
     A discussion of eligible hospitals reclassified under the 
one-time appeals process under section 508 of Public Law 108-173.
     Proposed changes to the labor-related share to which the 
wage index is applied in determining the PPS rate for hospitals located 
in specific geographic areas, to implement section 403 of Public Law 
108-173.
     The revised timetable for reviewing and verifying the wage 
data that is in effect for the proposed FY 2005 wage index.
3. Other Decisions and Proposed Changes to the PPS for Inpatient 
Operating and GME Costs
    In section IV. of this preamble, we discuss a number of provisions 
of the regulations in 42 CFR Parts 412 and 413 and set forth proposed 
changes concerning the following:
     Proposed expansion of the current postacute care transfer 
policy.
     Payments for inpatient care in providers that change 
classification status during a patient stay.
     Proposed changes in the definitions of urban and rural 
areas for geographic reclassifications purposes.

[[Page 28204]]

     Equalization of the standardized amount for urban and 
rural hospitals.
     The reporting of hospital quality data as a condition for 
receiving the full annual payment update increase.
     Proposed revision of the regulations to reflect the 
revision of the labor share of the wage index.
     Proposed revision of the regulations to reflect the wage 
index adjustment for commuting patterns of hospital employees who live 
in one county and commute to work in other areas with higher level 
wages.
     Proposed changes in the threshold amount for eligibility 
for new medical services and technology add-on payments.
     Proposed revision to our policy on additional payments to 
hospitals with high percentages of ESRD discharges.
     Proposed changes to the IME adjustment formula 
multipliers, and the formula multiplier applicable to redistribution of 
unused numbers of FTE residents slots.
     Proposed changes in DSH adjustment payments to rural and 
small urban hospitals.
     Proposed payment adjustments for low-volume hospitals.
     Proposed changes in policy affecting hospitals that apply 
as a group for reclassification and a discussion of possible 
reclassifications for dominant hospitals and hospitals in single-
hospital MSAs.
     Proposed changes in policies governing payments for direct 
GME, including the redistribution of unused FTE resident slots; changes 
in the GME initial residency period; extension of the update limitation 
on hospital-specific per resident amounts; and changes in the policies 
on residents training in nonhospital settings, including written 
agreements for teaching physician compensation.
     An announcement of the rural community hospital 
demonstration to be established under section 410A of Public Law 108-
173 and the opportunity for eligible hospitals to apply for 
participation in the demonstration program.
     A solicitation of public comments on the effect of 
increases in malpractice insurance premiums on hospitals participating 
in the Medicare program and beneficiary access of services.
4. Proposed Changes to the PPS for Capital-Related Costs
    In section V. of this preamble, we discuss the payment requirements 
for capital-related costs and propose changes relating to capital 
payments to hospitals located in Puerto Rico, changes in the policies 
on exception payments for extraordinary circumstances, treatment of 
hospitals previously reclassified for the operating standardized 
amounts, and capital payment adjustments based on the proposed changes 
in geographic classifications.
5. Proposed Changes for Hospitals and Hospital Units Excluded From the 
IPPS
    In section VI. of this preamble, we discuss the following proposed 
revisions and clarifications concerning excluded hospitals and hospital 
units and CAHs:
     Proposed changes in the payment rate for new excluded 
hospitals.
     Proposed changes to the criteria for determining payments 
to hospitals-within-hospitals.
     Proposed changes to the policies governing payment to 
CAHs, including a change in the payment percentage for services 
furnished by CAHs; changes in the rules governing the election by a CAH 
of the optional method of payment; expansion of the payment to 
emergency room on-call providers to include physician assistants, nurse 
practitioners, and clinical nurse specialists; authorization for the 
making of periodic interim payments (PIPs) for CAHs for inpatient 
services furnished; revision of the bed count limit for CAHs from 15 to 
25 acute care beds; proposed requirements for establishing psychiatric 
and rehabilitation distinct part units in CAHs; and termination of the 
location requirement for a CAH by designating the CAH as a necessary 
provider.
6. Proposed Changes to QIO Disclosure of Information Requirements
    In section VII. of this preamble, we discuss our proposed 
clarification of the requirements for disclosure by QIOs of information 
on institutions and practitioners collected in the course of the QIO's 
quality improvement activities.
7. Proposed Changes Relating to Medicare Provider Agreements, Hospital 
Conditions of Participation, and Fire Safety Requirements for Certain 
Health Care Facilities
    In section VIII. of this preamble, we are proposing to--
     Require hospitals, as part of the discharge planning 
standard under the Medicare hospital conditions of participation, to 
furnish a list of Medicare-participating home health agencies to 
patients who receive home health services after discharge and to 
provide information on Medicare-certified SNFs to patients who are 
likely to need posthospital extended care services.
     Require that Medicare provider agreements include 
provisions that would ensure that all hospital employees who may come 
into contact with human blood in the course of their duties are 
provided proper protection from bloodborne pathogens.
     Correct a technical error relating to the application of 
the 2000 edition of the Life Safety Code as the fire safety 
requirements for certain health care facilities; and clarify the 
effective date for the prohibition on the use of roller latches in 
these facilities.
8. Determining Prospective Payment Operating and Capital Rates and 
Rate-of-Increase Limits
    In the Addendum to this proposed rule, we set forth proposed 
changes to the amounts and factors for determining the FY 2005 
prospective payment rates for operating costs and capital-related 
costs. We also establish the proposed threshold amounts for outlier 
cases. In addition, we address proposed update factors for determining 
the rate-of-increase limits for cost reporting periods beginning in FY 
2005 for hospitals and hospital units excluded from the PPS.
9. Impact Analysis
    In Appendix A of the proposed rule, we set forth an analysis of the 
impact that the proposed changes would have on affected hospitals.
10. Recommendation of Update Factor for Hospital Inpatient Operating 
Costs
    In Appendix B of this proposed rule, as required by sections 
1886(e)(4) and (e)(5) of the Act, we provide our recommendations of the 
appropriate percentage changes for FY 2005 for the following:
     A single average standardized amount for all areas for 
hospital inpatient services paid under the IPPS for operating costs 
(and hospital-specific rates applicable to SCHs and MDHs).
     Target rate-of-increase limits to the allowable operating 
costs of hospital inpatient services furnished by hospitals and 
hospital units excluded from the IPPS.
11. Discussion of Medicare Payment Advisory Commission Recommendations
    Under section 1805(b) of the Act, the Medicare Payment Advisory 
Commission (MedPAC) is required to submit a report to Congress, no 
later than March 1 of each year, that reviews and makes recommendations 
on Medicare payment policies. MedPAC's March 2004 recommendation

[[Page 28205]]

concerning hospital inpatient payment policies addressed only the 
update factor for inpatient hospital operating costs and capital-
related costs under the IPPS and for hospitals and distinct part 
hospital units excluded from the IPPS. This recommendation is addressed 
in Appendix B. For further information relating specifically to the 
MedPAC March 1 report or to obtain a copy of the report, contact MedPAC 
at (202) 220-3700 or visit MedPAC's Web site at: www.medpac.gov.

II. Proposed Changes to DRG Classifications and Relative Weights

A. Background

    Section 1886(d) of the Act specifies that the Secretary shall 
establish a classification system (referred to as DRGs) for inpatient 
discharges and adjust payments under the IPPS based on appropriate 
weighting factors assigned to each DRG. Therefore, under the IPPS, we 
pay for inpatient hospital services on a rate per discharge basis that 
varies according to the DRG to which a beneficiary's stay is assigned. 
The formula used to calculate payment for a specific case multiplies an 
individual hospital's payment rate per case by the weight of the DRG to 
which the case is assigned. Each DRG weight represents the average 
resources required to care for cases in that particular DRG, relative 
to the average resources used to treat cases in all DRGS.
    Congress recognized that it would be necessary to recalculate the 
DRG relative weights periodically to account for changes in resource 
consumption. Accordingly, section 1886(d)(4)(C) of the Act requires 
that the Secretary adjust the DRG classifications and relative weights 
at least annually. These adjustments are made to reflect changes in 
treatment patterns, technology, and any other factors that may change 
the relative use of hospital resources. The proposed changes to the DRG 
classification system and the proposed recalibration of the DRG weights 
for discharges occurring on or after October 1, 2004, are discussed 
below.

B. DRG Reclassifications

    [If you choose to comment on issues in this section, please include 
the caption ``DRG Reclassifications'' at the beginning of your 
comment.]
1. General
    Cases are classified into DRGs for payment under the IPPS based on 
the principal diagnosis, up to eight additional diagnoses, and up to 
six procedures performed during the stay. In a small number of DRGs, 
classification is also based on the age, sex, and discharge status of 
the patient. The diagnosis and procedure information is reported by the 
hospital using codes from the International Classification of Diseases, 
Ninth Revision, Clinical Modification (ICD-9-CM).
    For FY 2004, cases are assigned to one of 522 DRGs in 25 major 
diagnostic categories (MDCs). Most MDCs are based on a particular organ 
system of the body. For example, MDC 6 is Diseases and Disorders of the 
Digestive System. This approach is used because clinical care is 
generally organized in accordance with the organ system affected. 
However, some MDCs are not constructed on this basis because they 
involve multiple organ systems (for example, MDC 22 (Burns)). The table 
below lists the 25 MDCs.

------------------------------------------------------------------------
                   Major diagnostic categories (MDCs).
-------------------------------------------------------------------------
1--Diseases and Disorders of the Nervous System.
2--Diseases and Disorders of the Eye.
3--Diseases and Disorders of the Ear, Nose, Mouth, and Throat.
4--Diseases and Disorders of the Respiratory System.
5--Diseases and Disorders of the Circulatory System.
6--Diseases and Disorders of the Digestive System.
7--Diseases and Disorders of the Hepatobiliary System and Pancreas.
8--Diseases and Disorders of the Musculoskeletal System and Connective
 Tissue.
9--Diseases and Disorders of the Skin, Subcutaneous Tissue and Breast.
10--Endocrine, Nutritional and Metabolic Diseases and Disorders.
11--Diseases and Disorders of the Kidney and Urinary Tract.
12--Diseases and Disorders of the Male Reproductive System.
13--Diseases and Disorders of the Female Reproductive System.
14--Pregnancy, Childbirth, and the Puerperium.
15--Newborns and Other Neonates with Conditions Originating in the
 Perinatal Period.
16--Diseases and Disorders of the Blood and Blood Forming Organs and
 Immunological Disorders.
17--Myeloproliferative Diseases and Disorders and Poorly Differentiated
 Neoplasms.
18--Infectious and Parasitic Diseases (Systemic or Unspecified Sites).
19--Mental Diseases and Disorders.
20--Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders.
21--Injuries, Poisonings, and Toxic Effects of Drugs.
22--Burns.
23--Factors Influencing Health Status and Other Contacts with Health
 Services.
24--Multiple Significant Trauma.
25--Human Immunodeficiency Virus Infections
------------------------------------------------------------------------

    In general, cases are assigned to an MDC based on the patient's 
principal diagnosis before assignment to a DRG. However, for FY 2004, 
there are eight DRGs to which cases are directly assigned on the basis 
of ICD-9-CM procedure codes. These DRGs are for heart, liver, bone 
marrow, lung, simultaneous pancreas/kidney, and pancreas transplants 
and for tracheostomies. Cases are assigned to these DRGs before they 
are classified to an MDC. The table below lists the current eight pre-
MDCs.

------------------------------------------------------------------------
               Pre-Major Diagnostic Categories (Pre-MDCs)
-------------------------------------------------------------------------
DRG 103--Heart Transplant.
DRG 480--Liver Transplant.

[[Page 28206]]

 
DRG 481--Bone Marrow Transplant.
DRG 482--Tracheostomy for Face, Mouth, and Neck Diagnoses.
DRG 483--Tracheostomy with Mechanical Ventiliation 96+ Hours or
 Principal Diagnosis Except for Face, Mouth, and Neck Diagnoses.
DRG 495--Lung Transplant.
DRG 512--Simultaneous Pancreas/Kidney Transplant.
DRG 513--Pancreas Transplant
------------------------------------------------------------------------

    Within most MDCs, cases are then divided into surgical DRGs and 
medical DRGs. Surgical DRGs are based on a hierarchy that orders 
operating room (O.R.) procedures or groups of O.R. procedures by 
resource intensity. Medical DRGs generally are differentiated on the 
basis of diagnosis and age (less than or greater than 17 years of age). 
Some surgical and medical DRGs are further differentiated based on the 
presence or absence of a complication or a comorbidity (CC).
    Generally, nonsurgical procedures and minor surgical procedures 
that are not usually performed in an operating room are not treated as 
O.R. procedures. However, there are a few non-O.R. procedures that do 
affect DRG assignment for certain principal diagnoses, for example, 
extracorporeal shock wave lithotripsy for patients with a principal 
diagnosis of urinary stones.
    Patient's diagnosis, procedure, discharge status, and demographic 
information is fed into the Medicare claims processing systems and 
subjected to a series of automated screens called the Medicare Code 
Editor (MCE). The MCE screens are designed to identify cases that 
require further review before classification into a DRG.
    After patient information is screened through the MCE and any 
further development of the claim is conducted, the cases are classified 
into the appropriate DRG by the Medicare GROUPER software program. The 
GROUPER program was developed as a means of classifying each case into 
a DRG on the basis of the diagnosis and procedure codes and, for a 
limited number of DRGs, demographic information (that is, sex, age, and 
discharge status).
    After cases are screened through the MCE and assigned to a DRG by 
the GROUPER, a base DRG payment is calculated by the PRICER software. 
The PRICER calculates the payments for each case covered by the IPPS 
based on the DRG relative weight and additional factors associated with 
each hospital, such as IME and DSH adjustments. These additional 
factors increase the payment amount to hospitals above the base DRG 
payment.
    The records for all Medicare hospital inpatient discharges are 
maintained in the Medicare Provider Analysis and Review (MedPAR) file. 
The data in this file are used to evaluate possible DRG classification 
changes and to recalibrate the DRG weights. However, in the July 30, 
1999 IPPS final rule (64 FR 41500), we discussed a process for 
considering non-MedPAR data in the recalibration process. In order for 
us to consider using particular non-MedPAR data, we must have 
sufficient time to evaluate and test the data. The time necessary to do 
so depends upon the nature and quality of the non-MedPAR data 
submitted. Generally, however, a significant sample of the non-MedPAR 
data should be submitted by mid-October for consideration in 
conjunction with the next year's proposed rule. This allows us time to 
test the data and make a preliminary assessment as to the feasibility 
of using the data. Subsequently, a complete database should be 
submitted by early December for consideration in conjunction with the 
next year's proposed rule.
    Many of the changes to the DRG classifications are the result of 
specific issues brought to our attention by interested parties. We 
encourage individuals with concerns about DRG classifications to bring 
those concerns to our attention in a timely manner so they can be 
carefully considered for possible inclusion in the next proposed rule 
and so any proposed changes may be subjected to public review and 
comment. Therefore, similar to the timetable for interested parties to 
submit non-MedPAR data for consideration in the DRG recalibration 
process, concerns about DRG classification issues should be brought to 
our attention no later than early December in order to be considered 
and possibly included in the next annual proposed rule updating the 
IPPS.
    The changes we are proposing to the DRG classification system for 
the FY 2005 GROUPER version 22.0 and to the methodology used to 
recalibrate the DRG weights are set forth below. Unless otherwise noted 
in this proposed rule, our DRG analysis is based on data from the 
December 2003 update of the FY 2003 MedPAR file, which contains 
hospital bills received through December 31, 2003 for discharges in FY 
2003.
2. MDC 1 (Diseases and Disorders of the Nervous System): Intracranial 
Hemorrhage and Stroke With Infarction
    It has come to our attention that the title of DRG 14 (Intracranial 
Hemorrhage and Stroke With Infarction) may be misleading because it 
implies that a combination of conditions exists when the DRG is 
assigned. When we developed this title, we did not intend to imply that 
a combination of conditions exists. Therefore, we are proposing to 
change the title of DRG 14 to read ``Intracranial Hemorrhage or 
Cerebral Infarction''.
3. MDC 5 (Diseases and Disorders of the Circulatory System)
a. Heart Assist System Implant
    Circulatory support devices, also known as heart assist systems, 
ventricular assist devices (VADs) or left ventricular assist devices 
(LVADs), offer a surgical alternative for end-stage heart failure 
patients. This type of device is often implanted near a patient's 
native heart and assumes the pumping function of the weakened heart's 
left ventricle. In many cases, heart transplantation would be the 
treatment of choice for this type of patient. However, the low number 
of donor hearts limits this treatment option.
    We have reviewed the payment and DRG assignment for this type of 
device many times in the past. The reader is referred to the August 1, 
2002 IPPS final rule (67 FR 49989) for a complete listing of those 
discussions.
    In the August 1, 2002 final rule (67 FR 49990), we attempted to 
clinically and financially align VAD procedures by creating new DRG 525 
(Heart Assist System Implant). We also noted that cases in which a 
heart transplant also occurred during the same hospitalization episode 
would continue to be assigned to DRG 103 (Heart Transplant). At that 
time, we announced that DRG 525 would consist of any principal 
diagnosis in MDC 5, plus one of the following surgical procedure codes:

 37.62, Insertion of nonimplantable heart assist system
 37.63, Repair of heart assist system

[[Page 28207]]

 37.65, Implant of external heart assist system
 37.66, Insertion of implantable heart assist system

    (To avoid confusion, we note that the titles of codes 37.62, 37.63, 
37.65, and 37.66 have been revised for FY 2005 through the ICD-9-CM 
Coordination and Maintenance Committee process as reflected in Table 
6F, Revised Procedure Code Titles in the Addendum to this proposed 
rule.)
    Commenters on the May 19, 2003 proposed rule that preceded the 
August 1, 2003 IPPS (FY 2004) final rule notified us that procedure 
code 37.66 was neither a clinical nor a financial match to the rest of 
the procedure codes now assigned to DRG 525. We did not modify DRG 525 
for FY 2004. We agreed that we would continue to evaluate whether to 
make further changes to DRG 525. After publication of the August 1, 
2003 final rule, we again reviewed the MedPAR data concerning DRG 525, 
and came to the conclusion that procedure code 37.62 is different in 
terms of clinical procedures and resource utilization from the other 
procedure codes assigned to DRG 525. Therefore, in a correction to the 
August 1, 2003 IPPS (FY 2004) final rule, published on October 6, 2003 
(68 FR 57733), we revised the composition of DRG 525 by correcting the 
assignment of procedures to DRG 525 in light of the lower charges 
associated with procedure code 37.62. We moved code 37.62 into DRG 104 
(Cardiac Valve and Other Major Cardiothoracic Procedures With Cardiac 
Catheterization) and DRG 105 (Cardiac Valve and Other Major 
Cardiothoracic Procedures Without Cardiac Catheterization), and left 
procedure codes 37.63, 37.65, and 37.66 in DRG 525.
    In addition, we have evaluated a request for expanded coverage for 
VADs and LVADs as destination (or permanent) therapy for end-stage 
heart failure patients who are not candidates for heart 
transplantation. VADs and LVADs had been approved for support of blood 
circulation post-cardiotomy (effective for services performed on or 
after October 18, 1993) and as a bridge to heart transplant (effective 
for services performed on or after January 22, 1996) to assist a 
damaged or weakened heart in pumping blood. The criteria that must be 
fulfilled in order for Medicare coverage to be provided for these 
purposes have been previously discussed in the August 1, 2000 final 
rule (65 FR 47058), and can also be accessed online at: www.cms.gov/manuals/pm_trans/r2ncd1.pdf.
    As a result of that review, effective for services performed on or 
after October 1, 2003, VADs have been approved as destination therapy 
for patients requiring permanent mechanical cardiac support. Briefly, 
VADs used for destination therapy are covered only if they have 
received approval from the FDA for that purpose, and the device is used 
according to the FDA-approved labeling instructions. VADs are covered 
for patients who have chronic end-stage heart failure (New York Heart 
Association Class IV end-stage left ventricular failure for at least 90 
days with a life expectancy of less than 2 years). Implanting 
facilities as well as patients must also meet all of the additional 
conditions that are listed in the national coverage determination for 
artificial hearts and related devices, which is posted on the above CMS 
Web site.
    In light of the new indication of destination therapy, we again 
reviewed the FY 2003 MedPAR data for all cases in which a VAD had been 
implanted, using the criterion of any case containing a procedure code 
of 37.66. We found a total of 65 cases in 3 DRGs: DRG 103 (Heart 
Transplant); DRG 483 (Tracheostomy With Mechanical Ventilation 96+ 
Hours or Principal Diagnosis Except Face, Mouth, and Neck Diagnoses); 
and DRG 525 (Heart Assist System Implant). The following table displays 
our findings:

----------------------------------------------------------------------------------------------------------------
                                                                                  Average length      Average
                  DRG with code 37.66 reported                         Count          of stay         charges
----------------------------------------------------------------------------------------------------------------
103.............................................................              14           77.36        $836,011
483.............................................................               6          100.50       1,400,706
525.............................................................              45           38.93         308,725
----------------------------------------------------------------------------------------------------------------

    The remaining 354 cases in DRG 103 that did not report code 37.66 
had average charges of $282,578. The remaining 171 cases in DRG 525 
that did not contain code 37.66 had an average length of stay of 12.39 
days and average charges of $168,388. The 45 cases in DRG 525 with code 
37.66 accounted for 26 percent of the cases. However, the average 
charges for these cases are approximately $140,340 higher than the 
average charges for cases in DRG 525 that did not report code 37.66.
    Commenters on the FY 2004 final rule suggested adding code 37.66 to 
DRG 103. We were concerned with the timing of that comment, as it was 
received after publication of the proposed rule. We noted that the 
commenter's suggestions on the structure of the DRGs involved were 
significant, and that change of that magnitude should be subject to 
public review and comment. We also noted that we would evaluate the 
suggestion further. (68 FR 45370) However, as one of the indications 
for this device has become destination therapy, and as this new 
indication is more clinically aligned with DRG 103, we are proposing to 
remove procedure code 37.66 from DRG 525 and assign it to DRG 103. We 
also are proposing to change the title of DRG 103 to ``Heart Transplant 
or Implant of Heart Assist System''. The proposed restructured DRG 103 
would include any principal diagnosis in MDC 5, plus one of the 
following surgical procedure codes:

 33.6, Combined heart-lung transplantation
 37.51, Heart transplantation
 37.66, Insertion of implantable heart assist system

    In addition to the proposed changes to DRG 103, we are proposing to 
change the title of DRG 525 to ``Other Heart Assist System Implant''.
    In conjunction with the above data review, we also looked at DRGs 
104 and 105.
    DRGs 104 and 105 had been restructured in FY 2003 by assigning code 
37.62 to them. (Note: The code title for 37.62 has been revised, 
effective FY 2005, as reflected in Table 6F of the Addendum to this 
proposed rule). We examined the MedPAR data and found that the average 
charges were $113,667 and $82,899, respectively, for DRGs 104 and 105 
for cases not reporting code 37.62, while cases containing code 37.62 
had average charges of $124,559 and $166,129, respectively.
    The removal of code 37.66 from DRG 525 would have the effect of 
clinically realigning that DRG to be more coherent. As a result of the 
proposal to remove code 37.66 from DRG 525 and assign it to DRG 103, we 
also are proposing to remove code 37.62 from DRGs 104 and 105 and 
assign it back into DRG 525. In addition, the average

[[Page 28208]]

charges for code 37.62 shown above in DRGs 104 and 105 ($124,559 and 
$166,129) more closely match the average charges reported for the 171 
cases in DRG 525, absent code 37.66 ($168,388).
    The proposed restructured DRG 525 would include any principal 
diagnosis in MDC 5, plus the following surgical procedure codes:

 37.52, Implantation of total replacement heart system*
 37.53, Replacement or repair of thoracic unit of total 
replacement heart system*
 37.54, Replacement or repair of other implantable component of 
total replacement heart system*
 37.62, Insertion of nonimplantable heart assist system
 37.63, Repair of heart assist system
 37.65, Implant of external heart assist system
*These codes represent noncovered services for Medicare beneficiaries. 
However, it is our longstanding practice to assign every code in the 
ICD-9-CM classification to a DRG. Therefore, they have been assigned to 
DRG 525.
b. Cardiac Resychronization Therapy and Heart Failure
    We received a request from a manufacturer of a Cardiac 
Resynchronization Therapy Defibrillator (CRT-D) device for a 
modification to DRG 535 (Cardiac Defibrillator Implant With Cardiac 
Catheterization With Acute Myocardial Infarction/Heart Failure/Shock) 
and DRG 536 (Cardiac Defibrillator Implant With Cardiac Catheterization 
Without Acute Myocardial Infarction/Heart Failure/Shock). The commenter 
pointed out that defibrillator device implantations, including the CRT-
D type of defibrillator, are assigned to DRG 535 when the patient also 
has a cardiac catheterization and has either an acute myocardial 
infarction, heart failure, or shock as a principal diagnosis. If the 
patient receiving the defibrillator implant and cardiac catheterization 
does not have a principal diagnosis of acute myocardial infarction, 
heart failure, or shock, the cases are assigned to DRG 536.
    The commenter requested that cases be assigned to DRG 535 when the 
patient has heart failure as either a principal diagnosis or a 
secondary diagnosis. The commenter stated that patients receive a CRT-D 
(as opposed to other types of defibrillators) when they have both heart 
failure and arrhythmia. The commenter was concerned that some coders 
may sequence the heart failure as a secondary diagnosis, which would 
result in the patient being assigned to DRG 536.
    As stated earlier, DRGs 535 and 536 are split based on the 
principal diagnosis of acute myocardial infarction, heart failure, or 
shock. Cases are not assigned to DRG 535 when heart failure is a 
secondary diagnosis.
    The commenter described a scenario where a patient was admitted 
with heart failure for an evaluation of the need for a CRT-D 
implantation. The hospitalization studies indicated that the patient 
had a ventricular tachycardia. The commenter indicated that coders 
would be confused as to which code should be listed as the principal 
diagnosis.
    CMS' review of this scenario as described would be that the heart 
failure led to the admission and would be the principal diagnosis. This 
case would properly be assigned to DRG 535. Furthermore, when two 
conditions are considered to be equally responsible for the admission, 
either one of the two conditions may be selected as the principal 
diagnosis.
    The commenter also stated that its own study shows CRT-D patients 
have significantly higher charges than do other patients in DRGs 535 
and 536 who receive an implantable defibrillator. This was the case 
whether heart failure was used as a principal or secondary diagnosis.
    A cardiac catheterization is a diagnostic procedure generally 
performed to establish the nature of the patient's cardiac problem and 
determine if implantation of a cardiac defibrillator is appropriate. 
Generally, the cardiac catheterization can be done on an outpatient 
basis. Patients who are admitted with acute myocardial infarction, 
heart failure, or shock and have a cardiac catheterization are 
generally acute patients who require emergency implantation of the 
defibrillator. Thus, there are very high costs associated with these 
patients.
    We examined the MedPAR file for all cases in DRGs 535 and 536 and 
only cases in DRG 536 in which acute myocardial infarction or heart 
failure was listed as a secondary diagnosis. The following chart 
illustrates the results of our findings:

----------------------------------------------------------------------------------------------------------------
                                                                            Average length of
                          DRGs                                 Count               stay         Average charges
----------------------------------------------------------------------------------------------------------------
535....................................................              6,801               9.50        $110,663.57
536--All cases.........................................             17,454               5.47          89,493.85
536--Cases With Secondary Diagnosis of Cardiac                       8,562                6.5          94,832.14
 Defibrillator Implant With Cardiac Catheterization
 Without Acute Myocardial Infarction/Heart Failure/
 Shock.................................................
----------------------------------------------------------------------------------------------------------------

    The data show that cases with a secondary diagnosis of acute 
myocardial infarction or heart failure have average charges 
($94,832.14) closer to the overall average charges for DRG 536 
($89,493.85) where they are currently assigned. Overall charges for DRG 
535 were $110,663.57. We do not believe these data support modifying 
DRG 535 and DRG 536 as requested. Many of the CRT-D patients who are 
admitted for heart failure would be assigned into DRG 535. Furthermore, 
modifying the DRG logic for one specific type of defibrillator (CRT-D) 
is not consistent with our overall policy of grouping similar types of 
patients together in the same DRG. In addition, to modify the DRG logic 
for the small percentage of cases where there might be confusion 
concerning the selection of the principal diagnosis does not seem 
prudent. Therefore, we are not proposing a modification to DRG 535 or 
536 for CRT-Ds.
c. Combination Cardiac Pacemaker Devices and Lead Codes
    We received a comment that recommended that we include additional 
combination procedure codes representing cardiac pacemaker device and 
lead codes under DRG 115 (Permanent Cardiac Pacemaker Implant With 
Acute Myocardial Infarction, Heart Failure, or Shock or ACID Lead or 
Generator Procedures) and DRG 116 (Other Permanent Cardiac Pacemaker 
Implant). DRGs 115 and 116 are assigned when a complete pacemaker unit 
with leads is implanted. Combinations of pacemaker devices and lead 
codes that would lead to the DRG assignment are listed under DRGs 115 
and 116. The commenter recommended that the following pacemaker device 
and lead procedure code combinations be added to these two DRGs:

 00.53 & 37.70

[[Page 28209]]

 00.53 & 37.71
 00.53 & 37.72
 00.53 & 37.73
 00.53 & 37.74
 00.53 & 37.76
    These codes are defined as follows:

 00.53, Implantation or replacement of cardiac 
resynchronization pacemaker, pulse generator only [CRT-P]
 37.70, Initial insertion of pacemaker lead [electrode], not 
otherwise specified
 37.71, Initial insertion of transvenous lead [electrode] into 
ventricle
 37.72, Initial insertion of transvenous lead [electrode] into 
atrium and ventricle
 37.73, Initial insertion of transvenous lead [electrode] into 
atrium
 37.74, Initial insertion or replacement of epicardial lead 
[electrode] into epicadium
 37.76, Replacement of transvenous atrial and/or ventricular 
lead(s) [electrode]
    We have consulted our medical advisors and they agree that these 
recommended procedure code combinations also describe pacemaker device 
and lead implantations and should be included under DRGs 115 and 116. 
Therefore, we are proposing to add the recommended procedure code 
combinations to the list of procedure code combinations under DRGs 115 
and 116.
4. MDC 6 (Diseases and Disorders of the Digestive System): Artificial 
Anal Sphincter
    In the FY 2003 IPPS final rule (67 FR 50242), we created two new 
codes for procedures involving an artificial anal sphincter, effective 
for discharges occurring on or after October 1, 2002: code 49.75 
(Implantation or revision of artificial anal sphincter) that is used to 
identify cases involving implantation or revision of an artificial anal 
sphincter and code 49.76 (Removal of artificial anal sphincter) that is 
used to identify cases involving the removal of the device. In Table 6B 
of that final rule, we assigned both codes to one of four MDCs, based 
on principal diagnosis, and one of six DRGs within those MDCs. In the 
August 1, 2003 IPPS final rule (68 FR 45372), we discussed the 
assignment of these codes in response to a request we had received to 
consider reassignment of these two codes to different MDCs and DRGs. 
The requester believed that the average charges ($44,000) for these 
codes warranted reassignment. In the August 1, 2003 IPPS final rule, we 
stated that we did not have sufficient MedPAR data available on the 
reporting of codes 49.75 and 49.76 to make a determination on DRG 
reassignment of these codes. We agreed that, if warranted, we would 
give further consideration to the DRG assignments of these codes 
because it is our customary practice to review DRG assignment(s) for 
newly created codes to determine clinical coherence and similar 
resource consumption after we have had the opportunity to collect 
MedPAR data on utilization, average length of stay charges, and 
distribution throughout the system.
    Therefore, we reviewed the FY 2003 MedPAR data for the presence of 
codes 49.75 and 49.76. We then arrayed the results by DRG, count, 
average length of stay, charges, and the presence or absence of a 
secondary diagnosis that could be classified as a CC. We found that 
there were a total of 13 cases in 5 total DRGs with CCs, and 9 cases in 
4 total DRGs without CCs, for a total of 22 cases that reported these 
procedure codes. We had anticipated that the majority of cases would 
have been found in DRGs 157 (Anal and Stomal Procedures With CC) and 
158 (Anal and Stomal Procedures Without CC), but found only 2 cases 
grouped to DRG 157 and 4 cases grouped to DRG 158. Our data showed 
average charges of $22,374 for the cases with CC, and average charges 
of $20,831 for the cases without CC. Average charges for DRG 157 were 
$18,196, while average charges for DRG 158 were $9,348.
    Our medical advisors also reviewed the contents of DRGs 157 and 
158. The consensus was that codes 49.75 and 49.76 are not a clinical 
match to the other procedure codes found in these two DRGs. The other 
procedure codes in DRGs 157 and 158 are for simpler and less invasive 
procedures. In some circumstances, these procedures could potentially 
be performed in an outpatient setting or in a physician's office. Our 
medical advisors determined that clinical coherence was not 
demonstrated and recommended that we move these codes to DRGs 146 
(Rectal Resection With CC) and 147 (Rectal Resection Without CC), as 
these anal sphincter procedures more closely resemble the procedures in 
these DRGs. In addition, the average charges for paired DRG 146 
($33,853) and DRG 147 ($21,747) more closely resemble the actual 
average charges found in the MedPAR data for these cases.
    Even though there are few reports of codes 49.75 and 49.76 in the 
MedPAR data and we do not anticipate a significant increase in 
utilization of these procedures, we are proposing that these two codes 
would only be removed from paired DRG 157 and 158 and reassigned to 
paired DRG 146 and 147 under MDC 6 (Diseases and Disorders of the 
Digestive System). All other MDC and DRG assignments for codes 49.75 
and 49.76 would remain the same.
5. MDC 8 (Diseases and Disorders of the Musculoskeletal System and 
Connective Tissue)
a. 360 Spinal Fusions
    We received a comment that suggested procedure code 81.61 (360 
Spinal fusion) should not be included in DRG 496 (Combined Anterior/
Posterior Spinal Fusion). The commenter stated that code 81.61 does not 
represent the same types of cases as other codes included in DRG 496. 
The commenter indicated that cases reported with code 81.61 involve 
making only one incision, and then fusing both the anterior and 
posterior portion of the spine. All other cases in DRG 496 involve two 
separate surgical approaches used to reach the site of the spinal 
fusion. For these other patients, an incision is made into the patient, 
and a fusion is made in part of the spine. The patient is then turned 
over and a separate incision is made so that a fusion can be made in 
another part of the spine. The commenter added that these two separate 
incisions and fusions are more time consuming than the single incision 
used for code 81.61. The commenter also stated that patients receiving 
the two surgical approaches have a longer recovery period and use more 
hospital resources.
    We examined data in the MedPAR file for cases assigned to DRG 496 
and found the following:

----------------------------------------------------------------------------------------------------------------
                                                                                  Average length      Average
                               DRG                                     Count          of stay         charges
----------------------------------------------------------------------------------------------------------------
496--All Cases..................................................           2,706             8.0      $74,967.33
496--Cases with code 81.61......................................             829             4.7       50,659.69
496--Cases with code 81.61 with CC..............................             451             5.4       55,639.50
496--Cases with code 81.61 without CC...........................             378             3.8       44,718.16
496--Cases without 81.61........................................            1877             9.4       85,703.09
----------------------------------------------------------------------------------------------------------------


[[Page 28210]]

    We also examined cases in related DRG 497 (Spinal Fusion Except 
Cervical With CC) and DRG 498 (Spinal Fusion Except Cervical Without 
CC) in which code 81.61 was not reported. The chart below reflects our 
findings.

----------------------------------------------------------------------------------------------------------------
                                                                                  Average length      Average
                               DRG                                     Count          of stay         charges
----------------------------------------------------------------------------------------------------------------
497.............................................................          16,965            6.19      $49,315.27
498.............................................................          11,598            3.95       37,450.68
----------------------------------------------------------------------------------------------------------------

    These data clearly show that cases with code 81.61 have 
significantly less average charges than other cases in DRG 496 that 
have two surgical approaches. Cases with code 81.61 are more closely 
aligned with cases in DRG 497 and DRG 498. Furthermore, including code 
81.61 will have the effect of lowering the relative weights for DRG 496 
in future years. Therefore, we are proposing to remove code 81.61 from 
DRG 496 and reassign it to DRGs 497 and 498.
b. Multiple Level Spinal Fusion
    On October 1, 2003 (68 FR 45596), the following new ICD-9-CM 
procedure codes were created to identify the number of levels of 
vertebra fused during a spinal fusion procedure:

 81.62, Fusion or refusion of 2-3 vertebrae
 81.63, Fusion or refusion of 4-8 vertebrae
 81.64, Fusion or refusion of 9 or more vertebrae

    Prior to the creation of these new codes, we received a comment 
recommending the establishment of new DRGs that would differentiate 
between the number of levels of vertebrae involved in a spinal fusion 
procedure. In the August 1, 2003 final rule, we discussed the creation 
of these new codes and the lack of sufficient MedPAR data with the new 
multiple level spinal fusion codes (68 FR 45369). The commenter had 
conducted an analysis and submitted data to support redefining the 
spinal fusion DRGs. The analysis found that increasing the levels fused 
from 1 to 2 levels to 3 levels or more levels increased the mean 
standardized charges by 38 percent for lumbar/thoracic fusions, and by 
47 percent for cervical fusions.
    The following current spinal fusion DRGs separate cases based on 
whether or not a CC is present: DRG 497 (Spinal Fusion Except Cervical 
With CC) and DRG 498 (Spinal Fusion Except Cervical Without CC); DRG 
519 (Cervical Spinal Fusion With CC) and DRG 520 (Cervical Spinal 
Fusion Without CC). However, the difference in charges associated with 
the current CC split was only slightly greater than the difference 
attributable to the number of levels fused as found by the commenter's 
analysis. In addition, adopting the commenter's recommendation would 
have necessitated adjusting the DRG relative weights using non-MedPAR 
data because Medicare claims data with the new ICD-9-CM codes would not 
have been available until the FY 2003 MedPAR file. Therefore, at that 
time, we did not redefine the spinal fusion DRGs to differentiate on 
the basis of the number of levels of vertebrae involved in a spinal 
fusion procedure.
    We did not yet have any reported cases utilizing the new multilevel 
spinal fusion codes in our data. We stated that we would wait until 
sufficient data with the new multilevel spinal fusion codes were 
available before making a final determination on whether multilevel 
spinal fusions should be incorporated into the spinal fusion DRG 
structure. The codes went into effect on October 1, 2003 and we have 
not received any data using these codes. Spinal surgery is an area of 
rapid changes. In addition, we have created a series of new procedure 
codes that describe a new type of spinal surgery, spinal disc 
replacement. (See codes 84.60 through 84.69 in Table 6B in the Addendum 
to this proposed rule that will go into effect on October 1, 2004.) Our 
medical advisors describe this new surgical procedure as a more 
conservative approach for back pain than the spinal fusion surgical 
procedure. With only limited data concerning multiple level spinal 
fusion and the rapid changes in spinal surgery, we believe it is more 
prudent not to propose the establishment of new DRGs based on the 
number of levels of vertebrae involved in a spinal fusion procedure at 
this time.
    In addition, no other surgical DRG is split based on the number of 
procedures performed. For instance, the same DRG is assigned whether 
one or more angioplasties are performed on a patient's arteries. The 
insertion of multiple stents within an artery does not result in a 
different DRG assignment. Similarly, the excision of neoplasms from 
multiple sites does not lead to a different DRG assignment. To begin 
splitting DRGs based on the number of procedures performed or devices 
inserted could set a new and significant precedent for DRG policy. 
Therefore, while we will continue to study this area, we are not 
proposing to redefine the spinal fusion DRGs based on the number of 
levels of vertebrae fused at this time.
6. MDC 15 (Newborns and Other Neonates With Conditions Originating in 
the Perinatal Period)
    We continue to receive comments that MDC 15 (Newborn and Other 
Neonates With Conditions Originating in the Perinatal Period) does not 
adequately capture care provided for newborns and neonates by 
hospitals. The commenters point out that we have not updated the DRGs 
within MDC 15 as we have for other parts of the DRG system.
    Our primary focus of updates to the Medicare DRG classification 
system is on changes relating to the Medicare patient population, not 
the pediatric or neonatal patient populations. However, we acknowledge 
the Medicare DRGs are sometimes used to classify other patient 
populations. Over the years, we have received comments about aspects of 
the Medicare newborn DRGs that appear problematic, and we have 
responded to these on an individual basis. In the May 9, 2002 IPPS 
proposed rule (67 FR 31413), we proposed extensive changes to multiple 
DRGs within MDC 15. Because of our limited data and experience with 
newborn cases under Medicare, we contacted the National Association of 
Children's Hospitals and Related Institutions (NACHRI) to obtain 
proposals for possible revisions of the DRG categories within MDC 15. 
We received extensive comments opposing these revisions. Therefore, we 
did not implement the proposals.
    We advise those non-Medicare systems that need a more up-to-date 
system to choose from other systems that are currently in use in this 
country, or to develop their own modifications. As previously stated, 
we do not have the data or the expertise to develop more extensive 
newborn and pediatric DRGs. Our mission in maintaining the Medicare 
DRGs is to serve the Medicare population. Therefore, we will make only 
minor corrections of obvious errors to the DRGs within MDC 15. At this 
time, we do not plan to conduct a more extensive analysis involving 
major revisions to these DRGs.
    In the IPPS final rule for FY 2004 (68 FR 45360), we added heart 
failure

[[Page 28211]]

diagnosis codes 428.20 through 428.43 to the list of secondary 
diagnosis of major problem under DRG 387 (Prematurity With Major 
Problems) and DRG 389 (Full-Term Neonate With Major Problems). We 
received a comment after the August 1, 2003 final rule stating that we 
should add the following list of combination codes, which also include 
heart failure, to the list of major problems under DRGs 387 and 389:

 398.91, Rheumatic heart failure (congestive)
 402.01, Malignant hypertensive heart disease, with heart 
failure
 402.11, Benign hypertensive heart disease, with heart failure
 402.91, Unspecified hypertensive heart disease, with heart 
failure
 404.01, Malignant hypertensive heart and renal disease, with 
heart failure
 404.03, Malignant hypertensive heart and renal disease, with 
heart failure and renal failure
 404.11, Benign hypertensive heart and renal disease, with 
heart failure
 404.13, Benign hypertensive heart and renal disease, with 
heart failure and renal failure
 404.91, Unspecified hypertensive heart and renal disease, with 
heart failure
 404.93, Unspecified hypertensive heart and renal disease, with 
heart failure and renal failure.
 428.9, Heart failure, unspecified
    We agree that the codes listed above also include heart failure and 
should also be added to DRGs 387 and 389 as major problems. Therefore, 
we are proposing to add the heart failure codes listed above to DRGs 
387 and 389 as major problems.
7. MDC 20 (Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental 
Disorders): Drug-Induced Dementia
    We received a request from a commenter that we remove the principal 
diagnosis code 292.82 (Drug-induced dementia) from MDC 20 (Alcohol/Drug 
Use and Alcohol/Drug Induced Organic Mental Disorders) and the 
following DRGs under MDC 20:

 DRG 521 (Alcohol/Drug Abuse or Dependence With CC)
 DRG 522 (Alcohol/Drug Abuse or Dependence With Rehabilitation 
Therapy Without CC)
 DRG 523 (Alcohol/Drug Abuse or Dependence Without 
Rehabilitation Therapy Without CC)
    The commenter indicated that a patient who has a drug-induced 
dementia should not be classified to an alcohol/drug DRG. However, the 
commenter did not propose a new DRG assignment for code 292.82.
    Our medical advisors have evaluated the request and determined that 
the most appropriate DRG classification for a patient with drug-induced 
dementia would be within MDC 20. The medical advisors indicated that 
because this mental condition is drug induced, it is appropriately 
classified to DRGs 521 through 523 in MDC 20. Therefore, we are not 
proposing a new DRG classification for the principal diagnosis code 
292.82.
8. MDC 22 (Burns): Burn Patients on Mechanical Ventilation
    We have received concerns raised by hospitals treating burn 
patients that the current DRG payment for burn patients on mechanical 
ventilation is not adequate. The DRG assignment for these cases depends 
on whether the hospital performed the tracheostomy or the tracheostomy 
was performed prior to transfer to the hospital. If the hospital does 
not actually perform the tracheostomy, the case is assigned to one of 
the burn DRGs in MDC 22 (Burns). If the hospital performs a 
tracheostomy, the case is assigned to Pre-MDC DRG 482 (Tracheostomy for 
Face, Mouth, and Neck Diagnoses) or DRG 483 (Tracheostomy With 
Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, 
Mouth and Neck Diagnoses).
    In the August 1, 2002 final rule, we modified DRGs 482 and 483 to 
recognize code 96.72 (Continuous mechanical ventilation for 96+ hours) 
for the first time in the DRG assignment (67 FR 49996). The 
modification was partially in response to concerns that hospitals could 
omit diagnosis codes indicating face, mouth, or neck diagnoses in order 
to have cases assigned to DRG 483 rather than the much lower paying DRG 
482 (the payment for DRG 483 is more than four times greater than the 
DRG 482 payment weight). In addition, we noted that many patients 
assigned to DRG 483 did not have code 96.72 recorded. We believed this 
was due, in part, to the limited number of procedure codes (six) that 
can be submitted on the current billing form and the fact that code 
96.72 did not affect the DRG assignment prior to FY 2003. The 
modification was the first attempt to refine DRGs 482 and 483 so that 
patients who receive long-term mechanical ventilation for more than 96 
hours are differentiated from those who receive mechanical ventilation 
for less than 96 hours. The modification was intended to ensure that 
patients who have a tracheostomy and continuous mechanical ventilation 
greater than 96 hours (code 96.72) would be assigned to DRG 483. By 
making the GROUPER recognize long-term mechanical ventilation and 
assigning those patients to the higher weighted DRG 483, we encouraged 
hospitals to be more aware of the importance of reporting code 96.72 
and to increase reporting of code 96.72 when, in fact, patients had 
been on the mechanical ventilator for greater than 96 hours. We stated 
in the August 1, 2002 final rule that, once we received more accurate 
data, we would give consideration to further modifying DRGs 482 and 483 
based on the presence of code 96.72.
    To assess the DRG payments for burn patients on mechanical 
ventilation, we analyzed FY 2003 MedPAR data for burn cases in the 
following DRGs to determine the frequency for which these burn cases 
were treated with continuous mechanical ventilation for 96 or more 
consecutive hours (code 96.72):

 DRG 483 (Tracheostomy With Mechanical Ventilation 96+ Hours or 
Principal Diagnosis Except Face, Mouth, and Neck Diagnoses)
 DRG 504 (Extensive 3rd Degree Burns With Skin Graft)
 DRG 505 (Extensive 3rd Degree Burns Without Skin Graft)
 DRG 506 (Full Thickness Burn With Skin Graft or Inhalation 
Injury With CC or Significant Trauma)
 DRG 507 (Full Thickness Burn With Skin Graft or Inhalation 
Injury Without CC or Significant Trauma)
 DRG 508 (Full Thickness Burn Without Skin Graft or Inhalation 
Injury With CC or Significant Trauma)
 DRG 509 (Full Thickness Burn Without Skin Graft or Inhalation 
Injury Without CC or Significant Trauma)
 DRG 510 (Nonextensive Burns With CC or Significant Trauma)
 DRG 511 (Nonextensive Burns Without CC or Significant Trauma)

    The following chart summarizes those findings:

----------------------------------------------------------------------------------------------------------------
                                                                                  Average length      Average
                               DRG                                     Count          of stay         charges
----------------------------------------------------------------------------------------------------------------
483--All cases..................................................          31,754           37.68     $210,631.94
483--Cases with code 96.72 reported.............................          19,669           36.54      195,171.66

[[Page 28212]]

 
483--Cases without code 96.72 reported..........................          12,085           39.52      235,794.39
504--All cases..................................................              98           30.54      191,645.49
504--Cases with code 97.62 reported.............................              19           25.79      264,095.16
504--Cases without code 96.72 reported..........................              79           31.68      174,220.89
505--All cases..................................................             119            2.96       18,619.78
505--Cases with code 96.72 reported.............................              20            7.70       42,613.00
505--Cases without code 96.72 reported..........................              99            2.00       13,772.67
506--All cases..................................................             754           16.15       61,370.63
506--Cases with code 96.72 reported.............................              54           20.13      138,272.46
506--Cases without code 96.72 reported..........................             700           15.85       55,438.20
507--All cases..................................................             236            8.78       25,891.89
507--Cases with code 96.72 reported.............................               1           38.00      137,132.00
507--Cases without code 96.72 reported..........................             235            8.66       25,418.53
508--All cases..................................................             448            7.02       18,332.46
508--Cases with code 96.72 reported.............................               5           10.40       83,171.80
508--Cases without code 96.72 reported..........................             443            6.98       17,600.64
509--All cases..................................................             117            4.32        8,994.71
509--Cases with code 96.72 reported.............................               0               0               0
509--Cases without code 96.72 reported..........................             117            4.32        8,994.71
510--All cases..................................................           1,209            6.90       18,457.21
510--Cases with code 96.72 reported.............................              21           20.52       93,925.62
510--Cases without code 96.72 reported..........................           1,188            6.66       17,123.18
511--All cases..................................................             413            4.18       10,046.89
511--Cases with code 96.72 reported.............................               0               0               0
511--Cases without code 96.72 reported..........................             413            4.18       10,046.89
----------------------------------------------------------------------------------------------------------------

    We found 120 cases that reported code 96.72 within the 3,394 burn 
DRG cases (DRGs 504 through 511). Cases reporting code 96.72 have 
significantly longer average lengths of stay and average charges. The 
majority (54) of these cases that reported code 96.72 were in DRG 506. 
The cases with code 96.72 reported had average charges approximately 
1.5 times higher than other cases in DRG 506 without code 96.72.
    We noted that there were 21 cases that reported code 96.72 within 
DRG 510. Since the 21 patients were on continuous mechanical 
ventilation for 96 consecutive hours or more, it seems surprising that 
the principal diagnosis was listed as one of the nonextensive burn 
codes included in DRG 510. A closer review of these cases shows some 
questionable coding and reporting of information. It would appear that 
hospitals did not always correctly select the principal diagnosis (the 
reason after study that led to the hospital admission). For instance, 
one admission was for a second-degree burn of the ear. This patient was 
on a ventilator for over 96 hours. It would appear that the reason for 
the admission was a diagnosis other than the burn of the ear. Other 
cases where the patient received long-term mechanical ventilation 
included those with a principal diagnosis of first degree burn of the 
face, second degree burn of the nose, second degree burn of the lip, 
and an unspecified burn of the foot. These four cases reported average 
charges ranging from $48,551 to $186,824 and had lengths of stay 
ranging from 8 to 36 days.
    The impact of long-term mechanical ventilation is quite clear on 
burn cases as was shown by the data above. Therefore, we are proposing 
to modify the burn DRGs 504 through 509 under MDC 22 to recognize this 
impact. We are proposing to modify DRG 504 and DRG 505 so that code 
96.72 will be assigned to these DRGs when there is a principal 
diagnosis of extensive third degree burns or full thickness burns 
(those cases currently assigned to DRGs 504 through 509). In other 
words, when cases currently in DRGs 506 through 509 also have code 
96.72 reported, they would now be assigned to DRGs 504 or 505. We are 
proposing to modify the titles of DRGs 504 and 505 to reflect the 
proposed changes in reporting code 96.72 as follows:

 Proposed DRG 504 (Extensive Burns or Full Thickness Burns With 
Mechanical Ventilation 96+ Hours With Skin Graft)
 Proposed DRG 505 (Extensive Burns or Full Thickness Burns With 
Mechanical Ventilation 96+ Hours Without Skin Graft)

    Cases currently assigned to DRGs 504 and 505 that do not entail 96+ 
hours of mechanical ventilation will continue to be assigned to DRGs 
504 and 505 because they would have extensive burns, as required by the 
DRG logic.
    We are not proposing to include DRG 510 and DRG 511 within this 
revised DRG logic. Cases currently assigned to DRG 510 or DRG 511 that 
also report code 96.72 would not be reassigned to DRGs 504 and 505. We 
recommend that hospitals examine cases that are assigned to DRG 510 or 
DRG 511 and that have code 96.72 to determine if there are possible 
coding problems or other issues. As stated earlier, in examining 
reported cases within DRG 510, we noted several cases with code 96.72 
that appear to have an incorrect principal diagnosis. It would appear 
that the principal diagnosis may more appropriately be related to an 
inhalation injury, if the injury was present at the time of admission.
    We are specifically seeking comments on our proposal to move cases 
reporting code 96.72 from DRGs 506 through 509 and assign them to DRGs 
504 and 505. We also are seeking comments on our proposal not to 
include DRGs 510 and 511 in this proposed revision.
9. Pre-MDC: Tracheostomy
    In the August 1, 2002 IPPS final rule (67 FR 49996), for FY 2003, 
we modified DRG 482 (Tracheostomy for Face, Mouth, and Neck Diagnoses) 
and DRG 483 (Tracheostomy With Mechanical Ventilation 96+ Hours or 
Principal Diagnosis Except Face, Mouth, and Neck Diagnoses) to 
recognize procedure code 96.72 (Continuous mechanical ventilation 96+ 
hours) in the DRG 483 assignment. As discussed earlier, we were 
concerned about an underreporting of code 96.72 and wanted to encourage 
increased reporting of this code.
    We examined cases in the MedPAR file in which code 96.72 was 
reported

[[Page 28213]]

within DRGs 482 and 483. The following chart illustrates the average 
charges and lengths of stays for cases within DRGs 482 and 483 with and 
without code 96.72 reported:

----------------------------------------------------------------------------------------------------------------
                                                                                  Average length      Average
                               DRG                                     Count          of stay         charges
----------------------------------------------------------------------------------------------------------------
482--All cases..................................................           3,557           11.77      $45,419.10
482--Cases with code 96.72......................................              22           31.64      137,880.41
482--Cases without code 96.72...................................           3,535           11.64       44,843.67
483--All cases..................................................          31,754           37.68      210,631.94
483--Cases with code 96.72......................................          19,669           36.54      195,171.66
483--Cases without code 96.72...................................          12,085           39.52      235,794.39
----------------------------------------------------------------------------------------------------------------

    Of the 3,557 cases reported in DRG 482, only 22 cases reported code 
96.72. These 22 cases did not have a tracheostomy performed. All 22 
cases reported code 30.4 (Laryngectomy), which also leads to an 
assignment of DRG 482. It would appear that the long-term mechanical 
ventilation was performed through an endotracheal tube instead of 
through a tracheostomy. While the average charges for DRG 482 cases 
with code 96.72 reported were significantly higher than the average 
charges for other cases in the DRG, we do not believe that the very 
limited number of cases (22) warrants proposing a DRG modification. 
Therefore, we are not proposing any modification for DRG 482 at this 
time. We will continue to monitor cases assigned to this DRG.
    In DRG 483, 19,669 cases were reported with code 96.72. However, 
the data were counter-intuitive. While one would expect to find higher 
average charges for cases reported with code 96.72, the opposite is the 
case. Cases in DRG 483 reported with code 96.72 had average charges 
that were $40,623 lower than those not reported with code 96.72. 
Clearly, the presence or absence of code 96.72 does not explain 
differences in charges for patients within DRG 483.
    As stated earlier, we are concerned that hospitals may not always 
report code 96.72 because of space limitations. The electronic billing 
system limits the number of procedure codes that can be reported to six 
codes. We then looked at whether or not another major O.R. procedure is 
performed in addition to a tracheostomy. The DRG 483 logic requires 
that all patients assigned to DRG 483 have a tracheostomy. We examined 
cases in DRG 483 in the MedPAR file and discovered that those patients 
in DRG 483 who have a major procedure performed in addition to the 
tracheostomy have higher charges. A major procedure is a procedure 
whose code is included on the list that would be assigned to DRG 468 
(Extensive O.R. Procedure Unrelated to Principal Diagnosis), except for 
tracheostomy codes 31.21 and 31.29. Currently, this additional O.R. 
procedure does not affect the DRG assignment for cases assigned to DRG 
483. The following chart reflects our findings.

----------------------------------------------------------------------------------------------------------------
                                                                                  Average length      Average
                               DRG                                     Count          of stay         Charges
----------------------------------------------------------------------------------------------------------------
483--All Cases..................................................          31,754           37.68     $210,631.94
483--Cases with major O.R. procedure............................          15,664           42.70      255,914.00
483--Cases without major O.R. procedure.........................          12,867            32.7      168,890.20
----------------------------------------------------------------------------------------------------------------

    We found that cases of patients assigned to DRG 483 who had a major 
procedure (in addition to the required tracheostomy) had average 
charges that were $87,023 higher than the average charges for cases 
without a major O.R. procedure and an average length of stay of 5 days 
more than those without a major O.R. procedure. We found that the 
performance of an additional major O.R. procedure helps to identify the 
more expensive patients within DRG 483.
    Therefore, as a result of our findings, we are proposing to modify 
DRG 483 by dividing these cases into two new DRGs depending on whether 
or not there is a major O.R. procedure reported (in addition to the 
tracheostomy). We are proposing to delete DRG 483 and create two new 
DRGs as follows:

 Proposed new DRG 541 (Tracheostomy With Mechanical Ventilation 
96+ Hours or Principal Diagnosis Except Face, Mouth, and Neck Diagnoses 
With Major O.R. Procedure)
 Proposed new DRG 542 (Tracheostomy With Mechanical Ventilation 
96+ Hours or Principal Diagnosis Except Face, Mouth and Neck Diagnoses 
Without Major O.R. Procedure)

    We are specifically seeking comments on our proposal to delete DRG 
483 and replace it with two proposed new DRGs by splitting the 
assignment of cases on the basis of the performance of a major O.R. 
procedure (in addition to the tracheostomy).
10. Medicare Code Editor (MCE) Changes
    [If you choose to comment on issues in this section, please include 
the caption ``Medicare Code Editor'' at the beginning of your comment.]
    As explained under section II.B.1. of this preamble, the Medicare 
Code Editor (MCE) is a software program that detects and reports errors 
in the coding of Medicare claims data. In this proposed rule, we are 
proposing to make changes to three of the edits in the MCE.
    a. Edit 11 (Noncovered Procedures) in the MCE contains codes that 
describe procedures for which Medicare does not provide reimbursement. 
We received a request to remove procedure codes relating to stem cell 
transplants from Edit 11 to conform the MCE edit to our published 
coverage decisions in the Medicare Coverage Issues Manual. In 
accordance with chapter 13, section 4 of the Program Integrity Manual 
(PIM), contractor discretion exists to cover diagnoses that are not 
explicitly stated in a national coverage decision as noncovered. 
Specifically this section states: that ``a local medical review policy 
(LMRP)'' must be clear, concise, properly formatted and not restrict or 
conflict with NCDs or coverage provision in interpretive manuals. If an 
NCD or coverage provision in an interpretive manual states that a given

[[Page 28214]]

item is ``covered for diagnoses/conditions A, B, and C,'' contractors 
may not use that as a basis to develop LMRP to cover only ``diagnosis/
conditions A, B, C''. When an NCD or coverage provision in an 
interpretive manual does not exclude coverage for other diagnoses/
conditions, contractors must allow for individual consideration unless 
the LMRP supports automatic denial for some or all of those other 
diagnoses/conditions.''
    The national coverage decision on stem cell transplantation 
provides for coverage of certain diagnoses and excludes coverage for 
other diagnoses. However, the vast majority of diagnoses are not 
mentioned as either covered or noncovered. In accordance with the 
above-cited provision of the PIM, contractors must allow for individual 
consideration of these diagnoses. Thus, they are not appropriate for 
inclusion in the edit for noncovered procedures.
    We agree that we need to make conforming changes relating to stem 
cell transplants. Therefore, we are proposing the following restructure 
of Edit 11:
    This list contains ICD-9-CM procedure codes identified as 
``Noncovered Procedures'' that are always considered noncovered 
procedures:

 11.71, Keratomileusis
 11.72, Keratophakia
 11.75, Radial keratotomy
 11.76, Epikeratophakia
 36.32, Other transmyocardial revascularization
 37.35, Partial ventriculectomy
 37.52, Implantation of total replacement heart system
 37.53, Replacement or repair of thoracic unit of total 
replacement heart system
 37.54, Replacement or repair of other implantable component of 
total replacement heart system
 39.28, Extracranial-intracranial (EC-IC) vascular bypass
 44.93, Insertion of gastric bubble (balloon)
 50.51, Auxiliary liver transplant
 52.83, Heterotransplant of pancreas
 57.96, Implantation of electronic bladder stimulator
 57.97, Replacement of electronic bladder stimulator
 63.70, Male sterilization procedure, not otherwise specified
 63.71, Ligation of vas deferens
 63.72, Ligation of spermatic cord
 63.73, Vasectomy
 64.5, Operations for sex transformation, not elsewhere 
classified
 66.21, Bilateral endoscopic ligation and crushing of fallopian 
tubes
 66.22, Bilateral endoscopic ligation and division of fallopian 
tubes
 66.29, Other bilateral endoscopic destruction or occlusion of 
fallopian tubes
 66.31, Other bilateral ligation and crushing of fallopian 
tubes
 66.32, Other bilateral ligation and division of fallopian 
tubes
 66.39, Other bilateral destruction or occlusion of fallopian 
tubes
 98.52, Extracorporeal shockwave lithotripsy [ESWL] of the 
gallbladder and/or bile duct
 98.59, Extracorporeal shockwave lithotripsy of other sites

    The following list contains ICD-9-CM procedure codes identified as 
``Noncovered Procedures'' only when any of the following diagnoses are 
present as either a principal or secondary diagnosis.

Procedure List

 41.01, Autologous bone marrow transplant without purging
 41.04, Autologous hematopoietic stem cell transplant without 
purging
 41.07, Autologous hematopoietic stem cell transplant with 
purging
 41.09, Autologous bone marrow transplant with purging

Principal or Secondary Diagnosis List

 204.00, Acute lymphoid leukemia, without mention of remission
 205.00, Acute myeloid leukemia, without mention of remission
 206.00, Acute monocytic leukemia, without mention of remission
 207.00, Acute erythremia and erythroleukemia, without mention 
of remission
 208.00, Acute leukemia of unspecified cell type, without 
mention of remission
 205.10, Acute myeloid leukemia, in remission
 205.11, Chronic myeloid leukemia, in remission

    The following list contains ICD-9-CM procedure codes identified as 
``Noncovered Procedures'' only when any of the following diagnoses are 
present as either a principal or secondary diagnosis.

Procedure List

 41.02, Allogeneic bone marrow transplant with purging
 41.03, Allogeneic bone marrow transplant without purging
 41.05, Allogeneic hematopoietic stem cell transplant without 
purging
 41.08, Allogeneic hematopoietic stem cell transplant with 
purging

Principal or Secondary Diagnosis List

 203.00, Multiple myeloma, without mention of remission

 203.01, Multiple myeloma, in remission

    The following list contains ICD-9-CM procedure codes identified as 
``Non-Covered Procedures'' except when there is at least one principal 
or secondary diagnosis code present from both list 1 and list 2.

Procedure List

 52.80, Pancreatic transplant, not otherwise specified
 52.82, Homotransplant of pancreas

Procedure List 1

 250.00, Diabetes mellitus without mention of complication, 
type II [non-insulin dependent type] [NIDDM type] [adult-onset type] or 
unspecified type, not stated as uncontrolled
 250.01, Diabetes mellitus without mention of complication, 
type I [insulin dependent type] [IDDM] [juvenile type], not stated as 
uncontrolled
 250.02, Diabetes mellitus without mention of complication, 
type II [non-insulin dependent type] [NIDDM type] [adult-onset type] or 
unspecified type, uncontrolled
 250.03, Diabetes mellitus without mention of complication, 
type I [insulin dependent type] [IDDM type] [juvenile type], 
uncontrolled
 250.10, Diabetes with ketoacidosis, type II [non-insulin 
dependent type] [NIDDM type] [adult-onset type] or unspecified type, 
not stated as uncontrolled
 250.11, Diabetes with ketoacidosis, type I [insulin dependent 
type] [IDDM] [juvenile type], not stated as uncontrolled
 250.12, Diabetes with ketoacidosis, type II [non-insulin 
dependent type] [NIDDM type] [adult-onset type] or unspecified type, 
uncontrolled
 250.13, Diabetes with ketoacidosis, type I [insulin dependent 
type] [IDDM type] [juvenile type], uncontrolled
 250.20, Diabetes with hyperosmolarity, type II [non-insulin 
dependent type] [NIDDM type] [adult-onset type] or unspecified type, 
not stated as uncontrolled
 250.21, Diabetes with hyperosmolarity, type I [insulin 
dependent type] [IDDM] [juvenile type], not stated as uncontrolled
 250.22, Diabetes with hyperosmolarity, type II [non-insulin 
dependent type] [NIDDM type] [adult-onset type] or unspecified type, 
uncontrolled
 250.23, Diabetes with hyperosmolarity, type I [insulin 
dependent type] [IDDM] [juvenile type], uncontrolled
 250.30, Diabetes with other coma, type II [non-insulin 
dependent type]

[[Page 28215]]

[NIDDM type] [adult-onset type] or unspecified type, not stated as 
uncontrolled
 250.31, Diabetes with other coma, type I [insulin dependent 
type] [IDDM] [juvenile type], not stated as uncontrolled
 250.32, Diabetes with other coma, type II [non-insulin 
dependent type] [NIDDM type] [adult-onset type] or unspecified type, 
uncontrolled
 250.33, Diabetes with other coma, type I [insulin dependent 
type] [IDDM] [juvenile type], uncontrolled, type I [insulin dependent 
type] [IDDM type] [juvenile type], uncontrolled
 250.40, Diabetes with renal manifestation, type II [non-
insulin dependent type] [NIDDM type] [adult-onset type] or unspecified 
type, not stated as uncontrolled
 250.41, Diabetes with renal manifestation, type I [insulin 
dependent type] [IDDM] [juvenile type], not stated as uncontrolled
 250.42, Diabetes with renal manifestation, type II [non-
insulin dependent type] [NIDDM type] [adult-onset type] or unspecified 
type, uncontrolled
 250.43, Diabetes with renal manifestation, type I [insulin 
dependent type] [IDDM type] [juvenile type], uncontrolled
 205.50, Diabetes with ophthalmic manifestations, type II [non-
insulin dependent type] [NIDDM type] [adult-onset type] or unspecified 
type, not stated as uncontrolled
 205.51, Diabetes with ophthalmic manifestations, type I 
[insulin dependent type] [IDDM] [juvenile type], not stated as 
uncontrolled
 205.52, Diabetes with ophthalmic manifestations, type II [non-
insulin dependent type] [NIDDM type] [adult-onset type] or unspecified 
type, uncontrolled
 205.53, Diabetes with ophthalmic manifestations, type I 
[insulin dependent type] [IDDM type] [juvenile type], uncontrolled
 250.60, Diabetes with neurological manifestations, type II 
[non-insulin dependent type] [NIDDM type] [adult-onset type] or 
unspecified type, not stated as uncontrolled
 250.61, Diabetes with neurological manifestations, type I 
[insulin dependent type] [IDDM] [juvenile type], not stated as 
uncontrolled
 250.62, Diabetes with neurological manifestations, type II 
[non-insulin dependent type] [NIDDM type] [adult-onset type] or 
unspecified type, uncontrolled
 250.63, Diabetes with neurological manifestations, type I 
[insulin dependent type] [IDDM type] [juvenile type], uncontrolled
 250.70, Diabetes with peripheral circulatory disorders, type 
II [non-insulin dependent type] [NIDDM type] [adult-onset type] or 
unspecified type, not stated as uncontrolled
 250.71, Diabetes with peripheral circulatory disorders type I 
[insulin dependent type] [IDDM] [juvenile type], not stated as 
uncontrolled
 250.72, Diabetes with peripheral circulatory disorders, type 
II [non-insulin dependent type] [NIDDM type] [adult-onset type] or 
unspecified type, uncontrolled
 250.73, Diabetes with peripheral circulatory disorders, type I 
[insulin dependent type] [IDDM type] [juvenile type], uncontrolled
 250.80, Diabetes with other specified manifestations, type II 
[non-insulin dependent type] [NIDDM type] [adult-onset type] or 
unspecified type, not stated as uncontrolled
 250.81, Diabetes with other specified manifestations, type I 
[insulin dependent type] [IDDM] [juvenile type], not stated as 
uncontrolled
 250.82, Diabetes with other specified manifestations, type II 
[non-insulin dependent type] [NIDDM type] [adult-onset type] or 
unspecified type, uncontrolled
 250.83, Diabetes with other specified manifestations, type I 
[insulin dependent type] [IDDM] [juvenile type], uncontrolled
 250.90, Diabetes with unspecified complication, type II [non-
insulin dependent type] [NIDDM type] [adult-onset type] or unspecified 
type, not stated as uncontrolled
 250.91, Diabetes with unspecified complication, type I 
[insulin dependent type] [IDDM] [juvenile type], not stated as 
uncontrolled
 250.92, Diabetes with unspecified complication, type II [non-
insulin dependent type] [NIDDM type] [adult-onset type] or unspecified 
type, uncontrolled
 250.93, Diabetes with unspecified complication, type I 
[insulin dependent type] [IDDM] [juvenile type], uncontrolled

Diagnosis List 2

 403.01, Malignant hypertensive renal disease, with renal 
failure
 403.11, Benign hypertensive renal disease, with renal failure
 403.91, Unspecified hypertensive renal disease, with renal 
failure
 404.02, Malignant hypertensive heart and renal disease, with 
renal failure
 404.03, Malignant hypertensive heart and renal disease, with 
heart failure and renal failure
 404.12, Benign hypertensive heart and renal disease, with 
renal failure
 404.13, Benign hypertensive heart and renal disease, with 
heart failure and renal failure
 404.92, Unspecified hypertensive heart and renal disease, with 
renal failure
 404.93, Unspecified hypertensive heart and renal disease, with 
heart failure and renal failure
 585, Chronic renal failure
 V42.0, Organ or tissue replaced by transplant, kidney
 V43.89, Organ or tissue replaced by other means, other

    b. Edit 6 (Manifestations Not Allowed As Principal Diagnosis) in 
the MCE contains codes that describe the manifestation of an underlying 
disease, not the disease itself, and therefore, should not be used as a 
principal diagnosis. The following codes describe manifestations of an 
underlying disease; they should not be used as a principal diagnosis 
according to ICD-9-CM coding convention. Therefore, we are proposing to 
add the following diagnosis codes to Edit 6:

 289.52, Splenic sequestration
 571.3, Acute chest syndrome
 785.52, Septic shock

    Coding conventions in the ICD-9-CM Diagnostic Tabular List specify 
that etiologic conditions be coded first.
    c. Edit 9 (Unacceptable Principal Diagnoses) contains codes ``that 
describe a circumstance which influences an individual's health status 
but is not a current illness of injury; therefore, these codes are 
considered unacceptable as a principal diagnosis.'' (This definition 
can be found on page 1094 of the DRG Definitions Manual, Version 21.0). 
Therefore, these codes are considered unacceptable as a principal 
diagnosis. Last year, we became aware that two codes should be removed 
from this list, as they can be legitimate causes for inpatient 
admission. However, we were made aware of this too late in the process 
to make a change to this edit prior to FY 2004. We will now be able to 
make the necessary system changes before the start of FY 2005. 
Therefore, in this proposed rule, we are proposing to remove the 
following codes from Edit 9:

 V53.01, Adjustment of cerebral ventricular (communicating) 
shunt
 V53.02, Adjustment of neuropacemaker (brain) (peripheral 
nerve) (spinal cord)
11. Surgical Hierarchies
    [If you choose to comment on the issues in this section, please 
include the caption ``Surgical Hierarchies'' at the beginning of your 
comment.]

[[Page 28216]]

    Some inpatient stays entail multiple surgical procedures, each one 
of which, occurring by itself, could result in assignment of the case 
to a different DRG within the MDC to which the principal diagnosis is 
assigned. Therefore, it is necessary to have a decision rule within the 
GROUPER by which these cases are assigned to a single DRG. The surgical 
hierarchy, an ordering of surgical classes from most resource-intensive 
to least resource-intensive, performs that function. Application of 
this hierarchy ensures that cases involving multiple surgical 
procedures are assigned to the DRG associated with the most resource-
intensive surgical class.
    Because the relative resource intensity of surgical classes can 
shift as a function of DRG reclassification and recalibrations, we 
reviewed the surgical hierarchy of each MDC, as we have for previous 
reclassifications and recalibrations, to determine if the ordering of 
classes coincides with the intensity of resource utilization.
    A surgical class can be composed of one or more DRGs. For example, 
in MDC 11, the surgical class ``kidney transplant'' consists of a 
single DRG (DRG 302) and the class ``kidney, ureter and major bladder 
procedures'' consists of three DRGs (DRGs 303, 304, and 305). 
Consequently, in many cases, the surgical hierarchy has an impact on 
more than one DRG. The methodology for determining the most resource-
intensive surgical class involves weighting the average resources for 
each DRG by frequency to determine the weighted average resources for 
each surgical class. For example, assume surgical class A includes DRGs 
1 and 2 and surgical class B includes DRGs 3, 4, and 5. Assume also 
that the average charge of DRG 1 is higher than that of DRG 3, but the 
average charges of DRGs 4 and 5 are higher than the average charge of 
DRG 2. To determine whether surgical class A should be higher or lower 
than surgical class B in the surgical hierarchy, we would weight the 
average charge of each DRG in the class by frequency (that is, by the 
number of cases in the DRG) to determine average resource consumption 
for the surgical class. The surgical classes would then be ordered from 
the class with the highest average resource utilization to that with 
the lowest, with the exception of ``other O.R. procedures'' as 
discussed below.
    This methodology may occasionally result in assignment of a case 
involving multiple procedures to the lower-weighted DRG (in the 
highest, most resource-intensive surgical class) of the available 
alternatives. However, given that the logic underlying the surgical 
hierarchy provides that the GROUPER search for the procedure in the 
most resource-intensive surgical class, this result is unavoidable.
    We note that, notwithstanding the foregoing discussion, there are a 
few instances when a surgical class with a lower average charge is 
ordered above a surgical class with a higher average charge. For 
example, the ``other O.R. procedures'' surgical class is uniformly 
ordered last in the surgical hierarchy of each MDC in which it occurs, 
regardless of the fact that the average charge for the DRG or DRGs in 
that surgical class may be higher than that for other surgical classes 
in the MDC. The ``other O.R. procedures'' class is a group of 
procedures that are only infrequently related to the diagnoses in the 
MDC but are still occasionally performed on patients in the MDC with 
these diagnoses. Therefore, assignment to these surgical classes should 
only occur if no other surgical class more closely related to the 
diagnoses in the MDC is appropriate.
    A second example occurs when the difference between the average 
charges for two surgical classes is very small. We have found that 
small differences generally do not warrant reordering of the hierarchy 
because, as a result of reassigning cases on the basis of the hierarchy 
change, the average charges are likely to shift such that the higher-
ordered surgical class has a lower average charge than the class 
ordered below it.
    Based on the preliminary recalibration of the DRGs, we are 
proposing modifications of the surgical hierarchy as set forth below.
    At this time, we are proposing to revise the surgical hierarchy for 
the pre-MDC DRGs and MDC 8 (Diseases and Disorders of the 
Musculoskeletal System and Connective Tissue).
    In the pre-MDC DRGs, we are proposing to reorder DRG 541 
(Tracheostomy With Mechanical Ventilation 96+ Hours or Principal 
Diagnosis Except Face, Mouth, and Neck Diagnoses With Major O.R. 
Procedure) and DRG 542 (Tracheostomy With Mechanical Ventilation 96+ 
Hours or Principal Diagnosis Except Face, Mouth, and Neck Diagnoses 
Without Major O.R. Procedure) above DRG 480 (Liver Transplant).
    In MDC 8, we are proposing to--
     Reorder DRG 496 (Combined Anterior/Posterior Spinal 
Fusion), DRG 497 (Spinal Fusion Except Cervical With CC), and DRG 498 
(Spinal Fusion Except Cervical Without CC) above DRG 471 (Bilateral or 
Multiple Major Joint Procedures of the Lower Extremity).
     Reorder DRG 519 (Cervical Spinal Fusion With CC) and DRG 
520 (Cervical Spinal Fusion Without CC) above DRG 216 (Biopsies of the 
Musculoskeletal System and Connective Tissue).
     Reorder DRG 213 (Amputation for the Musculoskeletal System 
and Connective Tissue Disorders) above DRG 210 (Hip and Femur 
Procedures Except Major Joint Age > 17 With CC), DRG 211 (Hip and Femur 
Procedures Except Major Joint Age > 17 Without CC), and DRG 212 (Hip 
and Femur Procedures Except Major Joint Age 0-17).
     Reorder DRG 499 (Back and Neck Procedures Except Spinal 
Fusion With CC) and DRG 500 (Back and Neck Procedures Except Spinal 
Fusion Without CC) above DRG 218 (Lower Extremity and Humerus 
Procedures Except Hip, Foot, and Femur Age > 17 With CC), DRG 219 
(Lower Extremity and Humerus Procedures Except Hip, Foot, and Femor Age 
> 17 Without CC), and DRG 220 (Lower Extremity and Humerus Procedures 
Except Hip, Foot, and Femur Age 0-17).
12. Refinement of Complications and Comorbidities (CC) List
    [If you choose to comment on issues in this section, please include 
the caption ``CC List'' at the beginning of your comment.]
    In the September 1, 1987 final notice (52 FR 33143) concerning 
changes to the DRG classification system, we modified the GROUPER logic 
so that certain diagnoses included on the standard list of CCs would 
not be considered valid CCs in combination with a particular principal 
diagnosis. We created the CC Exclusions List for the following reasons: 
(1) To preclude coding of CCs for closely related conditions; (2) to 
preclude duplicative or inconsistent coding from being treated as CCs; 
and (3) to ensure that cases are appropriately classified between the 
complicated and uncomplicated DRGs in a pair. We developed this list of 
diagnoses, using physician panels, to include those diagnoses that, 
when present as a secondary condition, would be considered a 
substantial complication or comorbidity. In previous years, we have 
made changes to the list of CCs, either by adding new CCs or deleting 
CCs already on the list. At this time, we are not proposing to delete 
any of the diagnosis codes on the CC list.
    In the May 19, 1987 proposed notice (52 FR 18877) and the September 
1, 1987 final notice (52 FR 33154), we explained that the excluded 
secondary diagnoses were established using the following five 
principles:

[[Page 28217]]

     Chronic and acute manifestations of the same condition 
should not be considered CCs for one another.
     Specific and nonspecific (that is, not otherwise specified 
(NOS)) diagnosis codes for the same condition should not be considered 
CCs for one another.
     Codes for the same condition that cannot coexist, such as 
partial/total, unilateral/bilateral, obstructed/unobstructed, and 
benign/malignant, should not be considered CCs for one another.
     Codes for the same condition in anatomically proximal 
sites should not be considered CCs for one another.
     Closely related conditions should not be considered CCs 
for one another.
    The creation of the CC Exclusions List was a major project 
involving hundreds of codes. We have continued to review the remaining 
CCs to identify additional exclusions and to remove diagnoses from the 
master list that have been shown not to meet the definition of a CC.\1\
---------------------------------------------------------------------------

    \1\ See the September 30, 1988 final rule (53 FR 38485) for the 
revision made for the discharges occurring in FY 1989; the September 
1, 1989 final rule (54 FR 36552) for the FY 1990 revision; the 
September 4, 1990 final rule (55 FR 36126) for the FY 1991 revision; 
the August 30, 1991 final rule (56 FR 43209) for the FY 1992 
revision; the September 1, 1992 final rule (57 FR 39753) for the FY 
1993 revision; the September 1, 1993 final rule (58 FR 46278) for 
the FY 1994 revisions; the September 1, 1994 final rule (59 FR 
45334) for the FY 1995 revisions; the September 1, 1995 final rule 
(60 FR 45782) for the FY 1996 revisions; the August 30, 1996 final 
rule (61 FR 46171) for the FY 1997 revisions; the August 29, 1997 
final rule (62 FR 45966) for the FY 1998 revisions; the July 31, 
1998 final rule (63 FR 40954) for the FY 1999 revisions, the August 
1, 2000 final rule (65 FR 47064) for the FY 2001 revisions; the 
August 1, 2001 final rule (66 FR 39851) for the FY 2002 revisions; 
the August 1, 2002 final rule (67 FR 49998) for the FY 2003 
revisions; and the August 1, 2003 final rule (68 FR 45364) for the 
FY 2004 revisions.) In the July 30, 1999 final rule (64 FR 41490), 
we did not modify the CC Exclusions List for FY 2000 because we did 
not make any changes to the ICD-9-CM codes for FY 2000.
---------------------------------------------------------------------------

    We are proposing a limited revision of the CC Exclusions List to 
take into account the proposed changes that will be made in the ICD-9-
CM diagnosis coding system effective October 1, 2004. (See section 
II.B.15. of this preamble for a discussion of ICD-9-CM changes.) We are 
proposing these changes in accordance with the principles established 
when we created the CC Exclusions List in 1987.
    Tables 6G and 6H in the Addendum to this proposed rule contain the 
proposed revisions to the CC Exclusions List that would be effective 
for discharges occurring on or after October 1, 2004. Each table shows 
the principal diagnoses with changes to the excluded CCs. Each of these 
principal diagnoses is shown with an asterisk, and the additions or 
deletions to the CC Exclusions List are provided in an indented column 
immediately following the affected principal diagnosis.
    CCs that are added to the list are in Table 6G--Additions to the CC 
Exclusions List. Beginning with discharges on or after October 1, 2004, 
the indented diagnoses would not be recognized by the GROUPER as valid 
CCs for the asterisked principal diagnosis.
    CCs that are deleted from the list are in Table 6H--Deletions from 
the CC Exclusions List. Beginning with discharges on or after October 
1, 2004, the indented diagnoses would be recognized by the GROUPER as 
valid CCs for the asterisked principal diagnosis.
    Copies of the original CC Exclusions List applicable to FY 1988 can 
be obtained from the National Technical Information Service (NTIS) of 
the Department of Commerce. It is available in hard copy for $152.50 
plus shipping and handling. A request for the FY 1988 CC Exclusions 
List (which should include the identification accession number (PB) 88-
133970) should be made to the following address: National Technical 
Information Service, United States Department of Commerce, 5285 Port 
Royal Road, Springfield, VA 22161; or by calling (800) 553-6847.
    Users should be aware of the fact that all revisions to the CC 
Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996, 
1997, 1998, 1999, 2001, 2002, 2003, and 2004) and those in Tables 6G 
and 6H of this proposed rule for FY 2005 must be incorporated into the 
list purchased from NTIS in order to obtain the CC Exclusions List 
applicable for discharges occurring on or after October 1, 2004. (Note: 
There was no CC Exclusions List in FY 2000 because we did not make 
changes to the ICD-9-CM codes for FY 2000.)
    Alternatively, the complete documentation of the GROUPER logic, 
including the current CC Exclusions List, is available from 3M/Health 
Information Systems (HIS), which, under contract with CMS, is 
responsible for updating and maintaining the GROUPER program. The 
current DRG Definitions Manual, Version 21.0, is available for $225.00, 
which includes $15.00 for shipping and handling. Version 22.0 of this 
manual, which includes the final FY 2004 DRG changes, is available for 
$225.00. These manuals may be obtained by writing 3M/HIS at the 
following address: 100 Barnes Road, Wallingford, CT 06492; or by 
calling (203) 949-0303. Please specify the revision or revisions 
requested.
13. Review of Procedure Codes in DRGs 468, 476, and 477
    [If you choose to comment on issues in this section, please include 
the caption ``DRGs 468, 476, and 477'' at the beginning of your 
comment.]
    Each year, we review cases assigned to DRG 468 (Extensive O.R. 
Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic O.R. 
Procedure Unrelated to Principal Diagnosis), and DRG 477 (Nonextensive 
O.R. Procedure Unrelated to Principal Diagnosis) to determine whether 
it would be appropriate to change the procedures assigned among these 
DRGs.
    DRGs 468, 476, and 477 are reserved for those cases in which none 
of the O.R. procedures performed are related to the principal 
diagnosis. These DRGs are intended to capture atypical cases, that is, 
those cases not occurring with sufficient frequency to represent a 
distinct, recognizable clinical group. DRG 476 is assigned to those 
discharges in which one or more of the following prostatic procedures 
are performed and are unrelated to the principal diagnosis:

 60.0, Incision of prostate
 60.12, Open biopsy of prostate
 60.15, Biopsy of periprostatic tissue
 60.18, Other diagnostic procedures on prostate and 
periprostatic tissue
 60.21, Transurethral prostatectomy
 60.29, Other transurethral prostatectomy
 60.61, Local excision of lesion of prostate
 60.69, Prostatectomy, not elsewhere classified
 60.81, Incision of periprostatic tissue
 60.82, Excision of periprostatic tissue
 60.93, Repair of prostate
 60.94, Control of (postoperative) hemorrhage of prostate
 60.95, Transurethral balloon dilation of the prostatic urethra
 60.96, Transurethral destruction of prostate tissue by 
microwave thermotherapy
 60.97, Other transurethral destruction of prostate tissue by 
other thermotherapy
 60.99, Other operations on prostate

    All remaining O.R. procedures are assigned to DRGs 468 and 477, 
with DRG 477 assigned to those discharges in which the only procedures 
performed are nonextensive procedures that are unrelated to the 
principal diagnosis.\2\
---------------------------------------------------------------------------

    \2\ In the August 1, 2003 final rule (68 FR 45365) we moved 
several procedures from DRG 468 to DRGs 476 and 477 because the 
procedures are nonextensive. The original list of the ICD-9-CM 
procedure codes for the procedures we consider nonextensive 
procedures, if performed with an unrelated principal diagnosis, was 
published in Table 6C in section IV. of the Addendum to the 
September 30, 1988 final rule (53 FR 38591). As part of the final 
rules published on September 4, 1990 (55 FR 36135), August 30, 1991 
(56 FR 43212), September 1, 1992 (57 FR 23625), September 1, 1993 
(58 FR 46279), September 1, 1994 (59 FR 45336), September 1, 1995 
(60 FR 45783), August 30, 1996 (61 FR 46173), and August 29, 1997 
(62 FR 45981), we moved several other procedures from DRG 468 to DRG 
477, and some procedures from DRG 477 to DRG 468. No procedures were 
moved in FY 1999, as noted in the July 31, 1998 final rule (63 FR 
40962); in FY 2000, as noted in the July 30, 1999 final rule (64 FR 
41496); in FY 2001, as noted in the August 1, 2000 final rule (65 FR 
47064); or in FY 2002, as noted in the August 1, 2001 final rule (66 
FR 39852). In the August 1, 2002 final rule (67 FR 49999), we did 
not move any procedures from DRG 477. However, we did move 
procedures codes from DRG 468 and placed them in more clinically 
coherent DRGs.

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

[[Page 28218]]

a. Moving Procedure Codes From DRG 468 or DRG 477 to MDCs
    We annually conduct a review of procedures producing assignment to 
DRG 468 or DRG 477 on the basis of volume, by procedure, to see if it 
would be appropriate to move procedure codes out of these DRGs into one 
of the surgical DRGs for the MDC into which the principal diagnosis 
falls. The data are arrayed two ways for comparison purposes. We look 
at a frequency count of each major operative procedure code. We also 
compare procedures across MDCs by volume of procedure codes within each 
MDC.
    We identify those procedures occurring in conjunction with certain 
principal diagnoses with sufficient frequency to justify adding them to 
one of the surgical DRGs for the MDC in which the diagnosis falls. 
Based on this year's review, we did not identify any procedures in DRG 
477 that should be removed. Therefore, we are not proposing to move any 
procedures from DRG 477 to one of the surgical DRGs.
b. Reassignment of Procedures Among DRGs 468, 476, and 477
    We also annually review the list of ICD-9-CM procedures that, when 
in combination with their principal diagnosis code, result in 
assignment to DRGs 468, 476, and 477, to ascertain if any of those 
procedures should be reassigned from one of these three DRGs to another 
of the three DRGs based on average charges and the length of stay. We 
look at the data for trends such as shifts in treatment practice or 
reporting practice that would make the resulting DRG assignment 
illogical. If we find these shifts, we would propose to move cases to 
keep the DRGs clinically similar or to provide payment for the cases in 
a similar manner. Generally, we move only those procedures for which we 
have an adequate number of discharges to analyze the data. Based on a 
comment we received in response to last year's proposed rule (68 FR 
45366), we are proposing to move procedure code 51.23 (Laparoscopic 
cholecystectomy) from DRG 468 (Extensive O.R. Procedure Unrelated to 
Principal Diagnosis) into DRG 477 (Nonextensive O.R. Procedure 
Unrelated to Principal Diagnosis).
    The commenter suggested that a laparoscopic procedure was probably 
not an extensive O.R. procedure; it was more likely a nonextensive O.R. 
procedure. We agree and, therefore, are proposing this change. In 
addition, we are proposing to add several new procedure codes to DRGs 
476 and 477. These procedures are also listed on Table 6B--New 
Procedure Codes in the Addendum to this proposed rule. However, DRGs 
476 and 477 are not limited to one MDC, so the new codes are also 
included here for nonextensive cases in which the procedures are 
unrelated to the principal diagnosis:

 44.67, Laparoscopic procedures for creation of esophagogastric 
sphincteric competence
 44.68, Laparoscopic gastroplasty
 44.95, Laparoscopic gastric restrictive procedure
 44.96, Laparoscopic revision of gastric restrictive procedure
 44.97, Laparoscopic removal of gastric restrictive device(s)
 44.98, Laparoscopic adjustment of size of adjustable gastric 
restrictive device

    In DRG 476, the above codes are to be added to the section ``With 
or Without Operating Room Procedures'' in the GROUPER logic.
    We are not proposing to move any procedure codes from DRG 476 to 
DRGs 468 or 477, or from DRG 477 to DRGs 468 or 476.
c. Adding Diagnosis or Procedure Codes to MDCs
    Based on our review this year, we are not proposing to add any 
diagnosis codes to MDCs.
14. Pancreatic Islet Cell Transplantation in Clinical Trials
    [If you choose to comment on issues in this section, please include 
the caption ``Pancreatic Islet Cell Transplantation'' at the beginning 
of your comment.]
    Section 733(a) of Public Law 108-173 directs the Secretary, acting 
through the National Institute of Diabetes and Digestive and Kidney 
Disorders (NIDDKD) to conduct a clinical investigation of pancreatic 
islet cell transplantation that includes Medicare beneficiaries. 
Section 733(b) provides for Medicare payments, beginning no earlier 
than October 1, 2004, for the routine costs as well as the costs of the 
transplantation and appropriate related items and services for Medicare 
beneficiaries who are participating in a clinical trial as if such 
transplantation were covered under Medicare Part A or Part B. Routine 
costs are defined as reasonable and necessary routine patient care 
costs (as defined in the CMS Coverage Issues Manual, Section 30-1) 
including immunosuppressive drugs and other followup care. Section 
733(c)(2) defines transplantation and appropriate related items and 
services as items and services related to the acquisition and delivery 
of the pancreatic islet cell transplantation, notwithstanding any 
national noncoverage determination contained in the CMS Coverage Issues 
Manual.
    While the DRG payment will cover the transplant injection and the 
subsequent hospital stay, we are considering establishing an add-on 
payment to the DRG payment amount to reimburse the acquisition costs 
associated with islet cell procurement. Historically, organ acquisition 
costs have been reimbursed as a cost pass-through. However, islet cell 
transplants are not exactly the same as solid organ transplants. While 
solid pancreata are procured, islet cells are not transplanted in the 
solid organ state as are other types of organs. Rather, the pancreata 
are procured by an organ procurement organization (OPO) and are then 
sent to an islet cell resource center that extracts the islet cells 
from the pancreata and sends the cells on to the transplant center. 
Since the procurement and processing system for islet cell transplants 
is not the same as for solid organ transplants, we do not intend to pay 
for these costs as a pass through. With the anticipated small number of 
beneficiaries in the clinical trial and the Medicare program's 
unfamiliarity with the isolation process, we believe it is most 
appropriate at this time to have a set payment rate for acquisition 
costs, rather than attempting a case-by-case determination of the 
reasonableness of these costs in each institution. We note there is 
precedent to exclude acquisition costs from the pass-through payment 
process. For example, stem cell transplants and corneal transplants do 
not have acquisition costs reimbursed as a cost pass-through payment.
    The add-on payment would be a single amount that includes pre-
transplant tests and services, pancreas procurement, and islet 
isolation services. We are proposing to use an

[[Page 28219]]

add-on as opposed to increasing the DRG amount because the DRGs at 
issue are also applied in cases involving a variety of other procedures 
that do not include the costly islet cell acquisition required for this 
procedure. Thus, including these costs in the DRGs would have the 
potential of skewing the weights for all other DRGs. We are asking for 
specific comments on whether an add-on payment amount is the 
appropriate way to reimburse islet cell acquisition costs, or whether 
another methodology may be more appropriate.
    In addition, while we have some data available regarding the cost 
of pancreas procurement, we are specifically asking for any other data 
that support the costs of acquisition and the costs of isolation cell 
resource centers.
    Because we do not yet have enough data, we are unable to publish a 
proposed acquisition amount in this proposed rule. After analyzing data 
submitted during the comment period, other data acquired by CMS, and 
any suggested changes from the methodology proposed, we will issue the 
final organ acquisition payment amount in the IPPS final rule.
    Pancreatic islet cell transplantation during the clinical trial 
will be performed to decrease or eliminate the need for insulin in 
patients with Type I diabetes. Islet cells are acquired from a 
cadaveric pancreas donor (islet allotransplantation).
    As described in II.B.1. of this preamble, ICD-9-CM diagnosis and 
procedure codes are used to determine DRG assignments. In 1996, CMS 
(then HCFA) created codes for islet cell transplantation:

 52.84, Autotransplantation of cells of islets of Langerhans
 52.85, Allotransplantation of cells of islets of Langerhans

    The Medicare GROUPER does not consider codes 52.84 and 52.85 as 
O.R. procedures and, therefore, these codes do not move the case from a 
medical DRG into a surgical DRG unless another procedure is performed. 
Based on the circumstances noted above under which pancreatic islet 
cell transplantation would be performed, we identified the three most 
logical DRGs to which we believe cases would be assigned. If a patient 
has Type I diabetes mellitus with ESRD and a pancreatectomy is 
performed, the case would group to DRG 468 (Extensive O.R. Procedure 
Unrelated to Principal Diagnosis). If a patient has Type I diabetes 
mellitus with ESRD and is also receiving a kidney transplant 
(simultaneous kidney and islet transplantation), the case would group 
to DRG 302 (Kidney Transplant). If a patient has Type I diabetes 
mellitus with ESRD and a history of a kidney transplant and then has 
the islet cells inserted via an open approach, the case would group to 
DRG 315 (Other Kidney and Urinary Tract O.R. Procedures).
    As each case is assigned to a DRG based on all of the ICD-9-CM 
codes reported, cases could also be assigned to DRGs other than those 
mentioned above. In fact, our review of FY 2003 MedPAR data revealed 
that codes 52.84 and 52.85 were present in only four cases, and that 
each case was assigned to a different DRG. We found one case each in 
DRG 18 (Cranial and Peripheral Nerve Disorders With CC), DRG 192 
(Pancreas, Liver, and Shunt Procedures Without CC), DRG 207 (Disorders 
of the Biliary Tract With CC), and DRG 302 (Kidney Transplant).
    We are reluctant to propose assigning the islet cell codes to one 
specific DRG, as the islet cell infusion will have different 
indications depending on the merits of each case, as is shown from the 
MedPAR data mentioned above. In addition, we do not currently have 
accurate cost data or charges for patients in this type of clinical 
trial, which makes it difficult to determine an appropriate DRG weight. 
As a result, assignment of cases to a specific DRG might have the 
consequence of either overpaying or underpaying the cases. We believe 
that both of these consequences are unacceptable. Therefore, we are not 
proposing that cases involved in the clinical trials be assigned to one 
specific DRG for payment purposes. As we believe that these cases will 
be assigned to DRGs 302, 315, and 468, we are proposing to establish an 
add-on payment for cases in these three DRGs containing procedure codes 
52.84 or 52.85. As stated earlier, we will not be able to establish the 
amount of this add-on until we have determined procurement costs for 
the islet cells. We are soliciting information from transplant centers 
and organ procurement organizations on costs for these types of 
transplantations.
15. Changes to the ICD-9-CM Coding System
    [If you choose to comment on issues in this section, please include 
the caption ``ICD-9-CM Coding'' at the beginning of your comment.]
    As described in section II.B.1. of this preamble, the ICD-9-CM is a 
coding system that is used for the reporting of diagnoses and 
procedures performed on a patient. In September 1985, the ICD-9-CM 
Coordination and Maintenance Committee was formed. This is a Federal 
interdepartmental committee, co-chaired by the National Center for 
Health Statistics (NCHS) and CMS, charged with maintaining and updating 
the ICD-9-CM system. The Committee is jointly responsible for approving 
coding changes, and developing errata, addenda, and other modifications 
to the ICD-9-CM to reflect newly developed procedures and technologies 
and newly identified diseases. The Committee is also responsible for 
promoting the use of Federal and non-Federal educational programs and 
other communication techniques with a view toward standardizing coding 
applications and upgrading the quality of the classification system.
    The ICD-9-CM Manual contains the list of valid diagnosis and 
procedure codes. (The ICD-9-CM Manual is available from the Government 
Printing Office on CD-ROM for $25.00 by calling (202) 512-1800.) The 
NCHS has lead responsibility for the ICD-9-CM diagnosis codes included 
in the Tabular List and Alphabetic Index for Diseases, while CMS has 
lead responsibility for the ICD-9-CM procedure codes included in the 
Tabular List and Alphabetic Index for Procedures.
    The Committee encourages participation in the above process by 
health-related organizations. In this regard, the Committee holds 
public meetings for discussion of educational issues and proposed 
coding changes. These meetings provide an opportunity for 
representatives of recognized organizations in the coding field, such 
as the American Health Information Management Association (AHIMA), the 
American Hospital Association (AHA), and various physician specialty 
groups, as well as individual physicians, medical record 
administrators, health information management professionals, and other 
members of the public, to contribute ideas on coding matters. After 
considering the opinions expressed at the public meetings and in 
writing, the Committee formulates recommendations, which then must be 
approved by the agencies.
    The Committee presented proposals for coding changes for 
implementation in FY 2005 at public meetings held on April 3, 2003 and 
December 4-5, 2003, and finalized the coding changes after 
consideration of comments received at the meetings and in writing by 
January 12, 2004. Those coding changes are announced in Tables 6A 
through 6F in the Addendum to this proposed rule. Copies of the minutes 
of the procedure codes discussions at the Committee's 2003 meetings can 
be obtained from the CMS Web site: http://www.cms.gov/paymentsystems/icd9/ icd9/. The minutes of

[[Page 28220]]

the diagnoses codes discussions at the 2003 meetings are found at: 
http://www.cdc.gov/nchs/icd9.htm htm. Paper copies of these minutes 
are no longer available and the mailing list has been discontinued.
    For a report of procedure topics discussed at the April 1-2, 2004 
meeting, see the Summary Report at: http://www.cms.hhs.gov/paymentsystems/icd9/ icd9/. For a report of the diagnosis topics discussed at the 
April 1-2, 2004 meeting, see the Summary Report at: http:/www. cdc. 
gov/ nchs/ icd9. htm.
    We encourage commenters to address suggestions on coding issues 
involving diagnosis codes to: Donna Pickett, Co-Chairperson, ICD-9-CM 
Coordination and Maintenance Committee, NCHS, Room 2404, 3311 Toledo 
Road, Hyattsville, MD 20782. Comments may be sent by E-mail to: 
[email protected].
    Questions and comments concerning the procedure codes should be 
addressed to: Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination 
and Maintenance Committee, CMS, Center for Medicare Management, 
Hospital and Ambulatory Policy Group, Division of Acute Care, C4-08-06, 
7500 Security Boulevard, Baltimore, MD 21244-1850. Comments may be sent 
by E-mail to: [email protected].
    The ICD-9-CM code changes that have been approved will become 
effective October 1, 2004. The new ICD-9-CM codes are listed, along 
with their DRG classifications, in Tables 6A and 6B (New Diagnosis 
Codes and New Procedure Codes, respectively) in the Addendum to this 
proposed rule. As we stated above, the code numbers and their titles 
were presented for public comment at the ICD-9-CM Coordination and 
Maintenance Committee meetings. Both oral and written comments were 
considered before the codes were approved. In this proposed rule, we 
are only soliciting comments on the proposed DRG classification of 
these new codes.
    For codes that have been replaced by new or expanded codes, the 
corresponding new or expanded diagnosis codes are included in Table 6A. 
New procedure codes are shown in Table 6B. Diagnosis codes that have 
been replaced by expanded codes or other codes or have been deleted are 
in Table 6C (Invalid Diagnosis Codes). These invalid diagnosis codes 
will not be recognized by the GROUPER beginning with discharges 
occurring on or after October 1, 2004. Table 6D usually contains 
invalid procedure codes, however, for FY 2005, there are no invalid 
procedure codes. Revisions to diagnosis code titles are in Table 6E 
(Revised Diagnosis Code Titles), which also includes the DRG 
assignments for these revised codes. Table 6F includes revised 
procedure code titles for FY 2005.
    The first of the 2004 public meetings was held on April 1-2, 2004. 
In the September 7, 2001 final rule implementing the IPPS new 
technology add-on payments (66 FR 46906), we indicated we would attempt 
to include proposals for procedure codes that would describe new 
technology discussed and approved at the April meeting as part of the 
code revisions effective the following October.
    Section 503(a) of Public Law 108-173 includes a requirement for 
updating ICD-9-CM codes twice a year instead of the current process of 
annual updates on October 1 of each year. This requirement is included 
as part of the amendments to the Act relating to recognition of new 
technology under the IPPS. Section 503(a) amended section 1886(d)(5)(K) 
of the Act by adding a new clause (vii) which states that the 
``Secretary shall provide for the addition of new diagnosis and 
procedure codes in April 1 of each year, but the addition of such codes 
shall not require the Secretary to adjust the payment (or diagnosis-
related group classification) * * * until the fiscal year that begins 
after such date.'' Because this new statutory requirement will have a 
significant impact on health care providers, coding staff, publishers, 
system maintainers, software systems, among others, we are soliciting 
comments on our proposals described below to implement this 
requirement. This new requirement will improve the recognition of new 
technologies under the IPPS system by providing information on these 
new technologies at an earlier date. Data would be available 6 months 
earlier than would be possible with updates occurring only once a year 
on October 1. Many coding changes apply to longstanding medical issues.
    While the new requirement states that the Secretary shall not 
adjust the payment of the DRG classification for the April 1 new codes, 
the Department will have to update its DRG software and other systems 
in order to recognize and accept the new codes. We will also have to 
publicize the code changes and the need for a mid-year systems update 
by providers to capture the new codes. Hospitals will have to obtain 
the new code books and encoder updates, and make other system changes 
in order to capture and report the new codes. We are aware of the 
additional burden this will have on health care providers.
    The ICD-9-CM Coordination and Maintenance Committee has held its 
meetings in April and December of each year in order to update the 
codes and the applicable payment and reporting systems by October 1 of 
each year. Items are placed on the agenda for the ICD-9-CM Coordination 
and Maintenance Committee meeting if the request is received at least 2 
months prior to the meeting. This requirement allows time for staff to 
review and research the coding issues and prepare material for 
discussion at the meeting. It also allows time for the topic to be 
publicized in meeting announcements in the Federal Register as well as 
on the CMS Web site. The public decides whether or not to attend the 
meeting based on the topics listed on the agenda. In order to provide 
an update on April 1, it became clear that a December Committee meeting 
would not provide time to finalize and publicize these code revisions. 
Final decisions on code title revisions are currently made by March 1 
so that these titles can be included in the IPPS proposed rule. A 
complete addendum describing details of all changes to ICD-9-CM, both 
tabular and index, are publicized on CMS and NCHS web pages in May of 
each year. Publishers of coding books and software companies use this 
information to modify their products that are used by health care 
providers. This 5-month time period has proved to be necessary for 
hospitals and other providers to update their systems.
    A discussion of this timeline and the need for changes are included 
in the December 4-5, 2003 ICD-9-CM Coordination and Maintenance 
Committee minutes. The public provided comment that additional time 
would be needed to update hospital systems and obtain new code books 
and coding software. There was considerable concern expressed about the 
impact this new update would have on providers. Therefore, we are 
rescheduling the second Committee meeting for 2004. We have scheduled 
this meeting for October 7-8, 2004. Those who wish to have a coding 
issue discussed at the October Committee meeting would be required to 
submit their request by August 7, 2004. The Department will continue 
this process to accommodate all requestors who submit appropriate 
requests in a timely manner.
    We are proposing to implement section 503(a) by developing a 
mechanism for approving, in time for the April update, diagnoses and 
procedure code revisions needed to describe new technologies and 
medical services for purposes of the new technology add-on payment 
process. We are proposing the following process for

[[Page 28221]]

making these determinations. Topics considered during the October ICD-
9-CM Coordination and Maintenance Committee meeting would be considered 
for an April 1 update if a strong and convincing case is made by the 
requestor at the Committee's public meeting. The request must identify 
the reason why a new code is needed in April for purposes of the new 
technology process. The participants at the meeting and those reviewing 
the Committee meeting summary report would be provided the opportunity 
to comment on this expedited request. All other topics would be 
considered for the October 1 update. Participants at the Committee 
meeting would be encouraged to comment on all such requests.
    We believe that this proposal captures the intent of section 
503(a). This requirement was included in the provision revising the 
standards and process for recognizing new technology under the IPPS. In 
addition, the need for approval of new codes outside the existing cycle 
(October 1) arises most frequently and most acutely where the new codes 
would capture new technologies that are (or will be) under 
consideration for new technology add-on payments. Thus, we believe this 
provision was intended to expedite data collection through the 
assignment of new ICD-9-CM codes for new technologies seeking higher 
payments. Our proposal is designed to carry out that intention, while 
minimizing the additional administrative costs associated with mid-year 
changes to the ICD-9-CM codes.
    The Department of Health and Human Services has been actively 
working on the development of new coding systems to replace the ICD-9-
CM. In December 1990, the National Committee on Vital and Health 
Statistics (NCVHS) issued a report noting that, while the ICD-9-CM 
classification system had been responsive to changing technologies and 
identifying new diseases, there was concern that the ICD classification 
might be stressed to a point where the quality of the system would soon 
be compromised. The ICD-10-CM (for diagnoses) and the ICD-10-PCS (for 
procedures) were developed in response to these concerns. These efforts 
have become increasingly important because of the growing number of 
problems with the ICD-9-CM, which was implemented 25 years ago.
    In November 2003, the NCVHS recommended that the Secretary prepare 
a notice of proposed rulemaking for the implementation of ICD-10-CM and 
ICD-10-PCS. A complete report on the activities of this committee can 
be found at: http://www.ncvhs.hhs.gov. The Department is studying these 
recommendations.
16. Other Issues
    [If you choose to comment on issues in this section, please include 
the caption ``Other DRG Issues'' at the beginning of your comments.]
a. Craniotomy Procedures
    As discussed in the August 1, 2003 IPPS final rule (68 FR 45353), 
for FY 2004 we conducted an analysis of the charges for various 
procedures and diagnoses within DRG 1 (Craniotomy Age > 17 With CC) and 
DRG 2 (Craniotomy Age > 17 Without CC) to determine whether further 
changes to these DRGs were warranted. Based on our analysis and 
consideration of public comments received on our May 19, 2003 IPPS 
proposed rule (68 FR 27161), in the August 1, 2003 IPPS final rule, we 
created three new DRGs: DRG 528 (Intracranial Vascular Procedures With 
a Principal Diagnosis of Hemorrhage) for patients with an intracranial 
vascular procedure and an intracranial hemorrhage; and DRGs 529 
(Ventricular Shunt Procedures With CC) and 530 (Ventricular Shunt 
Procedures Without CC) for patients with only a vascular shunt 
procedure.
    As discussed below, we have received further comments regarding the 
composition of DRGs 1 and 2 that relate to the appropriate DRG 
assignment of unruptured cerebral aneurysm cases and cases involving 
implantation of GLIADEL[reg] chemotherapy wafers. We have also received 
comments on possible revisions to DRG 3 (Craniotomy Age 0-17).
(1) Unruptured Cerebral Aneurysms
    In the August 1, 2003 final rule (68 FR 45354), in response to a 
comment that suggested we create a companion DRG to DRG 528 for 
intracranial vascular procedures for unruptured cerebral aneurysms, we 
evaluated cases in the MedPAR file involving unruptured cerebral 
aneurysm and determined that the average charges for unruptured 
cerebral aneurysm cases were consistent with the variation of charges 
found in DRGs 1 and 2. Therefore, we did not propose a change in the 
DRG classification. We indicated that we would continue to monitor 
cases involving unruptured cerebral aneurysms.
    We now have examined cases in the FY 2003 MedPAR file that reported 
unruptured cerebral aneurysms. We found 657 unruptured aneurysm cases 
assigned to DRG 1 and 481 unruptured cerebral aneurysm cases assigned 
to DRG 2. The average charges for these unruptured cerebral aneurysm 
cases in DRG 1 ($50,879) are slightly lower than the overall charges 
for all cases in that DRG ($51,300). For unruptured cerebral aneurysm 
cases assigned to DRG 2, we found the average charges of approximately 
$29,524 are consistent with the overall average charges of that DRG of 
approximately $28,416.
    Based on the results of our analysis, we still do not believe a 
proposal to modify the DRG assignment of unruptured cerebral aneurysm 
cases is warranted.
(2) GLIADEL[reg] Chemotherapy Wafers
    In the August 1, 2003 final rule (68 FR 45354), we stated that we 
had received comments requesting a change to the DRG assignment of 
cases involving implantation of GLIADEL[reg] chemotherapy wafers to 
treat brain tumors. One of the commenters had offered two options: (1) 
Create a new DRG for cases involving implantation of GLIADEL[reg] 
chemotherapy wafers; and (2) reassign these cases to DRG 484 
(Craniotomy for Multiple Significant Trauma).
    At that time, we had analyzed data in the March 2003 update of the 
FY 2003 MedPAR file and found a total of 61 cases in which procedure 
code 00.10 (Implantation of a chemotherapy agent) was reported for 
cases assigned to DRGs 1 and 2. There were 38 cases assigned to DRG 1 
and 23 cases assigned to DRG 2. The GROUPER logic for these DRGs 
assigns cases with CCs to DRG 1 and those without CCs to DRG 2. 
Consistent with the GROUPER logic for these DRGs, we had found that the 
average standardized charges in DRGs 1 and 2 were approximately $64,864 
and $42,624, respectively. However, while the estimated average charges 
for GLIADEL[reg] wafer cases of $50,394 may have been higher than the 
average standardized charges for DRG 2, they were within the normal 
variation of overall charges within each DRG. In addition, the volume 
of cases in these two DRGs was too small to warrant the establishment 
of a separate new DRG for this technology. Therefore, we stated that we 
wanted to review a full year of data and take the time to consider 
alternative options that might appear warranted before proposing a 
change.
    We have now examined more complete MedPAR data (December 2003 
update for FY 2003) on cases reporting GLIADEL[reg] chemotherapy 
wafers. We found a total of 127 cases in which procedure code 00.10 was 
reported for cases assigned to DRGs 1 and 2. There were 80 cases 
assigned to DRG 1 and 47 cases assigned to DRG 2. The average

[[Page 28222]]

charges for these cases in DRGs 1 and 2 were approximately $61,866 and 
$47,189, respectively. The average charges for these cases are higher 
than the overall charges of DRGs 1 and 2 of approximately $51,300 and 
$28,416, respectively. Although the average charges for the 
GLIADEL[reg] wafer cases within these DRGs are higher than the average 
charges of all cases in these DRGs, they remain within the range of 
average charges for other procedures included in these DRGs. The 
majority of the GLIADEL[reg] wafer cases are assigned to the second 
highest weighted DRG in MDC 1 behind DRG 528 (Intracranial Vascular 
Procedure With a Principal Diagnosis of Hemorrhage) in which the 
weights were derived from average charges of approximately $113,884. In 
DRG 1, there are 10 procedures that have higher average charges than 
the GLIADEL[reg] wafer cases. However, in DRG 2, the charges associated 
with GLIADEL[reg] wafer cases are the highest of the procedures 
included within the DRG.
    DRGs are based on the principal diagnosis, secondary diagnosis, and 
procedures performed on the patient. DRGs are not generally created to 
recognize the presence or absence of specific technologies for each 
patient. In the past, we have made one exception to this rule. The 
exception was the creation of two new DRGs for drug-eluting stents: DRG 
526 (Percutaneous Cardiovascular Procedure With Drug-Eluting Stent With 
Acute Myocardial Infarction) and DRG 527 (Percutaneous Cardiovascular 
Procedure With Drug-Eluting Stent Without Acute Myocardial Infarction) 
(67 FR 50003). We took this unprecedented approach in response to the 
unique circumstances surrounding the potential breakthrough nature of 
this technology. We currently have 59,613 drug-eluting cases annually, 
far more cases than the volume for GLIADEL[reg] wafers. We believe that 
the volume of GLIADEL[reg] wafer cases remains too small to warrant the 
taking of the exceptional step of establishing a separate new DRG for 
this technology.
    Commenters also have proposed the reassignment of GLIADEL[reg] 
wafer cases to other existing DRGs, such as DRG 484 (Craniotomy for 
Multiple Significant Trauma), DRG 528 (Intracranial Vascular Procedures 
With Principal Diagnosis of Hemorrhage), DRG 492 (Chemotherapy With 
Acute Leukemia as a Secondary Diagnoses or With Use of a High Dose 
Chemotherapeutic Agent), or DRG 481 (Bone Marrow Transplant). We have 
examined these alternatives, and have come to the conclusion that none 
of these alternatives meets the standard of clinical coherence under 
the DRG system. For example, reconfiguring DRG 484 to include 
GLIADEL[reg] wafer cases would not produce a clinically coherent DRG 
because DRG 484 contains cases where craniotomy is performed in the 
setting of multiple significant trauma. Similarly, assigning 
GLIADEL[reg] wafer cases to DRG 528 would not produce a clinically 
coherent DRG because DRG 528 contains cases where craniotomy is 
performed as part of a vascular procedure with a primary diagnosis of 
hemorrhage, as in the case of a ruptured aneurysm. DRG 492 is 
clinically inappropriate because it contains cases of acute leukemia 
treated with chemotherapy, and DRG 481 is clinically inappropriate 
because it contains cases involving bone marrow transplant. None of 
these DRGs contains cases of glioblastoma multiforme or other primary 
brain tumors. Therefore, we are not proposing to adopt any of these 
changes at this time.
    We also considered several other approaches to reassigning 
GLIADEL[reg] wafer cases in a manner that is appropriate both in terms 
of clinical coherence and resource use. For example, we considered the 
creation of a new DRG that includes GLIADEL[reg] wafer cases along with 
other types of local therapy for intracerebral malignant disease. 
Specifically, we considered the creation of a new DRG that includes 
GLIADEL[reg] wafers and a Gliasite Radiation Therapy System, a 
relatively new form of intracavitary brachytherapy. Such a DRG would be 
clinically coherent because it would contain cases of malignant brain 
tumors treated with local therapy. However, our analysis of existing 
MedPAR data suggests that such a DRG would probably not provide 
enhanced reimbursement for the GLIADEL[reg] wafer cases, and that, in 
fact, decreased reimbursement for GLIADEL[reg] wafer cases is a more 
likely result. Therefore, we are not proposing a change at this time. 
However, we will continue to monitor our data to determine whether a 
change is warranted in the future.
    We recognize that the implantation of chemotherapeutically active 
wafers for local therapy of malignant brain tumors represents a 
significant medical technology that currently offers clinical benefits 
to patients and holds out the promise of future innovation in the 
treatment of these brain tumors. Therefore, we invite further comments 
and suggestions regarding the appropriate DRG assignment for this 
technology. (3) DRG 3 (Craniotomy Age 0-17)
    We received a comment stating concern that DRG 3 has not been 
reviewed, while DRGs 1 and 2 have had some revisions. The commenter 
believed that, particularly with the removal of major trauma cases, age 
distinctions may no longer be significant for craniotomies and the 
other intracranial procedures classified in DRGs 1 through 3. The 
commenter stated that it may be more consistent, from both a clinical 
and resource perspective, to simply eliminate DRG 3 and redistribute 
the pediatric and juvenile cases to DRGs 1 and 2 based on the 
procedures performed and the complication or comorbidities present, 
instead. This analysis would require supplemental data from non-MedPAR 
sources.
    We note that the primary focus of updates to the Medicare DRG 
classification system is for changes relating to the Medicare patient 
population, not the pediatric patient population. In the FY 2003 data, 
there were only two cases assigned to DRG 3. Therefore, we do not 
believe a proposal to address the commenter's request is warranted at 
this time. We are aware that the Medicare DRGs are sometimes used to 
classify other patient populations. We advise those non-Medicare 
systems that need a more up-to-date system to consider choosing from 
other systems that are currently in use in this country, or developing 
their own modifications.
b. Coronary Stent Procedures
    We have received comments and recommendations from several industry 
representatives about the DRG assignments for coronary artery stents. 
These representatives expressed concern about whether the reimbursement 
for stents is adequate, especially for insertion of multiple stents. 
They also expressed concern about whether the current DRG structure 
represents the most clinically coherent classification of stent cases.
    We received two comprehensive recommendations for refinement and 
restructuring of the current coronary stent DRGs. The current DRG 
structure incorporates stent cases into the following two pairs of 
DRGs, depending on whether bare metal or drug-eluting stents are used 
and whether acute myocardial infarction (AMI) is present:

 DRG 516 (Percutaneous Cardiovascular Procedures With AMI)
 DRG 517 (Percutaneous Cardiovascular Procedures With Nondrug-
Eluting Stent Without AMI)
 DRG 526 (Percutaneous Cardiovascular Procedures With Drug-
Eluting Stent With AMI)
 DRG 527 (Percutaneous Cardiovascular Procedures With Drug-
Eluting Stent Without AMI)


[[Page 28223]]


    One of the recommendations involved restructuring these DRGs to 
create two additional stent DRGs that are closely patterned after these 
existing pairs and that would reflect insertion of multiple stents with 
and without AMI. The manufacturer recommended incorporating either 
stenting code 36.06 (Insertion of nondrug-eluting coronary artery 
stent(s)) or code 36.07 (Insertion of drug-eluting coronary artery 
stent(s)) when they are reported along with code 36.05 (Multiple vessel 
percutaneous transluminal coronary angioplasty [PTCA] or coronary 
atherectomy performed during the same operation, with or without 
mention of thrombolytic agent). The manufacturer expressed concern that 
hospitals are steering patients toward coronary artery bypass graft 
surgery in place of stenting in order to avoid significant financial 
losses due to what it considered the inadequate reimbursement for 
inserting multiple stents.
    We appreciate receiving the manufacturer's recommendation, and 
agree that the DRG classification of cases involving coronary stents 
must be clinically coherent and provide for adequate reimbursement, 
including adequate reimbursement of cases requiring multiple stents. We 
also agree that the recommendation has some merits and deserves further 
study. However, we believe that it is premature to act on this 
recommendation for two reasons. One reason is that the current coding 
structure for coronary artery stents cannot distinguish cases in which 
multiple stents are inserted from cases in which only a single stent is 
inserted. Current codes are able to identify performance of PTCA in 
more than one vessel by use of code 36.05. However, while this code 
indicates that PTCA was performed in more than one vessel, its use does 
not reflect the exact number of procedures performed or the exact 
number of vessels treated. Similarly, when codes 36.06 and 36.07 are 
used, they document the insertion of at least one stent. However, these 
stenting codes do not identify how many stents were inserted in a 
procedure, nor distinguish insertion of a single stent from insertion 
of multiple stents. Even the use of one of the stenting codes in 
conjunction with multiple-PTCA code 36.05 does not distinguish 
insertion of a single stent from insertion of multiple stents. The use 
of code 36.05 in conjunction with code 36.06 or code 36.07 indicates 
only performance of PTCA in more than one vessel, along with insertion 
of at least one stent. The precise numbers of PTCA-treated vessels, the 
number of vessels into which stents were inserted, and the total number 
of stents inserted in all treated vessels cannot be determined. 
Therefore, the capabilities of the current coding structure do not 
permit the distinction between single vessel stenting and multiple 
vessel stenting that would be required under the recommended 
restructuring of the stenting DRGs.
    In addition, because the FDA approved drug-eluting stents for use 
in April 2003, the distinct DRGs for drug-eluting stents have only been 
effective for payment in the last year. The MedPAR file thus does not 
contain a full year of data with which to conduct the requisite 
analysis to evaluate the adequacy of the current structure of four 
stenting DRGs. Therefore, we believe that it is still premature to 
undertake such a thorough restructuring of the stent DRGs. 
Nevertheless, we will consider this recommendation as we evaluate the 
current DRG structure once adequate data on the current stenting DRGs 
become available.
    The second recommendation was that we transform the current 
structure of stenting DRGs into two new pairs of DRGs, reclassifying 
stenting cases according to whether bare metal or drug-eluting stents 
are used (as with the present DRGs) and whether the cases are 
``complex'' or ``noncomplex.'' The manufacturer indicated that complex 
cases are those that include certain comorbid conditions or procedural 
factors such as hypertensive renal failure, diabetes, AMI, and 
multivessel PCI. The manufacturer further indicated that this structure 
would provide an improvement in both clinical and resource coherence 
over the current structure that classifies cases according to the type 
of stent inserted and the presence or absence of AMI alone, without 
considering other complicating conditions. Specifically, the 
manufacturer recommended replacing the current structure with the 
following four DRGs:

 Recommended restructured DRG 516 (Complex percutaneous 
cardiovascular procedures with nondrug-eluting stents)
 Recommended restructured DRG 517 (Noncomplex percutaneous 
cardiovascular procedures with nondrug-eluting stents)
 Recommended restructured DRG 526 (Complex percutaneous 
cardiovascular procedures with drug-eluting stents)
 Recommended restructured DRG 527 (Noncomplex percutaneous 
cardiovascular procedures with drug-eluting stents)
    The manufacturer presented an analysis based on FY 2002 MedPAR 
data, in which it evaluated charges and lengths of stay for cases with 
expected high resource use, and reclassified cases into the recommended 
new structure of paired ``complex'' and ``noncomplex'' DRGs. The 
analysis shows some evidence of clinical and resource coherence in the 
recommended DRG structure. However, the analysis does not yet provide a 
convincing case for adopting the recommended restructure. First, the 
analysis does not reveal significant gains in resource coherence 
compared to previous DRGs for stenting cases. Second, the analysis is 
limited in assessing the feasibility of using the recommended DRG 
restructure versus the current DRG structure for classification of 
stent cases. Because the manufacturer used FY 2002 MedPAR data in its 
analysis, it was not able to compare the resource coherence of the 
recommended structure with the current structure of four DRGs, but only 
with the two DRGs that preceded the approval of drug-eluting stents. 
While the manufacturer asserted that ``similar results would be 
expected'' from a comparison between its recommended DRG restructure 
and the current DRG structure, we do not believe that it is advisable 
to undertake a critical DRG restructuring without examining the 
recommendation against actual experience under the current structure. 
Nevertheless, we believe that this recommendation may have merit, and 
we will conduct a full analysis of the recommendation in comparison to 
the current DRG structure once adequate data become available.
    The drug-eluting stents had not yet been FDA approved when we 
calculated the relative weights for DRGs 526 and 527 for the FY 2003 
IPPS final rule. Therefore, in the absence of MedPAR data, we based our 
FY 2003 relative weight calculations on prices in countries where drug-
eluting stents were already being used. A full discussion of this 
process can be found in the FY 2004 IPPS final rule (68 FR 45370). For 
computation of the proposed relative weights for FY 2005 for this 
proposed rule, we are using the December update of FY 2003 MedPAR data. 
There have been a total of 42,356 cases in DRG 526, and 33,179 cases in 
DRG 527, with adjustments made for transfers to other facilities. For 
computation of the final FY 2005 relative weights, we will use the 
latest update of the MedPAR data file for cases in these two DRGs. No 
foreign data will be used to compute the relative weights for DRGs 526 
and 527 in FY 2005.

[[Page 28224]]

c. Severe Sepsis
    We received a comment that recommended a separate DRG be assigned 
to the diagnosis of severe sepsis. Patients admitted with sepsis 
currently are assigned to DRG 416 (Septicemia Age > 17) and DRG 417 
(Septicemia Age 0-17) in MDC 18 (Infectious and Parasitic Diseases, 
Systemic or Unspecified Sites). The commenter contended that the costs 
of caring for patients with severe sepsis exceed those costs associated 
with other types of sepsis. Therefore, the commenter indicated, severe 
sepsis should be given a separate, unique DRG. Furthermore, the 
commenter requested that all cases in which severe sepsis is present on 
admission, as well as those cases in which it develops after admission 
(which are currently classified elsewhere) be included in this new DRG. 
The commenter suggested using various coexisting conditions and their 
corresponding ICD-9-CM codes (for example, respiratory failure or 
hypotension and renal failure) to identify patients with severe sepsis. 
The conditions suggested do not describe a clinically coherent set of 
patients that have severe sepsis. Using this list of conditions would 
erroneously identify patients as having severe sepsis.
    We acknowledge the high costs of caring for seriously ill patients 
with sepsis. However, we do not find, from a clinical perspective, that 
a subset of patients with severe sepsis exists to the degree that a 
separate DRG classification is justified. Sepsis in all forms is quite 
common across many DRGs in the Medicare population. In addition, we do 
not believe that the commenter's suggested defining criteria for severe 
sepsis are specific, accurate, or unique enough to warrant a new DRG 
classification. Therefore, at this time, we are not proposing any 
change to the current DRG structure for sepsis.
d. Implantable Cardiac Defibrillators
    There is a range of implantable cardiac defibrillators (ICDs) 
available on the market from extremely complex devices with multiple 
leads, settings, and functions to simpler models with a single lead and 
simpler functions. ICDs deliver electrical shocks to the heart to 
eliminate the life-threatening abnormal rhythms such as ventricular 
fibrillation or ventricular tachycardia.
    We have received a coverage request to expand the indications for 
implantable defibrillators to include the population studied in the 
Sudden Cardiac Death in Heart Failure Trial (SCD-HeFT) sponsored by the 
National Institutes of Health. SCD-HeFT treated heart failure patients 
with conventional therapy and randomized them to one of three 
additional treatment strategies: (1) Placebo; (2) amiodarone (drug 
therapy); or (3) single lead implantable defibrillator. The SCD-HeFT 
investigators presented results at the American College of Cardiology 
annual meeting that the basic single-lead implantable defibrillator is 
effective for saving lives in a population at low-moderate risk for 
sudden cardiac death. The requestor indicated that, as part of CMS' 
coverage decisions, CMS could expand the population eligible for 
implantable defibrillators. The requestor further added that CMS could 
restrict use of complex defibrillators to patients for whom they are 
medically necessary, that is, in the population at low-moderate risk 
for sudden cardiac death.
    Given the potential increase of implantable defibrillator use in 
our population, we are soliciting input on how to encourage physicians 
to use the simpler, less costly device when advanced devices are not 
medically preferred. We are also soliciting input on the appropriate 
measures within the payment systems to accommodate payment for classes 
of defibrillators with very different costs. Ideally, we would like not 
only to align payments with relative costs, but also to align the 
incentives within the payment system with medically appropriate uses of 
different technologies.
    We believe that, within the PPS for inpatient hospital operating 
costs, there are several ways to deal with the expanding use of 
simpler, lower cost defibrillators. One possibility is to maintain the 
current DRG configuration, under which complex, expensive devices and 
simpler, less costly devices would remain within the same DRGs and 
receive the same payment rates. This approach would encourage use of 
the simpler devices, which would receive relatively higher 
reimbursement because their lower charges would be averaged in with the 
higher charges for the more complex devices in setting the DRG weights. 
However, it could lead to complaints that the program is underpaying 
for the more complex, expensive devices as the lower charges for 
simpler, less expensive devices begin to affect (lower) the DRG 
weights.
    Another approach would be to recognize the cost differences between 
various classes of defibrillators by establishing separate DRGs for 
basic single-lead implantable defibrillators as opposed to more 
complex, expensive models. This approach would prevent payments for the 
use of more expensive defibrillators (where medically necessary) from 
being diluted by the effect of the lower charges for basic single-lead 
implantable defibrillators on the weights within common DRGs. However, 
this policy would arguably provide less incentive for use of the lower 
cost devices: the weights for the DRGs containing the less expensive 
devices would be driven solely by their relatively lower charges, 
without being lifted by the higher charges for the more expensive 
models. This approach might also be criticized for departing from the 
averaging principle within the DRG system by basing too much on the 
cost differential alone in reconfiguring these DRGs.
    We welcome comments on these and other approaches to paying for 
defibrillators under the IPPS. We discuss an application for new 
technology add-on payments for a Cardiac Resynchronization Therapy with 
Defibrillator (CRT-D) in section II.E.4.c. of this proposed rule.

C. Recalibration of DRG Weights

    [If you choose to comment on issues in this section, please include 
the caption ``DRG Weights'' at the beginning of your comment.]
    We are proposing to use the same basic methodology for the FY 2005 
recalibration as we did for FY 2004 (August 1, 2003 IPPS final rule (68 
FR 45373)). That is, we are proposing to recalibrate the DRG weights 
based on charge data for Medicare discharges using the most current 
charge information available (the FY 2003 MedPAR file).
    The MedPAR file is based on fully coded diagnostic and procedure 
data for all Medicare inpatient hospital bills. The FY 2003 MedPAR data 
used in this proposed rule include discharges occurring between October 
1, 2002 and September 30, 2003, based on bills received by CMS through 
December 31, 2003, from all hospitals subject to the IPPS and short-
term acute care hospitals in Maryland (which is under a waiver from the 
IPPS under section 1814(b)(3) of the Act). The FY 2003 MedPAR file 
includes data for approximately 11,717,744 Medicare discharges. 
Discharges for Medicare beneficiaries enrolled in a Medicare+Choice 
managed care plan are excluded from this analysis. The data excludes 
CAHs, including hospitals that subsequently became CAHs after the 
period from which the data were taken.
    The proposed methodology used to calculate the DRG relative weights 
from the FY 2003 MedPAR file is as follows:
     To the extent possible, all the claims were regrouped 
using the DRG classification revisions discussed in section II.B. of 
this preamble.

[[Page 28225]]

     The transplant cases that were used to establish the 
relative weight for heart and heart-lung, liver, and lung transplants 
(DRGs 103, 480, and 495) were limited to those Medicare-approved 
transplant centers that have cases in the FY 2001 MedPAR file. 
(Medicare coverage for heart, heart-lung, liver, and lung transplants 
is limited to those facilities that have received approval from CMS as 
transplant centers.)
     Organ acquisition costs for kidney, heart, heart-lung, 
liver, lung, pancreas, and intestinal (or multivisceral organs) 
transplants continue to be paid on a reasonable cost basis. Because 
these acquisition costs are paid separately from the prospective 
payment rate, it is necessary to subtract the acquisition charges from 
the total charges on each transplant bill that showed acquisition 
charges before computing the average charge for the DRG and before 
eliminating statistical outliers.
     Charges were standardized to remove the effects of 
differences in area wage levels, indirect medical education and 
disproportionate share payments, and, for hospitals in Alaska and 
Hawaii, the applicable cost-of-living adjustment.
     The average standardized charge per DRG was calculated by 
summing the standardized charges for all cases in the DRG and dividing 
that amount by the number of cases classified in the DRG. A transfer 
case is counted as a fraction of a case based on the ratio of its 
transfer payment under the per diem payment methodology to the full DRG 
payment for nontransfer cases. That is, a transfer case receiving 
payment under the transfer methodology equal to half of what the case 
would receive as a nontransfer would be counted as 0.5 of a total case.
     Statistical outliers were eliminated by removing all cases 
that are beyond 3.0 standard deviations from the mean of the log 
distribution of both the charges per case and the charges per day for 
each DRG.
     The average charge for each DRG was then recomputed 
(excluding the statistical outliers) and divided by the national 
average standardized charge per case to determine the relative weight.
    The proposed new weights are normalized by a proposed adjustment 
factor of 1.46899 so that the average case weight after recalibration 
is equal to the average case weight before recalibration. This proposed 
adjustment is intended to ensure that recalibration by itself neither 
increases nor decreases total payments under the IPPS.
    When we recalibrated the DRG weights for previous years, we set a 
threshold of 10 cases as the minimum number of cases required to 
compute a reasonable weight. We are proposing to use that same case 
threshold in recalibrating the proposed DRG weights for FY 2005. Using 
the FY 2003 MedPAR data set, there are 42 DRGs that contain fewer than 
10 cases. We are proposing to compute the weights for these low-volume 
DRGs by adjusting the FY 2004 weights of these DRGs by the percentage 
change in the average weight of the cases in the other DRGs.
    Section 1886(d)(4)(C)(iii) of the Act requires that, beginning with 
FY 1991, reclassification and recalibration changes be made in a manner 
that assures that the aggregate payments are neither greater than nor 
less than the aggregate payments that would have been made without the 
changes. Although normalization is intended to achieve this effect, 
equating the average case weight after recalibration to the average 
case weight before recalibration does not necessarily achieve budget 
neutrality with respect to aggregate payments to hospitals because 
payments to hospitals are affected by factors other than average case 
weight. Therefore, as we have done in past years and as discussed in 
section II.A.4.a. of the Addendum to this proposed rule, we are 
proposing to make a budget neutrality adjustment to ensure that the 
requirement of section 1886(d)(4)(C)(iii) of the Act is met.

D. Proposed LTC-DRG Reclassifications and Relative Weights for LTCHs 
for FY 2005

    [If you choose to comment on issues in this section, please include 
the caption ``LTC-DRGs'' at the beginning of your comment.]
1. Background
    In the June 6, 2003 LTCH PPS final rule (68 FR 34122), we changed 
the LTCH PPS annual payment rate update cycle to be effective July 1 
through June 30 instead of October 1 through September 30. In addition, 
since the patient classification system utilized under the LTCH PPS is 
based directly on the DRGs used under the IPPS for acute care 
hospitals, in that same final rule, we explained that the annual update 
of the long-term care diagnosis-related group (LTC-DRG) classifications 
and relative weights will continue to remain linked to the annual 
reclassification and recalibration of the CMS-DRGs under the IPPS.
    The annual update to the IPPS DRGs is based on the annual revisions 
to the ICD-9-CM codes and is effective each October 1. In the health 
care industry, annual changes to the ICD-9-CM codes are effective for 
discharges occurring on or after October 1 each year. The use of the 
ICD-9-CM coding system is also compliant with the requirements of the 
Health Insurance Portability and Accountability Act (HIPAA), Public Law 
104-191, under 45 CFR Parts 160 and 162. Therefore, the manual and 
electronic versions of the GROUPER software, which are based on the 
ICD-9-CM codes, are also revised annually and effective for discharges 
occurring on or after October 1 each year. Because the LTC-DRGs are 
based on the patient classification system used under the IPPS (CMS-
DRGs), which is updated annually and effective for discharges occurring 
on or after October 1 through September 30 each year, in the June 6, 
2003 LTCH PPS final rule (68 FR 34128), we specified that we will 
continue to update the LTC-DRG classifications and relative weights to 
be effective for discharges occurring on or after October 1 through 
September 30 each year. Furthermore, we stated that we will publish the 
annual update of the LTC-DRGs in the proposed and final rules for the 
IPPS.
    In this proposed rule, we are proposing revisions to the LTC-DRG 
classifications and relative weights and will finalize them in the IPPS 
final rule, to be effective October 1, 2004 through September 30, 2005. 
The proposed LTC-DRGs and relative weights for FY 2005 in this proposed 
rule are based on the IPPS DRGs (GROUPER version 22.0) discussed in 
section II. of this proposed rule.
2. Proposed Changes in the LTC-DRG Classifications
a. Background
    Section 123 of Public Law 106-113 specifically requires that the 
PPS for LTCHs be a per discharge system with a DRG-based patient 
classification system reflecting the differences in patient resources 
and costs in LTCHs while maintaining budget neutrality. Section 
307(b)(1) of Public Law 106-554 modified the requirements of section 
123 of Public Law 106-113 by specifically requiring that the Secretary 
examine ``the feasibility and the impact of basing payment under such a 
system [the LTCH PPS] on the use of existing (or refined) hospital 
diagnosis-related groups (DRGs) that have been modified to account for 
different resource use of long-term care hospital patients as well as 
the use of the most recently available hospital discharge data.''
    In accordance with section 307(b)(1) of Public Law 106-554 and 
Sec.  412.515 of our existing regulations, the LTCH PPS uses 
information from LTCH patient

[[Page 28226]]

records to classify patient cases into distinct LTC-DRGs based on 
clinical characteristics and expected resource needs. The LTC-DRGs used 
as the patient classification component of the LTCH PPS correspond to 
the DRGs under the IPPS for acute care hospitals. Thus, in this 
proposed rule, we are proposing to use the IPPS version 22.0 GROUPER 
for FY 2005 to process LTCH PPS claims. The proposed changes to the 
IPPS DRG classification system for FY 2005 (Grouper 22.0) are discussed 
in section II.B. of this preamble.
    Under the LTCH PPS, we determine relative weights for each of the 
CMS DRGs to account for the difference in resource use by patients 
exhibiting the case complexity and multiple medical problems 
characteristic of LTCH patients. In a departure from the IPPS, as we 
discussed in the August 30, 2002 final rule (67 FR 55985), which 
implemented the LTCH PPS, and the August 1, 2003 IPPS final rule (68 FR 
45374), we use low-volume quintiles in determining the LTC-DRG weights 
for LTC-DRGs with less than 25 LTCH cases, since LTCHs do not typically 
treat the full range of diagnoses as do acute care hospitals. 
Specifically, we group those low-volume LTC-DRGs (LTC-DRGs with fewer 
than 25 cases) into 5 quintiles based on average charge per discharge. 
(A listing of the composition of low-volume quintiles for the FY 2004 
LTC-DRGs (based on FY 2002 MedPAR data) appears in section II.D.3. of 
the August 1, 2003 IPPS final rule (68 FR 45377--45380).) We also 
adjust for cases in which the stay at the LTCH is less than or equal to 
five-sixths of the geometric average length of stay; that is, short-
stay outlier cases (Sec.  412.529), as discussed below in section 
II.D.4. of this preamble.
b. Patient Classifications Into DRGs
    Generally, under the LTCH PPS, Medicare payment is made at a 
predetermined specific rate for each discharge; that is, payment varies 
by the LTC-DRG to which a beneficiary's stay is assigned. Similar to 
case classification for acute care hospitals under the IPPS (see 
section II.B. of this preamble), cases are classified into LTC-DRGs for 
payment under the LTCH PPS based on the principal diagnosis, up to 
eight additional diagnoses, and up to six procedures performed during 
the stay, as well as age, sex, and discharge status of the patient. The 
diagnosis and procedure information is reported by the hospital using 
codes from the ICD-9-CM.
    As discussed above in section II.B. of this preamble, the CMS DRGs 
are organized into 25 major diagnostic categories (MDCs), most of which 
are based on a particular organ system of the body; the remainder 
involve multiple organ systems (such as MDC 22, Burns). Accordingly, 
the principal diagnosis determines MDC assignment. Within most MDCs, 
cases are then divided into surgical DRGs and medical DRGs. Some 
surgical and medical DRGs are further differentiated based on the 
presence or absence of CCs. (See section II.B. of this preamble for 
further discussion of surgical DRGs and medical DRGs.)
    Because the assignment of a case to a particular LTC-DRG will help 
determine the amount that is paid for the case, it is important that 
the coding is accurate. As used under the IPPS, classifications and 
terminology used under the LTCH PPS are consistent with the ICD-9-CM 
and the Uniform Hospital Discharge Data Set (UHDDS), as recommended to 
the Secretary by the National Committee on Vital and Health Statistics 
(``Uniform Hospital Discharge Data: Minimum Data Set, National Center 
for Health Statistics, April 1980'') and as revised in 1984 by the 
Health Information Policy Council (HIPC) of the U.S. Department of 
Health and Human Services. We wish to point out again that the ICD-9-CM 
coding terminology and the definitions of principal and other diagnoses 
of the UHDDS are consistent with the requirements of the Administrative 
Simplification Act of 1996 of the HIPAA (45 CFR Parts 160 and 162).
    The emphasis on the need for proper coding cannot be overstated. 
Inappropriate coding of cases can adversely affect the uniformity of 
cases in each LTC-DRG and produce inappropriate weighting factors at 
recalibration and result in inappropriate payments under the LTCH PPS. 
LTCHs are to follow the same coding guidelines used by the acute care 
hospitals to ensure accuracy and consistency in coding practices. There 
will be only one LTC-DRG assigned per long-term care hospitalization; 
it will be assigned at the discharge. Therefore, it is mandatory that 
the coders continue to report the same principal diagnosis on all 
claims and include all diagnostic codes that coexist at the time of 
admission, that are subsequently developed, or that affect the 
treatment received. Similarly, all procedures performed during that 
stay are to be reported on each claim.
    Upon the discharge of the patient from a LTCH, the LTCH must assign 
appropriate diagnosis and procedure codes from the ICD-9-CM. As of 
October 16, 2002, a LTCH that was required to comply with the HIPAA 
Administrative Simplification Standards and that had not obtained an 
extension in compliance with the Administrative Compliance Act (Public 
Law 107-105) is obligated to comply with the standards at 45 CFR 
162.1002 and 45 CFR 162.1102. Completed claim forms are to be submitted 
to the LTCH's Medicare fiscal intermediary. Medicare fiscal 
intermediaries enter the clinical and demographic information into 
their claims processing systems and subject this information to a 
series of automated screening processes called the Medicare Code Editor 
(MCE). These screens are designed to identify cases that require 
further review before assignment into an LTC-DRG can be made.
    After screening through the MCE, each LTCH claim will be classified 
into the appropriate LTC-DRG by the Medicare LTCH GROUPER. The LTCH 
GROUPER is specialized computer software based on the same GROUPER used 
under the IPPS. After the LTC-DRG is assigned, the Medicare fiscal 
intermediary determines the prospective payment by using the Medicare 
LTCH PPS PRICER program, which accounts for LTCH hospital-specific 
adjustments. As provided for under the IPPS, we provide an opportunity 
for the LTCH to review the LTC-DRG assignments made by the fiscal 
intermediary and to submit additional information within a specified 
timeframe (Sec.  412.513(c)).
    The GROUPER is used both to classify past cases in order to measure 
relative hospital resource consumption to establish the LTC-DRG weights 
and to classify current cases for purposes of determining payment. The 
records for all Medicare hospital inpatient discharges are maintained 
in the MedPAR file. The data in this file are used to evaluate possible 
DRG classification changes and to recalibrate the DRG weights during 
our annual update (as discussed in section II. of this preamble). The 
LTC-DRG relative weights are based on data for the population of LTCH 
discharges, reflecting the fact that LTCH patients represent a 
different patient mix than patients in short-term acute care hospitals.
3. Development of the Proposed FY 2005 LTC-DRG Relative Weights
a. General Overview of Development of the LTC-DRG Relative Weights
    As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 
55981), one of the primary goals for the implementation of the LTCH PPS 
is to pay each LTCH an appropriate amount for the efficient delivery of 
care to Medicare patients. The system must be able to account 
adequately for each

[[Page 28227]]

LTCH's case-mix in order to ensure both fair distribution of Medicare 
payments and access to adequate care for those Medicare patients whose 
care is more costly. To accomplish these goals, we adjust the LTCH PPS 
standard Federal prospective payment system rate by the applicable LTC-
DRG relative weight in determining payment to LTCHs for each case.
    Under the LTCH PPS, relative weights for each LTC-DRG are a primary 
element used to account for the variations in cost per discharge and 
resource utilization among the payment groups (Sec.  412.515). To 
ensure that Medicare patients classified to each LTC-DRG have access to 
an appropriate level of services and to encourage efficiency, we 
calculate a relative weight for each LTC-DRG that represents the 
resources needed by an average inpatient LTCH case in that LTC-DRG. For 
example, cases in a LTC-DRG with a relative weight of 2 will, on 
average, cost twice as much as cases in a LTC-DRG with a weight of 1.
b. Data
    To calculate the proposed LTC-DRG relative weights for FY 2005 in 
this proposed rule, we obtained total Medicare allowable charges from 
FY 2003 Medicare hospital bill data from the December 2003 update of 
the MedPAR file, and we used the proposed Version 22.0 of the CMS 
GROUPER for IPPS, as discussed in section II.B. of this preamble, to 
classify cases. Consistent with the methodology under the IPPS, we are 
proposing to recalculate the FY 2005 LTC-DRG relative weights based on 
the best available data for the final rule.
    As we discussed in the August 1, 2003 final rule (68 FR 45376), we 
have excluded the data from LTCHs that are all-inclusive rate providers 
and LTCHs that are reimbursed in accordance with demonstration projects 
authorized under section 402(a) of Public Law 90-248 (42 U.S.C. 1395b-
1) or section 222(a) of Public Law 92-603 (42 U.S.C. 1395b-1). 
Therefore, in the development of the proposed FY 2005 LTC-DRG relative 
weights, we have excluded the data of the 22 all-inclusive rate 
providers and the 3 LTCHs that are paid in accordance with 
demonstration projects that had claims in the FY 2003 MedPAR file.
    In the August 1, 2003 final rule (68 FR 45367), we discussed coding 
inaccuracies that were found in claims data for a large chain of LTCHs 
in the FY 2002 MedPAR file used to determine the LTC-DRG relative 
weights for FY 2004. Specifically, the principal diagnosis was not 
reported correctly on many of those LTCHs' claims, which resulted in 
those claims being incorrectly assigned to a LTC-DRG. As we explained 
in that same final rule, we were able to determine the correct 
diagnoses and procedure codes for the claims that contained the coding 
errors, and we used them to group each LTCH case to the appropriate 
LTC-DRG for determining the LTC-DRG relative weights for FY 2004. In 
addition, we stated that since the LTCH PPS was implemented for cost 
reporting periods beginning on or after October 1, 2002 (FY 2003), we 
believe that this problem will be self-correcting as LTCHs submit more 
completely coded data in the future.
    As we discussed in the May 7, 2004 LTCH PPS final rule (69 FR 
25673), an analysis of LTCH claims data from the September 2003 update 
of the FY 2003 MedPAR file contained coding errors. Specifically, a 
large hospital chain of LTCHs continued to consistently code diagnoses 
inaccurately on the claims it submitted, and these coding errors were 
reflected in the September 2003 update of the FY 2003 MedPAR file. Upon 
discovering the coding errors, we notified the large chain of LTCHs 
whose claims contained the coding inaccuracies to request that they 
resubmit those claims with the correct diagnoses codes by December 31, 
2003, so that those corrected claims would be contained in the December 
2003 update of the FY 2003 MedPAR file. As we discussed in that same 
final rule, it appears that those claims were submitted timely with the 
correct diagnoses codes. Therefore, it was not necessary to correct the 
FY 2003 MedPAR data for the development of the rates and factors 
established in the May 7, 2004 LTCH PPS final rule. Accordingly, we are 
proposing to use LTCH claims data from the December 2003 update of the 
FY 2003 MedPAR file for the determination of the proposed FY 2005 LTC-
DRG relative weights in this proposed rule.
c. Hospital-Specific Relative Value Methodology
    By nature LTCHs often specialize in certain areas, such as 
ventilator-dependent patients and rehabilitation and wound care. Some 
case types (DRGs) may be treated, to a large extent, in hospitals that 
have, from a perspective of charges, relatively high (or low) charges. 
Such nonarbitrary distribution of cases with relatively high (or low) 
charges in specific LTC-DRGs has the potential to inappropriately 
distort the measure of average charges. To account for the fact that 
cases may not be randomly distributed across LTCHs, we use a hospital-
specific relative value method to calculate the LTC-DRG relative 
weights instead of the methodology used to determine the DRG relative 
weights under the IPPS described above in section II.C. of this 
preamble. We believe this method will remove this hospital-specific 
source of bias in measuring LTCH average charges. Specifically, we 
reduce the impact of the variation in charges across providers on any 
particular LTC-DRG relative weight by converting each LTCH's charge for 
a case to a relative value based on that LTCH's average charge.
    Under the hospital-specific relative value method, we standardize 
charges for each LTCH by converting its charges for each case to 
hospital-specific relative charge values and then adjusting those 
values for the LTCH's case-mix. The adjustment for case-mix is needed 
to rescale the hospital-specific relative charge values (which, by 
definition, averages 1.0 for each LTCH). The average relative weight 
for a LTCH is its case-mix, so it is reasonable to scale each LTCH's 
average relative charge value by its case-mix. In this way, each LTCH's 
relative charge value is adjusted by its case-mix to an average that 
reflects the complexity of the cases it treats relative to the 
complexity of the cases treated by all other LTCHs (the average case-
mix of all LTCHs).
    In accordance with the methodology established under Sec.  412.523, 
we standardize charges for each case by first dividing the adjusted 
charge for the case (adjusted for short-stay outliers under Sec.  
412.529 as described in section II.D.4. (step 3) of this preamble) by 
the average adjusted charge for all cases at the LTCH in which the case 
was treated. Short-stay outliers under Sec.  412.529 are cases with a 
length of stay that is less than or equal to five-sixths the average 
length of stay of the LTC-DRG. The average adjusted charge reflects the 
average intensity of the health care services delivered by a particular 
LTCH and the average cost level of that LTCH. The resulting ratio is 
multiplied by that LTCH's case-mix index to determine the standardized 
charge for the case.
    Multiplying by the LTCH's case-mix index accounts for the fact that 
the same relative charges are given greater weight in a LTCH with 
higher average costs than they would at a LTCH with low average costs 
which is needed to adjust each LTCH's relative charge value to reflect 
its case-mix relative to the average case-mix for all LTCHs. Because we 
standardize charges in this manner, we count charges for a Medicare 
patient at a LTCH with high average charges as less resource intensive 
than they would

[[Page 28228]]

be at a LTCH with low average charges. For example, a $10,000 charge 
for a case in a LTCH with an average adjusted charge of $17,500 
reflects a higher level of relative resource use than a $10,000 charge 
for a case in a LTCH with the same case-mix, but an average adjusted 
charge of $35,000. We believe that the adjusted charge of an individual 
case more accurately reflects actual resource use for an individual 
LTCH because the variation in charges due to systematic differences in 
the markup of charges among LTCHs is taken into account.
d. Low-Volume LTC-DRGs
    In order to account for LTC-DRGs with low-volume (that is, with 
fewer than 25 LTCH cases), in accordance with the methodology discussed 
in the August 1, 2002 final rule (67 FR 55984), we group those low-
volume LTC-DRGs into one of five categories (quintiles) based on 
average charges, for the purposes of determining relative weights. For 
this proposed rule, using LTCH cases from the December 2003 update of 
the FY 2003 MedPAR file, we identified 171 LTC-DRGs that contained 
between 1 and 24 cases. This list of proposed LTC-DRGs was then divided 
into one of the five low-volume quintiles, each containing a minimum of 
34 LTC-DRGs (171/5 = 34 with 1 LTC-DRG as the remainder). For FY 2005, 
we are proposing to make an assignment to a specific low-volume 
quintile by sorting the 171 low-volume proposed LTC-DRGs in ascending 
order by average charge. Since the number of LTC-DRGs with less than 25 
LTCH cases is not evenly divisible by five, the average charge of the 
proposed low-volume LTC-DRG was used to determine which low-volume 
quintile received the proposed additional LTC-DRG. After sorting the 
171 low-volume proposed LTC-DRGs in ascending order, we are proposing 
that the first fifth (34) of low-volume LTC-DRGs with the lowest 
average charge would be grouped into Quintile 1. The highest average 
charge cases would be grouped into Quintile 5. Since the average charge 
of the proposed 69th LTC-DRG in the sorted list is closer to the 
previous proposed LTC-DRG's average charge (assigned to Quintile 2) 
than to the average charge of the proposed 70th LTC-DRG in the sorted 
list (to be assigned to Quintile 3), we are proposing to place it into 
Quintile 2. This process was repeated through the remaining low-volume 
proposed LTC-DRGs so that 4 proposed low-volume quintiles contain 34 
proposed LTC-DRGs and 1 proposed low-volume quintile contains 35 
proposed LTC-DRGs.
    In order to determine the proposed relative weights for the 
proposed LTC-DRGs with low volume for FY 2005, in accordance with the 
methodology described in the August 1, 2002 final rule (67 FR 55984), 
we are proposing to use the five proposed low-volume quintiles 
described above. The composition of each of the five proposed low-
volume quintiles shown below in Table 1 would be used in determining 
the proposed LTC-DRG relative weights for FY 2005. We would determine a 
proposed relative weight and (geometric) average length of stay for 
each of the five proposed low-volume quintiles using the formula that 
we are proposing to apply to the regular proposed LTC-DRGs (25 or more 
cases), as described below in section II.D.4. of this preamble. We are 
proposing to assign the same proposed relative weight and proposed 
average length of stay to each of the proposed LTC-DRGs that make up 
that proposed low-volume quintile. We note that as this system is 
dynamic, it is possible that the number and specific type of LTC-DRGs 
with a low volume of LTCH cases will vary in the future. We use the 
best available claims data in the MedPAR file to identify low-volume 
LTC-DRGs and to calculate the relative weights based on our 
methodology.

         Table 1.--Proposed Composition of Low-Volume Quintiles
------------------------------------------------------------------------
      Proposed LTC-DRG                       Description
------------------------------------------------------------------------
                               QUINTILE 1
------------------------------------------------------------------------
11.........................  NERVOUS SYSTEM NEOPLASMS W/O CC.
43.........................  HYPHEMA.
45.........................  NEUROLOGICAL EYE DISORDERS.
47.........................  OTHER DISORDERS OF THE EYE AGE >17 W/O CC.
84.........................  MAJOR CHEST TRAUMA W/O CC.
95.........................  PNEUMOTHORAX W/O CC.
110........................  MAJOR CARDIOVASCULAR PROCEDURES W CC.
119........................  VEIN LIGATION & STRIPPING.
143........................  CHEST PAIN.
149........................  MAJOR SMALL & LARGE BOWEL PROCEDURES W/O
                              CC.
178........................  UNCOMPLICATED PEPTIC ULCER W/O CC.
193........................  BILIARY TRACT PROC EXCEPT ONLY CHOLECYST W
                              OR W/O C.D.E. W CC.
208........................  DISORDERS OF THE BILIARY TRACT W/O CC.
229........................  HAND OR WRIST PROC, EXCEPT MAJOR JOINT
                              PROC, W/O CC.
241........................  CONNECTIVE TISSUE DISORDERS W/O CC.
260........................  SUBTOTAL MASTECTOMY FOR MALIGNANCY W/O CC.
273........................  MAJOR SKIN DISORDERS W/O CC.
284........................  MINOR SKIN DISORDERS W/O CC.
301........................  ENDOCRINE DISORDERS W/O CC.
323........................  URINARY STONES W CC, &/OR ESW LITHOTRIPSY.
324........................  URINARY STONES W/O CC.
326........................  KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE
                              >17 W/O CC .
339........................  TESTES PROCEDURES, NON-MALIGNANCY AGE >17.
347........................  MALIGNANCY, MALE REPRODUCTIVE SYSTEM, W/O
                              CC.
367........................  MALIGNANCY, FEMALE REPRODUCTIVE SYSTEM W/O
                              CC.
404........................  LYMPHOMA & NON-ACUTE LEUKEMIA W/O CC.
414........................  OTHER MYELOPROLIF DIS OR POORLY DIFF NEOPL
                              DIAG W/O CC.
433........................  ALCOHOL/DRUG ABUSE OR DEPENDENCE, LEFT AMA.
450........................  POISONING & TOXIC EFFECTS OF DRUGS AGE >17
                              W/O CC.
479........................  OTHER VASCULAR PROCEDURES W/O CC.

[[Page 28229]]

 
500........................  BACK & NECK PROCEDURES EXCEPT SPINAL FUSION
                              W/O CC.
509........................  FULL THICKNESS BURN W/O SKIN GRFT OR INH
                              INJ W/O CC OR SIG TRAUMA.
522........................  ALC/DRUG ABUSE OR DEPEND W REHABILITATION
                              THERAPY W/O CC
523........................  ALC/DRUG ABUSE OR DEPEND W/O REHABILITATION
                              THERAPY W/O CC
----------------------------
                               QUINTILE 2
------------------------------------------------------------------------
8..........................  PERIPH & CRANIAL NERVE & OTHER NERV SYST
                              PROC W/O CC.
22.........................  HYPERTENSIVE ENCEPHALOPATHY.
25.........................  SEIZURE & HEADACHE AGE >17 W/O CC.
31.........................  CONCUSSION AGE >17 W CC.
69*........................  OTITIS MEDIA & URI AGE >17 W/O CC.
109........................  CORONARY BYPASS W/O PTCA OR CARDIAC CATH.
128........................  DEEP VEIN THROMBOPHLEBITIS.
129........................  CARDIAC ARREST, UNEXPLAINED.
140........................  ANGINA PECTORIS.
175........................  G.I. HEMORRHAGE W/O CC.
177........................  UNCOMPLICATED PEPTIC ULCER W CC.
181........................  G.I. OBSTRUCTION W/O CC.
227........................  SOFT TISSUE PROCEDURES W/O CC.
228........................  MAJOR THUMB OR JOINT PROC, OR OTH HAND OR
                              WRIST PROC W CC.
234........................  OTHER MUSCULOSKELET SYS & CONN TISS O.R.
                              PROC W/O CC.
237........................  SPRAINS, STRAINS, & DISLOCATIONS OF HIP,
                              PELVIS & THIGH.
250........................  FX, SPRN, STRN & DISL OF FOREARM, HAND,
                              FOOT AGE >17 W CC.
251........................  FX, SPRN, STRN & DISL OF FOREARM, HAND,
                              FOOT AGE >17 W/O CC .
276........................  NON-MALIGANT BREAST DISORDERS.
295........................  DIABETES AGE 0-35.
305........................  KIDNEY,URETER & MAJOR BLADDER PROC FOR NON-
                              NEOPL W/O CC.
307........................  PROSTATECTOMY W/O CC.
325........................  KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE
                              >17 W CC.
328........................  URETHRAL STRICTURE AGE >17 W CC.
348........................  BENIGN PROSTATIC HYPERTROPHY W CC.
349........................  BENIGN PROSTATIC HYPERTROPHY W/O CC.
399........................  RETICULOENDOTHELIAL & IMMUNITY DISORDERS W/
                              O CC.
420........................  FEVER OF UNKNOWN ORIGIN AGE >17 W/O CC.
427........................  NEUROSES EXCEPT DEPRESSIVE.
441........................  HAND PROCEDURES FOR INJURIES.
447........................  ALLERGIC REACTIONS AGE >17.
449........................  POISONING & TOXIC EFFECTS OF DRUGS AGE >17
                              W CC.
467........................  OTHER FACTORS INFLUENCING HEALTH STATUS.
511........................  NON-EXTENSIVE BURNS W/O CC OR SIGNIFICANT
                              TRAUMA
532........................  SPINAL PROCEDURES W/O CC
----------------------------
                               QUINTILE 3
------------------------------------------------------------------------
17.........................  NONSPECIFIC CEREBROVASCULAR DISORDERS W/O
                              CC.
21.........................  VIRAL MENINGITIS.
29.........................  TRAUMATIC STUPOR & COMA, COMA <1 HR AGE >17
                              W/O CC.
44.........................  ACUTE MAJOR EYE INFECTIONS.
53.........................  SINUS & MASTOID PROCEDURES AGE >17.
83.........................  MAJOR CHEST TRAUMA W CC.
122........................  CIRCULATORY DISORDERS W AMI W/O MAJOR COMP,
                              DISCHARGED ALIVE.
124........................  CIRCULATORY DISORDERS EXCEPT AMI, W CARD
                              CATH & COMPLEX DIAG.
136........................  CARDIAC CONGENITAL & VALVULAR DISORDERS AGE
                              >17 W/O CC.
159........................  HERNIA PROCEDURES EXCEPT INGUINAL & FEMORAL
                              AGE >17 W CC.
185........................  DENTAL & ORAL DIS EXCEPT EXTRACTIONS &
                              RESTORATIONS, AG >17.
200........................  HEPATOBILIARY DIAGNOSTIC PROCEDURE FOR NON-
                              MALIGNANCY.
262........................  BREAST BIOPSY & LOCAL EXCISION FOR NON-
                              MALIGNANCY.
266........................  SKIN GRAFT &/OR DEBRID EXCEPT FOR SKIN
                              ULCER OR CELLULITIS W/O CC.
270........................  OTHER SKIN, SUBCUT TISS & BREAST PROC W/O
                              CC.
275........................  MALIGNANT BREAST DISORDERS W/O CC.
288........................  O.R. PROCEDURES FOR OBESITY.
299........................  INBORN ERRORS OF METABOLISM.
306........................  PROSTATECTOMY W CC.
319*.......................  KIDNEY & URINARY TRACT NEOPLASMS W/O CC
336........................  TRANSURETHRAL PROSTATECTOMY W CC.
352........................  OTHER MALE REPRODUCTIVE SYSTEM DIAGNOSES.
369........................  MENSTRUAL & OTHER FEMALE REPRODUCTIVE
                              SYSTEM DISORDERS.
394........................  OTHER O.R. PROCEDURES OF THE BLOOD AND
                              BLOOD FORMING ORGANS.
410........................  CHEMOTHERAPY W/O ACUTE LEUKEMIA AS
                              SECONDARY DIAGNOSIS.
476........................  PROSTATIC O.R. PROCEDURE UNRELATED TO
                              PRINCIPAL DIAGNOSIS.

[[Page 28230]]

 
493........................  LAPAROSCOPIC CHOLECYSTECTOMY W/O C.D.E. W
                              CC.
496........................  COMBINED ANTERIOR/POSTERIOR SPINAL FUSION.
497........................  SPINAL FUSION EXCEPT CERVICAL W CC.
502........................  KNEE PROCEDURES W PDX OF INFECTION W/O CC.
517........................  PERC CARDIO PROC W NON-DRUG ELUTING STENT W/
                              O AMI.
518........................  PERC CARDIO PROC W/O CORONARY ARTERY STENT
                              OR AMI.
538........................  LOCAL EXCIS & REMOV OF INT FIX DEV EXCEPT
                              HIP & FEMUR W/O CC
539........................  LYMPHOMA & LEUKEMIA W MAJOR OR PROCEDURE W
                              CC
----------------------------
                               QUINTILE 4
------------------------------------------------------------------------
1..........................  CRANIOTOMY AGE >17 W CC.
63.........................  OTHER EAR, NOSE, MOUTH & THROAT O.R.
                              PROCEDURES.
86*........................  PLEURAL EFFUSION W/O CC.
102*.......................  OTHER RESPIRATORY SYSTEM DIAGNOSES W/O CC.
108........................  OTHER CARDIOTHORACIC PROCEDURES.
115........................  PRM CARD PACEM IMPL W AMI/HR/SHOCK OR AICD
                              LEAD OR GNRTR.
116........................  OTHER PERMANENT CARDIAC PACEMAKER IMPLANT.
157........................  ANAL & STOMAL PROCEDURES W CC.
168........................  MOUTH PROCEDURES W CC.
201........................  OTHER HEPATOBILIARY OR PANCREAS O.R.
                              PROCEDURES.
216........................  BIOPSIES OF MUSCULOSKELETAL SYSTEM &
                              CONNECTIVE TISSUE.
218........................  LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT,
                              FEMUR AGE >17 W CC.
224........................  SHOULDER, ELBOW OR FOREARM PROC,EXC MAJOR
                              JOINT PROC, W/O CC.
226........................  SOFT TISSUE PROCEDURES W CC.
268........................  SKIN, SUBCUTANEOUS TISSUE & BREAST PLASTIC
                              PROCEDURES.
292........................  OTHER ENDOCRINE, NUTRIT & METAB O.R. PROC W
                              CC.
303........................  KIDNEY, URETER & MAJOR BLADDER PROCEDURES
                              FOR NEOPLASM.
304........................  KIDNEY, URETER & MAJOR BLADDER PROC FOR NON-
                              NEOPL W CC.
308........................  MINOR BLADDER PROCEDURES W CC.
310........................  TRANSURETHRAL PROCEDURES W CC.
312........................  URETHRAL PROCEDURES, AGE >17 W CC.
345........................  OTHER MALE REPRODUCTIVE SYSTEM O.R. PROC
                              EXCEPT FOR MALIGNANCY.
401........................  LYMPHOMA & NON-ACUTE LEUKEMIA W OTHER O.R.
                              PROC W CC.
408........................  MYELOPROLIF DISORD OR POORLY DIFF NEOPL W
                              OTHER O.R. PROC.
419........................  FEVER OF UNKNOWN ORIGIN AGE >17 W CC.
455........................  OTHER INJURY, POISONING & TOXIC EFFECT DIAG
                              W/O CC.
485........................  LIMB REATTACHMENT, HIP AND FEMUR PROC FOR
                              MULTIPLE SIGNIFICANT TRA .
487........................  OTHER MULTIPLE SIGNIFICANT TRAUMA.
501........................  KNEE PROCEDURES W PDX OF INFECTION W CC.
503........................  KNEE PROCEDURES W/O PDX OF INFECTION.
505........................  EXTENSIVE BURNS OF FULL THICKNESS BURNS
                              WITH MECH VENT 96+HRS WITHOUT SKIN GRAFT.
506........................  FULL THICKNESS BURN W SKIN GRAFT OR INHAL
                              INJ W CC OR SIG TRAUMA.
519........................  CERVICAL SPINAL FUSION W CC
529........................  VENTRICULAR SHUNT PROCEDURES W CC
----------------------------
                               QUINTILE 5
------------------------------------------------------------------------
46.........................  OTHER DISORDERS OF THE EYE AGE >17 W CC.
55.........................  MISCELLANEOUS EAR, NOSE, MOUTH & THROAT
                              PROCEDURES.
77.........................  OTHER RESP SYSTEM O.R. PROCEDURES W/O CC.
117........................  CARDIAC PACEMAKER REVISION EXCEPT DEVICE
                              REPLACEMENT.
118........................  CARDIAC PACEMAKER DEVICE REPLACEMENT.
125........................  CIRCULATORY DISORDERS EXCEPT AMI, W CARD
                              CATH W/O COMPLEX DIAG.
150........................  PERITONEAL ADHESIOLYSIS W CC.
152........................  MINOR SMALL & LARGE BOWEL PROCEDURES W CC.
154........................  STOMACH, ESOPHAGEAL & DUODENAL PROCEDURES
                              AGE >17 W CC.
161........................  INGUINAL & FEMORAL HERNIA PROCEDURES AGE
                              >17 W CC.
171*.......................  OTHER DIGESTIVE SYSTEM O.R. PROCEDURES W/O
                              CC.
191........................  PANCREAS, LIVER & SHUNT PROCEDURES W CC.
197........................  CHOLECYSTECTOMY EXCEPT BY LAPAROSCOPE W/O
                              C.D.E. W CC.
206*.......................  DISORDERS OF LIVER EXCEPT MALIG,CIRR,ALC
                              HEPA W/O CC.
209........................  MAJOR JOINT & LIMB REATTACHMENT PROCEDURES
                              OF LOWER EXTREMITY.
210........................  HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT
                              AGE >17 W CC.
230........................  LOCAL EXCISION & REMOVAL OF INT FIX DEVICES
                              OF HIP & FEMUR.
261........................  BREAST PROC FOR NON-MALIGNANCY EXCEPT
                              BIOPSY & LOCAL EXCISION.
267........................  PERIANAL & PILONIDAL PROCEDURES.
338........................  TESTES PROCEDURES, FOR MALIGNANCY.
341........................  PENIS PROCEDURES.
365........................  OTHER FEMALE REPRODUCTIVE SYSTEM O.R.
                              PROCEDURES.
406........................  MYELOPROLIF DISORD OR POORLY DIFF NEOPL W
                              MAJ O.R. PROC W CC.

[[Page 28231]]

 
424........................  O.R. PROCEDURE W PRINCIPAL DIAGNOSES OF
                              MENTAL ILLNESS.
443*.......................  OTHER O.R. PROCEDURES FOR INJURIES W/O CC.
454........................  OTHER INJURY, POISONING & TOXIC EFFECT DIAG
                              W CC.
486........................  OTHER O.R. PROCEDURES FOR MULTIPLE
                              SIGNIFICANT TRAUMA.
488........................  HIV W EXTENSIVE O.R. PROCEDURE.
499........................  BACK & NECK PROCEDURES EXCEPT SPINAL FUSION
                              W CC.
515........................  CARDIAC DEFIBRILLATOR IMPLANT W/O CARDIAC
                              CATH.
531........................  SPINAL PROCEDURES W CC.
533........................  EXTRACRANIAL PROCEDURES W CC.
535........................  CARDIAC DEFIB IMPLANT W CARDIAC CATH W AMI/
                              HF/SHOCK.
536........................  CARDIAC DEFIB IMPLANT W CARDIAC CATH W/O
                              AMI/HF/SHOCK.
------------------------------------------------------------------------
* One of the original 171 proposed low-volume LTC-DRGs initially
  assigned to this low-volume quintile; removed from the low-volume
  quintiles in addressing nonmonotonicity (see step 5 below).

4. Steps for Determining the Proposed FY 2005 LTC-DRG Relative Weights
    As we noted previously, the proposed FY 2005 LTC-DRG relative 
weights are determined in accordance with the methodology described in 
the August 1, 2003 final rule (68 FR 45380). In summary, LTCH cases 
must be grouped in the appropriate LTC-DRG, while taking into account 
the low-volume LTC-DRGs as described above, before the proposed FY 2005 
LTC-DRG relative weights can be determined. After grouping the cases in 
the appropriate proposed LTC-DRG, we are proposing to calculate the 
proposed relative weights for FY 2005 in this proposed rule by first 
removing statistical outliers and cases with a length of stay of 7 days 
or less. Next, we are proposing to adjust the number of cases in each 
proposed LTC-DRG for the effect of short-stay outlier cases under Sec.  
412.529. The short-stay adjusted discharges and corresponding charges 
would be used to calculate ``relative adjusted weights'' in each 
proposed LTC-DRG using the hospital-specific relative value method 
described above.
    Below we discuss in detail the steps for calculating the proposed 
FY 2005 LTC-DRG relative weights.
    Step 1--Remove statistical outliers.
    The first step in the calculation of the proposed FY 2005 LTC-DRG 
relative weights is to remove statistical outlier cases. We define 
statistical outliers as cases that are outside of 3.0 standard 
deviations from the mean of the log distribution of both charges per 
case and the charges per day for each LTC-DRG. These statistical 
outliers would be removed prior to calculating the proposed relative 
weights. We believe that they may represent aberrations in the data 
that distort the measure of average resource use. Including those LTCH 
cases in the calculation of the proposed relative weights could result 
in an inaccurate proposed relative weight that does not truly reflect 
relative resource use among the proposed LTC-DRGs.
    Step 2--Remove cases with a length of stay of 7 days or less.
    The proposed FY 2005 LTC-DRG relative weights should reflect the 
average of resources used on representative cases of a specific type. 
Generally, cases with a length of stay 7 days or less do not belong in 
a LTCH because such stays do not fully receive or benefit from 
treatment that is typical in a LTCH stay, and full resources are often 
not used in the earlier stages of admission to a LTCH. If we were to 
include stays of 7 days or less in the computation of the proposed FY 
2005 LTC-DRG relative weights, the value of many proposed relative 
weights would decrease and, therefore, payments would decrease to a 
level that may no longer be appropriate.
    We do not believe that it would be appropriate to compromise the 
integrity of the payment determination for those LTCH cases that 
actually benefit from and receive a full course of treatment at a LTCH, 
in order to include data from these very short-stays. Thus, in 
determining the proposed FY 2005 LTC-DRG relative weights, we remove 
LTCH cases with a length of stay of 7 days or less.
    Step 3--Adjust charges for the effects of short-stay outliers.
    The third step in the calculation of the proposed FY 2005 LTC-DRG 
relative weights is to adjust each LTCH's charges per discharge for 
short-stay outlier cases (that is, a patient with a length of stay that 
is less than or equal to five-sixths the average length of stay of the 
LTC-DRG).
    We make this adjustment by counting a short-stay outlier as a 
fraction of a discharge based on the ratio of the length of stay of the 
case to the average length of stay for the proposed LTC-DRG for 
nonshort-stay outlier cases. This has the effect of proportionately 
reducing the impact of the lower charges for the short-stay outlier 
cases in calculating the average charge for the proposed LTC-DRG. This 
process produces the same result as if the actual charges per discharge 
of a short-stay outlier case were adjusted to what they would have been 
had the patient's length of stay been equal to the average length of 
stay of the proposed LTC-DRG.
    As we explained in the August 1, 2003 final rule (68 FR 45380), 
counting short-stay outlier cases as full discharges with no adjustment 
in determining the proposed LTC-DRG relative weights would lower the 
proposed LTC-DRG relative weight for affected proposed LTC-DRGs because 
the relatively lower charges of the short-stay outlier cases would 
bring down the average charge for all cases within a proposed LTC-DRG. 
This would result in an ``underpayment'' to nonshort-stay outlier cases 
and an ``overpayment'' to short-stay outlier cases. Therefore, in this 
proposed rule, we adjust for short-stay outlier cases under Sec.  
412.529 in this manner since it results in more appropriate payments 
for all LTCH cases.
    Step 4--Calculate the Proposed FY 2005 LTC-DRG relative weights on 
an iterative basis.
    The process of calculating the proposed LTC-DRG relative weights 
using the hospital specific relative value methodology is iterative. 
First, for each LTCH case, we calculate a hospital-specific relative 
charge value by dividing the short-stay outlier adjusted charge per 
discharge (see step 3) of the LTCH case (after removing the statistical 
outliers (see step 1)) and LTCH cases with a length of stay of 7 days 
or less (see step 2) by the average charge per discharge for the LTCH 
in which the case occurred. The resulting ratio is then multiplied by 
the LTCH's case-mix

[[Page 28232]]

index to produce an adjusted hospital-specific relative charge value 
for the case. An initial case-mix index value of 1.0 is used for each 
LTCH.
    For each proposed LTC-DRG, the proposed FY 2005 LTC-DRG relative 
weight is calculated by dividing the average of the adjusted hospital-
specific relative charge values (from above) for the proposed LTC-DRG 
by the overall average hospital-specific relative charge value across 
all cases for all LTCHs. Using these recalculated proposed LTC-DRG 
relative weights, each LTCH's average proposed relative weight for all 
of its cases (case-mix) is calculated by dividing the sum of all the 
LTCH's proposed LTC-DRG relative weights by its total number of cases. 
The LTCHs' hospital-specific relative charge values above are 
multiplied by these hospital specific case-mix indexes. These hospital-
specific case-mix adjusted relative charge values are then used to 
calculate a new set of proposed LTC-DRG relative weights across all 
LTCHs. In this proposed rule, this iterative process is continued until 
there is convergence between the weights produced at adjacent steps, 
for example, when the maximum difference is less than 0.0001.
    Step 5--Adjust the proposed FY 2005 LTC-DRG relative weights to 
account for nonmonotonically increasing relative weights.
    As explained in section II.B. of this preamble, the proposed FY 
2005 CMS DRGs, upon which the proposed FY 2005 LTC-DRGs are based, 
contain ``pairs'' that are differentiated based on the presence or 
absence of CCs. The proposed LTC-DRGs with CCs are defined by certain 
secondary diagnoses not related to or inherently a part of the disease 
process identified by the principal diagnosis, but the presence of 
additional diagnoses does not automatically generate a CC. As we 
discussed in the August 1, 2003 final rule (68 FR 45381), the value of 
monotonically increasing relative weights rises as the resource use 
increases (for example, from uncomplicated to more complicated). The 
presence of CCs in a proposed LTC-DRG means that cases classified into 
a ``without CC'' proposed LTC-DRG are expected to have lower resource 
use (and lower costs). In other words, resource use (and costs) are 
expected to decrease across ``with CC''/''without CC'' pairs of 
proposed LTC-DRGs.
    For a case to be assigned to a proposed LTC-DRG with CCs, more 
coded information is called for (that is, at least one relevant 
secondary diagnosis), than for a case to be assigned to a proposed LTC-
DRG ``without CCs'' (which is based on only one principal diagnosis and 
no relevant secondary diagnoses). Currently, the LTCH claims data 
include both accurately coded cases without complications and cases 
that have complications (and cost more) but were not coded completely. 
Both types of cases are grouped to a proposed LTC-DRG ``without CCs'' 
since only one principal diagnosis was coded. Since the LTCH PPS was 
only implemented for cost reporting periods beginning on or after 
October 1, 2002 (FY 2003) and LTCHs were previously paid under cost-
based reimbursement, which is not based on patient diagnoses, coding by 
LTCHs for these cases may not have been as detailed as possible.
    Thus, in developing the FY 2003 LTC-DRG relative weights for the 
LTCH PPS based on FY 2001 claims data, as we discussed in the August 
30, 2002 LTCH PPS final rule (67 FR 55990), we found on occasion that 
the data suggested that cases classified to the LTC-DRG ``with CCs'' of 
a ``with CC''/``without CC'' pair had a lower average charge than the 
corresponding LTC-DRG ``without CCs.'' Similarly, based on FY 2003 
claims data, we also found on occasion that the data suggested that 
cases classified to the proposed LTC-DRG ``with CCs'' of a ``with CC''/
``without CC'' pair have a lower average charge than the corresponding 
proposed LTC-DRG ``without CCs'' for FY 2005.
    We believe this anomaly may be due to coding that may not have 
fully reflected all comorbidities that were present. Specifically, 
LTCHs may have failed to code relevant secondary diagnoses, which 
resulted in cases that actually had CCs being classified into a 
``without CC'' LTC-DRG. It would not be appropriate to pay a lower 
amount for the ``with CC'' LTC-DRG. Therefore, in this proposed rule, 
we grouped both the cases ``with CCs'' and ``without CCs'' together for 
the purpose of calculating the proposed FY 2005 LTC-DRG relative 
weights in this proposed rule. As we stated in the August 30, 2002 LTCH 
PPS final rule (67 FR 55990), we will continue to employ this 
methodology to account for nonmonotonically increasing relative weights 
until we have adequate data to calculate appropriate separate weights 
for these anomalous LTC-DRG pairs. We expect that, as was the case when 
we first implemented the IPPS, this problem will be self-correcting, as 
LTCHs submit more completely coded data in the future.
    There are three types of ``with CC'' and ``without CC'' pairs that 
could be nonmonotonic, that is, where the ``without CC'' proposed LTC-
DRG would have a higher average charge than the ``with CC'' proposed 
LTC-DRG. For this proposed rule, using the LTCH cases in the December 
2003 update of the FY 2003 MedPAR file, we identified two of the three 
types of nonmonotonic LTC-DRG pairs.
    The first category of nonmonotonically increasing proposed relative 
weights for FY 2005 LTC-DRG pairs ``with and without CCs'' contains 2 
pairs of proposed LTC-DRGs in which both the proposed LTC-DRG ``with 
CCs'' and the proposed LTC-DRG ``without CCs'' had 25 or more LTCH 
cases and, therefore, did not fall into one of the 5 low-volume 
quintiles. For those nonmonotonic LTC-DRG pairs, we would combine the 
LTCH cases and compute a new proposed relative weight based on the 
case-weighted average of the combined LTCH cases of the proposed LTC-
DRGs. The case-weighted average charge is determined by dividing the 
total charges for all LTCH cases by the total number of LTCH cases for 
the combined proposed LTC-DRG. This new proposed relative weight would 
then be assigned to both of the proposed LTC-DRGs in the pair. In this 
proposed rule, we are proposing that, for FY 2005, proposed LTC-DRGs 
144 and 145 and LTC-DRGs 444 and 445 are in this category.
    The second category of nonmonotonically increasing relative weights 
for proposed LTC-DRG pairs with and without CCs consists of zero pairs 
of proposed LTC-DRGs that has fewer than 25 cases, and each proposed 
LTC-DRG would be grouped to different proposed low-volume quintiles in 
which the ``without CC'' proposed LTC-DRG would be in a higher-weighted 
proposed low-volume quintile than the ``with CC'' proposed LTC-DRG. For 
those pairs, we would combine the LTCH cases and determine the case-
weighted average charge for all LTCH cases. The case-weighted average 
charge is determined by dividing the total charges for all LTCH cases 
by the total number of LTCH cases for the combined proposed LTC-DRG. 
Based on the case-weighted average LTCH charge, we determine which low-
volume quintile the ``combined LTC-DRG'' would be grouped. Both 
proposed LTC-DRGs in the pair would then be grouped into the same 
proposed low-volume quintile, and thus would have the same proposed 
relative weight. For FY 2005, in this proposed rule, there are no 
proposed LTC-DRGs that fall into this category.
    The third category of nonmonotonically increasing relative weights 
for proposed LTC-DRG pairs with and without CCs consists of 7 pairs of 
proposed LTC-DRGs where one of the proposed LTC-DRGs has fewer than

[[Page 28233]]

25 LTCH cases and is grouped to a proposed low-volume quintile and the 
other proposed LTC-DRG has 25 or more LTCH cases and has its own 
proposed LTC-DRG relative weight, and the proposed LTC-DRG ``without 
CCs'' has the higher proposed relative weight. We remove the proposed 
low-volume LTC-DRG from the proposed low-volume quintile and combine it 
with the other proposed LTC-DRG for the computation of a new proposed 
relative weight for each of these proposed LTC-DRGs. This new proposed 
relative weight is assigned to both proposed LTC-DRGs, so they each 
have the same proposed relative weight. For FY 2005, in this proposed 
rule, we are proposing the following proposed LTC-DRGs would be in this 
category: LTC-DRGs 68 and 69; LTC-DRGs 85 and 86; LTC-DRGs 101 and 102; 
LTC-DRGs 170 and 171; LTC-DRGs 205 and 206; LTC-DRGs 318 and 319; and 
LTC-DRGs 442 and 443.
    Step 6--Determine a proposed FY 2005 LTC-DRG relative weight for 
proposed LTC-DRGs with no LTCH cases.
    As we stated above, we determine the proposed relative weight for 
each proposed LTC-DRG using charges reported in the December 2003 
update of the FY 2003 MedPAR file. Of the 519 proposed LTC-DRGs for FY 
2005, we identified 170 proposed LTC-DRGs for which there were no LTCH 
cases in the database. That is, based on data from the FY 2003 MedPAR 
file used in this proposed rule, no patients who would have been 
classified to those proposed LTC-DRGs were treated in LTCHs during FY 
2003 and, therefore, no charge data were reported for those proposed 
LTC-DRGs. Thus, in the process of determining the proposed LTC-DRG 
relative weights, we are unable to determine proposed weights for these 
170 proposed LTC-DRGs using the methodology described in steps 1 
through 5 above. However, since patients with a number of the diagnoses 
under these proposed LTC-DRGs may be treated at LTCHs beginning in FY 
2005, we assign proposed relative weights to each of the 170 ``no 
volume'' proposed LTC-DRGs based on clinical similarity and relative 
costliness to one of the remaining 349 (519-170 = 349) proposed LTC-
DRGs for which we are able to determine proposed relative weights, 
based on FY 2003 claims data.
    As there are currently no LTCH cases in these ``no volume'' 
proposed LTC-DRGs, we determine proposed relative weights for the 170 
proposed LTC-DRGs with no LTCH cases in the FY 2003 MedPAR file used in 
this proposed rule by grouping them to the appropriate proposed low-
volume quintile. This methodology is consistent with our methodology 
used in determining proposed relative weights to account for the 
proposed low-volume LTC-DRGs described above.
    Our methodology for determining proposed relative weights for the 
``no volume'' proposed LTC-DRGs is as follows: First, we crosswalk the 
proposed no volume LTC-DRGs by matching them to other similar proposed 
LTC-DRGs for which there were LTCH cases in the FY 2003 MedPAR file 
based on clinical similarity and intensity of use of resources as 
determined by care provided during the period of time surrounding 
surgery, surgical approach (if applicable), length of time of surgical 
procedure, post-operative care, and length of stay. We assign the 
proposed relative weight for the applicable proposed low-volume 
quintile to the proposed no volume LTC-DRG if the proposed LTC-DRG to 
which it is crosswalked is grouped to one of the proposed low-volume 
quintiles. If the proposed LTC-DRG to which the proposed no volume LTC-
DRG is crosswalked is not one of the proposed LTC-DRGs to be grouped to 
one of the proposed low-volume quintiles, we compare the proposed 
relative weight of the proposed LTC-DRG to which the proposed no volume 
LTC-DRG is crosswalked to the proposed relative weights of each of the 
five quintiles and we assign the proposed no volume LTC-DRG the 
proposed relative weight of the proposed low-volume quintile with the 
closest proposed weight. For this proposed rule, a list of the proposed 
no volume FY 2005 LTC-DRGs and the proposed FY 2005 LTC-DRG to which it 
is crosswalked in order to determine the appropriate proposed low-
volume quintile for the assignment of a proposed relative weight for FY 
2005 is shown below in Table 2.

           Table 2.--Proposed No Volume LTC-DRG Crosswalk and Proposed Quintile Assignment for FY 2005
----------------------------------------------------------------------------------------------------------------
                                                                                                   Proposed low-
                                                                                  Proposed cross-     volume
        Proposed LTC-DRG                           Description                    walked LTC-DRG     quintile
                                                                                                     assigned.
----------------------------------------------------------------------------------------------------------------
2..............................  CRANIOTOMY AGE >17 W/O CC......................               1     Quintile 4.
3..............................  CRANIOTOMY AGE 0-17............................               1     Quintile 4.
6..............................  CARPAL TUNNEL RELEASE..........................             251     Quintile 2.
26.............................  SEIZURE & HEADACHE AGE 0-17....................              25     Quintile 2.
30.............................  TRAUMATIC STUPOR & COMA, COMA <1 HR AGE 0-17...              29     Quintile 3.
32.............................  CONCUSSION AGE >17 W/O CC......................              25     Quintile 2.
33.............................  CONCUSSION AGE 0-17............................              25     Quintile 2.
36.............................  RETINAL PROCEDURES.............................              47     Quintile 1.
37.............................  ORBITAL PROCEDURES.............................              47     Quintile 1.
38.............................  PRIMARY IRIS PROCEDURES........................              47     Quintile 1.
39.............................  LENS PROCEDURES WITH OR WITHOUT VITRECTOMY.....              47     Quintile 1.
40.............................  EXTRAOCULAR PROCEDURES EXCEPT ORBIT AGE >17....              47     Quintile 1.
41.............................  EXTRAOCULAR PROCEDURES EXCEPT ORBIT AGE 0-17...              47     Quintile 1.
42.............................  INTRAOCULAR PROCEDURES EXCEPT RETINA, IRIS &                 47     Quintile 1.
                                  LENS.
48.............................  OTHER DISORDERS OF THE EYE AGE 0-17............              47     Quintile 1.
49.............................  MAJOR HEAD & NECK PROCEDURES...................              64     Quintile 4.
50.............................  SIALOADENECTOMY................................              63     Quintile 4.
51.............................  SALIVARY GLAND PROCEDURES EXCEPT                             63     Quintile 4.
                                  SIALOADENECTOMY.
52.............................  CLEFT LIP & PALATE REPAIR......................              63     Quintile 4.
54.............................  SINUS & MASTOID PROCEDURES AGE 0-17............              53     Quintile 3.
56.............................  RHINOPLASTY....................................              53     Quintile 3.
57.............................  T&A PROC, EXCEPT TONSILLECTOMY &/OR                          69     Quintile 2.
                                  ADENOIDECTOMY ONLY, AGE >17.
58.............................  T&A PROC, EXCEPT TONSILLECTOMY &/OR                          69     Quintile 2.
                                  ADENOIDECTOMY ONLY, AGE 0-17.
59.............................  TONSILLECTOMY &/OR ADENOIDECTOMY ONLY, AGE >17.              69     Quintile 2.
60.............................  TONSILLECTOMY &/OR ADENOIDECTOMY ONLY, AGE 0-17              69     Quintile 2.

[[Page 28234]]

 
61.............................  MYRINGOTOMY W TUBE INSERTION AGE >17...........              69     Quintile 2.
62.............................  MYRINGOTOMY W TUBE INSERTION AGE 0-17..........              69     Quintile 2.
66.............................  EPISTAXIS......................................              69     Quintile 2.
67.............................  EPIGLOTTITIS...................................              63     Quintile 4.
70.............................  OTITIS MEDIA & URI AGE 0-17....................              69     Quintile 2.
71.............................  LARYNGOTRACHEITIS..............................              97     Quintile 1.
72.............................  NASAL TRAUMA & DEFORMITY.......................              53     Quintile 3.
74.............................  OTHER EAR, NOSE, MOUTH & THROAT DIAGNOSES AGE 0-             69     Quintile 2.
                                  17.
81.............................  RESPIRATORY INFECTIONS & INFLAMMATIONS AGE 0-17              69     Quintile 2.
91.............................  SIMPLE PNEUMONIA & PLEURISY AGE 0-17...........              90     Quintile 2.
98.............................  BRONCHITIS & ASTHMA AGE 0-17...................              97     Quintile 1.
104............................  CARDIAC VALVE & OTH MAJOR CARDIOTHORACIC PROC W             110     Quintile 1.
                                  CARD CATH.
105............................  CARDIAC VALVE & OTH MAJOR CARDIOTHORACIC PROC W/            110     Quintile 1.
                                  O CARD CATH.
106............................  CORONARY BYPASS W PTCA.........................             110     Quintile 1.
107............................  CORONARY BYPASS W CARDIAC CATH.................             110     Quintile 1.
111............................  MAJOR CARDIOVASCULAR PROCEDURES W/O CC.........             110     Quintile 1.
137............................  CARDIAC CONGENITAL & VALVULAR DISORDERS AGE 0-              136     Quintile 3.
                                  17.
146............................  RECTAL RESECTION W CC..........................             148     Quintile 5.
147............................  RECTAL RESECTION W/O CC........................             148     Quintile 5.
151............................  PERITONEAL ADHESIOLYSIS W/O CC.................             150     Quintile 5.
153............................  MINOR SMALL & LARGE BOWEL PROCEDURES W/O CC....             152     Quintile 5.
155............................  STOMACH, ESOPHAGEAL & DUODENAL PROCEDURES AGE               154     Quintile 5.
                                  >17 W/O CC.
156............................  STOMACH, ESOPHAGEAL & DUODENAL PROCEDURES AGE 0-            154     Quintile 5.
                                  17.
158............................  ANAL & STOMAL PROCEDURES W/O CC................             157     Quintile 4.
160............................  HERNIA PROCEDURES EXCEPT INGUINAL & FEMORAL AGE             159     Quintile 3.
                                  >17 W/O CC.
162............................  INGUINAL & FEMORAL HERNIA PROCEDURES AGE >17 W/             178     Quintile 1.
                                  O CC.
163............................  HERNIA PROCEDURES AGE 0-17.....................             178     Quintile 1.
164............................  APPENDECTOMY W COMPLICATED PRINCIPAL DIAG W CC.             148     Quintile 5.
165............................  APPENDECTOMY W COMPLICATED PRINCIPAL DIAG W/O               148     Quintile 5.
                                  CC.
166............................  APPENDECTOMY W/O COMPLICATED PRINCIPAL DIAG W               148     Quintile 5.
                                  CC.
167............................  APPENDECTOMY W/O COMPLICATED PRINCIPAL DIAG W/O             148     Quintile 5.
                                  CC.
169............................  MOUTH PROCEDURES W/O CC........................              53     Quintile 3.
184............................  ESOPHAGITIS, GASTROENT & MISC DIGEST DISORDERS              183     Quintile 2.
                                  AGE 0-17.
186............................  DENTAL & ORAL DIS EXCEPT EXTRACTIONS &                      185     Quintile 3.
                                  RESTORATIONS, AGE 0-17.
187............................  DENTAL EXTRACTIONS & RESTORATIONS..............             185     Quintile 3.
190............................  OTHER DIGESTIVE SYSTEM DIAGNOSES AGE 0-17......             189     Quintile 3.
192............................  PANCREAS, LIVER & SHUNT PROCEDURES W/O CC......             191     Quintile 5.
194............................  BILIARY TRACT PROC EXCEPT ONLY CHOLECYST W OR W/            193     Quintile 1.
                                  O C.D.E. W/O CC.
195............................  CHOLECYSTECTOMY W C.D.E. W CC..................             197     Quintile 5.
196............................  CHOLECYSTECTOMY W C.D.E. W/O CC................             197     Quintile 5.
198............................  CHOLECYSTECTOMY EXCEPT BY LAPAROSCOPE W/O                   197     Quintile 5.
                                  C.D.E. W/O CC.
199............................  HEPATOBILIARY DIAGNOSTIC PROCEDURE FOR                      200     Quintile 3.
                                  MALIGNANCY.
211............................  HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT AGE               210     Quintile 5.
                                  >17 W/O CC.
212............................  HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT AGE 0-            210     Quintile 5.
                                  17.
219............................  LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT,                 218     Quintile 4.
                                  FEMUR AGE >17 W/O CC ].
220............................  LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT,                 218     Quintile 4.
                                  FEMUR AGE 0-17.
223............................  MAJOR SHOULDER/ELBOW PROC, OR OTHER UPPER                   224     Quintile 4.
                                  EXTREMITY PROC W CC.
232............................  ARTHROSCOPY....................................             234     Quintile 2.
252............................  FX, SPRN, STRN & DISL OF FOREARM, HAND, FOOT                234     Quintile 2.
                                  AGE 0-17.
255............................  FX, SPRN, STRN & DISL OF UPARM, LOWLEG EX FOOT              234     Quintile 2.
                                  AGE 0-17.
257............................  TOTAL MASTECTOMY FOR MALIGNANCY W CC...........             275     Quintile 3.
258............................  TOTAL MASTECTOMY FOR MALIGNANCY W/O CC.........             275     Quintile 3.
259............................  SUBTOTAL MASTECTOMY FOR MALIGNANCY W CC........             275     Quintile 3.
279............................  CELLULITIS AGE 0-17............................             273     Quintile 1.
282............................  TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE 0-             281     Quintile 3.
                                  17.
286............................  ADRENAL & PITUITARY PROCEDURES.................              53     Quintile 3.
289............................  PARATHYROID PROCEDURES.........................              53     Quintile 3.
290............................  THYROID PROCEDURES.............................              53     Quintile 3.
291............................  THYROGLOSSAL PROCEDURES........................              53     Quintile 3.
293............................  OTHER ENDOCRINE, NUTRIT & METAB O.R. PROC W/O               292     Quintile 2.
                                  CC.
298............................  NUTRITIONAL & MISC METABOLIC DISORDERS AGE 0-17             297     Quintile 2.
309............................  MINOR BLADDER PROCEDURES W/O CC................             308     Quintile 4.
311............................  TRANSURETHRAL PROCEDURES W/O CC................             310     Quintile 4.
313............................  URETHRAL PROCEDURES, AGE >17 W/O CC............             312     Quintile 4.
314............................  URETHRAL PROCEDURES, AGE 0-17..................             305     Quintile 2.
322............................  KIDNEY & URINARY TRACT INFECTIONS AGE 0-17.....             326     Quintile 1.
327............................  KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE 0-              326     Quintile 1.
                                  17.
329............................  URETHRAL STRICTURE AGE >17 W/O CC..............             305     Quintile 2.
330............................  URETHRAL STRICTURE AGE 0-17....................             305     Quintile 2.

[[Page 28235]]

 
333............................  OTHER KIDNEY & URINARY TRACT DIAGNOSES AGE 0-17             332     Quintile 2.
334............................  MAJOR MALE PELVIC PROCEDURES W CC..............             345     Quintile 4.
335............................  MAJOR MALE PELVIC PROCEDURES W/O CC............             345     Quintile 4.
337............................  TRANSURETHRAL PROSTATECTOMY W/O CC.............             306     Quintile 3.
340............................  TESTES PROCEDURES, NON-MALIGNANCY AGE 0-17.....             339     Quintile 1.
342............................  CIRCUMCISION AGE >17...........................             339     Quintile 1.
343............................  CIRCUMCISION AGE 0-17..........................             339     Quintile 1.
344............................  OTHER MALE REPRODUCTIVE SYSTEM O.R. PROCEDURES              345     Quintile 4.
                                  FOR MALIGNANCY.
351............................  STERILIZATION, MALE............................             339     Quintile 1.
353............................  PELVIC EVISCERATION, RADICAL HYSTERECTOMY &                 365     Quintile 5.
                                  RADICAL VULVECTOMY.
354............................  UTERINE, ADNEXA PROC FOR NON-OVARIAN/ADNEXAL                365     Quintile 5.
                                  MALIG W CC.
355............................  UTERINE, ADNEXA PROC FOR NON-OVARIAN/ADNEXAL                365     Quintile 5.
                                  MALIG W/O CC.
356............................  FEMALE REPRODUCTIVE SYSTEM RECONSTRUCTIVE                   303     Quintile 4.
                                  PROCEDURES.
357............................  UTERINE & ADNEXA PROC FOR OVARIAN OR ADNEXAL                303     Quintile 4.
                                  MALIGNANCY.
358............................  UTERINE & ADNEXA PROC FOR NON-MALIGNANCY W CC..             303     Quintile 4.
359............................  UTERINE & ADNEXA PROC FOR NON-MALIGNANCY W/O CC             303     Quintile 4.
360............................  VAGINA, CERVIX & VULVA PROCEDURES..............             303     Quintile 4.
361............................  LAPAROSCOPY & INCISIONAL TUBAL INTERRUPTION....             149     Quintile 1.
362............................  ENDOSCOPIC TUBAL INTERRUPTION..................             149     Quintile 1.
363............................  D&C, CONIZATION & RADIO-IMPLANT, FOR MALIGNANCY             367     Quintile 1.
364............................  D&C, CONIZATION EXCEPT FOR MALIGNANCY..........             367     Quintile 1.
370............................  CESAREAN SECTION W CC..........................             369     Quintile 3.
371............................  CESAREAN SECTION W/O CC........................             367     Quintile 1.
372............................  VAGINAL DELIVERY W COMPLICATING DIAGNOSES......             367     Quintile 1.
373............................  VAGINAL DELIVERY W/O COMPLICATING DIAGNOSES....             367     Quintile 1.
374............................  VAGINAL DELIVERY W STERILIZATION &/OR D&C......             367     Quintile 1.
375............................  VAGINAL DELIVERY W O.R. PROC EXCEPT STERIL &/OR             367     Quintile 1.
                                  D&C.
376............................  POSTPARTUM & POST ABORTION DIAGNOSES W/O O.R.               367     Quintile 1.
                                  PROCEDURE.
377............................  POSTPARTUM & POST ABORTION DIAGNOSES W O.R.                 367     Quintile 1.
                                  PROCEDURE.
378............................  ECTOPIC PREGNANCY..............................             369     Quintile 3.
379............................  THREATENED ABORTION............................             367     Quintile 1.
380............................  ABORTION W/O D&C...............................             367     Quintile 1.
381............................  ABORTION W D&C, ASPIRATION CURETTAGE OR                     367     Quintile 1.
                                  HYSTEROTOMY.
382............................  FALSE LABOR....................................             367     Quintile 1.
383............................  OTHER ANTEPARTUM DIAGNOSES W MEDICAL                        367     Quintile 1.
                                  COMPLICATIONS.
384............................  OTHER ANTEPARTUM DIAGNOSES W/O MEDICAL                      367     Quintile 1.
                                  COMPLICATIONS.
385............................  NEONATES, DIED OR TRANSFERRED TO ANOTHER ACUTE              367     Quintile 1.
                                  CARE FACILITY.
386............................  EXTREME IMMATURITY OR RESPIRATORY DISTRESS                  367     Quintile 1.
                                  SYNDROME, NEONATE.
387............................  PREMATURITY W MAJOR PROBLEMS...................             367     Quintile 1.
388............................  PREMATURITY W/O MAJOR PROBLEMS.................             367     Quintile 1.
389............................  FULL TERM NEONATE W MAJOR PROBLEMS.............             367     Quintile 1.
390............................  NEONATE W OTHER SIGNIFICANT PROBLEMS...........             367     Quintile 1.
391............................  NORMAL NEWBORN.................................             367     Quintile 1.
392............................  SPLENECTOMY AGE >17............................             197     Quintile 5.
393............................  SPLENECTOMY AGE 0-17...........................             197     Quintile 5.
396............................  RED BLOOD CELL DISORDERS AGE 0-17..............             399     Quintile 2.
402............................  LYMPHOMA & NON-ACUTE LEUKEMIA W OTHER O.R. PROC             395     Quintile 4.
                                  W/O CC.
405............................  ACUTE LEUKEMIA W/O MAJOR O.R. PROCEDURE AGE 0-              404     Quintile 1.
                                  17.
407............................  MYELOPROLIF DISORD OR POORLY DIFF NEOPL W MAJ               408     Quintile 4.
                                  O.R. PROC W/O CC.
411............................  HISTORY OF MALIGNANCY W/O ENDOSCOPY............             367     Quintile 1.
412............................  HISTORY OF MALIGNANCY W ENDOSCOPY..............             367     Quintile 1.
417............................  SEPTICEMIA AGE 0-17............................             416     Quintile 3.
422............................  VIRAL ILLNESS & FEVER OF UNKNOWN ORIGIN AGE 0-              426     Quintile 1.
                                  17.
432............................  OTHER MENTAL DISORDER DIAGNOSES................             427     Quintile 2.
446............................  TRAUMATIC INJURY AGE 0-17......................             445     Quintile 3.
448............................  ALLERGIC REACTIONS AGE 0-17....................             447     Quintile 2.
451............................  POISONING & TOXIC EFFECTS OF DRUGS AGE 0-17....             455     Quintile 4.
471............................  BILATERAL OR MULTIPLE MAJOR JOINT PROCS OF                  236     Quintile 2.
                                  LOWER EXTREMITY.
481............................  BONE MARROW TRANSPLANT.........................             394     Quintile 3.
482............................  TRACHEOSTOMY FOR FACE, MOUTH & NECK DIAGNOSES..              63     Quintile 4.
484............................  CRANIOTOMY FOR MULTIPLE SIGNIFICANT TRAUMA.....               1     Quintile 4.
491............................  MAJOR JOINT & LIMB REATTACHMENT PROCEDURES OF               209     Quintile 5.
                                  UPPER EXTREMITY.
492............................  CHEMOTHERAPY W ACUTE LEUKEMIA OR W USE OF HI                410     Quintile 3.
                                  DOSE CHEMOAGENT.
494............................  LAPAROSCOPIC CHOLECYSTECTOMY W/O C.D.E. W/O CC.             493     Quintile 3.
498............................  SPINAL FUSION EXCEPT CERVICAL W/O CC...........             497     Quintile 3.
504............................  EXTENSIVE BURNS OF FULL THICKNESS BURNS WITH                468     Quintile 5.
                                  MECH VENT 96+HRS WITH SKIN GRAFT.
507............................  FULL THICKNESS BURN W SKIN GRFT OR INHAL INJ W/             508     Quintile 3.
                                  O CC OR SIG TRAUMA.
516............................  PERCUTANEOUS CARDIOVASC PROC W AMI.............             518     Quintile 3.

[[Page 28236]]

 
520............................  CERVICAL SPINAL FUSION W/O CC..................             497     Quintile 3.
525............................  OTHER HEART ASSIST SYSTEM IMPLANT..............             468     Quintile 5.
526............................  PERCUTNEOUS CARDIOVASULAR PROC W DRUG ELUTING               517     Quintile 3.
                                  STENT W AMI.
527............................  PERCUTNEOUS CARDIOVASULAR PROC W DRUG ELUTING               517     Quintile 3.
                                  STENT W/O AMI.
528............................  INTRACRANIAL VASCULAR PROC W PDX HEMORRHAGE....               1     Quintile 4.
530............................  VENTRICULAR SHUNT PROCEDURES W/O CC............             529     Quintile 4.
534............................  EXTRACRANIAL PROCEDURES W/O CC.................             500     Quintile 1.
540............................  LYMPHOMA & LEUKEMIA W MAJOR OR PROCEDURE W/O CC             399     Quintile 2.
----------------------------------------------------------------------------------------------------------------

    To illustrate this methodology for determining the proposed 
relative weights for the 170 proposed LTC-DRGs with no LTCH cases, we 
are providing the following examples, which refer to the no volume 
proposed LTC-DRGs crosswalk information for FY 2005 provided above in 
Table 2:

    Example 1: There were no cases in the FY 2003 MedPAR file used 
for this proposed rule for proposed LTC-DRG 163 (Hernia Procedures 
Age 0-17). Since the procedure is similar in resource use and the 
length and complexity of the procedures and the length of stay are 
similar, we determined that proposed LTC-DRG 178 (Uncomplicated 
Peptic Ulcer Without CC), which is assigned to proposed low-volume 
quintile 1 for the purpose of determining the proposed FY 2005 
relative weights, would display similar clinical and resource use. 
Therefore, we assign the same proposed relative weight of proposed 
LTC-DRG 178 of 0.4964 (Quintile 1) for FY 2005 (Table 11 in the 
Addendum to this proposed rule) to LTC-DRG 163.
    Example 2: There were no LTCH cases in the FY 2003 MedPAR file 
used in this proposed rule for proposed LTC-DRG 91 (Simple Pneumonia 
and Pleurisy Age 0-17). Since the severity of illness in patients 
with bronchitis and asthma is similar in patients regardless of age, 
we determined that proposed LTC-DRG 90 (Simple Pneumonia and 
Pleurisy Age >17 Without CC) would display similar clinical and 
resource use characteristics and have a similar length of stay to 
LTC-DRG 91. There were over 25 cases in proposed LTC-DRG 90. 
Therefore, it would not be assigned to a low-volume quintile for the 
purpose of determining the LTC-DRG relative weights. However, under 
our established methodology, proposed LTC-DRG 91, with no LTCH 
cases, would need to be grouped to a low-volume quintile. We 
identified that the proposed low-volume quintile with the closest 
weight to proposed LTC-DRG 90 (0.7368; see Table 11 in the Addendum 
to this proposed rule) would be proposed low-volume quintile 2 
(0.6685; see Table 11 in the Addendum to this proposed rule). 
Therefore, we assign proposed LTC-DRG 91 a proposed relative weight 
of 0.6885 for FY 2005.
    Furthermore, we are proposing LTC-DRG relative weights of 0.0000 
for heart, kidney, liver, lung, pancreas, and simultaneous pancreas/
kidney transplants (LTC-DRGs 103, 302, 480, 495, 512, and 513, 
respectively) for FY 2005 because Medicare will only cover these 
procedures if they are performed at a hospital that has been 
certified for the specific procedures by Medicare and presently no 
LTCH has been so certified.
    Based on our research, we found that most LTCHs only perform 
minor surgeries, such as minor small and large bowel procedures, to 
the extent any surgeries are performed at all. Given the extensive 
criteria that must be met to become certified as a transplant center 
for Medicare, we believe it is unlikely that any LTCHs would become 
certified as a transplant center. In fact, in the nearly 20 years 
since the implementation of the IPPS, there has never been a LTCH 
that even expressed an interest in becoming a transplant center.
    However, if in the future a LTCH applies for certification as a 
Medicare-approved transplant center, we believe that the application 
and approval procedure would allow sufficient time for us to 
determine appropriate weights for the LTC-DRGs affected. At the 
present time, we would only include these six transplant LTC-DRGs in 
the GROUPER program for administrative purposes. Since we use the 
same GROUPER program for LTCHs as is used under the IPPS, removing 
these LTC-DRGs would be administratively burdensome.
    Again, we note that as this system is dynamic, it is entirely 
possible that the number of proposed LTC-DRGs with a zero volume of 
LTCH cases based on the system will vary in the future. We used the 
best most recent available claims data in the MedPAR file to 
identify zero volume LTC-DRGs and to determine the proposed relative 
weights in this proposed rule.
    Table 11 in the Addendum to this proposed rule lists the 
proposed LTC-DRGs and their respective proposed relative weights, 
geometric mean length of stay, and five-sixths of the geometric mean 
length of stay (to assist in the determination of short-stay outlier 
payments under Sec.  412.529) for FY 2005.

E. Proposed Add-On Payments for New Services and Technologies

[If you choose to comment on issues in this section, please include the 
caption ``New Technology Applications'' at the beginning of your 
comment.]
1. Background
    Sections 1886(d)(5)(K) and (L) of the Act establish a process of 
identifying and ensuring adequate payment for new medical services and 
technologies under the IPPS. Section 1886(d)(5)(K)(vi) of the Act 
specifies that a medical service or technology will be considered new 
if it meets criteria established by the Secretary after notice and 
opportunity for public comment. Section 1886(d)(5)(K)(ii)(I) of the Act 
specifies that the process must apply to a new medical service or 
technology if, ``based on the estimated costs incurred with respect to 
discharges involving such service or technology, the DRG prospective 
payment rate otherwise applicable to such discharges under this 
subsection is inadequate.''
    The regulations implementing this provision establish three 
criteria for special treatment. First, Sec.  412.87(b)(2) defines when 
a specific medical service or technology will be considered new for 
purposes of new medical service or technology add-on payments. The 
statutory provision contemplated the special payment treatment for new 
medical services or technologies until such time as data are available 
to reflect the cost of the technology in the DRG weights through 
recalibration. There is a lag of 2 to 3 years from the point a new 
medical service or technology is first introduced on the market and 
when data reflecting the use of the medical service or technology are 
used to calculate the DRG weights. For example, data from discharges 
occurring during FY 2003 are used to calculate the proposed FY 2005 DRG 
weights in this proposed rule. Section 412.87(b)(2) provides that a 
``medical service or technology may be considered new within 2 or 3 
years after the point at which data begin to become available 
reflecting the ICD-9-CM code assigned to the new medical service or 
technology (depending on when a new code is assigned and data on the 
new medical service or technology become

[[Page 28237]]

available for DRG recalibration). After CMS has recalibrated the DRGs, 
based on available data, to reflect the costs of an otherwise new 
medical service or technology, the medical service or technology will 
no longer be considered `new' under the criterion for this section.''
    The 2-year to 3-year period would ordinarily begin with FDA 
approval, unless there was some documented delay in bringing the 
product onto the market after that approval (for instance, component 
production or drug production had been postponed until FDA approval due 
to shelf life concerns). After the DRGs have been recalibrated to 
reflect the costs of an otherwise new medical service or technology, 
the special add-on payment for new medical services or technology 
ceases (Sec.  412.87(b)(2)). For example, an approved new technology 
that received FDA approval in October 2003 and entered the market at 
that time may be eligible to receive add-on payments as a new 
technology until FY 2006 (discharges occurring before October 1, 2005), 
when data reflecting the costs of the technology would be used to 
recalibrate the DRG weights. Because the FY 2006 DRG weights will be 
calculated using FY 2004 MedPAR data, the costs of such a new 
technology would likely be reflected in the FY 2006 DRG weights.
    Section 412.87(b)(3) further provides that, to receive special 
payment treatment, new medical services or technologies must be 
inadequately paid otherwise under the DRG system. To assess whether 
technologies would be inadequately paid under the DRGs, we establish 
thresholds to evaluate applicants for new technology add-on payments. 
In the August 1, 2003 final rule (68 FR 45385), we established the 
threshold at the geometric mean standardized charge for all cases in 
the DRG plus 75 percent of 1 standard deviation above the geometric 
mean standardized charge (based on the logarithmic values of the 
charges and transformed back to charges) for all cases in the DRG to 
which the new medical service or technology is assigned (or the case-
weighted average of all relevant DRGs, if the new medical service or 
technology occurs in many different DRGs). Table 10 in the Addendum to 
the August 1, 2003 final rule (68 FR 45648) listed the qualifying 
threshold by DRG, based on the discharge data that we used to calculate 
the FY 2004 DRG weights.
    However, section 503(b)(1) of Public Law 108-173 amended section 
1886(d)(5)(K)(ii)(I) of the Act to provide for ``applying a threshold* 
* *that is the lesser of 75 percent of the standardized amount 
(increased to reflect the difference between cost and charges) or 75 
percent of one standard deviation for the diagnosis-related group 
involved.'' The provisions of section 503(b)(1) apply to classification 
for fiscal years beginning with FY 2005. We have updated Table 10 from 
the October 6, 2003 Federal Register correction document, which 
contains the thresholds that we are using to evaluate applications for 
new service or technology add-on payments for FY 2005, using the 
section 503(b)(1) measures stated above, and posted these new 
thresholds on our Web site at: www.cms.hhs.gov/providers/hipps/newtech.asp. The thresholds published in this FY 2005 proposed rule are 
preliminary thresholds for FY 2006. The final thresholds published in 
the FY 2005 final rule will be used to evaluate applicants for new 
technology add-on payments during FY 2006. (Refer to section IV. D. of 
this preamble for a discussion of a revision of the regulations to 
incorporate the change made by section 503(b)(1) of Public Law 108-
173.)
    Section 412.87(b)(1) of our existing regulations provides that a 
new technology is an appropriate candidate for an additional payment 
when it represents an advance in medical technology that substantially 
improves, relative to technologies previously available, the diagnosis 
or treatment of Medicare beneficiaries. For example, a new technology 
represents a substantial clinical improvement when it reduces 
mortality, decreases the number of hospitalizations or physician visits 
or reduces recovery time compared to the technologies previously 
available. (See the September 7, 2001 final rule (66 FR 46902) for a 
complete discussion of this criterion.)
    The new medical service or technology add-on payment policy 
provides additional payments for cases with high costs involving 
eligible new medical services or technologies while preserving some of 
the incentives under the average-based payment system. The payment 
mechanism is based on the cost to hospitals for the new medical service 
or technology. Under Sec.  412.88, Medicare pays a marginal cost factor 
of 50 percent for the costs of a new medical service or technology in 
excess of the full DRG payment. If the actual costs of a new medical 
service or technology case exceed the DRG payment by more than the 50-
percent marginal cost factor of the new medical service or technology, 
Medicare payment is limited to the DRG payment plus 50 percent of the 
estimated costs of the new technology.
    The report language accompanying section 533 of Public Law 106-554 
indicated Congressional intent that the Secretary implement the new 
mechanism on a budget neutral basis (H.R. Conf. Rep. No. 106-1033, 
106th Cong., 2nd Sess. at 897 (2000)). Section 1886(d)(4)(C)(iii) of 
the Act requires that the adjustments to annual DRG classifications and 
relative weights must be made in a manner that ensures that aggregate 
payments to hospitals are not affected. Therefore, in the past, we 
accounted for projected payments under the new medical service and 
technology provision during the upcoming fiscal year at the same time 
we estimated the payment effect of changes to the DRG classifications 
and recalibration. The impact of additional payments under this 
provision was then included in the budget neutrality factor, which was 
applied to the standardized amounts and the hospital-specific amounts.
    Section 503(d)(2) of Public Law 108-173 amended section 
1886(d)(5)(K)(ii)(III) of the Act to provide that there shall be no 
reduction or adjustment in aggregate payments under the IPPS due to 
add-on payments for new medical services and technologies. Therefore, 
add-on payments for new medical services or technologies for FY 2005 
and later years will not be budget neutral. We discuss the regulation 
change necessary to implement this provision in section IV.H. of this 
proposed rule.
    Applicants for add-on payments for new medical services or 
technologies for FY 2006 must submit a formal request, including a full 
description of the clinical applications of the medical service or 
technology and the results of any clinical evaluations demonstrating 
that the new medical service or technology represents a substantial 
clinical improvement, along with a significant sample of data to 
demonstrate the medical service or technology meets the high-cost 
threshold, no later than early October 2004. Applicants must submit a 
complete database no later than mid-December 2004. Complete application 
information, along with final deadlines for submitting a full 
application, will be available at our Web site after publication of the 
FY 2005 final rule at: www.cms.hhs.gov/providers/hipps/default.asp. To 
allow interested parties to identify the new medical services or 
technologies under review before the publication of the proposed rule 
for FY 2006, the Web site will also list the tracking forms completed 
by each applicant.

[[Page 28238]]

2. Other Provisions of Section 503 of Public Law 108-173
    Section 503(b)(2) of Public Law 108-173 amended section 
1886(d)(5)(K) of the Act by adding a new clause (viii) to provide for a 
mechanism for public input before publication of a notice of proposed 
rule making regarding whether a medical service or technology 
represents a substantial improvement or advancement. The revised 
process for evaluating new medical service and technology applications 
requires the Secretary to--
     Provide, before publication of a proposed rule, for public 
input regarding whether a new service or technology represents an 
advance in medical technology that substantially improves the diagnosis 
or treatment of Medicare beneficiaries.
     Make public and periodically update a list of the services 
and technologies for which an application for add-on payments is 
pending.
     Accept comments, recommendations, and data from the public 
regarding whether a service or technology represents a substantial 
improvement.
     Provide, before publication of a proposed rule, for a 
meeting at which organizations representing hospitals, physicians, 
manufacturers, and any other interested party may present comments, 
recommendations, and data regarding whether a new service or technology 
represents a substantial clinical improvement to the clinical staff of 
CMS.
    In order to satisfy the requirements of this last provision, we 
published a notice in the Federal Register on February 27, 2004, and 
held a town meeting at the CMS Headquarters Office in Baltimore, MD, on 
March 15, 2004. In the announcement notice for the meeting, we stated 
that the opinions and alternatives provided during the meeting would 
assist us in our evaluations of applications by allowing public 
discussions of the substantial clinical improvement criteria for each 
of the FY 2005 new medical service and technology add-on payment 
applications before the publication of this FY 2005 IPPS proposed rule.
    Approximately 70 participants registered and attended in person, 
while additional participants listened over an open telephone line. The 
participants focused on presenting data on the substantial clinical 
improvement aspect of their products, as well as the need for 
additional payments to ensure access to Medicare beneficiaries. In 
addition, we also received many written comments regarding the 
substantial clinical improvement criterion for the applicants. We have 
considered these comments in our evaluation of each new application for 
FY 2005 in this proposed rule. We have summarized these comments, or if 
applicable, indicated that no comments were received, at the end of the 
discussion of the individual applications.
    Section 503(c) of Public Law 108-173 amended section 1886(d)(5)(K) 
of the Act by adding a new clause (ix) requiring that before 
establishing any add-on payment for a new medical service or 
technology, that the Secretary shall seek to identify one or more DRGs 
associated with the new technology, based on similar clinical or 
anatomical characteristics and the costs of the technology and assign 
the new technology into a DRG where the average costs of care most 
closely approximate the costs of care using the new technology. No add-
on payment shall be made with respect to such a new technology.
    At the time an application is submitted, the DRGs associated with 
the new technology are identified. We only determine that a new 
technology add-on payment is appropriate when the reimbursement under 
these DRGs is not adequate for this new technology. The criterion for 
this determination is the cost threshold, which we discuss below. We 
discuss the assignments of several new technologies within the DRG 
payment system in section II.B. of this preamble.
    In this proposed rule, we evaluate whether new technology add-on 
payments will continue in FY 2005 for the two technologies that 
currently receive such payments. In accordance with section 503(e)(2) 
of Public Law 108-173, we also reconsider one application for new 
technology add-on payments that was denied last year. Finally, we 
present our evaluations of 10 new applications for add-on payments in 
FY 2005.
3. FY 2005 Status of Technology Approved for FY 2004 Add-On Payments
    a. Drotrecogin Alfa (Activated)--Xigris[reg]
    Xigris[reg], a biotechnology product that is a recombinant version 
of naturally occurring Activated Protein C (APC), was approved by the 
FDA on November 21, 2001. In the August 1, 2002 IPPS final rule (67 FR 
50013), we determined that cases involving the administration of 
Xigris[reg], (as identified by the presence of code 00.11 (Infusion of 
drotrecogin alfa (activated)) were eligible for additional payments in 
FY 2003. (The August 1, 2002 final rule contains a detailed discussion 
of this technology.)
    In the August 1, 2003 final IPPS rule (68 FR 45387), we indicated 
that, for FY 2004, we would continue to make add-on payments for cases 
involving the administration of Xigris[reg] as identified by the 
presence of code 00.11. This was because we determined that Xigris[reg] 
was still within the 2-year to 3-year period before the costs of this 
new technology would be reflected in the DRG weights.
    Xigris[reg] became available on the market at the time of its FDA 
licensure on November 21, 2001. Early in FY 2005, Xigris[reg] will be 
beyond the 2-year to 3-year period during which a technology can be 
considered new. Therefore, we are proposing that Xigris[reg] will not 
continue to receive new technology add-on payments in FY 2005. During 
the period of 2 years and 6 months since it came onto the market, 
Xigris[reg] has been used frequently in the appropriate DRGs. For FY 
2005, we analyzed the number of cases involving this technology in the 
FY 2003 MedPAR file. We found 4,243 cases that received Xigris[reg], 
the majority of which fell appropriately into DRGs 415, 416, 475, and 
483, with by far the most cases in DRG 416 (Septicemia Age >17). 
Accordingly, the costs of Xigris[reg] are now well-represented in those 
DRGs. Therefore, we are proposing that FY 2004 will be the final year 
for Xigris[reg] to receive add-on payments.
    We received no public comments regarding the continuation of add-on 
payments for Xigris[reg].
    The manufacturer also asked us to consider creating a DRG 
specifically for severe sepsis. We discuss this request in section 
II.B.16.c. of this proposed rule. b. InFUSETM (Bone 
Morphogenetic Proteins (BMPs) for Spinal Fusions)
    InFUSETM was approved by FDA for use on July 2, 2002, 
and became available on the market immediately thereafter. In the 
August 1, 2003 IPPS final rule (68 FR 45388), we approved 
InFUSETM for add-on payments under Sec.  412.88, effective 
for FY 2004. This approval was on the basis of using 
InFUSETM for single-level, lumbar spinal fusion, consistent 
with the FDA's approval and the data presented to us by the applicant. 
Therefore, we limited the add-on payment to cases using this technology 
for anterior lumbar fusions in DRGs 497 (Spinal Fusion Except Cervical 
With CC) and 498 (Spinal Fusion Except Cervical Without CC). Cases 
involving InFUSETM that are eligible for the new technology 
add-on payment are identified by assignment to DRGs 497 and 498 as a 
lumbar spinal fusion, with the combination of ICD-9-CM procedure codes 
84.51 (Insertion of

[[Page 28239]]

interbody spinal fusion device) and 84.52 (Insertion of recombinant 
bone morphogenetic protein).
    Because InFUSETM was approved by the FDA for use on July 
2, 2003, it is still within the 2-year to 3-year period during which a 
technology can be considered new under the regulations. Therefore, we 
are proposing to continue add-on payments for FY 2005 for cases 
receiving InFUSETM for spinal fusions in DRGs 497 (Spinal 
Fusion Except Cervical With CC) and 498 (Spinal Fusion Except Cervical 
Without CC). We are also proposing to continue limiting the add-on 
payment for cases receiving InFUSETM, to those cases 
identified by the presence of procedure codes 84.51 and 84.52. However, 
we are proposing to eliminate add-on payment for the interbody fusion 
device that is used in combination with this recombinant human bone 
morphogenetic protein (rhBMP) product (procedure code 84.52). We note 
that currently add-on payments for InFUSETM include costs 
for the interbody fusion device (the LT cage, identified by procedure 
code 84.51), used in the spinal fusion procedure with the 
InFUSETM product. Because this device is not a new 
technology, but in fact has been in use for 9 years for spinal fusions, 
we believe that it is inappropriate to pay for this device in 
conjunction with the genuinely new rhBMP technology. Therefore, we are 
proposing no longer to pay for the interbody fusion device as bundled 
in the current maximum add-on payment amount of $4,450 for cases that 
qualify for additional payment. This proposal would reduce the add-on 
payment to account for no longer paying for the LT cage. This would 
reduce the cost of this new technology by $4,990, which results in a 
total cost of $3,910 for InFUSETM. Therefore, we are 
proposing a maximum add-on amount of $1,955 for cases that qualify for 
additional payment. Although we are proposing to eliminate payment for 
the LT cage, we would still require the presence of procedure code 
84.51 (in combination with procedure code 84.52) when making add-on 
payments for new technology for InFUSETM. This is due to the 
fact that the LT cage is still required by the FDA when 
InFUSETM is used for single level spinal fusions.
    We received the following public comments in accordance with 
section 503(b)(2) of Public Law 108-173 regarding the continuation of 
add-on payments for this technology.
    Comment: Several commenters wrote expressing support for continued 
add-on payments for this technology. Many of these commenters were 
physicians who use the device. These commenters noted that the 
hospitals for which they work did not allow use of the device until the 
new technology add-on payments began on October 1, 2003. Therefore, 
they encouraged the continued add-on payment to ensure continued access 
of the device to patients. They also argued that, because utilization 
remained low in FY 2003, the DRG recalibration for FY 2005 would not 
supply adequate payment data for the cases using the device, further 
jeopardizing patient access to the technology.
    Response: As discussed above, we are proposing to continue payments 
because this technology is still within the 2-year to 3-year period 
during which a technology can be considered new under the regulation.
4. Reevaluation of FY 2004 Applications That Were Not Approved
    Section 503(e)(2) of Public Law 108-173 requires us to reconsider 
all applications for new medical service or technology add-on payments 
that were denied for FY 2004. We received two applications for new 
technologies to be designated eligible for add-on payments for new 
technology for FY 2004. We approved InFUSE for use in spinal fusions 
for new technology add-on payments in FY 2004. We denied the 
application for new technology add-on payments for the GLIADEL[reg] 
wafer.

GLIADEL[reg] Wafer

    Gliablastoma Multiforme (GBM) is a very aggressive primary brain 
tumor. Standard care for patients diagnosed with GBM includes surgical 
resection followed by radiation and, in some cases, systemic 
chemotherapy. According to the manufacturer, the GLIADEL[reg] wafer is 
indicated for use at the time of surgery in order to prolong survival 
in patients with GBM. Implanted directly into the cavity that is 
created when a brain tumor is surgically removed, the GLIADEL[reg] 
wafer delivers chemotherapy directly to the site where the tumor is 
most likely to recur.
    The FDA gave initial approval for the GLIADEL[reg] wafer on 
September 23, 1996, for use as an adjunct to surgery to prolong 
survival in patients with recurrent GBM for whom surgical resection is 
indicated. In 2003, Guilford Pharmaceuticals submitted an application 
for approval of the GLIADEL[reg] wafer for add-on payments and stated 
that the technology should still be considered new for FY 2004, despite 
its approval by the FDA on September 23, 1996. The manufacturer argued 
that the technology was still new because it had not been possible to 
specifically identify cases involving use of the GLIADEL[reg] wafer in 
the MedPAR data prior to the adoption of a new ICD-9-CM code 00.10 
(Implantation of a chemotherapeutic agent) on October 1, 2002. However, 
as discussed in the September 7, 2001 final rule (66 FR 46914), the 
determination concerning whether a technology meets this criterion 
depends on the date of its availability for use in the Medicare 
population rather than the date a specific code may be assigned. A 
technology can be considered new for 2 or 3 years after data reflecting 
the costs of the technology begin to become available. Data on the 
costs of this technology began to become available in September 1996. 
As a result, the costs of this technology are currently reflected in 
the DRG weights. As discussed in the final rule for FY 2004 (68 FR 
45391), on February 26, 2003, the FDA approved the GLIADEL[reg] wafer 
for use in newly diagnosed patients with high-grade malignant glioma as 
an adjunct to surgery and radiation. However, our understanding is that 
many newly diagnosed patients were already receiving this therapy. To 
the extent that this is true, the charges associated with this use of 
the GLIADEL[reg] wafer were also reflected in the DRG relative weights. 
Therefore, the GLIADEL[reg] wafer did not meet this criterion for FY 
2004.
    Section 503(e)(2) of Public Law 108-173 required us to reconsider 
this application, but did not revise the criterion for determining 
whether a medical service or technology is new. As stated above, the 
FDA originally approved the GLIADEL[reg] wafer on September 23, 1996. 
Therefore, this technology is beyond the period in which it can be 
considered new. Accordingly, we are proposing to deny this application 
for new technology add-on payments for FY 2005.
    We received no public comments regarding our reconsideration of 
this application for add-on payments.
    Guilford also asked us to consider reclassifying this device into 
another DRG. We discuss issues relating to the DRG assignment of the 
GLIADEL[reg] wafer in section II.B.16.c. of this preamble.
5. FY 2005 Applicants for New Technology Add-On Payments
a. InFUSETM Bone Graft (Bone Morphogenetic Proteins (BMPs) 
for Tibia Fractures)
    Bone Morphogenetic Proteins (BMPs) have been shown to have the 
capacity to induce new bone formation and, therefore, to enhance 
healing. Using recombinant techniques, some BMPs

[[Page 28240]]

(referred to as rhBMPs) can be produced in large quantities. This has 
cleared the way for their potential use in a variety of clinical 
applications such as in delayed unions and nonunions of fractured bones 
and spinal fusions. One such product, rhBMP-2, is developed for use 
instead of a bone graft with spinal fusions.
    Medtronic Sofamor Danek submitted an application for the 
InFUSETM Bone Graft for use in tibia fractures for approval 
as a new technology eligible for add-on payments in FY 2005. Medtronic 
submitted a similar application for new technology add-on payments in 
FY 2004 for InFUSETM Bone Graft/LT-CAGE Lumbar Tapered 
Fusion Device. As discussed above, we approved this application for FY 
2004, and we are proposing to continue to make new technology payments 
for FY 2005 for InFUSETM when used in spinal fusions (refer 
to section III.E.3.b. of this preamble).
    In cases of open tibia fractures, InFUSETM is applied 
using an absorbable collagen sponge, which is then applied to the 
fractured bone in order to promote new bone formation. This use 
currently represents an off-label use of InFUSETM. The 
manufacturer contends that this use is severely limited due to the 
greatly increased costs for treating these cases with 
InFUSETM at the time of wound debridement and closure. The 
manufacturer has conducted a clinical trial and is awaiting FDA 
approval for the use of InFUSETM for open tibia fractures. 
According to the manufacturer, this approval is expected before 
publication of the final rule. The application for add-on payments for 
the use of InFUSE for open tibia fractures proposes that such payment 
would encourage the use of InFUSETM for treatment of these 
fractures of grade II or higher (up to and including grade III, which 
often must be amputated due to the severity of injury). The additional 
payment, according to the applicant, would encourage more hospitals to 
use the technology at the time of initial wound closure and would 
result in reduced rates of infection and nonunion currently associated 
with the treatment of these injuries.
    The manufacturer submitted data on 315 cases using 
InFUSETM for open tibia fractures in the FY 2002 MedPAR 
file, as identified by procedure code 79.36 (Reduction, fracture, open, 
internal fixation, tibia and fibula) and diagnosis codes of either 
823.30 (Fracture of tibia alone, shaft, open) or 823.32 (Fracture of 
fibula and tibia, shaft, open). The applicant also submitted data for a 
hospital sample that included 63 cases using the same identifying 
codes. Based on the data submitted by the applicant, 
InFUSETM would be used in four different DRGs: 217 (Wound 
Debridement and Skin Graft Except Hand, for Musculoskeletal and 
Connective Tissue Disorders), 218 and 219 (Lower Extremity and Humerus 
Procedures Except Hip, Foot, Femur Age > 17, With and Without CCs, 
respectively) and 486 (Other O.R. Procedures for Multiple Significant 
Trauma). The analysis performed by the applicant resulted in a case-
weighted cost threshold of $27,111 for these four DRGs. The average 
case-weighted standardized charge for cases using InFUSE in these four 
DRGs would be $46,468. Therefore, the applicant maintains that 
InFUSETM for open tibia fractures meets the cost criterion.
    InFUSETM was approved by the FDA for use in open tibia 
fractures on April 30, 2004. Because FDA approval was not received in 
time for full consideration of the application in this proposed rule, 
we are not presenting our full analysis of this application in this 
proposed rule. However, we have already determined that this technology 
still qualifies as new in the context of proposing to extend new 
technology add-on payments for InFUSETM for single-level 
spinal fusions. We must still determine whether it is appropriate to 
approve add-on payments for InFUSETM in cases of open tibia 
fractures in light of the cost and substantial improvement criteria. 
Therefore, we invite comments on whether use of InFUSETM for 
open tibia fractures should qualify for add-on payments under these 
criteria.
    We note that, in the September 7, 2001 final rule (66 FR 46915), we 
stated that if an existing technology was assigned to different DRGs 
than those in which the technology was initially used, the new use may 
be considered for new technology add-on payments if it also meets the 
substantial clinical improvement and inadequacy of payment criteria. 
Under the policy suggested in that rule, approval of 
InFUSETM for tibia fractures would start a new period of 
add-on payments for the new use of this technology. However, we have 
some reservations about whether this result would be appropriate. It 
might be possible, under the policy described in the September 7, 2001 
final rule, for a technology to receive new technology add-on payments 
for many years after it is introduced, provided that use of the 
technology is continually expanded to treatment of new conditions. We 
invite comment on whether it would be more appropriate merely to extend 
the existing approval of InFUSETM for spinal fusions to 
cases where InFUSETM is used for open tibia fractures, 
without extending the time period during which the technology will 
qualify for add-on payments.
    We note that as part of its application, the applicant submitted 
evidence on the substantial clinical improvement criterion. The 
applicant cited data from a prospective, controlled study published on 
December 12, 2002 in The Journal of Bone and Joint Surgery (Govender, 
S., Crismma, C., Genant, H.K., Valentin-Opran, V., ``Recombinant Human 
Bone Morphogenetic Protein-2 for Treatment of Open Tibia Fractures,'' 
Vol. 84-A, No. 12. p. 2123). The study, also known as BESTT study 
group, involved 49 trauma centers in 11 countries. The study enrolled 
450 patients who had sustained an open tibia shaft fracture that 
normally would be treated by intramedullary nail fixation and soft 
tissue management. The patients were randomly and blindly assigned to 
one of three groups: the standard of care as stated above, the standard 
of care plus implantation an absorbable collagen sponge soaked with .75 
mg/ml of rhBmP-2, or the standard of care plus implantation of an 
absorbable collagen sponge soaked with 1.50 mg/ml of rhBMP-2. The study 
followed up with 421 (94 percent) of all patients. The applicant stated 
that the study found that patients who received the standard of care 
plus an absorbable collagen sponge soaked with 1.50 mg/ml of rhBMP-2 
achieved the following results compared to the standard of care without 
the rhBMP: a 44-percent reduction in the rate of secondary surgery, an 
average of 39 days reduction in time of clinical healing and lower 
infection rates. As a result, the applicant maintains that 
InFUSETM in tibia fractures represents a substantial 
clinical improvement over previously available technologies.
    We are not presenting a full analysis of this application under the 
substantial clinical improvement criterion because the technology had 
not yet received FDA approval for this use in time for consideration in 
this proposed rule. However, we note that although the cited study does 
provide some evidence of clinical efficacy, we have some concerns about 
whether the study conclusively demonstrates substantial clinical 
improvement over previously available technologies because of its 
design. (It is important to note, as we stated in the August 1, 2002 
Federal Register (67 FR 50015), that we do not employ FDA guidelines to 
determine what drugs, devices, or technologies qualify for new 
technology add-on payments under Medicare. Our criteria

[[Page 28241]]

do not depend on the standard of safety and efficacy that the FDA sets 
for general use, but on a demonstration of substantial clinical 
improvement in the Medicare population, particularly patients over age 
65.) We will present our full analysis of the evidence regarding 
clinical improvement in the final rule.
    We received no public comments regarding this application for add-
on payments.
b. Norian Skeletal Repair System (SRS)[reg] Bone Void Filler
    Brigham and Women's Hospital submitted an application for approval 
of the Norian Skeletal Repair System (SRS)[reg] Bone Void Filler 
(Norian SRS[reg] Cement), manufactured by Synthes for new technology 
add-on payments for FY 2005. Synthes has been assisting the applicant 
with supplemental information and data to help the applicant with the 
application process. According to the manufacturer, Norian SRS[reg] 
Cement is an injectable, fast-setting carbonated apatite cement used to 
fill defects in areas of compromised cancellous bone during restoration 
or augmentation of the skeleton. The product provides a bone void 
filler that resorbs and is replaced with bone during the healing 
process.
    On December 23, 1998, the FDA approved Norian SRS[reg] for use as 
an adjunct for fracture stabilization in the treatment of low impact, 
unstable, metaphyseal distal radius fractures, in cases where early 
mobilization is indicated. On December 20, 2001, the FDA approved 
Norian SRS[reg] Cement for use in bony voids or defects that are not 
intrinsic to the stability of the bony structure. Norian SRS[reg] 
Cement is intended to be placed or injected into bony voids or gaps in 
the skeletal system. These defects may be surgically created osseous 
defects or osseous defects caused by traumatic injury to the bone.
    Despite the time that has elapsed since FDA approval, the 
manufacturer contends that Norian SRS[reg] Cement should still be 
considered new for several reasons. First, until April 2002, Norian 
SRS[reg] Cement was hand mixed using a mortar and pestle. Once Norian 
SRS[reg] Cement was approved by the FDA in December 2001 (for the 
indication of use in bony voids or defects that are not intrinsic to 
the stability of the bony structure), the manufacturer issued a new 
pneumatic mixer. According to the manufacturer, this new pneumatic 
mixer allows for better preparation, reliability, and ease of use. In 
addition, a new injection syringe mechanism was developed and made 
available in May 2002 and replaced the ``Norian Delivery Device''. The 
manufacturer believes these new procedures for mixing and delivery of 
the product to the patient should be considered new services as stated 
in section 1886(d)(5)(k)(ii) of the Act and Sec.  412.87(b)(1) of the 
regulations. Second, the manufacturer contends that the cement should 
still be considered new because there is no ICD-9-CM code to uniquely 
identify Norian SRS[reg] Cement within the DRGs.
    Although there have been changes in the way Norian SRS[reg] Cement 
is mixed and delivered to the patient, we do not believe these changes 
are significant enough to regard the technology as new. While these 
changes may enhance the ease with which the technology is used, the 
product remains substantially the same as when it was initially 
developed. As we have indicated previously, technology can be 
considered new only for 2 to 3 years after data reflecting the costs of 
the technology begin to become available. Data on the costs of this 
technology began to become available after FDA approval in 1998, and 
these costs are currently reflected in the DRG weights. As we discussed 
in the September 7, 2001 final rule (66 FR 46914), the determination 
concerning whether a technology meets this criterion depends on the 
date of its availability for use in the Medicare population rather than 
the date a specific code may be assigned. Therefore, we are proposing 
that Norian SRS[reg] Cement does not meet the criterion that a medical 
service or technology be considered new.
    Although we are not proposing to approve this application for add-
on payments because the technology does not meet the newness criterion, 
we note that the manufacturer submitted information on the cost 
criterion and the substantial clinical improvement criterion. The 
manufacturer submitted 52 Medicare and non-Medicare cases using Norian 
SRS[reg] Cement. There are currently no ICD-9-CM codes that can 
distinctly identify Norian SRS[reg] Cement within the MedPAR data; 
therefore, we cannot track this technology with our own analysis of 
MedPAR data. Based on the data submitted by the manufacturer, cases 
using Norian SRS'' Cement were found in 12 DRGs, with 71.1 percent of 
the cases in DRGs 210, 218, 219, and 225. Based on the 52 cases 
submitted by the applicant, the case-weighted threshold across all DRGs 
was $22,493. The average case-weighted standardized charge was $29,032. 
As a result, the applicant and manufacturer maintain that Norian 
SRS[reg] Cement meets the cost criterion.
    According to the manufacturer, Norian SRS[reg] Cement represents a 
substantial clinical improvement for the following reasons: It enhances 
short-term and long-term structural support, improves the rate and 
durability of healing, decreases donor site morbidity, decreases risk 
of infection at graft site, lowers the risk of operative complications 
from shorter operative procedures, lowers the rate of post-treatment 
hospitalizations and physician visits, and finally, reduces pain.
    However, we are not presenting a full evaluation of the application 
for add-on payments for Norian SRS[reg] Cement under these criteria 
because the technology does not meet the newness criterion. Therefore, 
we are proposing to deny add-on payments for this technology.
    We received no public comments on this application for add-on 
payments.
c. InSync[reg] Defibrillator System (Cardiac Resynchronization Therapy 
with Defibrillation (CRT-D))

    Cardiac Resynchronization Therapy (CRT), also known as bi-
ventricular pacing, is a therapy for chronic heart failure. A CRT 
implantable system provides electrical stimulation to the right atrium, 
right ventricle, and left ventricle to recoordinate or resynchronize 
ventricular contractions and improve the oxygenated blood flow to the 
body (cardiac output).
    Medtronic submitted an application for approval of the InSync[reg] 
Defibrillator System, a cardiac resynchronization therapy with 
defibrillation system (CRT-D), for new technology add-on payments for 
FY 2005. This technology combines resynchronization therapy with 
defibrillation for patients with chronic, moderate-to-severe heart 
failure who meet the criteria for an implantable cardiac defibrillator. 
Unlike conventional implantable cardiac defibrillators, which treat 
only arrhythmias, CRT- devices have a dual therapeutic nature intended 
to treat two aspects of a patient's heart disease concurrently: (1) The 
symptoms of moderate to severe heart failure (that is, the ventricular 
dysynchrony); and (2) cardiac arrhythmias, as documented by an 
electrophysiologic testing or clinical history or both, which would 
cause sudden cardiac arrest.
    InSync[reg] Defibrillation System received FDA approval on June 26, 
2002. However, another manufacturer, Guidant, received FDA approval for 
its CRT-D device on May 2, 2002. Guidant, and another competitor that 
has yet to receive FDA approval for its CRT-D device, have requested 
that their devices

[[Page 28242]]

be included in any approval of CRT-D for new technology add-on 
payments. As we discussed in the September 7, 2001 final rule (66 FR 
46915), an approval of a new technology for special payment should 
extend to all technologies that are substantially similar. Otherwise, 
our payment policy would bestow an advantage to the first applicant to 
receive approval for a particular new technology.
    The applicant contends that, despite the approval of a similar 
device in May 2002, the InSync[reg] Defibrillator System should still 
be considered new for several reasons: First, an ICD-9-CM code was only 
issued in FY 2003, which falls within the 2-year to 3-year range 
provided in the regulations. Second, the utilization of CRT-Ds is still 
growing and has not reached full utilization and, therefore, CRT-Ds 
remain underreported within the FY 2003 MedPAR data that will be used 
to recalibrate the DRG weights for FY 2005. Finally, the applicant 
believes reporting of CRT-Ds may be insufficient to accurately 
recalibrate the DRGs because the new ICD-9-CM codes for CRT-Ds are 
unlikely to be used consistently and accurately by hospitals in the 
first year.
    We have discussed the relationship between existence of a specific 
ICD-9-CM code for a technology and our determination of its status as a 
new technology. As discussed in the September 7, 2001 final rule (66 FR 
46914), the determination of whether a technology is new depends on the 
date of its availability for use in the Medicare population, rather 
than the date a specific code may be assigned. Because CRT-Ds were 
available upon the initial FDA approval in May 2002, we consider the 
technology to be new from this date and not the date a code was 
assigned.
    Using the December 2003 update file to the FY 2003 MedPAR file, we 
have identified 10,950 cases using CRT-D in the FY 2003 MedPAR 
database. Of these, 10,694 cases were reported in DRGs 514 and 515 
(then Cardiac Defibrillator Implant With and Without Cardiac Catheter, 
respectively). In DRG 515, we found 3,948 cases with procedure code 
00.51 (Implantation of cardiac resynchronization defibrillator, total 
system (CRT-D)) and 6,746 cases in DRG 514. DRG 514 is no longer valid, 
effective in FY 2004. In FY 2004, we assigned new cases of 
defibrillator implants with cardiac catheters from DRG 514 to new DRGs 
535 (Cardiac Defibrillator Implant with Cardiac Catheter With Acute 
Myocardial Infarction (AMI) Heart Failure/Shock) and 536 (Cardiac 
Defibrillator Implant with Cardiac Catheter Without Acute Myocardial 
Infarction (AMI) Heart Failure/Shock). Using the 6,746 cases from the 
FY 2003 MedPAR found in DRG 514, we examined the primary diagnosis 
codes necessary for assignment to DRG 535 along with procedure code 
00.51 and found 3,396 cases of CRT-D for DRG 535. The remaining 3,350 
CRT-D cases found in DRG 514 using procedure code 00.51 fall into DRG 
536. For FY 2003, the total number of cases of CRT-D found in the FY 
2003 MedPAR data for DRGs 514 and 515 were 48,486. Cases reporting CRT-
Ds thus represent 22 percent of all cases for these DRGs.
    A medical service or technology can no longer be considered new 
after 2 to 3 years, when data reflecting the costs of the technology 
begin to become available. Data on the costs of this technology began 
to become available in May 2002. Our analysis of data from the FY 2003 
MedPAR file also shows that the costs of CRT-D are represented by a 
substantial number of cases within the DRGs. However, as discussed 
above, the technology still remains within the 2-year to 3-year period 
during which it can be considered new. Therefore, we are considering 
whether the CRT-D technology still meets the newness criterion. We 
welcome comments on this issue as we analyze whether to approve this 
technology (which would included the InSync[reg] application) in the 
final rule.
    We note that the applicant submitted information on the cost and 
substantial clinical improvement criteria. The applicant commissioned 
Navigant Consulting, Inc. to collect charge data on CRT-D. Navigant 
found 354 Medicare cases among 30 hospitals. Cases were identified 
using ICD-9-CM procedure code 00.51. Of these 354 cases, 44.1 percent 
were reported in DRG 515, 23.7 percent were reported in DRG 535, and 
32.2 percent were reported in DRG 536. These DRGs result in a case-
weighted threshold of $78,674. The average case-weighted standardized 
charge for the 354 cases mentioned above was $79,163. Based on these 
data, the manufacturer contends that InSync[reg] Defibrillator System 
would meet the cost criterion.
    In the September 7, 2001 final rule, we stated that the data 
submitted must be of a sufficient sample size to demonstrate a 
significant likelihood that the sample mean approximates the true mean 
across all cases likely to receive the new technology. Using a standard 
statistical methodology for determining the needed (random) sample size 
based on the standard deviations of the DRGs identified by the 
applicant as likely to include cases receiving a CRT-D, we have 
determined that a random sample size of 354 cases can be reasonably 
expected to produce an estimate within $3,500 of the true mean.\3\ Of 
course, the data submitted do not represent a random sample of all 
cases in these DRGs across all hospitals.
---------------------------------------------------------------------------

    \3\ The formula is n=4 [sigma]/B\2\, where [sigma] the standard 
deviation of the population, and B is the bound on the error of the 
estimate (the range within which the sample means can reliably 
predict the population mean). See Statistics for Management and 
Economics, Fifth Edition, by Mendenhall, W., Reinmuth, J., Beaver, 
R., and Duhan, D.
---------------------------------------------------------------------------

    The manufacturer also contends that the added capability of the 
InSync[reg] Defibrillator System device provides significant benefits 
over and above a conventional defibrillator. The InSync[reg] 
Defibrillator System device treats both the comorbid conditions of 
ventricular arrhythmias and moderate to severe heart failure, and takes 
the place of the existing treatment of drug therapy for heart failure 
plus a conventional implantable cardiac defibrillator for ventricular 
arrhythmia. The applicant states this CRT-D is a substantial clinical 
improvement for patients who remain symptomatic despite drug therapy 
and have the comorbid condition of heart failure. According to the 
applicant, some of the improved outcomes that result from using a CRT-D 
device instead of existing treatments include: improved quality of 
life, improved exercise tolerance, improved homodynamic performance, 
and reduced hospitalizations and mortality due to chronic heart 
failure.
    We welcome comments on whether this technology meets these 
criteria, but especially about whether it meets the newness criterion 
in the light of the extent to which it is represented cases within the 
relevant DRGs. We will determine whether to approve this technology in 
the light of these comments and our continuing analysis.
    We received the following public comments in accordance with 
section 503(b)(2) of Public Law 108-173 regarding this application for 
add-on payments:
    Comment: One commenter noted that CRT-D has had positive clinical 
outcomes by reversing remodeling of the heart and improving the heart's 
ability to pump more efficiently. The commenter added that CRT-D has 
helped decrease hospitalizations and length of stay.
    Response: We appreciate the commenters' input on this criterion. We 
will consider these comments regarding the substantial clinical 
improvement criterion if we determine that the technology meets the 
other two criteria.

[[Page 28243]]

    d. GliaSite[reg] Radiation Therapy System (RTS)
    The Pinnacle Health Group submitted an application for approval of 
GliaSite[reg] Radiation Therapy System (RTS) for new technology add-on 
payments. GliaSite[reg] RTS was approved by the FDA for use on April 
15, 2001. The system involves several components, including a drug 
called Iotrex and a GliaSite[reg] catheter. Iotrex is an organically 
bound liquid form of Iodine \125\ used in intracavitary brachytherapy 
with GliaSite[reg] RTS. Iotrex is a single nonencapsulated (liquid) 
radioactive source. The liquid is a solution of sodium 
3-(I\125\) iodo-4-hydroxybenzenesulfonate and is used to 
deliver brachytherapy for treatment of brain cancer.
    The delivery system for Iotrex is the GliaSite[reg] RTS catheter. 
Iotrex is administered via injection through a self-sealing port into 
the primary lumen of the barium-impregnated catheter that leads to the 
balloon reservoir. After a malignant brain tumor has been resected, the 
balloon catheter (GliaSite[reg]) is implanted temporarily inside the 
cavity. The patient is released from the hospital. After a period of 3 
days to 3 weeks, the patient is readmitted. During the second 
admission, the appropriate dose (200 to 600 millicuries) of radiation 
is then administered. Iotrex is infused into the GliaSite[reg] catheter 
and intracavitary radiation is delivered to the target area. The gamma 
radiation emitted by Iotrex is delivered directly to the margins of the 
tumor bed. After 3 to 7 days, the Iotrex is removed.
    GliaSite[reg] RTS was approved by the FDA for use on April 15, 
2001. Technology is no longer considered new 2 to 3 years after data 
reflecting the costs of the technology begin to become available. 
Because data regarding this technology began to become available in 
2001, we have determined that GliaSite[reg] RTS does not meet the 
criterion that a medical service or technology be considered new. 
Therefore, we are proposing to deny approval of GliaSite[reg] RTS for 
new technology add-on payments.
    Although we are proposing not to approve this application because 
GliaSite[reg] does not meet the newness criterion, we note that the 
applicant submitted information on the cost criterion and substantial 
clinical improvement criterion. The applicant stated that the number of 
cases in DRG 7 for FY 2004 was projected to be 14,782, and estimated 
that 10 percent (or about 1,478) of those patients would be candidates 
for GliaSite[reg] RTS. The applicant estimated that the standardized 
charge for all cases using the technology in DRG 7 was $49,406. Based 
on this calculation, the manufacturer stated in its application that 
this figure is greater than the cost threshold of $32,115 for DRG 7. 
Therefore, according to the manufacturer, it appears that GliaSite[reg] 
would meet the cost criterion.
    The applicant also claims this way of delivering brachytherapy to 
the brain is significantly more patient friendly. The use of a single 
intracavitary applicator positioned inside the resection cavity during 
the initial surgery in place of an interstitial-seed implant removes 
the need for additional invasive procedures and the need for multiple 
puncture sites (up to 20). In addition, the manufacturer claims that 
the approach used in the GliaSite[reg] RTS system improves dose-
delivery and provides a more practical means of delivering the 
brachytherapy.
    However, as discussed above, GliaSite[reg] does not meet the 
newness criterion. Therefore, we are proposing to deny add-on payments 
for this technology in FY 2005.
    We received no public comments on this application for add-on 
payments.
e. Natrecor[reg]--Human B-Type Natriuretic Peptide (hBNP)
    Scios, Inc. submitted an application for approval of Natrecor[reg] 
for new technology add-on payments. Natrecor is a member of a new class 
of drugs, Human B-type Natriuretic Peptide (hBNP), and it is 
manufactured from E. coli with recombinant DNA technology. It binds to 
the particulate guanylate cyclase receptor of vascular smooth muscle 
endothelial cells, leading to increased intracellular concentrations of 
guanosine 3'5'-cyclic monophosphate, and therefore to enhance smooth 
muscle cell relaxation, ultimately causing dilation of arteries and 
veins. The applicant states that Natrecor[reg] is more potent and 
relieves symptoms of heart failure more rapidly, while also causing 
less hemodynamic instability than intravenous nitroglycerin, the most 
commonly used vasodilator for heart failure.
    Natrecor[reg] was approved by the FDA for the treatment of acute 
congestive heart failure on August 10, 2001. It is indicated for the 
intravenous treatment of patients with acutely decompensated congestive 
heart failure (dyspnea). Congestive heart failure is the result of 
impaired pumping capacity of the heart. It causes a variety of clinical 
consequences, including water retention, sodium retention, pulmonary 
congestion, and diminished perfusion of blood to all parts of the body.
    The applicant concedes that the FY 2003 MedPAR file includes 
hospital charge information for patients receiving Natrecor[reg]. The 
manufacturer contends that Natrecor[reg] should still be considered new 
for several reasons. The first reason is that these data will not 
provide an accurate representation of hospital utilization of this 
product nor an adequate reimbursement rate for hospitals treating acute 
congestive heart failure patients with Natrecor[reg] in FY 2005. The FY 
2003 MedPAR file represents the first full year in which the ICD-9-CM 
procedure code 00.13 (Injection or infusion of nesiritide) was in 
effect. Therefore, the manufacturer anticipates a slow increase in the 
accuracy of coding and billing in FY 2003. In addition, the 
manufacturer stated that market penetration for this product was 3 
percent for FY 2003, but is expected to be significantly higher for FY 
2005.
    However, technology is no longer considered new 2 to 3 years after 
data reflecting its costs begin to become available. Because data 
reflecting the costs of Natrecor[reg] began to become available in 
2001, these costs are currently reflected in the DRG weights. In 
addition, as discussed in the September 7, 2001 final rule (66 FR 
46914), the determination of whether a technology is new depends on the 
date of its availability for use in the Medicare population rather than 
the date a specific code was assigned. Because Natrecor[reg] was 
available upon FDA approval, it does not meet the criterion that a 
medical service or technology be considered new.
    Although we are proposing not to approve this application because 
Natrecor[reg] does not meet the newness criterion, we note that the 
applicant submitted information on the cost criterion and substantial 
clinical improvement criterion. Scios commissioned Premier, Inc. to 
search its database of 196 hospitals for cases in FY 2003 that used 
Natrecor[reg]. Premier identified 9,811 cases across many DRGs using 
National Drug Codes from pharmacy databases. The majority of cases 
(approximately 42 percent) were found in DRG 127 (Heart Failure and 
Shock), while the remaining cases were found in other DRGs that 
individually had a maximum of 8 percent of the 9,811 cases identified 
by Premier. The case-weighted threshold across all DRGs for 
Natrecor[reg], using data provided by Premier, was $26,509. (DRGs with 
less than 25 discharges were not included in this analysis.) The 
average charge for cases with Natrecor[reg] was $70,137. The average 
case-weighted standardized charge across all DRGs was $43,422.

[[Page 28244]]

Because the average standardized charge is greater than the case-
weighted threshold, the applicant stated that Natrecor[reg] meets the 
cost criterion.
    The manufacturer stated that Natrecor[reg] represents a substantial 
clinical improvement over existing treatments for decompensated 
congestive heart failure because it provides novel clinical effects, 
leads to fewer complications, and improves overall clinical outcomes. 
Specifically, Natrecor[reg] reduces left ventricular preload, 
afterload, and pulmonary capillary wedge pressure without inducing 
tachyphylaxis, and it causes a balanced vasodilation of veins, 
arteries, and coronary arteries that increases cardiac output. It has 
also been shown to significantly reduce dyspnea, and it blocks the 
rennin-aldosterone-angiotensin system, thereby reducing sodium 
retention and enhancing diuresis and natriuresis. In addition, 
Natrecor[reg] is not pro-arrhythmic; it does not increase cardiac work 
by causing tachycardia, and it does not cause electrolyte imbalances.
    However, as discussed above, Natrecor[reg] does not meet the 
newness criterion. Therefore, we are proposing to deny add-on payments 
for this technology in FY 2005.
    We received no public comments on this application for add-on 
payments.
f. Kinetra[reg] Implantable Neurostimulator for Deep Brain Stimulation
    Medtronic, Inc. submitted an application for approval of the 
Kinetra[reg] implantable neurostimulator device for new technology add-
on payments. The Kinetra[reg] device was approved by the FDA on 
December 16, 2003. The Kinetra[reg] implantable neurostimulator is 
designed to deliver electrical stimulation to the subthalamic nucleus 
(STN) or internal globus pallidus (GPi) in order to ameliorate symptoms 
caused by abnormal neurotransmitter levels that lead to abnormal cell-
to-cell electrical impulses in Parkinson's Disease and essential 
tremor. Before the development of Kinetra[reg], treating bilateral 
symptoms of patients with these disorders required the implantation of 
two neurostimulators (in the form of a product called 
SoletraTM manufactured by Medtronic): One for the right side 
of the brain (to control symptoms on the left side of the body), the 
other for the left side of the brain (to control symptoms on the right 
side of the body). Additional procedures are required to create pockets 
in the chest cavity to place the two generators required to run the 
individual leads. The Kinetra[reg] neurostimulator generator, implanted 
in the pectoral area, is designed to eliminate the need for two devices 
by accommodating two leads that are placed in both the left and right 
sides of the brain to deliver the necessary impulses. The manufacturer 
argues that the development of a single neurostimulator that treats 
bilateral symptoms provides a less invasive treatment option for 
patients, and for simpler implantation, followup, and programming 
procedures for physicians.
    The device was approved by the FDA in December 2003. Therefore, it 
qualifies under the first criterion because it is not yet reflected in 
the DRG weights. Because there are no data available to evaluate costs 
associated Kinetra[reg], we conducted the cost analysis using 
SoletraTM, the predecessor technology used to treat this 
condition, as a proxy for Kinetra[reg]. The pre-existing technology 
provides the closest means to track cases that have actually used 
similar technology and serves to identify the need and use of the new 
device. The manufacturer informed us that the cost of the Kinetra[reg] 
device is twice the price of a single SoletraTM device. 
Since most patients would receive two SoletraTM devices if 
the Kinetra[reg] device is not implanted, data regarding the cost of 
SoletraTM give a good measure of the actual costs that will 
be incurred. Medtronic submitted data for 104 cases that involved the 
SoletraTM device (26 cases in DRG 1 (Craniotomy Age > 17 
With CC), and 78 cases in DRG 2 (Craniotomy Age > 17 Without CC)). 
These cases were identified from the FY 2002 MedPAR file using 
procedure codes 02.93 (Implantation, intracranial neurostimulator) and 
86.09 (Other incision of skin and subcutaneous tissue). In the analysis 
presented by the applicant, the mean standardized charges for cases 
involving SoletraTM in DRGs 1 and 2 were $69,018 and 
$44,779, respectively. The mean standardized charge for these 
SoletraTM cases according to Medtronic's data was $50,839.
    We used the same procedure codes to identify 187 cases involving 
the SoletraTM device in DRGs 1 and 2 in the FY 2003 MedPAR 
file. Similar to the Medtronic data, 53 of the cases were found in DRG 
1, and 134 cases were found in DRG 2. The average standardized charges 
for these cases in DRGs 1 and 2 were $51,163 and $44,874, respectively. 
Therefore, the case-weighted average standardized charge for cases that 
included implantation of the SoletraTM device was $46,656. 
The new cost thresholds established under the revised criteria in 
Public Law 108-173 for DRGs 1 and 2 are $43,245 and $30,129, 
respectively. Accordingly, the case-weighted threshold to qualify for 
new technology add-on payment using the data we identified would be 
$33,846. Under this analysis, Kinetra[reg] would qualify for the cost 
threshold.
    We note that an ICD-9-CM code was approved for dual array pulse 
generator devices, effective October 1, 2004, for IPPS tracking 
purposes. The new ICD-9-CM code that will be assigned to this device is 
86.95 (Insertion or replacement of dual array neurostimulator pulse 
generator), which includes dual array and dual channel generators for 
intracranial, spinal, and peripheral neurostimulators. The code will 
not identify cases with this specific device and will only be used to 
distinguish single versus dual channel-pulse generator devices.
    The manufacturer claims that Kinetra[reg] provides a range of 
substantial improvements beyond previously available technology. These 
include a reduced rate of device-related complications and 
hospitalizations or physician visits and less surgical trauma because 
only one generator implantation procedure is required. Kinetra[reg] has 
a reed switch disabling function that physicians can use to prevent 
inadvertent shutoff of the device, as occurs when accidentally tripped 
by electromagnetic inference (caused by common products such as metal 
detectors and garage door openers). Kinetra[reg] also provides 
significant patient control, allowing patients to monitor whether the 
device is on or off, to monitor battery life, and to fine-tune the 
stimulation therapy within clinician-programmed parameters. While 
Kinetra[reg] provides the ability for patients to better control their 
symptoms and reduce the complications associated with the existing 
technology, it does not eliminate the necessity for two surgeries. 
Because the patients who receive the device are often frail, the 
implantation generally occurs in two phases: The brain leads are 
implanted in one surgery, and the generator is implanted in another 
surgery, typically on another day. However, implanting Kinetra[reg] 
does reduce the number of potential surgeries compared to its 
predecessor (which requires two surgeries to implant the two single-
lead arrays to the brain).
    Despite the improvement Kinetra[reg] represents over its immediate 
predecessor, SoletraTM, we have some concerns about whether 
the device is significantly different in terms of how it achieves its 
desired clinical result. The stimulation mechanism by which it treats 
patient symptoms remains substantially the same as the

[[Page 28245]]

predecessor device. The enhancements cited by the manufacturer are 
primarily to features such as control, power, monitoring, and 
reliability. Nevertheless, these improvements, along with the reduced 
number of surgeries required, may be sufficient to warrant a 
determination that the device represents a substantial clinical 
improvement. We welcome further public comment on the issue of whether 
the device is sufficiently different from the previously used 
technology to qualify as a substantially improved treatment of the same 
patient symptoms.
    We also invite comments concerning the cost of the device. If the 
new device, at twice the cost of the existing technology, merely 
replaces the costs of two of the previous devices, then the charges for 
Kinetra[reg] are not substantially different from current charges 
resulting from the use of either device alone. Because the costs for 
the predecessor device meet the statutory cost criterion, the successor 
technology would meet the criterion as well, at least under the 
manufacturer's assumption that a single Kinetra[reg] costs twice as 
much as each of the two SoletrasTM required to perform the 
same function. However, since there should be less surgery involved, 
more patient control, less risk of complications, and fewer office 
visits as a result of using Kinetra[reg], the costs for patients who 
receive the new device would be expected to drop. This suggests that it 
may not be appropriate to base the cost analysis for Kinetra[reg] on 
the manufacturer's assumption that total costs for SoletraTM 
and Kinetra[reg] are substantially the same.
    In addition, we also invite public comment concerning the approval 
of the device for add-on payment, given the uncertainty over the 
frequency with which the patients receiving the device have the 
generator implanted in a second hospital stay, and the frequency with 
which this implantation occurs in an outpatient setting. Any hospital 
performing the implantation in two separate patient stays, whether they 
are both inpatient or whether one is inpatient and the second is 
outpatient, would be paid double for the single device. Therefore, we 
have some concern about the appropriateness of approving add-on 
payments for a device that may already receive payment at a nonbundled 
rate for a high percentage of patients who receive the device. We are 
currently investigating whether a second hospital stay is needed for 
implantation of Kinetra[reg].
    Despite these issues, we are still considering whether it is 
appropriate to approve add-on status for Kinetra[reg] for FY 2005. If 
approved for add-on payments, the device would be reimbursed up to half 
of the costs for the device. Since the manufacturer has stated that the 
cost for Kinetra[reg] would be $16,570, the maximum add-on payment for 
the device would be $8,285. We will make a final determination in the 
light of public comments and our continuing analysis.
    We received no public comments on this application for add-on 
payments.
    We note that the manufacturer of Kinetra[reg] also submitted an 
application for pass-through payments under the hospital outpatient 
payment system (OPPS). This application was denied for pass-through 
payment in OPPS because the item was already described by a previously 
existing category of devices for pass-through payment (C1767, 
Generator, neurostimulator (implantable)). Therefore, no substantial 
improvement determination was made for that application, although one 
would have been required for approval if it had met all other criteria. 
The manufacturer subsequently applied for assignment of deep brain 
stimulation with Kinetra[reg] neurostimulator to a new technology 
ambulatory payment classification (APC) under the OPPS. This 
application is currently under consideration. These special APCs were 
initiated in OPPS to expedite recognition of and payment for innovative 
new technologies that do not qualify for pass-through payment. In 
contrast to the annual decisionmaking under the IPPS, applications for 
new technology APCs of the OPPS are accepted on an ongoing basis and 
updates are made quarterly.
g. Intramedullary Skeletal Kinetic Distractor (ISKD)
    Orthofix, Inc. submitted an application for approval of the 
Intramedullary Skeletal Kinetic Distractor (ISKD) Internal Limb 
Lengthener for new technology add-on payments for FY 2005. The device 
received FDA marketing approval on May 2, 2001. The ISKD System is a 
``closed'' lengthening system. There are no fixation pins exiting the 
skin, thus eliminating this portal for entry of infectious organisms. 
The device is implanted in the intramedullary canal. This provides 
mechanical stability and support to the bone segments during the 
distraction, regeneration and consolidation phases, thus reducing the 
opportunity for misalignment.
    We reviewed the application and technology, and we have determined 
that the device is not new and cannot be approved for new technology 
add-on payments because it came on the market on May 2, 2001. The costs 
of the device are thus reflected in the FY 2001 MedPAR file, as 
acknowledged by the manufacturer's data. As a result, the costs of the 
device are already reflected in the DRG weights.
    The manufacturer submitted charge data for cases found in the FY 
2001 MedPAR file, as well as data from several hospitals that have used 
the device. The manufacturer identified cases using ICD-9-CM codes 
78.35 (Limb lengthening procedure, femur) and 78.37 (Limb lengthening, 
tibia/fibula). These procedure codes occur in four DRGs: DRGs 210 and 
211 (Hip and Femur Procedures Except Major Joint Procedures Age > 17, 
With and Without CC, respectively) and DRGs 218 and 219 (Lower 
Extremity and Humerus Procedures Except Hip, Foot and Femur Age > 17, 
With and Without CC). The average charges for cases involving these 
procedure codes identified by the applicant were not standardized. The 
average charges provided for DRGs 210, 211, 218, and 219 were $26,692, 
$18,187, $32,959 and $20,228, respectively. The manufacturer then added 
the cost of the device, which the manufacturer states is $6,750. The 
manufacturer projects that, in FY 2005, there will be 9 cases in DRG 
210, 4 cases in DRG 211, 28 cases in DRG 218, and 19 cases in DRG 219, 
which results in a case-weighted threshold of $22,347. Thus, according 
to the manufacturer's data, because the case-weighted average 
standardized charges of $27,003 for the technology are greater than the 
cost threshold of $22,347 for these projected 60 cases, the ISKD would 
qualify for new technology add-on payments.
    The manufacturer also asserted that the ISKD met the substantial 
clinical improvement criteria because, in addition to the improvements 
mentioned above (reduces infection rates and provides mechanical 
stability), lengthening with the ISKD occurs gradually and with no soft 
tissue impingement, reducing two factors commonly associated with pain 
during distraction. The manufacturer also pointed out that with the 
ISKD, the lengthening procedure is discreet because there are no 
external pins. There is no cumbersome external frame that may hinder 
the patient's activities of daily living, or draw further attention to 
the discrepant limb. In addition, the patient may have partial weight 
bearing during the lengthening process and resume some activities of 
normal living.
    However, because the device is already captured in our DRG weights, 
we are proposing to deny the application for the ISKD device for new 
technology add-on payments for FY 2005.

[[Page 28246]]

    We received no public comments on this application for add-on 
payments.
h. ActiconTM Neosphincter
    American Medical Systems submitted an application for approval of 
the ActiconTM Neosphincter for new technology add-on 
payments for FY 2005. The ActiconTM Neosphincter is a small, 
fluid-filled prosthesis that is completely implanted within the body. 
The ActiconTM Neosphincter prosthesis has been developed to 
treat severe fecal incontinence (the accidental loss of solid or liquid 
stool at least weekly). It is designed to mimic the natural process of 
bowel control and bowel movements. The prosthesis consists of three 
components: a occlusive cuff implanted around the anal canal, a 
pressure-regulating balloon implanted in the prevesical space, and a 
control pump with septum implanted in the scrotum. All components are 
connected with color-coded, kink-resistant tubing.
    The FDA approved the Acticon Neosphincter for use on December 18, 
2001. A technology can be considered new only 2 to 3 years after data 
reflecting the costs of the technology begin to become available. Data 
on the costs of this technology began to become available after the 
December 2001 FDA approval. As a result, the costs of this technology 
are currently reflected in the DRG weights. Therefore, we have 
determined that ActiconTM Neosphincter does not meet this 
criterion.
    Although we are proposing not to approve this application because 
ActiconTM Neosphincter does not meet the newness criterion, 
we note that the applicant submitted information on the cost criterion 
and substantial clinical improvement criterion. The applicant submitted 
23 cases (that are indistinguishable as to whether they are Medicare or 
non-Medicare) using ICD-9-CM procedure codes 49.75 (Implantation or 
revision of artificial anal sphincter) and 49.76 (Removal of artificial 
anal sphincter) in order to identify cases where the 
ActiconTM Neosphincter was used. Of these cases, 9 were in 
DRG 157 (Anal and Stomal Procedures With CC), and 14 were in DRG 158 
(Anal and Stomal Procedures Without CC). The average standardized 
charge per case was $16,758. The case-weighted threshold for DRGs 157 
and 158 (39.1 percent of cases in DRG 157 and 60.1 percent of cases in 
DRG 158) for this technology is $14, 426. Therefore, according to the 
applicant, the ActiconTM Neosphincter meets the cost 
criterion.
    The applicant states in its application that the 
ActiconTM Neosphincter represents a substantial clinical 
improvement for the following reasons: First, there is no other 
existing device in the United States that can be used to treat severe 
fecal incontinence. Second, self-treatment for severe fecal 
incontinence has proven to be largely unsuccessful and surgical options 
have historically been more limited, including sphincteroplasty or 
muscle transposition.
    However, since ActiconTM Neosphincter does not meet the 
newness criterion, we are proposing to deny add-on payments for this 
new technology. The applicant also requested a DRG reclassification for 
this technology. In section II.B.4 of the preamble of this proposed 
rule, we are proposing, in MDC 6 (Diseases and Disorders of the 
Digestive System) only, to remove codes 49.75 and 49.76 from DRGs 157 
and 158, and reassign them to DRGs 146 (Rectal Resection With CC) and 
147 (Rectal Resection Without CC). All other MDC and DRG assignments 
for codes 49.75 and 49.76 would remain the same.
    We received the following public comments in accordance with 
section 50(b)(2) of Pub. L. 108-173 regarding this application for add-
on payments.
    Comment: One commenter noted that the implant of the 
ActiconTM Neosphincter avoids the life-altering and 
disfiguring consequences of a permanent stoma. Another commenter noted 
that the implant of the ActiconTM Neosphincter avoids the 
need for a colostomy, which limits a patient's ability to travel and 
work due to the fact they could have a fecal accident at any time.
    Response: We appreciate the commenters' input on this criterion. 
However, as stated above, the ActiconTM Neosphincter is no 
longer new. Therefore, we are proposing that it is not eligible for 
add-on payments for new technologies.
i. TandemHeartTM Percutaneous Left Ventricular Assist System
    Brigham and Women's Hospital submitted an application for approval 
of the TandemHeartTM Percutaneous Ventricular Assist System 
(PVTA) manufactured by Cardiac Assists, Inc., for new technology add-on 
payments for FY 2005. Cardiac Assists, Inc. has been assisting the 
applicant with supplemental information and data to support the 
application process. According to the manufacturer, the device contains 
a controller, arterial and venous cannulae and the 
TandemHeartTM Percutaneous Ventricular Assist Device (pVAD) 
that works parallel with the left ventricle to provide left ventricular 
circulatory support. The device is intended for extracorporeal 
circulatory support using an extracorporeal bypass circuit. The 
duration of use approved by the FDA is for periods of up to 6 hours.
    On November 11, 2000, FDA approved the AB-180 XC Blood Pump (also 
known as the TandemHeartTM pVAD) as a single use, disposable 
centrifugal blood pump designed to circulate blood through an 
extracorporeal circuit. On May 23, 2003, FDA approved the CardiacAssist 
Transseptal Cannula Set for transseptal catherization of the left 
atrium via the femoral vein for the purpose of providing a means for 
temporary (6 hours or less) left ventricular bypass when connected to a 
suitable extracorporeal blood pump unit that returns blood to the 
patient via the femoral artery or other appropriate site. The 
manufacturer stated that, although the TandemHeartTM pVAD 
was approved in November 2000, this device should still be considered 
new because the device was not marketed and sold to hospitals until the 
CardiacAssist Transseptal Cannula Set was approved by FDA in May 2003. 
We have received confirmation from hospitals that the 
TandemHeartTM pVAD was indeed not marketed until FDA 
approved the CardiacAssist Transseptal Cannula Set. Also, only half of 
a year's worth of data containing the TandemHeartTM pVAD is 
reflected within the FY 2003 MedPAR file. The manufacturer stated that 
approximately 60 TandemHeartTM pVADs have been used since 
FDA approved the Cardiac Arrest Transseptal Cannula Set in May 2003. 
Therefore, the costs of the TandemHeartTM pVAD are not 
adequately reflected within the DRGs. As a result, we consider the 
TandemHeartTM pVAD to be new under our criterion.
    As stated above, according to the manufacturer, approximately 60 
TandemHeartTM pVADs have been used since FDA approved the 
Cardiac Assist Transseptal Cannula Set in May 2003 (not all of these 
have been used in Medicare beneficiaries). However, only two actual 
cases were submitted by the applicant with an ICD-9-CM code of 37.65 
(Implant of an external pulsatile heart assist system) used to identify 
the device. As stated in the September 7, 2001 final rule (66 FR 
46916), data submitted by the applicant must be of a sufficient sample 
size to demonstrate a significant likelihood that the true mean across 
all cases likely to receive the technology will exceed the threshold 
established by CMS. Because we lack a significant sample of data 
reflecting the costs of this technology,

[[Page 28247]]

we cannot accurately determine the average charge per case for the 
TandemHeartTM pVAD. Neither can we determine whether this 
technology meets our cost criterion. If we receive sufficient data to 
complete our analysis in time for inclusion in the final rule, we will 
assess whether this technology meets the cost criterion.
    Although we are not proposing to approve this application because 
we have insufficient data to determine whether TandemHeartTM 
pVAD meets the cost criterion, we note that the applicant submitted 
information on the substantial clinical improvement criterion. The 
applicant stated in its application that the TandemHeartTM 
pVAD represents a substantial clinical improvement because, at present, 
the only alternative to intra-aortic balloon pump support is the 
surgical implantation of a ventricular assist device. The 
TandemHeartTM pVAD is the only therapeutic intervention that 
is capable of achieving effective circulatory support to stabilize 
cardiogenic shock patients that could be placed via a percutaneous 
approach. We will present a full analysis of this technology under the 
significant improvement criterion if we receive sufficient data in time 
for the final rule to evaluate whether the technology meets the cost 
criterion.
    The applicant also requested an ICD-9-CM code for this technology. 
We discuss this request in section II.B.3. of the preamble of this 
proposed rule.
    We received no public comments on this application for add-on 
payments.
j. AquadexTM System 100 Fluid Removal System (System 100)
    CHF Solutions, Inc. submitted an application for the approval of 
the System 100 for new technology add-on payments for FY 2005. The 
System 100 is designed to remove excess fluid (primarily excess water) 
from patients suffering from severe fluid overload through the process 
of ultrafiltration. Fluid retention, sometimes to an extreme degree, is 
a common symptom of patients with chronic congestive heart failure. 
This technology removes excess fluid without causing hemodynamic 
instability. It also avoids the inherent nephrotoxicity and 
tachyphylaxis associated with aggressive diuretic therapy, the mainstay 
of current therapy for fluid overload in congestive heart failure.
    The System 100 consists of: (1) An S-100 console; (2) a UF 500 
blood circuit; (3) an extended length catheter (ELC); and (4) a 
catheter extension tubing. The System 100 is designed to monitor the 
extracorporeal blood circuit and to alert the user to abnormal 
conditions. Vascular access is established via the peripheral venous 
system, and up to 4 liters of excess fluid can be removed in an 8-hour 
period.
    On June 3, 2002, FDA approved the System 100 for use with 
peripheral venous access. On November 20, 2003, FDA approved the System 
100 for expanded use with central venous access and catheter extension 
use for infusion or withdrawal circuit line with other commercial 
applicable venous catheters. According to the applicant, although the 
System 100 was first approved by FDA in June 2002, the System 100 was 
not used by hospitals until August 2002 because it took a substantial 
amount of time to market and sell the device to hospitals. As a result, 
the applicant believes that the System 100 should still be considered 
new. The applicant has presented data and evidence demonstrating that 
the System 100 was not marketed until August 2002. Therefore, we also 
believe August 1, 2002 is the relevant date for determining the 
availability of the System 100.
    The applicant estimates that 308 patients (approximately 120 cases 
per year) have used the System 100 since its inception and the 
potential population for use of the device is 60,000 cases per year. 
These 308 cases represent a small percentage of the potential number of 
cases that can utilize the System 100. Therefore, the System 100 is not 
adequately reflected within the DRG weights (as discussed in the 
September 7, 2001 final rule (66 FR 46914)). In addition, the System 
100 is within the 2 to 3 year period contemplated under Sec.  
412.87(b)(2) of the regulations. Therefore, the System 100 could be 
considered new. However, the ultrafiltration process that the System 
100 employs can also be considered to be a type of hemodialysis, which 
is an old and well-established technology. We have concerns about 
whether new technology add-on payments should be extended to a well-
established technology, even when a new clinical application is 
developed for that technology. As discussed above, in the September 7, 
2001 final rule (66 FR 46915), we noted that if an existing technology 
is used for treating patients not expected to be assigned to the same 
DRG as the patients already receiving the technology, it may be 
considered for approval if it also meets the other cost and clinical 
improvement criteria. In this case, the device does treat a different 
patient population of congestive heart failure than the patient 
population for renal dialysis. Under the policy described in the 
September 7, 2001 final rule, this technology may be considered new for 
the purposes of determining whether it qualifies for add-on payments. 
However, we have some concerns about whether this is an appropriate 
result, and about whether technologies that have been in use for many 
years, in some cases decades, should be able to qualify for add-on 
payments for new technologies. Therefore, we invite comments on whether 
this technology should be considered new, and on the general issue of 
whether existing technologies should be approved for add-on payments 
when new applications are developed for these technologies and whether 
special standards regarding, for example, clinical improvement, should 
be applied in such cases.
    The applicant submitted five sets of data to demonstrate that the 
System 100 meets the cost criterion. Of these five, three sets of data 
were flawed in the analysis of the cost criterion. Therefore, we will 
discuss only the data that are most accurate and relevant. It is 
important to note at the outset of the cost analysis that the console 
is reusable and is, therefore, a capital cost. Only the circuits and 
catheters are components that represent operating expenses. Section 
1886(d)(K)(i) of the Act requires that the Secretary establish a 
mechanism to recognize the costs of new medical services or 
technologies under the payment system established under that 
subsection, which establishes the system for paying for the operating 
costs of inpatient hospital services. The system of payment for capital 
costs is established under section 1886(g) of the Act, which makes no 
mention of any add-on payments for a new medical service or technology. 
Therefore, it is not appropriate to include capital costs in the add-on 
payments for a new medical service or technology and these costs should 
also not be considered in evaluating whether a technology meets the 
cost criterion. The applicant has applied for add-on payments only for 
the circuits and catheter, which represent the operating expenses of 
the device. However, catheters cannot be considered new technology in 
any sense. As a result, only the UF 500 disposable blood circuit is 
relevant to the evaluation of the cost criterion.
    The applicant commissioned Covance to search the FY 2002 MedPAR 
file. The applicant used a combination of diagnosis codes to determine 
which cases could potentially use the System 100. Covance found 27,589 
cases with the following combination of ICD-9-CM diagnosis codes: 428.0 
through 428.9 (Heart Failure), 402.91 (Unspecified with Heart Failure), 
or 402.11

[[Page 28248]]

(Hypertensive Heart Disease with Heart Failure), in combination with 
276.6 (Fluid Overload) and 782.3 (Edema). The 27,589 cases were found 
among 281 DRGs with 49.4 percent of cases mapped across DRGs 88, 89, 
127, 277 and 316. The applicant eliminated those DRGs with less than 
150 cases, which resulted in a total of 22,024 cases that could 
potentially use the System 100. The case-weighted average standardized 
charge across all DRGs was $14,534. The case-weighted threshold across 
all DRGs was $17,789. Although the case-weighted threshold is greater 
than the case-weighted standardized charge, it is necessary to include 
the standardized charge for the circuits used in each case. In order to 
establish the charge per circuit, the manufacturer submitted data 
regarding 51 actual cases that used the System 100. Based on these 51 
cases, the standardized charge per circuit was $2,209. The manufacturer 
also stated that an average of two circuits are used per case. 
Therefore, adding $4,418 for the charge of the two circuits to the 
case-weighted average standardized charge of $14,534 results in a total 
case-weighted standardized charge of $18,952. This is greater than the 
case-weighed threshold of $17,789. We welcome comments from the public 
on the charge information submitted by the applicant for the circuits.
    Using the FY 2003 MedPAR file, we used the same combination of 
diagnosis codes to identify 28,660 cases across all DRGs. As in the 
applicant's analysis, we eliminated those DRGs with less than 150 
cases, which resulted in 22,395 cases. The case-weighted average 
standardized charge for these cases is $15,447. The case-weighted 
threshold to qualify for new technology add-on payment using the data 
we identified would then be $18,029. Again, as in the applicant's 
analysis, it was necessary to include in the charge of $4,418 for the 
circuits. This results in a total case-weighted average standardized 
charge of $19,865, which is also greater than the case-weighted 
threshold of $18,029. Based on these two analyses, the System 100 meets 
the cost criterion.
    The applicant contends that the System 100 represents a substantial 
clinical improvement for the following reasons: It removes excess fluid 
without the use of diuretics; it does not lead to electrolyte 
imbalance, hemodynamic instability or worsening renal function; it can 
restore diuretic responsiveness; it does not adversely affect the 
renin-angiotensin system; it reduces hospital length of stay for the 
treatment of congestive heart failure; and it requires only peripheral 
venous access.
    Although we lack data from a large, multicenter, randomized, 
prospective clinical trial, we believe the applicant has submitted data 
that demonstrate the use of this technology in achieving the clinical 
benefits cited. We believe that there is some basis for concluding that 
the System 100 represents a substantial clinical improvement over 
current standard treatment of fluid overload in congestive heart 
failure. However, we invite comment on whether the data submitted are 
indeed adequate to demonstrate significant clinical improvement.
    Based on the criteria, we believe that the System 100 could be 
approved for new technology add-on payments for FY 2005. However, we 
invite comments on this application, and especially on whether the 
System 100 is really new and on whether it represents a new technology 
within the meaning of the statute and regulations. If approved for add-
on payments, the device would be reimbursed up to half of the costs for 
the disposable portion of the device. The manufacturer has stated that 
the cost for the disposable blood circuit and filter would be $900. As 
stated above, an average two circuits are used per case, which results 
in a total cost of $1,800 per case. Therefore, the maximum add-on 
payment for the disposable parts of the device would be $900 per case. 
We will determine whether to approve this application in the light of 
the comments we receive and our continuing analysis.
    We received the following public comments in accordance with 
section 503(b)(2) of Pub. L. 108-173 regarding this application for 
add-on payments.
    Comment: Several commenters noted that the System 100 provides 
physicians a new treatment option for patients with fluid overload who 
are unresponsive to diuretics and has been documented in clinical 
studies and other published articles to effectively treat fluid 
overload. Another commenter noted that patients who have been treated 
with the System 100 seem to have improved health versus those who have 
lingered on diuretic therapy or have been treated by hemodialysis. The 
commenter also noted that the system 100 reduces hospital stays. Other 
commenters noted that the System 100 is safer for those patients in 
terms of reduced electrolyte imbalance and renal dysfunction and is a 
major step forward in the treatment of decompensated heart failure.
    Response: As we stated above, we believe that there is some basis 
for concluding that the System 100 offers substantial clinical 
improvement. We will consider these comments as we continue to evaluate 
whether the System 100 meets this criterion.

III. Proposed Changes to the Hospital Wage Index

A. Background

    Section 1886(d)(3)(E) of the Act requires that, as part of the 
methodology for determining prospective payments to hospitals, the 
Secretary must adjust the standardized amounts ``for area differences 
in hospital wage levels by a factor (established by the Secretary) 
reflecting the relative hospital wage level in the geographic area of 
the hospital compared to the national average hospital wage level.'' In 
accordance with the broad discretion conferred under the Act, we 
currently define hospital labor market areas based on the definitions 
of statistical areas established by the Office of Management and Budget 
(OMB). A detailed discussion of the proposed FY 2005 hospital wage 
index based on the statistical areas, including OMB's revised 
definitions of Metropolitan Areas, appears under section III.B of this 
preamble.
    Beginning October 1, 1993, section 1886(d)(3)(E) of the Act 
requires that we update the wage index annually. Furthermore, this 
section provides that the Secretary base the update on a survey of 
wages and wage-related costs of short-term, acute care hospitals. The 
survey should measure, to the extent feasible, the earnings and paid 
hours of employment by occupational category, and must exclude the 
wages and wage-related costs incurred in furnishing skilled nursing 
services. This provision also requires us to make any updates or 
adjustments to the wage index in a manner that ensures that aggregate 
payments to hospitals are not affected by the change in the wage index. 
The adjustment we are proposing for FY 2005 is discussed in section 
II.B. of the Addendum to this proposed rule.
    As discussed below in section III.G. of this preamble, we also take 
into account the geographic reclassification of hospitals in accordance 
with sections 1886(d)(8)(B) and 1886(d)(10) of the Act when calculating 
the wage index. Under section 1886(d)(8)(D) of the Act, the Secretary 
is required to adjust the standardized amounts so as to ensure that 
aggregate payments under the IPPS after implementation of the 
provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act 
are equal to the aggregate prospective payments that would have been 
made absent these provisions. The budget neutrality adjustment we are 
proposing for FY

[[Page 28249]]

2005 is discussed in section II.B. of the Addendum to this proposed 
rule.
    Section 1886(d)(3)(E) of the Act also provides for the collection 
of data every 3 years on the occupational mix of employees for short-
term, acute care hospital participating in the Medicare program, in 
order to construct an occupational mix adjustment to the wage index. A 
discussion of the initial collection of these data and the occupational 
mix adjustment that we are proposing to apply beginning October 1, 2004 
(the FY 2005 wage index) appears under section III.C. of this preamble.

B. Revised OMB Definitions for Geographical Statistical Areas

[If you choose to comment on issues in this section, please include the 
caption ``Revised MSAs'' at the beginning of your comment.]
1. Current Labor Market Areas Based on MSAs
    The wage index is calculated and assigned to hospitals on the basis 
of the labor market area in which the hospital is located. In 
accordance with the broad discretion under section 1886(d)(3)(E) of the 
Act, we currently define hospital labor market areas based on the 
definitions of Metropolitan Statistical Areas (MSAs), Primary MSAs 
(PMSAs), and New England County Metropolitan Areas (NECMAs) issued by 
OMB. OMB also designates Consolidated MSAs (CMSAs). A CMSA is a 
metropolitan area with a population of one million or more, comprising 
two or more PMSAs (identified by their separate economic and social 
character). For purposes of the hospital wage index, we use the PMSAs 
rather than CMSAs because they allow a more precise breakdown of labor 
costs. If a metropolitan area is not designated as part of a PMSA, we 
use the applicable MSA.
    These different designations use counties as the building blocks 
upon which they are based. Therefore, hospitals are assigned to either 
an MSA, PMSA, or NECMA based on whether the county in which the 
hospital is located is part of that area. For purposes of the IPPS wage 
index, we combine all of the counties in a State outside a designated 
MSA, PMSA, or NECMA together to calculate a statewide rural wage index.
2. Core-Based Statistical Areas
    OMB reviews its Metropolitan Area (MA) definitions preceding each 
decennial census. In the fall of 1998, OMB chartered the Metropolitan 
Area Standards Review Committee to examine the MA standards and develop 
recommendations for possible changes to those standards. Three notices 
related to the review of the standards were published on the following 
dates in the Federal Register, providing an opportunity for public 
comment on the recommendations of the Committee: December 21, 1998 (63 
FR 70526); October 20, 1999 (64 FR 56628), and August 22, 2000 (65 FR 
51060).
    In the December 27, 2000 Federal Register (65 FR 82228 through 
82238), OMB announced its new standards. According to that notice, OMB 
defines a Core-Based Statistical Area (CBSA), beginning in 2003, as ``a 
geographic entity associated with at least one core of 10,000 or more 
population, plus adjacent territory that has a high degree of social 
and economic integration with the core as measured by commuting ties. 
The standards designate and define two categories of CBSAs: 
Metropolitan Statistical Areas and Micropolitan Statistical Areas.'' 
(65 FR 82235)
    According to OMB, MSAs are based on urbanized areas of 50,000 or 
more population, and Micropolitan Statistical Areas (referred to in 
this discussion as Micropolitan Areas) are based on urban clusters of 
at least 10,000 population but less than 50,000 population. Counties 
that do not fall within CBSAs are deemed ``Outside CBSAs.'' In the 
past, OMB defined MSAs around areas with a minimum core population of 
50,000, and smaller areas were ``Outside MSAs.''
    The general concept of the CBSAs is that of an area containing a 
recognized population nucleus and adjacent communities that have a high 
degree of integration with that nucleus. The purpose of the standards 
is to provide nationally consistent definitions for collecting, 
tabulating, and publishing Federal statistics for a set of geographic 
areas. CBSAs include adjacent counties that have a minimum of 25 
percent commuting to the central counties of the area. This is an 
increase over the minimum commuting threshold for outlying counties 
applied in the previous MSA definition of 15 percent.
    On June 6, 2003, OMB announced the new CBSAs, comprised of MSAs and 
the new Micropolitan areas based on Census 2000 data. (A copy of the 
announcement may be obtained at the following Internet address: http://www.whitehouse.gov/omb/bulletins/fy04/b04-03.html.) The new definitions 
recognize 49 new MSAs and 565 new Micropolitan Areas, and extensively 
revise the construct of many of the existing MSAs. There are 1,090 
counties in MSAs under these new definitions (previously, there were 
848 counties in MSAs). Of these 1,090 counties, 737 are in the same MSA 
as they were prior to the changes, 65 are in a different MSA, and 288 
were not previously designated to any MSA. There are 674 counties in 
Micropolitan Areas. Of these, 41 were previously in an MSA, while 633 
were not previously designated to an MSA. There are five counties that 
previously were designated to an MSA but are no longer designated to 
either an MSA or a new Micropolitan Area: Carter County, KY; St. James 
Parish, LA; Kane County, UT; Culpepper County, VA; and King George 
County, VA.
3. Revised Labor Market Areas
    In its June 6, 2003 announcement, OMB cautioned that these new 
definitions ``should not be used to develop and implement Federal, 
State, and local nonstatistical programs and policies without full 
consideration of the effects of using these definitions for such 
purposes. These areas should not serve as a general-purpose geographic 
framework for nonstatistical activities, and they may or may not be 
suitable for use in program funding formulas.''
    We have previously examined alternatives to the use of MSAs for the 
purpose of establishing labor market areas for the Medicare wage index. 
In the May 27, 1994, proposed rule (59 FR 27724), we presented our 
latest research concerning possible future refinements to the labor 
market areas. Specifically, we discussed and solicited comment on the 
proposal by the Prospective Payment Assessment Commission (ProPAC, a 
predecessor organization to the Medicare Payment Advisory Commission 
(MedPAC)) for hospital-specific labor market areas based on each 
hospital's nearest neighbors, and our research and analysis on 
alternative labor market areas. Even though we found that none of the 
alternative labor market areas that we studied provided a distinct 
improvement over the use of MSAs, we presented an option using the MSA-
based wage index but generally giving a hospital's own wages a higher 
weight than under the current system. We also described for comment a 
State labor market option, under which hospitals would be allowed to 
design labor market areas within their own State boundaries.
    We described the comments we received in the June 2, 1995 proposed 
rule (60 FR 29219). There was no consensus among the commenters on the 
choice for new labor market areas. Many individual hospitals that 
commented expressed dissatisfaction with all of the proposals. However, 
several State hospital associations commented that the options merited 
further study. Therefore, we contacted the association representatives 
that

[[Page 28250]]

participated in our November 1993 meeting on labor market issues in 
which we solicited ideas for additional types of labor market research 
to conduct. None of the individuals we contacted suggested any ideas 
for further research.
    Consequently, we have continued to use MSAs to define labor market 
areas for purposes of the wage index. While we recognize MSAs are not 
designed specifically to define labor market areas, we believe they do 
represent a useful proxy for this purpose, and our analysis and 
discussion here are focused on issues related to adopting the new CBSAs 
to define labor market areas.
a. New England MSAs
    As stated above, we currently use NECMAs to define labor market 
areas in New England, because these are county-based designations 
rather than the 1990 MSA definitions for New England, which used minor 
civil divisions such as cities and towns. Under the previous MSA 
definitions, NECMAs provided more consistency in labor market 
definitions for New England compared with the rest of the country, 
where MSAs are county-based. Under the new CBSAs, OMB has defined the 
MSAs and Micropolitan Areas in New England on the basis of counties. 
OMB also established New England City and Town Areas, which are similar 
to the previous New England MSAs. Therefore, to maintain consistency in 
the definition of labor market areas between New England and the rest 
of the country, we are proposing to use the New England MSAs under the 
new CBSA definition.
b. Metropolitan Divisions
    A Metropolitan Division is a county or group of counties within a 
CBSA that contains a core population of at least 2.5 million, 
representing an employment center, plus adjacent counties associated 
with the main county or counties through commuting ties. A county 
qualifies as a main county if 65 percent or more of its employed 
residents work within the county and the ratio of the number of jobs 
located in the county to the number of employed residents is at least 
.75. A county qualifies as a secondary county if 50 percent or more, 
but less than 65 percent, of its employed residents work within the 
county and the ratio of the number of jobs located in the county to the 
number of employed residents is at least .75. After all the main and 
secondary counties are identified and grouped, each additional county 
that already has qualified for inclusion in the MSA falls within the 
Metropolitan Division associated with the main/secondary county or 
counties with which the county at issue has the highest employment 
interchange measure. Counties in a Metropolitan Division must be 
contiguous. (65 FR 82236)
    As noted above, in the past, OMB designated CMSAs as Metropolitan 
Areas with a population of one million or more and comprising two or 
more PMSAs. We currently use the PMSAs rather than CMSAs to define 
labor market areas because they comprise a smaller geographic area with 
potentially varying labor costs due to different local economies. 
Similarly, we are proposing to use the Metropolitan Divisions where 
applicable under the CBSA definitions.
    Under the CBSA definitions, there are 11 MSAs containing 
Metropolitan Divisions: Boston; Chicago; Dallas; Detroit; Los Angeles; 
Miami; New York; Philadelphia; San Francisco; Seattle; and Washington, 
D.C. Although these MSAs were also CMSAs under the prior definitions, 
in some cases their areas have been significantly altered. Under the 
prior definitions, Boston was a single NECMA. It is now comprised of 4 
Divisions. Los Angeles went from 4 PMSAs to 2 Divisions because 2 MSAs 
became separate MSAs. The New York CMSA went from 15 MSAs down to only 
4 Divisions. Five PMSAs in Connecticut now become separate MSAs, and 
the number of PMSAs in New Jersey goes from 5 to 2, with the 
consolidation of 2 New Jersey PMSAs (Bergen-Passaic and Jersey City) 
into the New York-Wayne-White Plains, NY-NJ Division. In San Francisco, 
only 2 Divisions remain where there were once 6 PMSAs, some of which 
are now separate MSAs.
    Previously, Cincinnati, Cleveland, Denver, Houston, Milwaukee, 
Portland, Sacramento, and San Juan were all previously designated as 
CMSAs, but are not any longer. As noted previously, the population 
threshold to be designated a CMSA was one million. In most of these 
cases, counties formerly in a PMSA have become a separate, independent 
MSA, leaving only the MSA for the core area under the new CBSA 
definitions.
c. Micropolitan Areas
    One of the major issues with respect to the new definitions is 
whether to use Micropolitan Areas to define labor market areas for the 
purpose of the IPPS wage index. Because the new Micropolitan Areas are 
essentially a third area definition made up mostly of currently rural 
areas, but also some or all of current MSAs, how these areas are 
treated will have significant impacts on the calculation and 
application of the wage index. Treating Micropolitan Areas as separate 
and distinct labor market areas would affect both the wage indexes of 
the hospitals in the Micropolitan Areas and the hospitals in the labor 
market areas where those hospitals are currently located (both 
positively and negatively).
    Because we currently use MSAs to define urban labor market areas 
and we group all the hospitals in counties within each State that are 
not assigned to an MSA together into a statewide rural labor market 
area, we have used the terms ``urban'' and ``rural'' wage indexes in 
the past for ease of reference. However, the introduction of 
Micropolitan Areas complicates this terminology because these areas 
include so many hospitals that are currently included in the statewide 
rural labor market areas. In order to facilitate the discussion below, 
we use the term ``rural'' hospitals to describe hospitals in counties 
that are not assigned to either an MSA or a Micropolitan Area. This 
should not be taken to indicate that hospitals in Micropolitan Areas 
are no longer ``rural'' hospitals. In fact, we are proposing that 
hospitals in Micropolitan Areas are included in the statewide rural 
labor market areas, for the reasons outlined below. The reader is 
referred to section IV.B. of the preamble of this proposed rule for a 
more specific discussion of the implications of these changes for 
defining urban and rural areas under Sec.  412.62(f).
    Chart 1 below demonstrates the distributions of hospitals by their 
current and new designations. Approximately 50 percent of hospitals 
currently designated rural are now in either Micropolitan Areas (691 
hospitals) or MSAs (197 hospitals). The vast majority of hospitals 
currently in MSAs remain in an MSA (2,478, although in some cases the 
MSAs have been reconfigured), while 2 are now in rural areas and 65 are 
now in Micropolitan Areas.

   Chart 1.--Distribution of Hospitals by Current and New Designation
------------------------------------------------------------------------
                                                   Currently   Currently
                Statistical area                     rural       MSA.
------------------------------------------------------------------------
Rural...........................................         861           2
Micropolitan....................................         691          65
MSA.............................................         197       2,478
                                                 -------------
    Totals......................................       1,749       2,545
------------------------------------------------------------------------

    In order to evaluate the impact of these changes, we grouped 
hospitals based on the county where they are located according to the 
new MSA and Micropolitan areas using the definitions

[[Page 28251]]

on the Census Bureau's Web site: http://www.census.gov/population/www/estimates/metrodef.html. We then compared the proposed FY 2004 wage 
indexes (using data from hospitals' FY 2001 cost reports) calculated 
based on the current MSAs, without any effects of hospital geographic 
reclassifications. Consistent with current policy, we applied the rural 
floor in the case where the statewide rural wage index is greater than 
the wage index for a particular urban area. We excluded Indian Health 
Service hospitals from the analysis due to the special characteristics 
of the prospective payment system for these hospitals. Hospitals in 
Maryland were excluded from the analysis because they remain excluded 
from the IPPS under the waiver at section 1814(b)(3) of the Act. Our 
analysis also does not reflect any changes to the Puerto Rico-specific 
wage index, which is applicable only to the Puerto Rico standardized 
amounts (the analysis does include the national wage index values for 
Puerto Rico hospitals).
    Chart 2 below shows the impact on hospitals' wage indexes of 
recalculating new wage indexes based on the new MSAs, and treating the 
new Micropolitan Areas as separate labor market areas. Specifically, 
the table shows the impact of treating the new MSA and Micropolitan 
Areas as labor market areas and calculating a wage index for each one. 
The most dramatic impact of this change would be on hospitals that are 
currently classified as rural. Only 10 currently rural hospitals would 
experience no changes in their wage indexes after applying the new MSA 
definitions. Five of these hospitals are in Delaware and Connecticut 
(three and two hospitals respectively), where the only counties in the 
State currently considered rural are now part of Micropolitan Areas.
    Approximately 62 percent (1,092 out of 1,749) of currently rural 
hospitals experience decreases in their wage indexes under this change. 
Among hospitals that remain rural after separately recognizing 
Micropolitan Areas (those hospitals in counties ``outside CBSAs''), 
rural hospitals in six States (Arizona, Florida, Idaho, Indiana, 
Minnesota, and Missouri) experience a positive impact after applying 
the new MSA definitions. These hospitals benefit because the net effect 
on their wage index of other hospitals moving into Micropolitan Areas 
is positive. The majority of the currently rural hospitals (762 out of 
1,092) that experience decreases in their wage indexes are hospitals 
that would remain rural under the new definitions. Moreover, among the 
646 rural hospitals whose wage indexes would increase under the new 
definitions, 547 would now be in an MSA or Micropolitan Area.
    Furthermore, in many cases, the magnitude of the changes is quite 
large. Nearly one-half of all rural hospitals would experience payment 
changes of at least 5.0 percent, either negatively or positively, if we 
were to adopt labor market areas based in part on the new Micropolitan 
Areas.
    In contrast, there are 938 currently urban hospitals (37 percent) 
with wage indexes that are unaffected by the new MSA definitions. These 
hospitals are in MSAs or PMSAs that are either unchanged (for example, 
the Austin, Buffalo, Milwaukee, Oakland, Phoenix, San Diego, and Tampa-
St. Petersburg MSAs are all unchanged) or include new counties without 
any hospitals in those counties that are now part of the existing MSA 
(for example, Atlanta, Denver, Little Rock, Omaha, Portland, Richmond, 
Toledo, Virginia Beach-Norfolk added counties but not hospitals).
    The most significant negative impact (more than a 20-percent 
decrease) among hospitals currently in an MSA is on those located in 
counties that become Micropolitan areas or rural areas. Among hospitals 
with the largest positive impacts (more than a 20-percent increase), 
the changes appear to be largely due to changes in the counties that 
are now included (under the CBSAs) in the MSA labor market area.

  Chart 2.--Impact on Wage Indexes of New MSA, Micropolitan Areas, and
                        Rural Labor Market Areas
------------------------------------------------------------------------
                                    Number of    Number of
                                    currently    currently      Total
Percent change in area wage index     rural         MSA       number of
                                    hospitals    hospitals    hospitals.
------------------------------------------------------------------------
Decrease Greater Than 10.0.......           99           36          135
Decrease Between 5.0 and 10.0....          420           77          497
Decrease Between 2.0 and 5.0.....          238           95          333
Decrease Between 0 and 02.0......          335          585          920
No Change........................           10          938          948
Increase Between 0 and 2.0.......          168          495          663
Increase Between 2.0 and 5.0.....          138          145          283
Increase Between 5.0 and 10.0....          203          139          342
Increase Greater Than 10.0.......          138           35          173
                                  --------------
    Total........................        1,749        2,545        4,294
------------------------------------------------------------------------

    One of the reasons Micropolitan Areas have such a dramatic impact 
on the wage index is, because Micropolitan Areas encompass smaller 
populations than MSAs, they tend to include fewer hospitals per 
Micropolitan Area. Currently, there are only 25 MSAs with one hospital 
in the MSA. However, under the new definitions, there are 373 
Micropolitan Areas with one hospital, and 49 MSAs with only one 
hospital.
    This large number of labor market areas with only one hospital and 
the increased potential for dramatic shifts in the wage indexes from 
one year to the next is a problem for several reasons. First, it 
creates instability in the wage index from year to year for a large 
number of hospitals. Second, it reduces the averaging effect of the 
wage index, lessening some of the efficiency incentive inherent in a 
system based on the average hourly wages for a large number of 
hospitals. In labor market areas with a single hospital, high wage 
costs are passed directly into the wage index with no counterbalancing 
averaging with lower wages paid at nearby competing hospitals. Third, 
it creates an arguably inequitable system when so many hospitals have 
wage indexes based solely on their own wages, while other hospitals' 
wage indexes are based on an average hourly wage across many hospitals.
    For these reasons, we are proposing not to adopt Micropolitan Areas 
as independent labor market areas. Although we considered alternative

[[Page 28252]]

approaches that would aggregate Micropolitan Areas in order to reduce 
the number of one-hospital labor market areas, these approaches created 
geographically disconnected labor market areas, an undesirable outcome. 
Therefore, we are proposing to maintain our current policy of defining 
labor market areas based on the new MSAs (and Divisions, where they 
exist) using OMB's new criteria and the 2000 Census data.
    Chart 3 displays the impacts on hospital wage indexes of this 
proposed approach. The most apparent difference comparing this chart to 
Chart 2 is the reduction in the numbers of currently rural hospitals 
impacted by more than 2.0 percent. Recognizing Micropolitan Areas as 
independent labor market areas results in negative impacts of more than 
2.0 percent for 757 currently rural hospitals, while the comparative 
number, when recognizing only MSAs, is 256. Conversely, the number of 
currently rural hospitals positively impacted by more than 2.0 percent 
declines from 479 to 154.
    The greatest negative impacts among hospitals currently designated 
rural are in Idaho, where the statewide rural wage index falls 6.7 
percent as a result of 6 formerly rural hospitals now being included in 
either new or redefined MSAs. The wage index for rural Utah hospitals 
declines by 5.7 percent, for similar reasons. Conversely, formerly 
rural hospitals that are not part of an MSA generally experience 
positive impacts.
    Among hospitals that are currently in MSAs, the number of hospitals 
with decreases in their wage indexes of at least 10 percent increases 
under this proposal from 35 to 45. These are primarily hospitals that 
are now located in Micropolitan Areas that are included in the 
statewide labor market area. There are 46 counties with 72 hospitals 
that are currently in an MSA that would be treated as rural under our 
proposal.

Chart 3.--Impact on Wage Indexes of New MSA and Rural Labor Market Areas
------------------------------------------------------------------------
                                    Number of    Number of
                                    currently    currently      Total
Percent change in area wage index     rural         MSA       number of
                                    hospitals    hospitals    hospitals.
------------------------------------------------------------------------
Decrease Greater Than 10.0.......            0           45           45
Decrease Between 5.0 and 10.0....          122           60          182
Decrease Between 2.0 and 5.0.....          134           73          207
Decrease Between 0 and 2.0.......          588          615        1,203
No Change........................          160        1,015        1,175
Increase Between 0 and 2.0.......          591          574        1,165
Increase Between 2.0 and 5.0.....           32          103          135
Increase Between 5.0 and 10.0....           64           25           89
Increase Greater Than 10.0.......           58           35           93
                                  --------------
    Total........................        1,749        2,545        4,294
------------------------------------------------------------------------

    d. Transition Period
    We have in the past provided for transition periods when adopting 
changes that have significant payment implications, particularly large 
negative impacts. When we recently removed the wage costs of teaching 
physicians and residents from the wage index data of teaching 
hospitals, we spread out the impact over 3 years by blending the 
hospitals' average hourly wages with and without the data. Similarly, 
the regulations at Sec.  412.102 provide for a 3-year transition to the 
standardized amount and DSH adjustment payments to a hospital 
redesignated from urban to rural.
    Given the significant payment impacts upon some hospitals of these 
changes, we considered options to transition from the current MSAs to 
the new MSAs. As noted above, the most dramatic negative impacts are 
among hospitals currently located in an MSA but would become rural 
under our proposal. Some negative impacts also occur among urban 
hospitals that remain in MSAs that have been reconfigured. However, 
these impacts are generally smaller than those among currently urban 
hospitals that would become rural. To help alleviate the decreased 
payments for currently urban hospitals that would become rural, we are 
proposing to allow them to maintain their assignment to the MSA where 
they are currently located for the 3-year period FY 2005, FY 2006, and 
FY 2007. Beginning in FY 2008, these hospitals would receive their 
statewide rural wage index, although they would be eligible to apply 
for reclassification by the MGCRB, both during this transition period 
as well as subsequent years.
    We also considered the option of allowing a transition to the new 
MSAs for all hospitals, such as a blend of wage indexes based on the 
old and new MSAs for some specified period of time. Although this would 
help some hospitals that are negatively impacted by the changes to the 
MSAs, it would dampen the payment increases for those hospitals that 
are positively impacted by the changes. However, we are not proposing a 
blended transition. We note that OMB in the past has announced MSA 
changes on an annual basis due to population changes, and we have not 
transitioned these changes.

C. Proposed Occupational Mix Adjustment to Proposed FY 2005 Index

    [If you choose to comment on issues in this section, please include 
the caption ``Occupational Mix'' at the beginning of your comment.]
    As stated earlier, section 1886(d)(3)(E) of the Act provides for 
the collection of data every 3 years on the occupational mix of 
employees for each short-term, acute care hospital participating in the 
Medicare program, in order to construct an occupational mix adjustment 
to the wage index, for application beginning October 1, 2004 (the FY 
2005 wage index). The purpose of the occupational mix adjustment is to 
control for the effect of hospitals' employment choices on the wage 
index. For example, hospitals may choose to employ different 
combinations of registered nurses, licensed practical nurses, nursing 
aides, and medical assistants for the purpose of providing nursing care 
to their patients. The varying labor costs associated with these 
choices reflect hospital management decisions rather than geographic 
differences in the costs of labor.

[[Page 28253]]

1. Development of Data for the Occupational Mix Adjustment
    In the September 19, 2003 Federal Register (68 FR 54905), we 
published a final notice of intent to collect occupational mix data 
from hospitals using the Medicare Wage Index Occupational Mix Survey, 
Form CMS-10079. (The survey and instructions may be accessed at the Web 
site: http://cms.hhs.gov/providers/hipps/ippswage.asp.) The survey 
requires hospitals to report the number of total paid hours for 
directly hired and contract employees in occupations that provide the 
following services: Nursing, physical therapy, occupational therapy, 
respiratory therapy, medical and clinical laboratory, dietary, and 
pharmacy. These services each include several standard occupational 
classifications (SOCs), as defined by the Bureau of Labor Statistics 
(BLS) on its Occupational Employment Statistics (OES) survey (http://www.bls.gov/oes/2001/oes_tec.htm), that may be used by hospitals in 
different mixes to provide specific aspects of patient care. CMS 
decided to use BLS's SOCs to categorize employees for the occupational 
mix survey in an effort to ease hospitals' reporting burden; most 
hospitals have had experience with collecting and reporting their 
employment data according to the SOC definitions. The survey includes a 
total of 19 SOCs that provide services for the above 7 categories and 
an ``all other occupations'' category. The hours collected on the 
survey would be used to determine the proportion of a general service 
category total that is attributable to each of the category's SOCs, 
that is, the category's occupational mix.
    In order to accurately reflect a hospital's employment, we 
initially planned to require all hospitals to provide occupational mix 
data collected from a 1-year period. Several hospitals and their 
representatives advised us that a 1-year reporting period was feasible 
because salary and wage data are maintained quarterly for revenue and 
tax reporting purposes. However, several hospitals expressed concern 
that their payroll and other personnel accounting systems are typically 
not set up to collect data on hours for contract employees. The 
hospitals and their representatives advised us that the approximately 
2-month timeframe (see dates below) for collecting and submitting the 
occupational mix data to the fiscal intermediaries would not allow 
hospitals enough time to develop a year's worth of hours data for 
contract workers. Therefore, given the short timeframe for collecting 
the occupational mix data, and to reduce hospitals' reporting burden 
associated with the initial collection of the data, we decided to allow 
hospitals the option of providing their hours data for the 19 SOCs 
either prospectively for a 4-week period beginning on or between 
December 28, 2003 and January 11, 2004, and ending no later than 
February 7, 2004, or retrospectively for a 12-month period, that is, 
calendar year 2003. Although we recognize that using data from only a 
4-week period increases our risk of obtaining results that reflect 
seasonal rather than normal employment trends, we believe that the 4-
week prospective reporting period should enable hospitals to plan and 
provide more accurate data according to our survey instructions and 
definitions. (See the discussion below on the verification and validity 
of our occupational mix survey results.)
    An advance copy of the occupational mix survey was provided to 
hospitals in mid-December 2003 so that hospitals could begin gathering 
their data and documentation necessary to complete the survey. The 
official survey was published as a CMS One-Time Notification (Pub. 100-
20, R47OTN) on January 23, 2004. We instructed our fiscal 
intermediaries to distribute and collect completed occupational mix 
surveys from any hospital that is subject to IPPS, or any hospital that 
would be subject to IPPS if not granted a waiver. If a hospital was not 
an IPPS provider during FY 2001 or, otherwise, did not submit a FY 2001 
cost report, the hospital was not required to submit occupational mix 
data. Consistent with the wage data, CAHs were excluded from the 
occupational mix survey. In addition, the FY 2005 wage index does not 
include occupational mix data for hospitals that submitted FY 2001 wage 
data, but terminated participation in the Medicare program as IPPS 
providers before calendar year 2003. For such terminated hospitals, 
there would be no occupational mix data to collect for our survey 
period.
    Hospitals were to submit their completed occupational mix surveys 
to their fiscal intermediaries by February 16, 2004. Our initial 
collection of these data was completed by March 1, 2004, the deadline 
for fiscal intermediaries to submit hospitals' survey data to CMS. We 
released a public use file containing the data on March 8, 2004 
(through the Internet on our Web site at: http://cms/hhs.gov/providers/
hipps/ippswage.asp. In a memorandum also dated March 8, 2004, we 
instructed all fiscal intermediaries to inform the IPPS hospitals they 
service of the availability of the occupational mix data file and the 
process and timeframe for requesting corrections and revisions. If a 
hospital wished to request a change to its data as shown in that file, 
the hospital had to submit the changes to its fiscal intermediary by 
March 22, 2004. In addition, as this was hospitals' first experience 
with the occupational mix survey, we provided hospitals another 
opportunity, if they missed the February 16 filing deadline, to submit 
their completed surveys. The deadline for this one-time, final 
opportunity to submit occupational mix data to fiscal intermediaries 
for the FY 2005 wage index was also March 22, 2004. The final deadline 
for fiscal intermediaries to submit hospitals' data to CMS was April 
16, 2004. (From April 16 until the final rule is published, the 
process, criteria, and timetable for correcting occupational mix data 
is the same as for Worksheet S-3 wage data, under Section H.) 
Occupational mix survey data received by us through March 15, 2004, are 
used in computing the proposed wage index in this proposed rule. Data 
received from intermediaries after March 15 through April 16, 2004 will 
be included in the final rule.
    The response rate for the occupational mix survey, as of March 15, 
2004, was 89.4 percent. We received occupational mix data from 3,593 
hospitals. We expected to receive completed survey data from 4,018 
hospitals that submitted cost report wage data for FY 2001 and were 
still IPPS hospitals during calendar year 2003 or on January 1, 2004. 
For any hospital that was expected to provide occupational mix data but 
did not, we are considering using proxy occupational mix data to adjust 
the hospital's wage data in the final wage index. One option would be 
to assume that the hospital only has employees in the highest level SOC 
for each of the general service categories included on the occupational 
mix survey. Another option would be to assume that such hospitals have 
the national SOC mix for each general service category. We invite 
public comment to this proposal. We note that the wage index in this 
proposed rule does not include proxy data for hospitals that did not 
complete and submit the occupational mix survey.
    As this was the first administration of the occupational mix 
survey, we did not provide fiscal intermediaries an extensive program 
for reviewing the hours of data collected. However, hospitals were 
required to be able to provide any documentation that could be used by 
the fiscal intermediaries to verify the survey data. In addition, after 
reviewing the compiled survey data, we contacted fiscal intermediaries 
to

[[Page 28254]]

request corrections from a few hospitals that provided data for 
reporting periods that were out of range with our specified 12-month or 
4-week data collection periods. As the wage index is a relative measure 
of labor costs across geographic areas, it is important that the data 
collected from hospitals reflects a common period. We also tested the 
validity of our occupational mix survey data by comparing our results 
to those of the 2001 BLS OES survey. As shown in Charts 4 and 5 below, 
the results of our survey are consistent with the findings of the BLS 
OES survey.
    In addition, to compute the occupational mix adjustment, we 
collected data on the average hourly rates for the 19 SOCs so that we 
could derive a weighted average hourly rate for each labor market area. 
(More details about the occupational mix calculation are included in 
section III.C.2. of this preamble.) To decrease hospital's reporting 
burden for this initial collection of the occupational mix data, and to 
facilitate the timely collection of the data, we did not require 
hospitals to report data on their total wages or average hourly rates 
associated with the 19 SOCs. Instead, we used national average hourly 
rates from the BLS OES 2001 National Industry--Specific Occupational 
Employment and Wage Estimates, SIC--Hospitals (accessible at Web site: 
http://www.bls.gov/oes/2001/oesi3_806.htm), as reflected in Chart 4 
below.

                 Chart 4.--BLS National Occupational Employment and Wage Estimates for Hospitals
----------------------------------------------------------------------------------------------------------------
                                                     Number of      Percent of      Percent of       National
           General service categories                hospital         service          total      average hourly
                                                     employees       category        employees        wage $
----------------------------------------------------------------------------------------------------------------
                                 Nursing Services and Medical Assistant Services
----------------------------------------------------------------------------------------------------------------
Registered Nurses...............................       1,307,960            68.8           25.88           23.62
Licensed Practical Nurses.......................         194,900            10.2            3.86           14.65
Nursing Aides, Orderlies, & Attendants..........         351,910            18.5            6.96           10.01
Medical Assistants..............................          47,250             2.5            0.93           11.79
                                                 -----------------
    Total.......................................       1,902,020           100.0           37.63
-------------------------------------------------
                                            Physical Therapy Services
----------------------------------------------------------------------------------------------------------------
Physical Therapists.............................          46,290            61.0            0.92           27.80
Physical Therapist Assistants...................          17,610            23.2            0.35           17.11
Physical Therapist Aides........................          12,020            15.8            0.24           10.40
                                                 -----------------
    Total.......................................          75,920           100.0            1.50
-------------------------------------------------
                                          Occupational Therapy Services
----------------------------------------------------------------------------------------------------------------
Occupation Therapists...........................          24,110            75.3            0.48           25.62
Occupation Therapist Assistants.................           5,690            17.8            0.11           16.81
Occupation Therapist Aides......................           2,220             6.9            0.04           11.60
                                                 -----------------
    Total.......................................          32,020           100.0            0.63
-------------------------------------------------
                                           Respiratory Therapy Services
----------------------------------------------------------------------------------------------------------------
Respiratory Therapists..........................          68,920            72.8            1.36           19.26
Respiratory Therapy Technicians.................          25,710            27.2            0.51           16.96
                                                 -----------------
    Total.......................................          94,630           100.0            1.87
-------------------------------------------------
                                                Pharmacy Services
----------------------------------------------------------------------------------------------------------------
Pharmacists.....................................          48,630            48.8            0.96           34.58
Pharmacy Technicians............................          44,270            44.4            0.88           12.30
Pharmacy Assistants/Aides.......................           6,810             6.8            0.13           11.52
                                                 -----------------
    Total.......................................          99,710           100.0            1.97
-------------------------------------------------
                                                 Dietary Services
----------------------------------------------------------------------------------------------------------------
Dieticians......................................          16,820            56.4            0.33           20.02
Dietetic Technicians............................          13,020            43.6            0.26           11.64
                                                 -----------------
    Total.......................................          29,840           100.0            0.59
-------------------------------------------------
                                         Medical & Clinical Lab Services
----------------------------------------------------------------------------------------------------------------
Medical & Clinical Lab Technologists............          87,380            57.8            1.73           20.74
Medical & Clinical Lab Technicians..............          63,900            42.2            1.26           14.90
                                                 -----------------
    Total.......................................         151,280           100.0            2.99
                                                 =================

[[Page 28255]]

 
    Total Nursing, Therapy, Pharmacy, Dietary,         2,385,420  ..............           47.19
     and Medical & Clinical Occupations.........
                                                 =================
    All Other Occupations.......................       2,669,400  ..............           52.81
                                                 =================
    Total Hospital Employees....................       5,054,820  ..............          100.0
----------------------------------------------------------------------------------------------------------------
Source: BLS, OES, 2001 National Industry-Specific Occupational Employment and Wage Estimates, http://www.bls.gov/
  oes/2001


                               Chart 5.--Medicare Occupational Mix Survey Results
----------------------------------------------------------------------------------------------------------------
                                                                                    Percent of      Percent of
               General Service Categories                   Number of employee        service     total employee
                                                                  hours           category hours       hours
----------------------------------------------------------------------------------------------------------------
                                 Nursing Services and Medical Assistant Services
----------------------------------------------------------------------------------------------------------------
Registered Nurses......................................         1,349,683,706.61           70.38           26.23
Licensed Practical Nurses..............................           148,480,984.66            7.74            2.89
Nursing Aides, Orderlies, & Attendants.................           349,482,222.23           18.22            6.79
Medical Assistants.....................................            70,155,219.44            3.66            1.36
                                                        --------------------------
    Total..............................................         1,917,802,132.94          100.00           37.27
--------------------------------------------------------
                                            Physical Therapy Services
----------------------------------------------------------------------------------------------------------------
Physical Therapists....................................            42,728,556.90           60.87            0.83
Physical Therapist Assistants..........................            16,278,842.28           23.19            0.32
Physical Therapist Aides...............................            11,192,122.93           15.94            0.22
                                                        --------------------------
    Total..............................................            70,199,522.11          100.00            1.36
--------------------------------------------------------
                                          Occupational Therapy Services
----------------------------------------------------------------------------------------------------------------
Occupation Therapists..................................            18,016,924.74           76.46            0.35
Occupation Therapist Assistants........................             3,912,014.51           16.60            0.08
Occupation Therapist Aides.............................             1,635,953.90            6.94            0.03
                                                        --------------------------
    Total..............................................            23,564,893.16          100.00            0.46
--------------------------------------------------------
                                          Respiratory Therapy Services
----------------------------------------------------------------------------------------------------------------
Respiratory Therapists.................................            79,768,909.24           79.96            1.55
Respiratory Therapy Technicians........................            19,993,236.90           20.04            0.39
                                                        --------------------------
    Total..............................................            99,762,146.14          100.00            1.94
--------------------------------------------------------
                                                Pharmacy Services
----------------------------------------------------------------------------------------------------------------
Pharmacists............................................            52,574,888.83           48.35            1.02
Pharmacy Technicians...................................            51,947,662.82           47.77            1.01
Pharmacy Assistants/Aides..............................             4,219,798.43            3.88            0.08
                                                        --------------------------
    Total..............................................           108,742,350.08          100.00            2.11
--------------------------------------------------------
                                                Dietary Services
----------------------------------------------------------------------------------------------------------------
Dieticians.............................................            18,221,465.33           42.23            0.35
Dietetic Technicians...................................            24,929,864.59           57.77            0.48
                                                        --------------------------
    Total..............................................            43,151,329.92          100.00            0.84
--------------------------------------------------------
                                         Medical & Clinical Lab Services
----------------------------------------------------------------------------------------------------------------
Medical & Clinical Lab Technologists...................           109,938,139.37           52.07            2.14
Medical & Clinical Lab Technicians.....................           101,208,507.21           47.93            1.97
                                                        --------------------------
    Total..............................................           211,146,646.58          100.00            4.10
                                                        ==========================
        Total Nursing, Therapy, Pharmacy, Dietary, and          2,474,369,020.92  ..............           48.08
         Medical & Clinical Occupations................
                                                        ==========================

[[Page 28256]]

 
        All Other Occupations..........................         2,671,751,872.61  ..............           51.92
                                                        ==========================
            Total Hospital Employees...................         5,146,120,893.53  ..............         100.00
----------------------------------------------------------------------------------------------------------------
Source: Medicare Wage Index Occupational Mix Survey, Form CMS-10079

2. Proposed Calculation of the Occupational Mix Adjustment Factor and 
the Proposed Occupational Mix Adjusted Wage Index
    The method used to calculate the proposed occupational mix adjusted 
wage index follows:
    Step 1--For each hospital, the percentage of the general service 
category attributable to an SOC is determined by dividing the SOC hours 
by the general service category's total hours. Repeat this calculation 
for each of the 19 SOCs.
    Step 2--For each hospital, the weighted average hourly rate for an 
SOC is determined by multiplying the percentage of the general service 
category (from Step 1) by the national average hourly rate for that SOC 
from the 2001 BLS OES survey (see Chart 4 above). Repeat this 
calculation for each of the 19 SOCs.
    Step 3--For each hospital, the hospital's adjusted average hourly 
rate for a general service category is computed by summing the weighted 
hourly rate for each SOC within the general category. Repeat this 
calculation for each of the 7 general service categories.
    Step 4--For each hospital, the occupational mix adjustment factor 
for a general service category is calculated by dividing the national 
adjusted average hourly rate for the category by the hospital's 
adjusted average hourly rate for the category. (The national adjusted 
average hourly rate is computed in the same manner as Steps 1 through 
3, using instead, the total SOC and general service category hours for 
all hospitals in the occupational mix survey database.) Repeat this 
calculation for each of the 7 general service categories. If the 
hospital's adjusted rate is less than the national adjusted rate 
(indicating the hospital employs a less costly mix of employees within 
the category), the occupational mix adjustment factor will be greater 
than 1.0000. If the hospital's adjusted rate is greater than the 
national adjusted rate, the occupational mix adjustment factor will be 
less than 1.0000.
    Step 5--For each hospital, the occupational mix adjusted salaries 
and wage-related costs for a general service category is calculated by 
multiplying the hospital's total salaries and wage-related costs (from 
Step 5 of the unadjusted wage index calculation in section F) by the 
national percentage of total hospital workers attributable to the 
general service category (from the occupational mix survey data; see 
Chart 5 above) and by the general service category's occupational mix 
adjustment factor (from Step 4 above). Repeat this calculation for each 
of the 7 general service categories. The remaining portion of the 
hospital's total salaries and wage-related costs that is attributable 
to all other employees of the hospital is not adjusted for occupational 
mix.
    Step 6--For each hospital, the total occupational mix adjusted 
salaries and wage-related costs for a hospital are calculated by 
summing the occupational mix adjusted salaries and wage-related costs 
for the 7 general service categories (from Step 5) and the unadjusted 
portion of the hospital's salaries and wage-related costs for all other 
employees. To compute a hospital's occupational mix adjusted average 
hourly wage, divide the hospital's total occupational mix adjusted 
salaries and wage-related costs by the hospital's total hours (from 
Step 4 of the unadjusted wage index calculation in Section F).
    Step 7--To compute the occupational mix adjusted average hourly 
wage for an urban or rural area, sum the total occupational mix 
adjusted salaries and wage-related costs for all hospitals in the area, 
then sum the total hours for all hospitals in the area. Next, divide 
the area's occupational mix adjusted salaries and wage-related costs by 
the area's hours.
    Step 8--To compute the national occupational mix adjusted average 
hourly wage, sum the total occupational mix adjusted salaries and wage-
related costs for all hospitals in the nation, then sum the total hours 
for all hospitals in the nation. Next, divide the national occupational 
mix adjusted salaries and wage-related costs by the national hours. The 
proposed national occupational mix adjusted average hourly wage is 
26.2566.
    Step 9--To compute the occupational mix adjusted wage index, divide 
each area's occupational mix adjusted average hourly wage (Step 7) by 
the proposed national occupational mix adjusted average hourly wage 
(Step 8).
    Step 10--To compute the proposed Puerto Rico specific occupational 
mix adjusted wage index, follow the Steps 1 through 9 above. The 
proposed Puerto Rico occupational mix adjusted average hourly wage is 
12.2035.

                                     Example of Occupational Mix Adjustment
----------------------------------------------------------------------------------------------------------------
                                                                  Percent of       Percent of     BLS  national
      General service categories/SOCs            Number of         service      total  employee  average  hourly
                                              employee  hours  category  hours        hours            wage
----------------------------------------------------------------------------------------------------------------
                                NATIONAL--Nursing and Medical Assistant Services
----------------------------------------------------------------------------------------------------------------
Registered Nurses..........................     1,349,683,707            70.38            26.23          $23.62.
Licensed Practical Nurses..................       148,480,985             7.74             2.89           14.65.
Nursing Aides, Orderlies, & Attendants.....       349,482,222            18.22             6.79            10.01
Medical Assistants.........................        70,155,219             3.66             1.36          11.79 .
                                            -------------------

[[Page 28257]]

 
    Total..................................     1,917,802,133           100.00            37.27           20.01.
Hospital A:
    Registered Nurses......................         1,642,116            79.84  ...............           18.86.
    Licensed Practical Nurses..............            67,860             3.30  ...............            0.48.
    Nursing Aides, Orderlies, & Attendants.           259,177            12.60  ...............             1.26
    Medical Assistants.....................            87,622             4.26  ...............            0.50.
                                            -------------------
    Total..................................         2,056,774           100.00  ...............            21.11
    Occupational Mix Adjustment............  ................  ...............  ...............           0.9481
Hospital B:
    Registered Nurses......................         1,510,724            64.44  ...............             0.31
    Licensed Practical Nurses..............           159,795             6.82  ...............             0.09
    Nursing Aides, Orderlies, & Attendants.           391,201            16.69  ...............             0.08
    Medical Assistants.....................           282,728            12.06  ...............             2.55
                                            -------------------
        Total..............................         2,344,449           100.00  ...............            19.31
    Occupational Mix Adjustment............  ................  ...............  ...............           1.0362
--------------------------------------------
                                       NATIONAL--Physical Therapy Services
----------------------------------------------------------------------------------------------------------------
Physical Therapists........................        42,728,557            60.87             0.83            27.80
Physical Therapist Assistants..............        16,278,842            23.19             0.32            17.11
Physical Therapist Aides...................        11,192,123            15.94             0.22            10.40
                                            -------------------
    Total..................................        70,199,522           100.00             1.36            22.55
Hospital A:
    Physical Therapists....................            94,987            61.40  ...............            17.07
    Physical Therapist Assistants..........            36,254            23.43  ...............             4.01
    Physical Therapist Aides...............            23,460            15.16  ...............             1.58
                                            -------------------
        Total..............................           154,701           100.00  ...............            22.66
    Occupational Mix Adjustment............  ................  ...............  ...............           0.9953
--------------------------------------------
Hospital B:
    Physical Therapists....................            60,337            57.37  ...............            15.95
    Physical Therapist Assistants..........            22,391            21.29  ...............             3.64
    Physical Therapist Aides...............            22,444            21.34  ...............             2.22
                                            -------------------
        Total..............................           105,173           100.00  ...............            21.81
    Occupational Mix Adjustment............  ................  ...............  ...............           1.0339
--------------------------------------------
                                     NATIONAL--Occupational Therapy Services
----------------------------------------------------------------------------------------------------------------
Occupation Therapists......................        18,016,925            76.46             0.35            25.62
Occupation Therapist Assistants............         3,912,015            16.60             0.08            16.81
Occupation Therapist Aides.................         1,635,954             6.94             0.03            11.60
                                            -------------------
    Total..................................        23,564,893           100.00             0.46           23.18.
Hospital A:
    Occupation Therapists..................            40,366            90.06  ...............            23.07
    Occupation Therapist Assistants........                 0             0.00  ...............             0.00
    Occupation Therapist Aides.............             4,454             9.94  ...............             1.15
                                            -------------------
        Total..............................            44,820           100.00  ...............            24.23
    Occupational Mix Adjustment............  ................  ...............  ...............           0.9568
--------------------------------------------
Hospital B:
    Occupation Therapists..................            26,547            79.48  ...............            20.36
    Occupation Therapist Assistants........             1,610             4.82  ...............             0.81
    Occupation Therapist Aides.............             5,242            15.70  ...............             1.82
                                            -------------------
        Total..............................            33,399           100.00  ...............            22.99
    Occupational Mix Adjustment............  ................  ...............  ...............           1.0081
--------------------------------------------
                                     NATIONAL--Respiratory Therapy Services
----------------------------------------------------------------------------------------------------------------
Respiratory Therapists.....................        79,768,909            79.96             1.55            19.26
Respiratory Therapy Technicians............        19,993,237            20.04             0.39            16.96
                                            -------------------
    Total..................................        99,762,146           100.00             1.94            18.80

[[Page 28258]]

 
Hospital A:
    Respiratory Therapists.................            75,339            97.40  ...............            18.76
    Respiratory Therapy Technicians........             2,008             2.60  ...............             0.44
                                            -------------------
        Total..............................            77,347           100.00  ...............            19.20
    Occupational Mix Adjustment............  ................  ...............  ...............           0.9792
Hospital B:
    Respiratory Therapists.................            73,592            65.62  ...............            12.64
    Respiratory Therapy Technicians........            38,549            34.38  ...............             5.83
                                            -------------------
        Total..............................           112,141           100.00  ...............            18.47
    Occupational Mix Adjustment............  ................  ...............  ...............           1.0179
--------------------------------------------
                                           NATIONAL--Pharmacy Services
----------------------------------------------------------------------------------------------------------------
Pharmacists................................        52,574,889            48.35             1.02            34.58
Pharmacy Technicians.......................        51,947,663            47.77             1.01            12.30
Pharmacy Assistants/Aides..................         4,219,798             3.88             0.08            11.52
                                            -------------------
    Total..................................       108,742,350           100.00             2.11            23.04
Hospital A:
    Pharmacists............................            65,863            48.65  ...............            16.82
    Pharmacy Technicians...................            69,525            51.35  ...............             6.32
    Pharmacy Assistants/Aides..............                 0             0.00  ...............             0.00
                                            -------------------
        Total..............................           135,388           100.00  ...............            23.14
    Occupational Mix Adjustment............  ................  ...............  ...............           0.9957
Hospital B:
    Pharmacists............................            45,856            39.23  ...............            13.57
    Pharmacy Technicians...................            64,986            55.60  ...............             6.84
    Pharmacy Assistants/Aides..............             6,039             5.17  ...............             0.60
---------------------------------------------------------------
        Total..............................           116,881           100.00  ...............            21.00
    Occupational Mix Adjustment............  ................  ...............  ...............           1.0971
--------------------------------------------
                                           NATIONAL--Dietary Services
----------------------------------------------------------------------------------------------------------------
Dieticians.................................        18,221,465            42.23             0.35            20.02
Dietetic Technicians.......................        24,929,865            57.77             0.48            11.64
    Total..................................        43,151,330           100.00             0.84            15.18
Hospital A:
    Dieticians.............................            13,943           100.00  ...............            20.02
    Dietetic Technicians...................                 0             0.00  ...............             0.00
                                            -------------------
        Total..............................            13,943           100.00  ...............            20.02
    Occupational Mix Adjustment............  ................  ...............  ...............           0.7582
Hospital B:
    Dieticians.............................            27,458            16.29  ...............             3.26
    Dietetic Technicians...................           141,148            83.71  ...............             9.74
                                            -------------------
        Total..............................           168,606           100.00  ...............            13.00
    Occupational Mix Adjustment............  ................  ...............  ...............           1.1676
--------------------------------------------
                                    NATIONAL--Medical & Clinical Lab Services
----------------------------------------------------------------------------------------------------------------
Medical & Clinical Lab Technologists.......       109,938,139            52.07             2.14            20.74
Medical & Clinical Lab Technicians.........       101,208,507            47.93             1.97           14.90.
                                            -------------------
    Total..................................       211,146,647           100.00             4.10            17.94
Hospital A:
    Medical & Clinical Lab Technologists...           166,522            90.82  ...............            18.84
    Medical & Clinical Lab Technicians.....            16,841             9.18  ...............             1.37
                                            -------------------
        Total..............................           183,363           100.00  ...............            20.20
    Occupational Mix Adjustment............  ................  ...............  ...............           0.8880
Hospital B:
    Medical & Clinical Lab Technologists...           295,516            47.34  ...............             9.82
    Medical & Clinical Lab Technicians.....           328,716            52.66  ...............             7.85
                                            -------------------

[[Page 28259]]

 
        Total..............................           624,232           100.00  ...............            17.66
    Occupational Mix Adjustment............  ................  ...............  ...............           1.0156
--------------------------------------------
Total Nursing, Therapy, Pharmacy, Dietary,      2,474,369,021  ...............            48.08  ...............
 and Medical & Clinical Occupations........
All Other Occupations......................     2,671,751,873  ...............            51.92  ...............
Total Hospital Employees...................     5,146,120,894  ...............           100.00  ...............
----------------------------------------------------------------------------------------------------------------

    In implementing an occupational mix adjusted wage index based on 
the above calculation, the wage index values for 18 rural areas (36.7 
percent) and 166 urban areas (51.2 percent) would decrease as a result 
of the adjustment. Nine (9) rural areas (18.4 percent) and 89 urban 
areas (27.5 percent) would experience a decrease of 1 percent or 
greater in their wage index values. The largest negative impact for a 
rural area would be 2.2 percent and for an urban area, 4.5 percent. 
Meanwhile, 31 rural areas (63.3 percent) and 158 urban areas (48.8 
percent) would experience an increase in their wage index values. 
Although these results show that rural hospitals would gain the most 
from an occupational mix adjustment to the wage index, their gains may 
not be as great as might have been expected. Further, it might not have 
been anticipated that over one-third of rural hospitals would actually 
fare worse under the adjustment. Overall, a fully implemented 
occupational mix adjusted wage index would have a redistributive effect 
on Medicare payments to hospitals.

D. Worksheet S-3 Wage Data for the Proposed FY 2005 Wage Index Update

[If you choose to comment on issues in this section, please include the 
caption ``Wage Data'' at the beginning of your comment.]
    The proposed FY 2005 wage index values (effective for hospital 
discharges occurring on or after October 1, 2004 and before October 1, 
2005) in section VI. of the Addendum to this proposed rule are based on 
the data collected from the Medicare cost reports submitted by 
hospitals for cost reporting periods beginning in FY 2001 (the FY 2004 
wage index was based on FY 2000 wage data).
    The proposed FY 2005 wage index includes the following categories 
of data associated with costs paid under the IPPS (as well as 
outpatient costs):
     Salaries and hours from short-term, acute care hospitals 
(including paid lunch hours and hours associated with military leave 
and jury duty).
     Home office costs and hours.
     Certain contract labor costs and hours (which includes 
direct patient care, certain top management, pharmacy, laboratory, and 
nonteaching physician Part A services).
     Wage-related costs (The September 1, 1994 Federal Register 
included a list of core wage-related costs that are included in the 
wage index, and discussed criteria for including other wage-related 
costs (59 FR 45356)).
    Consistent with the wage index methodology for FY 2004, the 
proposed wage index for FY 2005 also excludes the direct and overhead 
salaries and hours for services not subject to IPPS payment, such as 
SNF services, home health services, costs related to GME (teaching 
physicians and residents) and certified registered nurse anesthetists 
(CRNAs), and other subprovider components that are not paid under the 
IPPS. The proposed FY 2005 wage index also excludes the salaries, 
hours, and wage-related costs of hospital-based rural health clinics 
(RHCs), and Federally qualified health centers (FQHCs) because Medicare 
pays for these costs outside of the IPPS (68 FR 45395). In addition, 
salaries, hours and wage-related costs of CAHs are excluded from the 
wage index, for the reasons explained in the FY 2004 IPPS final rule 
(68 FR 45397).
    Data collected for the IPPS wage index are also currently used to 
calculate wage indexes applicable to other providers, such as SNFs, 
home health agencies, and hospices. In addition, they are used for 
prospective payments to rehabilitation, psychiatric, and long-term care 
hospitals, and for hospital outpatient services.

E. Verification of Worksheet S-3 Wage Data

[If you choose to comment on issues in this section, please include the 
caption ``Wage Data'' at the beginning of your comment.]
    The wage data for the proposed FY 2005 wage index were obtained 
from Worksheet S-3, Parts II and III of the FY 2001 Medicare cost 
reports. Instructions for completing the Worksheet S-3, Parts II and 
III are in the Provider Reimbursement Manual, Part I, sections 3605.2 
and 3605.3. The data file used to construct the proposed wage index 
includes FY 2001 data submitted to us as of March 15, 2004. As in past 
years, we performed an intensive review of the wage data, mostly 
through the use of edits designed to identify aberrant data.
    We asked our fiscal intermediaries to revise or verify data 
elements that resulted in specific edit failures. Some unresolved data 
elements are included in the calculation of the proposed FY 2005 wage 
index, pending their resolution before calculation of the final FY 2005 
index. We instructed the fiscal intermediaries to complete their data 
verification of questionable data elements and to transmit any changes 
to the wage data no later than April 16, 2004. We believe all 
unresolved data elements will be resolved by the date the final rule is 
issued. The revised data will be reflected in the final rule.
    In addition, as part of our editing process, we removed data for 
222 hospitals from our database: 147 hospitals became critical access 
hospitals by the time we published the February public use file, and 75 
hospitals were low Medicare utilization hospitals or failed edits that 
could not be corrected because the hospitals terminated the program or 
changed ownership. In addition, we removed the wage data for 15 
hospitals with incomplete or inaccurate data resulting in zero or 
negative, or otherwise aberrant, average hourly wages. We have notified 
the fiscal intermediaries of these hospitals and will continue to work 
with the fiscal intermediaries to correct these data until we finalize 
our database to compute the final wage index. As a result, the proposed 
FY 2005 wage index is calculated based on FY 2001 wage data for 3,954 
hospitals.

[[Page 28260]]

    In constructing the proposed FY 2005 wage index, we include the 
wage data for facilities that were IPPS hospitals in FY 2001, even for 
those facilities that have terminated their participation in the 
program as hospitals, as long as those data do not fail any of our 
edits for reasonableness. We believe that including the wage data for 
these hospitals is, in general, appropriate to reflect the economic 
conditions in the various labor market areas during the relevant past 
period. However, we exclude the wage data for CAHs (as discussed in 68 
FR 45397). The proposed wage index in this proposed rule excludes 
hospitals that are designated as CAHs by February 24, 2004, the date of 
the latest available Medicare CAH listing at the time we released the 
proposed wage index public use file on February 27, 2004.

F. Computation of the Unadjusted Wage Index

[If you choose to comment on issues in this section, please include the 
caption ``Wage Index'' at the beginning of your comment.]
    The method used to compute the proposed FY 2005 wage index without 
an occupational mix adjustment follows:
    Step 1--As noted above, we based the proposed FY 2005 wage index on 
wage data reported on the FY 2001 Medicare cost reports. We gathered 
data from each of the non-Federal, short-term, acute care hospitals for 
which data were reported on the Worksheet S-3, Parts II and III of the 
Medicare cost report for the hospital's cost reporting period beginning 
on or after October 1, 2000 and before October 1, 2001. In addition, we 
included data from some hospitals that had cost reporting periods 
beginning before October 2000 and reported a cost reporting period 
covering all of FY 2001. These data were included because no other data 
from these hospitals would be available for the cost reporting period 
described above, and because particular labor market areas might be 
affected due to the omission of these hospitals. However, we generally 
describe these wage data as FY 2001 data. We note that, if a hospital 
had more than one cost reporting period beginning during FY 2001 (for 
example, a hospital had two short cost reporting periods beginning on 
or after October 1, 2000 and before October 1, 2001), we included wage 
data from only one of the cost reporting periods, the longer, in the 
wage index calculation. If there was more than one cost reporting 
period and the periods were equal in length, we included the wage data 
from the later period in the wage index calculation.
    Step 2--Salaries--The method used to compute a hospital's average 
hourly wage excludes certain costs that are not paid under the IPPS. In 
calculating a hospital's average salaries plus wage-related costs, we 
subtracted from Line 1 (total salaries) the GME and CRNA costs reported 
on lines 2, 4.01, 6, and 6.01, the Part B salaries reported on Lines 3, 
5 and 5.01, home office salaries reported on Line 7, and excluded 
salaries reported on Lines 8 and 8.01 (that is, direct salaries 
attributable to SNF services, home health services, and other 
subprovider components not subject to the IPPS). We also subtracted 
from Line 1 the salaries for which no hours were reported. To determine 
total salaries plus wage-related costs, we added to the net hospital 
salaries the costs of contract labor for direct patient care, certain 
top management, pharmacy, laboratory, and nonteaching physician Part A 
services (Lines 9 and 10), home office salaries and wage-related costs 
reported by the hospital on Lines 11 and 12, and nonexcluded area wage-
related costs (Lines 13, 14, and 18).
    We note that contract labor and home office salaries for which no 
corresponding hours are reported were not included. In addition, wage-
related costs for nonteaching physician Part A employees (Line 18) are 
excluded if no corresponding salaries are reported for those employees 
on Line 4.
    Step 3--Hours--With the exception of wage-related costs, for which 
there are no associated hours, we computed total hours using the same 
methods as described for salaries in Step 2.
    Step 4--For each hospital reporting both total overhead salaries 
and total overhead hours greater than zero, we then allocated overhead 
costs to areas of the hospital excluded from the wage index 
calculation. First, we determined the ratio of excluded area hours (sum 
of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours 
(Line 1 minus the sum of Part II, Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 
7, and Part III, Line 13 of Worksheet S-3). We then computed the 
amounts of overhead salaries and hours to be allocated to excluded 
areas by multiplying the above ratio by the total overhead salaries and 
hours reported on Line 13 of Worksheet S-3, Part III. Next, we computed 
the amounts of overhead wage-related costs to be allocated to excluded 
areas using three steps: (1) We determined the ratio of overhead hours 
(Part III, Line 13) to revised hours (Line 1 minus the sum of Lines 2, 
3, 4.01, 5, 5.01, 6, 6.01, and 7); (2) we computed overhead wage-
related costs by multiplying the overhead hours ratio by wage-related 
costs reported on Part II, Lines 13, 14, and 18; and (3) we multiplied 
the computed overhead wage-related costs by the above excluded area 
hours ratio. Finally, we subtracted the computed overhead salaries, 
wage-related costs, and hours associated with excluded areas from the 
total salaries (plus wage-related costs) and hours derived in Steps 2 
and 3.
    Step 5--For each hospital, we adjusted the total salaries plus 
wage-related costs to a common period to determine total adjusted 
salaries plus wage-related costs. To make the wage adjustment, we 
estimated the percentage change in the employment cost index (ECI) for 
compensation for each 30-day increment from October 14, 2000 through 
April 15, 2002 for private industry hospital workers from the Bureau of 
Labor Statistics' Compensation and Working Conditions. We use the ECI 
because it reflects the price increase associated with total 
compensation (salaries plus fringes) rather than just the increase in 
salaries. In addition, the ECI includes managers as well as other 
hospital workers. This methodology to compute the monthly update 
factors uses actual quarterly ECI data and assures that the update 
factors match the actual quarterly and annual percent changes. The 
factors used to adjust the hospital's data were based on the midpoint 
of the cost reporting period, as indicated below.

                    Midpoint of Cost Reporting Period
------------------------------------------------------------------------
         After                    Before            Adjustment  factor.
------------------------------------------------------------------------
        10/14/2000               11/15/2000                 1.07771
        11/14/2000               12/15/2000                 1.07273
        12/14/2000                1/15/2001                 1.06767
        01/14/2001               02/15/2001                 1.06245
        02/14/2001               03/15/2001                 1.05706
        03/14/2001               04/15/2001                 1.05168
        04/14/2001               05/15/2001                 1.04645
        05/14/2001               06/15/2001                 1.04139
        06/14/2001               07/15/2001                 1.03638
        07/14/2001               08/15/2001                 1.03134
        08/14/2001               09/15/2001                 1.02627
        09/14/2001               10/15/2001                 1.02133
        10/14/2001               11/15/2001                 1.01665
        11/14/2001               12/15/2001                 1.01224
        12/14/2001               01/15/2002                 1.00803
        01/14/2002               02/15/2002                 1.00395
        02/14/2002               03/15/2002                 1.00000
        03/14/2002               04/15/2002                 0.99610
------------------------------------------------------------------------

    For example, the midpoint of a cost reporting period beginning 
January 1, 2001 and ending December 31, 2001 is June 30, 2001. An 
adjustment factor of 1.03638 would be applied to the wages of a 
hospital with such a cost reporting period. In addition, for the data 
for any

[[Page 28261]]

cost reporting period that began in FY 2001 and covered a period of 
less than 360 days or more than 370 days, we annualized the data to 
reflect a 1-year cost report. Dividing the data by the number of days 
in the cost report and then multiplying the results by 365 accomplish 
annualization.
    Step 6--Each hospital was assigned to its appropriate urban or 
rural labor market area before any reclassifications under section 
1886(d)(8)(B) or section 1886(d)(10) of the Act. Within each urban or 
rural labor market area, we added the total adjusted salaries plus 
wage-related costs obtained in Step 5 for all hospitals in that area to 
determine the total adjusted salaries plus wage-related costs for the 
labor market area.
    Step 7--We divided the total adjusted salaries plus wage-related 
costs obtained under both methods in Step 6 by the sum of the 
corresponding total hours (from Step 4) for all hospitals in each labor 
market area to determine an average hourly wage for the area.
    Step 8--We added the total adjusted salaries plus wage-related 
costs obtained in Step 5 for all hospitals in the nation and then 
divided the sum by the national sum of total hours from Step 4 to 
arrive at a national average hourly wage. Using the data as described 
above, the proposed national average hourly wage is $26.2939.
    Step 9--For each urban or rural labor market area, we calculated 
the hospital wage index value by dividing the area average hourly wage 
obtained in Step 7 by the national average hourly wage computed in Step 
8.
    Step 10--Following the process set forth above, we developed a 
separate Puerto Rico-specific wage index for purposes of adjusting the 
Puerto Rico standardized amounts. (The national Puerto Rico 
standardized amount is adjusted by a wage index calculated for all 
Puerto Rico labor market areas based on the national average hourly 
wage as described above.) We added the total adjusted salaries plus 
wage-related costs (as calculated in Step 5) for all hospitals in 
Puerto Rico and divided the sum by the total hours for Puerto Rico (as 
calculated in Step 4) to arrive at an overall proposed average hourly 
wage of 12.2038 for Puerto Rico. For each labor market area in Puerto 
Rico, we calculated the Puerto Rico-specific wage index value by 
dividing the area average hourly wage (as calculated in Step 7) by the 
overall Puerto Rico average hourly wage.
    Step 11--Section 4410 of Public Law 105-33 provides that, for 
discharges on or after October 1, 1997, the area wage index applicable 
to any hospital that is located in an urban area of a State may not be 
less than the area wage index applicable to hospitals located in rural 
areas in that State. Furthermore, this wage index floor is to be 
implemented in such a manner as to ensure that aggregate IPPS payments 
are not greater or less than those that would have been made in the 
year if this section did not apply. For FY 2005, this change affects 
195 hospitals in 51 MSAs. The MSAs affected by this provision are 
identified by a footnote in Table 4A in the Addendum of this proposed 
rule.

G. Computation of the Proposed FY 2005 Blended Wage Index

[If you choose to comment on issues in this section, please include the 
caption ``Wage Index'' at the beginning of your comment.]
    For the FY 2005 wage index, we are proposing a blend of the 
occupational mix adjusted wage index and the unadjusted wage index, in 
order to minimize the redistributive impact of the occupational mix 
adjustment (as discussed in section III.C.2. of this preamble) for the 
first year of its implementation. Specifically, we are proposing to 
base the FY 2005 wage index on a blend of 10 percent of an average 
hourly wage, adjusted for occupational mix, and 90 percent of an 
average hourly wage, unadjusted for occupational mix. Using this blend, 
the national average hourly wage is 26.2902 and the Puerto Rico 
specific average hourly wage is 12.2038. We chose this blend for FY 
2005 in recognition that this was the first time, for the 
administration of the occupational mix survey, hospitals had a short 
timeframe for collecting their occupational mix survey data and 
documentation, and we could not collect optimum data (that is, wages 
and hours data from a 1-year period for all hospitals) within the 
mandatory timeframe for implementing the adjustment, and we had no 
baseline data to use in developing a desk review program that could 
ensure the accuracy of the occupational mix survey data.
    In addition, we are moving cautiously with implementing the 
occupational mix adjustment in recognition of changing trends in the 
hiring of nurses, the largest group in our survey. Since the enactment 
of section 304(c) of Public Law 106-554, the law requiring the 
occupational mix adjustment to the wage index, some States have 
implemented laws that establish floors on the minimum level of 
registered nurse staffing that hospitals must maintain in order to 
continue to be licensed and certified by the State. In addition, some 
rural areas that are facing a shortage of physicians may be hiring more 
registered nurses as extenders or substitutes for physicians. Such 
trends may explain why the occupational mix impacts in section III.C.2. 
of this preamble are not as expected for rural areas in particular.
    Further, we are proposing this blend because, although we want to 
minimize the immediate impact of the occupational mix adjustment on 
hospitals' wage index values, we do not want to nullify the value and 
intent of the occupational mix adjustment. We believe that the blended 
wage index we are proposing satisfies both of these goals. With only 10 
percent of the wage index adjusted for occupational mix, the wage index 
values for 17 rural areas (34.7 percent) and 159 urban areas (49.1 
percent) would decrease as a result of the adjustment. However, the 
decreases would be minimum; the largest negative impact for a rural 
area would be only 0.22 percent and for an urban area, 0.45 percent. 
Conversely, 32 rural areas (65.3 percent) and 165 urban areas (50.9 
percent) would benefit from this adjustment, but each area's gain would 
be less than 1 percent. Overall, a wage index that has only 10 percent 
of the salaries adjusted for occupational mix would have a minimal 
redistributive effect on Medicare payments to hospitals. (See Appendix 
A to this proposed rule for further analyses of the impact of the 
proposed occupational mix adjustment on the FY 2005 wage index.)
    The wage index values in Tables 4A, 4B, 4C, 4F, 4G, and 4H and the 
average hourly wages in Tables 2, 3A, and 3B in the Addendum to this 
proposed rule include the occupational mix adjustment as proposed. We 
note that, although we are proposing a blended wage index for FY 2005, 
at this time we are not proposing an incremental phase-in of the 
occupational mix adjustment beyond FY 2005. The application of the 
occupational mix adjustment beyond FY 2005 will be determined and 
discussed in subsequent IPPS updates.

H. Proposed Revisions to the Wage Index Based on Hospital Redesignation

[If you choose to comment on issues in this section, please include the 
caption ``Hospital Redesignations'' at the beginning of your comment.]
1. General
    Under section 1886(d)(10) of the Act, the Medicare Geographic 
Classification Review Board (MGCRB) considers applications by hospitals 
for geographic reclassification for purposes of payment under the IPPS. 
Hospitals must apply to the MGCRB to reclassify by September 1 of the 
year preceding the year during which reclassification is sought.

[[Page 28262]]

Generally, hospitals must be proximate to the labor market area to 
which they are seeking reclassification and must demonstrate 
characteristics similar to hospitals located in that area. The MGCRB 
issues its decisions by the end of February for reclassification to 
become effective for the following fiscal year (beginning October 1). 
The regulations applicable to reclassifications by the MGCRB are 
located in Sec. Sec.  412.230 through 412.280.
    Section 1886(d)(10)(D)(v) of the Act provides that, beginning with 
FY 2001, a MGCRB decision on a hospital reclassification for purposes 
of the wage index is effective for 3 fiscal years, unless the hospital 
elects to terminate the reclassification. Section 1886(d)(10)(D)(vi) of 
the Act provides that the MGCRB must use the 3 most recent years' 
average hourly wage data in evaluating a hospital's reclassification 
application for FY 2003 and any succeeding fiscal year.
    Section 304(b) of Public Law 106-554 provides that the Secretary 
must establish a mechanism under which a statewide entity may apply to 
have all of the geographic areas in the State treated as a single 
geographic area for purposes of computing and applying a single wage 
index, for reclassifications beginning in FY 2003. The implementing 
regulations for this provision are located at Sec.  412.235.
    Section 1886(d)(8)(B) of the Act requires the Secretary to treat a 
hospital located in a rural county adjacent to one or more urban areas 
as being located in the MSA to which the greatest number of workers in 
the county commute if: The rural county would otherwise be considered 
part of an urban area under the standards for designating MSAs if the 
commuting rates used in determining outlying counties were determined 
on the basis of the aggregate number of resident workers who commute to 
(and, if applicable under the standards, from) the central county or 
counties of all contiguous MSAs. In light of the new CBSA definitions 
and the Census 2000 data, we undertook to identify those counties 
meeting these criteria. The eligible counties are identified below, as 
well as a discussion of counties that no longer meet the criteria under 
this provision.
2. Effects of Reclassification
    Section 1886(d)(8)(C) of the Act provides that the application of 
the wage index to redesignated hospitals is dependent on the 
hypothetical impact that the wage data from these hospitals would have 
on the wage index value for the area to which they have been 
redesignated. These requirements for determining the wage index values 
for redesignated hospitals is applicable both to the hospitals located 
in rural counties deemed urban under section 1886(d)(8)(B) of the Act 
and hospitals that were reclassified as a result of the MGCRB decisions 
under section 1886(d)(10) of the Act. Therefore, as provided in section 
1886(d)(8)(C) of the Act,\4\ the wage index values were determined by 
considering the following:
---------------------------------------------------------------------------

    \4\ Although section 1886(d)(8)(C)(iv)(I) of the Act also 
provides that the wage index for an urban area may not decrease as a 
result of redesignated hospitals if the urban area wage index is 
below the wage index for rural areas in the State in which the urban 
area is located, this was effectively made moot by section 4410 of 
Public Law 105-33, which provides that the area wage index 
applicable to any hospital that is located in an urban area of a 
State may not be less than the area wage index applicable to 
hospitals located in rural areas in that State.
    Also, section 186(d)(8)(C)(iv)(II) of the Act provides that an 
urban area's wage index may not decrease as a result of redesignated 
hospitals if the urban area is located in a State that is composed 
of a single urban area.
---------------------------------------------------------------------------

     If including the wage data for the redesignated hospitals 
would reduce the wage index value for the area to which the hospitals 
are redesignated by 1 percentage point or less, the area wage index 
value determined exclusive of the wage data for the redesignated 
hospitals applies to the redesignated hospitals.
     If including the wage data for the redesignated hospitals 
reduces the wage index value for the area to which the hospitals are 
redesignated by more than 1 percentage point, the area wage index 
determined inclusive of the wage data for the redesignated hospitals 
(the combined wage index value) applies to the redesignated hospitals.
     If including the wage data for the redesignated hospitals 
increases the wage index value for the urban area to which the 
hospitals are redesignated, both the area and the redesignated 
hospitals receive the combined wage index value. Otherwise, the 
hospitals located in the urban area receive a wage index excluding the 
wage data of hospitals redesignated into the area.
     The wage data for a reclassified urban hospital is 
included in both the wage index calculation of the area to which the 
hospital is reclassified (subject to the rules described above) and the 
wage index calculation of the urban area where the hospital is 
physically located.
     Rural areas whose wage index values would be reduced by 
excluding the wage data for hospitals that have been redesignated to 
another area continue to have their wage index values calculated as if 
no redesignation had occurred (otherwise, redesignated rural hospitals 
are excluded from the calculation of the rural wage index).
     The wage index value for a redesignated rural hospital 
cannot be reduced below the wage index value for the rural areas of the 
State in which the hospital is located.
3. FY 2005 Issues
    Recent policies and decisions that will affect hospitals' 
geographic classifications for FY 2005 are discussed below. First, we 
describe decisions by the MGCRB on applications received in accordance 
with the ongoing reclassification process described in the regulations 
at Sec. Sec.  412.230 through 412.280. Second, we describe the 
implications for reclassification decisions by the MGCRB to be 
effective during FY 2005 of our proposal to adopt new MSA definitions 
for the FY 2005 wage index. Third, we discuss the new counties 
identified under the standards at section 1886(d)(8)(B) of the Act, 
based on the new CBSAs and the Census 2000 data. Fourth, we discuss the 
interactions of these changes with reclassifications approved under the 
one-time appeal process for hospital wage index reclassifications at 
section 508 of Public Law 108-173. Fifth, we discuss our proposed 
implementation of section 505 of Public Law 108-173. Under this 
provision, the Secretary must establish a new process, similar to the 
current wage index reclassification process, to make adjustments to the 
hospital wage index, based on commuting patterns of hospital employees.
a. FY 2005 MGCRB Reclassifications
    In the August 1, 2003 IPPS final rule, we indicated that hospitals 
submitting applications for reclassification by the MGCRB for FY 2005 
should base those applications on the current (for Medicare payment 
purposes) MSAs (68 FR 45401). At the time this proposed rule was 
constructed, the MGCRB had completed its review of FY 2005 
reclassification requests. There were 339 hospitals approved for wage 
index reclassifications by the MGCRB for FY 2005. Because MGCRB wage 
index reclassifications are effective for 3 years, hospitals 
reclassified during FY 2003 or FY 2004 are eligible to continue to be 
reclassified based on prior reclassifications to current MSAs during FY 
2005. There were 55 hospitals reclassified for wage index in FY 2003 
and 102 hospitals reclassified for wage index in FY 2004.
    In the past, hospitals have been able to apply to be reclassified 
for purposes of either the wage index or the standardized amount. 
Existing regulations at Sec.  412.230(a)(5)(ii) state

[[Page 28263]]

that, after 2002, a hospital may not be reclassified for purposes of 
the standardized amount if the area to which the hospital seeks 
reclassification does not have a higher standardized amount than the 
standardized amount the hospital currently receives. Standardized 
amount reclassifications are only effective for 1 year, so hospitals 
must reapply every year. At the time the FY 2005 reclassification 
applications were due, hospitals applied on the basis that the law 
still provided for a higher standardized amount for hospitals in large 
urban areas. However, section 401 of Public Law 108-173 established 
that all hospitals would be paid on the basis of the large urban 
standardized amount beginning with FY 2004. Consequently, all hospitals 
will be paid on the basis of the same standardized amount, which 
effectively makes standardized amount reclassifications moot, at least 
for purposes of the standardized amount. As a result, the MGCRB denied 
all applications for standardized amount reclassifications for FY 2005. 
In light of the fact that all hospitals are now paid on the basis of 
the same standardized amount, we are proposing to eliminate 
standardized amount reclassifications (a discussion appears under 
section IV.C. of this preamble). Although there could still be some 
benefit in terms of payments for some hospitals under the DSH 
adjustment for operating IPPS, section 402 of Public Law 108-173 
equalized DSH payments for rural and urban hospitals, with the 
exception that the rural DSH adjustment is capped at 12 percent (except 
that rural referral centers have no cap) (a detailed discussion appears 
in section IV.H. of this preamble).
b. Implementation of New MSAs
    As discussed above, we are proposing to implement the new CBSAs for 
FY 2005. Under these new CBSAs definitions, many existing MSAs are 
reconfigured. Therefore, because hospitals applied for reclassification 
during FY 2005 on the basis of the MSAs currently used to define labor 
market areas for FY 2004, the definition of the MSA to which they have 
been reclassified, or the area where they are located, may have changed 
under our proposed implementation. Hospitals that have been 
reclassified for FY 2005 should verify that the reclassified wage index 
for the labor market area into which they have been reclassified (in 
Table 4C or 4D in the Addendum to this proposed rule) exceeds the wage 
index of the labor market area where they are located (in Table 4A or 
4B in the Addendum of this proposed rule) after our proposed 
implementation of the new MSAs. Hospitals may withdraw their FY 2005 
reclassifications within 45 days of the publication of this proposed 
rule.
    In some cases, the new CBSA definitions result in previously 
existing MSAs being divided into two or more separate MSAs. In these 
situations, we are proposing to assign the hospital to the nearest 
county in the current MSA, and the hospital's FY 2005 reclassification 
would be to the new MSA (under the CBSA definitions) that includes that 
county to which it has been assigned.
    For example, the Ann Arbor, MI MSA currently includes the counties 
of Lenawee, MI; Livingston, MI; and Washtenaw, MI. Under the new CBSA 
definitions, the Ann Arbor, MI MSA is comprised solely of the county of 
Washtenaw, MI. Lenawee, MI now comprises the Adrian, MI Micropolitan 
Area, and Livingston, MI is now in the Warren-Farmington Hills-Troy, MI 
Metropolitan Division of Detroit. Therefore, a hospital that was 
reclassified by the MGCRB into Ann Arbor for either FY 2003, FY 2004, 
or FY 2005, would be assigned to either the Ann Arbor, MI MSA or the 
Warren-Farmington Hills-Troy, MI Metropolitan Division, depending on 
whether the hospital was closer to Washtenaw or Livingston (a 
reclassified hospital located closest to Lenawee County would be 
assigned to the Ann Arbor MSA, based on Lenawee County's prior 
inclusion in this MSA).
    Reclassified hospitals that have been assigned to a new MSA on this 
proposed basis are identified in Table 9 in the Addendum of this 
proposed rule by the identification of the county used to designate 
them. We have determined the hospital is in closest proximity to the 
county listed based on mapping data available to us at the time of the 
preparation of this proposed rule. Hospitals that disagree with our 
determination of the closest proximate county on which to assign them 
to a new MSA must submit a comment (as specified under the ``Comment 
Period'' and Addresses sections at the beginning of this proposed rule) 
indicating the basis for their disagreement. Changes to a hospital's 
MSA assignment on the basis of a hospital's disagreement will be 
announced in the final rule.
c. Redesignations Under Section 1886(d)(8)(B) of the Act
    Beginning October 1, 1988, section 1886(d)(8)(B) of the Act 
required us to treat a hospital located in a rural county adjacent to 
one or more urban areas as being located in the MSA to which the 
greatest number of workers in the county commute, if the rural county 
would otherwise be considered part of an urban area under the standards 
published in the Federal Register on January 3, 1980 (45 FR 956) for 
designating MSAs (and for designating NECMAs), and if the commuting 
rates used in determining outlying counties (or, for New England, 
similar recognized areas) were determined on the basis of the aggregate 
number of resident workers who commute to (and, if applicable under the 
standards, from) the central county or counties of all contiguous MSAs 
(or NECMAs). Hospitals that met the criteria using the January 3, 1980 
version of these OMB standards were deemed urban for purposes of the 
standardized amounts and for purposes of assigning the wage data index.
    Section 402 of Public Law 106-113 provides that, with respect to 
FYs 2001 and 2002, a hospital may elect to have the 1990 standards 
applied to it for purposes of section 1886(d)(8)(B) of the Act and 
that, beginning with FY 2003, hospitals will be required to use the 
standards published in the Federal Register by the Director of OMB 
based on the most recent decennial census. We implemented section 402 
in the August 1, 2001 Federal Register (66 FR 39868). However, at that 
time, updated standards based on the Census 2000 data were not 
available.
    We have used OMB's 2000 CBSA standards and the Census 2000 data to 
identify counties qualifying under section 1886(d)(8)(B) of the Act for 
FY 2005. The number of qualifying counties, shown in the following 
chart, increases from 28 to 97. On the basis of the evaluation of these 
data, we are proposing that, effective for discharges on or after 
October 1, 2004, hospitals located in the rural counties listed in the 
first column of the following table will be redesignated for purposes 
of assigning the wage index to the urban area listed in the second 
column.

[[Page 28264]]



                 Chart 6.--Counties Redesignated as Urban Under Section 1886(d)(8)(B) of the Act
                                      [Based on CBSAs and Census 2000 Data]
----------------------------------------------------------------------------------------------------------------
                Rural county                                                 MSA.
----------------------------------------------------------------------------------------------------------------
Cherokee, AL................................  Rome, GA.
Macon, AL...................................  Auburn, AL.
Talladega, AL...............................  Anniston, AL.
Hot Spring, AR..............................  Hot Spring, AR.
Litchfield, CT..............................  Hartford, CT.
Windham, CT.................................  Hartford, CT.
Bradford, FL................................  Gainesville, FL.
Flagler, FL.................................  Deltona-Daytona Beach-Ormond Beach, FL.
Hendry, FL..................................  Miami, FL.
Levy, FL....................................  Gainesville, FL.
Walton, FL..................................  Ft. Walton Beach, FL.
Banks, GA...................................  Gainesville, FL.
Chattooga, GA...............................  Chattanooga, TN-GA.
Jackson, GA.................................  Atlanta, GA.
Lumpkin, GA.................................  Atlanta, GA.
Morgan, GA..................................  Atlanta, GA.
Peach, GA...................................  Macon, GA.
Polk, GA....................................  Atlanta, GA.
Talbot, GA..................................  Columbus, GA-AL.
Bingham, ID.................................  Idaho Falls, ID.
Christian, IL...............................  Springfield, IL.
DeWitt, IL..................................  Bloomington-Normal, IL.
Iroquois, IL................................  Kankakee, IL.
Logan, IL...................................  Springfield, IL.
Mason, IL...................................  Peoria, IL.
Ogle, IL....................................  Rockford, IL.
Clinton, IN.................................  Lafayette, IN.
Henry, IN...................................  Indianapolis, IN.
Spencer, IN.................................  Evansville, IN-KY.
Starke, IN..................................  Chicago, IL-IN.
Warren, IN..................................  Lafayette, IN.
Boone, IA...................................  Ames, IA.
Buchanan, IA................................  Waterloo, IA.
Cedar, IA...................................  Iowa City, IA.
Allen, KY...................................  Bowling Green, KY.
Assumption Parish, LA.......................  Baton Rouge, LA.
St. James Parish, LA........................  Baton Rouge, LA.
Allegan, MI.................................  Holland, MI.
Montcalm, MI................................  Grand Rapids, MI.
Oceana, MI..................................  Muskegon, MI.
Shiawassee, MI..............................  Lansing, MI.
Tuscola, MI.................................  Saginaw, MI.
Fillmore, MN................................  Rochester, MN.
Dade, MO....................................  Springfield, MO.
Pearl River, MS.............................  Biloxi-Gulfport, MS.
Caswell, NC.................................  Burlington, NC.
Granville, NC...............................  Durham, NC.
Harnett, NC.................................  Raleigh, NC.
Lincoln, NC.................................  Charlotte NC-SC.
Polk, NC....................................  Spartanburg, NC.
Los Alamos, NM..............................  Sante Fe, NM.
Lyon, NV....................................  Carson City, NV.
Cayuga, NY..................................  Syracuse, NY.
Columbia, NY................................  Albany, NY.
Genesee, NY.................................  Rochester, NY.
Greene, NY..................................  Albany, NY.
Schuyler, NY................................  Ithaca, NY.
Sullivan, NY................................  Poughkeepsie-Newburgh, NY.
Wyoming, NY.................................  Buffalo, NY.
Ashtabula, OH...............................  Cleveland, OH.
Champaign, OH...............................  Springfield, OH.
Columbiana, OH..............................  Youngstown, OH-PA.
Cotton, OK..................................  Lawton, OK.
Linn, OR....................................  Corvalis, OR.
Adams, PA...................................  York, PA.
Clinton, PA.................................  Williamsport, PA.
Greene, PA..................................  Pittsburgh, PA.
Monroe, PA..................................  New York-Newark, NY-NJ-CT.
Schuylkill, PA..............................  Reading, PA.
Susquehanna, PA.............................  Binghamton, NY-PA.

[[Page 28265]]

 
Clarendon, SC...............................  Sumter, SC.
Lee, SC.....................................  Sumter, SC.
Oconee, SC..................................  Greenville, SC.
Union, SC...................................  Spartanburg, SC.
Meigs, TN...................................  Cleveland, TN.
Bosque, TX..................................  Waco, TX.
Falls, TX...................................  Waco, TX.
Fannin, TX..................................  Dallas-Fort Worth-Arlington, TX.
Grimes, TX..................................  College Station-Bryan, TX.
Harrison, TX................................  Longview, TX.
Henderson, TX...............................  Dallas-Fort Worth-Arlington, TX.
Milam, TX...................................  Austin, TX.
Van Zandt, TX...............................  Dallas-Fort Worth-Arlington, TX.
Willacy, TX.................................  Brownsville, TX.
Buckingham, VA..............................  Charlottesville, VA.
Floyd, VA...................................  Blacksburg, VA.
Middlesex, VA...............................  Virginia Beach, VA.
Page, VA....................................  Harrisonburg, VA.
Shenandoah, VA..............................  Winchester, VA.
Island, WA..................................  Seattle, WA.
Mason, WA...................................  Olympia-Lacey, WA.
Wahkiakum, WA...............................  Longview, WA-OR.
Jackson, WV.................................  Charleston, WV.
Roane, WV...................................  Charleston, WV.
Green, WI...................................  Madison, WI.
Green Lake, WI..............................  Fond du Lac, WI.
Jefferson, WI...............................  Milwaukee, WI.
Walworth, WI................................  Chicago, IL-IN.
----------------------------------------------------------------------------------------------------------------

    As in the past, hospitals redesignated under section 1886(d)(8)(B) 
of the Act are also eligible to be reclassified to a different area by 
the MGCRB. Affected hospitals should compare the reclassified wage 
index for the labor market area in Table 4C or 4D in the Addendum of 
this proposed rule into which they have been reclassified by the MGCRB 
to the wage index for the area to which they are redesignated under 
section 1886(d)(8)(B) of the Act. Hospitals may withdraw from an MGCRB 
reclassification within 45 days of the publication of this proposed 
rule.
    When we apply the OMB 2000 CBSA standards, 16 rural counties no 
longer meet the qualifying criteria, either because they are now 
included in a metropolitan area (with the exception of Barry, MI and 
Cass, MI, most of the counties are now in the metropolitan area in 
which they were grouped in accordance with section 402) or they fail to 
meet the 25-percent cumulative out-migration threshold when we apply 
the new OMB standards. Counties that are now identified as metropolitan 
are:

Chilton, AL
Macoupin, IL
Piatt, IL
Brown, IN
Carroll, IN
Jefferson, KS
Barry, MI
Cass, MI
Ionia, MI
Hartnett, NC
Preble, PA

    Counties that failed to meet the 25-percent threshold are: 
Marshall, AL; Putnam, FL; Wilson, NC; Van Wert, OH; and Lawrence, PA.
d. Reclassifications Under Section 508 of Public Law 108-173
    Under section 508 of Public Law 108-173, a qualifying hospital may 
appeal the wage index classification otherwise applicable to the 
hospital and apply for reclassification to another area of the State in 
which the hospital is located (or, at the discretion of the Secretary, 
to an area within a contiguous State). Hospitals were required to 
submit their applications by February 15, 2004. We implemented this 
process through notices published in the Federal Register on January 6, 
2004 (69 FR 661) and February 13, 2004 (69 FR 7340). Such 
reclassifications are applicable to discharges occurring during the 3-
year period beginning April 1, 2004 and ending March 31, 2007. Under 
section 508(b), reclassifications under this process do not affect the 
wage index computation for any area or for any other hospital and 
cannot be effected in a budget neutral manner.
    The applications submitted under this process were reviewed and 
decided upon by the MGCRB. The MGCRB issued notifications of its 
decisions on April 16, 2004. Reclassifications under this one-time 
appeal process interact with: FY 2005 MGCRB reclassification decisions 
under the ongoing reclassification process described in the regulations 
at Sec. Sec.  412.230 through 412.280; the proposed implementation of 
the new MSA definitions; and the new redesignations under section 
1886(d)(8)(B) of the Act.
    In the notices implementing this process, we indicated that, with 
limited exceptions, hospitals eligible for reclassification under 
section 508 of Public Law 108-173 are not otherwise reclassified, 
effective for discharges on or after October 1, 2004. Therefore, aside 
from the exceptions specified in the notices, hospitals reclassified 
under this one-time appeal process are not otherwise reclassified by 
the MGCRB for FY 2005. For those hospitals that were exempted from this 
requirement and that were granted reclassification under this one-time 
appeal process, the reclassification under the one-time appeal process 
takes precedence over any other MGCRB reclassification. We show the 
reclassifications effective under the one-time appeal process in Table 
9B, in the Addendum to this proposed rule.
    With regard to the proposed implementation of the new MSAs, we are 
proposing to apply the reclassified

[[Page 28266]]

wage indexes on the basis of the new MSAs. Hospitals reclassified under 
the one-time appeal process may terminate their reclassifications that 
would otherwise be effective on or after October 1, 2004, under the 
normal termination and withdrawal process at Sec.  412.273 (these 
reclassifications may not be terminated prior to October 1, 2004). 
Table 9B in the Addendum to this proposed rule shows the areas to which 
hospitals have been reclassified under the one-time appeal process. 
Therefore, similar to other hospitals reclassified by the MGCRB under 
the ongoing reclassification process for FY 2005, hospitals 
reclassified under the one-time appeal process should verify that the 
reclassified wage index for the labor market area into which they have 
been reclassified (in Table 4C or 4D in the Addendum to this proposed 
rule) exceeds the wage index of the labor market area where they are 
located (in Table 4A or 4B in the Addendum to this proposed rule) after 
our proposed implementation of the new MSAs. Affected hospitals may 
withdraw their one-time appeal process reclassifications within 45 days 
of the publication of this proposed rule.
    As we have discussed above, in some cases, the new CBSA definitions 
result in the division of previously existing MSAs into two or more 
separate MSAs. (See the example in section III.H.3.b of this preamble.) 
In these situations, we are proposing to assign a hospital reclassified 
under the one-time appeal process to the nearest county in the current 
MSA, and the hospital's FY 2005 reclassification would be to the new 
MSA (under the CBSA definitions) that includes that county to which it 
has been assigned. Hospitals reclassified under the one-time appeals 
process that have been assigned to a new MSA on this proposed basis are 
identified in Table 9B, column 7, in the Addendum of this proposed 
rule. We have determined the county to which a hospital is in closest 
proximity based on mapping data available to us at the time of the 
preparation of this proposed rule. Hospitals that disagree with our 
determination of the closest proximate county must submit a comment (as 
specified under the ``Comment Period'' and ``Addresses'' sections at 
the beginning of this proposed rule) indicating the basis for their 
disagreement. Changes to a hospital's MSA assignment on the basis of a 
hospital's disagreement will be announced in the final rule.
    Similarly, hospitals reclassified under the section 508 one-time 
appeal process that are also in counties identified under the 
redesignation process in accordance with section 1886(d)(8)(B) of the 
Act should compare the wage index applicable to the area to which they 
were reclassified under section 508 with the wage index applicable to 
the area to which they are redesignated under section 1886(d)(8)(B) of 
the Act, if those areas are different. Again, affected hospitals may 
withdraw their one-time appeal process reclassifications within 45 days 
of the publication of this proposed rule.
e. Proposed Wage Index Adjustment Based on Commuting Patterns of 
Hospital Employees (Section 505 of Pub. L. 108-173)
[If you choose to comment on issues in this section, please include the 
caption ``Out-Migration of Hospital Employees'' at the beginning of 
your comment.]
    Section 505 of Public Law 108-173 established new section 
1886(d)(13) of the Act. The new section 1886(d)(13) requires that the 
Secretary establish a new process to make adjustments to the hospital 
wage index based on commuting patterns of hospital employees. The 
process provides for an increase in the wage index for hospitals 
located in certain counties that have a relatively high percentage of 
hospital employees who reside in the county but work in a different 
county with a higher wage index. Such adjustments to the wage index are 
effective for 3 years beginning with discharges occurring on or after 
October 1, 2004. Adjustments under this provision are not subject to 
the budget neutrality requirements at section 1886(d)(3)(E) or section 
1886(d)(8)(D) of the Act.
    The Secretary is required to establish criteria to identify 
``qualifying counties,'' and hospitals located in such qualifying 
counties are to receive an adjustment to their wage index. Section 
1886(d)(13)(B)(i) of the Act directs the Secretary to establish a 
threshold percentage difference between the county's wage index and the 
weighted average of the wage indexes of the surrounding higher wage 
index area(s) to which hospital employees commute that must be met in 
order for the county to qualify. Section 1886(d)(13)(B)(ii) of the Act 
specifies that the Secretary is also to establish the minimum out-
migration threshold in order to qualify, which may not be less than 10 
percent. Section 1886(d)(13)(iii) of the Act requires that the average 
hourly wage for all hospitals in the county must be equal to or exceed 
the average hourly wage for all hospitals in the labor market area. 
Section 1886(d)(13)(E) of the Act indicates this process may be based 
on the process used by the MGCRB. This section also gives the Secretary 
the authority to require hospitals to submit data necessary to 
implement this provision, or to use other data sources as available.
    Hospitals located in counties that qualify for the payment 
adjustment are to receive an increase in the wage index that is equal 
to a weighted average of the differences between the wage indexes of 
the MSA(s) with higher wage indexes and the wage index of the resident 
county, weighted by the overall percentage of hospital workers residing 
in the qualifying county who are employed in any MSA with a higher wage 
index. As discussed below, we have employed the prereclassified wage 
indexes in making these calculations. The wage index increase is 
effective for 3 years, unless a hospital requests to waive the 
application of the payment adjustment. Hospitals that receive this 
payment adjustment are not eligible for reclassification under section 
1886(d)(8) or section 1886(d)(10) of the Act.
(1) Data
    To implement this provision, we analyzed commuting data compiled by 
the U.S. Census Bureau. The data derive from a special tabulation of 
Census 2000 journey-to-work data, compiled from responses to the long-
form (sample) census survey questions on where people worked. When the 
Census conducts its decennial survey, each household receives either a 
short form or a long form. On average, about 1 in every 6 households 
receive the long form. The results from the long form are used to 
formulate descriptive population estimates. Thus, the data set is based 
on the Census 2000 sample and represents estimates of the actual 
figures that would be obtained from a complete count.
    The data provide information about commuting patterns of workers at 
the county level for residents of the 50 States and the District of 
Columbia. Each record within the dataset represents a combination of a 
particular resident county, a workplace county, and a particular 
industry category. Thus, the record shows the county-of-residence by 
county-of-work commuter flows. The resident county represents the 
county where the worker resides, while the workplace county represents 
the county where the worker works. The industry category associated 
with workers is based on the 108 Industrial Structure codes developed 
by the Bureau of Economic Analysis. These Industrial Structure codes 
break down economic activities by defining industries (such as 
``fabricated metal product manufacturing,'' ``legal services,'' and 
``gasoline stations''). We

[[Page 28267]]

limited the data set to those employees working in the category 
designated ``hospitals'' (BEA code 622000).
    Using these data, we are able to identify the total number of 
hospital workers who live in each county and the number of workers 
within that county who commute to hospitals in other counties. For 
example, the data can be used to determine that, from a sample of 100 
hospital employees who live in County A, 50 commute to work at 
hospitals within County A, 20 commute to work at hospitals within 
County B, and 30 commute to work at hospitals within County C.
    There are some intrinsic limitations to the data. The file shows 
the weighted worker estimate for flows using a threshold or minimum 
size of 50 unweighted worker (from all industry codes) records. This 
means that only county-to-county flows that are comprised of at least 
50 unweighted worker records are shown in this file. The Census Bureau 
omitted all other county-to-county flows from the file for 
confidentiality reasons. While this could eliminate the workflows of 
some hospital residents, we believe the eliminations would not have a 
major impact on the policy.
    When Census calculated this special tabulation, the estimates of 
workers numbering from 1 through 7 have been rounded to 4. Values of 8 
or greater have been rounded to the nearest multiple of 5, unless the 
estimate already ended in 5 or 0, in which case it was not changed. In 
addition, in this special tabulation, workers are defined as people 16 
years and older who were employed and at work during the Census long 
form reference week. This is the week prior to when the questionnaire 
was filled out, which was the last week of March 2000 for most people.
    In addition, because these data derive from the decennial census, 
the data file will not change until the census is taken again in 2010. 
This does not mean that the list of qualifying counties will not change 
from year to year. The out-migration percentage for each county is a 
function both of the commuting data and changes in the wage index 
values. Because the wage indices associated with each work and resident 
county change each year, a county's out-migration percentages can still 
vary each year because a higher wage index area in one year, might not 
be a higher wage index area in the next year. For example, if 100 
hospital employees living in County A (wage index 1.00 in FY 2004) 
commute to County B (wage index 1.10 in FY 2004), then County B would 
be a higher wage index area for 2004. If in FY 2005, County A's wage 
index increases to 1.02 and County B's wage index decreases to 1.01, 
those 100 workers commuting from County A to County B will not be 
commuting to a higher wage index area for 2005. Consequentially, County 
A's out-migration percentage would decrease from 100 percent in 2004 to 
0 percent in 2005. These normal changes in wage index values could also 
result in a county not deemed a qualifying county for FY 2005, becoming 
a qualifying county in FY 2006 or later.
    We believe these data provide a useable data source to implement 
this provision. However, we welcome and encourage comments on the 
availability and value of alternative data sources. Although the 
statute authorizes the Secretary to require all hospitals to submit 
data on the commuting patterns of their employees, such a requirement 
would be a major undertaking for the hospital industry and CMS. It was 
not possible to pursue this approach in time to implement the provision 
by FY 2005. However, in addition to welcoming comments on the merits of 
relying on the Census data, we welcome comments on the feasibility of 
surveying hospitals on the residence and commuting patterns of all 
their hospital employees for purposes of developing future year 
adjustments.
(2) Qualifying Counties
    As noted previously, section 1886(d)(13)(B)(iii) of the Act 
requires that, to qualify for this commuting wage index adjustment, the 
average hourly wage for all hospitals in the county must be equal to or 
exceed the average hourly wage for all hospitals in the labor market 
area in which the county is located. To determine which counties meet 
this requirement, we calculated the average of hospitals' 3-year 
average hourly wages for all hospitals in a given county. We compared 
this county average 3-year average hourly wage to the 3-year average 
hourly wage for the labor market area where the county is located. We 
chose to use the 3-year average hourly wage because we believe it 
provides a more accurate and stable estimate for the wages paid by a 
given hospital over a period of time. This statutory requirement limits 
the number of eligible counties, as counties with a 3-year average 
hourly wage less than the 3-year average hourly wage of the MSA where 
the county is located were not considered to meet this requirement.
    Some resident counties do not have average hourly wages because 
either there is no hospital located in the county, or the only hospital 
in the county is new and has not yet submitted wage data. We did not 
consider these counties to have met the average hourly wage criteria 
and thus hospitals in these counties are not yet eligible to receive an 
increase in wage index. This is consistent with our regulations at 42 
CFR 412.230(e)(2)(iii), which require a new hospital to accumulate at 
least 1 year of wage data, before it is eligible to apply for 
reclassification.
    As noted previously, section 1886(d)(13)(B)(ii) of the Act 
specifies that the Secretary is to establish the minimum out-migration 
threshold in order to qualify, which may not be less than 10 percent. 
To determine the out-migration percentage for each county, we 
identified higher wage index areas, by comparing 2005 prereclassified 
wage index of a resident county with the 2005 prereclassified wage 
index of the MSA or rural statewide area where the work county is 
located. We use the prereclassified wage index so that hospitals in the 
county are not disadvantaged by reclassification of other hospitals 
into the county.
    Once we limited the dataset to those county-to-county flows where 
hospital employees were commuting to a higher wage index area, we 
calculated the out-migration percentage for resident counties. To 
calculate the out-migration percentage, we calculated the total number 
of hospital employees in a resident county who were commuting to a 
higher wage area as a percentage of the total number of hospital 
employees residing in the resident county. For example, there are 100 
hospital employees who live in County A (wage index 1.0). Of those 100 
employees, 50 commute to County B (wage index 1.10), 20 commute to 
County C (wage index 1.05), and 30 work within County A. Because 70 out 
of 100 people commute to higher wage areas (assuming County C also 
qualifies as a higher wage area), County A's out-migration percentage 
is equal to 70 percent.
    To implement section 1886(d)(13)(B)(ii) of the Act, we are 
proposing that the out-migration threshold to qualify for this 
adjustment would be the statutory minimum of 10 percent. We believe 
that this threshold provides an opportunity for a reasonable number of 
hospitals that would not have recourse to the normal reclassification 
process to receive an appropriate adjustment to their wage index. We 
welcome comments on this proposed threshold.
    As noted previously, section 1886(d)(13)(B)(i) of the Act directs 
the Secretary to establish a threshold percentage difference between 
the county's wage index and the weighted average wage indexes of the 
higher wage index areas to which hospital

[[Page 28268]]

employees commute. However, unlike the threshold for the level of out-
migration, the statute does not designate a minimum level for this 
threshold. Because of the nature of the adjustment provided under this 
provision, we are proposing to establish that the minimum difference in 
the wage indexes between the resident county and the work county can be 
any percentage greater than zero. We are proposing this threshold 
because the wage index increment for hospitals in qualifying counties 
under the statutory formula is a function of the differences between 
that county's wage index and the wage indices of the areas into which 
resident hospital workers of that county are commuting. In those cases 
where that difference is very small, the adjustment to the wage index 
will also be very small. (See the discussion of the statutory formula 
in section III.H.3.e.(3) of this preamble.) Therefore, we believe that 
a threshold of anything greater than zero is justifiable and consistent 
with the purposes of this provision.
    Our analysis indicates that 224 counties qualify under these 
proposed criteria. There are 411 hospitals located in these qualifying 
counties. Hospitals located in qualifying counties are identified in 
Table 4J in the Addendum to this proposed rule.
(3) The Adjustment
    Hospitals located in the qualifying counties identified in Table 4J 
in the Addendum to this proposed rule that have not already been 
reclassified for purposes of the wage index would receive the wage 
index adjustment listed in the table. This increase is equal to the 
percentage of the hospital employees residing in the qualifying county 
who are employed in any higher wage area, multiplied by the sum of: the 
products, for each higher wage index area, of the difference between 
the wage index for such higher wage index area and the wage index of 
the qualifying county, and the percentage of hospital employees 
residing in the qualifying county who are employed in any higher wage 
index area who are employed in such higher wage index area. This 
increase in wage index is depicted using the following equation:

Adjustment = A * [Sigma][(B - C) * (D/E)]

    A is the percentage of hospital employees residing in a qualifying 
county who are employed in any higher wage index area. B represents the 
wage index of the higher wage index area. C represents the wage index 
of the qualifying resident county. D represents the number of hospital 
employees residing in the qualifying county involved who are employed 
in such higher wage index area. E represents the total number of 
hospital employees residing in qualifying county who are employed in 
any higher wage index area.
    For example, County A is identified as a qualifying county. As 
illustrated before, if 100 hospital employees live in County A (wage 
index = 1.00), 50 commute to County B (wage index = 1.10), 20 commute 
to County C (wage index = 1.05); and 30 commute within County A, the 
out-migration percentage is equal to 70 percent.
    The adjustment for hospitals in County A would be:

= .70 * (((1.10 - 1.00)*(50/70)) + ((1.05 - 1.00)*(20/70)))
= .70 * ((.10 * .714) + (.05 * .285))
= .70 * (0.0714 + 0.01428)
= .70 * (0.0856)
= 0.05998

    So, hospitals in County A could receive a new wage index of 
1.05998, instead of 1.000.
    The proposed adjustments calculated for qualifying hospitals are 
listed in Table 4J in the Addendum to this proposed rule. These 
proposed adjustments are effective for each county for a period of 3 
fiscal years beginning with discharges occurring on or after October 1, 
2004. The commuting adjustments for each county will remain static for 
the 3-year period, after which the county's status as a qualifying 
county and the adjustment will be recalculated.
(4) Automatic Adjustments
    Section 1886(d)(13)(A) of the Act allows the Secretary to establish 
the process for receiving this increase in wage index through 
application or otherwise. Listed in Table 4J in the Addendum to this 
proposed rule are the counties and corresponding hospitals that qualify 
for an increase in wage index through our proposed implementation of 
the section. We are proposing that all hospitals located in qualifying 
counties will automatically receive the increase in wage index, unless 
the hospital has already been reclassified to another geographic area 
for purposes of the wage index amount (including reclassifications 
under section 508 of Pub. L. 108-173). This commuting wage index 
adjustment will be effective for the county for a period of 3 fiscal 
years, FY 2005 through FY 2007. As discussed previously, yearly changes 
in the wage indices associated with areas could result in changes in 
the out-migration percentage for a given county. Irrespective of these 
changes, a county will not lose its status as a qualifying county due 
to wage index changes during the 3-year period, and counties will 
receive the same wage index increase for those 3 years. However, a 
county that qualifies in FY 2005 may no longer qualify in FY 2008, or 
it may qualify but receive a different adjustment level.
    We encourage comments on the automatic application of such a wage 
index adjustment, and whether an application process should be 
developed under which individual hospitals would have to apply in order 
to receive the adjustment. We note that, given the short timeframe 
before implementation of this provision on October 1, 2004, we believe 
that there is no practical alternative to providing for an automatic 
adjustment for FY 2005. However, one possibility is to employ an 
automatic adjustment process this year, and to replace the automatic 
process with an application process for future years. We invite 
comments on whether to establish the automatic process permanently, or 
to devise an application process for future years. We also invite 
comments on whether any application process should be the 
responsibility of the MGCRB or some other entity.
    Hospitals receiving this wage index increase under section 
1886(d)(13)(F) of the Act are not eligible for reclassification under 
section 1886(d)(8) or section 1886(d)(10) of the Act. As previously 
noted, the wage index increase is effective for 3 years, unless a 
hospital elects to waive the application of the wage index adjustment. 
Hospitals that wish to waive the application of this wage index 
adjustment must notify CMS within 45 days of the publication of this 
proposed rule. Waiver notifications should be sent to the following 
address: Centers for Medicare & Medicaid Services, Center for Medicare 
Management, Attention: Wage Index Adjustment Waivers, Division of Acute 
Care, C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244-1850. 
However, consistent with Sec.  412.273, hospitals that have been 
reclassified by the MGCRB are permitted to withdraw their applications 
within 45 days of the publication of this proposed rule in the Federal 
Register. Hospitals that have been reclassified by the MGCRB (including 
reclassifications under section 508 of the MMA) may terminate an 
existing 3-year reclassification within 45 days of the publication of 
this proposed rule in order to receive the wage index adjustment under 
this provision. Hospitals that are eligible for this adjustment and 
that withdraw their application for reclassification will then

[[Page 28269]]

automatically receive the wage index adjustment listed in Table 4J in 
the Addendum of this proposed rule. The request for withdrawal of an 
application for reclassification or termination of an existing 3-year 
reclassification that would be effective in FY 2005 must be received by 
the MGCRB within 45 days of the publication of this proposed rule. 
Hospitals should carefully review the wage index adjustment that they 
would receive under this provision (as listed in Table 2 in the 
Addendum to this proposed rule) in comparison with the wage index that 
they would receive under MGCRB reclassification (Table 9 in the 
Addendum to this proposed rule).
4. Proposed FY 2005 Reclassifications
    The proposed wage index values for FY 2005 (except those for 
hospitals receiving wage index adjustments under section 505 of Pub. L. 
108-173) are shown in Tables 4A, 4B, 4C, and 4F in the Addendum to this 
proposed rule. Hospitals that are redesignated will be required to use 
the wage index values shown in Table 4C. Areas in Table 4C may have 
more than one wage index value because the wage index value for a 
redesignated urban or rural hospital cannot be reduced below the wage 
index value for the rural areas of the State in which the hospital is 
located. Therefore, those areas with more than one wage index shown 
have hospitals from more than one State reclassified into them, and the 
rural wage index for a State in which at least one hospital is 
physically located is higher than the wage index for the area to which 
the hospital is reclassified.
    Tables 3A and 3B in the Addendum to this proposed rule list the 3-
year average hourly wage for each labor market area before the 
redesignation of hospitals, based on FYs 1999, 2000, and 2001 cost 
reporting periods. Table 3A lists these data for urban areas and Table 
3B lists these data for rural areas. In addition, Table 2 in the 
Addendum to this proposed rule includes the adjusted average hourly 
wage for each hospital from the FY 1999 and FY 2000 cost reporting 
periods, as well as the FY 2001 period used to calculate the proposed 
FY 2005 wage index. The 3-year averages are calculated by dividing the 
sum of the dollars (adjusted to a common reporting period using the 
method described previously) across all 3 years, by the sum of the 
hours. If a hospital is missing data for any of the previous years, its 
average hourly wage for the 3-year period is calculated based on the 
data available during that period.
    At the time this proposed wage index was constructed, the MGCRB had 
completed its review of FY 2005 reclassification requests. We are 
including in the Addendum of this proposed rule Table 9A, which shows 
hospitals that have been reclassified under either section 1886(d)(8) 
or section 1886(d)(10)(D) of the Act. This table includes 400 hospitals 
reclassified for FY 2005 by the MGCRB (for wage index purposes), as 
well as hospitals that were reclassified for the wage index in either 
FY 2003 53 or FY 2004 102 and are, therefore, in either the second or 
third year of their 3-year reclassification. This table also includes 
hospitals located in urban areas that have been redesignated rural in 
accordance with section 1886(d)(8)(E) of the Act (17). In addition, it 
includes rural hospitals redesignated to urban areas under section 
1886(d)(8)(B) of the Act for purposes of the wage index (98).
    Under Sec.  412.273, hospitals that have been reclassified by the 
MGCRB are permitted to withdraw their applications within 45 days of 
the publication of this proposed rule. The request for withdrawal of an 
application for reclassification or termination of an existing 3-year 
reclassification that would be effective in FY 2004 must be received by 
the MGCRB within 45 days of the publication of this proposed rule. If a 
hospital elects to withdraw its wage index application after the MGCRB 
has issued its decision but prior to the above date, it may later 
cancel its withdrawal in a subsequent year and request the MGCRB to 
reinstate its wage index reclassification for the remaining fiscal 
year(s) of the 3-year period (Sec.  412.273(b)(2)(i)). The request to 
cancel a prior withdrawal must be made in writing to the MGCRB no later 
than the deadline for submitting reclassification applications for the 
following fiscal year (Sec.  412.273(d)). For further information about 
withdrawing, terminating, or canceling a previous withdrawal or 
termination of a 3-year reclassification for wage index purposes, we 
refer the reader to Sec.  412.273, as well as the August 1, 2002 IPPS 
final rule (67 FR 50065) and the August 1, 2001 IPPS final rule (66 FR 
39887).
    Any changes to the wage index that result from withdrawals of 
requests for reclassification, wage index corrections, appeals, and the 
Administrator's review process will be incorporated into the wage index 
values published in the final rule following this proposed rule. 
Therefore, the final wage indexes will likely be different from those 
published in this proposed rule, and in some cases, they may be quite 
different.
    Although, as described above, the statute provides that a 
reclassified rural hospital may not have a lower wage index after 
reclassification than before, there is not similar protection for urban 
hospitals. Therefore, hospitals should carefully evaluate the impacts 
of their reclassifications prior to the deadline for withdrawing from 
an approved reclassification.
    Applications for FY 2006 reclassifications are due to the MGCRB by 
September 1, 2004. We note that this is also the deadline for canceling 
a previous wage index reclassification withdrawal or termination under 
Sec.  412.273(d). Applications and other information about MCGRB 
reclassifications may be obtained, beginning in mid-July 2004, via the 
CMS Internet Web site at: http://cms.hhs.gov/providers/prrb/mgcinfo.asp, or by calling the MCGRB at (410) 786-1174. The mailing 
address of the MGCRB is: 2520 Lord Baltimore Drive, Suite L, Baltimore, 
MD 21244-2670.

I. Process for Requests for Wage Index Data Corrections

[If you choose to comment on issues in this section, please include the 
caption ``Wage Data Corrections'' at the beginning of your comment.]
1. Worksheet S-3 Wage Data
    In the August 1, 2003 final rule (68 FR 27194), we revised the 
process and timetable for application for development of the wage 
index, beginning with the FY 2005 wage index. The preliminary and 
unaudited Worksheet S-3 wage data file was made available on October 8, 
2003 through the Internet on CMS's Web site at: http://cms.hhs.gov/providers/hipps/ippswage.asp. In a memorandum dated October 10, 2003, 
we instructed all Medicare fiscal intermediaries to inform the IPPS 
hospitals they service of the availability of the wage data file and 
the process and timeframe for requesting revisions (including the 
specific deadlines listed below). We also instructed the fiscal 
intermediaries to advise hospitals that these data are also made 
available directly through their representative hospital organizations.
    If a hospital wished to request a change to its data as shown in 
that wage data file, the hospital was to submit corrections along with 
complete, detailed supporting documentation to its intermediary by 
November 24, 2003. Hospitals were notified of this deadline and of all 
other possible deadlines and requirements, including the requirement to 
review and verify their data as posted on the preliminary wage data 
file on the Internet, through the October 10, 2003 memorandum 
referenced above.

[[Page 28270]]

    The fiscal intermediaries notified the hospitals in early February 
of any changes to the wage data as a result of the desk reviews and the 
resolution of the hospitals' early November change requests. The fiscal 
intermediaries also submitted the revised data to CMS in early 
February. CMS published the proposed wage index public use file that 
included hospitals' revised wage data on February 27, 2004. In a 
memorandum also dated March 1, 2004, we instructed fiscal 
intermediaries to notify all hospitals regarding the availability of 
the proposed wage index public use file and the criteria and process 
for requesting corrections and revisions to the wage data. Hospitals 
had until March 12, 2004 to submit requests to the fiscal 
intermediaries for reconsideration of adjustments made by the fiscal 
intermediaries as a result of the desk review, and to correct errors 
due to CMS's or the intermediary's mishandling of the wage data. 
Hospitals were also required to submit sufficient documentation to 
support their requests.
    After reviewing requested changes submitted by hospitals, fiscal 
intermediaries are to submit additional revisions resulting from the 
hospitals' reconsideration requests by April 16, 2004. The deadline for 
hospitals to request CMS intervention in cases where the hospital 
disagrees with the fiscal intermediary's policy interpretations is 
April 23, 2004.
    Hospitals should also examine Table 2 in the Addendum to this 
proposed rule. Table 2 contains each hospital's adjusted average hourly 
wage used to construct the wage index values for the past 3 years, 
including the FY 2001 data used to construct the proposed FY 2005 wage 
index. We note that the hospital average hourly wages shown in Table 2 
only reflect changes made to a hospital's data and transmitted to CMS 
by March 15, 2004.
    We will release a final wage data file in early May to hospital 
associations and the public on the Internet at http://www.cms.hhs.gov/providers/hipps/ippswage.asp. The May 2004 public use file will be made 
available solely for the limited purpose of identifying any potential 
errors made by CMS or the fiscal intermediary in the entry of the final 
wage data that result from the correction process described above 
(revisions submitted to CMS by the fiscal intermediaries by April 16, 
2004). If, after reviewing the May 2004 final file, a hospital believes 
that its wage data are incorrect due to a fiscal intermediary or CMS 
error in the entry or tabulation of the final wage data, it should send 
a letter to both its fiscal intermediary and CMS that outlines why the 
hospital believes an error exists and provide all supporting 
information, including relevant dates (for example, when it first 
became aware of the error).
    CMS and the fiscal intermediaries must receive these requests no 
later than June 11, 2004. Requests mailed to CMS should be sent to: 
Centers for Medicare & Medicaid Services, Center for Medicare 
Management, Attention: Wage Index Team, Division of Acute Care, C4-08-
06, 7500 Security Boulevard, Baltimore, MD 21244-1850. Each request 
also must be sent to the hospital's fiscal intermediary. The 
intermediary will review requests upon receipt and contact CMS 
immediately to discuss its findings.
    At this point in the process, that is, after the release of the May 
2004 wage index file, changes to the hospital wage data will only be 
made in those very limited situations involving an error by the 
intermediary or CMS that the hospital could not have known about before 
its review of the final wage data file. Specifically, neither the 
intermediary nor CMS will approve the following types of requests:
     Requests for wage data corrections that were submitted too 
late to be included in the data transmitted to CMS by fiscal 
intermediaries on or before April 16, 2004.
     Requests for correction of errors that were not, but could 
have been, identified during the hospital's review of the March 1, 2004 
wage data file (or the March 8 occupational mix data; see section 
III.H.2. of this preamble).
     Requests to revisit factual determinations or policy 
interpretations made by the intermediary or CMS during the wage index 
data correction process.
2. Occupational Mix Data
    The process and criteria for requesting corrections to the 
occupational mix survey data are described in section III.C.1 of this 
preamble. As stated in that section, from April 16, 2004 forward, the 
process for correcting the final occupational mix survey data is the 
same, and on the same schedule, as described above for correcting the 
final Worksheet S-3 wage data.
3. All FY 2005 Wage Index Data
    Verified corrections to the wage index received timely (that is, by 
June 11, 2004) will be incorporated into the final wage index in the 
final rule to be published by August 1, 2004, and to be effective 
October 1, 2004.
    We created the processes described above to resolve all substantive 
wage index data correction disputes before we finalize the wage and 
occupational mix data for the FY 2005 payment rates. Accordingly, 
hospitals that did not meet the procedural deadlines set forth above 
will not be afforded a later opportunity to submit wage data 
corrections or to dispute the intermediary's decision with respect to 
requested changes. Specifically, our policy is that hospitals that do 
not meet the procedural deadlines set forth above will not be permitted 
to challenge later, before the Provider Reimbursement Review Board, the 
failure of CMS to make a requested data revision (See W. A. Foote 
Memorial Hospital v. Shalala, No. 99-CV-75202-DT (E.D. Mich. 2001), 
also Palisades General Hospital v. Thompson, No. 99-1230 (D.D.C. 
2003)).
    Again, we believe the wage index data correction process described 
above provides hospitals with sufficient opportunity to bring errors in 
their wage data to the fiscal intermediaries' attention. Moreover, 
because hospitals will have access to the final wage index data by 
early May 2004, they will have the opportunity to detect any data entry 
or tabulation errors made by the fiscal intermediary or CMS before the 
development and publication of the FY 2005 wage index by August 1, 
2004, and the implementation of the FY 2005 wage index on October 1, 
2004. If hospitals avail themselves of this opportunity, the wage index 
implemented on October 1 should be accurate. Nevertheless, in the event 
that errors are identified after that date, we retain the right to make 
midyear changes to the wage index under very limited circumstances.
    Specifically, in accordance with Sec.  412.63(x)(2) of our existing 
regulations, we make midyear corrections to the wage index for an area 
only if a hospital can show: (1) That the intermediary or CMS made an 
error in tabulating its data; and (2) that the requesting hospital 
could not have known about the error or did not have an opportunity to 
correct the error, before the beginning of FY 2005 (that is, by the 
June 11, 2004 deadline). This provision is not available to a hospital 
seeking to revise another hospital's data that may be affecting the 
requesting hospital's wage index. As described earlier, the requesting 
hospital must show that it could not have known about the error, or 
that it did not have the opportunity to correct the error, before the 
publication of the FY 2005 wage index. As indicated earlier, since a 
hospital will have the opportunity to verify its data, and the fiscal 
intermediary will notify the hospital of any changes, we do not expect 
that midyear corrections will be necessary. However, if the correction 
of a data error

[[Page 28271]]

changes the wage index value for an area, the revised wage index value 
will be effective prospectively from the date the correction is 
approved.

J. Proposed Revision of the Labor-Related Share of the Wage Index

[If you choose to comment on issues in this section, please include the 
caption ``Labor-Related Share'' at the beginning of your comment.]
    Section 1886(d)(3)(E) of the Act directs the Secretary to adjust 
the proportion of the national prospective payment system base payment 
rates that are attributable to wages and wage-related costs by a factor 
that reflects the relative differences in labor costs among geographic 
areas. It also directs the Secretary to estimate from time to time the 
proportion of hospital costs that are labor-related: ``The Secretary 
shall adjust the proportion (as estimated by the Secretary from time to 
time) of hospitals' costs which are attributable to wages and wage-
related costs of the DRG prospective payment rates. * * *'' The portion 
of hospital costs attributable to wages and wage-related costs is 
referred to as the labor-related share. The labor-related share of the 
prospective payment rate is adjusted by an index of relative labor 
costs, which is referred to as the wage index. In the past, we have 
defined the labor-related share for prospective payment acute care 
hospitals as the national average proportion of operating costs that 
are related to, influenced by, or vary with the local labor market. The 
labor-related share for the acute care hospital inpatient prospective 
payment system has been calculated as the sum of the weights for wages 
and salaries, fringe benefits, nonmedical professional fees, contract 
labor, postage, and labor-intensive services.
    In its June 2001 Report to Congress, MedPAC recommended that the 
Secretary ``should reevaluate current assumptions about the proportion 
of providers'' costs that reflect resources purchased in local and 
national markets.'' (Report to the Congress: Medicare in Rural America, 
Recommendation 4D, page 80.) MedPAC recommended that the labor-related 
share include the weights for wages and salaries, fringe benefits, 
contract labor, and other labor-related costs for locally purchased 
inputs only. MedPAC noted that this would likely result in a lower 
labor share, which would decrease the amount of the national base 
payment amount adjusted by the wage index. As a result, hospitals 
located in low-wage markets (those with a wages index less than 1.0) 
would receive higher payments, while those located in high-wage labor 
markets would receive lower payments.
    In our proposed and final regulations updating the IPPS for FY 2003 
(67 FR 31404, May 9, 2002 and 67 FR 49982, August 1, 2002), we 
discussed the methodology that we have used to determine the labor-
related share. We noted that, at that time, the results of employing 
that methodology suggested that an increase in the labor-related share 
(from 71.066 percent to 72.495 percent) was warranted. However, we 
decided not to propose such an increase in the labor-related share 
until we conducted further research to determine whether a different 
methodology for determining the labor-related share should be adopted. 
The labor-related share has thus remained 71.066 percent.
    Section 403 of Pub. L. 108-173 amended sections 1886(d)(3)(E) of 
the Act to provide that the Secretary must employ 62 percent as the 
labor-related share unless this ``would result in lower payments than 
would otherwise be made.'' However, this provision of Pub. L. 108-173 
did not the change the legal requirement that the Secretary estimate 
``from time to time'' the proportion of hospitals'' costs that are 
``attributable to wages and wage-related costs.'' In fact, section 404 
of Pub. L. 108-173 requires the Secretary to develop a frequency for 
revising the weights used in the hospital market basket, including the 
labor share, to reflect the most current data more frequently than once 
every 5 years. This reflects Congressional intent that hospitals will 
receive payment based on a 62-percent labor share, or the labor share 
estimated from time to time by the Secretary, whichever is higher.
    Section 404 further requires us to include in the final IPPS rule 
for FY 2006 an explanation of the reasons for, and options considered, 
in determining the frequency for revising the weights used in the 
hospital market basket, including the labor share. In the meantime, we 
are also continuing our research into the assumptions employed in 
calculating the labor-related share. Our research involves analyzing 
the compensation share separately for urban and rural hospitals, using 
regression analysis to determine the proportion of costs influenced by 
the area wage index, and exploring alternative methodologies to 
determine whether all or only a portion of professional fees and 
nonlabor intensive services should be considered labor-related. We will 
present our analysis and conclusions regarding the frequency and 
methodology for updating the labor share in the proposed and final 
rules for FY 2006.
    In section IV.F. of this preamble, we discuss our proposal to 
incorporate the requirements of section 403 of Pub. L. 108-173 in a new 
Sec.  412.64(h) of the regulations.
    As discussed above, the Secretary had determined, prior to the 
enactment of Pub. L. 108-173, that the labor-related share would be 
71.066 percent. As a result, application of a 62-percent labor share 
would result in lower payments for any hospital with a wage index 
greater than 1.0. Therefore, we are modifying our payment system 
software for FY 2005 to apply wage indexes greater than 1.0 to 71.066 
percent of the standardized amount, and to apply wage indexes less than 
or equal to 1.0 to 62 percent of the standardized amount.

IV. Other Decisions and Proposed Changes to the IPPS for Operating 
Costs and GME Costs

A. Postacute Care Transfer Payment Policy (Sec.  412.4)

[If you choose to comment on issues in this section, please include the 
caption ``Postacute Care Transfers'' at the beginning of your 
document.]
1. Background
    Existing regulations at Sec.  412.4(a) define discharges under the 
IPPS as situations in which a patient is formally released from an 
acute care hospital or dies in the hospital. Section 412.4(b) defines 
transfers from one acute care hospital to another, and Sec.  412.4(c) 
defines transfers to certain postacute care providers. Our policy 
provides that, in transfer situations, full payment is made to the 
final discharging hospital and each transferring hospital is paid a per 
diem rate for each day of the stay, not to exceed the full DRG payment 
that would have been made if the patient had been discharged without 
being transferred.
    The per diem rate paid to a transferring hospital is calculated by 
dividing the full DRG payment by the geometric mean length of stay for 
the DRG. Based on an analysis that showed that the first day of 
hospitalization is the most expensive (60 FR 45804), our policy 
provides for payment that is double the per diem amount for the first 
day (Sec.  412.4(f)(1)). Transfer cases are also eligible for outlier 
payments. The outlier threshold for transfer cases is equal to the 
fixed-loss outlier threshold for nontransfer cases, divided by the 
geometric mean length of stay for the DRG, multiplied by the length of 
stay for the case, plus one day.
    Medicare adopted its IPPS transfer policy because, if the program 
were to pay the full DRG payment regardless of

[[Page 28272]]

whether a patient is transferred or discharged, there would be a strong 
incentive for hospitals to transfer patients to another IPPS hospital 
early in the patients' stay in order to minimize costs while still 
receiving the full DRG payment. The transfer policy adjusts the 
payments to approximate the reduced costs of transfer cases.
    Previously, when a patient chose to depart from a hospital against 
the medical opinion of treating physicians, the case was treated as a 
left against medical advice (LAMA) discharge and coded as discharge 
status ``07-Left Against Medical Advice (LAMA)'' on the inpatient 
billing claim form. Because, by definition, LAMA discharges were 
assumed not to involve the active participation of the hospital 
administration, our policy had been to treat LAMA cases as discharges. 
This policy applied even if the patient was admitted to another 
hospital on the date of the LAMA discharge. Consequently, until FY 
2004, we made a full DRG payment for any discharge coded as a LAMA 
case.
    Last year, in response to an Office of Inspector General (OIG) 
report issued in March 2002 (A-06-99-00045), we became concerned that 
some hospitals were incorrectly coding transfers as LAMA cases. 
Therefore, in the August 1, 2003 final IPPS rule (68 FR 45405), we 
expanded our definition of a transfer under Sec.  412.4(b) to include 
all patients who are admitted to another IPPS hospital on the same day 
that the patient is discharged from an IPPS hospital, unless the first 
(transferring) hospital can demonstrate that the patient's treatment 
was completed at the time of discharge from that hospital. In other 
words, unless the same-day readmission is to treat a condition that is 
unrelated to the condition treated during the original admission (for 
example, the beneficiary is in a car accident later that day), any 
situation where the beneficiary is admitted to another IPPS hospital on 
the same date that he or she is discharged from an IPPS hospital would 
be considered a transfer, even if the patient left against medical 
advice from the first hospital.
    Hospitals are now allowed to report a patient as left against 
medical advice only if they have no knowledge that the patient has been 
admitted to another hospital on the same day. If a hospital later leans 
that a patient was admitted to another facility on the same day, the 
hospital must resubmit the claim and correctly code the patient as a 
``transfer.'' This change prohibits payment of two claims for the same 
patient on the same day. Therefore, if a hospital believes a claim has 
been wrongly denied, the original discharging hospital must resubmit 
the claim with documentation that the discharge was appropriate and 
unrelated to the subsequent same-day admission.
2. Proposed Changes to DRGs Subject to the Postacute Care Transfer 
Policy (Sec. Sec.  412.4(c) and (d))
    Under section 1886(d)(5)(J) of the Act, a ``qualified discharge'' 
from one of 10 DRGs selected by the Secretary to a postacute care 
provider is treated as a transfer case beginning with discharges on or 
after October 1, 1998. This section required the Secretary to define 
and pay as transfers all cases assigned to one of 10 DRGs selected by 
the Secretary, if the individuals are discharged to one of the 
following postacute care settings:
     A hospital or hospital unit that is not a subsection 
1886(d) hospital. (Section 1886(d)(1)(B) of the Act identifies the 
hospitals and hospital units that are excluded from the term 
``subsection (d) hospital'' as psychiatric hospitals and units, 
rehabilitation hospitals and units, children's hospitals, long-term 
care hospitals, and cancer hospitals.)
     A SNF (as defined at section 1819(a) of the Act).
     Home health services provided by a home health agency, if 
the services relate to the condition or diagnosis for which the 
individual received inpatient hospital services, and if the home health 
services are provided within an appropriate period (as determined by 
the Secretary).
    In the July 31, 1998 IPPS final rule (63 FR 40975 through 40976), 
we specified the appropriate time period during which we would consider 
a discharge to postacute home health services to constitute a transfer 
as within 3 days after the date of discharge. In addition, in the July 
31, 1998 final rule, we did not include in the definition of postacute 
care transfer cases patients transferred to a swing-bed for skilled 
nursing care (63 FR 40977).
    Section 1886(d)(5)(J) of the Act directed the Secretary to select 
10 DRGs based upon a high volume of discharges to postacute care and a 
disproportionate use of postacute care services. As discussed in the 
July 31, 1998 final rule, these 10 DRGs were selected in 1998 based on 
the MedPAR data from FY 1996. Using that information, we identified and 
selected the first 20 DRGs that had the largest proportion of 
discharges to postacute care (and at least 14,000 such transfer cases). 
In order to select 10 DRGs from the 20 DRGs on our list, we considered 
the volume and percentage of discharges to postacute care that occurred 
before the mean length of stay and whether the discharges occurring 
early in the stay were more likely to receive postacute care. We 
identified 10 DRGs to be subject to the postacute care transfer rule 
starting in FY 1999.
    Section 1886(d)(5)(J)(iv) of the Act authorizes the Secretary to 
expand the postacute care transfer policy beyond 10 DRGs for FY 2001 or 
subsequent fiscal years. In the FY 2004 IPPS final rule (68 FR 45412), 
we expanded the postacute care transfer policy to include additional 
DRGs. We established the following criteria that a DRG must meet, for 
both of the 2 most recent years for which data are available, in order 
to be added to the postacute care transfer policy:
     At least 14,000 postacute care transfer cases;
     At least 10 percent of its postacute care transfers 
occurring before the geometric mean length of stay;
     A geometric mean length of stay of at least 3 days; and
     If a DRG is not already included in the policy, a decline 
in its geometric mean length of stay during the most recent 5 year 
period of at least 7 percent.
    We identified 21 new DRGs that met these criteria. We also 
determined that one DRG from the original group of 10 DRGs (DRG 263) no 
longer met the volume criterion of 14,000 transfer cases. Therefore, we 
removed DRGs 263 and 264 (DRG 264 is paired with DRG 263) from the 
policy and the postacute care transfer policy to include payments for 
transfer cases in the new 21 DRGs, effective October 1, 2003. As a 
result, a total of 29 DRGs were subject to the postacute care transfer 
policy in FY 2004.
    We indicated in last year's rule that we would review and update 
this list periodically to assess whether additional DRGs should be 
added or existing DRGs should be removed. We have analyzed the 
available data from the FY 2003 MedPAR file. For the 2 most recent 
years of available data (FY 2002 and FY 2003), we have found that no 
additional DRGs qualify under the four criteria set forth in the IPPS 
final rule for FY 2004. We have also analyzed the DRGs included under 
the policy for FY 2004 to determine if they still meet the criteria to 
remain under the policy. In addition, we have analyzed the special 
circumstances arising from a change to one of the DRGs included under 
the policy in FY 2004.
    As discussed in section II.B.9. of this preamble, we are proposing 
to eliminate DRG 483. The cases that would have been placed into DRG 
483 would now be split into two proposed new DRGs, 541 (Tracheostomy 
With Mechanical

[[Page 28273]]

Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth and 
Neck Diagnoses With Major O.R. Procedure) and 542 (Tracheostomy with 
Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, 
Mouth and Neck Diagnoses Without Major O.R. Procedure). This would be 
done by subdividing the cases in the existing DRG 483 based on the 
presence of a major O.R. procedure, in addition to the tracheotomy code 
that is currently required to be assigned to this DRG. Therefore, if 
the patient's case involves a major O.R. procedure (a procedure whose 
code is included on the list that is assigned to DRG 468 (Extensive 
O.R. Procedure Unrelated to Principal Diagnosis), except for 
tracheostomy codes 31.21 and 31.29), the case would be assigned to the 
proposed new DRG 541. If the patient does not have an additional major 
O.R. procedure (that is, there is only a tracheotomy code assigned to 
the case), the case would be assigned to proposed new DRG 542.
    Neither of the proposed new DRGs 541 and 542 would have enough 
cases to meet the first criterion for inclusion in the postacute care 
transfer policy. DRG 483 had 44,788 total cases with 15,520 transfer 
cases in FY 2002, and 44,618 total cases with 20,034 transfer cases in 
FY 2003. These cases would now split between proposed new DRG 541 
(20,812 total cases) and proposed new DRG 542 (23,387 total cases). As 
a result, neither of these proposed new DRGs would meet the existing 
threshold of 14,000 transfer cases (6,779 projected transfer cases for 
proposed DRG 541, and 8,570 projected transfer cases for proposed DRG 
542). Nevertheless, we believe the cases that would now be incorporated 
into these two proposed new DRGs remain appropriate candidates for 
application of the postacute care transfer policy. The proposed new 
DRGs 541 and 542 would contain the same cases that were included in 
existing DRG 483, which qualified for inclusion in the postacute care 
transfer policy. Furthermore, many of the cases in the proposed new 
DRGs 541 and 542 would continue to require postacute care.
    When we analyzed the cases that we projected would fall into the 
two proposed new DRGs in the FY 2003 GROUPER Version 22.0, we found 
that a high proportion of cases in both the proposed new DRGs are 
projected to be transfer cases: 33 percent of all cases in proposed DRG 
541, and 37 percent in proposed DRG 542. In addition, a high proportion 
of the transfer cases in these proposed new DRGs, based on the data 
from cases in DRG 483 in the FY 2003 MedPAR file, are projected to fall 
into the short-stay transfer category: 41 percent of transfer cases in 
proposed new DRG 541 and 42 percent of transfer cases in proposed new 
DRG 542 are projected to occur before the geometric mean length of stay 
for these proposed new DRGs. By contrast, among all DRGs, approximately 
15 percent of transfer cases are short-stay transfer cases. The 
percentage of transfer cases that are short-stay cases that would be in 
both proposed new DRGs 541 and 542 would be more than 2 standard 
deviations above the mean percentage of short-stay cases across all 
DRGs. (Two standard deviations above the mean across all DRGs is 37 
percent for FY 2005.) Therefore, we believe this proposed subdivision 
of DRG 483 should not change the original application of the postacute 
care transfer policy to the cases once included in that DRG. We do not 
believe that it is appropriate for these cases to fall outside the 
scope of this policy solely because of the proposed revision to the DRG 
structure that was driven by policy reasons unrelated to the postacute 
care transfer provision. The high proportion of transfer cases among 
all cases that would be assigned to these proposed new DRGs, along with 
the unusually high proportion of short-stay cases among those transfer 
cases, provide solid reasons for considering whether alternate criteria 
might better address the special circumstances that can arise from 
changes in DRGs unrelated to the postacute care transfer policy.
    Therefore, we are proposing alternate criteria to be applied in 
cases where DRGs do not satisfy the existing criteria, for discharges 
occurring on or after October 1, 2004. These proposed new criteria are 
designed to address situations such as those posed by the proposed 
split of DRG 483, where there remain substantial grounds for inclusion 
of cases within the postacute care transfer policy, although one or 
more of the original criteria may no longer apply. Therefore, we are 
proposing to examine DRGs for inclusion within the policy against two 
sets of criteria, first, the original four criteria, and then, the 
proposed alternate set of criteria. DRGs that do not satisfy the first 
set of criteria would still be included if they satisfy the second set. 
Specifically, a DRG would still be subject to the postacute care 
transfer policy under the alternative set of criteria if, for the 2 
most recent years for which data are available, there are at least 
5,000 total transfers to postacute care among the cases included in the 
DRG, and if, among the cases included in the DRG, the percentage of 
transfer cases that are short-stay transfer cases is at least 2 
standard deviations above the geometric mean length of stay across all 
DRGs (which is 37 percent for FY 2005). We would also continue to 
require a geometric mean length of stay of at least 3 days among the 
cases included in the DRG. Finally, we would require that, if a DRG is 
not already included in the policy, it either experienced a decline in 
its geometric mean length of stay during the most recent 5 year period 
of at least 7 percent or contains only cases that would have been 
included in a DRG to which the policy applied in the prior year.
    Under these proposed alternate criteria, DRGs 430, 541, and 542 
would qualify for inclusion in the postacute care transfer policy. DRG 
430 meets the proposed threshold of 5,000 transfer cases in both of the 
2 most recent years, with 11,973 transfer cases and 46 percent short-
stay transfer cases in FY 2002, and 12,202 transfer cases and 38 
percent short-stay transfers in FY 2003. In addition, DRG 430 
experienced a 7-percent decline in length of stay from FY 2000 to FY 
2004. DRG 430 also had a 5.8 day average length of stay during those 
years. As discussed above, the cases that would be included in proposed 
new DRGs 541 and 542 contain a sufficient number of transfers to meet 
the first alternate criterion, and among the cases that would be 
included in these DRGs, the percentages of transfer cases occurring 
before the geometric mean length of stay for these two proposed new 
DRGs exceed 2 standard deviations above the geometric mean length of 
stay for all DRGs. The average lengths of stay for the cases that would 
be included in proposed new DRGs 541 and 542 are 37.7 days and 28.9 
days, respectively.
    We are proposing to revise the regulations governing the postacute 
transfer policy to include the alternative criteria described above 
(Sec.  412.4(d)). We are also proposing that DRG 430 and proposed new 
DRGs 541 and 542 would be included in the postacute care transfer 
policy.
    We would also like to call attention to the data concerning DRG 
263, which was subject to the postacute care transfer policy until FY 
2004. We removed DRG 263 from the postacute care transfer policy last 
year because it did not have the minimum number of cases (14,000) 
transferred to postacute care (13,588 transfer cases in FY 2002, with 
more than 50 percent of transfer cases being short-stay transfers). The 
FY 2003 MedPAR data show that there were 15,602 transfer cases in the 
DRG in FY 2003, of which 46 percent were short-stay transfers. Because 
we

[[Page 28274]]

removed the DRG from the postacute care transfer policy in FY 2004, it 
must meet all criteria to be included under the policy in subsequent 
fiscal years. Because the geometric mean length of stay for DRG 263 
shows only a 6-percent decrease since 1999, DRG 263 does not qualify to 
be added to the policy for FY 2005 under the existing criterion that 
was included in last year's rule. However, DRG 263 would qualify under 
the volume threshold and percent of short-stay transfer cases under the 
proposed new alternate criteria in this proposed rule, but it still 
does not meet the proposed required decline in length of stay to 
qualify to be added to the policy in FY 2005.
    The table below displays the 31 DRGs that we are proposing to 
include in the postacute care transfer policy, effective for discharges 
occurring on or after October 1, 2004. These 31 DRGs include the 
effects of dropping DRG 483, which we are proposing to delete from the 
DRG list, and adding the two proposed new DRGs 541 and 542 that would 
now incorporate the cases formerly assigned to DRG 483. They also 
include the proposed addition of DRG 430 to the list. These DRGs meet 
the criteria specified above during both of the 2 most recent years 
available prior to the publication of the FY 2005 IPPS proposed rule 
(FYs 2002 and 2003), as well as their paired-DRG if one of the DRGs 
meeting the criteria includes a CC/no-CC split.

------------------------------------------------------------------------
                DRG                              DRG title.
------------------------------------------------------------------------
12................................  Degenerative Nervous System
                                     Disorders.
14................................  Intracranial Hemorrhage and Stroke
                                     with Infarction.
24................................  Seizure and Headache Age > 17 With
                                     CC.
25................................  Seizure and Headache Age > 17
                                     Without CC.
88................................  Chronic Obstructive Pulmonary
                                     Disease.
89................................  Simple Pneumonia and Pleurisy Age >
                                     17 With CC.
90................................  Simple Pneumonia and Pleurisy Age >
                                     17 Without CC.
113...............................  Amputation for Circulatory System
                                     Disorders Except Upper Limb and
                                     Toe.
121...............................  Circulatory Disorders With AMI and
                                     Major Complication, Discharged
                                     Alive.
122...............................  Circulatory Disorders With AMI
                                     Without Major Complications
                                     Discharged Alive.
127...............................  Heart Failure & Shock.
130...............................  Peripheral Vascular Disorders With
                                     CC.
131...............................  Peripheral Vascular Disorders
                                     Without CC.
209...............................  Major Joint and Limb Reattachment
                                     Procedures of Lower Extremity.
210...............................  Hip and Femur Procedures Except
                                     Major Joint Age > 17 With CC.
211...............................  Hip and Femur Procedures Except
                                     Major Joint Age > 17 Without CC.
236...............................  Fractures of Hip and Pelvis.
239...............................  Pathological Fractures and
                                     Musculoskeletal and Connective
                                     Tissue Malignancy.
277...............................  Cellulitis Age > 17 With CC.
278...............................  Cellulitis Age > 17 Without CC.
294...............................  Diabetes Age > 35.
296...............................  Nutritional and Miscellaneous
                                     Metabolic Disorders Age > 17 With
                                     CC.
297...............................  Nutritional and Miscellaneous
                                     Metabolic Disorders Age > 17
                                     Without CC.
320...............................  Kidney and Urinary Tract Infections
                                     Age > 17 With CC.
321...............................  Kidney and Urinary Tract Infections
                                     Age > 17 Without CC.
395...............................  Red Blood Cell Disorders Age > 17.
429...............................  Organic Disturbances and Mental
                                     Retardation.
430...............................  Psychoses.
468...............................  Extensive O.R. Procedure Unrelated
                                     to Principal Diagnosis.
Proposed 541......................  Tracheostomy with Mechanical
                                     Ventilation 96+ Hours or Principal
                                     Diagnosis Except Face, Mouth and
                                     Neck Diagnoses With Major O.R.
                                     Procedure.
Proposed 542......................  Tracheostomy with Mechanical
                                     Ventilation 96+ Hours or Principal
                                     Diagnosis Except Face, Mouth and
                                     Neck Diagnoses Without Major O.R.
                                     Procedure.
------------------------------------------------------------------------

    Section 1886(d)(5)(J)(i) of the Act recognizes that, in some cases, 
a substantial portion of the costs of care is incurred in the early 
days of the inpatient stay. Similar to the policy for transfers between 
two acute care hospitals, the transferring hospital in a postacute care 
transfer receives twice the per diem rate for the first day of 
treatment and the per diem rate for each following day of the stay 
before the transfer, up to the full DRG payment. However, three of the 
DRGs subject to the postacute care transfer policy exhibit a 
disproportionate share of costs very early in the hospital stay in 
postacute care transfer situations. For these DRGs, hospitals receive 
50 percent of the full DRG payment plus the single per diem (rather 
than double the per diem) for the first day of the stay and 50 percent 
of the per diem for the remaining days of the stay, up to the full DRG 
payment.
    In previous years, we determined that DRGs 209 and 211 met this 
cost threshold and qualified to receive this special payment 
methodology. Because DRG 210 is paired with DRG 211, we include payment 
for cases in that DRG for the same reason we include paired DRGs in the 
postacute care transfer policy (to eliminate any incentive to code 
incorrectly in order to receive higher payment for those cases). The FY 
2003 MedPAR data show that DRGs 209 and 211 continue to have charges on 
the first day of the stay that are higher than 50 percent of the 
average charges in the DRGs. Therefore, we are proposing to continue 
the special payment methodology for DRGs 209, 210, and 211 for FY 2005.

B. Payments for Inpatient Care in Providers That Change Classification 
Status During a Patient Stay (Sec. Sec.  412.2(b)(3) and 412.521(e))

[If you choose to comment on issues in this section, please include the 
caption ``Crossover Patients'' at the beginning of your document.]
    Different Medicare payment systems apply to care furnished to 
Medicare beneficiaries during inpatient stays, depending on the 
classification status of the provider. For example, payments made to an 
acute care hospital for inpatient services are made under the IPPS on a 
per discharge basis, using a

[[Page 28275]]

DRG classification system. Payments to LTCHs that are classified under 
section 1886(d)(1)(B)(iv)(I) and (II) of the Act are made under the 
LTCH PPS on a per discharge basis, using a LTC-DRG classification 
system. The main difference between a LTCH that is classified under 
section 1886(d)(1)(B)(iv)(I) of the Act and an acute care hospital is 
the average length of stay at the hospital. Specifically, section 
1886(d)(1)(B)(iv)(I) hospitals must have a greater than 25 day average 
Medicare inpatient length of stay. (section 1886(d)(1)(B)(iv)(II) 
hospitals, among other requirements, must have a greater than 20 day 
Medicare and non-Medicare inpatient length of stay to qualify as 
LTCHs.) Situations occur in hospital inpatient care settings in which a 
Medicare provider changes its Medicare payment classification status 
during a patient's stay, for example, an acute care hospital changes to 
a LTCH. (We refer to the patients in these situations as ``crossover 
patients.'')
    Questions have arisen as to how Medicare should pay for an 
inpatient stay in a hospital when the hospital changes its 
classification status during the course of the beneficiary's single 
hospital stay. Specifically, how should Medicare pay for an inpatient 
stay when a patient is in an acute care hospital and the acute care 
hospital changes to a LTCH during the beneficiary's hospitalization. In 
other words, how does Medicare pay for the first part of the stay that 
occurs before the change in classification status and how does Medicare 
pay for the part of the stay that occurs after the change in 
classification status. Although the situation may occur in other 
settings, this payment issue is most prevalent for services furnished 
to crossover patients in a newly established LTCH. This is because all 
new LTCHs begin as other provider types, generally as acute care 
hospitals, and generally after at least 5 months of experience showing 
an average length of stay in excess of 25 days, and are then paid as 
LTCHs. Therefore, as explained further below, we are currently 
addressing this problem in the context of crossover patients discharged 
from LTCHs.
    To address payment for inpatient care for such crossover patients, 
we had issued instructions for hospital billing purposes (paper-based 
manual, Hospital Manual, HCFA Pub. 10, section 404, which has been 
replaced by the Medicare Claims Processing Manual, Pub. 100-4, Chapter 
3, section 100.4.1) that were in effect prior to the implementation of 
the PPS for LTCHs (that is, prior to October 1, 2002). The manual 
instructed hospitals as follows: ``The hospital must submit a discharge 
bill with the old provider number and an admission notice with the new 
provider number. The date of discharge and the date of admission are 
the same date, which is the first day of the new fiscal period. All 
subsequent billings are submitted under the new provider number.''
    It is important to note that at the time this manual provision was 
written, IPPS-excluded hospitals, including LTCHs, were reimbursed 
under the reasonable cost-based (TEFRA) payment system, not under other 
PPSs that pay on a per discharge basis. Thus, under the manual 
instructions, if a patient was in an acute care hospital and the 
hospital converted to a LTCH during the patient's stay, Medicare would 
then make payment for what was, in reality, only one episode of care as 
if it were two episodes. Specifically, the days of the stay while the 
facility was certified as an acute care hospital generate a full DRG 
payment under the IPPS; and the services provided from the time the 
facility was certified as a LTCH were reimbursed under the reasonable 
cost-based payment system. We are proposing to revisit the issue of 
Medicare payment for crossover patients now that there has been a 
fundamental change in the Medicare payment system for LTCHs. LTCHs are 
now paid under the discharge-based LTCH PPS which was effective for 
LTCHs for cost reporting periods beginning on or after October 1, 2002.
    Under the LTCH PPS for crossover patients, under the existing 
manual instructions, Medicare makes a full DRG payment under the IPPS 
to the acute care hospital for the ``first portion'' of the inpatient 
stay, and when the acute care hospital converts to an LTCH, Medicare 
makes a second PPS payment under the LTCH PPS for the ``second 
portion'' of the stay. We believe that this results in excessive 
Medicare payments and results in the inappropriate use of the Medicare 
Trust Fund. We believe the results described above are contrary to a 
basic premise of a PPS, which is that a single discharge-based PPS 
payment is adequate and appropriate reimbursement for the entire bundle 
of services that a hospital provides during the course of a patient's 
stay. We believe the care provided prior to and after the conversion to 
a LTCH is really one bundle of services provided during a single 
hospitalization. The ``discharge'' from the acute care hospital and 
``admission'' to the LTCH has only been a ``paper discharge'' that was 
triggered solely by a change in the Medicare payment classification of 
the hospital treating the inpatient. In the instant case, the 
beneficiary, by mere coincidence, just happened to be an inpatient of 
the acute care hospital when it changed status--the acute care hospital 
does not drastically change the medical care it provides a beneficiary 
during his or her single hospitalization because its classification as 
an acute care hospital ends on one day and changes to LTCH 
classification on the next day, nor does the ``discharge'' signify the 
completion of a discrete period of care. Under the existing manual 
instructions, the hospital is receiving not one payment, but two PPS 
payments for a bundle of services that, in fact, was furnished during a 
single inpatient hospital stay and should have been adequately and 
properly reimbursed by a single PPS payment.
    In addition, presently, if the DRG assigned to the ``discharge'' 
from the acute care hospital for a crossover patient falls within one 
of the DRGs covered by the postacute care transfer policy at Sec.  
412.4(c), the provider will receive a payment under the postacute care 
transfer policy as if the patient, who in fact has not moved, was 
transferred to a postacute care provider. Payment under the postacute 
care transfer policy is triggered when a discharge bill with the old 
provider number and an admission notice with the new provider number is 
submitted and processed by the Medicare standard bill processing 
systems as a transfer. Because the patient is, in reality, at the 
``same'' facility (an acute care hospital that had met the LTCH 
designation criteria) and is in one episode of care, we do not believe 
the application of the existing transfer policy is the appropriate 
methodology for dealing with this situation. Under the postacute care 
transfer policy, the payment to the transferring hospital is only 
affected if the patient is discharged prior to the day before the 
geometric mean length of stay for the DRG. Where the patient is 
discharged by the day before the geometric mean length of stay, the 
``discharging'' acute care hospital will receive the equivalent of the 
full IPPS DRG payment and the LTCH hospital will also receive a full 
LTCH PPS payment.
    Accordingly, we are proposing to revise our regulations to provide 
for only one Medicare program payment for LTCH crossover patients. 
After reconsidering the current payment policy for crossover patients, 
we do not believe it is appropriate to make two separate discharge-
based payments under Medicare for what, in reality, is a single 
inpatient hospital stay. In fact, when a patient under existing policy 
is deemed discharged from an acute care

[[Page 28276]]

hospital that has met the LTCH designation requirements during the 
patient's stay and has now changed its classification to LTCH status, 
we believe the patient has been receiving one consistent course of 
treatment throughout his or her stay. An acute care hospital that has 
become a LTCH prior to being paid as a LTCH has been admitting and 
treating patients with the multi-cormorbidities that result in longer 
hospital stays that are characteristic of the patient census at a LTCH, 
as required by Sec.  412.23(e). Invariably, at the time the acute care 
hospital becomes a LTCH, there will be patients who were admitted to 
the acute care hospital and who remain in the facility when it converts 
to a LTCH and are ultimately discharged from the LTCH. An acute care 
hospital's change in payment classification status to a LTCH at the 
start of its first cost reporting period should have no impact on the 
course of treatment that is already underway for the patient in what is 
now a LTCH and not an acute care hospital. Accordingly, we believe that 
only one Medicare payment should be made for the entire stay.
    Therefore, we are proposing a more appropriate payment policy for 
crossover patients that would provide one Medicare payment for what has 
been treated, for payment purposes under Medicare, to be two stays, but 
is, in reality, one continuous and uninterrupted period of inpatient 
hospital care. Consistent with the authority granted to the Secretary 
in both section 123 of the BBRA (Pub. L. 106-113) and section 307 of 
the BIPA (Pub. L. 106-554) to develop a LTCH PPS DRG-based system, we 
are proposing, effective for a patient stay in which a patient is in an 
acute care hospital and that hospital is designated as a LTCH on or 
after October 1, 2004, to make only one LTCH payment based on the PPS 
of the facility that is actually discharging the patient. Under this 
approach, we would include those days of care and costs incurred by the 
hospital for the crossover patient before the facility met the LTCH 
status criteria, in determining payments to the LTCH for that patient 
under the LTCH PPS. Under this proposed policy, for example, if an 
acute care hospital admits a patient on December 28 and the hospital 
converts to a LTCH on January 1 when its cost reporting period begins, 
and the patient is physically discharged from the LTCH on February 5, a 
single Medicare payment would be made for this entire stay (December 28 
through February 5), and payment would be made to the LTCH based on the 
LTCH-DRGs under the LTCH PPS. We are proposing to count the crossover 
patient's entire hospitalization (that is, all days and costs of the 
patient stay in the facility that occurred prior to and after 
conversion) in determining the applicable payment under the LTCH PPS. 
This proposed provision would also count all the days of the inpatient 
stay, that is, prior to and after conversion, as LTCH days for purposes 
of determining whether the facility continues to meet the average 
length of stay regulations for LTCH. We believe that this proposed 
policy is consistent with the discretionary authority granted to the 
Secretary at section 1886(d)(1)(B)(iv)(I) of the Act for determining 
average lengths of stay for LTCHs. Specifically, section 
1886(d)(1)(B)(iv)(I) of the Act provides that a LTCH is a hospital that 
has an average length of stay (as determined by the Secretary) of 
greater than 25 days. Thus, the Secretary determines how a LTCH's 
average length of stay is to be determined.
    We are also using the broad discretionary authority provided in 
section 1871 of the Act to not count the days of the patient's stay in 
the acute care hospital prior to conversion as acute care days. In 
addition, we are using the broad authority in section 1871 of the Act 
to not pay for the days of the patient's stay in the acute care 
hospital as acute days. Section 1871 of the Act authorizes the 
Secretary to promulgate regulations that are necessary to carry on the 
administration of the Medicare program.
    In addition, we believe counting all days for the patient's stay is 
consistent with the policy at recently revised Sec.  412.23(e)(3), 
which provides that if a LTCH patient is admitted in one cost reporting 
period and discharged in a second cost reporting period, all of the 
days of the patient's stay, even those from prior fiscal years, are 
counted in the cost reporting period in which the patient is 
discharged. In the example of a crossover patient cited above, 
including the days in December may result in a full LTC-DRG payment 
rather than the lower payment under the short-stay outlier policy 
(Sec.  412.529) based on the length of the stay. (Under the short-stay 
policy, we would adjust (lower) the Federal prospective payment if the 
payment is for a length of stay that is up to and including five-sixths 
of the geometric average length of stay for the LTC-DRG assigned to the 
case.)
    Accordingly, we are proposing to add a new Sec.  412.2(b)(3), 
applicable to acute care hospitals, and a new Sec.  412.521(e), 
applicable to LTCHs, that specify that Medicare would make only one 
LTCH PPS payment for a crossover patient to the LTCH that is 
discharging the patient based on the entire stay, both prior to the 
change to LTCH status and after the change. Medicare considers all days 
of the patient stay in the facility (days prior to and after conversion 
to the LTCH status) to be a single episode of LTCH care. Medicare will 
not make any payment under 42 CFR Part 412, Subpart H for any part of 
the hospitalization. In addition, for purposes of determining the 
beneficiary LTCH length of stay, the days prior to and after conversion 
to LTCH status are included. In order to implement the proposed policy, 
we would create systems adjustments that would enable the single claim 
generated by the discharging provider to include patient days under the 
initial provider number. We note that our proposal to define and pay 
for crossover patient stays as one episode of care based on the PPS of 
the discharging provider is consistent with existing regulations that 
establish that payment under the per discharge PPS constitutes 
``payment in full'' for acute care hospitals at Sec.  412.2(b) under 
the IPPS and for LTCHs, at Sec.  412.521(b) under the LTCH PPS.
    In this proposal, we have specifically addressed only the situation 
of a crossover patient that was in an acute care hospital that meets 
the requirements to be paid as a LTCH. However, we believe the policy 
may be equally applicable to other crossover situations. For example, 
an acute care hospital may meet the requirements to be paid as an 
inpatient rehabilitation facility (under the IRF PPS) and there could 
be rehabilitation patients who were admitted to the acute care hospital 
who were not discharged from the hospital until after the facility was 
designated as an IRF. At this time, we are not proposing to make a 
change to the existing payment policy in situations other than the LTCH 
crossover patient. We have only addressed the LTCH crossover patient 
because, based on the statutory and regulatory qualifying criteria, 
every LTCH must first be certified as a hospital before it can meet the 
LTCH criteria. However, the same is not true for other hospital 
certifications. For example, an inpatient rehabilitation hospital can 
be certified as an IRF without first being certified and paid as an 
acute care hospital for inpatient services. However, we intend to 
revisit the existing crossover policy as it affects other crossover 
situations in the future. We also welcome comments on how Medicare 
payment policy should address those situations.

[[Page 28277]]

C. Geographic Reclassifications--Definitions of Urban and Rural Areas 
(Sec.  412.63(b) and Proposed New Sec.  412.64(b))

[If you choose to comment on issues in this section, please include the 
caption ``Urban and Rural Areas Definitions'' at the beginning of your 
document.]
    As discussed in section III.B. and III.G. of this proposed rule, we 
are proposing how we would implement OMB's revised standards for 
defining MSAs and our plan to use the New England MSAs established by 
OMB. These proposals relate to our policies in established regulations 
under Sec.  412.63(b) governing geographic classification of hospitals 
for purposes of the wage index and the standardized amounts in 
determining the Federal rates for inpatient operating costs. In this 
section, we define the geographic areas for purposes of 
reclassification of hospitals. Therefore, consistent with our proposed 
changes to reflect the new definitions of CBSAs based on the Census 
2000 data, effective for discharges occurring on or after October 1, 
2004, we are proposing to revise Sec.  412.63(b) and add a new Sec.  
412.64(b) to reflect the existing geographic classification 
definitions.

D. Equalization of Urban and Rural Standardized Amounts (Sec.  
412.63(c) and Proposed New Sec.  412.64)

[If you choose to comment on issues in this section, please include the 
caption ``Standardized Amounts'' at the beginning of your document.]
    Sections 1886(d)(2)(D) and (d)(3) of the Act previously required 
the Secretary to compute two average standardized amounts for 
discharges occurring in a fiscal year: one for hospitals located in 
large urban areas and one for hospitals located in other areas. In 
addition, under sections 1886(d)(9)(B)(iii) and (d)(9)(C)(i) of the 
Act, the average standardized amount per discharge was determined for 
hospitals located in large urban and other areas in Puerto Rico. In 
accordance with section 1886(b)(3)(B)(i) of the Act, prior to April 1, 
2003, the large urban average standardized amount was 1.6 percent 
higher than the other area average standardized amount. The two 
standardized amounts are currently equal, as discussed in the following 
paragraphs.
    Section 402(b) of Pub. L. 108-7 required that, effective for 
discharges occurring on or after April 1, 2003, and before October 1, 
2003, the Federal rate for all IPPS hospitals would be based on the 
large urban standardized amount. Subsequently, Pub. L. 108-89 extended 
section 402(b) of Pub. L. 108-7 to discharges occurring on or after 
October 1, 2003, and before April 1, 2004. Finally, section 401(a) of 
Pub. L. 108-173 required that, beginning with FY 2004 and thereafter, 
an equal standardized amount is to be computed for all hospitals at the 
level computed for large urban hospitals during FY 2003, updated by the 
applicable percentage update. This provision in effect makes permanent 
the equalization of the standardized amounts at the level of the 
previous standardized amount for large urban hospitals. Section 401(c) 
also equalizes the Puerto Rico-specific urban and other area rates.
    Accordingly, we are providing in this proposed rule for a single 
national standardized amount and a single Puerto Rico standardized 
amount for FY 2005 and thereafter, as discussed in detail in the 
Addendum to this proposed rule. We are proposing to revise existing 
Sec.  412.63 that includes the provisions related to computation of the 
standardized amount to make it applicable to fiscal years through FY 
2004 and to establish a new Sec.  412.64 that will include the 
provisions applicable to the single national standardized amount 
applicable for FY 2005 and subsequent years. Similarly, we are 
proposing to revise existing Sec.  412.210 for Puerto Rico to make it 
applicable to fiscal years through FY 2004 and adding a new Sec.  
412.211 for FY 2005 and subsequent years for the Puerto Rico 
standardized amount. We are also proposing to make conforming changes 
to various other sections of the regulations to reflect the single 
standardized amount for the States and for Puerto Rico.

E. Reporting of Hospital Quality Data for Annual Hospital Payment 
Update (Proposed New Sec.  412.64(d))

[If you choose to comment on issues in this section, please include the 
caption ``Hospital Quality Data'' at the beginning of your document.]
1. Background
    Section 501(b) of Pub. L. 108-173 amended section 1886(b)(3)(B) of 
the Act to add a new subclause (vii) to revise the mechanism used to 
update the standardized amount for payment for inpatient hospital 
operating costs. Specifically, the amendment provides that the update 
percentage increase (also known as the market basket update) for each 
of FYs 2005 through 2007 will be reduced by 0.4 percentage point for 
any ``subsection (d) hospital'' that does not submit data on a set of 
10 quality indicators established by the Secretary as of November 1, 
2003. (The statutory reference to a ``subsection (d) hospital'' 
restricts the application of this provision to hospitals paid under the 
IPPS. Therefore, the provision does not apply to hospitals and hospital 
units excluded from the IPPS, nor to payments to hospitals under other 
systems such as the outpatient hospital PPS.) The statute also provides 
that any reduction will apply only to the fiscal year involved, and 
will not be taken into account in computing the applicable percentage 
increase for a subsequent fiscal year. This measure establishes an 
incentive for IPPS hospitals to submit data on the quality measures 
established by the Secretary.
    We are proposing to implement the provisions of section 501(b) as 
described at the CMS Web site: http://www.cms.hhs.gov/quality/hospital.
    At a press conference on December 12, 2002, the Secretary of HHS 
announced a series of steps that HHS and its collaborators are taking 
for public reporting of hospital quality information. These 
collaborators include the American Hospital Association, the Federation 
of American Hospitals, the Association of American Medical Colleges, 
the Joint Commission on Accreditation of Healthcare Organizations, the 
National Quality Forum, the American Medical Association, the Consumer-
Purchaser Disclosure Project, the American Association of Retired 
Persons, the American Federation of Labor-Congress of Industrial 
Organizations and the Agency for Healthcare Research and Quality, as 
well as CMS, QIOs, and others.
    CMS began the public reporting initiative in July 2003 with a 
professional Web site that provides data intended for health care 
professionals. The professional Web site will be followed by a consumer 
Web site. The information on the consumer Web site will include the 
data from the professional Web site but in an easy-to-use format for 
consumers. It is intended to be an important tool for individuals to 
use in making decisions about their health care coverage. This 
information will assist beneficiaries by providing comparison 
information for consumers who need to select a hospital. It will also 
serve as a way of encouraging hospitals to adopt quality improvement 
strategies.
    The 10 measures that were employed in this voluntary initiative as 
of November 1, 2003, are:

 Heart Attack (Acute Myocardial Infarction)
    Was aspirin given to the patient upon arrival to the hospital?

[[Page 28278]]

    Was aspirin prescribed when the patient was discharged?
    Was a beta-blocker given to the patient upon arrival to the 
hospital?
    Was a beta-blocker prescribed when the patient was discharged?
    Was an ACE inhibitor given for the patient with heart failure?
 Heart Failure
    Did the patient get an assessment of his or her heart function?
    Was an ACE inhibitor given to the patient?
 Pneumonia
    Was an antibiotic given to the patient in a timely way?
    Had a patient received a pneumococcal vaccination?
    Was the patient's oxygen level assessed?

    These measures have been endorsed by the National Quality Forum 
(NQF) and are a subset of the same measures currently collected for the 
JCAHO by its accredited hospitals. Many hospitals are currently 
participating in the Department's National Voluntary Hospital Reporting 
Initiative (NVHRI) and are already submitting data to the QIO Clinical 
Warehouse. The Secretary adopted collection of data on these 10 quality 
measures in order to: (1) Provide useful and valid information about 
hospital quality to the public; (2) provide hospitals a sense of 
predictability about public reporting expectations; (3) begin to 
standardize data and data collection mechanisms; and (4) foster 
hospital quality improvement.
2. Requirements for Hospital Reporting of Quality Data
    For the hospital reporting initiative for the Medicare annual 
payment update provided for under section 501(b) of Public Law 108-173, 
we will be collecting data on the 10 clinical measures for all 
patients. We refer to this program as the Reporting Hospital Quality 
Data for the Annual Payment Update (RHQDAPU) program to distinguish it 
from the continuing NVHRI.
    The procedures for participating in the RHQDAPU can be found on the 
QualityNet Exchange at the Web site: http://qnetexchange.org in the 
``Reporting Hospital Quality Data for Annual Payment Update Reference 
Checklist.'' This checklist also contains all of the forms to be 
completed by hospitals participating in the program. In order to 
participate in the RHQDAPU, hospitals must follow the following steps:
     The hospital must identify a QualityNet Exchange 
administrator who follows the registration process and submits the 
information through the QIO. This must be done, regardless of whether 
the hospital uses a vendor for transmission of data.
     All participants must first register with the QualityNet 
Exchange, regardless of the method used for data submission. If a 
hospital is currently participating in the voluntary reporting 
initiative, re-registration on the QualityNet Exchange is unnecessary. 
However, registration includes completion of the RHQDAPU Notice of 
Participation form. All hospitals must send the RHQDAPU form to their 
QIOs no later than August 1, 2004, for the FY 2005 update.
     The hospital must collect data for all 10 measures and 
submit the data to the QIO Clinical Warehouse either using the CMS 
Abstraction & Reporting Tool (CART), the JCAHO Oryx Core Measures 
Performance Measurement System (PMS), or another third-party vendor who 
has met the measurement specification requirements for data 
transmission to the QualityNet Exchange. The QIO Clinical Warehouse 
will submit the data to CMS on behalf of the hospitals. The submission 
will be done through QualityNet Exchange, which is a secure site that 
voluntarily meets or exceeds all current Health Insurance Portability 
and Accountability Act (HIPAA) requirements, while maintaining QIO 
confidentiality as required by law. The information in the Clinical 
Warehouse is considered QIO data, and therefore, is subject to the 
stringent confidentiality regulations in 42 CFR part 480.
    Hospitals must begin the submission of data under the provisions of 
section 1886(b)(3)(B)(vii)(II) of the Act, as added by section 501(b) 
of Public Law 108-173, by July 1, 2004. Because section 501(b) of 
Public Law 108-173 grants a 30-day grace period for submission of data 
with respect to FY 2005, we are proposing to allow hospitals until 
August 1, 2004, for completed submissions to be successfully accepted 
into the QIO Clinical Warehouse. Hospitals would be required to submit 
data for the first calendar quarter of 2004 discharges in order to meet 
the requirements for the FY 2005 payment update. Hospitals 
participating in the NVHRI that submit the required 10 measures for the 
fourth calendar quarter of 2003 by the CMS-established deadline of May 
15, 2004, and that meet the registration requirements for the market 
basket update, would be given until August 15, 2004, to submit data for 
the first calendar quarter of 2004. There will be no chart-audit 
validation criteria in place for the FY 2005 payment update beyond the 
CART edits, currently in force, applied to data entering the QIO 
Clinical Warehouse. In addition, we will estimate the minimum number of 
discharges anticipated to be submitted by a hospital using Medicare 
administrative data. We will use this anticipated minimum number to 
establish our expectations of the number of cases for each hospital. 
Hospitals that do not treat a condition or have very few discharges 
would not be penalized and would receive the full annual payment update 
if they submit all the data they do possess. New hospitals should begin 
collecting and reporting data immediately and complete the registration 
requirements for the market basket update. The same standards that are 
applied to established hospitals will be applied to new hospitals when 
determining the expected number of discharges for the calendar quarters 
covered for each fiscal year.
    The annual payment updates will be based on the successful 
submission of data to CMS via the QIO Clinical Warehouse by the 
established deadlines. Hospitals may withdraw from RHQDAPU at any time 
up to August 1, 2004. Hospitals withdrawing from the program will not 
receive the full market basket update. Instead, they will receive a 0.4 
percentage point reduction in the update. By law, a hospital's actions 
each fiscal year will not affect its update in a subsequent fiscal 
year. Therefore, a hospital must meet the requirements for RHQDAPU each 
fiscal year the program is in effect, and failure to receive the full 
update in one fiscal year will not affect its update in a succeeding 
fiscal year.
3. Submission of Hospital Data for FYs 2006 and 2007
    For FYs 2006 and 2007, we will require hospitals to submit data 
quarterly, starting August 15, 2004. Eligibility for the full annual 
payment update will be based on the most recent four quarters of data. 
These data would be submitted on the same schedule for data 
transmission currently in force for CART data. That is, data must be 
submitted to the QIO Clinical warehouse no later than 15 calendar days 
after the fourth month following the end of the calendar quarter. This 
schedule is available at http://www.qnetexchange.org. We will establish 
validation requirements for submitted data for FYs 2006 and 2007. 
Submissions would, at a minimum, need to be accurate, timely, and 
complete. That is--
     The hospital-submitted data must meet minimum levels of 
reliability through chart audit re-abstractions over all topics. At the 
data element level, there must be an 80 percent agreement

[[Page 28279]]

between the original abstraction and the re-abstraction using the CART 
tool.
     The submitted data must be on schedule, pass all warehouse 
edits, and be successfully accepted into the warehouse.
     Completeness of submitted data will be assessed to ensure 
the number of submitted cases corresponds to the number of bills 
submitted by the hospital to CMS.
    We are planning to publish the most recent 12 months of discharge 
data (4 quarters) for all data accepted into the warehouse and passing 
all validation requirements. For FY 2005, we will publish as much data 
as we have available. Hospitals will have the opportunity to review the 
information prior to posting on the CMS Web site. However, there will 
be no opportunity to withhold the publication of the information. The 
preview will only be to correct obvious errors.
4. Proposed Regulation Change
    We are proposing to establish a new Sec.  412.64(d)(2) to provide 
that, for FYs 2005, 2006, and 2007, the applicable percentage change is 
reduced by 0.4 percentage point in the case of any subsection (d) 
hospital that does not submit data to CMS on the 10 quality indicators 
established by the Secretary as of November 1, 2003. Any reduction will 
apply only to the fiscal year involved, and will not be taken into 
account in computing the applicable percentage increase for a 
subsequent fiscal year. We will be modifying our payment software to 
apply the correct updates to hospitals, depending on whether they 
submit the requisite data on the 10 quality indicators. We show the 
different standardized amounts that apply to hospitals that submit the 
requisite quality data, and to hospitals that do not, in the Addendum 
to this proposed rule.

F. Proposed Revision of the Labor-Related Share for the Hospital Wage 
Index (Sec.  412.64(h))

[If you choose to comment on issues in this section, please include the 
caption ``Labor-Related Share'' at the beginning of your document.]
    As discussed in section III. of the preamble of this proposed rule, 
section 1886(d)(3)(E) of the Act directs the Secretary to adjust the 
proportion of the national prospective payment system base payment 
rates that are attributable to wages and wage-related costs by a factor 
that reflects the relative differences in labor costs among geographic 
areas. It also directs the Secretary to estimate from time to time the 
proportion of hospital costs that are labor-related. The portion of 
hospital costs attributable to wages and wage-related costs is referred 
to as the labor-related share. The labor-related share of the 
prospective payment rate is adjusted by an index of relative labor 
costs, which is referred to as the wage index. In the past, we have 
defined the labor-related share for prospective payment acute care 
hospitals as the national average proportion of operating costs that 
are related to, influenced by, or vary with the local labor market. The 
labor-related share for the acute care hospital inpatient prospective 
payment system has been calculated as the sum of the weights for wages 
and salaries, fringe benefits, nonmedical professional fees, contract 
labor, postage, and labor-intensive services. For FY 2004, the labor 
share of the hospital wage index was established at 71.066 percent.
    Section 403 of Pub. L. 108-173 amended section 1886(d)(3)(E) of the 
Act to provide that the Secretary must use 62 percent as the labor-
related share unless application of this percentage ``would result in 
lower payments than would otherwise be made.'' However, this provision 
of Pub. L. 108-173 did not change the legal requirement that the 
Secretary estimate ``from time to time'' the proportion of hospitals' 
costs that are ``attributable to wages and wage-related costs.'' In 
fact, section 404 of Pub. L. 108-173 requires the Secretary to develop 
a frequency for revising the weights used in the hospital market 
basket, including the labor share, to reflect the most current data 
more frequently than once every 5 years. Section 404 further requires 
us to include in the final IPPS rule for FY 2006 an explanation of the 
reasons for, and options considered, in determining such frequency.
    Under section III. of this preamble, we discuss our proposed 
implementation of section 1886(d)(3)(E) of the Act, as amended by 
section 403, as it applies to the development of the proposed FY 2005 
wage index. In this section IV.F. of the preamble, we are proposing to 
incorporate the provisions of section 403 of Pub. L. 108-173 under a 
new Sec.  412.64(h). Specifically, we are proposing to specify that CMS 
will adjust the proportion of the Federal rate for inpatient operating 
costs that are attributable to wages and labor-related costs for area 
differences in hospital wage levels by a factor (established by CMS 
based on survey data) reflecting the relative level of hospital wages 
and wage-related costs in the geographic area (that is, urban or rural 
area as determined the regulations) of the hospital compared to the 
national average level of hospital wages and wage-related costs. The 
wage index would continue to be updated annually. In addition, we are 
proposing to specify that CMS will determine the proportion of the 
Federal rate that is attributable to wages and labor-related costs from 
time to time, employing a methodology that is described in the annual 
regulation updating the system of payment for inpatient hospital 
operating costs. However, CMS would employ 62 percent as the proportion 
of the rate that is adjusted for the relative level of hospital wages 
and wage-related costs, unless employing that percentage would result 
in lower payments for the hospital than employing the proportion 
determined under the methodology described in the preceding sentence.

G. Wage Index Adjustment for Commuting Patterns of Hospital Employees 
(Proposed New Sec.  412.64(i))

[If you choose to comment on issues in this section, please include the 
caption ``Out-Migration of Hospital Employees'' at the beginning of 
your document.]
    As discussed in section III.G.2.e. of this preamble, section 505 of 
Pub. L. 108-173 established new section 1886(d)(13) of the Act. The new 
section 1886(d)(13) requires that the Secretary establish a new process 
to make adjustments to the hospital wage index based on commuting 
patterns of hospital employees. The process provides for an increase in 
the wage index for hospitals located in certain counties that have a 
high percentage of hospital employees who reside in the county but work 
in a different area with a higher wage index. These adjustments to the 
wage index are effective for 3 years beginning with discharges 
occurring on or after October 1, 2004. Adjustments under this provision 
are not subject to the budget neutrality requirements at section 
1886(d)(3)(E) or section 1886(d)(8)(D) of the Act.
    Under section III.G.3.e of this preamble, we discuss the proposed 
implementation of the provisions of section 505 in developing the 
proposed FY 2005 wage index and the proposed applicable adjustments to 
that index. We are proposing in this section IV.G. of the preamble to 
incorporate the provisions of section 505 in the regulations by adding 
a new Sec.  412.64(i).
    The Secretary is required to establish criteria to identify 
``qualifying counties,'' and hospitals located in the qualifying 
counties are to receive an adjustment to their wage index. To implement 
this provision, we are proposing to use commuting data compiled by the 
U.S. Census Bureau based on a special tabulation of Census 2000 
journey-to-work data. This

[[Page 28280]]

information is gathered from responses to the Census long-form (sample) 
questions on where people worked. The resulting county-of-residence by 
county-of-work commuter flow file uses 108 Industrial Structure codes, 
developed by the Bureau of Economic Analysis. Using these data, we are 
able to identify the total number of hospital workers who live in each 
county and the number of workers within that county who commute to 
hospitals in other counties.
    Section 1886(d)(13)(B)(i) of the Act directs the Secretary to 
establish a threshold percentage difference between the county's wage 
index and a weighted wage index of the surrounding higher wage index 
areas that must be met in order for the county to qualify. We are 
proposing to establish this threshold at any percentage greater than 
zero, such that any increase in the wage index resulting from this 
provision that is greater than zero percent would be recognized. 
Section 1886(d)(13)(B)(ii) of the Act specifies that the Secretary is 
to establish the minimum out-migration threshold in order to qualify, 
which may not be less than 10 percent. We are proposing to establish 
the out-migration threshold at the minimum 10 percent.
    Section 1886(d)(13)(B)(iii) of the Act requires that the average 
hourly wage for all hospitals in the county must be equal to or exceed 
the average hourly wage for all hospitals in the labor market area. 
Section 1886(d)(13)(E) of the Act indicates this process may be based 
on the process used by the MGCRB. This section also gives the Secretary 
the authority to require hospitals to submit data necessary to 
implement this provision, or to use other data sources as available. To 
compute this requirement, we are proposing to determine the average of 
hospitals' 3-year average hourly wage for all hospitals in a given 
county. We would compare this county average hourly wage to the 3-year 
average hourly wage for the labor market area where the county is 
located. We are proposing to use the 3-year average hourly wage because 
we believe it gives a better estimate for the wages paid by a given 
hospital over a period of time. This statutory requirement limits the 
number of eligible counties.
    Section 1886(d)(13)(A) of the Act allows the Secretary to establish 
the process through application or otherwise for this adjustment to the 
wage index. We are proposing not to use an application process. Rather, 
all hospitals located in qualifying counties would automatically 
receive the increase in wage index, unless the hospital has already 
been reclassified to another geographic area for purposes of wage index 
or standardized amount. This wage index increase would be effective for 
a period of 3 fiscal years, FY 2005 through FY 2007.
    Hospitals receiving this wage index increase under section 
1886(d)(13)(F) of the Act are not eligible for reclassification under 
section 1886(d)(8) or section 1886(d)(10) of the Act. Therefore, 
consistent with Sec.  412.273, hospitals that have been reclassified by 
the MGCRB are permitted to withdraw their applications within 45 days 
of the publication of this proposed rule in the Federal Register. 
Similarly, hospitals may terminate an existing 3-year reclassification 
within 45 days of the publication of this proposed rule. Hospitals that 
withdraw their application for reclassification would then 
automatically receive the commuting wage index adjustment. The request 
for withdrawal of an application for reclassification or termination of 
an existing 3-year reclassification that would be effective in FY 2005 
must be received by the MGCRB within 45 days of the publication of this 
proposed rule.

H. Additional Payments for New Medical Services and Technology: 
Proposed Policy Changes (Sec. Sec.  412.87 and 412.88)

[If you choose to comment on issues in this section, please include the 
caption ``New Technology Threshold'' at the beginning of your 
document.]
    As discussed in section II.D. of this proposed rule, sections 
1886(d)(5)(K) and (L) of the Act establish a process of identifying and 
ensuring adequate payment for new medical services and technologies 
under the IPPS, effective for discharges beginning on or after October 
1, 2001. Section 1886(d)(5)(K)(ii)(I) of the Act specifies that the 
process must apply to a new medical service or technology if, ``based 
on the estimated costs incurred with respect to discharges involving 
such service or technology, the DRG prospective payment rate otherwise 
applicable to such discharges under this subsection is inadequate.'' 
Section 1886(d)(5)(K)(vi) of the Act specifies that a medical service 
or technology will be considered ``new'' if it meets criteria 
established by the Secretary after notice and opportunity for public 
comment.
    Sections 1886(d)(5)(K)(ii) through (d)(5)(K)(vi) of the Act further 
provide--
     For an additional payment for new medical services and 
technology in an amount beyond the DRG prospective payment system 
payment rate that adequately reflects the estimated average costs of 
the service or technology.
     That the requirement for an additional payment for a new 
service or technology may be satisfied by means of a new technology 
group (described in section 1886(d)(5)(L) of the Act), an add-on 
payment, a payment adjustment, or any other similar mechanism for 
increasing the amount otherwise payable with respect to a discharge.
     For the collection of data relating to the cost of a new 
medical service or technology for not less than 2 years and no more 
than 3 years after an appropriate inpatient hospital services code is 
issued. The statute further provides that discharges involving new 
services or technology that occur after the collection of these data 
will be classified within a new or existing DRG group with a weighting 
factor derived from cost data collected for discharges occurring during 
such period.
    Section 412.87(b)(1) of our existing regulations provides that a 
new technology will be an appropriate candidate for an additional 
payment when it represents an advance in medical technology that 
substantially improves, relative to technologies previously available, 
the diagnosis or treatment of Medicare beneficiaries (see the September 
7, 2001 final rule (66 FR 46902)). Section 412.87(b)(3) provides that, 
to receive special payment treatment, new technologies meeting this 
clinical definition must be demonstrated to be inadequately paid 
otherwise under the DRG system.
    In the August 1, 2003 final IPPS rule, we revised the threshold 
amount for determining if payment for a new technology or medical 
service is inadequate, effective for FY 2005 and subsequent fiscal 
years (68 FR 45392). We lowered the previously established threshold of 
1 standard deviation to 75 percent of 1 standard deviation (based on 
the logarithmic values of the charges) beyond the geometric mean 
standardized charges for all cases in the DRG to which the new 
technology is assigned (or the case-weighted average of all relevant 
DRGs, if the new technology occurs in many different DRGs), transformed 
back to charges.
    Section 503(b) of Pub. L. 108-173 amended section 
1886(d)(5)(K)(ii)(I) of the Act to specify that in determining whether 
payments for a new technology or medical service are inadequate, the 
Secretary is to determine and apply a threshold amount that is the 
``lesser of 75 percent of the standardized amount (increased to reflect 
the difference between cost and charges) or 75 percent of 1 standard 
deviation for the DRG involved.'' As a result of enactment of section 
503(b), we are proposing to revise our regulations at Sec.  
412.87(b)(3)

[[Page 28281]]

to incorporate the revised threshold amount.
    The report language accompanying section 533 of Pub. L. 106-554 
indicated Congressional intent that the Secretary implement the new 
mechanism on a budget neutral basis (H.R. Conf. Rep. No. 106-1033, 
106th Cong., 2nd Sess., at 897 (2000)). Section 1886(d)(4)(C)(iii) of 
the Act requires that the adjustments to annual DRG classifications and 
relative weights must be made in a manner that ensures that aggregate 
payments to hospitals are not affected. Therefore, in the past, we 
accounted for projected payments under the new medical service and 
technology provision during the upcoming fiscal year at the same time 
we estimated the payment effect of changes to the DRG classifications 
and recalibration. The impact of additional payments under this 
provision was then included in the budget neutrality factor, which was 
applied to the standardized amounts and the hospital-specific amounts.
    To balance appropriately the Congressional intent to increase 
Medicare payments for eligible new technologies with concern that the 
total size of those payments not result in significantly reduced 
payments for other cases, we set a target limit for estimated add-on 
payments for new technology under the provisions of sections 
1886(d)(5)(K) and (L) of the Act at 1.0 percent of estimated total 
operating prospective payments. In accordance with Sec.  412.88(c) of 
the regulations, if the target limit was exceeded, we would reduce the 
level of payments for approved technologies across the board, to ensure 
estimated payments did not exceed the limit.
    Section 503(d)(1) of Pub. L. 108-173 amended section 
1886(d)(5)(K)(ii)(III) of the Act to remove the budget neutrality 
provision for add-on payments for a new medical service or technology. 
Section 503(d)(2) specifies that ``There shall be no reduction or other 
adjustment to payments under section 1886 of the Social Security Act 
because an additional payment is provided'' for new technology. 
Accordingly, as a result of the enactment of section 503(d) of Pub. L. 
108-173, we will no longer include the impact of additional payments 
for new medical services and technologies in the budget neutrality 
factor. In addition, we are proposing to delete Sec.  412.88(c) of the 
regulations.

I. Rural Referral Centers (Sec.  412.96)

[If you choose to comment on issues in this section, please include the 
caption ``Rural Referral Centers'' at the beginning of your document.]
    Under the authority of section 1886(d)(5)(C)(i) of the Act, the 
regulations at Sec.  412.96 set forth the criteria that a hospital must 
meet in order to qualify under the IPPS as a rural referral center. For 
discharges occurring before October 1, 1994, rural referral centers 
received the benefit of payment based on the other urban standardized 
amount rather than the rural standardized amount. Although the other 
urban and rural standardized amounts are the same for discharges 
occurring on or after October 1, 1994, rural referral centers continue 
to receive special treatment under both the DSH payment adjustment and 
the criteria for geographic reclassification.
    Section 402 of Pub. L. 108-173 raised the DSH adjustment for other 
rural hospitals with less than 500 beds and rural referral centers. 
Other rural hospitals with less than 500 beds are subject to a 12-
percent cap on DSH payments. Rural referral centers are not subject to 
the 12.0 percent cap on DSH payments that is applicable to other rural 
hospitals (with the exception of rural hospitals with 500 or more 
beds). Rural referral centers are not subject to the proximity criteria 
when applying for geographic reclassification, and they do not have to 
meet the requirement that a hospital's average hourly wage must exceed 
106 percent of the average hourly wage of the labor market area where 
the hospital is located.
    As discussed in Federal Register documents at 62 FR 45999 and 63 FR 
26325, under section 4202 of Pub. L. 105-33, a hospital that was 
classified as a rural referral center for FY 1991 is to be considered 
as a rural referral center for FY 1998 and later years so long as that 
hospital continues to be located in a rural area and does not 
voluntarily terminate its rural referral center status. Effective 
October 1, 2000, if a hospital located in what is now an urban area was 
ever a rural referral center, it is reinstated to rural referral center 
status (65 FR 47089). Otherwise, a hospital seeking rural referral 
center status must satisfy the applicable criteria.
    One of the criteria under which a hospital may qualify as a rural 
referral center is to have 275 or more beds available for use (Sec.  
412.96(b)(1)(ii)). A rural hospital that does not meet the bed size 
requirement can qualify as a rural referral center if the hospital 
meets two mandatory prerequisites (a minimum case-mix index and a 
minimum number of discharges) and at least one of three optional 
criteria (relating to specialty composition of medical staff, source of 
inpatients, or referral volume) (Sec.  412.96(c)(1) through (c)(5)). 
(See also the September 30, 1988 Federal Register (53 FR 38513)). With 
respect to the two mandatory prerequisites, a hospital may be 
classified as a rural referral center if--
     The hospital's case-mix index is at least equal to the 
lower of the median case-mix index for urban hospitals in its census 
region, excluding hospitals with approved teaching programs, or the 
median case-mix index for all urban hospitals nationally; and
     The hospital's number of discharges is at least 5,000 per 
year, or, if fewer, the median number of discharges for urban hospitals 
in the census region in which the hospital is located. (The number of 
discharges criterion for an osteopathic hospital is at least 3,000 
discharges per year, as specified in section 1886(d)(5)(C)(i) of the 
Act.)
1. Case-Mix Index
    Section 412.96(c)(1) provides that CMS will establish updated 
national and regional case-mix index values in each year's annual 
notice of prospective payment rates for purposes of determining rural 
referral center status. The methodology we use to determine the 
proposed national and regional case-mix index values is set forth in 
regulations at Sec.  412.96(c)(1)(ii). The proposed national median 
case-mix index value for FY 2005 includes all urban hospitals 
nationwide, and the proposed regional values for FY 2005 are the median 
values of urban hospitals within each census region, excluding those 
hospitals with approved teaching programs (that is, those hospitals 
receiving indirect medical education payments as provided in Sec.  
412.105). These proposed values are based on discharges occurring 
during FY 2003 (October 1, 2002 through September 30, 2003) and include 
bills posted to CMS' records through December 2003.
    We are proposing that, in addition to meeting other criteria, if 
they are to qualify for initial rural referral center status for cost 
reporting periods beginning on or after October 1, 2004, rural 
hospitals with fewer than 275 beds must have a case-mix index value for 
FY 2003 that is at least--
     1.3550; or
     The median case-mix index value (not transfer-adjusted) 
for urban hospitals (excluding hospitals with approved teaching 
programs as identified in Sec.  412.105) calculated by CMS for the 
census region in which the hospital is located.
    The proposed median case-mix index values by region are set forth 
in the following table:

[[Page 28282]]



------------------------------------------------------------------------
                                                             Case-mix
                         Region                            index value.
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT).................          1.2400
2. Middle Atlantic (PA, NJ, NY).........................          1.2387
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)..          1.3249
4. East North Central (IL, IN, MI, OH, WI)..............          1.2661
5. East South Central (AL, KY, MS, TN)..................          1.2777
6. West North Central (IA, KS, MN, MO, NE, ND, SD)......          1.1787
7. West South Central (AR, LA, OK, TX)..................          1.3043
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)............          1.3527
9. Pacific (AK, CA, HI, OR, WA).........................          1.3095
------------------------------------------------------------------------

    The preceding numbers will be revised in the final rule to the 
extent required to reflect the updated FY 2001 MedPAR file, which will 
contain data from additional bills received through March 31, 2002.
    Hospitals seeking to qualify as rural referral centers or those 
wishing to know how their case-mix index value compares to the criteria 
should obtain hospital-specific case-mix index values (not transfer-
adjusted) from their fiscal intermediaries. Data are available on the 
Provider Statistical and Reimbursement (PS&R) System. In keeping with 
our policy on discharges, these case-mix index values are computed 
based on all Medicare patient discharges subject to DRG-based payment.
2. Discharges
    Section 412.96(c)(2)(i) provides that CMS will set forth the 
national and regional numbers of discharges in each year's annual 
notice of prospective payment rates for purposes of determining rural 
referral center status. As specified in section 1886(d)(5)(C)(ii) of 
the Act, the national standard is set at 5,000 discharges. We are 
proposing to update the regional standards based on discharges for 
urban hospitals' cost reporting periods that began during FY 2001 (that 
is, October 1, 2000 through September 30, 2001), which is the latest 
available cost report data we have at this time. In last year's final 
rule we inadvertently indicated that we relied upon data regarding 
discharges occurring during FY 2002. However, we have now determined 
that our values were based upon data regarding discharges occurring 
during FY 2000.
    Therefore, we are proposing that, in addition to meeting other 
criteria, a hospital, if it is to qualify for initial rural referral 
center status for cost reporting periods beginning on or after October 
1, 2004, must have as the number of discharges for its cost reporting 
period that began during FY 2001 a figure that is at least--
     5,000 (3,000 for an osteopathic hospital); or
     The median number of discharges for urban hospitals in the 
census region in which the hospital is located, as indicated in the 
following table:

------------------------------------------------------------------------
                                                             Number of
                         Region                             discharges.
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT).................           8,212
2. Middle Atlantic (PA, NJ, NY).........................           9,574
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)..          10,303
4. East North Central (IL, IN, MI, OH, WI)..............           8,684
5. East South Central (AL, KY, MS, TN)..................           7,624
6. West North Central (IA, KS, MN, MO, NE, ND, SD)......           6,789
7. West South Central (AR, LA, OK, TX)..................           6,485
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)............           8,489
9. Pacific (AK, CA, HI, OR, WA).........................           6,274
------------------------------------------------------------------------

    These numbers will be revised in the final rule based on the latest 
available cost report data.
    We reiterate that if an osteopathic hospital is to qualify for 
rural referral center status for cost reporting periods beginning on or 
after October 1, 2004, the hospital would be required to have at least 
3,000 discharges for its cost reporting period that began during FY 
2001.

J. Additional Payments to Hospitals With High Percentage of End-Stage 
Renal Disease (ESRD) Discharges (Sec.  412.104)

[If you choose to comment on issues in this section, please include the 
caption ``ESRD Discharges'' at the beginning of your document.]
    Under existing regulations at Sec.  412.104(a), CMS provides for 
additional Medicare payments to a hospital for inpatient dialysis 
provided to Medicare beneficiaries with end-stage renal disease (ESRD) 
if the hospital's ESRD Medicare beneficiary discharges are 10 percent 
or more of its total Medicare discharges. This provision states that 
discharges classified into DRG 302 (Kidney Transplant), DRG 316 (Renal 
Failure), or DRG 317 (Admit for Renal Dialysis) are excluded for 
purposes of determining a hospital's eligibility for this special 
payment. We have been informed that, under this provision, hospitals 
may be counting all discharges of ESRD Medicare beneficiaries towards 
determining the 10 percent factor rather than counting only those 
discharges where the ESRD beneficiary received inpatient dialysis.
    When we established this regulation in the August 31, 1984 final 
rule (49 FR 34747), we stated that this special payment was intended to 
ameliorate those circumstances in which the concentration of ESRD 
beneficiaries receiving inpatient dialysis may be such that the 
hospital would not be able to absorb the entire expense with revenue 
from other less costly cases. We further stated that we believed those 
few hospitals most extremely impacted by the ESRD beneficiary 
population should be afforded some protection against the chance of 
encountering inpatient dialysis expenses that could not be offset by 
revenue from cases in which the DRG payment was greater than the 
hospital's cost. Because this special payment is intended to limit the 
adverse impact on hospitals delivering inpatient dialysis services to 
ESRD beneficiaries, we firmly believe that only those

[[Page 28283]]

discharges of beneficiaries who receive dialysis services during an 
inpatient stay should be counted in determining a hospital's 
eligibility for the additional payment. After a careful review of Sec.  
412.104(a), we acknowledge that hospitals may require additional 
guidance in appropriately determining their eligibility for this 
special payment. Therefore, we are proposing to revise Sec.  412.104(a) 
to make it clear that, in determining a hospital's eligibility for the 
additional Medicare payment, only discharges involving ESRD Medicare 
beneficiaries who have received a dialysis treatment during an 
inpatient hospital stay are to be counted. This proposed change would 
be applied prospectively, effective for cost reporting periods 
beginning on or after October 1, 2004.

K. Indirect Medical Education (IME) Adjustment (Sec.  412.105)

[If you choose to comment on issues in this section, please include the 
caption ``IME Adjustment'' at the beginning of your document.]
1. IME Adjustment Factor Formula Multipliers (Section 502(a) of Public 
Law 108-173 and Existing Sec.  412.105(d)(3)(vii) and Proposed Sec.  
412.105(d)(3)(viii) Through (d)(3)(xii) of the Regulations)
    Section 1886(d)(5)(B) of the Act provides that prospective payment 
hospitals that have residents in an approved graduate medical education 
(GME) program receive an additional payment to reflect the higher 
indirect costs of teaching hospitals relative to nonteaching hospitals. 
The regulations regarding the calculation of this additional payment, 
known as the indirect medical education (IME) adjustment, are located 
at Sec.  412.105. The IME adjustment is based in part on the applicable 
IME adjustment factor. The IME adjustment factor is calculated using a 
hospital's ratio of residents to beds, which is represented as r, and a 
formula multiplier, which is represented as c, in the following 
equation: c x [{1 + r{time}  \.405\ -1]. The formula is traditionally 
described in terms of a certain percentage increase in payment for 
every 10-percent increase in the resident-to-bed ratio.
    Section 502(a) of Pub. L. 108-173 modified the formula multiplier c 
to be used in the calculation of the IME adjustment. Prior to enactment 
of Pub. L. 108-173, the formula multiplier was fixed at 1.35 for 
discharges occurring during FY 2003 and thereafter. Section 502(a) 
modifies the formula multiplier beginning midway through FY 2004 and 
provides for a new schedule of formula multipliers for FYs 2005 and 
thereafter as follows:
     For discharges occurring on or after April 1, 2004, and 
before October 1, 2004, the formula multiplier is 1.47.
     For discharges occurring during FY 2005, the formula 
multiplier is 1.42.
     For discharges occurring during FY 2006, the formula 
multiplier is 1.37.
     For discharges occurring during FY 2007, the formula 
multiplier is 1.32.
     For discharges occurring during FY 2008 and fiscal years 
thereafter, the formula multiplier is 1.35.
    We are proposing to revise Sec.  412.105(d)(3)(vii) and add Sec.  
412.105(d)(3)(viii) through (d)(3)(xii) to incorporate these changes in 
the formula multipliers.
2. IME Adjustment Formula Multiplier for Redistributed FTE Resident 
Slots (Section 422(b)(1)(C) of Pub. L. 108-173)
    Under new section 1886(h)(7)(B) of the Act, added by section 422(a) 
of Pub. L. 108-173, a hospital may receive an increase in its FTE 
resident cap as a result of the agency's redistribution of unused 
resident positions. (This provision is discussed in detail in section 
IV.J.2. of the preamble of this proposed rule.) Section 422(b)(1)(C) of 
Pub. L. 108-173 amended section 1886(d)(5)(B) of the Act to add a new 
subclause (ix) to provide that, for discharges occurring on or after 
July 1, 2005, for a hospital whose FTE resident cap is increased as a 
result of a redistribution of unused resident positions, the IME 
adjustment factor is to be calculated using a formula multiplier of 
0.66 with respect to any additional residents counted by the hospital 
as a result of that increase in the hospital's FTE resident cap. Thus, 
we are proposing that a hospital that counts additional residents as a 
result of an increase in its FTE resident cap under section 
1886(h)(7)(B) of the Act would receive IME payments based on the sum of 
two different IME adjustment factors: (1) An IME adjustment factor that 
is calculated using the schedule of formula multipliers described in 
section IV.G.1. of this preamble established by section 502(a) of Pub. 
L. 108-173, and which also uses the hospital's number of FTE residents, 
not including residents attributable to an FTE cap increase under 
section 1886(h)(7)(B) of the Act, in the numerator of the resident-to-
bed ratio; and (2) an IME adjustment factor that is calculated using 
the formula multiplier of 0.66, and the additional number of FTE 
residents that are attributable to the increase in the hospital's FTE 
resident cap under section 1886(h)(7)(B) of the Act in the numerator of 
the resident-to-bed ratio. (The number of available beds used in the 
denominator would be the same for both IME adjustments.)
    We note that section 422(b) of Pub. L. 108-173, which addresses the 
application of the IME adjustment to the residents counted as a result 
of an increase in a hospital's FTE resident cap under section 422(a), 
makes no reference to section 1886(d)(5)(B)(vi) of the Act. That is, 
the statute does not provide for an exclusion from application of the 
cap on the resident-to-bed ratio at section 1886(d)(5)(B)(vi)(I) of the 
Act or from application of the rolling average count at section 
1886(d)(5)(B)(vi)(II) of the Act for residents added as a result of FTE 
cap increases under section 1886(h)(7)(B). There is no specific 
pronouncement in section 422 exempting residents counted as a result of 
the FTE resident cap increases under section 422(a) from the cap on the 
resident-to-bed ratio and the rolling average, and we see no apparent 
reason to treat those residents differently for purposes of these two 
provisions. Therefore, we are proposing to require that if a hospital 
increases its IME FTE count of residents as a result of section 
1886(h)(7)(B) of the Act, those FTE residents are immediately subject 
to the cap on the resident-to-bed ratio and the rolling average 
calculation. Furthermore, we believe that, given potentially 
significant shifts of FTE positions among hospitals as a result of the 
new section 1886(h)(7) of the Act, the inclusion of FTE residents added 
as a result of section 1886(h)(7)(B) of the Act in the cap on the 
resident-to-bed ratio and in the rolling average introduces a measure 
of stability and predictability, and mitigates radical shifts in IME 
payments from period to period. Thus, a hospital's increase in IME 
payment may be delayed for one year to the extent that the resident-to-
bed ratio for the current cost reporting period is capped by the 
resident-to-bed ratio for the previous cost reporting period. Further, 
the additional FTE residents would be phased in over a 3-year period in 
the hospital's FTE count because they are immediately included in the 
rolling average calculation.
    The following illustrates how the IME payment would be calculated 
for a hospital that receives an increase to its FTE resident cap as a 
result of section 1886(h)(7)(B) of the Act. For example, Hospital A has 
a fiscal year end (FYE) of September 30, and a 1996 IME FTE cap of 20 
FTEs. During its FYEs September 30, 2003, September 30, 2004, and 
September 30, 2005, Hospital A trains 25 FTE residents. Effective July 
1, 2005, under section 1886(h)(7)(B) of

[[Page 28284]]

the Act, Hospital A receives an increase to its IME 1996 cap of 5 FTEs, 
for a total adjusted IME cap of 25 FTEs. Hospital A has maintained an 
available bed count of 200 beds in FYE September 30, 2004 and 
throughout FYE September 30, 2005. For the FYE September 30, 2005 cost 
report, the IME adjustment factor is calculated as follows:
    Step 1. For discharges occurring on October 1, 2004, through 
September 30, 2005 for residents NOT counted pursuant to section 
1886(d)(5)(B)(ix) of the Act:
     Rolling average count of FTE residents: 20+20+20/3 = 20.
     Current year resident-to-bed ratio: 20/200 = .10.
     Cap on resident-to-bed ratio (from prior year): 20/200 = 
.10.
     Compare, and use the lower of, prior year resident-to-bed 
ratio and current year resident-to-bed ratio: .10 = .10.
     Compute IME adjustment factor: 1.42 x [{1 + .10{time}  
\.405\ -1] = 0.0559.
    Step 2. For discharges occurring on July 1, 2005 through September 
30, 2005 for residents counted pursuant to section 1886(d)(5)(B)(ix) of 
the Act:
     Rolling average count of FTE residents: 25+20+20/3 = 21.7.
     Resident-to-bed ratio for 7/1/05-9/30/05: 21.7/200 = .11.
     Cap on resident-to-bed ratio (from prior year): 20/200 = 
.10.
     Compare, and use the lower of, prior year resident-to-bed 
ratio and resident-to-bed ratio for 7/1/05-9/30/05: .10 < .11. Capped 
by prior year ratio of .10.
     Compute IME adjustment factor: 0.66 x [{1 + 0{time}  
\.405\ -1] = 0.0.
    In this example, the addition of 5 FTE residents under section 
1886(h)(7)(B) caused Hospital A's resident-to-bed ratio for discharges 
occurring on July 1, 2005, through September 30, 2005, to exceed the 
resident-to-bed ratio of .10 from the prior year. Since the multiplier 
of 0.66 is to be used for determining IME payment ``insofar as an 
additional payment amount * * * is attributable to resident positions 
redistributed to a hospital * * *'' under section 1886(d)(5)(B)(v) of 
the Act, as amended by section 422(b)(1)(C) of Pub. L. 108-173, 
Hospital A does not receive any IME payment attributable to the 5 FTE 
residents added as a result of section 1886(h)(7)(B) of the Act for 
discharges occurring on July 1, 2005, through September 30, 2005. As 
shown under the fifth bullet point in Step 2 of the example above, a 
resident-to-bed ratio of zero is used to compute the IME adjustment for 
FTE residents attributable to increases in the FTE resident cap under 
section 1886(h)(7)(B) of the Act for discharges occurring on or after 
July 1, 2005 and on or before September 30, 2005. The ratio of .10 
would not be used to compute the IME adjustment for FTE residents 
attributable to an increase in the FTE resident cap under section 
1886(h)(7)(B) because the ratio of .10 is attributable to the 20 FTE 
residents from the prior year, and is not related to residents added 
under section 1886(h)(7)(B) of the Act. (We note that a hospital's 
resident-to-bed ratio in the current year might decrease despite 
residents added as a result of section 1886(h)(7)(B) of the Act, due to 
an increase in the number of available beds in the denominator of the 
current year resident-to-bed ratio. In such a case, because the current 
year ratio would be less than the prior year ratio, the hospital's 
resident-to-bed ratio would not be capped by the prior year resident-
to-bed ratio, and, therefore, the hospital could receive an IME payment 
in the current year (that is, there would not be a 1-year delay) 
relating to residents added under section 1886(h)(7)(B) of the Act).
    However, an increase in the resident-to-bed ratio in the current 
period may establish a higher cap for the following period, and, all 
other things being equal, a hospital could then receive IME payment for 
FTE residents added as a result of section 1886(h)(7)(B) of the Act 
after a 1-year lag. In the example above, Hospital A would receive an 
IME payment for residents added as a result of section 1886(h)(7)(B) of 
the Act in its cost reporting period ending September 30, 2006, as 
follows:
    Step 1. For residents NOT counted pursuant to section 
1886(d)(5)(B)(ix) of the Act:
     Rolling average count of FTE residents: 20+20+20/3 = 20.
     Current year resident-to-bed ratio: 20/200 = .10.
     Cap on resident-to-bed ratio (from prior year): 20/200 = 
.10.
     Compare, and use the lower of, prior year resident-to-bed 
ratio and current year resident-to-bed ratio: .10 = .10.
     Compute IME adjustment factor: 1.37 x [{1 + .10{time}  
\.405\ -1] = 0.0559.
    Step 2. For 5 FTE residents counted pursuant to with section 
1886(d)(5)(B)(ix) of the Act:
     Rolling average count of FTE residents: 25+25+20/3 = 23.3.
     Resident-to-bed ratio for FYE 9/30/06: 23.3/200 = .12.
     Cap on resident-to-bed ratio (from prior year): 25/200 = 
.13.
     Compare, and use the lower of, prior year resident-to-bed 
ratio and current year resident-to-bed ratio: .13 >.12. Current year 
ratio of .12 is the lower of the two.
     Take the difference between the rolling average count of 
FTE residents counted as a result of section 1886(h)(7)(B) of the Act, 
and the rolling average count of FTE residents not counted as a result 
of section 1886(h)(7)(B) of the Act, (rolling average count under step 
2 minus rolling average count under step 1): 23.3-20 = 3.3.
     Compute current year resident-to-bed ratio attributable to 
residents added under section 1886(h)(7)(B): 3.3/200 = 0.02.
     Compute IME adjustment factor: 0.66 x [{1 + .02{time}  
\.405\ -1] = 0.0053.
    Step 3. Compute IME payment for FYE September 30, 2006: [Total DRG 
payments for discharges occurring on October 1, 2005 through September 
30, 2006] x [0.0592] (that is, 0.0539 + 0.0053).
    We are proposing to revise Sec.  412.105 to incorporate these 
changes under proposed new paragraph (d)(4), proposed new paragraph 
(e)(2), proposed new paragraph (f)(1)(iv)(B), and proposed added new 
last sentence of paragraph (f)(1)(v).
3. Technical Changes
     In Sec.  412.105(a)(1), introductory text, we include a 
cross-reference to ``paragraph (f) and (h)'' of Sec.  412.105. 
Paragraph (h) no longer exists in this section. Therefore, we are 
proposing to remove the cross-reference to paragraph (h).
     In Sec.  412.105(f)(1)(i)(A), we reference national 
organizations listed in Sec.  415.200(a). The cross-reference to Sec.  
415.200(a) is incorrect. We are proposing to correct the cross-
reference to read ``Sec.  415.152.''
     In section IV.O. of this preamble, we discuss our proposal 
to redesignate existing Sec.  413.86 governing payments for direct 
costs of GME to nine separate sections. Many of the paragraphs in the 
existing Sec.  413.86 are cited in Sec.  412.105 governing the IME 
adjustment. We are proposing to make changes to the cross-reference in 
Sec.  412.105 to conform them to these proposed redesignated separate 
sections.

L. Payment to Disproportionate Share Hospitals (DSHs) (Section 402 of 
Pub. L. 108-173 and Sec.  412.106 of Existing Regulations)

[If you choose to comment on issues in this section, please include the 
caption ``DSH Adjustment'' at the beginning of your document.]

[[Page 28285]]

1. Enhanced DSH Adjustment for Rural Hospitals and Urban Hospitals With 
Fewer Than 100 Beds
    Section 1886(d)(5)(F) of the Act provides for additional payments 
to subsection (d) hospitals that serve a disproportionate share of low-
income patients. The Act specifies two methods for a hospital to 
qualify for the Medicare disproportionate share hospital (DSH) 
adjustment. Under the first method, hospitals that are located in an 
urban area and have 100 or more beds may receive a DSH payment 
adjustment if the hospital can demonstrate that, during its cost 
reporting period, more than 30 percent of its net inpatient care 
revenues are derived from State and local government payments for care 
furnished to indigent patients. These hospitals are commonly known as 
``Pickle hospitals.'' The second method, which is also the most 
commonly used method for a hospital to qualify, is based on a complex 
statutory formula under which payment adjustments are based on the 
level of the hospital's DSH patient percentage, which is the sum of two 
computations. The first computation includes the number of patient days 
that are furnished to patients who were entitled to both Medicare Part 
A and Supplemental Security Income (SSI) benefits. This number is 
divided by the total number of patient days that are associated with 
patients entitled to benefits under Medicare Part A. The second 
computation includes hospital patient days that are furnished to 
patients who, for those days, were eligible for Medicaid but were not 
entitled to benefits under Medicare Part A. This number is divided by 
the number of total hospital inpatient days in the same period.
    Hospitals whose DSH patient percentage exceeds 15 percent are 
eligible for a DSH payment adjustment (prior to April 1, 2001, the 
qualifying DSH patient percentage varied, in part, by the number of 
beds (66 FR 39882)). The DSH payment adjustment may vary based on the 
DSH patient percentage and the type of hospital. The statute provides 
for different payment adjustments for urban hospitals with 100 or more 
beds and rural hospitals with 500 or more beds, hospitals that qualify 
as RRCs or SCHs, and other hospitals.
    Effective April 1, 2004, section 402 of Public Law 108-173 amended 
section 1886(d)(5)(F) of the Act to revise the formulae used to 
calculate DSH payment adjustments for certain hospitals that qualify 
for the adjustments under the second method. Specifically, under the 
new section 1886(d)(5)(F)(xiv), added by section 402, for hospitals 
that are not large urban or large rural hospitals, DSH payments are 
calculated using the same DSH adjustment formula used for large urban 
hospitals. However, the DSH payment adjustment for most of these 
categories of hospitals, except for hospitals classified as RRCs, 
including RRCs that are also SCHs, is capped at 12 percent. In 
addition, the formula for large urban hospitals with 100 beds or more, 
and large rural hospitals with 500 beds or more, has not been revised 
by section 402. Finally, Pickle hospitals are not affected by this 
change; they will continue to receive a DSH adjustment under the 
alternative formula.
    Effective for discharges occurring on or after April 1, 2004, the 
following DSH payment adjustment formulae apply for the following 
specified categories of hospitals:
     For urban hospitals with fewer than 100 beds and whose 
disproportionate patient percentage is equal to or greater than 15 
percent and less than or equal to 20.2 percent: (Disproportionate 
patient percentage -15 percent) (65 percent) + 2.5 percent.
     For urban hospitals with fewer than 100 beds and whose 
disproportionate patient percentage is greater than 20.2: 
(Disproportionate patient percentage -20.2 percent) (82.5 percent) + 
5.88 percent.
    For urban hospitals with fewer than 100 beds, the maximum DSH 
payment adjustment is 12 percent.
     For rural hospitals that are SCHs and are not RRCs and 
whose disproportionate patient percentage is equal to or greater than 
15 percent and less than or equal to 20.2 percent: (Disproportionate 
patient percentage -15 percent) (65 percent) + 2.5 percent.
     For rural hospitals that are SCHs and are not RRCs and 
whose disproportionate patient percentage is greater than 20.2 percent: 
(Disproportionate patient percentage -20.2 percent) (82.5 percent) + 
5.88 percent.
    For rural hospitals that are SCHs and are not RRCs, the maximum DSH 
payment adjustment is 12 percent.
     For RRCs whose disproportionate patient percentage is 
greater than or equal to 15 percent and less than or equal to 20.2 
percent: (Disproportionate patient percentage -15 percent) (65 percent) 
+ 2.5 percent.
     For RRCs whose disproportionate patient percentage is 
greater than 20.2 percent: (Disproportionate patient percentage -20.2 
percent) (82.5 percent) + 5.88 percent.
     For rural hospitals that are both RRCs and SCHs and whose 
disproportionate patient percentage is greater than or equal to 15 
percent and less than or equal to 20.2 percent: (Disproportionate 
patient percentage -15 percent) (65 percent) + 2.5 percent.
     For rural hospitals that are both RRCs and SCHs whose 
disproportionate patient percentage is greater than 20.2 percent: 
(Disproportionate patient percentage -20.2 percent) (82.5 percent) + 
5.88 percent.
     For rural hospitals with fewer than 500 beds and whose 
disproportionate patient percentage is equal to or greater than 15 
percent and less than or equal to 20.2 percent: (Disproportionate 
patient percentage -15 percent) (65 percent) + 2.5 percent.
     For rural hospitals with fewer than 500 beds and whose 
disproportionate patient percentage is greater than 20.2 percent: 
(Disproportionate patient percentage -20.2 percent) (82.5 percent) + 
5.88 percent.
    For rural hospitals with fewer than 500 beds, the maximum DSH 
payment adjustment is 12 percent.
    These revised formulae, which became effective for discharges 
occurring on or after April 1, 2004, were implemented through a CMS 
One-Time Notification (CR 3158), issued on March 26, 2004. The notice 
describes the changes required by section 402 of Public Law 108-173. In 
this proposed rule, we are proposing to revise Sec. Sec.  412.106 
(d)(2)(ii), (d)(2)(iii), and (d)(2)(iv) of the regulations to reflect 
these statutory revisions.
    The following DSH formulae were not affected by the changes made by 
section 402 of Pub. L. 108-173 and remain in effect:
     For urban hospitals with 100 beds or more and whose 
disproportionate patient percentage is equal to or greater than 15 
percent and less than or equal to 20.2 percent: (Disproportionate 
patient percentage -15 percent) (65 percent) + 2.5 percent.
     For urban hospitals with 100 beds or more and whose 
disproportionate patient percentage is greater than 20.2 percent: 
(Disproportionate patient percentage -20.2 percent) (82.5 percent) + 
5.88 percent.
     For rural hospitals with 500 beds or more and whose 
disproportionate patient percentage is equal to or greater than 15 
percent and less than or equal to 20.2 percent: (Disproportionate 
patient percentage -15 percent) (65 percent) + 2.5 percent.
     For rural hospitals with 500 beds or more and whose 
disproportionate patient percentage is greater than 20.2 percent: 
(Disproportionate patient

[[Page 28286]]

percentage -20.2 percent) (82.5 percent) + 5.88 percent.
2. Proposals for Available Beds and Patient Days for the DSH Adjustment
    In our May 19, 2003 IPPS proposed rule for FY 2004 (68 FR 27201), 
we proposed changes to our policy on counting available beds and 
patient days for the purposes of the DSH adjustment. For the available 
beds policy we proposed changes to counting unoccupied beds and 
observation beds. In regard to patient days, we proposed changes to 
counting dual-eligible and Medicare+Choice (M+C) days. Due to the 
number and nature of the public comments received, we did not respond 
to the public comments on these proposals in the final rule for FY 2004 
(68 FR 45415). We indicated that we would address those public comments 
in a separate document. We plan to address the comments regarding 
unoccupied beds, observation beds, dual eligible days, and M+C days in 
the IPPS final rule for FY 2005.

M. Payment Adjustments for Low-Volume Hospitals (Proposed New Sec.  
412.101)

[If you choose to comment on issues in this section, please include the 
caption ``Low-Volume Hospital Adjustment'' at the beginning of your 
document.]
    Section 406 of Pub. L. 108-173 amended section 1886(d) of the Act 
to add a new subclause (12) to provide for a new payment adjustment to 
account for the higher costs per discharge of low-volume hospitals 
under the IPPS. Section 1886(d)(12)(C)(i) of the Act, as added by 
section 406, defines a low-volume hospital as a ``subsection (d) 
hospital . . . that the Secretary determines is located more than 25 
road miles from another subsection (d) hospital and that has less than 
800 discharges during the fiscal year.'' Section 1886(d)(12)(C)(ii) of 
the Act further stipulates that the term ``discharge'' refers to total 
discharges, and not merely to Medicare discharges. Specifically, the 
term refers to the ``inpatient acute care discharge of an individual 
regardless of whether the individual is entitled to benefits under part 
A.'' Finally, the provision requires the Secretary to determine an 
applicable percentage increase for these low-volume hospitals based on 
the ``empirical relationship'' between ``the standardized cost-per-case 
for such hospitals and the total number of discharges of these 
hospitals and the amount of the additional incremental costs (if any) 
that are associated with such number of discharges.'' The statute thus 
mandates the Secretary to develop an empirically justifiable adjustment 
formula based on the relationship between costs and discharges for 
these low-volume hospitals. The statute also limits the adjustment to 
no more than 25 percent.
    MedPAC has published an analysis of the financial performance and 
cost profiles of low-volume hospitals (MedPAC June 2001 Report to 
Congress, page 66). Its analysis indicated that hospitals with 500 
discharges or less generally have negative Medicare margins. 
Specifically, hospitals with 200 discharges or less have margins of -
16.4 percent, and hospitals with 201 to 500 discharges have margins of 
-2.1 percent. MedPAC's analysis further revealed that hospitals with a 
small volume of discharges have higher costs per discharge than larger 
facilities, after controlling for the other cost factors recognized in 
the payment system. MedPAC's analysis thus indicates that low-volume 
providers are disadvantaged by payment rates based on average volume. 
In analyzing the relationship between costs per case and discharges, 
MedPAC also found that this relationship begins to level off and 
reaches zero variation at around 500 discharges. Therefore, MedPAC 
recommended an adjustment formula in the form of:

1.25 = (.0005*D), if D<500 discharges

    Where 1.25 represents the maximum 25-percent add-on, .0005 is the 
payment adjustment per case (derived by dividing .25 by 500 discharges) 
and ``D'' is the number of discharges.
    Using FY 2001 cost report data, we found an even larger disparity 
than MedPAC found between low-volume providers and their higher-volume 
counterparts. Although Medicare margins remain healthy overall at 9.32 
percent, the Medicare margin for providers with 200 or less discharges 
is -46.26 percent, and the margin for providers with 201 to 500 
discharges is -11.74 percent. We employed a bivariate regression 
analysis to determine the fit between total hospital discharges and 
operating costs from FY 2001. For the final rule, we plan to conduct 
more detailed multivariate analyses. We have some concerns about 
whether we have sufficient information (for example, total hospital 
case-mix) to support valid multivariate analyses. We are continuing to 
examine this in preparation for the final rule.
    We found a very strong correlation between costs and the total 
number of discharges. We then examined the variation in cost-per-case 
among subsection (d) hospitals, using both log and nonlog functions. 
When the analysis was limited to hospitals with fewer than 1,000 
discharges, we found a strong relationship between cost per case and 
low volume. We found that the greatest variation from the mean costs 
per case exists between 1 and 150 discharges, indicating (as MedPAC 
also found) that hospitals with the lowest case volume generally 
experience greater costs per case than hospitals with higher volume. 
However, after about 150 discharges, the trend line begins to level off 
rapidly. The trend line reaches zero variation from mean cost per case 
at approximately 450 discharges (cost per case in log form) or 500 
discharges (nonlog form). Immediately after that point, the trend line 
in both forms becomes negative, while still maintaining a very smooth 
line. Both because of where the trend line crosses zero and because 
there is very little variation from the mean after this point, we 
believe that 500 discharges is the appropriate cutoff for an add-on 
payment under this provision.
    Based on these results, we are proposing to adopt a slightly 
revised version of MedPAC's recommended formula for an add-on payment 
to low-volume hospitals:

Adjustment = 1.25 - (.0005*D), if 00'' in 
order to avoid the anomalous result that a hospital without any 
discharges would qualify for the maximum 25-percent adjustment.
    We note that, under this formula, some hospitals that meet the 
statutory definition of low-volume hospital would receive no 
adjustment. Specifically, hospitals with more than 500 but fewer than 
800 total discharges for the year would receive no adjustment under 
this formula. Despite the statutory definition of a low-volume hospital 
as a subsection (d) hospital that has less than 800 discharges during 
the fiscal year, the statutory provision mandating this adjustment also 
requires the Secretary to determine the empirical relationship between 
the standardized cost-per-case, the total number of discharges, and the 
amount of incremental costs associated with the number of discharges. 
In addition, the provision requires that the applicable percentage 
increase shall be ``based upon such relationship in a manner that

[[Page 28287]]

reflects * * * such incremental costs.'' We believe that the statutory 
language thus gives the Secretary the flexibility to set the percentage 
increase at zero for a given number of discharges if the empirical 
evidence shows that hospitals experience no higher incremental costs 
when they reach that number of discharges. In other words, the statute 
does not require the Secretary to provide an adjustment in the absence 
of empirical evidence that an adjustment is warranted by higher 
incremental costs.
    While the statute defines low-volume hospitals in terms of total 
inpatient acute care discharges and mandates that the adjustment be 
based upon the amount of incremental costs associated with the number 
of discharges, it does not specify whether the count of discharges, 
either for purposes of the definition or the payment adjustment 
formula, should be based on the payment year or some previous year. 
Specifically, the statute defines low-volume hospital as ``for a fiscal 
year, a subsection (d) hospital * * * [that] has less than 800 
discharges during the fiscal year'' (emphasis added).
    We believe that this statutory language gives us the flexibility to 
define which fiscal year to use in determining the number of 
discharges, both for purposes of the definition of ``low-volume 
hospital'' and the payment adjustment formula. Prospective payment 
systems place substantial value on providing hospitals with 
predictability regarding payments. If the determination of whether 
hospitals qualify for low-volume payment adjustments and the 
computation of the payment adjustment amount are based on the number of 
discharges in the current fiscal year, neither CMS nor the hospital 
will know with certainty whether a hospital qualifies for the 
adjustment, or what the amount of the adjustment would be, until after 
the end of the payment year (probably not until the time of final cost 
report settlement for the year). In such circumstances, CMS could be 
faced with the prospect of recouping large overpayments in some cases 
or reimbursing for large underpayments in others. Hospitals would face 
similar uncertainties. On the other hand, if these determinations are 
based on discharge counts from a prior fiscal year, hospitals will know 
in advance whether they will be receiving a payment adjustment and what 
the size of the adjustment will be. Both hospitals and CMS will be able 
to plan accordingly.
    Therefore, we are proposing to base the count of discharges, for 
purposes both of meeting the qualifying definition and determining the 
amount of the payment adjustment, on the number of inpatient acute care 
discharges occurring during the cost reporting period for the most 
recent submitted cost report. We recognize that this policy may 
temporarily disadvantage certain hospitals. For example, a hospital 
that had more than 500 discharges in its most recent submitted cost 
report may have fewer than 500 discharges during the first fiscal year 
in which this low-volume payment adjustment is available. Such a 
hospital would not qualify for the low-volume adjustment during the 
first fiscal year of the adjustment under the policy that we are 
proposing, but it would qualify under alternative policy of basing the 
discharge count on the fiscal year for which payment is made. However, 
even in such cases, the hospital would not be certain about whether it 
would receive an adjustment until its cost report for the payment year 
is settled. In addition, under the policy we are now proposing, the 
hospital would still be certain of receiving a low-volume adjustment 
for any fiscal year in which it had 500 or fewer discharges. The 
hospital would receive the adjustment during the fiscal year after the 
cost report is submitted for any fiscal year in which the hospital had 
500 discharges or less.
    A further implication of this proposed policy is that a new 
hospital would not receive an adjustment during its first year of 
operation, even if it has fewer than 500 total discharges during that 
year. While this approach is somewhat disadvantageous for hospitals in 
their first year of existence, we believe that it is justified in order 
to avoid setting up a settlement process to finalize payments under 
this new proposed adjustment. Therefore, we are proposing that new 
hospitals that meet the distance requirement would not be eligible for 
the adjustment until data become available to determine that the annual 
number of discharges is 500 or less. Under this approach, new hospitals 
would not receive a low-volume adjustment during at least the first 2 
years of their existence. (This is generally the amount of time that 
elapses before submission of a cost report.) This treatment is 
consistent with the treatment of some existing hospitals, for example, 
hospitals that have declining numbers of discharges, and would not be 
eligible for the adjustment until their data show 500 or fewer 
discharges.
    As we noted above, the statute defines a low-volume hospital as a 
subsection (d) hospital that the Secretary determines is located more 
than 25 road miles from another subsection (d) hospital and that has 
less than 800 discharges during the fiscal year. In order to enforce 
the requirement that a qualifying hospital must be located more than 25 
miles from another PPS hospital, we are proposing that a hospital that 
wishes to qualify for the adjustment must provide its fiscal 
intermediary with evidence that it meets this distance requirement. The 
intermediary will then certify, on the basis of the evidence presented 
by the hospital and any other relevant evidence that it may be able to 
develop, that the hospital meets this requirement. Other relevant 
evidence may include maps, mapping software, and inquiries to State and 
local police, transportation officials, or other government officials.
    We are proposing to add a new Sec.  412.101 to incorporate the 
provisions of section 406 of Public Law 108-173.

N. Medicare Geographic Classification Review Board (MGCRB) 
Reclassifications (Sec. Sec.  412.230, 412.234, and 412.236)

[If you choose to comment on issues in this section, please include the 
caption ``Hospital Reclassifications'' at the beginning of your 
document.]
1. Background
    With the creation of the MGCRB, beginning in FY 1991, under section 
1886(d)(10) of the Act, hospitals could request reclassification from 
one geographic location to another for the purpose of using the other 
area's standardized amount for inpatient operating costs or the wage 
index value, or both (September 6, 1990 interim final rule with comment 
period (55 FR 36754), June 4, 1991 final rule with comment period (56 
FR 25458), and June 4, 1992 proposed rule (57 FR 23631)). Implementing 
regulations in Subpart L of Part 412 (Sec. Sec.  412.230 et seq.) set 
forth criteria and conditions for redesignations for purposes of the 
wage index or the average standardized amount, or both, from rural to 
urban, rural to rural, or from an urban area to another urban area, 
with special rules for SCHs and rural referral centers.
    Effective with reclassifications for FY 2003, section 
1886(d)(10)(D)(vi)(II) of the Act provides that the MGCRB must use the 
average of the 3 years of hourly wage data from the most recently 
published data for the hospital when evaluating a hospital's request 
for reclassification. The regulations at Sec.  412.230(e)(2)(ii) 
stipulate that the wage data are taken from the CMS hospital wage 
survey used to construct the wage index in effect for prospective 
payment purposes. To evaluate applications for wage index 
reclassifications for FY 2005, the

[[Page 28288]]

MGCRB used the 3-year average hourly wages published in Table 2 of the 
August 1, 2003 IPPS final rule (68 FR 50135). These average hourly 
wages are taken from data used to calculate the wage indexes for FY 
2002, FY 2003, and FY 2004, based on cost reporting periods beginning 
during FY 1998, FY 1999, and FY 2000, respectively.
2. Standardized Amount Reclassification Provisions
    As specified in Sec.  412.230(d)(1), to be reclassified to an 
adjacent area for the purpose of using that area's standardized amount, 
an individual hospital seeking redesignation must demonstrate that its 
incurred costs are comparable to hospital costs in the adjacent area 
(that is, hospitals must demonstrate that their costs exceed their 
current payments by 75 percent of the additional payments they would 
receive through reclassification) and that it has the necessary close 
proximity to that area (that is, an urban hospital must be no more than 
15 miles and a rural hospital no more than 35 miles from the adjacent 
area; or at least 50 percent of the hospital's employees must reside in 
the adjacent area).
    Under section 402(b) of Public Law 108-7, Congress provided that 
all inpatient PPS hospitals be paid at the large urban average 
standardized amount for discharges occurring on or after April 1, 2003 
and before October 1, 2003. Under Public Law 108-89, Congress extended 
section 402(b) of Public Law 108-7 to discharges occurring through 
March 31, 2004. Section 401 of Public Law 108-173 further extended the 
equalization of urban and rural operating standardized payment amounts. 
(See section IV.B. of this preamble for a more detailed discussion.) 
Section 401 also equalized the Puerto Rico-specific urban and other 
area rates by requiring that the Puerto Rico-specific urban and other 
area rates be made retroactive to October 1, 2003. The Puerto Rico-
specific equalization of the urban and rural operating standardized 
amounts became effective for discharges beginning on or after April 1, 
2004.
    As a result of these legislative changes, the standardized amount 
reclassification criterion is no longer necessary or appropriate. 
Therefore, we are proposing to revise Sec.  412.230 and Sec.  412.234 
to remove all standardized amount criteria provisions. We are proposing 
to remove the provisions of ``Sec.  412.230(d)'' (existing paragraph 
(e) would be redesignated as paragraph (d)), and to remove Sec.  
412.234(c) and (d)(2) (existing paragraph (d)(1) would be redesignated 
as paragraph (c) and revised), which contain the criterion requiring 
individual hospitals and urban hospital groups to demonstrate that 
their costs are more comparable to the average amount they would be 
paid if they were reclassified than the amount they would be paid under 
their current classification.
    With the implementation of the equalization of the national 
adjusted operating standardized amount for large urban and other areas 
provision of Public Law 108-173, we also are proposing the following 
technical revisions to several sections under Subpart L of Part 412, 
which set forth the criteria and conditions for redesignations.
     We are proposing to delete the cross-reference to ``Sec.  
412.230(d)(2)'' cited in Sec.  412.230(a)(4) and to make redesignation 
changes for the existing cross-reference changes to paragraph (e), 
which is proposed to be redesignated as paragraph (d).
     We are proposing to delete Sec.  412.230(a)(5)(ii) (the 
existing paragraphs (a)(5)(iii), (a)(5)(iv), and (a)(5)(v) would be 
redesignated as paragraphs (a)(5)(ii), (a)(5)(iii), and (a)(5)(iv), 
respectively. Under existing Sec.  412.230(a)(5)(ii), we defined, for 
fiscal years 1997, 1998, and 2002, the limitation for redesignation for 
purposes of the standardized amount. Our policy has been that a 
hospital may not be redesignated for purposes of the standardized 
amount to an area that does not have a higher standardized amount than 
the standardized amount the hospital currently receives.
    We are proposing to delete existing Sec.  412.236. Section 412.236 
sets forth the redesignation criteria for hospitals in a NECMA. Under 
the new CBSAs, OMB has defined the MSAs and Micropolitan areas in New 
England on the basis of counties. As discussed in section III.B. of 
this proposed rule, to maintain consistency in the definition of labor 
market areas between New England and the rest of the country, we are 
proposing to use the New England MSAs under the new CBSA definition. 
Proposing to adopt the New England MSAs requires not only that we 
delete the reference to NECMAs in existing definitions, but that we 
also delete reference to criteria applicable to hospitals located in a 
NECMA that apply for reclassification. In keeping with the proposal to 
define labor market areas as MSAs, including those in New England, the 
criteria and conditions for redesignation set forth in Sec.  412.230 
will be applicable to New England hospitals seeking to reclassify.
    In an effort to refine the reclassification guidelines, we 
established Sec. Sec.  412.234 and 412.236 in the existing guidelines 
to allow for reclassification of urban groups and New England groups, 
respectively (56 FR 25458). Under Sec.  412.232(a) and Sec.  
412.234(a), we set forth similar criteria for rural and urban hospitals 
to be reclassified as a group, respectively. Prior to the 
implementation of legislation to eliminate the differential in the 
standardized amount, urban county groups that were interested in 
applying for purposes of the wage index submitted applications to the 
MGCRB for consideration. Many urban county group applications were 
unable to reclassify solely because they failed to meet the 
standardized amount criteria. In light of the fact that the 
standardized amount criteria are no longer appropriate, we believe it 
would be appropriate to make an adjustment to the hospital's wage index 
by assigning, to hospitals that were unable to reclassify in 
applications for both FY 2004 and FY 2005, the wage index for the MSA 
requested in the FY 2004 and FY 2005 group application. Section 
1886(d)(5)(I)(i) of the Act provides the Secretary with broad authority 
to make adjustments and exceptions under the IPPS. Specifically, the 
section provides that the ``Secretary shall provide by regulation for 
such other exceptions and adjustments to such payment amounts under 
this subsection as the Secretary deems appropriate.'' Under this unique 
circumstance, we are proposing to exercise the broad authority under 
section 1886(d)(5)(I)(i) of the Act, to make an exception to the 
assignment of wage index value for certain hospitals that failed to 
reclassify as a group under Sec.  412.234 for FY 2004 and FY 2005. 
Specifically, effective with discharges occurring during the 3-year 
period beginning October 1, 2004 through September 30, 2007, any 
hospital whose urban county group application under Sec.  412.234 would 
have been approved by the MGCRB but for the failure to meet the 
requirements in Sec.  412.234(c), would be assigned the wage index for 
the MSA identified in the FY 2004 and FY 2005 group application (in 
cases where the group identified more than one preference, the hospital 
would be assigned the wage index that is most advantageous). Hospitals 
that wish to receive the wage index of the area identified in their FY 
2004 and FY 2005 group applications under this provision need only 
notify CMS in writing, at the address provided under the Addresses 
section of this proposed rule, before the close of the comment period. 
The notification should only contain:
     The hospital's name and street address.
     The hospital's provider number.

[[Page 28289]]

     The name, title, and telephone number of a contact person 
for communications.
     The area (name and MSA number) identified in their FY 2005 
group application.
     Copies of any and all MGCRB decision notification letters 
for FY 2004 and FY 2005.
3. Reclassification of Urban Rural Referral Centers
    Under existing regulations at Sec.  412.230(e)(3), rural referral 
centers (RRCs) (including hospitals that were ever RRCs) are exempt 
from one of the average hourly wage criteria that apply to other 
hospitals seeking reclassification. Specifically, an RRC is exempt from 
the requirement under Sec.  412.230(e)(1)(iii) that the hospital's 3-
year average hourly wage meet a threshold percentage in relation to the 
average hourly wage of all the hospitals in the area in which the 
hospital is located. These threshold percentages are 108 percent for 
hospitals located in urban areas, and 106 percent for hospitals located 
in rural areas. However, an RRC is not exempt from another threshold 
requirement, namely the requirement under Sec.  412.230(e)(1)(iv) that 
the hospital's 3-year average hourly wage must meet a threshold 
percentage of the 3-year average hourly wage of the hospitals located 
in the area to which the hospital seeks reclassification. As in the 
case of the first threshold, this threshold percentage is different for 
urban and rural hospitals. An urban hospital's 3-year average hourly 
wage must be at least 84 percent of the average hourly wage of the 
hospitals located in the area to which the hospital seeks 
reclassification, while a rural hospital's 3-year average hourly wage 
must be at least 82 percent of the average hourly wage of the hospitals 
located in the area to which the hospital seeks reclassification.
    It has come to our attention that the requirement of Sec.  
412.230(e)(1)(iv) places RRCs located in urban areas on a different 
footing than RRCs located in rural areas. In some cases, urban RRCs 
that have been denied reclassification because they failed to meet the 
84-percent threshold would have been able to meet the 82-percent 
threshold that would have applied if they were located in a rural area. 
RRCs play a significant role in treating Medicare beneficiaries from 
rural areas, whether or not a particular RRC is physically located in a 
rural area or an urban area. Thus, we believe that it would be more 
appropriate for all RRCs, whether they are actually located in urban or 
rural areas, to be treated on an equal basis with respect to the 
qualifications for geographic reclassification. Therefore, we are 
proposing to revise Sec.  412.230(e)(1)(iii) of the regulations to 
provide that RRCs, including RRCs located in urban areas, must meet the 
82-percent threshold that applies to rural hospitals rather than the 
84-percent threshold that applies to urban hospitals.
    Furthermore, we are aware of at least one case in which an RRC was 
reclassified by the MGCRB for FY 2004, but upon applying to the MGCRB 
for FY 2005, was found to be ineligible for reclassification because 
its 3-year average hourly wage was now less than 84 percent of the 
hospitals located in the MSA to which it applied for reclassification. 
In this case, the hospital's 3-year average hourly wage was still 
greater than 82 percent of the MSA to which it had applied for 
reclassification. In such a case, we believe that it would be 
appropriate to make an accommodation for one year, so that the hospital 
is not subjected to the financial strain that may be caused by 
receiving a lower wage index for one year until it qualifies to apply 
for reclassification under the revised threshold criterion that we are 
proposing here. Therefore, we are proposing that, in such a case, we 
would exercise our authority under section 1886(d)(5)(I)(i) of the Act 
to make an exception by assigning to the hospitals for one additional 
year the wage index that applied to the hospital in FY 2004 through FY 
2005. We are proposing to use this authority to provide, under this 
unique circumstance, special protection to a small number of hospitals 
that would otherwise be subject to a temporary, but serious, 
disadvantage. Specifically, we would assign an RRC that meets the 
conditions described above, the wage index value of the MSA to which it 
was reclassified by the MGCRB in FY 2004. In order to be eligible for 
this exception, the hospital may not qualify for any geographic 
reclassification for discharges effective October 1, 2004 (under the 
regular rules or the special one-time appeal provision). This 
assignment would be valid only for FY 2005, after which the hospital 
would have the opportunity to apply for reclassification under the new 
threshold for all RRCs that we are proposing in this rule.
    We are proposing to revise proposed redesignated Sec.  
412.230(d)(3) and add a new Sec.  412.64(j) to incorporate this 
proposal.
4. Special Circumstances of Sole Community Hospitals (SCHs) in Low 
Population Density States
    Medicare program policy has long provided special treatment for 
hospitals in rural areas. For many years, rural hospitals have 
experienced lower margins than other hospitals, and Congress has 
created several special measures to address the unique issues of 
hospitals in rural areas. For example, Congress created the CAH program 
in 1997 to ensure that beneficiaries in isolated areas had access to 
emergency services and certain essential inpatient services. To qualify 
for CAH designation, a hospital must be located more than 35 miles from 
the nearest similar hospital and have an average length of stay not 
exceeding 4 days. A CAH must provide 24-hour emergency care services 
and have no more than 25 acute care beds. CAHs are currently paid 101 
percent of their current Medicare allowable costs for inpatient and 
outpatient services. Similarly, the SCH program has long served to 
maintain access to needed health services for beneficiaries in isolated 
communities. SCHs are paid based on whichever of the following rates 
yields the greatest aggregate payment: the Federal national rate; the 
updated hospital-specific rate based on FY 1982 costs per discharge; 
the updated hospital-specific rate based on FY 1987 costs per 
discharge; or the updated hospital-specific rate based on FY 1996 costs 
per discharge.
    Many rural hospitals have taken advantage of the opportunity to 
participate in the CAH program in recent years. We expect the number of 
hospitals to increase because of the changes made to the CAH program 
under recently enacted Public Law 108-173 (for example, increasing the 
reasonable cost payment rate from 100 percent to 101 percent and 
increasing the qualifying bed size limitation from 15 to 25). Because 
CAHs are paid on the basis of their reasonable costs, the wage index is 
not a factor in their payments, and geographic reclassification is thus 
not an issue for these hospitals. However, for many rural hospitals 
that cannot qualify for CAH status, the wage index remains an important 
factor in their payment, even in the case of SCHs paid on their 
hospital-specific rate, for which the only impact of the wage index may 
be on their inpatient capital and outpatient payments. The regulations 
governing reclassifications by the MGCRB provide special treatment for 
SCHs by exempting them from the normal rules that require hospitals to 
demonstrate a close

[[Page 28290]]

proximity (15 miles in the case of urban hospitals; 35 miles for rural 
hospitals), and allowing these hospitals to reclassify to the urban 
area or the rural area that is the closest to the hospital.
    Wage index assignment is an especially pressing issue for hospitals 
in States with low population densities. In such States, employees are 
likely to commute greater distances to work. More distant areas are 
thus likely to compete for labor than is the case in more densely 
populated States. Because of this concern, and the program's 
longstanding recognition of these hospitals, we exercised our 
discretion in implementing the special one-time wage index 
reclassification appeal provision of section 508 of Pub. L. 108-173 to 
provide special consideration for SCHs in States with fewer than 10 
people per square mile, based on 2000 census data (Alaska, Montana, 
North Dakota, South Dakota, and Wyoming). Specifically, we provided 
that SCHs in such a State could reclassify to an MSA within its State. 
More than 20 SCHs in those States were able to reclassify under this 
provision.
    However, a number of SCHs from those States were precluded from 
reclassifying under the terms of section 508. We are concerned that 
these hospitals could now be placed at a serious disadvantage in 
comparison to other SCHs in their States and regions. Under the 
authority of section 1886(d)(5)(I)(i) of the Act, we are proposing to 
provide, under these unique and temporary circumstances, special 
protection to a small number of hospitals that would otherwise be 
subject to a temporary, but serious, disadvantage. Specifically, we are 
proposing to allow an SCH in one of the States with fewer than 10 
people per square mile (Alaska, Montana, North Dakota, South Dakota, 
and Wyoming) to adopt the wage index of another geographic area within 
its State for 3 years.
    Such wage index assignments would become effective for FY 2005 
through FY 2007. Because the wage index assignments would be made in 
order to remedy a temporary disadvantage, the assignments would be for 
the 3-year period only and would not be available thereafter. In order 
to receive the wage index of another area under this proposal, a SCH 
may not qualify for reclassification (under the regular rules or the 
special one-time appeal provision) effective for discharges on or after 
October 1, 2004. SCHs in the identified States will not be required to 
meet proximity or access requirements similar to those required for 
reclassification in order to qualify for change in wage index under 
this provision. SCHs that wish to receive the wage index of another 
area within their State under this provision need only notify CMS in 
writing, at the address in the ``Addresses'' section provided for 
comments on this proposed rule, before the close of the comment period. 
The notification should contain:
     The hospital's name and street address.
     The hospital's provider number.
     The name, title, and telephone number of a contact person 
for communications.
     A statement certifying the SCH status.
     The name of the area within the State whose wage index the 
hospital wishes to adopt.
5. Possible Reclassifications for Dominant Hospitals and Hospitals in 
Single-Hospital MSAs
    Representatives of individual hospitals have expressed concern 
about the special circumstances of dominant hospitals and hospitals in 
single-hospital MSAs in relation to the wage index and the rules 
governing geographic reclassification. The term ``dominant hospital'' 
generally refers to a hospital that pays a substantial proportion of 
all the wages paid by hospitals geographically located in the 
hospital's area. A dominant hospital necessarily has a preponderate 
influence on the wage index calculation for the area in which it is 
located. As a result, dominant hospitals find it difficult to meet the 
threshold requirements for wage index reclassification; for example, 
the requirement that an urban hospital's average hourly wage is at 
least 108 percent of the average hourly wage of hospitals in the area 
in which the hospital is located (Sec.  412.230(e)(1)(iii)(B)). Indeed, 
a dominant hospital would find it difficult to meet any threshold based 
on the ratio of the hospital's average hourly wage to the average 
hourly wage of hospitals in the area, unless the dominant hospital's 
wage data were removed from the denominator for purposes of the 
comparison. Dominant hospitals have argued that this places them in an 
unfair situation. While the lower wages of other, smaller hospitals in 
the area can still have the effect of holding down their wage index, 
their dominant position makes it difficult, or even impossible, to 
reclassify to another area where the wage index may more closely 
reflect their costs.
    Hospitals in single-hospital MSAs face a situation that is similar 
in certain respects, but quite different in others. By definition, the 
wage index for the sole hospital in an MSA is based completely on that 
hospital's wage data. Such a hospital receives, in effect, its own 
unique wage index, reflecting the hospital's exact position in relation 
to the national average hourly wage. As a result, these hospitals 
cannot qualify for reclassification, unless they are exempt from the 
wage threshold requirements due to rural referral center status. By 
definition, the ratio of such a hospital's average hourly wages to the 
area average hourly wage is always 100 percent, and these hospitals 
thus cannot meet either the 108 percent threshold for urban hospitals 
or the 106 percent threshold for rural hospitals (Sec.  
412.230(e)(1)(iii)(B)). Unlike dominant hospitals, hospitals in single-
hospital MSAs cannot argue that they are disadvantaged by the effect 
that lower wage hospitals can have on the area wage index. However, 
these hospitals have contended that they are sometimes in the position 
of competing for labor with hospitals in nearby MSAs with higher wage 
indexes. Under these circumstances, these hospitals cannot reclasssify 
to the higher wage index area even if they meet the relevant distance 
requirements. These hospitals also contend that they cannot afford to 
compete with hospitals that are paid under a higher wage index, and the 
3-year lag in the data used to compute the wage index can place them in 
a permanent position of playing catchup. On the other hand, it is also 
true that such a disadvantage may be only temporary because increasing 
wages may eventually equalize wage index values despite the temporary 
financial disadvantage that would accrue to these hospitals during the 
3-year lag period.
    We are inviting comment on the concerns raised by hospitals in 
these two situations and on possible methods of addressing these 
concerns. A number of measures might be considered to address the 
concerns of these hospitals. In the case of dominant hospitals, the 
threshold requirements for reclassification could be revised to provide 
that a hospital's average hourly wage is at least 108 percent (in the 
case of urban hospitals) or 106 percent (in the case of rural 
hospitals) of the average hourly wages of all other hospitals in the 
area. Removing a dominant hospital's wages from the denominator of the 
ratio would remove the current disadvantage imposed by their dominant 
status, and make it more realistic for a dominant hospital to meet the 
threshold requirement. An existing provision under Sec.  412.230(e)(4) 
provides this treatment for certain dominant

[[Page 28291]]

hospitals, specifically those that were approved for reclassification 
each year from 1992 through 1997. We could develop a parallel provision 
that applies to dominant hospitals generally. The use of this revised 
ratio could be restricted to the special circumstances of dominant 
hospitals, or extended to all hospitals. We could also adopt a revised 
threshold for dominant hospitals, as we did in the notice setting forth 
the criteria for reclassification under the one-time wage index appeal 
provision of section 508 of Public Law 108-173 (69 FR 7342). Consistent 
with the criteria from that notice, a dominant hospital might be 
defined for this purpose as a hospital that pays at least 40 percent of 
all the wages paid by hospitals geographically located in the 
hospital's area. We are considering adopting one of these measures in 
the final rule, and welcome comments on the advisability of doing so.
    In the case of hospitals in single-hospital MSAs, one new provision 
that we are proposing to implement in this proposed rule may address 
some of their concerns (see section III.G.3.2. of this preamble). 
Section 505 of Public Law 108-173 provides for a new wage index 
adjustment for hospitals in lower wage areas in cases where significant 
numbers of hospital workers commute from the lower wage area to higher 
wage areas nearby. The statute requires that at least 10 percent of the 
hospital workers in a county must be commuting to a higher wage area, 
or areas, in order for the hospitals in the county to receive the 
adjustment. The adjustment formula provides for an increase to the wage 
index for hospitals in the county, based on the differences between the 
wage index that applies to the county and the higher wage indexes of 
nearby areas, in proportion to the percentages of hospital workers 
commuting to the higher wage index areas. To the degree that hospitals 
in single-hospital MSAs experience disadvantages in competing for 
hospital workers with hospitals in higher wage index areas, we expect 
that the counties in which these hospitals are located would qualify 
for this adjustment. We are actively considering whether to address the 
concerns of these hospitals more directly. At the same time, we intend 
to analyze the extent to which this provision would alleviate the 
concerns of these hospitals. We welcome comments on the special 
circumstances of hospitals in single-hospital MSAs and whether their 
special circumstances should be addressed by revisions to the 
regulations governing reclassification, or other measures.
6. Special Circumstances of Hospitals in All-Urban States
    Section 4410 of Public Law 105-33 (BBA) provides that, for the 
purposes of section 1886(d)(3)(E) of the Act, for discharges occurring 
on or after October 1, 1997, the area wage index applicable to any 
hospital that is located in an urban area of a State may not be less 
than the area wage index applicable to hospitals located in rural areas 
in the State. This provision, commonly referred to as the ``rural 
floor,'' currently affects the payments received by 150 hospitals in 49 
MSAs. For these 150 hospitals, the applicable wage index and overall 
payment amounts under the IPPS are higher than they would be if their 
wage indexes were computed solely on the basis of the wage data from 
their MSAs. The wage index floor is applied in a budget neutral manner, 
so that aggregate IPPS payments each year are not greater or less than 
those that would have been made in the absence of this provision.
    The ``rural floor'' under section 4410 of Public Law 105-33 does 
not apply in the two States that have no rural areas under the labor 
market definitions that apply within the IPPS. Hospitals in these two 
States have commented that the absence of a rural floor disadvantages 
them for wage index purposes compared to hospitals in States where the 
``rural floor'' provision can apply. Specifically, some hospitals 
contend that they would have higher wage indexes, and higher payments 
overall, if there were a rural area in their State to set a floor under 
the wage indexes within the State.
    We are considering whether it would be appropriate to adopt some 
measure to address the concerns of these hospitals. For example, we are 
examining the ratios between the lowest and highest wage index values 
in States where the ``rural floor'' affects the wage indexes of some 
hospitals. We might consider employing the average ratio of highest-to-
lowest wage indexes in those States to set an imputed ``rural floor'' 
for all-urban States. For example, assume the average ``lowest-to-
highest'' ratio of States with rural floors is 0.9500. Assume further 
that the lowest wage index in an all-urban State is 1.0000, and the 
highest is 1.1000. The ``lowest-to-highest'' ratio for that State is 
0.9091. If we apply the average ``lowest-to-highest'' ratio to the 
highest wage index in the all-urban State, we would multiply 0.9500 by 
1.1000, which yields 1.0450. The imputed analogue to the ``rural 
floor'' for the all-urban State would then be 1.0450. Any hospital with 
a regular wage index value less than 1.0450 would then receive the new 
imputed floor.
    We welcome comments on the position of hospitals in all-urban 
States relative to hospitals that receive the ``rural floor'' in other 
States. We also welcome comments on whether it would be advisable to 
adopt an imputed floor measure or some alternative measure to address 
the concerns of hospitals in these States. We note that, in order to be 
consistent with the statutory provision establishing the rural floor, 
we would apply any such measure in budget neutral manner, that is, we 
would adjust the standardized amount so that aggregate IPPS payments 
each year are not greater or less than those that would have been made 
in the absence of this provision.

O. Payment for Direct Graduate Medical Education (Existing Sec.  
413.86)

[If you choose to comment on issues in this section, please include the 
caption ``Graduate Medical Education'' at the beginning of your 
comment.]
1. Background
    Section 1886(h) of the Act, as added by section 9202 of the 
Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 (Pub. L. 
99-272) and implemented in regulations at existing Sec.  413.86, 
establishes a methodology for determining payments to hospitals for the 
costs of approved GME programs. Section 1886(h)(2) of the Act, as added 
by COBRA, sets forth a payment methodology for the determination of a 
hospital-specific, base-period per resident amount (PRA) that is 
calculated by dividing a hospital's allowable costs of GME for a base 
period by its number of residents in the base period. The base period 
is, for most hospitals, the hospital's cost reporting period beginning 
in FY 1984 (that is, the period of October 1, 1983 through September 
30, 1984). The PRA is multiplied by the weighted number of full-time 
equivalent (FTE) residents working in all areas of the hospital (and 
nonhospital sites, when applicable), and the hospital's Medicare share 
of total inpatient days to determine Medicare's direct GME payments. In 
addition, as specified in section 1886(h)(2)(D)(ii) of the Act, for 
cost reporting periods beginning on or after October 1, 1993, through 
September 30, 1995, each hospital-specific PRA for the previous cost 
reporting period is not updated for inflation for any FTE residents who 
are not either a primary care or an obstetrics and gynecology resident. 
As a result, hospitals that train primary care and obstetrics and 
gynecology residents, as well as nonprimary care residents in FY

[[Page 28292]]

1994 or FY 1995, have two separate PRAs: one for primary care and 
obstetrics and gynecology and one for nonprimary care.
    The BBRA (Pub. L. 106-113) amended section 1886(h)(2) of the Act to 
establish a methodology for the use of a national average PRA in 
computing direct GME payments for cost reporting periods beginning on 
or after October 1, 2000, and on or before September 30, 2005. The BBRA 
established a ``floor'' for hospital-specific PRAs equal to 70 percent 
of the locality-adjusted national average PRA. In addition, the BBRA 
established a ``ceiling'' that limited the annual adjustment to a 
hospital-specific PRA if the PRA exceeded 140 percent of the locality-
adjusted national average PRA. Section 511 of the BIPA (Pub. L. 106-
554) increased the floor established by the BBRA to equal 85 percent of 
the locality-adjusted national average PRA. Existing regulations at 
Sec.  413.86(e)(4) specify that, for purposes of calculating direct GME 
payments, each hospital-specific PRA is compared to the floor and the 
ceiling to determine whether a hospital-specific PRA should be revised.
    Section 1886(h)(4)(F) of the Act established caps on the number of 
allopathic and osteopathic residents that hospitals may count for 
purposes of calculating direct GME payments. For most hospitals, the 
caps were the number of allopathic and osteopathic FTE residents 
training in the most recent cost reporting period ending on or before 
December 31, 1996.


    Note to Readers: This proposed rule includes a major 
redesignation of the contents of Sec.  413.86. As a result of the 
numerous amendments we have made over the years, the size of Sec.  
413.86 has become voluminous and difficult to follow because of the 
multiple levels of coding. We are taking a first step to split the 
one section (Sec.  413.86) into nine individual sections (Sec. Sec.  
413.75 through 413.83). We are proposing to designate each first 
level paragraph under existing Sec.  413.86 as a separate new 
section and vacate Sec.  413.86. At this time, we are not proposing 
to make any changes in the language of these new redesignated 
sections, except for the changes that are discussed in section IV.O. 
of this preamble (which would conform to the existing language of 
Sec.  413.86) and any appropriate cross-reference and conforming 
changes. We are providing a detailed crosswalk of the existing 
paragraphs of Sec.  413.86 to the proposed new Sec. Sec.  413.75 
through 413.83. In addition, in any discussion of changes we are 
proposing to make, we are providing both the existing citation under 
Sec.  413.86 and the proposed redesignated section and paragraph. At 
a later date, we may further refine the contents of the redesignated 
sections to improve readability.

2. Reductions of and Increases in Hospitals' FTE Resident Caps for GME 
Payment Purposes Under Section 422 of Public Law 108-173 (Proposed 
Redesignated Sec.  413.79 (a Proposed Redesignation of Sec.  413.86(g))
a. General Background on Methodology for Determining the FTE Resident 
Count
    As we explain earlier in this preamble, Medicare makes both direct 
and indirect GME payments to hospitals that train residents in approved 
medical residency training programs. Direct GME payments are made in 
accordance with section 1886(h) of the Act, based generally on 
hospital-specific PRAs, the number of FTE residents a hospital trains, 
and the hospital's Medicare patient share. IME payments are made in 
accordance with section 1886(d)(5)(B) of the Act, based generally on 
the ratio of the hospital's FTE residents to the number of hospital 
beds. Accordingly, the calculation of both direct GME and IME payments 
is affected by the number of FTE residents that a hospital is allowed 
to count; generally, the greater the number of FTE residents a hospital 
counts, the greater the amount of Medicare direct GME and IME payments 
the hospital will receive. In an attempt to end the implicit incentive 
for hospitals to increase the number of FTE residents, Congress 
instituted a cap on the number of allopathic and osteopathic residents 
a hospital is allowed to count for direct GME and IME purposes under 
the provisions of section 1886(h)(4)(F) of the Act for direct GME and 
section 1886(d)(5)(B)(v) of the Act for IME. Dental and podiatric 
residents were not included in this statutorily mandated cap.
b. Reduction of Hospitals' FTE Resident Caps Under the Provisions of 
Section 422 of Public Law 108-173
    Medicare makes direct GME and IME payments based only on the number 
of FTE residents that is within a hospital's FTE resident cap. Some 
hospitals have trained a number of allopathic and osteopathic residents 
in excess of their FTE resident caps. Other hospitals have reduced 
their resident counts to some level below their FTE resident caps. 
Section 422 of Public Law 108-173 added a new section 1886(h)(7) to the 
Act to provide for reductions in the statutory resident caps under 
Medicare for certain hospitals and authorize a ``redistribution'' of 
the FTE resident slots resulting from the reduction in the FTE resident 
caps to other hospitals.
    The new section 1886(h)(7)(A) of the Act provides that a hospital's 
FTE resident cap will be reduced if its reference resident level, as 
described below, is less than its otherwise applicable FTE resident 
cap. Rural hospitals with less than 250 acute care inpatient beds are 
exempt from these reductions. For other hospitals, the reduction will 
be equal to 75 percent of the difference between the hospital's 
otherwise applicable FTE resident cap and its reference resident level.
    (We note that the remainder of this section IV.O. of this preamble 
addresses the provisions of section 1886(h)(7) of the Act, as added by 
section 422 of Public Law 108-173, as it relates to hospitals' FTE 
resident caps for direct GME and IME payment purposes. We address the 
provisions of section 1886(h)(7) of the Act as it relates specifically 
to the IME adjustment under section IV.K.2. of this preamble.)
    Under the new section 1886(h)(7)(B) of the Act, the Secretary is 
authorized to increase the otherwise applicable FTE resident caps for 
certain categories of hospitals for portions of cost reporting periods 
occurring on or after July 1, 2005, by an aggregate number that does 
not exceed the estimated overall reduction in FTE resident caps for all 
hospitals under section 1886(h)(7)(A). A single hospital may receive an 
increase in its FTE resident cap of no more than 25 additional FTEs. In 
determining which hospitals would receive an increase in their FTE 
resident caps, section 1886(h)(7)(B) of the Act directs us to--
     Take into account the demonstrated likelihood of the 
hospital filling the additional positions within the first three cost 
reporting periods beginning on or after July 1, 2005.
     Establish a priority order to distribute resident slots 
first to programs in hospitals located in rural areas; second, to urban 
hospitals that are not in large urban areas; and third, to other 
hospitals operating a training program in a State where there is no 
other training program for a particular specialty in the State.
    In summary, section 422 of Public Law 108-173 added a new section 
1886(h)(7) of the Act that prescribes a methodology for determining 
reductions to certain hospitals' FTE resident caps based on unused FTE 
resident slots, provides for certain exceptions to the FTE resident cap 
reductions, and includes general criteria that CMS must consider in the 
redistribution, to other hospitals, of the estimated number of FTE 
resident slots resulting from the reductions in the FTE resident caps. 
In this proposed rule, we are proposing procedures for determining 
whether, and by what amount, a hospital's FTE resident cap is subject 
to a reduction under section 1886(h)(7) of the Act. We

[[Page 28293]]

also are proposing an application process for hospitals that seek to 
receive increases in their FTE resident caps and the specific criteria 
that we would use to determine which hospitals will receive the 
increases in their FTE resident caps under section 1886(h)(7)(B) of the 
Act.
c. Hospitals Subject to the FTE Resident Cap Reduction
    As indicated earlier, section 1886(h)(7)(A) of the Act, as added by 
section 422 of Public Law 108-173, provides that if a hospital's 
``reference resident level'' is less than its ``otherwise applicable 
resident limit,'' its ``otherwise applicable resident limit'' will be 
reduced by 75 percent of the difference between its ``otherwise 
applicable resident limit'' and its ``reference resident level.'' Under 
the amendments made by section 422, the ``reference resident level'' 
generally refers to the number of unweighted allopathic and osteopathic 
FTE residents who are training at a hospital in a given cost reporting 
period. The ``otherwise applicable resident limit'' refers to a 
hospital's FTE resident cap established under sections 1886(h)(4)(F)(i) 
and (h)(4)(H) of the Act. A hospital's permanent FTE cap under section 
1886(h)(4)(F)(i) of the Act is based on (1) for an urban hospital, the 
number of unweighted allopathic or osteopathic FTE residents in the 
hospital's most recent cost reporting period ending on or before 
December 31, 1996 (the ``1996 cap''), as specified under existing 
regulations at Sec.  413.86(g)(4) (proposed redesignated Sec.  
413.79(c)(2)), and, if applicable, the 1996 cap adjusted for new 
programs as specified under existing Sec.  413.86(g)(6) (proposed 
redesignated Sec.  413.79(e)); or (2) for a rural hospital, 130 percent 
of the 1996 cap increased, as specified under existing Sec.  
413.86(g)(4) and, if applicable, the 1996 cap adjusted for new programs 
as specified under Sec.  413.86(g)(6), or the 1996 cap with both 
adjustments. We also note that a hospital's 1996 cap may be adjusted in 
other instances (such as temporary adjustments for program or hospital 
closure) if the hospital is a member of a Medicare GME affiliated group 
under existing Sec.  413.86(b) (proposed redesignated Sec.  413.75(b)), 
but we will discuss the applicability of affiliations under section 
1886(h)(7)(A) of the Act in more detail at section IV.O.2.f.(5) of this 
preamble.
    In our discussion of the provisions of section 422 of Public Law 
108-173 under this section of this proposed rule, we will generally 
refer to a hospital's number of unweighted allopathic and osteopathic 
FTE residents in a particular period as a hospital's ``resident 
level.'' We will also refer to a hospital's resident level in the 
applicable ``reference period,'' as explained further below, as the 
hospital's ``reference resident level.'' In addition, we will refer to 
the ``otherwise applicable resident cap'' as the hospital's FTE 
resident cap that is applicable during a particular cost reporting 
period. Thus, we are proposing that if a hospital's resident level is 
less than the hospital's otherwise applicable resident cap in the 
``reference period'' (as explained below), effective for portions of 
cost reporting periods occurring on or after July 1, 2005, we would 
permanently reduce the hospital's FTE resident cap by 75 percent of the 
difference between a reference resident level and the otherwise 
applicable FTE resident cap. For example, if a hospital's otherwise 
applicable FTE resident cap for the reference period is 100, and its 
resident level for that period is 80 FTEs, we would reduce the 
hospital's FTE resident cap by 15 FTEs [0.75 (100-80)] = 15). (Proposed 
redesignated Sec.  413.79(c)(3)).
d. Exemption From FTE Resident Cap Reduction for Certain Rural 
Hospitals
    Section 1886(h)(7)(A)(i)(II) of the Act, as added by section 422 of 
Public Law 108-173, specifically exempts rural hospitals (as defined in 
section 1886(d)(2)(D)(ii) of the Act) with less than 250 acute care 
inpatient beds from the possible 75 percent reduction to their FTE 
resident caps. Section 1886(d)(2)(D)(ii) of the Act defines a rural 
area as any area outside a Metropolitan Statistical Area (MSA). Under 
the existing regulations at Sec.  413.62(f)(ii), an ``urban area'' 
means (1) a Metropolitan Statistical Area (MSA) or New England County 
Metropolitan Area (NECMA); or (2) the following New England counties: 
Litchfield County, Connecticut; York County, Maine; Sagadahoc County, 
Maine; Merrimack County, New Hampshire; and Newport County, Rhode 
Island. Under existing Sec.  413.62(f)(iii), a ``rural area'' means any 
area outside an urban area. In addition, we note that under section 
III. of this preamble, which discusses wage areas, we are proposing to 
no longer recognize NECMAs as a distinct category of wage areas. Thus, 
for purposes of the amendments made by section 422, we are proposing 
that any hospital located in an area that is not in a MSA is a rural 
hospital, regardless of any reclassification under Sec.  412.102 or 
Sec.  412.103. We note that this definition of ``rural'' is consistent 
with our proposal under section III. of this preamble concerning 
designation of wage index areas.
    A hospital's bed size is based on its number of available beds, as 
determined for IME payment purposes under Sec.  412.105 of the 
regulations. For purposes of determining whether a rural hospital has 
less than 250 beds, we are proposing to use data from the rural 
hospital's most recent cost reporting period ending on or before 
September 30, 2002. (This information may be found on Worksheet S-3, 
Part I of the Medicare cost report, CMS-2552-96, column 2, the sum of 
lines 1 and 6 through 10, divided by the number of days in the cost 
reporting period.) This is the cost reporting period under section 
1886(h)(7)(A)(ii)(I) of the Act that is to be used in determining a 
hospital's reference resident level (the unweighted allopathic and 
osteopathic FTE resident count) (unless a hospital makes and CMS grants 
a timely request under section 1886(h)(7)(A)(ii)(II) of the Act). We 
are proposing that if a rural hospital has less than 250 beds in its 
most recent cost reporting period ending on or before September 30, 
2002, it would not be subject to a possible reduction to its FTE 
resident cap under section 1886(h)(7)(A) of the Act. However, if a 
rural hospital has at least 250 beds in its most recent cost reporting 
period ending on or before September 30, 2002, we are proposing that 
the rural hospital would be subject to a possible reduction to its FTE 
resident cap. (Proposed redesignated Sec.  413.79(c)(3)(i)).
e. Determining the Estimated Number of FTE Resident Slots Available for 
Redistribution
    Under section 1886(h)(7)(A) of the Act, we will determine the 
number of resident positions available for redistribution by estimating 
possible reductions to hospitals' FTE resident caps. We believe that 
section 422 allows us to distinguish between the FTE counts that are 
used to determine the number of FTE resident slots that are available 
for redistribution (that is, the ``resident pool''), and the actual 
number of FTE residents by which hospitals' FTE resident caps are 
ultimately reduced. We are proposing to estimate the reduction to a 
hospital's FTE resident cap under section 1886(h)(7)(A) of the Act for 
purposes of determining the number of FTEs that a hospital might 
contribute to the resident pool. This proposed interpretation is based 
on the language at section 1886(h)(7)(B)(i) of the Act, as added by 
section 422(a)(3), which states that the ``aggregate number of 
increases in the otherwise applicable

[[Page 28294]]

resident limits under this subparagraph may not exceed the Secretary's 
estimate of the aggregate reduction in such limits * * *'' (emphasis 
added). We are proposing to interpret this language to mean that we 
would have complied with the statute as long as the aggregate number of 
FTE residents by which we increase the FTE resident caps of qualifying 
hospitals under section 1886(h)(7)(B) of the Act is not more than the 
estimate of the aggregate number of FTE residents by which we would 
reduce the FTE resident caps of hospitals whose reference resident 
levels are less than their otherwise applicable FTE resident caps. 
However, we could subsequently perform an audit, as described further 
in section IV.O.2.f.(3) of this preamble, in order to make a final 
determination regarding any reductions to a hospital's FTE resident 
cap.
    To ensure that we will begin making payments for most hospitals 
based on the revised FTE resident caps by July 1, 2005, we are 
proposing to set a date by which we will have estimated a hospital's 
resident level and compared it to the hospital's otherwise applicable 
resident cap to estimate whether, and by how much, the hospital's FTE 
resident cap would be reduced. We are not proposing to commit to make a 
final determination as to whether, and by how much, a particular 
hospital's FTE resident cap should be reduced as of this date, nor are 
we proposing to commit to inform any hospital that it will receive an 
increase to its FTE resident cap by this date. Rather, we are only 
proposing to use this date as an internal ``deadline'' to ensure that 
we will have sufficient time to distribute the resident pool and begin 
making payments for most hospitals based on the revised FTE resident 
caps by July 1, 2005. We are proposing that this date be May 1, 2005, 
and that date would apply for all hospitals for purposes of determining 
an estimate of whether and by how much their FTE resident caps should 
be reduced.
    Accordingly, in the event that the fiscal intermediaries have not 
completed an audit (explained further under section IV.O.2.f.(3) of 
this preamble) by May 1, 2005, we are proposing that CMS may estimate 
the number of FTE residents by which a hospital's FTE resident cap 
should be reduced by May 1, 2005. For example, a fiscal intermediary 
may estimate by May 1, 2005, that Hospital A's FTE resident cap should 
be reduced by 10 FTEs. Thus, we would place 10 FTEs into the resident 
pool. It is possible that even after May 1, 2005, the fiscal 
intermediary may continue to audit Hospital A's relevant cost report(s) 
to determine if, in fact, 10 FTEs is the appropriate amount by which to 
reduce Hospital A's FTE resident cap, and could ultimately conclude 
that Hospital A's FTE resident cap should only be reduced by 8 FTEs. If 
the fiscal intermediary makes this final determination by May 1, 2005, 
we would change the number of FTE residents in the resident pool 
attributable to Hospital A from 10 FTEs to 8 FTEs. If the fiscal 
intermediary does not make this determination by May 1, 2005, based on 
the audit, we would only reduce Hospital A's FTE resident cap by 8 FTEs 
effective July 1, 2005, but the number of FTE residents in the resident 
pool attributable to Hospital A would remain at 10 FTEs (the estimated 
number as of May 1, 2005). Similarly, if the fiscal intermediary 
ultimately concluded that Hospital A's FTE resident cap should be 
reduced by 12 FTEs, but this final determination is not made by May 1, 
2005, Hospital A's FTE resident cap would be reduced by 12 FTEs 
effective July 1, 2005, but the number of FTE residents in the resident 
pool attributable to Hospital A would remain at 10 FTEs.
    As we stated above, because we believe that section 422 allows us 
to distinguish between the FTE counts that are used to determine the 
size of the resident pool, and the actual number of FTE residents by 
which hospitals' FTE resident caps are ultimately reduced, we are 
proposing, in certain instances, to use estimated information to 
determine possible reductions to hospitals' FTE resident caps. As 
described further below, sections 1886(h)(7)(A)(ii) and (h)(7)(A)(iii) 
of the Act direct CMS to adjust a hospital's reference resident level 
in certain instances, due to an expansion of an existing program that 
is not reflected on the most recent settled cost report, or to include 
the number of residents for which a new program was accredited, or for 
hospitals that are members of a Medicare GME affiliated group as of 
July 1, 2003. We note that, in adjusting the reference resident level 
in these instances, the number of FTE residents by which we adjust the 
reference resident level for purposes of determining possible 
reductions to a hospital's FTE resident cap may not be the actual or 
audited number of FTE residents that we would otherwise use for direct 
GME or IME payment purposes. For example, for expansions under newly 
approved programs (as explained in more detail in section IV.O.2.f.(3) 
of this preamble), we are proposing to adjust the reference resident 
level to include the number of residents for which a new program was 
accredited at a hospital, even though at the time the fiscal 
intermediary is determining possible reductions to a hospital's FTE 
resident cap, the hospital may not be training the full complement of 
residents for which the program was accredited. Thus, the number of FTE 
residents (including those training in the newly accredited program) 
for purposes of IME and direct GME payment would be dependent upon the 
actual number of FTEs the hospital is permitted to count in a 
particular cost reporting period, as determined in accordance with the 
regulations at Sec.  412.105 for IME and Sec.  413.86 for direct GME.
    In addition, we realize that there may be instances where a 
hospital's FTE resident cap or a hospital's FTE resident count for the 
reference cost reporting period might be under appeal. We believe that 
appeals related to these issues should be resolved through the normal 
course of business. In the event that an appeal that may affect 
determinations made under section 1886(h)(7)(A) of the Act is not 
resolved by May 1, 2005, we are proposing that we would estimate the 
number of FTE residents by which a hospital's FTE resident cap should 
be reduced (or not reduced, as applicable) by May 1, 2005.
f. Determining the Possible Reduction to a Hospital's FTE Resident Cap
(1) Reference Resident Level--General
    In order to determine if a hospital's resident level is less than 
the hospital's otherwise applicable FTE resident cap, section 
1886(h)(7)(A)(ii) of the Act, as added by section 422 of Public Law 
108-173, directs the Secretary to use one of two reference cost 
reporting periods. Section 1886(h)(7)(A)(ii)(I) of the Act directs CMS 
to use a hospital's most recent cost reporting period ending on or 
before September 30, 2002, ``for which a cost report has been settled 
(or, if not, submitted (subject to audit)), as determined by the 
Secretary,'' as the reference period, unless we grant the hospital's 
timely request to use a later cost report under section 
1886(h)(7)(A)(ii)(II) of the Act, as described under section 
IV.O.2.f.(2) of this preamble. Generally, if the hospital's resident 
level for either direct GME or IME is less than the hospital's 
otherwise applicable resident cap for direct GME or IME, respectively, 
for the most recent cost reporting period ending on or before September 
30, 2002, the hospital's FTE resident cap for direct GME or IME will be 
reduced by 75 percent of the difference between the resident level and 
the otherwise

[[Page 28295]]

applicable FTE resident cap. On April 30, 2004, we issued a One-Time 
Notification (OTN) (Transmittal 77, CR 3247), ``Redistribution of 
Unused Resident Positions, Section 422 of the Medicare Modernization 
Act of 2003 (MMA), Public Law 108-173, for Purposes of Graduate Medical 
Education (GME) Payments'' that prescribed certain requirements related 
to the implementation of section 422 and established a deadline by 
which a hospital must exercise its option to request that we use of 
later cost report as the reference cost report. If the hospital's cost 
report for the most recent cost reporting period ending on or before 
September 30, 2002, is settled by April 30, 2004, the date on which the 
OTN was issued, we are proposing to use that cost report to determine 
if, and by how much, a hospital's FTE resident cap should be reduced. 
We note that the ``settled'' cost report does not necessarily mean the 
initial cost report settlement. The fiscal intermediary may have 
previously settled the cost report, reopened it to audit it, and then 
settled the cost report again, issuing a revised Notice of Program 
Reimbursement (NPR). Thus, we would refer to the more recently issued 
NPR. When a hospital's cost report for the most recent cost reporting 
period ending on or before September 30, 2002, has been settled by 
April 30, 2004, we are proposing to use the most recently settled cost 
report as of April 30, 2004, to determine any reduction to the 
hospital's FTE resident cap under section 1886(h)(7)(A)(ii)(I) of the 
Act (unless we grant the hospital's timely request under section 
1886(h)(7)(A)(ii)(II) of the Act to use a later cost report, as 
described in section IV.O.2.f.(2) of this preamble). If the hospital's 
cost report for the most recent cost reporting period ending on or 
before September 30, 2002 has not yet been settled as of April 30, 
2004, the as-submitted cost report would be used to determine any 
reduction in the FTE resident cap, subject to audit by the fiscal 
intermediary. If the cost report was initially settled, but then 
reopened, and the fiscal intermediary has not issued a revised NPR 
prior to April 30, 2004, the data from the initially settled cost 
report will be used to determine the possible reductions to the FTE 
resident caps.
(2) Expansion of an Existing Program
    Section 1886(h)(7)(A)(ii)(II) of the Act, as added by section 
422(a) of Public Law 108-173, provides that if a hospital's resident 
level increased due to an expansion of an existing program, and that 
expansion is not reflected on the hospital's most recent settled cost 
report, a hospital may make a timely request to CMS that, rather than 
using its most recent cost reporting period ending on or before 
September 30, 2002, to determine if its FTE resident cap should be 
reduced, CMS should use the cost report for the hospital's cost 
reporting period that includes July 1, 2003. For example, assume a 
hospital's most recent settled cost report is September 30, 2000 (that 
is, no NPRs were issued for subsequent year cost reports). The hospital 
increased its resident level due to an expansion of an existing program 
in its fiscal year ending September 30, 2001. The hospital may submit a 
timely request that CMS use its cost report that includes July 1, 2003 
(which would be its cost report for the fiscal year ending September 
30, 2003), to determine if and by how much the hospital's FTE resident 
cap should be reduced. (Proposed redesignated Sec.  
413.79(c)(3)(ii)(A)(2)). As explained on page 3 of the OTN, to be 
considered a timely and proper request, a hospital's request to use its 
cost reporting period that includes July 1, 2003, must be signed and 
dated by the hospital's chief financial officer (or equivalent) and 
submitted to its fiscal intermediary on or before June 4, 2004. In its 
timely request, the hospital must include the following:
    (1) The FTE resident caps for direct GME and IME and the number of 
unweighted allopathic and osteopathic FTE residents for direct GME and 
IME in its most recently settled cost report (that is, its cost report 
that is more recently settled as of April 30, 2004).
    (2) The FTE resident caps for direct GME and IME and the unweighted 
allopathic and osteopathic FTE residents for direct GME and IME for 
each cost report after its most recently settled cost report, up to and 
including its cost reporting period that includes July 1, 2003. If the 
cost reporting period that includes July 1, 2003, has not ended as of 
June 4, 2004, the hospital must report the estimated number of 
unweighted allopathic and osteopathic residents for that cost reporting 
period.
    (3) If not already reported in accordance with steps 1 and 2 above, 
the FTE resident caps for direct GME and IME and the number of 
unweighted allopathic and osteopathic FTE residents for direct GME and 
IME in its most recent cost reporting period ending on or before 
September 30, 2002.
    In addition, as we stated in the One-Time Notification (OTN), 
(Transmittal 77, CR 3247), ``Redistribution of Unused Resident 
Positions, Section 422 of the Medicare Modernization Act of 2003 (MMA), 
Public Law 108-173, for Purposes of Graduate Medical Education a 
hospital should refer to its most recently settled cost report as of 
the issuance of the OTN (that is, April 30, 2004) to determine whether 
the hospital believes it has expanded an existing program in a cost 
reporting period subsequent to the one for the most recently settled 
cost report.
    We also are proposing that, for purposes of this provision, an 
``expansion of an existing program'' means that, except for expansions 
due to newly approved programs, as described below in section 
IV.O.2.f.(4) of this preamble, the hospital's total number of 
unweighted allopathic and osteopathic FTE residents training in 
existing programs in a cost reporting period up to and including the 
hospital's cost report that includes July 1, 2003, is greater than the 
resident level in the hospital's most recent settled cost report. 
(Proposed redesignated Sec.  413.79(c)(3)(ii)(A)(3)). In other words, 
generally, as long as a hospital trained more unweighted allopathic and 
osteopathic FTE residents in a cost reporting period after its most 
recent settled cost report in programs that were existing during the 
cost reporting period for the most recently settled cost report, it may 
submit a timely request that its cost report that includes July 1, 
2003, be used for purposes of determining any FTE resident cap 
reduction under section 1886(h)(7)(A)(i) of the Act. We note that if a 
hospital expanded an existing program after its most recent settled 
cost report, and then subsequently reduced its FTE resident count to 
the extent that it actually trained fewer unweighted allopathic and 
osteopathic FTE residents in its cost report that includes July 1, 
2003, than in its most recent cost reporting period ending on or before 
September 30, 2002, the hospital would not benefit from, and would 
likely not make, a timely request that its cost report that includes 
July 1, 2003, be used for purposes of determining a possible reduction 
to its FTE resident cap.
(3) Audits of the Reference Cost Reporting Periods
    As mentioned under section IV.O.2.f.(1) of this preamble, to 
determine a possible reduction to a hospital's FTE resident cap, 
section 1886(h)(7)(A)(ii)(I) of the Act, as added by section 422(a) of 
Public Law 108-173, directs CMS to use a hospital's most recent cost 
reporting period ending on or before September 30, 2002, ``for which a 
cost report has been settled (or, if not, submitted (subject to audit), 
as determined by the Secretary'' (emphasis added). We are proposing to 
interpret

[[Page 28296]]

this language to mean that, if a hospital's cost report for the most 
recent cost reporting period ending on or before September 30, 2002, 
has been settled, then, unless the hospital submits a timely request to 
use the cost reporting period that includes July 1, 2003, we would use 
the hospital's settled cost report without further audit to determine 
possible reductions to the FTE resident caps. We also are proposing to 
interpret this language to mean that if a hospital's cost report for 
the most recent cost reporting period ending on or before September 30, 
2002, has not been settled, the hospital's as-submitted cost report for 
the most recent cost reporting period ending on or before September 30, 
2002, would be subject to audit by the fiscal intermediary. In 
addition, as stated under section 1886(h)(7)(A)(ii)(II) of the Act, use 
of a hospital's cost report that includes July 1, 2003 is made ``after 
audit and subject to the discretion of the Secretary.'' A hospital's 
cost report that includes July 1, 2003 may be at various stages of 
settlement, or may not even be submitted at the time this proposed rule 
is published. For example, if a hospital has a fiscal year end of June 
30, its cost reporting period that includes July 1, 2003 would not end 
until June 30, 2004. This cost report is not required to be submitted 
until 5 months after the cost reporting period closes, which would be 
by December 1, 2004. In any case, the fiscal intermediary would need to 
make a determination as to whether a hospital has actually increased 
its resident level due to an expansion of an existing program that is 
not reflected on the most recent settled cost report. Further, the FTE 
resident counts that are included (or would be included) in the cost 
report that includes July 1, 2003, are subject to audit by the fiscal 
intermediary to ensure that an appropriate determination is made as to 
whether, and by how much, a hospital's FTE resident cap will be 
reduced. To facilitate these determinations, we are proposing that the 
fiscal intermediaries may audit the FTE resident counts as necessary in 
the most recently settled cost reports and in the cost reports up to 
and including the cost report for the cost reporting period that 
includes July 1, 2003.
    Fiscal intermediaries will perform desk or onsite audits related to 
section 422, using instructions that will be issued in a separate 
document. As we explained in the OTN, Transmittal No. 77, CR 3247, in 
the interest of time and the most efficient use of audit resources, we 
have required that if a hospital would like CMS to use its cost report 
that includes July 1, 2003, as its reference period due to an expansion 
of an existing program, the hospital must notify the fiscal 
intermediary in accordance with the instructions provided in the OTN by 
June 4, 2004. If a hospital submits a timely request that its cost 
report that includes July 1, 2003, be used, the fiscal intermediary 
would audit that cost report and previous cost reports as necessary to 
determine if the hospital increased its resident level due to an 
expansion of an existing program that is not reflected on the most 
recent settled cost report. If a hospital does not submit a timely 
request to the fiscal intermediary that its cost report that includes 
July 1, 2003, be used, the fiscal intermediary would use the cost 
report for the most recent cost reporting period ending on or before 
September 30, 2002, to determine if, and by how much, a hospital's FTE 
resident cap should be reduced, as specified under section 
1886(h)(7)(A)(ii)(I) of the Act. If the cost report that is used to 
determine the possible reduction to a hospital's FTE resident count is 
for a period of less than or more than 12 months, we are proposing that 
the fiscal intermediary would prorate the FTE resident caps and 
unweighted FTE residents to equal 12-month counts.
(4) Expansions Under Newly Approved Programs
    Under section 1886(h)(7)(ii)(III) of the Act, as added by section 
422(a)(3) of Public Law 108-173, a hospital may request that its 
reference resident level be adjusted to include residents in certain 
newly approved programs. Specifically, if a hospital's new program was 
accredited by the appropriate accrediting body (that is, the 
Accreditation Council on Graduate Medical Education (ACGME) or the 
American Osteopathic Association (AOA)) before January 1, 2002, but was 
not in operation during the hospital's reference period, the hospital 
may submit a timely request that we adjust the reference resident level 
to include the number of residents for which a new program was 
accredited at a hospital(s). For a hospital that requests an adjustment 
due to a newly approved program, we are proposing to determine a 
hospital's reference period as we otherwise would. If a hospital 
received accreditation for a new medical residency training program 
before January 1, 2002, but the program was not in operation (that is, 
the hospital did not begin training residents in that program) during 
its reference period (which will be either the most recent cost 
reporting period ending on or before September 30, 2002, or the cost 
reporting period that includes July 1, 2003), the hospital may submit a 
timely request by June 4, 2004, as explained in the OTN, that its 
resident level for its reference period be adjusted to reflect the 
number of accredited slots for which that new medical residency 
training program was approved. We note that section 
1886(h)(7)(A)(ii)(III) of the Act does not require that CMS include the 
number of residents for which the new program is accredited in the 
hospital's reference cost reporting period for purposes of determining 
direct GME and IME payment in that reference cost reporting period. 
Rather, CMS is only required to include the number of residents for 
which a new program was accredited in the resident level for purposes 
of determining if, and by how much, a hospital's FTE resident cap 
should be reduced.
    For example, assume a hospital that has a fiscal year end of June 
30 received accreditation in October 2001 to train 10 residents in a 
new surgery program. The hospital does not have an expansion of an 
existing program not reflected on its most recent settled cost report, 
so its reference period is the most recent cost reporting period ending 
on or before September 30, 2002. The hospital first begins to train 
residents in the new surgery program on July 1, 2002. The new surgery 
residents are not reflected on the hospital's June 30, 2002 cost 
report, which is the hospital's most recent cost reporting period 
ending on or before September 30, 2002. Thus, the hospital may submit a 
timely request that we increase its resident level for the cost report 
ending June 30, 2002, by 10 FTE residents to reflect the residents 
approved for the new surgery program for purposes of determining if the 
hospital's reference resident level is below its otherwise applicable 
resident cap. However, we note that if the hospital's fiscal year end 
in this example was September 30, a program accredited in October 2001 
and begun on July 1, 2002, would be in operation during the hospital's 
cost reporting period ending on September 30, 2002, and the hospital 
could not receive an increase to its resident level for its cost 
reporting period ending September 30, 2002, to include the total number 
of accredited resident positions in the new surgery program. If the new 
program was accredited for a range of residents (for example, a 
hospital receives accreditation to train 6 to 8 residents in a new 
internal medicine program), we are proposing that the hospital may 
request that its resident level for its most recent cost reporting 
period ending on or before September 30, 2002 be

[[Page 28297]]

adjusted to reflect the maximum number of accredited positions (which, 
in this example, would be 8 internal medicine residents). We also are 
proposing that at the time the hospital makes the timely request to 
have its resident level adjusted to include the number of accredited 
resident positions, the new program need not be training the full 
complement of residents for which the program was accredited. (Proposed 
redesignated 413.79(c)(3)(A)(3)(ii)). In addition, if more than one 
hospital was approved as a training site for the residents in the newly 
accredited program (that is, more than one hospital sponsors the 
program or there are other participating institutions that serve as 
training sites for the residents in the program), we are proposing that 
the adjustment to a requesting hospital's reference resident level 
would reflect the appropriate portions of the FTE residents in the new 
program that would be training at that hospital.
    Similarly, if, in addition to having accreditation for a new 
program, a hospital has an expansion of an existing program that is not 
reflected on the most recent settled cost report, that hospital may 
submit a timely request that its resident level for the cost reporting 
period that includes July 1, 2003, be adjusted to include the number of 
resident positions for which a new program was accredited. We are 
proposing that a hospital whose reference period is the one that 
includes July 1, 2003, may only request that its reference resident 
level be adjusted to include the accredited number of residents for a 
new program if, in accordance with section 1886(h)(7)(A)(ii)(III) of 
the Act, the new program was approved by the appropriate accrediting 
body before January 1, 2002, but was not in operation during the cost 
reporting period that includes July 1, 2003. This proposal is based on 
our interpretation of the statutory language, which states that ``the 
Secretary shall adjust the reference resident level specified under 
subclause (I) or (II) to include the number of residents that were 
approved * * * for a medical residency program * * * but which was not 
in operation during the cost reporting period used under subclause (I) 
or (II) * * *'' (emphasis added). Because the statute provides for an 
adjustment to the reference resident level ``specified under subclause 
I or II,'' as mentioned above, for hospitals that request an adjustment 
under section 1886(h)(7)(A)(ii)(III) of the Act, we are proposing to 
identify the applicable reference period as we otherwise would under 
section 1886(h)(7)(A)(ii)(I) and (II) of the Act. That is, we are 
proposing to use the hospital's most recent cost reporting period 
ending on or before September 30, 2002, as the reference cost reporting 
period, unless the hospital submits a timely request to use the cost 
reporting period that includes July 1, 2003, due to an expansion of an 
existing program that is not reflected on the most recent settled cost 
report. We also note that, as mentioned above, subclause (III) requires 
that the program be accredited before January 1, 2002, but not be in 
operation during the hospital's reference cost reporting period, or in 
this case, the period that includes July 1, 2003. This means that, in 
order for the hospital to receive an adjustment to its reference 
resident level under section 1886(h)(7)(A)(ii)(III) of the Act for the 
cost reporting period that includes July 1, 2003, the new program also 
cannot be in operation in the cost reporting period that includes July 
1, 2003. Thus, while we believe it is possible for a hospital to 
qualify for this adjustment because the hospital started a new program 
that is not reflected on its most recent cost reporting period ending 
on or before September 30, 2002, we believe that few, if any, hospitals 
will qualify for this adjustment for a new program that was not in 
operation in the cost report that includes July 1, 2003, because it is 
unlikely that a program would receive its accreditation prior to 
January 1, 2002, and still not be in operation by July 1, 2003.
(5) Affiliations
    Section 1886(h)(7)(A)(iii) of the Act, as added by section 
422(a)(3) of Public Law 108-173, directs the Secretary to consider 
whether a hospital is a member of a Medicare GME affiliated group (as 
defined under Sec.  413.86(b)) as of July 1, 2003, in determining 
whether a hospital's FTE resident cap should be reduced. As described 
above, some hospitals that have reduced their resident levels below 
their FTE resident caps may have affiliated with other hospitals that 
would otherwise exceed their FTE resident caps. Thus, while some 
hospitals were below their FTE resident caps prior to entering into a 
Medicare GME affiliation agreement, upon affiliating, their FTE 
resident caps were temporarily reduced because some or all of their 
excess FTE slots were temporarily added to the FTE caps of other 
hospitals as part of the affiliation agreement. Under the Medicare GME 
affiliation agreement, these otherwise ``excess'' FTE slots have been 
transferred for use by other hospitals, and, therefore, CMS would take 
into account the revised caps under the affiliation agreement for both 
the hospital that would otherwise be below its FTE resident cap and the 
revised caps of the other hospital(s) that are part of an affiliated 
group. In determining whether hospitals' FTE resident caps should be 
reduced under section 1886(h)(7)(A)(i) of the Act, section 
1886(h)(7)(A)(iii) of the Act directs CMS to consider hospitals ``which 
are members of the same affiliated group * * * as of July 1, 2003.'' We 
are proposing that hospitals that are affiliated ``as of July 1, 2003'' 
means hospitals that have in effect a Medicare GME affiliation 
agreement, as defined in existing Sec.  413.86(b), for the program year 
July 1, 2003 through June 30, 2004, and have submitted a Medicare GME 
affiliation agreement by July 1, 2003 to their fiscal intermediaries 
with a copy to CMS. These hospitals may have already been affiliated 
prior to July 1, 2003, or may have affiliated for the first time on 
July 1, 2003. In either case, in determining possible reductions to a 
hospital's FTE resident cap, we are proposing to use a hospital's cap 
as revised by the July 1, 2003 Medicare GME affiliation agreement. We 
believe this interpretation is consistent with the intent of section 
1886(h)(7)(A)(iii) of the Act, as added by section 422(a)(3) of Public 
Law 108-173, in that a hospital's FTE resident cap should not be 
reduced if some or all of its excess resident slots have been 
transferred for use by hospitals with which it is affiliated (that is, 
the hospital is training at least as many FTE residents as are in its 
``affiliated'' FTE resident cap).
    Although hospitals in an affiliated group base the FTE cap 
adjustments on an aggregate FTE resident cap, we are proposing that we 
would determine whether a hospital's FTE resident cap should be reduced 
on a hospital-specific basis. Section 1886(h)(7)(A)(iii) of the Act 
states that ``the provisions of clause (i) shall be applied to 
hospitals which are members of the same affiliated group * * *'' 
(emphasis added). Clause (i) of section 1886(h)(7)(A), as described 
above, requires the reduction of hospitals' FTE resident caps under 
certain circumstances, based on the otherwise applicable FTE resident 
cap and the resident level in the applicable reference period, as 
described above (which would be either a hospital's most recent cost 
reporting period ending on or before September 30, 2002, or the cost 
reporting period that includes July 1, 2003). We are proposing to 
interpret this reference to clause (i) to mean that the Secretary is to 
use a hospital's July 1, 2003 ``affiliated'' FTE resident cap as

[[Page 28298]]

the otherwise applicable FTE resident cap when determining a possible 
reduction to the FTE resident cap. In other words, if a hospital is 
affiliated as of July 1, 2003, we are proposing to superimpose the 
``affiliated'' FTE resident cap onto the hospital's reference cost 
reporting period.
    Specifically, as we stated under section IV.O.2.f.(1) of this 
preamble, consistent with section 1886(h)(7)(A)(ii)(I) of the Act, to 
determine possible reductions to a hospital's FTE resident cap, we 
would use a hospital's most recent cost reporting period ending on or 
before September 30, 2002. If a hospital is part of a Medicare 
affiliated group for the program year beginning July 1, 2003, we are 
proposing to compare the hospital's July 1, 2003 ``affiliated'' FTE 
resident cap to its resident level on the most recent cost report 
ending on or before September 30, 2002. If the hospital's resident 
level from its most recent cost report ending on or before September 
30, 2002, is below its July 1, 2003 ``affiliated'' FTE resident cap, we 
are proposing to permanently reduce the hospital's FTE resident cap, 
that is, the hospital's FTE resident cap without the temporary 
adjustment under the July 1, 2003 affiliation agreement, by 75 percent 
of the difference between the hospital's resident level and the July 1, 
2003 ``affiliated'' FTE resident cap.
    Alternatively, as stated above under section IV.O.2.f.(2) of this 
preamble, consistent with section 1886(h)(7)(A)(ii)(II) of the Act, a 
hospital may submit a timely request to CMS that its cost report that 
includes July 1, 2003, be used as the reference period to determine 
possible FTE resident cap reductions because of an expansion of an 
existing program that is not reflected on the hospital's most recent 
settled cost report. If a hospital is affiliated for the program year 
beginning July 1, 2003, and we grant the hospital's timely request to 
use the cost reporting period that includes July 1, 2003, because its 
expansion of an existing program(s) is not reflected on the most recent 
settled cost report, we are proposing to compare the hospital's July 1, 
2003 ``affiliated'' FTE resident cap to its resident level on the cost 
report that includes July 1, 2003. If the hospital's resident level 
from its cost report that includes July 1, 2003 is below its July 1, 
2003 ``affiliated'' FTE resident cap, we are proposing to permanently 
reduce the hospital's FTE resident cap, that is, the hospital's FTE 
resident cap without the temporary adjustment under the July 1, 2003 
affiliation agreement, by 75 percent of the difference between the 
hospital's resident level and the July 1, 2003 ``affiliated'' FTE 
resident cap.
    For example, Hospital A's most recent cost report ending on or 
before September 30, 2002 is FYE December 31, 2001. Hospital A has a 
direct GME FTE resident cap (unadjusted for an affiliation) of 100, and 
an IME FTE resident cap (unadjusted for an affiliation) of 90. Hospital 
A did not have an expansion of an existing program that was not 
reflected on its most recent settled cost report, and therefore, its 
FYE December 31, 2001 cost report is being used as the reference period 
for purposes of determining a possible reduction to its FTE resident 
caps. Hospital A's unweighted direct GME count of allopathic and 
osteopathic FTE residents on its December 31, 2001 cost report is 60. 
Hospital A's IME count of allopathic and osteopathic FTE residents on 
its December 31, 2001 cost report is 55.
    Hospital B, with a FYE of September 30, expanded an existing 
program, and that expansion is not reflected on its most recent settled 
cost report. Hospital B has submitted, and we have granted, a timely 
request that its cost report that includes July 1, 2003 (that is, its 
FYE September 30, 2003 cost report) be used for purposes of determining 
a possible reduction to its FTE resident caps. Hospital B has a direct 
GME FTE resident cap (unadjusted for an affiliation) of 100, and an IME 
FTE resident cap (unadjusted for an affiliation) of 95. Hospital B's 
direct GME unweighted count of allopathic and osteopathic FTE residents 
on its September 30, 2003 cost report is 120, and its IME count of 
allopathic and osteopathic FTE residents for the same period is 110.
    On July 1, 2003, Hospital A and Hospital B entered into a Medicare 
GME affiliation agreement. Under the affiliation agreement, the 
hospitals' FTE resident caps are revised as follows:

                               Affiliation Year July 1, 2003 Through June 30, 2004
----------------------------------------------------------------------------------------------------------------
                                                     Direct GME
                                                   FTE resident     Direct GME        IME FTE     IME affiliated
                                                        cap       affiliated cap   resident cap        cap.
----------------------------------------------------------------------------------------------------------------
Hospital A......................................             100              60              90              55
Hospital B......................................             100             140              95             130
----------------------------------------------------------------------------------------------------------------

    To apply section 1886(h)(7)(A)(i) of the Act, Hospital A's 
affiliated FTE resident caps as of July 1, 2003, are compared to its 
direct GME and IME allopathic and osteopathic FTE resident counts from 
its FYE December 31, 2001 cost report, and Hospital B's affiliated FTE 
resident caps as of July 1, 2003, are compared to its direct GME and 
IME allopathic and osteopathic FTE resident counts from its FYE 
September 30, 2003 cost report, as follows:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Unweighted
                                              Affiliated      allopathic and     Unweighted  count below    If yes, reduce actual FTE resident cap by 75
                                            direct GME cap    osteopathic FTE        affiliated cap?        percent of difference between affiliated cap
                                                                   count                                                and unweighted count.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Hospital A...............................                60            \1\ 60  No.........................
Hospital B...............................               140           \2\ 120  Yes........................  100-[.75(140-120)] = 85
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ From FYE 12/31/01.
\2\ From FYE 9/30/03.


[[Page 28299]]


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Allopathic and                                If yes, reduce actual FTE resident cap by 75
                                            Affiliated IME    osteopathic FTE  Count below affiliated cap?  percent of difference between affiliated cap
                                                  cap              count                                                and unweighted count.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Hospital A...............................                55            \1\ 55  No.........................
Hospital B...............................               130           \2\ 110  Yes........................  95-[.75(130-110)] = 80
--------------------------------------------------------------------------------------------------------------------------------------------------------
From FYE 12/31/01.
From FYE 9/30/03.

    Effective for portions of cost reporting periods beginning on or 
after July 1, 2005, Hospital A's FTE resident caps for direct GME and 
IME will remain at 100 and 90, respectively, while Hospital B's FTE 
resident caps for direct GME and IME will be reduced to 85 and 80, 
respectively.
    We also note that there are hospitals that may have been members of 
a Medicare GME affiliated group in program years that coincide with or 
overlap the reference cost reporting periods, but these hospitals were 
not affiliated as of July 1, 2003. As such, they are not subject to the 
proposed policy described above applicable to section 
1886(h)(7)(A)(iii) of the Act, as added by section 422(a)(3). For such 
hospitals, we are proposing to compare the resident level in the 
applicable reference period to the FTE resident cap as adjusted by the 
affiliation agreement applicable to that reference period. If a 
hospital's resident level is below its otherwise applicable FTE 
resident cap for that reference period cost report, we are proposing to 
permanently reduce the hospital's FTE resident cap, that is, the 
hospital's FTE resident cap without the temporary adjustment under the 
affiliation agreement for that period, by 75 percent of the difference 
between the hospital's resident level and the otherwise applicable FTE 
resident cap. (Proposed redesignated Sec.  413.79(c)(3)(iv)(B)). For 
example, assume a hospital with a June 30 fiscal year end affiliated 
for one program year from July 1, 2001, through June 30, 2002. On its 
June 30, 2002 cost report (that is, its most recent cost report ending 
on or before September 30, 2002), its FTE resident cap is 20, its cap 
as revised by the affiliation agreement is 25, and its resident level 
is 21 FTEs. Because this hospital's resident level of 21 is below its 
otherwise applicable FTE resident cap of 25, the hospital's FTE 
resident cap of 20 will be reduced as follows: 20-[(.75(25-21)] = 17. 
We are proposing to apply the same methodology described above in the 
event that the reference period is a hospital's cost report that 
includes July 1, 2003 (that is, for a hospital that had an expansion of 
a program that is not reflected on its most recent settled cost report 
and that made a timely request to use the period that includes July 1, 
2003), if that hospital is not affiliated as of July 1, 2003, but its 
cost report that includes July 1, 2003 overlaps with a program year for 
which the hospital was affiliated. In other words, section 
1886(h)(7)(A)(i) of the Act will be applied by comparing a hospital's 
reference resident level to the otherwise applicable FTE resident cap, 
as adjusted for any affiliation agreement for the reference period.
g. Criteria for Determining Hospitals That Will Receive Increases in 
Their FTE Resident Caps
    Generally, under section 1886(h)(7) of the Act, as added by section 
422(a)(3) of Public Law 108-173, CMS is to reduce by 75 percent the 
``unused'' resident slots from hospitals that were below their FTE 
resident caps in a specific reference period, and ``redistribute'' the 
FTE slots for use by other hospitals. Under section 1886(h)(7)(B) of 
the Act, as added by section 422 of Public Law 108-173, the Secretary 
is authorized to increase the otherwise applicable FTE resident cap for 
each qualifying hospital that submits a timely application by a number 
that the Secretary may approve, for portions of cost reporting periods 
occurring on or after July 1, 2005. In implementing section 
1886(h)(7)(B) of the Act, we note the difficulty in deciding which 
teaching hospitals are more ``deserving'' than others to receive the 
redistributed unused resident slots. Therefore, we are proposing a 
decision making process that is an objective process. In addition, we 
note that section 422 does not provide detailed guidance to the 
Secretary for deciding which hospitals should receive the unused 
resident slots, but rather gives the Secretary discretion in making the 
choice of which hospitals should qualify.
    Section 1886(h)(7)(B) of the Act, as added by section 422, does 
establish certain parameters in the statutory language for hospitals to 
qualify to receive increases in their FTE resident caps. First, section 
1886(h)(7)(B)(i) of the Act states that the aggregate number of 
increases in the otherwise applicable resident limits (caps) may not 
exceed the estimate of the aggregate reduction in the resident limits 
determined under section 1886(h)(7)(A) of the Act (as specified in 
section IV.O.2.e. of this preamble). Section 1886(h)(7)(B)(iv) of the 
Act states that in no case will any hospital receive an FTE cap 
increase of more than 25 FTE additional residency slots as a result of 
the redistribution. (Proposed redesignated 413.79(c)(4)). In addition, 
section 1886(h)(7)(B)(ii) of the Act specifies that in determining 
which hospitals will receive the increases in their FTE resident caps, 
the Secretary is required to take into account the demonstrated 
likelihood that the hospital would be able to fill the position(s) 
within the first three cost reporting periods beginning on or after 
July 1, 2005.
    In setting up an application process for hospitals to apply for the 
unused resident slots discussed in section IV.O.2.h. of this preamble, 
we are proposing to implement this ``demonstrated likelihood'' 
requirement as an eligibility criterion that a hospital must meet in 
order for CMS to further consider the hospital's application for an 
increase in its FTE resident cap. Thus, we are proposing that, in order 
to be eligible for consideration for an increase under section 
1886(h)(7)(B) of the Act, a hospital must first demonstrate the 
likelihood that it will able to fill the slots within the first three 
cost reporting periods beginning on or after July 1, 2005, by meeting 
at least one of the following four criteria and by providing 
documentation that it meets that criterion in its application for an 
increase in its FTE resident cap:
    Demonstrated Likelihood Criterion 1. The applying hospital intends 
to use the additional FTEs to establish a new residency program(s) on 
or after July 1, 2005 (that is, a newly approved program that begins 
training residents on or after July 1, 2005).
    The hospital must meet the requirements in provisions (1) and (2) 
below:
    (1) In order to demonstrate that the hospital is, in fact, 
establishing a new residency program, the hospital must--

[[Page 28300]]

     Submit an application for approval of a new residency 
program to the ACGME or the AOA by December 1, 2004, and include a copy 
of that application with the application for an increase in its FTE 
resident cap; or
     Submit an application for approval of a new residency 
program to the ACGME or the AOA by December 1, 2004, and, if 
establishing an allopathic program, include a copy of the hospital's 
institutional review document or program information form concerning 
the new program with the application for the unused FTE resident slots; 
or
     Submit an application for approval of a new residency 
program to the ACGME or the AOA by December 1, 2004, and include 
written correspondence from the ACGME or AOA acknowledging receipt of 
the application for the new program, or other types of communication 
from the accrediting bodies concerning the new program approval process 
(such as notification of site visit).
    (2) To demonstrate that the hospital will be likely to fill the 
slots requested, the hospital must comply with one of the following:
     If the hospital has other previously established programs, 
submit documentation that each of the hospital's existing residency 
programs had a resident fill rate of at least 95 percent in each of 
program years 2001 through 2003; or
     If the hospital has other previously established residency 
programs, submit copies of the cover page of the hospital's employment 
contracts with the residents who are or will be participating in the 
new residency program (resident specific information may be redacted); 
or
     If the hospital is establishing a new residency program in 
a particular specialty, submit documentation indicating that the 
specialty has a resident fill rate nationally, across all hospitals, of 
at least 95 percent.
    Demonstrated Likelihood Criterion 2. The applying hospital intends 
to use the additional FTEs to expand an existing residency training 
program (that is, to increase the number of FTE resident slots in the 
program) on or after July 1, 2005, and before July 1, 2008.
    The hospital must comply with the requirements in provisions (1) 
and (2) below:
    (1) To demonstrate that the hospital intends to expand an existing 
program, the hospital must comply with one of the following:
     Document that the appropriate accrediting body (the ACGME 
or the AOA) has approved the hospital's expansion of the number of FTE 
residents in the program; or
     Document that the National Residency Match Program or the 
American Osteopathic Association Residency Match Program has accepted 
or will be accepting the hospital's participation in the match for the 
existing program that will include additional resident slots in that 
residency training program; or
     If expanding an allopathic program, submit a copy of the 
hospital's institutional review document or program information form 
for the expansion of the existing residency training program.
    (2) To demonstrate that the hospital will be likely to fill the 
slots of the expanded residency program, the hospital must comply with 
one of the following:
     Submit copies of the cover page of the hospital's 
employment contracts with the residents who are or will be 
participating in the expanded program (resident specific information 
may be redacted) and copies of the cover page of the hospital's 
employment contracts with the residents participating in the program 
prior to the expansion of the program.
     If the hospital has other previously established residency 
programs, submit documentation that each of the residency programs had 
a resident fill rate of at least 95 percent in each of program years 
2001 through 2003.
     If the hospital is expanding an existing program in a 
particular specialty, submit documentation that the specialty has a 
resident fill rate nationally, across all hospitals, of at least 95 
percent.
     If the hospital is expanding a program in order to train 
residents that need a program because another hospital in the State has 
closed a similar program, and the applying hospital received a 
temporary adjustment to its FTE cap(s) (under the requirements of Sec.  
413.86(g)(9)), submit documentation of this action.
    Demonstrated Likelihood Criterion 3. The hospital is applying for 
an increase in its FTE resident cap because the hospital is already 
training residents in an existing residency training program(s) in 
excess of its direct GME FTE cap or IME FTE cap, or both.
    The hospital must submit, with its application, each of the 
following:
     Copies of the most recent as-submitted Medicare cost 
reports documenting on Worksheet E, Part A and Worksheet E3, Part IV 
the resident counts and FTE resident caps for both direct GME and IME 
for the relevant cost reporting periods.
     Copies of the 2004 residency match information concerning 
the number of residents the hospital intends to have in its existing 
programs.
     Copies of the most recent accreditation letters on all of 
the hospital's training programs in which the hospital trains and 
counts FTE residents for direct GME and IME.
    Demonstrated Likelihood Criterion 4. The hospital is applying for 
the unused FTE resident slots because the hospital is at risk of losing 
accreditation of a residency training program if the hospital does not 
increase the number of FTE residents in the program on or after July 1, 
2005.
    The hospital must submit, with its application for an increase in 
its FTE resident cap, documentation from the appropriate accrediting 
body of the hospital's risk of lost accreditation as a result of an 
insufficient number of residents in the program.
    We are proposing that each hospital must meet at least one of the 
above criteria in order to demonstrate the likelihood that it will be 
able to fill the additional slots associated with any increase in the 
hospital's FTE resident cap within the first three cost reporting 
periods beginning on or after July 1, 2005. In other words, each 
hospital that wishes to apply for an increase in its FTE resident cap 
must, as a preliminary matter, meet the eligibility requirement of 
demonstrating the likelihood that it will fill the additional 
positions, in order for CMS to further consider the hospital's 
application for an increase in its FTE resident cap.
h. Application Process for the Increases in Hospitals' FTE Resident 
Caps
    As stated above, we are proposing an objective decision making 
process for determining how hospitals will be prioritized when 
identifying the hospitals that will receive increases in their FTE 
resident caps. In order for hospitals to be considered for increases in 
their FTE resident caps, section 1886(h)(7)(B)(i) of the Act, as added 
by section 422(a)(3) of Public Law 108-173, requires that each 
``qualifying hospital'' submit a ``timely application.'' We are 
proposing that each hospital must submit the following information on 
its application for an increase in its FTE resident cap:
     The name and Medicare provider number of the hospital.
     The total number of requested FTE resident slots (for all 
residency programs at the hospital) for direct GME or IME, or both (up 
to 25 FTEs).
     A completed copy of the CMS Evaluation Form (as described 
below) for each residency program for which

[[Page 28301]]

the applicant hospital intends to use the requested increase in the 
number of FTE residents and source documentation to support the 
assertions made by the hospital on the Evaluation Form. (For example, 
if the hospital checks off on the Evaluation Form that the hospital is 
located in a geographic Health Professions Shortage Area (HPSA), the 
hospital would include documentation to support that assertion.) A copy 
of the blank proposed CMS Evaluation Form appears at the end of this 
section of the preamble.
     FTE resident counts for direct GME and IME and FTE 
resident caps for direct GME and IME reported by the hospital in the 
most recent as-filed cost report.
     An attestation, signed and dated by an officer or 
administrator of the hospital who signs the hospital's Medicare cost 
report, of the following information in the hospital's application for 
an increase in its FTE resident cap:
    ``I hereby certify that I understand that misrepresentation or 
falsification of any information contained in this application may be 
punishable by criminal, civil, and administrative action, fine and/or 
imprisonment under federal law. Furthermore, I understand that if 
services identified in this application were provided or procured 
through payment directly or indirectly of a kickback or where otherwise 
illegal, criminal, civil, and administrative action, fines and/or 
imprisonment may result. I also certify that, to the best of my 
knowledge and belief, it is a true, correct, and complete application 
prepared from the books and records of the hospital in accordance with 
applicable instructions, except as noted. I further certify that I am 
familiar with the laws and regulations regarding Medicare payment to 
hospitals for the training of interns and residents.''
    We are further proposing that any hospital that wishes to receive 
an increase in its FTE resident cap(s) must submit a copy of its 
completed application (as described above) to the CMS Central Office 
and to the CMS Regional Office for the region in which the applicant 
hospital is located, and that the application must be received on or 
before December 1, 2004. (The mailing addresses for the CMS offices are 
indicated at the end of this section of the preamble.) We note that 
some hospitals' FTE counts will be subject to audit for purposes of 
section 1886(h)(7)(B) of the Act, and those audits may not be completed 
by December 1, 2004. Because the results of such an audit may be a 
factor in a hospital's decision whether to request an increase in its 
FTE resident cap under section 1886(h)(7)(B) of the Act, we are 
proposing to allow a later date for those hospitals to apply for 
increases in their FTE resident caps. Therefore, if a hospital's 
resident level is audited for purposes of section 1886(h)(7)(A) of the 
Act, and that hospital also wishes to apply for an increase in its FTE 
resident cap(s) available through section 1886(h)(7)(B) of the Act, we 
are proposing that such a hospital must submit a completed application 
to CMS and that the application must be received on or before March 1, 
2005. We are proposing that all completed applications that are timely 
received according to the above deadlines will be evaluated by CMS 
according to the criteria described under section IV.O.2.i. of this 
preamble for determining the priority distribution of FTE resident 
slots. Hospitals that satisfy at least one of the ``demonstrated 
likelihood'' criteria will be further evaluated by the evaluation 
criteria described below. Those hospitals that are chosen to receive an 
increase in their FTE resident caps would be notified by CMS by July 1, 
2005.
i. CMS Evaluation of Applications for Increases in FTE Resident Caps
    As noted in section IV.O.2.h. of this preamble, we are proposing to 
require hospitals to submit, with their applications for increases in 
their FTE resident caps, a completed copy of the CMS Evaluation Form. 
As we have stated, we are proposing to make the process of evaluating 
the applications as objective as possible. Therefore, we are proposing 
to use a CMS Evaluation Form that the hospital must complete and submit 
as part of its application. The CMS Evaluation Form will ask the 
hospital to check off which of the ``demonstrated likelihood'' criteria 
(described above in section IV.O.2.g. of this preamble) the hospital 
meets. We also are proposing to require the hospital to provide the 
documentation that supports the ``demonstrated likelihood'' criteria it 
has checked off on the Evaluation Form.
    Assuming that hospitals interested in applying for the increase in 
their FTE caps meet the eligibility criterion of ``demonstrated 
likelihood,'' we are proposing that applicant hospitals indicate on the 
CMS Evaluation Form the category(ies) for which it believes it will 
qualify. CMS will use this indication to prioritize the applications. 
Such prioritization is derived from section 1886(h)(7)(B) of the Act, 
as added by section 422 of Public Law 108-173. That section established 
the following priority order to determine the hospitals that will 
receive increases in their FTE caps:
    First, to hospitals that are ``located in rural areas, as defined 
in section 1886(d)(2)(D)(ii) of the Act'' (section 
1886(h)(7)(B)(iii)(I) of the Act). Section 1886(d)(2)(D)(ii) of the Act 
defines a rural area as any area outside a Metropolitan Statistical 
Area (MSA). Under the existing implementing regulations at Sec.  
413.62(f)(ii), an ``urban area'' means (1) a Metropolitan Statistical 
Area (MSA) or New England County Metropolitan Area (NECMA); or (2) the 
following New England counties: Litchfield County, Connecticut; York 
County, Maine; Sagadahoc County, Maine; Merrimack County, New 
Hampshire; and Newport County, Rhode Island. Under existing Sec.  
413.62(f)(iii), a ``rural area'' means any area outside an urban area. 
However, we note that under section III. of this preamble, which 
discusses proposed changes in wage areas for FY 2005, we are proposing 
to no longer recognize NECMAs as a distinct category of wage areas. 
Thus, for purposes of the amendments made by section 422, we are 
proposing that any hospital located in an area that is not in a MSA is 
a rural hospital, regardless of any reclassification under Sec.  
412.102 or Sec.  412.103. We note that this definition of ``rural'' is 
consistent with our proposal under section III. of this preamble 
concerning designation of wage index areas.
    Second, to hospitals that are located in urban areas that are not 
large urban areas, as defined for purposes of section 1886(d) of the 
Act (section 1886(h)(7)(B)(iii)(II) of the Act). Section 1886(d)(2)(D) 
of the Act defines ``large urban area'' as an ``urban area which the 
Secretary determines * * * has a population of more than 1,000,000.'' 
Existing implementing regulations at Sec.  412.63(c)(6) state generally 
that the term ``large urban area'' means an MSA with a population of 
more than 1,000,000. Again, we note that we are proposing changes to 
the definition of ``urban area'' to reflect the new geographic areas 
designated by the Office of Management and Budget under section III. of 
the preamble of this proposed rule. Therefore, if the eligible hospital 
applying for an increase in its FTE resident cap is an urban hospital 
that is located in the proposed redefined MSA area with a population of 
less than 1,000,000, CMS will give such a hospital second priority 
(after all rural hospitals in the first priority category under the 
statute) in deciding which hospitals should receive an increase in 
their FTE resident caps.

[[Page 28302]]

    Third, hospitals that currently operate, or will operate, a 
residency training program in a specialty for which there are not other 
residency training programs in the State (section 
1886(h)(7)(B)(iii)(III) of the Act). We are proposing to interpret ``a 
specialty for which there are not other residency training programs in 
the State'' to mean the only specialty in either allopathy or 
osteopathy in a particular State. For example, if in State X, Hospital 
A would like to use the additional FTE residents in order to establish 
a new osteopathic emergency medicine program (which would be the first 
osteopathic emergency medicine program in State X), and Hospital B has 
already established an allopathic emergency medicine program in State 
X, Hospital A's application for an increase in its FTE resident cap(s) 
would be put in the third priority category because Hospital A would be 
establishing a new osteopathic emergency medicine program, a specialty 
for which there are not other osteopathic emergency medicine programs 
in the State. We believe that a more ``expansive'' interpretation of 
``a specialty for which there are not other residency programs'' allows 
more hospitals to fit into this third priority category. In addition, 
it is our understanding that allopathic and osteopathic programs are, 
at least, nominally different disciplines in medicine. As a result, we 
believe that this more ``expansive'' interpretation for ``a specialty 
for which there are not other residency programs'' is the more 
appropriate interpretation.
    As we described above, we are proposing that applicant hospitals 
indicate on the CMS Evaluation Form the category(ies) for which it 
believes it will qualify; we will use this indication to prioritize the 
applications. Each of the categories (described below) is derived from 
the priorities established by section 1886(h)(7)(B) of the Act, as 
added by section 422 of Public Law 108-173. We would use the following 
categories to determine the order in which hospitals would be eligible 
to receive increases in their FTE resident caps:
    First Level Priority Category: The hospital is a rural hospital and 
has the only specialty training program in the State.
    Second Level Priority Category: The hospital is a rural hospital 
only.
    Third Level Priority Category: The hospital is a ``small'' urban 
hospital (that is, an urban hospital that is located in a ``not large 
urban area'') and has the only specialty program in the State.
    Fourth Level Priority Category: The hospital is a ``small'' urban 
hospital only.
    Fifth Level Priority Category: The hospital has the only specialty 
training program in the State.
    Sixth Level Priority Category: The hospital meets none of the 
statutory priority criteria.
    We believe the proposed first and third level categories are 
appropriate for CMS evaluation purposes (which is explained further 
below) because some hospitals that apply for the additional resident 
slots may fit into more than one of the three statutory priority 
categories listed in section 1886(h)(7)(B) of the Act. In addition, we 
are proposing to give consideration first to those hospitals that meet 
more than one of the statutory priority categories over those hospitals 
that meet only one of the statutory priorities (see second, fourth, and 
fifth level priority categories.) We also are proposing a sixth level 
priority category to identify those section 1886(d) hospitals that 
apply for additional resident slots, but do not fit into any of the 
priority categories listed in section 1886(h)(7)(B) of the Act (for 
example, hospitals in large urban areas).
    As specified by the statute, we are proposing to put each 
hospital's application for an increase in its FTE resident cap (based 
on how the hospital describes itself on the CMS Evaluation Form) into 
one of the ``level priority categories'' for evaluation purposes, 
giving first and second priority to the rural hospitals, as defined 
above. In addition, we note that we are proposing that hospital 
applicants provide residency specialty program information as part of 
the application for the increase to the cap(s), as well as a CMS 
Evaluation Form for each residency program for which the applicant 
hospital intends to use the increased FTE resident slots. Our intention 
in proposing these requirements is for CMS to be able to discern within 
which level priority category the applicant hospital's application 
should be placed based on the residency specialty program for which the 
FTE cap increase is being requested. In other words, it is possible 
that a hospital will apply for an increase in its FTE caps for more 
than one residency program at the hospital. It is possible that 
applications for the programs would fall within different level 
priority categories, for example, if a hospital is applying for an 
increase in its cap(s) for one program that is the ``only specialty 
training program in the State'' (which would place the hospital's 
application in the fifth level priority category on the CMS Evaluation 
Form) and for another program that is NOT the only program in the State 
(which, assuming the hospital is an urban hospital, would place the 
hospital on that Evaluation Form in the sixth level priority category). 
Therefore, we are proposing that hospitals complete an Evaluation Form 
for each residency program for which it is requesting an increase in 
its FTE resident cap.
    We note that section 1886(h)(7)(B)(iii) of the Act states that 
``increases of residency limits within the same priority category * * * 
shall be determined by the Secretary.'' Therefore, we are proposing to 
use the following criteria for evaluating the applications for 
increases in hospitals' FTE resident caps within each of the six level 
priority categories described above:
    Evaluation Criterion One. The hospital that is requesting the 
increase in its FTE resident cap(s) has a Medicare inpatient 
utilization over 60 percent, as reflected in at least two of the 
hospital's last three most recent audited cost reporting periods for 
which there is a settled cost report. We have selected 60 percent 
utilization because it will identify hospitals where Medicare 
beneficiaries will benefit the most from the presence of a residency 
program, and it is consistent with the utilization percentage required 
for Medicare-dependent, small rural hospitals (MDHs) as specified in 
Sec.  412.108. In addition, it identifies a type of hospital that 
warrants atypical treatment by the Medicare program because it is so 
reliant on Medicare funding.
    Evaluation Criterion Two. The hospital will use the additional 
slots to establish a new geriatrics residency program, or to add 
residents to an existing geriatrics program. We believe that, of all 
the medical specialties, geriatrics is the one specialty that is 
devoted primarily to the care of Medicare beneficiaries. In addition, 
we note that encouraging residency training in geriatrics is consistent 
with Congressional intent as expressed, among other places, in section 
712 of Public Law 108-173.
    Evaluation Criterion Three. The hospital does not qualify for an 
adjustment to its FTE caps under existing Sec.  413.86(g)(12) (proposed 
to be redesignated as Sec.  413.79(k) in this proposed rule) for a 
rural track residency program, but is applying for an increase in its 
FTE resident cap(s) under section 1886(h)(7)(B) of the Act because it 
rotates (or in the case of a new program, will rotate) residents for at 
least 25 percent of the duration of the residency program to any 
combination of the following: A rural area, as defined in section 
1886(d)(2)(D)(ii) of the Act

[[Page 28303]]

and Sec.  412.62(f)(1)(iii) of the regulations; a rural health clinic 
(RHC), as defined in section 1861(aa)(1) of the Act and Sec.  491.2 of 
the regulations; or a Federally Qualified Health Center (FQHC), as 
defined in section 1861(aa)(3) of the Act and Sec.  405.2401(b) of the 
regulations. We believe that Congress intended that the Secretary use 
section 422 to encourage resident training in rural areas, and we 
believe this criterion furthers this intention. We are proposing to 
include residency training in FQHCs in this criterion because we 
understand that some FQHCs are located in rural areas. In addition, we 
would like to encourage residency training at FQHCs because we believe 
that, similar to rural providers and RHCs, FQHCs provide services for 
medically underserved areas or populations, or both.
    Evaluation Criterion Four. In portions of cost reporting periods 
prior to July 1, 2005, the hospital qualified for a temporary 
adjustment to its FTE cap under existing Sec.  413.86(g)(9) (proposed 
to be redesignated as Sec.  413.79(h) in this proposed rule) because it 
was training displaced residents from either a closed program or a 
closed hospital, and, even after the temporary adjustment, the hospital 
continues to train residents in the specialty(ies) of the displaced 
residents and is training residents in excess of the hospital's direct 
GME FTE cap or IME FTE cap, or both, for that reason. We believe this 
criterion is appropriate because it will help to sustain the level of 
residency training in the community.
    Evaluation Criterion Five. The hospital is above its FTE caps 
because it was awaiting accreditation of a new program from the ACGME 
or the AOA during the base period for its FTE cap(s), but was not 
eligible to receive a new program adjustment as stated under existing 
Sec.  413.86(g)(6)(ii) (proposed to be redesignated as Sec.  
413.79(e)(2) in this proposed rule). Under existing Sec.  
413.86(g)(6)(ii) and Sec.  413 .86(g)(13) (proposed to be redesignated 
as Sec.  413.79(l) in this proposed rule), a hospital that had 
allopathic or osteopathic residents in its most recent cost reporting 
period ending on or before December 31, 1996 could receive an 
adjustment to its unweighted FTE cap for a new medical residency 
training program that either received its initial accreditation or 
began training residents on or after January 1, 1995 and on or before 
August 5, 1997. If a hospital failed to meet those deadlines, it was 
not eligible to have its cap(s) adjusted to include residents in a new 
program. Under this proposed criterion, a hospital would apply for 
additional FTE residents if the hospital had submitted its application 
for a new program to the accrediting body before August 5, 1997, and 
received its accreditation after August 5, 1997 but before August 5, 
1998. This would allow some hospitals to receive increases in their FTE 
resident caps in cases in which, in good faith, the hospital had 
submitted an application for accreditation for a new program prior to 
the date of enactment of FTE resident caps under the BBA, but because 
of the timing of the implementation of the FTE resident cap(s), had not 
yet received direct GME and IME payment for residents in the newly 
accredited program during the base period for the hospital's FTE 
resident cap(s).
    Evaluation Criterion Six. The hospital is training residents in 
excess of its FTE resident caps because, despite qualifying for an FTE 
cap adjustment for a new program under Sec.  413.86(g)(6)(i) or 
(g)(6)(ii) (proposed to be redesignated as Sec.  413.79(e)(1) and 
(e)(2) in this proposed rule), it was unable to ``grow'' its program to 
the full complement of residents for which the program was accredited 
before the hospital's FTE resident cap was permanently set beginning 
with the fourth program year of the new program. Similar to evaluation 
criterion five above, this criterion would allow some hospitals that 
had, in good faith, started up a new residency program as required in 
the regulations but could not completely fill the new program within 
the allowed regulatory period, to receive increases in their FTE 
resident caps. For instance, this could have occurred because the 
program was a program of long duration (such as a 5-year general 
surgery program), and the hospital did not have the opportunity to 
``grow'' the program to its full complement of residents because the 
regulations at Sec. Sec.  413.86(g)(6)(i) or (g)(6)(ii) allow a program 
to grow for only 3 years before the hospital's FTE resident cap is 
permanently adjusted for the new program.
    Evaluation Criterion Seven. The hospital is located in any one (or 
a combination) of the following: a geographic HPSA, as defined in 42 
CFR 5.2; a population HPSA, (also defined at 42 CFR 5.2); or a Medicare 
physician scarcity county, as defined under section 413 of Public Law 
108-173. We are proposing to use this 3-part criterion in order to 
capture, as objectively as possible, medically underserved areas or 
patient populations (many of which are Medicare beneficiaries), or 
both. We understand that if a particular community has been designated 
a HPSA (either a geographic or population HPSA), the designation 
information is available to hospitals from the Health Resources and 
Services Administration (HRSA) HPSA database at the Web site: http://belize.hrsa.gov/newhpsa/newhpsa.cfm. In addition, hospitals will be 
able to determine whether they are located in a Medicare physician 
scarcity county (consistent with section 413 of Pub. L. 108-173) on the 
CMS Internet Web site at www.cms.hhs.gov or upon publication of the 
annual final rule setting forth the Medicare physician fee schedule 
(which is generally published by November 1 of each year). We note that 
if Medicare does not publish the final rule setting forth the Medicare 
physician fee schedule in time for the application deadline for 
increases in FTE resident caps (December 1, 2004, or March 1, 2005, 
depending on the hospital), we are proposing that we will not use the 
Medicare physician scarcity county designations (as defined under 
section 413 of Pub. L. 108-173) for purposes of this criterion.
    Evaluation Criterion Eight. The hospital is in a rural area (as 
defined under section 1886(d)(2)(D)(ii) of the Act) and is a training 
site for a rural track residency program (as specified under Sec.  
413.86(g)(12) (proposed to be redesignated as Sec.  413.79(k) in this 
proposed rule)), but is unable to count all of the FTE residents 
training at the rural hospital in the rural track because the rural 
hospital's FTE cap is lower than the hospital's unweighted count of 
allopathic or osteopathic FTE residents beginning with portions of cost 
reporting periods on or after July 1, 2005.
    Evaluation Criterion Nine. The hospital is affiliated with a 
historically Black medical college. According to the language in the 
Conference Report for Public Law 108-173 (pages 204-205), the 
Conference agreement on section 422 generally restated the three 
statutory priority categories described above (rural, ``small'' urban, 
and only specialty program in the State) in terms of giving guidance to 
the Secretary for deciding which hospitals should receive the 
redistributed FTE resident slots. However, there was one additional 
cited criterion that the Conference indicated the Secretary should use 
in evaluating the hospital applications. Specifically, the Conference 
agreement states that the Secretary should consider whether the 
hospital is a ``historically large medical college'' (emphasis added). 
Upon consideration of this particular terminology, which, on its face, 
seems to contradict the three statutory priority categories (that is, 
rural, ``small'' urban, and only specialty program in the State), we 
are proposing to view the reference to ``historically large medical 
colleges''

[[Page 28304]]

as a scrivener's error, and to read this language to refer to 
``historically Black medical colleges.'' This proposed interpretation 
accomplishes two goals: first, we believe this interpretation serves 
the greater policy goal of encouraging residency training for the 
benefit of medically underserved populations. Second, we believe that 
this interpretation reflects the Conferees' intent in the language in 
the Conference Report. In addition, we are proposing to identify 
``historically Black medical colleges'' as Howard University College of 
Medicine, Morehouse School of Medicine, Meharry Medical College, and 
Charles R. Drew University of Medicine and Science. These four medical 
schools are identified as ``historically Black medical colleges'' by 
the American Medical Association (see http://www.ama-assn.org/ama/pub/category/7952.html). We are proposing that the hospital will meet this 
criterion if it intends to use an increase in its FTE resident cap(s) 
under section 1886(h)(7)(B) of the Act to count residents in residency 
programs sponsored by a historically Black medical college listed 
above.
    Evaluation Criterion Ten. The hospital is training residents in 
residency program(s) sponsored by a medical school(s) that is 
designated as a Center of Excellence for Underserved Minorities (COE) 
under section 736 of the Public Health Service Act in FY 2003. We 
understand that the COE program was established to be a catalyst for 
institutionalizing a commitment to underserved students and faculty, 
and to serve as a national resource and educational center for 
diversity and minority health issues. Therefore, we believe that it is 
appropriate to encourage hospitals to train residents in residency 
programs sponsored by medical schools that are designated as COEs. A 
hospital can verify whether it is training residents in programs 
sponsored by a medical school that is a COE. Medical schools that are 
COEs in FY 2003 are listed at the following Web site: http://bhpr.hrsa.gov/diversity/coe/grantees2003.htm. We note that, in FY 2003, 
there were 28 medical schools that were designated to be COEs.
    We are proposing to use the above set of criteria to evaluate the 
applications by hospitals for increases in their FTE resident caps that 
fall within each of the six level priority categories. We would place 
each application in the appropriate priority level category based on 
the information the hospitals check off on the proposed CMS Evaluation 
Form for each allopathic and osteopathic specialty program requested by 
the applicant hospital, and the corresponding requested FTE cap 
increase (see the proposed form below). We are proposing to place all 
of these evaluation criteria on the Evaluation Form and to ask the 
hospital to check off on the form which criteria apply for each 
specialty program for which an FTE cap increase is requested. Based on 
the assertions checked off on the form, CMS would score each CMS 
Evaluation Form (one point per criterion checked off). The higher 
scoring CMS Evaluation Form(s) for each applicant hospital within each 
level priority category would be awarded the FTE resident cap increases 
first. As we described above, we are proposing to award the cap 
increases in the order of the six specified level priority categories 
because, as a general rule, we believe hospitals that meet more than 
one of the statutory priorities should be awarded the increases in 
their FTE resident caps first before other hospitals. However, we also 
believe that hospitals that meet a higher statutory priority category 
should receive first consideration by CMS over hospitals that meet 
lower statutory priorities. That is the reason, for instance, we are 
proposing the first level (rural hospital + only specialty program in 
the State) and second level (rural only) priority categories to give 
all rural hospitals first consideration by CMS before any small urban 
hospital, as required by the statute.
    Thus, first level priority category hospitals that score highest on 
the evaluation criteria on the CMS Evaluation Form for a particular 
specialty program would receive the increases in their FTE resident 
caps first. For example, if Hospital D is a rural hospital and is 
establishing the first osteopathic internal medicine residency program 
in State Y, thereby falling within the first level priority category, 
and Hospital D checks off on the CMS Evaluation Form that it has a 
Medicare utilization of 60 percent, is located in a geographic HPSA, 
and is affiliated with a historically Black medical college, Hospital D 
would receive a score of 3 points on the completed CMS Evaluation Form 
for the osteopathic internal medicine residency program and 
accompanying application. We are proposing that we would first award 
FTE cap increases to hospitals whose CMS Evaluation Forms for a 
particular program receive 10 points based on the number of evaluation 
criteria checked off by the hospital for the program (if there are any) 
and then to those with successively fewer points within the level 
priority category. Hospital D would receive the increase in its FTE 
resident cap(s) requested on its application after all the hospitals in 
the first level priority category whose applications receive 10 through 
4 points are awarded their requests first.
    We are proposing that we would award the increases in FTE resident 
caps to all those hospitals that are in the first level priority 
category (rural hospitals + only specialty program in the State) before 
evaluating those hospitals in the second level priority category (rural 
hospital), and would award the FTE resident slots to all those 
hospitals in the second level priority category before evaluating those 
hospitals in the third level priority category (``small'' urban 
hospital + only specialty in the State), and so on. Once we reach an 
aggregate number of FTE resident cap increases from the aggregate 
estimated pool of FTE resident positions under section 1886(h)(7)(A) of 
the Act, but are unable, based on the number of remaining slots, to 
meet all of the requests at the next level priority category at the 
next score level, we are proposing to prorate any remaining estimated 
FTE resident slots among all the applicant hospitals within that level 
priority category and with the same score on the hospital's 
application.
    For example, assume all applicant hospitals in the first through 
fourth level priority categories receive the requested increases in 
their FTE resident caps by CMS, and CMS next evaluates hospital 
applications and accompanying CMS Evaluation Forms in the fifth level 
priority category (only specialty program in the State). At the point 
that CMS has awarded cap increases for all the fourth level priority 
category hospitals that scored 5 or above on their CMS Evaluation Forms 
for each residency program, CMS finds that there is only a sufficient 
number of resident slots remaining in the estimated pool to grant half 
of the requests for slots from hospitals that scored 4 points. We are 
proposing that we would prorate all of the remaining FTEs among the 4-
point CMS Evaluation Forms and accompanying applications in the fourth 
level priority category. Thus, if CMS could have awarded a total of 200 
FTE slots for direct GME and 185 FTE slots for IME to only the first 50 
percent of the 4-point CMS Evaluation Forms in the fourth level 
priority category at the point that the estimated pool of FTE slots is 
spent, we are proposing to prorate all of the 200 FTE slots for direct 
GME and 185 FTE slots for IME among all of the 4-point CMS Evaluation 
Forms and accompanying applications in that fourth priority category, 
no matter what level of FTE resident cap increase was requested on the 
individual hospital's application.

[[Page 28305]]

    We recognize the complexity of this proposed evaluation process for 
the award of increases in hospital's FTE resident caps under section 
1886(h)(7)(B) of the Act. Therefore, we are including some further 
examples depicting the proposed procedures:

    Example 1: Hospital M in State Z is an urban hospital located in 
an MSA that has a population of less than 1 million. Hospital M can 
demonstrate the likelihood that it will fill the requested five FTEs 
resident slots for direct GME and IME because it is currently 
training a number of FTE residents in geriatrics that exceeds both 
of its FTE caps, and has attached to its application for an increase 
in its FTE resident caps a copy of Hospital M's past three Medicare 
cost reports (as filed or audited, whichever is most recent and 
available), which documents on Worksheet E, Part A and Worksheet E3, 
Part IV that, according to the resident counts and the FTE resident 
caps, Hospital M is training residents in excess of its caps. 
Hospital M has taken on residents from a teaching hospital in the 
community that closed, and is also located in a Medicare physician 
scarcity county.
    Hospital M's application would be evaluated by CMS accordingly: 
Fourth level priority category (``small'' urban hospital); score of 
3 (expanding geriatrics program, Medicare physician scarcity area, 
residents from a closed hospital).
    Example 2: Hospital K is a large academic medical center located 
in an MSA with a population of greater than 1,000,000 and is in a 
population HPSA. Hospital K regularly trains residents in programs 
sponsored by Meharry Medical College, and wishes to add more 
residents from Meharry, and therefore, has requested accreditation 
from the ACGME to expand the number of Meharry residents training in 
both allopathic surgery and osteopathic pediatrics programs. 
Hospital K is above both its direct GME and IME FTE caps.
    Hospital K's CMS Evaluation Forms for allopathic surgery and 
osteopathic pediatrics would be evaluated (separately) by CMS 
accordingly: Sixth level priority category (large urban hospital); 
can demonstrate likelihood of filling the slots (because Hospital K 
can document both that the hospital is above its caps and that it 
has requested ACGME accreditation to expand the programs); and a 
score of 2 (population HPSA, historically Black medical college).
    Example 3: Hospital E is a rural hospital located in a Medicare 
physician scarcity area and a geographic HPSA. It is a rural 
training site for a rural track residency program that has only been 
a training site since 2002. Therefore, Hospital E has an FTE 
resident cap of zero FTEs for direct GME and IME.
    Hospital E's CMS Evaluation Form for the rural track family 
practice program and accompanying application would be evaluated CMS 
accordingly: Second level priority category (rural hospital); can 
demonstrate the likelihood of filling slots (because Hospital E can 
document that it is both over its cap of zero FTEs, and that it is a 
training site for an accredited rural track residency program; and a 
score of 2 (a training site for a rural track, and a Medicare 
physician scarcity area, and a geographic HPSA).
    Example 4: Hospital W is a rural hospital that has FTE caps of 
15 FTEs for both direct GME and IME. Hospital W requests an FTE cap 
adjustment of 25 FTEs for both direct GME and IME; 5 FTEs to expand 
an existing geriatric fellowship; 20 FTEs to establish the first 
osteopathic emergency medicine program in State K, in which Hospital 
W is located. Hospital W can document that it is at its FTE caps 
with existing residency programs. CMS would make the following 
assessment for Hospital W's Evaluation Form for the geriatric 
fellowship: Hospital W falls into the second level priority category 
for being a rural hospital; can demonstrate the likelihood that it 
will fill the 5 FTE slots of the geriatric program by documenting 
that it has requested additional slots in the accreditation of the 
geriatrics program and that Hospital W is above its caps. Hospital W 
would receive a score of 1 on its CMS Evaluation Form for the 
geriatrics program. CMS would make the following assessment for 
Hospital W's CMS Evaluation Form for the new osteopathic emergency 
medicine program: Hospital W would meet the first level priority 
category for this Evaluation Form because, not only is it a rural 
hospital, but it is also requesting 20 FTEs for the only osteopathic 
emergency medicine program in the State; can demonstrate the 
likelihood that it will fill the 20 osteopathic emergency medicine 
FTEs by documenting the accreditation request and that it is over 
its FTE caps. Hospital W would receive a score of zero, because it 
did not meet any of the 10 evaluation criteria on the CMS Evaluation 
Form.
j. Application of Locality-Adjusted National Average Per Resident 
Amount (PRA)
    Section 1886(h)(7)(B)(v) of the Act, as added by section 422 of 
Public Law 108-173, provides that, with respect to additional residency 
slots attributable to the increase in the hospital's FTE resident cap 
as a result of redistribution of resident positions, the approved FTE 
resident amount, or PRA, is deemed to be equal to the locality-adjusted 
national average per resident amount computed for that hospital. In 
other words, section 1886(h)(7)(B)(v) of the Act requires that, for 
purposes of determining direct GME payments for portions of cost 
reporting periods occurring on or after July 1, 2005, a hospital that 
receives an increase in its direct GME FTE resident cap under section 
1886(h)(7)(B) of the Act will receive direct GME payments with respect 
to those additional FTE residents using the locality-adjusted national 
average PRA. Thus, we are proposing that a hospital that receives an 
increase in its FTE resident cap under section 1886(h)(7)(B) of the Act 
would receive direct GME payments based on the sum of two different 
direct GME calculations: one that is calculated using the hospital's 
actual PRAs (primary care PRA or nonprimary care PRA) applicable under 
existing Sec.  413.86(e)(4) (proposed to be redesignated as Sec.  
413.77(d) in this proposed rule) and the hospital's number of FTE 
residents not attributable to an FTE cap increase under section 
1886(h)(7)(B) of the Act; and another that is calculated using the 
locality-adjusted national average PRA under existing Sec.  
413.86(e)(4)(ii)(B) (proposed to be redesignated as Sec.  
413.77(d)(2)(ii) in this proposed rule) inflated to a hospital's 
current cost reporting period, and the hospital's number of FTE 
residents that is attributable to the increase in the hospital's FTE 
resident cap under section 1886(h)(7)(B).
    Section 422(a) of Public Law 108-173 contains a cross-reference in 
the new section 1886(h)(7)(B)(v) of the Act to the locality adjusted 
national average PRA ``computed under paragraph (4)(E).'' However, 
section 1886(h)(4)(E) of the Act does not relate to the locality-
adjusted national average PRA. Rather, it relates to the circumstances 
under which a hospital may count FTE resident time spent training in 
nonhospital sites.
    We have concluded that the cross-reference to section 1886(h)(4)(E) 
of the Act is a legislative drafting error, or scrivener's error. 
Instead, we believe Congress intended to refer to section 
1886(h)(2)(E), which explicitly provides for the determination of 
locality-adjusted national average PRAs. Because the drafting error is 
apparent, and a literal reading of the cross-reference as specified in 
the statute would produce absurd results, we are proposing to interpret 
the cross-reference to section 1886(h)(4)(E) of the Act in the new 
section 1886(h)(7)(B)(v) of the Act as if the reference were to section 
1886(h)(2)(E) of the Act.
    We note that section 1886(h)(7)(B)(v) of the Act, which addresses 
the applicability of the locality-adjusted national average PRAs with 
respect to redistributed slots for the direct GME payment, makes no 
reference to section 1886(h)(4)(G) of the Act, which is the provision 
concerning the rolling average count of FTE residents. That is, the 
statute does not provide for an exclusion from application of the 
rolling average for residents counted as a result of FTE cap increases 
under section 1886(h)(7)(B) of the Act. In light of the absence of a 
specific pronouncement in section 1886(h)(7)(B) of the Act exempting 
those residents from application of the rolling average, and with no 
apparent reason to treat residents counted as a result of the FTE

[[Page 28306]]

cap increases under section 1886(h)(7)(B) of the Act differently for 
purposes of the rolling average, we are proposing to require that if a 
hospital increases its direct GME FTE count of residents as a result of 
an FTE resident cap increase under section 1886(h)(7)(B) of the Act, 
those FTE residents are immediately subject to the rolling average 
calculation. Furthermore, we believe that, given potentially 
significant shifts of FTE slots among hospitals as a result of section 
1886(h)(7) of the Act, the inclusion of FTE residents counted as a 
result of section 1886(h)(7)(B) of the Act in the rolling average 
introduces a measure of stability and predictability, and mitigates 
radical shifts in direct GME payments from period to period. Thus, any 
increase in a hospital's direct GME payment relating to an FTE cap 
increase under section 1886(h)(7)(B) of the Act will be phased-in over 
a 3-year period because the additional FTE residents are immediately 
included in the rolling average calculation and would only gradually be 
included in the hospital's FTE count.
    Following is an example of how direct GME payment would be 
determined for a hospital that received an increase in its direct GME 
FTE cap under section 1886(h)(7)(B) of the Act. Hospital A has a fiscal 
year end (FYE) of June 30, and a direct GME FTE resident cap of 20 
FTEs. During its FYEs June 30, 2004 and June 30, 2005, Hospital A 
trained 20 nonprimary care residents. During FYE June 30, 2006, 
Hospital A trains 25 nonprimary care FTE residents. Hospital A's FYE 
June 30, 2006 nonprimary care PRA is $100,000. The FYE June 30, 2006 
locality-adjusted national average PRA for Hospital A is $84,000. 
Hospital A's Medicare utilization is 35 percent. Effective July 1, 
2005, under section 1886(h)(7)(B) of the Act, Hospital A receives an 
increase to its direct GME FTE resident cap of 5 FTEs, for a total 
adjusted direct GME FTE resident cap of 25 FTEs. For the FYE June 30, 
2006 cost report, the direct GME payment is calculated as follows:
    Step 1. For residents NOT counted pursuant to section 1886(h)(7)(B) 
of the Act--

For July 1, 2005 through June 30 2006:

     Rolling average count: 20 + 20 + 20/3 = 20.

     Direct GME computation: $100,000 x 20 x .35 = $700,000.

    Step 2. For residents counted pursuant to section 1886(h)(7)(B) of 
the Act--

For July 1, 2005 through June 30, 2006:

     Rolling average count: 25 + 20 + 20/3 = 21.7
     Difference between rolling average count for residents 
counted pursuant to section 1886(h)(7)(B) of the Act and rolling 
average count for residents counted not pursuant to section 
1886(h)(7)(B) of the Act (rolling average count under step 2 minus 
rolling average count under step 1): 21.7 - 20 = 1.7.
     Direct GME computation: $84,000 x 1.7 x .35 = $49,980.

    Step 3. Direct GME payment for FYE June 30, 2006: $700,000 + 
$49,980 = $749,980.
k. Application of Section 422 to Hospitals That Participate in 
Demonstration Projects or Voluntary Reduction Programs
    Section 1886(h)(7)(B)(vi) of the Act, as amended by section 
422(a)(3) of Public Law 108-173, states that ``Nothing in this 
subparagraph shall be construed as permitting the redistribution of 
reductions in residency positions attributable to voluntary reduction 
programs * * * under a demonstration project approved as of October 31, 
2003.'' This language is referring to the New York Medicare GME 
Demonstration Project and the Voluntary Resident Reduction Project 
(VRRP) under section 402 of Public Law 90-248. In July 1997, 42 New 
York teaching hospitals participated in the demonstration project. As 
there were two entry points for this demonstration, an additional seven 
hospitals joined the program in July 1998. The purpose of the 
demonstration project was to test reimbursement changes associated with 
residency training to determine whether hospitals could use time-
limited transition funding to replace and reengineer the services 
provided by a portion of their residency trainees. In exchange for 
reducing its count of residents by 20 to 25 percent over a 5-year 
period, while maintaining or increasing its primary care-to-specialty 
ratio of residents, a participating hospital (or consortium of 
hospitals) would receive ``hold harmless payments'' for 6 years. These 
payments represented a declining percentage of the Medicare GME 
reimbursement the participating hospitals would have received had their 
number of residents not been reduced.
    For hospitals that successfully completed the demonstration 
project, the Balanced Budget Act of 1997 states that if a hospital 
increases the number of full-time equivalent residents permitted under 
its reduction plan as of the completion of the plan, it is liable for 
repayment of the total amounts paid under the demonstration. Following 
the demonstration's period of performance, which ended June 30, 2003, 
if a hospital exceeds its post-demonstration cap and trains residents 
in excess of the FTE levels achieved under the demonstration, the 
hospital is not permitted to count those excess residents for purposes 
of Medicare GME payments until such time as the hold harmless funds 
paid under the demonstration project have been repaid in full.
    Similarly, with the VRPP, hospitals could use time-limited 
transition funding to replace the services provided by a portion of 
their residents. In exchange for reducing its count of residents by 20 
to 25 percent over a 5-year period, while maintaining or increasing its 
primary care-to-specialty ratio of residents, a VRRP participating 
hospital would receive ``hold harmless payments'' for 5 years. These 
payments represented a declining percentage of the Medicare GME 
reimbursement the VRRP participating hospital would have received had 
its number of residents not been reduced.
    We believe that the language of section 1886(h)(7)(B)(vi) of the 
Act precludes the Secretary from redistributing residency positions 
that are unused due to a hospital's participation in a demonstration 
project or the VRRP to other hospitals that seek to increase their FTE 
resident caps under section 1886(h)(7)(B)(i) of the Act. That is, if we 
were to propose that hospitals that participated in a demonstration 
project or the VRRP are subject to possible reductions to their FTE 
resident caps under section 1886(h)(7)(A)(i) of the Act, any excess 
slots resulting from reductions made under section 1886(h)(7)(A)(i) of 
the Act attributable to the demonstration or the voluntary reduction 
program at these hospitals would not be allocated to the resident pool 
and redistributed to other hospitals. We also believe that section 
1886(h)(7)(B)(vi) of the Act is silent as to whether the Secretary 
should apply the possible reductions under section 1886(h)(7)(A)(i) of 
the Act to the FTE resident caps of these hospitals. Congress 
recognized the unique status of reductions in FTE resident counts made 
by these hospitals that participated in a demonstration project under 
the authority of section 402 of Public Law 90-248, or a VRRP under 
section 1886(h)(6) of the Act, in which these hospitals received hold-
harmless payments from Medicare for reducing the number of residents 
that they were training. Accordingly, we are proposing to recognize the 
unique status of FTE reductions made by these hospitals, and

[[Page 28307]]

are applying the discretion that Congress has granted the Secretary 
under section 1886(h)(7)(A)(ii) of the Act in determining the reference 
resident level applicable to these hospitals, to determine the extent 
to which section 1886(h)(7)(A)(i) of the Act applies to these 
hospitals.
    We note that section 1886(h)(7)(B)(vi) of the Act only applies to 
these hospitals to the extent that a hospital's ``reductions in 
residency positions'' were ``attributable'' to its participation in the 
demonstration project or the VRRP. In determining the reference 
resident level for these hospitals, we are proposing to adjust the 
reference resident level for ``reductions in residency positions 
attributable'' to participation in the demonstration project or the 
VRRP. We are proposing to define ``reductions in residency positions 
attributable'' to participation in the demonstration project or the 
VRRP as the difference between the number of unweighted allopathic and 
osteopathic residents training at the hospital at the start of a 
hospital's participation in the demonstration project or the VRRP, 
(that is, the base number of residents as defined by the terms of the 
demonstration project and the VRRP,) and the number of such residents 
training at the hospital in the hospital's most recent cost reporting 
period ending on or before September 30, 2002. We are proposing that, 
in determining any possible adjustments to the reference resident level 
for hospitals that participated in the demonstration project or the 
VRRP, we would differentiate between hospitals that withdrew from 
participation prior to the beginning of the most recent cost reporting 
period ending on or before September 30, 2002, and hospitals that 
either have not withdrawn from participation, or withdrew sometime 
during or after the most recent cost reporting period ending on or 
before September 30, 2002.
    Specifically, we are proposing that, if a hospital was 
participating in the demonstration project or the VRRP at any time 
during the hospital's most recent cost reporting period ending on or 
before September 30, 2002, for purposes of determining possible 
reductions to the FTE resident caps, we would compare the higher of the 
hospital's base number of residents, and the resident level in the 
hospital's most recent cost reporting period ending on or before 
September 30, 2002, to the hospital's otherwise applicable FTE resident 
cap. If the higher of the base number of residents or the resident 
level in the hospital's most recent cost reporting period ending on or 
before September 30, 2002, is still less than the otherwise applicable 
FTE resident cap, we are proposing to reduce the hospital's FTE 
resident cap amount by 75 percent of the difference, effective July 1, 
2005. We would also use those slots in the redistribution process under 
section 1886(h)(7)(B) of the Act since those slots are not 
``attributable'' to participation in the demonstration project or the 
VRRP.
    Under section 1886(h)(7)(A)(ii)(II) of the Act, a hospital may 
submit a timely request to use its cost report that includes July 1, 
2003, for purposes of determining the reference resident level if the 
hospital has an expansion of an existing program that is not reflected 
on the hospital's most recent settled cost report. If a hospital that 
was still participating in the demonstration project or the VRRP at 
some time during its most recent cost reporting period ending on or 
before September 30, 2002, had an expansion of an existing program that 
is not reflected on its most recent settled cost report, and the 
resident level for its cost reporting period that includes July 1, 
2003, is higher than the resident level for the most recent cost 
reporting period ending on or before September 30, 2002, and is higher 
than the base number of residents, we anticipate that the hospital 
would submit a timely request that its resident level from its cost 
reporting period that includes July 1, 2003, be compared to its 
otherwise applicable FTE resident cap, for purposes of determining a 
possible reduction to the hospital's FTE resident cap. We believe that 
under the proposed policy discussed above, a hospital would only 
request that we utilize its cost reporting period that includes July 1, 
2003, if the number of allopathic and osteopathic residents it trained 
in that cost reporting period is higher than its base number of 
residents and its base number of residents is less than its FTE 
resident cap. If we grant the hospital's request that we utilize its 
cost reporting period that includes July 1, 2003, and the resident 
level for that period is less than the FTE resident cap, we would 
reduce the FTE resident cap by 75 percent of the difference between the 
two numbers. We would also use those slots in the redistribution 
process under section 1886(h)(7)(B) of the Act, since those slots are 
not ``attributable'' to participation in the demonstration project or 
the VRRP.
    If a hospital withdrew from participation in the demonstration 
project or the VRRP prior to its most recent cost reporting period 
ending on or before September 30, 2002, we are proposing that such a 
hospital would be subject to the procedures applicable to all other 
hospitals for determining possible reductions to the FTE resident caps. 
However, we note that such a hospital may still apply for an increase 
to its FTE caps as specified under section 1886(h)(7)(B) of the Act 
(the proposals for applying for the increase are described above).
l. Application of Section 422 to Hospitals That File Low Utilization 
Medicare Cost Reports
    In general, section 422 of Public Law 108-173 applies to hospitals 
that are Medicare-participating providers and that train residents in 
approved residency programs. However, because Medicare-participating 
children's hospitals primarily serve a non-Medicare population and, 
therefore, receive minimal Medicare payments relative to other 
Medicare-participating hospitals, some children's hospitals choose 
(with approval from their fiscal intermediaries) to submit low 
utilization (abbreviated) Medicare cost reports. Typically, such low 
utilization cost reports do not include the information that would be 
necessary for us to calculate Medicare GME payments, such as FTE 
resident counts and caps. Thus, children's hospitals that submit these 
low utilization cost reports do not receive Medicare GME payments.
    Under section 1886(h)(7)(A) of the Act, as added by section 422(a) 
of Public Law 108-173, we are proposing that determinations as to 
whether, and by how much, a children's hospital's FTE resident cap will 
be reduced will be made using the same methodology (that is, utilizing 
the same reference cost reporting periods and the same reference 
resident levels) that we are proposing for other Medicare-participating 
teaching hospitals. We note that the low utilization cost reports may 
be filed with or without Worksheet E-3, Part IV (the worksheet on which 
the Medicare direct GME payment is calculated). If a children's 
hospital files a low utilization cost report in a given cost reporting 
period, and does not file the Worksheet E-3, Part IV, for Medicare 
purposes, that hospital is not considered by Medicare to be a teaching 
hospital in that cost reporting period. (We realize that a children's 
hospital that files a low utilization cost report may have a ``resident 
cap'' that is applicable for payment purposes under the Children's 
Hospital Graduate Medical Education (CHGME) Payment Program, 
administered by the Health Resources and Services Administration 
(HRSA), but this resident cap is not the Medicare FTE resident cap.) As 
stated in the One-Time Notification published on April 30, 2004 
(Transmittal 77, CR

[[Page 28308]]

3247), if a children's hospital filed a low utilization cost report in 
its most recent cost reporting period ending on or before September 30, 
2002, and did not file the Worksheet E-3, Part IV, there could be no 
reduction under section 1886(h)(7)(A) of the Act because there is no 
reference resident level for such a hospital. This would be the case 
even in instances where such a children's hospital has a FTE resident 
cap (for example, from 1996) that is recognized for Medicare purposes, 
because there would still be no reference resident level for its most 
recent cost reporting period ending on or before September 30, 2002, on 
which to determine a possible reduction to the children's hospital FTE 
resident cap.
    Although section 1886(h)(7)(A) of the Act does not apply to 
children's hospitals that filed a low utilization cost report (and no 
Worksheet E-3, Part IV) for the most recent cost reporting period 
ending on or before September 30, 2002, we are proposing that, 
regardless of how a children's hospital has previously filed its 
Medicare cost report (that is, a full cost report or an abbreviated 
one), or how it is treated for CHGME payment purposes, a children's 
hospital would be eligible to apply for an increase in its FTE resident 
cap under section 1886(h)(7)(B) of the Act, subject to the same 
demonstrated likelihood and evaluation criteria proposed above for all 
hospitals. However, we are proposing that, in order to receive an 
increase in its FTE resident cap under section 1886(h)(7)(B) of the 
Act, effective July 1, 2005, in addition to complying with the proposed 
application requirements described above, the hospital must file 
Worksheet E-3, Part IV, with its Medicare cost report for its cost 
reporting period that includes July 1, 2005. We are proposing that the 
children's hospital comply with this requirement because section 422 is 
intended to allow a hospital to increase its FTE counts for purposes of 
Medicare GME payments. We do not believe it would be appropriate to 
grant an increase in a hospital's FTE resident cap under section 
1886(h)(7)(B) of the Act if the hospital does not use the slots for 
Medicare purposes (but only for purposes of the CHGME Payment Program) 
as would be evidenced by not filing a Worksheet E-3, Part IV.
m. Specific Solicitation for Public Comment on the Proposals
    We specifically solicit public comment on the proposals in this 
section IV.O.2. In particular, in section IV.O.2.g. of this preamble on 
the determination of the hospitals that will receive increases in their 
FTE resident caps, we have considered many possible alternatives to 
evaluate hospital applications. We specifically solicit public comments 
on how hospitals should ``demonstrate the likelihood'' of filling the 
additional residency slots, and in a way that is documentable for all 
hospitals and verifiable by CMS. We also specifically solicit public 
comments on the criteria we have proposed for evaluating the hospital 
applications and are open to suggestions from the public on what other 
criteria we should use to determine which hospitals should receive the 
increases in their FTE resident caps. We ask the public to keep in mind 
that criteria should be documentable for all hospitals and verifiable 
by CMS.
n. CMS Evaluation Form

CMS Evaluation Form as Part of the Application for the Increase in a 
Hospital's FTE Cap(s) Under Section 422 of the Medicare Modernization 
Act of 2003

    Directions: Please fill out the information below for each 
residency program for which the applicant hospital intends to use 
the increase in its FTE cap(s). CMS notes that the applicant 
hospital is responsible for complying with the other requirements 
listed in the FY 2005 hospital inpatient prospective payment system 
proposed rule in order to complete its application for the increase 
in its FTE cap(s) under section 422 of Public Law 108-173.
 NAME OF HOSPITAL:-----------------------------------------------------
 MEDICARE PROVIDER NUMBER:---------------------------------------------
 NAME OF SPECIALTY TRAINING PROGRAM:-----------------------------------

(Check one): [ballot] Allopathic Program [ballot] Osteopathic 
Program

NUMBER OF FTE SLOTS REQUESTED FOR PROGRAM:

Direct GME:---------- IME:----------
-----------------------------------------------------------------------

Section A: Demonstrated Likelihood of Filling the FTE Slots

(Place an ``X'' in the box for the applicable criterion and 
subcriteria.)

[ballot] A1: Demonstrated Likelihood Criterion 1. The hospital 
intends to use the additional FTEs to establish a new residency 
program (listed above) on or after July 1, 2005 (that is, a newly 
approved program that begins training residents on or after July 1, 
2005).

[ballot] (1) Hospital is establishing this newly approved residency 
program. (Check one of the following.)

[ballot] Application for approval of the new residency program has 
been submitted to the ACGME or the AOA by December 1, 2004. (Copy 
attached.)

[ballot] The hospital has submitted an institutional review document 
or program information form concerning the new program in an 
application for approval of the new program by December 1, 2004. 
(Copy attached.)

[ballot] The hospital has received written correspondence from the 
ACGME or AOA acknowledging receipt of the application for the new 
program, or other types of communication from the accrediting bodies 
concerning the new program approval process (such as notification of 
site visit). (Copy attached.)

[ballot] (2) Hospital will likely fill the slots requested. (Check 
one of the following.)

[ballot] The hospital s existing residency programs had a resident 
fill rate of at least 95 percent in each of program years 2001 
through 2003. (Documentation attached.)

[ballot] The hospital has the cover page of its employment contracts 
with the residents who are or will be participating in the new 
residency program (resident specific information may be redacted). 
(Copies attached.)

[ballot] The specialty program (listed above) has a resident fill 
rate nationally, across all hospitals, of at least 95 percent. 
(Documentation attached.)

[ballot] A2: Demonstrated Likelihood Criterion 2. The applying 
hospital intends to use the additional FTEs to expand an existing 
residency training program that is listed above (that is, to 
increase the number of FTE resident slots in the program) on or 
after July 1, 2005, and before July 1, 2008.

[ballot] (1) Hospital intends to expand an existing program. (Check 
one of the following.)


[[Page 28309]]


[ballot] The appropriate accrediting body (the ACGME or the AOA) has 
approved the hospital s expansion of the number of FTE residents in 
the program. (Documentation attached.)

[ballot] The National Residency Match Program or the American 
Osteopathic Association Residency Match Program has accepted or will 
be accepting the hospital s participation in the match for the 
existing program that will include additional resident slots in that 
residency training program. (Documentation attached.)

[ballot] The hospital has institutional review document or program 
information form for the expansion of the existing residency 
training program. (Copy attached.)

[ballot] (2) Hospital will likely fill the slots of the expanded 
residency program. (Check one of the following.)

[ballot] Hospital has employment contracts with the residents who 
are or will be participating in the expanded program (resident 
specific information may be redacted) and employment contracts with 
the residents participating in the program prior to the expansion of 
the program. (Copy of the cover page of both documents attached.)

[ballot] Hospital has other previously established residency 
programs. (Documentation attached evidencing that each of the 
residency programs had a resident fill rate of at least 95 percent 
in each of program years 2001 through 2003.)

[ballot] Hospital is expanding an existing program in a particular 
specialty. (Documentation attached evidencing that the specialty has 
a resident fill rate nationally, across all hospitals, of at least 
95 percent.)

[ballot] Hospital is expanding a program in order to train residents 
that need a program because another hospital in the State has closed 
a similar program, and the applying hospital received a temporary 
adjustment to its FTE cap(s) (under the requirements of Sec.  
413.86(g)(9)). (Documentation attached.)

[ballot] A3: Demonstrated Likelihood Criterion 3. Hospital is 
applying for an increase in its FTE resident cap because the 
hospital is already training residents in an existing residency 
training program(s) in excess of its direct GME FTE cap or IME FTE 
cap, or both. (Copies of EACH of the following attached.)

     Copies of the most recent as-submitted Medicare cost 
reports documenting on Worksheet E, Part A and Worksheet E3, Part IV 
the resident counts and FTE resident caps for both direct GME and 
IME for the relevant cost reporting periods.
     Copies of the 2004 residency match information 
concerning the number of residents the hospital intends to have in 
its existing programs.
     Copies of the most recent accreditation letters on all 
of the hospital s training programs in which the hospital trains and 
counts FTE residents for direct GME and IME.

[ballot] A4: Demonstrated Likelihood Criterion 4. The hospital is 
applying for the unused FTE resident slots because the hospital is 
at risk of losing accreditation of a residency training program if 
the hospital does not increase the number of FTE residents in the 
program on or after July 1, 2005. (Documentation attached from the 
appropriate accrediting body of the hospital's risk of lost 
accreditation as a result of an insufficient number of residents in 
the program.)

Section B. Level Priority Category

[ballot] (Place an ``X'' in the appropriate box that is applicable 
to the level priority category that describes the applicant 
hospital.)

[ballot] B1: First Level Priority Category: The hospital is a rural 
hospital and has the only specialty training program in the State 
(for the program requested on page 1 of this CMS Evaluation Form).

[ballot] B2: Second Level Priority Category: The hospital is a rural 
hospital only.

[ballot] B3: Third Level Priority Category: The hospital is a small 
urban hospital (that is, an urban hospital that is located in a 
``not large urban area'' ) and has the only specialty program in the 
State (for the program requested on this CMS Evaluation Form).

[ballot] B4: Fourth Level Priority Category: The hospital is a 
``small'' urban hospital only.

[ballot] B5: Fifth Level Priority Category: The hospital has the 
only specialty training program in the State (for the program 
requested on page 1 of this CMS Evaluation Form).

[ballot] B6: Sixth Level Priority Category: The hospital meets none 
of the statutory priority criteria.

Section C. Evaluation Criteria

(Place an X in the box for each criterion that is appropriate for 
the applicant hospital and for the program for which the increase in 
the FTE cap is requested.)

[ballot] C1: Evaluation Criterion One. The hospital that is 
requesting the increase in its FTE resident cap(s) has a Medicare 
inpatient utilization over 60 percent, as reflected in at least two 
of the hospital s last three most recent audited cost reporting 
periods for which there is a settled cost report.

[ballot] C2: Evaluation Criterion Two. The hospital needs the 
additional slots to establish a new geriatrics residency program, or 
adding residents to an existing geriatrics program.

[ballot] C3: Evaluation Criterion Three. The hospital does not 
qualify for an adjustment to its FTE caps under existing Sec.  
413.86(g)(12) for a rural track residency program, but is applying 
for an increase in its FTE resident cap(s) under section 
1886(h)(7)(B) of the Act because it rotates (or in the case of a new 
program, will rotate) residents for at least 25 percent of the 
duration of the residency program to any one (or in combination 
thereof) of the following: a rural area, as defined in section 
1886(d)(2)(D)(ii) of the Act and Sec.  412.62(f)(1)(iii) of the 
regulations; a rural health clinic (RHC), as defined in section 
1861(aa)(1) of the Act and Sec.  491.2 of the regulations; or a 
Federally Qualified Health Center (FQHC), as defined in section 
1861(a)(3) of the Act and Sec.  405.2401(b) of the regulations.

[ballot] C4: Evaluation Criterion Four. In portions of cost 
reporting periods prior to July 1, 2005, the hospital qualified for 
a temporary adjustment to its FTE cap under existing Sec.  
413.86(g)(9) because it was training displaced residents from either 
a closed program or a closed hospital, and, even after the temporary 
adjustment, the hospital continues to train residents in the 
specialty(ies) of the displaced residents and is above the 
hospital's direct GME FTE cap or IME FTE cap, or both, for that 
reason.

[ballot] C5: Evaluation Criterion Five. The hospital is above its 
FTE caps because it was awaiting accreditation of a new program from 
the ACGME or the AOA during the base period for its FTE cap(s) but 
was not eligible to receive a new program adjustment as stated under 
existing Sec.  413.86(g)(6)(ii).

[ballot] C6: Evaluation Criterion Six. The hospital is above its FTE 
resident caps because, despite qualifying for an FTE cap adjustment 
for a new program under Sec.  413.86(g)(6)(i) or (g)(6)(ii), it was 
unable to ``grow'' its program to the full complement of residents 
for which the program was accredited before the hospital's FTE 
resident cap was permanently set beginning with the fourth program 
year of the new program.

[ballot] C7: Evaluation Criterion Seven. The hospital is located in 
any one (or in combination thereof) of the following: a geographic 
HPSA, as defined in 42 CFR 5.2; a population HPSA (also defined at 
42 CFR 5.2); or a Medicare physician scarcity county, as defined 
under section 413 of Public Law 108-173.


[[Page 28310]]


[ballot] C8: Evaluation Criterion Eight. The hospital is in a rural 
area (as defined under section 1886(d)(2)(D)(ii) of the Act) and is 
a training site for a rural track residency program (as specified 
under Sec.  413.86(g)(12), but is unable to count all of the FTE 
residents training at the rural hospital in the rural track because 
the rural hospital's FTE cap is lower than the hospital's unweighted 
count of allopathic or osteopathic FTE residents beginning with 
portions of cost reporting periods on or after July 1, 2005.

[ballot] C9: Evaluation Criterion Nine. The hospital is affiliated 
with a historically Black medical college.

[ballot] C10: Evaluation Criterion Ten: The hospital is training 
residents in residency program(s) sponsored by a medical school(s) 
that is designated as a Center of Excellence for Underserved 
Minorities (COE) under section 736 of the Public Health Service Act 
in FY 2003.
o. CMS Central and CMS Regional Office Mailing Addresses for 
Applications for Increases in FTE Resident Caps

Central Office

Centers for Medicare and Medicaid Services (CMS), Director, Division 
of Acute Care, 7500 Security Boulevard, Mail Stop C4-08-06, 
Baltimore, Maryland 21244.

Region I (Connecticut, Maine, Massachusetts, New Hampshire, Rhode 
Island, and Vermont)

Centers for Medicare and Medicaid Services (CMS), Associate Regional 
Administrator, Division of Medicare Financial Management, Region I, 
JFK Federal Building, Room 2325, Boston, MA 02203, Phone: (617) 565-
1185.

Region II (New York, New Jersey, U.S. Virgin Islands, and Puerto 
Rico)

Centers for Medicare and Medicaid Services (CMS), Associate Regional 
Administrator, Division of Medicare Financial Management, Region II, 
26 Federal Plaza, 38th Floor, New York, NY 10278, Phone: (212) 264-
3657.

Region III (Delaware, Maryland, Pennsylvania, Virginia and West 
Virginia, and the District of Columbia)

Centers for Medicare and Medicaid Services (CMS), Associate Regional 
Administrator, Division of Medicare Financial Management, Region 
III, Public Ledger Building, Suite 216, 150 South Independence Mall 
West, Philadelphia, PA 19106, Phone: (215) 861-4140.

Region IV (Alabama, North Carolina, South Carolina, Florida, 
Georgia, Kentucky, Mississippi, and Tennessee)

Centers for Medicare and Medicaid Services (CMS), Associate Regional 
Administrator, Division of Medicare Financial Management, Region IV, 
Atlanta Federal Center, 61 Forsyth Street, SW., Suite 4T20, Atlanta, 
GA 30303-8909, Phone: (404) 562-7500.

Region V (Illinois, Indiana, Michigan, Minnesota, Ohio, and 
Wisconsin)

Centers for Medicare and Medicaid Services (CMS), Associate Regional 
Administrator, Division of Medicare Financial Management, Region V, 
233 North Michigan Avenue, Suite 600, Chicago, IL 60601, Phone: 
(312) 886-6432.

Region VI (Arkansas, Louisiana, New Mexico, Oklahoma, and Texas)

Centers for Medicare and Medicaid Services (CMS), Associate Regional 
Administrator, Division of Medicare Financial Management, Region VI, 
1301 Young Street, Suite 714, Dallas, TX 75202, Phone: (214) 767-
6423.

Region VII (Iowa, Kansas, Missouri, and Nebraska)

Centers for Medicare and Medicaid Services (CMS), Associate Regional 
Administrator, Division of Medicare Financial Management, Region 
VII, Richard Bolling Federal Building, Room 235, 601 East 12th 
Street, Kansas City, MO 64106.

Region VIII (Colorado, Montana, North Dakota, South Dakota, Utah 
and Wyoming)

Centers for Medicare and Medicaid Services (CMS), Associate Regional 
Administrator, Division of Medicare Financial Managment, Region 
VIII, Colorado State Bank Building, 1600 Broadway, Suite 700, 
Denver, CO 80202, Phone: (303) 844-2111.

Region IX (Arizona, California, Hawaii, and Nevada and Territories 
of American Samoa, Guam and the Commonwealth of the Northern 
Mariana Islands)

Centers for Medicare and Medicaid Services (CMS), Associate Regional 
Administrator, Division of Medicare Financial Management, Region IX, 
75 Hawthorne St., Suite 408, San Francisco, CA 94105, Phone: (415) 
744-3501.

Region X (Alaska, Idaho, Oregon, and Washington)

Centers for Medicare and Medicaid Services (CMS), Associate Regional 
Administrator, Division of Medicare Financial Management, Region X, 
2201 Sixth Avenue, MS-40, Seattle, WA 98121, Phone: (206) 615-2306.
3. Direct GME Initial Residency Period (Proposed New Sec.  413.79, a 
Proposed Redesignation of Existing Sec.  413.86(g))
a. Background
    As we have generally described above, the amount of direct GME 
payment to a hospital is based in part on the number of FTE residents 
who are training at the hospital during a year. The number of FTE 
residents training at a hospital, and thus the amount of direct GME 
payment to a hospital, is directly affected by CMS policy on how 
``initial residency periods'' are determined for residents.
    Section 1886(h)(5)(A) of the Act defines ``approved medical 
residency training program'' as ``a residency or other postgraduate 
medical training program, participation in which may be counted toward 
certification in a specialty or subspecialty.'' This provision is 
implemented in regulations at existing Sec.  413.86(b). In accordance 
with section 1886(h)(5)(I) of the Act, the term ``resident'' is defined 
to include ``an intern or other participant in an approved medical 
residency training program.'' Existing Sec.  413.86(b) defines 
``resident'' as an ``intern, resident, or fellow who participates in an 
approved medical residency training program * * * as required in order 
to become certified by the appropriate specialty board.''
    Section 1886(h)(4)(C)(ii) of the Act provides that while a resident 
is in the ``initial residency period,'' the resident is weighted at 
1.00 (existing Sec.  413.86(g)(2) of the regulations). Section 
1886(h)(4)(C)(iii) of the Act requires that if a resident is ``not in 
the resident's initial residency period,'' the resident is weighted as 
.50 FTE resident (existing Sec.  413.86(g)(3) of the regulations).
    Section 1886(h)(5)(F) of the Act defines ``initial residency 
period'' as the ``period of board eligibility,'' and, subject to 
specific exceptions, limits the initial residency period to an 
``aggregate period of formal training'' of no more than 5 years for any 
individual. Section 1886(h)(5)(G) of the Act generally defines ``period 
of board eligibility'' for a resident as ``the minimum number of years 
of formal training necessary to satisfy the requirements for initial 
board eligibility in the particular specialty for which the resident is 
training.'' Existing Sec.  413.86(g)(1) of the regulations generally 
defines ``initial residency period'' as the ``minimum number of years 
required for board eligibility.''Existing Sec.  413.86(g)(1)(iv) 
provides that ``time spent in residency programs that do not lead to 
certification in a specialty or subspecialty, but that otherwise meet 
the definition of approved programs . . . is counted toward the initial 
residency period limitation.'' Section 1886(h)(5)(F) of the Act further 
provides that ``the initial residency period shall be determined, with 
respect to a resident, as of the time the resident enters the residency 
training program.''
    The initial residency period is determined as of the time the 
resident enters the ``initial'' or first residency training program and 
is based on the period of board eligibility associated with that 
medical specialty. Thus, this

[[Page 28311]]

provision limits the amount of direct GME that Medicare pays a hospital 
for a resident who switches specialties to a program with a longer 
period of board eligibility or completes training in a specialty and 
then continues training in a subspecialty (for example, cardiology and 
gastroenterology are subspecialties of internal medicine).
b. Direct GME Initial Residency Period Limitation: Simultaneous Match 
Issue
    CMS understands there are numerous programs, including 
anesthesiology, dermatology, psychiatry, and radiology, that require a 
year of generalized clinical training to be used as a prerequisite for 
the subsequent training in the particular specialty. For example, in 
order to become board eligible in anesthesiology, a resident must first 
complete a generalized training year and then complete 3 years of 
training in anesthesiology. This first year of generalized residency 
training is commonly known as the ``clinical base year.'' Commonly, the 
clinical base year requirement is fulfilled by completing either a 
preliminary year in internal medicine (although the preliminary year 
can also be in other specialties such as general surgery or family 
practice), or a transitional year program (which is not associated with 
any particular medical specialty).
    In many cases, during the final year of medical school, medical 
students apply for training in specialty programs. Typically, a medical 
student who wants to train to become a specialist is ``matched'' to 
both the clinical base year program and the residency training 
specialty program at the same time. For example, the medical student 
who wants to become an anesthesiologist will apply and ``match'' 
simultaneously for a clinical base year in an internal medicine program 
for year 1 and for an anesthesiology training program in years 2, 3, 
and 4.
    Based on our interpretation of the statute, CMS' policy is that the 
initial residency period is determined for a resident based on the 
program in which he or she participates in the resident's first year of 
training, without regard to the specialty in which the resident 
ultimately seeks board certification. Therefore, for example, a 
resident that chooses to fulfill the clinical base year requirement for 
an anesthesiology program with a preliminary year in an internal 
medicine program will be ``labeled'' with the initial residency period 
associated with internal medicine, or 3 years (3 years of training are 
required to become board eligible in internal medicine), even though 
the resident may seek board certification in anesthesiology, which 
requires a minimum of 4 years of training to become board eligible. As 
a result, this resident would be weighted at 0.5 FTE in his or her 
fourth year of training for purposes of direct GME payment.
    We understand that some hospitals have been assigning residents 
that complete a clinical base year in a different specialty from the 
one in which they ultimately train an initial residency period and a 
weighting factor based on the specialty associated with second program 
year in which the residents train. As a result, some residents have 
been assigned a weighting factor of 1.0 FTE for years beyond their 
initial residency periods, rather than the applicable 0.5 FTE weighting 
factor. This error results in Medicare overpayments, the size of which 
is dependent upon the hospital's direct GME PRA and its Medicare 
utilization. In addition, we have received numerous requests from the 
health care industry to revise our policy concerning the initial 
residency period for residency programs that require a clinical base 
year because some entities in the industry believe that our current 
policy is unfair to those individuals who ``match'' simultaneously for 
both a preliminary year (for example, the clinical base year in 
internal medicine) and the longer specialty residency program (for 
example, anesthesiology, dermatology, or radiology).
    To address these concerns, we are considering making a change in 
policy that addresses these ``simultaneous match'' residents. 
Specifically, we are considering a policy that, if a hospital can 
document that a particular resident matches simultaneously for a first 
year of training in a clinical base year in one medical specialty, and 
for additional year(s) of training in a different specialty program, 
the resident's initial residency period would be based on the period of 
board eligibility associated with the specialty program in which the 
resident matches for the subsequent year(s) of training and not on the 
period of board eligibility associated with the clinical base year 
program, for purposes of direct GME payment. In addition, we are 
considering a new definition of ``residency match'' to mean, for 
purposes of direct GME, a national process by which applicants to 
approved medical residency programs are paired with programs on the 
basis of preferences expressed by both the applicants and the program 
directors.
    This policy could apply regardless of whether the resident 
completes the first year of training in a separately accredited 
transitional year program or in a preliminary (or first) year in 
another residency training program such as internal medicine.
    Under such a policy, hospitals would apply a weight of 1.0 FTE 
(instead of 0.5) for an additional year or two to some residents who, 
as a prerequisite for training in a specialty program, complete a first 
year of training in a different specialty program. This would probably 
cause an increase in direct GME payments. This provision would apply to 
such programs as anesthesiology, dermatology, radiology, and physical 
medicine and rehabilitation. In 2004, there were approximately 1,840 
residents in these specialties that would be affected by this proposal, 
as compared to the approximately 83,000 residents in total for whom 
Medicare makes direct GME payments. Under current policy, these 1,840 
residents would be weighted at 0.5 FTE in their 4th year (and 5th year, 
if applicable) of training. Therefore, direct GME spending for these 
1,840 residents should currently be $26.5 million (1,840 x 0.5 x 82,249 
\5\ x .35 \6\). Under the policy CMS is considering, direct GME 
spending would be twice that amount at $53 million (1,840 x $82,249 x 
.35). However, because we believe a number of fiscal intermediaries may 
have been applying current policy incorrectly and instead have been 
weighting approximately 920 residents at 1.0 in their 4th year (and 5th 
year, if applicable) of training, the cost of this change would be 
expected to be closer to $13.25 million (920 x 0.5 x $82,249 x .35). We 
are providing this cost impact analysis to the public for its 
information in consideration of any such proposed change.
---------------------------------------------------------------------------

    \5\ $82,249 is the estimated national average per resident 
amount for FY 2005.
    \6\ .35 is the estimated average Medicare utilization.
---------------------------------------------------------------------------

    We note that in the Conference Committee report that accompanied 
Public Law 108-173, the Committee stated: ``The conferees also clarify 
that under section 1886 (h)(5)(F), the initial residency period for any 
residency for which the ACGME requires a preliminary or general 
clinical year of training is to be determined in the resident's second 
year of training.'' (Conference Committee Agreement Accompanying Public 
Law 108-173, 108 Cong., 2d Sess., 276 (2003)) The Conference Committee 
included this language as part of its explanation of section 712 of 
Public Law 108-173, which clarifies an exception to the initial 
residency period for geriatric fellowship programs (see section 
IV.O.3.c. of this preamble). We are

[[Page 28312]]

considering making a policy change for determining the initial 
residency period for a resident who participates in a clinical base 
year program based on the resident's second year of training, as the 
Conference Committee suggests. However, we understand that not all 
residents who participate in the clinical base year programs 
simultaneously match in specialty training programs before the 
residents' first year of training. Thus, if we were to propose a 
``second year'' policy, there would be no way to distinguish in the 
second year of training among those residents who simultaneously 
matched in a specialty program prior to their first year of training; 
those residents who did not match simultaneously, but participated in a 
clinical base year and then continued on to train in a different 
specialty; and those residents who simply switched specialties in their 
second year. As we have stated earlier, the initial residency period is 
to be determined based on the ``initial'' or first program in which a 
resident trains. Section 1886(h)(5)(F) of the Act provides that ``the 
initial residency period shall be determined, with respect to a 
resident, as of the time the resident enters the residency training 
program.'' (Emphasis added.)
    Therefore, we believe it is appropriate for us to consider changes 
to the ``simultaneous match'' policy that would allow for documentation 
that the residents' training program is arranged to continue in another 
medical specialty after the resident completes the clinical base year. 
However, we also specifically solicit comments concerning the issue of 
how to establish the initial residency period for a resident who does 
not match simultaneously for the first and second year, completes the 
first year in a preliminary program in one specialty, and then 
continues his or her training in a different specialty program that 
requires completion of a clinical base year.
    We note that if we were to propose such a change in the initial 
residency period policy, the change, if finalized, could result in an 
adjustment to the PRA applicable for the direct GME payments made to 
the hospital for a resident in a clinical base year. By treating the 
first year as part of a nonprimary care specialty program (for example, 
anesthesiology), the hospital would be paid at the lower nonprimary 
care PRA rather than the higher primary care PRA, which would be used 
for residents training in a clinical base year in a primary care 
program (for example, internal medicine). We note in conjunction with 
our proposal that the initial residency period would be established 
based upon the period of board eligibility for the specialty program 
for residents who simultaneously match with a clinical base year and a 
specialty program that we believe all of the programs that require a 
clinical base year are nonprimary care specialties. Because we are 
considering a policy change that the initial residency period would be 
based upon the period of board eligibility for the specialty program 
rather than the clinical base year, we would also consider a policy 
change that the nonprimary care PRA would apply for the duration of 
their initial residency period.
    Thus, we are considering making the above policy changes to address 
the clinical base year initial residency period issue. We specifically 
solicit comments on the changes we are considering to the existing 
initial residency period policy and other approaches to address this 
issue, particularly those that do not increase Medicare expenditures.
c. Exception to Initial Residency Period for Geriatric Residency or 
Fellowship Programs (Section 712 of Public Law 108-173 and Proposed 
Redesignated Sec.  413.79(a) (a proposed redesignation of existing 
Sec.  413.86(g)(1))
    As explained further below, under Medicare direct GME payment 
rules, the initial residency period is generally defined as the minimum 
number of years of training required for a resident to become board 
eligible in a specialty (not to exceed 5 years) and is established at 
the time the resident enters his or her first training program. For 
purposes of direct GME payments, a resident's full-time equivalent 
(FTE) training time is weighted at 1.0 during the initial residency 
period and 0.5 for training that continues beyond the initial residency 
period. Section 1886(h)(5)(F) of the Act generally limits a resident's 
initial residency period to no longer than 5 years. That section also 
provides an exception that allows FTE training time spent by residents 
in an approved geriatric residency program to be treated as part of the 
resident's initial residency period, that is, weighted at 1.0 FTE for 
up to an additional 2 years after conclusion of the otherwise 
applicable initial residency period.
    We understand, based on information provided by the American 
Geriatric Society (AGS), that in 1998, the American Board of Internal 
Medicine and the American Board of Family Physicians (hereinafter ``the 
Boards'') reduced the minimum number of years of formal training 
required for residents to become board eligible in geriatrics from 2 
years to 1 year. As a result, the initial residency period, and full 
direct GME funding for residents in geriatric training programs, would 
be limited to 1 year.
    However, we understand that many teaching hospitals continue to run 
geriatric residency or fellowship programs of at least 2 years in 
length (some are even 3 years). We also understand that, despite the 
decrease in the minimum requirements for board eligibility, the 
Accreditation Council for Graduate Medicare Education (ACGME) continues 
to accredit some geriatric training programs for the full duration of 
the fellowships. For example, if a hospital's geriatric fellowship is 3 
years in length, the program may continue to be accredited by the ACGME 
for the full 3 years, but the FTE time spent by a resident training in 
the geriatric program would be weighted at 1.0 for the first year of 
the resident's training and at 0.50 for the second and third year of 
the fellowship. (However, we note that FTE residents' time is not 
weighted for purposes of IME payments.)
    Effective October 1, 2003, section 712 (a) of Public Law 108-173 
clarified that Congress intended to provide an exception to the initial 
residency period for purposes of direct GME payments for geriatric 
residency or fellowship programs such that ``where a particular 
approved geriatric training program requires a resident to complete 2 
years of training to initially become board eligible in the geriatric 
specialty, the 2 years spent in the geriatric training program are 
treated as part of the resident's initial residency period, but are not 
counted against any limitation on the initial residency period.'' 
Therefore, we are proposing that, effective for cost reporting periods 
beginning on or after October 1, 2003, if a resident is training in an 
accredited geriatric residency or fellowship program of 2 (or more) 
years in duration, hospitals may treat training time spent during the 
first 2 years of the program as part of the resident's initial 
residency period and weight the resident's FTE time at 1.0 during that 
period, regardless of the fact that the minimum number of years of 
training required for board eligibility in geriatrics is only 1 year. 
We note that the statutory language quoted above does not allow a 
hospital to treat time spent by a resident in the second year of 
geriatric training as part of the resident's initial residency period 
in the case where the resident trained in a geriatric residency or 
fellowship program that is accredited as a 1-year program because, in 
that case, the

[[Page 28313]]

resident could be board eligible after only 1 year of training.
    Even though Congress gave the Secretary authority to implement 
section 712 of Public Law 108-173 through an interim final rule with 
comment period, we chose to provide instructions in a One-Time 
Notification (OTN) to fiscal intermediaries and providers (Transmittal 
61, CR 3071), ``Changes to the FY 2004 Graduate Medical Education (GME) 
Payments as Required by the Medicare Modernization Act of 2003 (MMA), 
P.L. 108-173,'' issued on March 12, 2004, and are implementing the 
statutory provision in our regulations through this notice and comment 
rulemaking process. We are proposing to revise proposed redesignated 
Sec.  413.79(a) (a proposed redesignation of Sec.  413.86(g)(1)) to 
incorporate the provision of section 712(a) of Public Law 108-173.
4. Per Resident Amount: Extension of Update Limitation on High-Cost 
Programs
    (Section 711 of Public Law 108-173 and Sec.  
413.77(d)(2)(iii)(B)(3) (a proposed redesignation of existing Sec.  
413.86(e)(4)(ii)(C)(2)(iii)))
    Section 1886(h)(2) of the Act, as amended by section 311 of the 
Balanced Budget Refinement Act (BBRA) of 1999 (Pub. L. 106-113), 
establishes a methodology for the use of a national average per 
resident amount (PRA) in computing direct GME payments for cost 
reporting periods beginning on or after October 1, 2000, and on or 
before September 30, 2005. Generally, section 1886(h)(2)(D)(ii) of the 
Act establishes a ``floor'' for hospital-specific PRAs at 70 percent of 
the locality-adjusted national average PRA. In addition, section 
1886(h)(2)(D)(iv) of the Act establishes a ``ceiling'' that limits the 
annual adjustment of a hospital-specific PRA if the PRA exceeded 140 
percent of the locality-adjusted national average PRA. Section 511 of 
the Benefits Improvement and Protection Act (BIPA) of 2000 (Pub. L. 
106-554) further amended section 1886 (h)(2) of the Act to increase the 
floor that was established by the BBRA to 85 percent of the locality-
adjusted national average PRA. For purposes of calculating direct GME 
payments, each hospital-specific PRA is compared to the floor and 
ceiling to determine whether the hospital-specific PRA should be 
revised. (We direct readers to Program Memorandum A-01-38, March 21, 
2001 for historical reference on calculating the floor and ceiling.)
    Section 711 of Public Law 108-173 amended section 1886 
(h)(2)(D)(iv) of the Act to freeze the annual CPI-U updates to 
hospital-specific PRAs for those PRAs that exceed the ceiling for FYs 
2004 through 2013. Therefore, we are proposing that, for cost reporting 
periods beginning during FY 2004 through FY 2013, we would calculate a 
ceiling that is equal to 140 percent of the locality-adjusted national 
average PRA for each hospital and compare it to each hospital-specific 
PRA. If the hospital-specific PRA for the preceding year is greater 
than 140 percent of the locality-adjusted national average PRA 
``ceiling'' in the current fiscal year, the hospital-specific PRA for 
the current year is frozen at the preceding fiscal year's hospital-
specific PRA and is not updated by the CPI-U factor. We note that a 
hospital may have more than one PRA. Each of a hospital's PRAs must be 
separately compared to the ``ceiling'' PRA to determine whether that 
PRA should be frozen at the level for the previous year or updated by 
the CPI-U factor.
    For example, to determine the applicable PRA for a cost reporting 
period beginning during FY 2004, we would compare the hospital-specific 
PRA from the cost reporting period that began during FY 2003 to the FY 
2004 locality-adjusted national average PRA for that hospital. If the 
FY 2003 hospital-specific PRA exceeds 140 percent of the FY 2004 
locality-adjusted national average PRA, the FY 2004 hospital-specific 
PRA is frozen at the level of the FY 2003 hospital-specific PRA and is 
not updated by the CPI-U factor for FY 2004.
    Due to the effective date of the statutory provision of section 711 
of Public Law 108-173, we issued a notification to fiscal 
intermediaries and providers regarding the provision in the OTN issued 
on March 12, 2004 (Transmittal 61, CR 3071). In this proposed rule, to 
incorporate the changes made by section 711 of Public Law 108-173 in 
our regulations regarding the determination of PRAs, we are proposing 
to: (1) revise proposed redesignated Sec.  413.77(d)(2)(iii)(B)(3) (a 
proposed redesignation of existing Sec.  413.86(e)(4)(ii)(C)(2)(iii)) 
to make it applicable only to FY 2003; (2) further redesignate proposed 
newly redesignated Sec.  413.77(d)(2)(iii)(B)(4) (the proposed 
redesignation of existing Sec.  413.86(e)(4)(ii)(C)(2)(iv)) as Sec.  
413.77(d)(2)(iii)(B)(4); and (3) add a proposed new Sec.  
413.77(d)(2)(iii)(B)(4).
5. Residents Training in Nonhospital Settings
a. Background
    With respect to reimbursement of direct GME costs, since July 1, 
1987, hospitals have been allowed to count the time residents spend 
training in sites that are not part of the hospital (referred to as 
``nonprovider'' or ``nonhospital sites'') under certain conditions. 
Section 1886(h)(4)(E) of the Act requires that the Secretary's rules 
concerning computation of FTE residents for purposes of direct GME 
payments ``provide that only time spent in activities relating to 
patient care shall be counted and that all the time so spent by a 
resident under an approved medical residency training program shall be 
counted towards the determination of full-time equivalency, without 
regard to the setting in which the activities are performed, if the 
hospital incurs all, or substantially all, of the costs for the 
training program in that setting.'' (Section 1886(h)(4)(E) of the Act, 
as added by section of 9314 of the Omnibus Budget Reconciliation Act of 
1986, Pub. L. 99-509.)
    Regulations regarding time spent by residents training in 
nonhospital sites for purposes of direct GME payment were first 
implemented in the September 29, 1989 final rule (54 FR 40286). We 
stated in that rule (under Sec.  413.86(f)(3)) that a hospital may 
count the time residents spend in nonprovider settings for purposes of 
direct GME payment if the residents spend their time in patient care 
activities and there is a written agreement between the hospital and 
the nonprovider entity stating that the hospital will incur all or 
substantially all of the costs of the program. The regulations at that 
time defined ``all or substantially all'' of the costs to include the 
residents' compensation for the time spent at the nonprovider setting.
    Prior to October 1, 1997, for IME payment purposes, hospitals could 
only count the time residents spend training in areas subject to the 
IPPS and outpatient areas of the hospital. Section 4621(b)(2) of the 
Balanced Budget Act of 1997 (Pub. L. 105-33) revised section 
1886(d)(5)(B) of the Act to allow providers to count time residents 
spend training in nonprovider sites for IME purposes, effective for 
discharges occurring on or after October 1, 1997. Specifically, section 
1886(d)(5)(B)(iv) of the Act was amended to provide that ``all the time 
spent by an intern or resident in patient care activities under an 
approved medical residency program at an entity in a nonhospital 
setting shall be counted towards the determination of full-time 
equivalency if the hospital incurs all, or substantially all, of the 
costs for the training program in that setting.''
    In the regulations at Sec. Sec.  412.105(f)(1)(ii)(c) and 
413.86(f)(4)

[[Page 28314]]

(as issued in the July 31, 1998 Federal Register), we specify the 
requirements a hospital must meet in order to include the time spent by 
a resident training in a nonhospital site in its FTE count for Medicare 
reimbursement for portions of cost reporting periods occurring on or 
after January 1, 1999 for both direct GME and for IME payments. The 
regulations at Sec.  413.86(b) redefine ``all or substantially all of 
the costs for the training program in the nonhospital setting'' as the 
residents' salaries and fringe benefits (including travel and lodging 
where applicable), and the portion of the cost of teaching physicians' 
salaries and fringe benefits attributable to direct GME. A written 
agreement between the hospital and the nonhospital site is required 
before the hospital may begin to count residents training at the 
nonhospital site; the agreement must provide that the hospital will 
incur the costs of the resident's salary and fringe benefits while the 
resident is training in the nonhospital site. The hospital must also 
provide reasonable compensation to the nonhospital site for supervisory 
teaching activities, and the written agreement must specify that 
compensation amount.
b. Moratorium on Disallowances of Allopathic or Osteopathic Family 
Practice Residents Training Time in Nonhospital Settings (Section 713 
of Pub. L. 108-173 and Proposed Redesignated Sec.  413.78 (a proposed 
redesignation of existing Sec.  413.86(f))
    As we mentioned above, under existing Sec.  413.86(f)(4), for 
portions of cost reporting periods occurring on or after January 1, 
1999, the time residents spend in nonhospital settings such as 
freestanding clinics, nursing homes, and physicians' offices in 
connection with approved programs may be included in determining the 
hospital's number of FTE residents for purposes of calculating both 
direct GME and IME payments, if the following conditions are met:
    (1) The resident spends his or her time in patient care activities.
    (2) There is a written agreement between the hospital and the 
nonhospital site that indicates that the hospital will incur the costs 
of the resident's salary and fringe benefits while the resident is 
training in the nonhospital site, and the hospital is providing 
reasonable compensation to the nonhospital site for supervisory 
teaching activities. The agreement must indicate the compensation the 
hospital is providing to the nonhospital site for supervisory teaching 
activities.
    (3) The hospital incurs ``all or substantially all'' of the costs 
for the training program in the nonhospital setting. ``All or 
substantially all'' means the residents'' salaries and fringe benefits 
(including travel and lodging where applicable) and the portion of 
teaching physicians' salaries and fringe benefits attributable to 
direct graduate medical education.
    In order for the hospital to incur ``all or substantially all'' of 
the costs in accordance with the regulations, the actual cost of the 
time spent by teaching physicians in supervising residents in the 
nonhospital setting must be compensated by the hospital. The amount of 
supervisory GME costs is dependent upon the teaching physician's salary 
and the percentage of time that he or she devotes to activities related 
to the residency program at the nonhospital site. As long as there are 
supervisory costs associated with the nonhospital training, the 
hospital must reimburse the nonhospital setting for those costs in 
order to count FTE resident time spent in the nonhospital site for 
purposes of IME and direct GME payments.
    Many hospitals have entered into written agreements with teaching 
physicians that state that the teaching physician is ``volunteering'' 
his or her time in the nonhospital site, and, therefore, the hospital 
is not providing any compensation to the teaching physician. Other 
hospitals have paid only a nominal amount of compensation for the 
supervisory teaching physicians' time in the nonhospital setting. 
Because the existing regulations at Sec.  413.86(f)(4) state that the 
hospital must incur all or substantially all of the direct GME costs, 
including those costs associated with the teaching physician, 
regardless of whether the written agreement states that the teaching 
physician is ``volunteering,'' we have required that the hospital must 
pay these costs in order to count FTE residents training in the 
nonhospital site, as long as these teaching physician costs exist.
    However, during the 1-year period from January 1, 2004 through 
December 31, 2004, section 713 of Public Law 108-173, through a 
moratorium, allows hospitals to count allopathic or osteopathic family 
practice residents training in nonhospital settings for IME and direct 
GME purposes, without regard to the financial arrangement between the 
hospital and the teaching physician practicing in the nonhospital 
setting to which the resident is assigned. We implemented section 713 
in the One-Time Notification (OTN), ``Changes to the FY 2004 Graduate 
Medical Education (GME) Payments as Required by the Medicare 
Modernization Act of 2003 (MMA)'' (CR 3071, Transmittal 61, issued on 
March 12, 2004). Generally, to implement the provisions of section 713, 
we stated in the OTN that, when settling prior year cost reports during 
this 1-year period, or for family practice residents actually training 
in nonhospital settings during this 1-year period, the fiscal 
intermediaries should allow the hospitals to count allopathic and 
osteopathic family practice residents training in the nonhospital 
setting for direct GME and IME payment purposes without regard to the 
financial arrangement between the hospital and the nonhospital site 
pertaining to the teaching physicians' costs associated with the 
residency program.
    (1) Cost Reports That Are Settled Between January 1, 2004 and 
December 31, 2004.
    When fiscal intermediaries settle cost reports during January 1, 
2004 through December 31, 2004 (Calendar Year (CY) 2004), a hospital 
that seeks to count allopathic or osteopathic family practice FTE 
residents training in a nonhospital setting(s) is allowed to count 
those FTEs for IME and direct GME purposes, even in instances where the 
written agreement between the hospital and a teaching physician or a 
nonhospital site does not mention teaching physician compensation, 
specifies only a nominal amount of compensation, or states that the 
teaching physician is ``volunteering'' his or her time training the 
residents. For example, when a fiscal intermediary is settling a cost 
report during CY 2004 that has a fiscal year end of June 30, 2001, the 
fiscal intermediary will allow the hospital to count family practice 
FTE residents that trained in a nonhospital setting during the period 
covered by the June 30, 2001 cost report, regardless of the financial 
arrangement in place between the hospital and the teaching physician at 
the nonhospital site during the period covered by the June 30, 2001 
cost report.
    We note that this moratorium does not apply to cost reports that 
are not settled during January 1 through December 31, 2004, that do not 
coincide with, or overlap, the January 1 through December 31, 2004 
period. For example, if a cost report for fiscal year ended December 
31, 2003 (or June 30, 2003, or others) is not settled during the 
January 1 through December 31, 2004 period, the moratorium would not 
apply.
    (2) Family Practice Residents That Are Training in Nonhospital 
Settings Between January 1, 2004 and December 31, 2004.
    In addition to allowing family practice residents that trained in 
nonhospital settings to be counted in

[[Page 28315]]

cost reports that the fiscal intermediaries settle during the period of 
January 1, 2004 through December 31, 2004, without regard to the 
financial arrangements between the hospital and the teaching physician 
at the nonhospital site, the fiscal intermediaries are to allow family 
practice residents that actually are or will be training in nonhospital 
settings during January 1, 2004 through December 31, 2004, without 
regard to the financial arrangements between the hospital and the 
teaching physician at the nonhospital site. That is, when fiscal 
intermediaries settle cost reports that cover service periods of 
January 1, 2004 through December 31, 2004, a hospital that seeks to 
count allopathic or osteopathic family practice FTE residents training 
in a nonhospital setting(s) would be allowed to count those FTEs, even 
in instances where the written agreement between the hospital and a 
teaching physician or a nonhospital site does not mention teaching 
physician compensation, specifies only a nominal amount of 
compensation, or states that the teaching physician is ``volunteering'' 
his or her time training the residents. If a hospital has a fiscal year 
that is other than a calendar year, the hospital may count the family 
practice residents training in the nonhospital setting during those 
portions of its fiscal years that fall within the January 1, 2004 and 
December 31, 2004 period. For example, when a fiscal intermediary is 
settling a hospital's June 30, 2004 cost report, the hospital would be 
allowed to count family practice FTE residents that trained in a 
nonhospital setting during the period of January 1, 2004 through June 
30, 2004, regardless of the financial arrangement between the hospital 
and the teaching physician at the nonhospital site from January 1 
through June 30, 2004. Similarly, when a fiscal intermediary settles 
the hospital's June 30, 2005 cost report, the hospital would be allowed 
to count family practice FTE residents that trained in a nonhospital 
setting during the period of July 1, 2004 through December 31, 2004, 
regardless of the financial arrangement between the hospital and the 
teaching physician at the nonhospital site from July 1 through December 
31, 2004. (However, we note that family practice residents that train 
in nonhospital settings beginning January 1, 2005, and after are not 
subject to the moratorium provided under section 713 of Pub. L. 108-
173.)
    Because we are interpreting this moratorium to apply to prior 
period cost reports that are settled during calendar year (CY) 2004, 
and to cost reports that are settled after CY 2004 that cover training 
that occurred during the period of January 1, 2004 through December 31, 
2004, a gap in applicability of the moratorium may result for family 
practice residents training in nonhospital settings. For example, a 
hospital might be permitted to count certain FTE family practice 
residents that are included in its FY 2001 cost report in accordance 
with the moratorium because that cost report is settled during CY 2004. 
However, the hospital might not be permitted to count certain FTE 
family practice residents in its FY 2002 and FY 2003 cost reports 
because these cost reports would not be settled during CY 2004 and the 
moratorium would not apply. The hospital then could be permitted to 
count certain FTE family practice residents in its FY 2004 cost report 
in accordance with the moratorium, because the FY 2004 cost report 
would contain family practice residents who actually trained in a 
nonhospital setting during CY 2004.
    Regardless of whether the fiscal intermediaries are settling prior 
period cost reports during CY 2004, or settling cost reports after CY 
2004 that cover training during the period of January 1, 2004 through 
December 31, 2004, we emphasize that the moratorium provided in section 
713 of Public Law 108-173 only applies for purposes of counting FTE 
residents in allopathic and osteopathic general family practice 
programs that were in existence (that is, training residents) as of 
January 1, 2002 and where the requirement to incur the teaching 
physician compensation related to direct GME may not have been met. 
Therefore, for residents training in nonhospital settings, we are 
proposing that the moratorium applies only: (1) To FTE residents in 
general family practice programs (and not to dental, podiatric, or 
other allopathic or osteopathic specialty programs); (2) to family 
practice programs that were in existence as of January 1, 2002; and (3) 
with the exception of teaching physician compensation, to training in 
nonhospital settings that meet the requirements in the existing 
regulations at Sec.  413.86(f)(4) (proposed to be redesignated as Sec.  
413.78(d)).
    We are not proposing any regulation text changes to address this 
provision at this time. We note that section 713(b) of Public Law 108-
173 directs the Inspector General of the Department of Health and Human 
Services to conduct a study of the appropriateness of alternative 
methodologies for payment of residency training in nonhospital settings 
and to submit a report to Congress on the results of the study, along 
with recommendations, as appropriate, by December 8, 2004. We will 
await the release of the Inspector General's report and may consider 
additional policy and regulation changes at that time if they are 
warranted.
c. Requirements for Written Agreements for Residency Training in 
Nonhospital Settings (Proposed redesignated Sec.  413.78 (a proposed 
redesignation of existing Sec.  413.86(f)).
    As mentioned above, under section 1886(h)(4)(E) of the Act, a 
hospital may count residents training in nonhospital settings for 
direct GME purposes (and under section 1886(d)(5)(B)(iv) of the Act, 
for IME purposes), if the residents spend their time in patient care 
activities and if ``* * * the hospital incurs all, or substantially 
all, of the costs for the training program in that setting.'' We 
believe Congress intended to facilitate residency training in 
nonhospital settings by requiring hospitals to commit to incur, and 
actually incur, all or substantially all of the costs of the training 
programs in the nonhospital sites. Accordingly, in implementing section 
1886(h)(4)(E) of the Act, first in the regulations at Sec.  
413.86(f)(3), effective July 1, 1987, and later at Sec.  413.86(f)(4), 
effective January 1, 1999, we required that, in addition to incurring 
all or substantially all of the costs of the program at the nonhospital 
setting, there must be a written agreement between the hospital and the 
nonhospital site stating that the hospital will incur all or 
substantially all of the costs of training in the nonhospital setting. 
The later regulations further specify that the written agreement must 
indicate the amount of compensation provided by the hospital to the 
nonhospital site for supervisory teaching activities. (We note that, in 
this proposed rule, Sec.  413.86(f)(3) is proposed to be redesignated 
as Sec.  413.78(c), and Sec.  413.86(f)(4) is proposed to be 
redesignated as Sec.  413.78(d).)
    We required the written agreements in regulations in order to 
provide an administrative tool for use by the fiscal intermediaries to 
assist in determining whether hospitals would incur all or 
substantially all of the costs of the training in the nonhospital 
setting in accordance with Congressional intent. Furthermore, CMS 
policy has required that the written agreement between the hospital and 
the nonhospital site be in place prior to the time that the hospital 
begins to count the FTE residents training in the nonhospital site. A 
written agreement signed before the time the residents begin training 
at the nonhospital site that states that the

[[Page 28316]]

hospital will incur the costs of the training program at the 
nonhospital site indicates the hospital's ongoing commitment to incur 
the costs of training at that site.
    In settling cost reports where hospitals have included residents 
training at nonhospital sites in their FTE count, the fiscal 
intermediaries have encountered numerous situations where hospitals 
have complied with the requirement to incur all or substantially all of 
the costs of training in nonhospital settings. However, despite our 
longstanding regulations that state the requirement for a written 
agreement, these hospitals have not met the regulatory requirements 
related to written agreements. For example, some hospitals had no 
written agreement in place during the training in the nonhospital 
setting, or written agreements were not timely (that is, they were 
prepared after the residents began or, in some cases, finished training 
at the nonhospital site), or the agreements did not include a specific 
amount of compensation to be provided by the hospital to the 
nonhospital site for supervisory teaching activities. As a result, 
hospitals have faced disallowances of direct GME and IME payments 
relating to FTE residents training in nonhospital settings because the 
hospitals did not comply with the regulatory requirements concerning 
written agreements.
    In retrospect, we believe the regulatory requirements concerning 
the written agreements may not have been the most efficient aid to 
fiscal intermediaries in determining whether hospitals would actually 
incur all or substantially all of the costs of the training programs in 
nonhospital settings. The fiscal intermediaries have been required to 
ensure that hospitals are complying with the regulations regarding 
written agreements, in addition to determining whether a hospital 
actually incurred the appropriate costs. We believe it would be more 
appropriate and less burdensome for both fiscal intermediaries and 
hospitals if we instead focus the fiscal intermediaries' reviews on the 
statutory requirement that hospitals must incur all or substantially 
all of the costs of the program in the nonhospital setting. Therefore, 
we are proposing to revise the regulations under proposed new Sec.  
413.78 (a proposed redesignation of existing Sec.  413.86(f)) to remove 
the requirement for a written agreement between the hospital and the 
nonhospital setting as a precondition for a hospital to count residents 
training in nonhospital settings for purposes of direct GME and IME 
payments. However, consistent with our belief that Congress intended 
that hospitals commit to incur, and actually incur, all or 
substantially all of the costs of the training programs in the 
nonhospital sites in order to facilitate training at nonhospital sites, 
we are also proposing that, in order for the hospital to count 
residents training in a nonhospital setting, the hospital must pay for 
the nonhospital site training costs concurrently with the training that 
occurs during the cost reporting period.
    We understand that residents' rotations, including those to 
nonhospital settings, are generally in discrete blocks of time (for 
example, 4-week or 6-week rotations). Therefore, to account for various 
rotation lengths, we are proposing under the new proposed Sec.  
413.78(e) that, in order to count residents training in a nonhospital 
setting, a hospital must pay all or substantially all of the costs of 
the training in a nonhospital setting(s) by the end of the month 
following a month in which the training in the nonhospital site 
occurred. If a hospital is counting residents training in a nonhospital 
setting for direct GME and IME purposes in any month of its cost 
reporting period, the hospital must make payment by the end of the 
following month to cover all or substantially all of the costs of 
training in that setting attributable to the preceding month. If the 
residents are employed by the hospital, and receive their salary 
payments (and fringe benefits) every 2 weeks, the hospital may continue 
to pay the residents' salaries every 2 weeks during the residents' 
rotation to the nonhospital setting. This should still result in 
payment being made for residents' time spent in nonhospital settings by 
the end of the following month. (We also note that the hospital must 
pay travel and lodging expenses, if applicable.) We are proposing that 
the hospital would be required to pay the nonhospital site for the 
portion of the cost of teaching physicians' salaries and fringe 
benefits attributable to direct GME by the end of the month following 
the month in which the training in the nonhospital setting occurred. We 
are proposing that if a hospital does not pay for all or substantially 
all of the costs of the program in the nonhospital setting by the end 
of the month following the month in which the training occurred, the 
hospital could not count those FTE residents in the month that the 
training occurred. Therefore, we are proposing to determine if 
residents training in nonhospital sites should be counted on a month-
to-month basis, depending on whether a hospital paid for the training 
costs of those residents by the end of the month following the month in 
which the training occurred.
    Following are examples of how a hospital that sends residents to 
train in nonhospital sites would make payments concurrently with the 
nonhospital site training:

    Example 1. Hospital A, with a fiscal year end (FYE) of December 
31, trains 10 internal medicine residents and 6 family practice 
residents. Each January, April, July, and October, Hospital A sends 
5 internal medicine FTE residents to the Physicians' Clinic for 4 
weeks. Each month, Hospital A sends 2 family practice FTE residents 
to the Family Clinic. The residents are employed by Hospital A, and 
the residents receive fringe benefits from and are paid every 2 
weeks by Hospital A, regardless of whether they are training in 
Hospital A or at a nonhospital site. In order to make payments 
concurrently with the training that is occurring in the nonhospital 
sites, Hospital A must pay the Physicians' Clinic by the end of 
February, May, August, and November, respectively, of each cost 
reporting year, to cover the costs of teaching physician 
compensation and fringe benefits attributable to direct GME. 
Similarly, because residents are training at the Family clinic each 
month, Hospital A must pay the Family Clinic by the end of each 
month for the previous month's costs of teaching physician 
compensation and fringe benefits attributable to direct GME. There 
are no travel and lodging costs associated with these rotations to 
nonhospital sites.
    Example 2. University A will sponsor an ophthalmology program 
with eight residents beginning on July 1, 2005. The residents will 
be on the payroll of the University, but they will train at Hospital 
B and at the University's Eye Clinic, which is a nonhospital 
setting. Hospital B has a June 30 FYE. Four of the residents will 
train in the Eye Clinic from August 1 to October 15, and the other 
four residents will train in the Eye Clinic from February 15 to 
April 30. Thus, residents are training in the Eye Clinic during the 
months of August, September, October, February, March, and April. If 
Hospital B wishes to count these FTE residents for IME and direct 
GME purposes in its cost reporting year ending June 30, 2006, and 
onward, it must pay the Eye Clinic at the end of September, October, 
November, March, April, and May, respectively, for the previous 
month's cost of the residents' salaries and fringe benefits, and the 
teaching physician compensation and fringe benefits attributable to 
direct GME.
    Example 3. Hospital C sends a resident to train at a nonhospital 
site from January 28 to February 20. The resident was employed by 
the nonhospital site during this time. Hospital C paid the 
nonhospital site for the cost of the resident's salary and fringe 
benefits and the teaching physician compensation and fringe benefits 
attributable to direct GME by February 28 to account for the 
training that occurred from January 28 through January 31. However, 
Hospital C did not pay the nonhospital site by March 31 to

[[Page 28317]]

account for the training that occurred in February. Therefore, 
Hospital C could not count the resident's time in the nonhospital 
setting from February 1 through February 20 for direct GME and IME 
purposes.

    We note that our proposal to require hospitals to pay for the 
nonhospital site training costs concurrently with the training that 
occurs in the nonhospital site is a departure from our current policy 
concerning the timeframe in which a hospital must make payment for the 
training costs. Currently, we apply the existing regulations at Sec.  
413.100(c)(2)(i), which state that a short-term liability (such as the 
hospital's obligation to pay the nonhospital site for the residency 
training costs) must be liquidated within 1 year after the end of the 
cost reporting period in which the liability is incurred. However, 
because we are proposing to no longer require that a written agreement 
between the hospital and the nonhospital site be in place prior to the 
time that the hospital begins to count the FTE residents training in 
the nonhospital site, we believe that a reasonable alternative to 
ensure that a hospital is facilitating the training at the nonhospital 
site through its ongoing commitment to incur all or substantially all 
of the costs is to require the hospital to make payments concurrently 
with the training that occurs in the nonhospital site in order to count 
the FTE residents for purposes of direct GME and IME payments.
    We are aware that there are situations where, rather than providing 
direct financial compensation to the nonhospital site for supervisory 
teaching activities, the hospital is incurring all or substantially all 
of the teaching physician costs through nonmonetary, in-kind 
arrangements. We are proposing that, in order to be considered 
concurrent with the nonhospital site training, in-kind arrangements 
must be provided or made available to the teaching physician at least 
quarterly, to the extent that there are residents training in a 
nonhospital setting(s) in a quarter.
    We are proposing to revise Sec.  413.86(f) (proposed to be 
redesignated as Sec.  413.78 in this proposed rule) to add a new 
paragraph (Sec.  413.78 (e)) to state that a hospital must incur all or 
substantially all of the costs of training in a nonhospital setting by 
the end of the month following a month in which the training in the 
nonhospital site occurred, to the extent that there are residents 
training in a nonhospital setting in a month. This proposed change 
would be effective for portions of cost reporting periods occurring on 
or after October 1, 2004. We would revise paragraph (d) of the proposed 
redesignated Sec.  413.78 to reflect the effective cost reporting 
periods of the provisions under the new paragraph (e).

P. Rural Community Hospital Demonstration Program

[If you choose to comment on issues in this section, please include the 
caption ``Rural Community Hospital Demonstration'' at the beginning of 
your comment.]
Section 410A(a) of Public Law 108-173 requires the Secretary to 
establish a demonstration to test the feasibility and advisability of 
establishing ``rural community hospitals'' for Medicare payment 
purposes for covered inpatient hospital services furnished to Medicare 
beneficiaries. A rural community hospital, as defined in section 
410A(f)(1), is a hospital that--
     Is located in a rural area (as defined in section 
1886(d)(8)(E) of the Act) or treated as being so located under section 
1886(d)(5)(F) of the Act;
     Has fewer than 51 beds (excluding beds in a distinct part 
psychiatric or rehabilitation unit) as reported in its most recent cost 
report;
     Provides 24-hour emergency care services; and
     Is not designated or eligible for designation as a CAH.
    Section 410A(a)(3) of Public Law 108-173 specifies that the 
Secretary is to select for participation not more than 15 rural 
community hospitals in rural areas of States that the Secretary 
identifies as having low population densities. Using 2003 data from the 
U.S. Census Bureau, we have identified 10 States with the lowest 
population density in which rural community hospitals must be located 
to participate in the demonstration: Alaska, Idaho, Montana, Nebraska, 
Nevada, New Mexico, North Dakota, South Dakota, Utah, and Wyoming. 
(Source: U.S. Census Bureau Statistical Abstract of the United States: 
2003)
    Under the demonstration, participating hospitals will be paid the 
reasonable costs of providing covered inpatient hospital services 
(other than services furnished by a psychiatric or rehabilitation unit 
of a hospital that is a distinct part), applicable for discharges 
occurring in the first cost reporting period beginning on or after 
implementation of the demonstration program. For discharges occurring 
in subsequent cost reporting periods, payment is the lesser of 
reasonable cost or a target amount, which is the prior year's cost or, 
after the second cost reporting period, the prior year's target amount, 
adjusted by the inpatient prospective payment update factor. Covered 
inpatient hospital services means inpatient hospital services (defined 
in section 1861(b) of the Act) and includes extended care services 
furnished under an agreement under section 1883 of the Act.
    Sections 410A(a)(5) and (a)(6) require the demonstration to be 
implemented not later than January 1, 2005, but not before October 1, 
2004. The demonstration is to operate for 5 years. We intend to 
implement the payment change for a participating hospital under this 
demonstration with the hospital's first cost reporting period beginning 
on or after October 1, 2004.
    Section 410A of Public Law 108-173 requires that ``in conducting 
the demonstration program under this section, the Secretary shall 
ensure that the aggregate payments made by the Secretary do not exceed 
the amount which the Secretary would have paid if the demonstration 
program under this section was not implemented.'' Generally, when CMS 
implements a demonstration on a budget neutral basis, the demonstration 
is budget neutral in its own terms; in other words, aggregate payments 
to the participating providers do not exceed the amount that would be 
paid to those same providers in the absence of the demonstration. This 
form of budget neutrality is viable when, by changing payments or 
aligning incentives to improve overall efficiency, or both, a 
demonstration may reduce the use of some services or eliminate the need 
for others, resulting in reduced expenditures for the demonstration 
participants. These reduced expenditures offset increased payments 
elsewhere under the demonstration, thus ensuring that the demonstration 
as a whole is budget neutral or yields savings. However, the small 
scale of this demonstration, in conjunction with the payment 
methodology, makes it extremely unlikely that this demonstration could 
be viable under the usual form of budget neutrality. Specifically, 
cost-based payments to 15 small rural hospitals is likely to increase 
Medicare outlays without producing any offsetting reduction in Medicare 
expenditures elsewhere. Therefore, a rural community hospital's 
participation in this demonstration is unlikely to yield benefits to 
the participant if budget neutrality were to be implemented by reducing 
other payments for these providers.
    In order to achieve budget neutrality, we are proposing to adjust 
national inpatient PPS rates by an amount sufficient to account for the 
added costs of this demonstration. In other words, we are proposing to 
apply budget neutrality across the payment system as

[[Page 28318]]

a whole rather than merely across the participants of this 
demonstration. We believe that the language of the statutory budget 
neutrality requirement permits the agency to implement the budget 
neutrality provision in this manner. This is because the statutory 
language refers merely to ensuring that ``aggregate payments made by 
the Secretary do not exceed the amount which the Secretary would have 
paid if the demonstration * * * was not implemented,'' and does not 
identify the range across which aggregate payments must be held equal. 
We invite public comment on this proposal. We discuss the payment rate 
adjustment that would be required to ensure the budget neutrality of 
this demonstration in the Addendum of this proposed rule.
    To participate in this demonstration, a hospital must be located in 
one of the identified States and meet the criteria for a rural 
community hospital. Eligible hospitals that desire to participate in 
the demonstration must submit an application to CMS. Information about 
the demonstration and details on how to apply can be found on the CMS 
Web site: www.cms.hhs.gov/researchers/demos/rch.asp.
    This demonstration has been approved by OMB under the title 
``Medicare Waiver Demonstration Application,'' under OMB approval 
number 0938-0880, with a current expiration date of July 30, 2006.

Q. Special Circumstances of Hospitals Facing High Malpractice Insurance 
Rate Increases

[If you choose to comment on issues in this section, please include the 
caption ``Malpractice Insurance'' at the beginning of your comment.]
    We have received comments from several hospitals about the effects 
of rapidly escalating malpractice insurance premiums on hospital 
financial performance and continued access for Medicare beneficiaries 
to high quality inpatient hospital services. We are aware that 
malpractice insurance premiums have increased at a high rate in some 
areas of the country during the last few years. While we are not aware 
of any specific situations in which malpractice premiums have created 
issues of access to inpatient hospital services for Medicare 
beneficiaries, some hospitals have expressed concern that they may be 
compelled to curtail their current operations by the rate of increase 
in their malpractice premiums. Therefore, we are inviting comments on 
the effect of increases in malpractice insurance premiums on hospitals 
participating in the Medicare program, and whether increasing 
malpractice costs may pose access problems for Medicare beneficiaries.

V. Proposed Changes to the PPS for Capital-Related Costs

[If you choose to comment on issues in this section, please include the 
caption ``Capital PPS'' at the beginning of your comment.]

A. Background

    Section 1886(g) of the Act requires the Secretary to pay for the 
capital-related costs of inpatient acute hospital services ``in 
accordance with a PPS established by the Secretary.'' Under the 
statute, the Secretary has broad authority in establishing and 
implementing the PPS for capital-related costs. We initially 
implemented the PPS for capital-related costs in the August 30, 1991 
IPPS final rule (56 FR 43358), in which we established a 10-year 
transition period to change the payment methodology for Medicare 
hospital inpatient capital-related costs from a reasonable cost-based 
methodology to a prospective methodology (based fully on the Federal 
rate).
    Federal fiscal year (FY) 2001 was the last year of the 10-year 
transition period established to phase in the PPS for hospital 
inpatient capital-related costs. For cost reporting periods beginning 
in FY 2002, capital PPS payments are based solely on the Federal rate 
for the acute care hospitals (other than certain new hospitals and 
hospitals receiving certain exception payments). The basic methodology 
for determining capital prospective payments using the Federal rate is 
set forth in Sec.  412.312. For the purpose of calculating payments for 
each discharge, the standard Federal rate is adjusted as follows:
    (Standard Federal Rate) x (DRG Weight) x (Geographic Adjustment 
Factor (GAF)) x (Large Urban Add-on, if applicable) x (COLA Adjustment 
for hospitals located in Alaska and Hawaii) x (1 + Capital DSH 
Adjustment Factor + Capital IME Adjustment Factor, if applicable)
    Hospitals also may receive outlier payments for those cases that 
qualify under the thresholds established for each fiscal year as 
specified in Sec.  412.312(c) of the existing regulations.
    The regulations at Sec.  412.348(f) provide that a hospital may 
request an additional payment if the hospital incurs unanticipated 
capital expenditures in excess of $5 million due to extraordinary 
circumstances beyond the hospital's control. This policy was originally 
established for hospitals during the 10-year transition period, but as 
we discussed in the August 1, 2002 IPPS final rule (67 FR 50102), we 
revised the regulations at Sec.  412.312 to specify that payments for 
extraordinary circumstances are also made for cost reporting periods 
after the transition period (that is, cost reporting periods beginning 
on or after October 1, 2001).
    During the transition period, under Sec. Sec.  412.348(b) through 
(e), eligible hospitals could receive regular exception payments. These 
exception payments guaranteed a hospital a minimum payment percentage 
of its Medicare allowable capital-related costs depending on the class 
of hospital (Sec.  412.348(c)), but were available only during the 
transition period. After the end of the transition period, eligible 
hospitals can no longer receive this exception payment. However, even 
after the transition period, hospitals receive additional payments 
under the special exceptions provisions at Sec.  412.348(g), which 
guarantees all eligible hospitals a minimum payment of 70 percent of 
its Medicare allowable capital-related costs provided that special 
exceptions payments do not exceed 10 percent of total capital IPPS 
payments. Special exceptions payments may be made only for the 10 years 
from the cost reporting year in which the hospital completes its 
qualifying project, and the hospital must have completed the project no 
later than the hospital's cost reporting period beginning before 
October 1, 2001. Thus, an eligible hospital may receive special 
exceptions payments for up to 10 years beyond the end of the capital 
PPS transition period. Hospitals eligible for special exceptions 
payments were required to submit documentation to the intermediary 
indicating the completion date of their project. (For more detailed 
information regarding the special exceptions policy under Sec.  
412.348(g), refer to the August 1, 2001 IPPS final rule (66 FR 39911 
through 39914) and the August 1, 2002 IPPS final rule (67 FR 50102).)
    Under the PPS for capital-related costs, Sec.  412.300(b) of the 
regulations defines a new hospital as a hospital that has operated 
(under current or previous ownership) for less than 2 years (56 FR 
43418, August 30, 1991). During the 10-year transition period, a new 
hospital was exempt from the capital PPS for its first 2 years of 
operation and was paid 85 percent of its reasonable costs during that 
period. Originally, this provision was effective only through the 
transition period and, therefore, ended with cost reporting periods 
beginning in FY 2002. Because we believe that special protection to new 
hospitals is also appropriate even after the transition period, as 
discussed in the August 1, 2002 IPPS final rule (67 FR 50101), we 
revised the regulations at Sec.  412.304(c)(2)

[[Page 28319]]

to provide that, for cost reporting periods beginning on or after 
October 1, 2002, a new hospital (defined under Sec.  412.300(b)) is 
paid 85 percent of its allowable Medicare inpatient hospital capital-
related costs through its first 2 years of operation, unless the new 
hospital elects to receive fully prospective payment based on 100 
percent of the Federal rate. (Refer to the August 1, 2001 IPPS final 
rule (66 FR 39910) for a detailed discussion of the statutory basis for 
the system, the development and evolution of the system, the 
methodology used to determine capital-related payments to hospitals 
both during and after the transition period, and the policy for 
providing exception payments.)

B. Payments to Hospitals Located in Puerto Rico

    As explained in section III.G. of this preamble, operating PPS and 
capital PPS payments to hospitals located in Puerto Rico are currently 
paid based on a blend of 50 percent of the Federal rate and 50 percent 
of the Puerto Rico rate. The Puerto Rico capital rate is derived from 
the costs of Puerto Rico hospitals only, while the capital Federal rate 
is derived from the costs of all acute care hospitals participating in 
the IPPS (including Puerto Rico). As also described in the section 
III.G. of this preamble, section 504 of Public Law 108-173 increases 
the national portion of the operating IPPS payment for Puerto Rico 
hospitals from 50 percent to 75 percent and decreases the Puerto Rico 
portion of the operating IPPS payments from 50 percent to 25 percent 
for discharges occurring on or after October 1, 2004. Under the broad 
authority of section 1886(g) of the Act, for the PPS, for capital-
related costs we are proposing to revise the calculations of capital 
IPPS payments to hospitals located in Puerto Rico, as well, to parallel 
the change in operating IPPS payments to hospitals located in Puerto 
Rico, for discharges occurring on or after October 1, 2004. 
Accordingly, we are proposing to revise Sec.  412.374 of the 
regulations to provide that, for discharges occurring on or after 
October 1, 2004, payments under the PPS for capital-related costs to 
hospitals located in Puerto Rico would be based on a blend of 25 
percent of the Puerto Rico capital rate and 75 percent of the capital 
Federal rate. This proposed change would increase capital IPPS payments 
to hospitals located in Puerto Rico because the proposed Federal 
capital rate is higher than the proposed Puerto Rico capital rate. In 
addition, we note that this proposed change is similar to the change in 
capital IPPS payments made to hospitals located in Puerto Rico 
beginning in FY 1998 that had paralleled the statutory change in the 
Puerto Rico blended payment amount required for operating IPPS payments 
to hospitals located in Puerto Rico as mandated by section 4406 of 
Public Law 105-33 (62 FR 46012 and 46048, August 29, 1997).

C. Exception Payment for Extraordinary Circumstances

    During the transition period, hospitals were guaranteed a minimum 
payment of a percentage of their Medicare allowable capital-related 
costs, depending on the class of hospital; that is, the minimum payment 
level for sole community hospitals was no greater than 90 percent, for 
urban hospitals with at least 100 beds meeting particular 
disproportionate share criteria, the minimum payment level was 80 
percent, and for all other hospitals, the minimum payment level was 70 
percent (Sec. Sec.  412.348(c)(i) through (iii)). Regular exception 
payments provided the means to ensure that hospitals received the 
minimum levels of capital payment. However, any amount by which a 
hospital's cumulative capital payments exceeded its cumulative minimum 
payment levels was deducted from the additional exception payment the 
hospital was eligible to receive (Sec.  412.348(e)). This type of 
exception payment ended with the end of the transition period.
    In the August 1, 2002 IPPS final rule (67 FR 50102), we specified 
that payments to hospitals that incur capital expenditures in excess of 
$5 million due to extraordinary circumstances beyond the hospital's 
control would be made for cost reporting periods after the transition 
period, that is, cost reporting periods beginning on or after October 
1, 2001, as established at Sec.  412.312(e). Generally, the exception 
payments for extraordinary circumstances are 85 percent of Medicare's 
share of allowable capital-related costs attributed to the 
extraordinary circumstances (100 percent for sole community hospitals). 
This amount is offset by any amount by which a hospital's cumulative 
payments exceed its cumulative minimum payment levels (adjusted for the 
extraordinary circumstances) under the PPS for capital-related costs. 
The minimum payment levels and the offsetting amounts were the same as 
those established for regular exceptions as indicated at Sec.  
412.348(f)(4). The regulation refers to the regular exception minimum 
payment levels at Sec.  412.348(c)(1) and the offsetting amounts at 
Sec.  412.348(e)(2).
    Because the regulations governing the regular exception payments, 
which include the minimum payment levels regulations at Sec.  
412.348(c) and the offsetting amounts at Sec.  412.348(e), were 
effective during the transition period only, we had not previously 
addressed whether or not the minimum payment levels under Sec.  
412.348(c) and the offsetting amounts at Sec.  412.348(e) remain 
applicable for extraordinary circumstances exceptions in the post-
transition period. In the August 1, 2002 IPPS final rule (67 FR 50102), 
we clarified our policy at a new Sec.  412.312(e) that exception 
payments for extraordinary circumstances continued to apply to periods 
beginning on or after October 1, 2001. When we added Sec.  412.312(e), 
we did not believe it was necessary to explain in the preamble that the 
minimum payment levels in Sec.  412.348(c) or the offsetting amounts in 
Sec.  412.348(e) were incorporated into Sec.  412.312(e). However, in 
order to avoid any confusion, in this proposed rule, we are clarifying 
our current policy that although the minimum payment levels established 
at Sec.  412.348(c)(1) are no longer in effect, they continue to be 
relevant in order to calculate the extraordinary circumstances 
exception payments after the end of the transition period. The 
extraordinary exception payment calculation incorporates the minimum 
payment levels as well as the offsetting deduction for cumulative 
payments. Thus, although the regular exception payments themselves have 
expired, it has always been our policy that the minimum payment levels 
will continue to be part of the formula for calculating extraordinary 
exception payments after the end of the transition period. In this 
proposed rule, we are proposing to amend Sec.  412.312(e) to reflect 
our current policy that, for cost reporting periods beginning on or 
after October 1, 2001, the minimum payment levels established at Sec.  
412.348(c)(1) are part of the formula for calculating extraordinary 
circumstances exception payments.
    Similarly, in this proposed rule, we clarify our current policy 
that the offsetting amounts established at Sec.  412.348(e)(2) also are 
part of the formula for determining extraordinary circumstances 
exception payments after the end of the transition period, in spite of 
the fact that the regular exception payment provision that included the 
offsetting amounts at Sec.  412.348(e)(2) expired at the end of the 
transition period. Accordingly, we are proposing to revise Sec.  
412.348(e) to clarify that, for cost reporting periods beginning on or 
after October 1, 2001, the offsetting

[[Page 28320]]

amounts established at Sec.  412.348(e)(2) remain in effect for 
extraordinary circumstances exception payments.
    In addition, we also are proposing to revise the period of time 
used to determine the offsetting amounts in Sec.  412.348(e)(2). Under 
existing regulations, the additional payment for extraordinary 
circumstances is offset by any amount by which a hospital's cumulative 
payments exceed its cumulative minimum payment levels under the PPS for 
capital-related costs. In order to determine this offsetting amount, a 
hospital must keep a record of the difference between its cumulative 
capital payments and its cumulative minimum payment levels since it 
became subject to the PPS for capital-related costs. For instance, 
under existing regulations, if a hospital would be eligible for an 
additional payment for extraordinary circumstances in FY 2005 and the 
hospital had been subject to the PPS for capital-related cost since 
that PPS was implemented in FY 1992, the offsetting amount would be the 
difference in the hospital's cumulative capital payments and its 
cumulative minimum payment levels for the past 13 years. Similarly, 
under existing regulations, if a hospital would be eligible for an 
additional payment for extraordinary circumstances in FY 2012 and the 
hospital had been subject to the capital PPS since it was implemented 
in FY 1992, the offsetting amount would be the difference in the 
hospital's cumulative capital payments and its cumulative minimum 
payment levels for the past 20 years.
    We believe that when the provisions for exception payments were 
originally implemented with the start of capital IPPS in FY 1992, it 
was anticipated that the offsetting amounts at Sec.  412.348(e)(2) 
would be determined based on a period of no longer than 10 years. 
However, under existing regulations, exception payments for 
extraordinary circumstances are offset by the difference in the 
hospital's cumulative payments and its cumulative minimum payment 
levels since it became subject to the PPS for capital-related-costs, 
which for most hospitals is over 13 years. Therefore, in this proposed 
rule, for cost reporting periods beginning during FY 2005 and 
thereafter, we are proposing to revise Sec.  412.312(e) to specify that 
the offsetting amounts in Sec.  412.348(e)(2) would be based on the 
hospital's capital payments and minimum payment levels from the most 
recent 10 years rather than from the entire period of time the hospital 
has been subject to the PPS for capital-related costs. If a hospital 
has been paid under the PPS for capital-related costs for less than 10 
years, the offsetting amounts would be based on the hospital's capital 
payments and minimum payment levels beginning with the date the 
hospital became subject to the PPS for capital-related costs. For 
example, if a hospital would be eligible for an additional payment for 
extraordinary circumstances in FY 2005 and the hospital had been 
subject to the PPS for capital-related costs since FY 1992 (13 years), 
the offsetting amounts used in the calculation of the extraordinary 
circumstances exception payment would be based on the hospital's 
cumulative capital PPS payments and cumulative minimum payment levels 
for the hospital's cost reporting period beginning during FY 1995 
through FY 2004. Similarly, if a hospital would be eligible for an 
additional payment for extraordinary circumstances in FY 2005 and the 
hospital had only been subject to the PPS for capital-related costs 
since FY 2000 (5 years), the offsetting amounts used in the calculation 
of the extraordinary circumstances exception payment would be based on 
the hospital's cumulative capital PPS payments and cumulative minimum 
payment levels for the hospital's cost reporting periods beginning 
during FY 2000 through FY 2004.

D. Treatment of Hospitals Previously Reclassified for the Operating PPS 
Standardized Amounts

    As we discussed in section IV.C. of this preamble, prior to April 
1, 2003, the standardized amounts varied under the operating IPPS based 
on a hospital's geographic location (large urban versus other urban and 
rural areas). Furthermore, previously, a hospital could be reclassified 
to a large urban area by the MGCRB for the purpose of the standardized 
amount if certain criteria were met (as described in Part 412, Subpart 
L of the Medicare regulations).
    Similarly, the standard capital Federal rate under the PPS for 
capital-related costs is adjusted to reflect the higher costs incurred 
by hospitals located in large urban areas (large urban add-on at Sec.  
412.316), as well as for hospitals in urban areas with at least 100 
beds serving low-income patients (capital disproportionate share (DSH) 
adjustment at Sec.  412.320). In the past, if a rural or other urban 
hospital was reclassified to a large urban area for purposes of the 
operating IPPS standardized amount under Sec.  412.63, the hospital 
also was then eligible for a large urban add-on payment, as well as a 
DSH payment, under the PPS for capital-related costs.
    Section 402(b) of the Consolidated Appropriations Resolution, 2003, 
Public Law 108-7, and section 402 of Public Law 108-89, (a Welfare 
Reform Act), provide that, for discharges occurring on or after April 
1, 2003 and before March 31, 2004, under the operating IPPS, all 
hospitals are paid based on the large urban standardized amount, 
regardless of geographic location or MGCRB redesignation. Section 
401(a) of Public Law 108-173 amended section 1886(d)(5)(A)(iv) by 
adding a subsection (II) that permanently equalizes the standardized 
amounts for large urban areas and for other urban and rural areas for 
discharges occurring on or after April 1, 2004.
    In addition, under section 1886(d) of the Act, a hospital may 
reclassify under the operating IPPS only for the purpose of either its 
standardized amount or its wage index adjustment, or both. As further 
specified in regulations at Sec.  412.230, a hospital may be 
reclassified for purposes of the standardized amount only if the area 
to which the hospital seeks redesignation has a higher standardized 
amount than the hospital currently receives. Because there are no 
longer differences in standardized amounts due to geographic 
classification as a result of the section 401 amendment, hospitals are 
no longer eligible to reclassify solely for standardized amount 
purposes. Accordingly, the MGCRB has denied all FY 2005 standardized 
amount reclassification requests. We note that although Public Law 108-
7 and Public Law 108-89 also equalized the standardized amounts for all 
hospitals in FY 2004, because these laws were not enacted until after 
the MGCRB had already made its reclassification determinations for FY 
2004, eligible hospitals received reclassification approval for the 
purposes of the standardized amount for FY 2004. However, in this case, 
Public Law 108-173 was enacted before the MGCRB issued its 
reclassification decisions for FY 2005. Therefore, no hospitals will be 
reclassified for the purpose of the standardized amounts in FY 2005.
    The changes to the operating IPPS described above, has an effect on 
payments under the PPS for capital-related costs. Rural and other urban 
hospitals that were previously eligible to receive the large urban add-
on and DSH payments under the PPS for capital-related costs if they 
reclassified to a large urban area for the purpose of the standardized 
amount under the operating IPPS, will no longer be reclassified, and 
therefore, will not be eligible to receive those additional

[[Page 28321]]

payments under the PPS for capital-related costs.
    Our analysis indicates that rural and other urban hospitals will 
gain approximately $0.5 billion in FY 2005 in operating PPS payments 
due to the equalization of the standardized amounts compared to a 
relatively small adjustment to payments for capital-related costs under 
the IPPS. We understand that Congress was aware of the effect of the 
equalization of the standardized amounts on the rural and other urban 
hospitals' adjustments under the PPS for capital-related costs. This 
approach is consistent with section 4203 of the BBA, which prevented 
hospitals from reclassifying to a different area to get an additional 
payment solely for DSH purposes under the operating IPPS. The 
restriction at section 4203 clearly indicates Congress' intent to 
maintain the principle that reclassifications under section 1886(d) of 
the Act are only intended to be made for purposes of either the 
standardized amount or the wage index adjustment.
    Therefore, in this proposed rule, we are clarifying that, beginning 
in FY 2005, only hospitals geographically located in a large urban area 
(as defined in proposed revised Sec.  412.63(c)(6)) would be eligible 
for large urban add-on payments under the PPS for capital-related costs 
under Sec.  412.312(b)(2)(ii) and Sec.  412.316(b). Beginning in FY 
2005, only hospitals serving low-income patients that are 
geographically located in an urban area (as defined in proposed new 
Sec.  412.64 and discussed in section IV.D. of this preamble) with 100 
or more beds (or that meet the criteria in Sec.  412.106(c)(2)) would 
be eligible for DSH payments under the PPS for capital-related costs 
under Sec.  412.320.

E. Geographic Classification and Definition of Large Urban Area

1. Core-Based Statistical Areas
    As we discuss in greater detail in section III.B. of this preamble, 
we are proposing to adopt changes to the MSA criteria used to define 
hospital labor market areas based on the new Core-Based Statistical 
Areas (CBSA) definitions announced by OMB on June 6, 2003, which are 
based on 2000 Census data. We currently define hospital labor market 
areas based on the definitions of Metropolitan Statistical Areas 
(MSAs), Primary MSAs (PMSAs), and New England County Metropolitan Areas 
(NECMAs) under standards issued by OMB in 1990. In addition, OMB 
designates Consolidated MSAs (CMSAs). A CMSA is a metropolitan area 
with a population of one million or more, comprised of two or more 
PMSAs (identified by their separate economic and social character). 
Under the operating PPS, the wage index is calculated and assigned to 
hospitals on the basis of the labor market area in which the hospital 
is located. For purposes of the hospital wage index, we use the PMSAs 
rather than CMSAs because they allow a more precise breakdown of labor 
costs. However, if a metropolitan area is not designated as part of a 
PMSA, we use the applicable MSA.
    As we discuss in sections III.B.3. and IV.C. of this preamble, we 
are proposing to adopt OMB's new CBSA designations to define labor 
market areas for discharges occurring on or after October 1, 2004, 
which would be set forth in regulations under a proposed new Sec.  
412.64. Currently, the large urban location adjustment under Sec.  
412.316(b) and the DSH adjustment for certain urban hospitals under 
Sec.  412.320 for payments for capital related costs rely on the 
existing geographic classifications set forth at Sec.  412.63. Because 
we are proposing to adopt OMB's new CBSA designations for FY 2005 and 
thereafter under proposed new Sec.  412.64, we are proposing to revise 
Sec.  412.316(b) and Sec.  412.320(a)(1) to specify that, for 
discharges on or after October 1, 2004, the payment adjustments under 
these sections, respectively, would be based on the geographic 
classifications at proposed new Sec.  412.64.
2. Metropolitan Divisions
    Under the revised MSA criteria based on CBSAs, a Metropolitan 
Division is a county or group of counties located within an MSA with a 
core population of at least 2.5 million, representing an employment 
center, plus adjacent counties associated with the main county or 
counties through commuting ties (see section III.B.3.b. of this 
preamble for further details). Under the proposed changes to the MSA 
criteria discussed in section III.B. of this preamble, we are proposing 
to use the Metropolitan Divisions where applicable under the CBSA 
definitions. Thus, similar to our treatment of PMSAs as labor market 
areas where applicable, we would use the Metropolitan Divisions rather 
than MSAs to define labor market areas.
    Currently, under the existing MSA criteria, a large urban area is 
defined at existing Sec.  412.63(c)(6) as an MSA with a population of 
more than 1.000,000 or a NECMA with a population of more than 970,000 
based on the most recent available population data published by the 
Bureau of the Census. As noted above, we currently use the PMSAs rather 
than CMSAs to define labor market areas. Accordingly, we currently 
determine large urban areas under existing Sec.  412.63(c)(6) based on 
the most recent available population data for each PMSA rather than the 
CMSA. Similarly, because we are proposing to treat Metropolitan 
Divisions of MSAs as labor market areas, under the proposed changes 
based on CBSA designations, we would designate large urban areas based 
on the most recent available population data for each Metropolitan 
Division, rather than the MSA.
    As discussed in section III.B.3.b., under the CBSA definitions, 
there are 11 MSAs containing Metropolitan Divisions: Boston; Chicago; 
Dallas; Detroit; Los Angeles; Miami; New York; Philadelphia; San 
Francisco; Seattle; and Washington, D.C. There are a total of 29 
Metropolitan Divisions, which would be treated as MSAs. Of those 29 
MSAs, 23 meet the definition of large urban area under Sec.  
412.63(c)(6) (as denoted in Tables 4A and 4B in the Addendum to this 
proposed rule). Under the proposed changes to the MSA criteria, there 
are a total of 62 large urban areas, including those 23 Metropolitan 
Divisions, as denoted in Tables 4A and 4B in the Addendum to this 
proposed rule.
    In this section, we are proposing to clarify that the current 
definition of large urban area at existing Sec.  412.63(c)(6) would 
remain in effect for the purpose of the large urban add-on adjustment 
to the Federal rate under the PPS for capital-related costs under 
Sec. Sec.  412.312(b)(2)(ii) and 412.316(b). With the equalization of 
the operating standardized amounts (as discussed in section IV.D. of 
this preamble), we are proposing to revise the regulations under Sec.  
412.63(c), and making them effective for FYs 1984 through 2004, and to 
add a new Sec.  412.64 that would be applicable for FYs 2005 and 
thereafter. Because CMS would compute a single standardized amount for 
hospitals located in all areas beginning in FY 2005, the term ``large 
urban area'' is no longer applicable under the operating PPS and 
therefore, a definition of large urban area would not be included under 
the proposed new Sec.  412.64. However, the term ``large urban area'' 
continues to be applicable under the capital PPS for the large urban 
add-on adjustment at Sec. Sec.  412.312(b)(2)(ii) and 412.316(b). 
Therefore, we are proposing to revise Sec. Sec.  412.312(b)(2)(ii) and 
412.316(b) to state that the definition of large urban area set forth 
at Sec.  412.63(c)(6) would continue to be in effect under the capital 
PPS for discharges occurring on or after September 30, 2004.

[[Page 28322]]

VI. Proposed Changes for Hospitals and Hospital Units Excluded From the 
IPPS

A. Payments to Excluded Hospitals and Hospital Units (Sec. Sec.  
413.40(c), (d), and (f))

[If you choose to comment on issues in this section, please include the 
caption ``Excluded Hospitals and Units'' at the beginning of your 
comment.]
1. Payments to Existing Excluded Hospitals and Hospital Units
    Section 1886(b)(3)(H) of the Act (as amended by section 4414 of 
Public Law 105-33) established caps on the target amounts for certain 
existing hospitals and hospital units excluded from the IPPS for cost 
reporting periods beginning on or after October 1, 1997 through 
September 30, 2002. For this period, the caps on the target amounts 
applied to the following three classes of excluded hospitals or units: 
psychiatric hospitals and units, rehabilitation hospitals and units, 
and LTCHs. In accordance with section 1886(b)(3)(H)(i) of the Act and 
effective for cost reporting periods beginning on or after October 1, 
2002, payments to these classes of existing excluded hospitals or 
hospital units are no longer subject to caps on the target amounts.
    In accordance with existing Sec. Sec.  413.40(c)(4)(ii) and 
(d)(1)(i) and (ii), where applicable, excluded psychiatric hospitals 
and units continue to be paid on a reasonable cost basis, and payments 
are based on their Medicare inpatient operating costs, not to exceed 
the ceiling, up to the date that the inpatient psychiatric facility PPS 
described in section VII.A. of this preamble becomes effective. The 
ceiling is computed using the hospital's or unit's target amount from 
the previous cost reporting period, updated by the rate-of-increase 
specified in Sec.  413.40(c)(3)(viii) of the regulations, and then 
multiplying this figure by the number of Medicare discharges.
    Effective for cost reporting periods beginning on or after October 
1, 2002, rehabilitation hospitals and units are paid in accordance with 
the IRF PPS at 100 percent of the Federal rate. In addition, effective 
for cost reporting periods beginning on or after October 1, 2002, LTCHs 
are no longer paid on a reasonable cost basis, but are paid under a 
DRG-based PPS. However, as part of the PPS for LTCHs, we have 
established a 5-year transition period from reasonable cost-based 
reimbursement to a fully Federal PPS. Under the LTCH PPS, a LTCH that 
is subject to the blend methodology may elect to be paid based on a 100 
percent of the Federal prospective rate. We have proposed, but not 
finalized, an inpatient psychiatric facility (IPF) prospective payment 
system under which psychiatric hospitals and psychiatric units would no 
longer be paid on a reasonable cost basis but would be paid on a 
prospective per diem basis. (Sections VI.A.3, 4, and 5 of this preamble 
contain a more detailed discussion of the IRF PPS and the LTCH PPS and 
the proposed IPF PPS.)
2. Updated Caps for New Excluded Hospitals and Units
    Section 1886(b)(7) of the Act established a payment limitation for 
new hospitals and units that fell within one of three classes of 
hospitals or units-psychiatric, rehabilitation, and long-term care that 
first receives payment as a hospital or unit excluded from the IPPS on 
or after October 1, 1997. A discussion of how the payment limitation 
was calculated can be found in the August 29, 1997 final rule with 
comment period (62 FR 46019); the May 12, 1998 final rule (63 FR 
26344); the July 31, 1998 final rule (63 FR 41000); and the July 30, 
1999 final rule (64 FR 41529). Under the statute, a ``new'' hospital or 
unit is a hospital or unit that falls within one of the three classes 
of hospitals or units (psychiatric, rehabilitation or long-term care) 
that first receives payment as a hospital or unit excluded from the 
IPPS on or after October 1, 1997.
    The amount of payment for a ``new'' psychiatric hospital or unit 
(as defined at 42 CFR 413.40(f)(2)(ii) would be determined as follows:
     Under existing Sec.  413.40(f)(2)(ii), for the first two 
12-month cost reporting periods, the amount of payment is the lesser 
of: (1) The operating costs per case; or (2) 110 percent of the 
national median (as estimated by the Secretary) of the target amounts 
for the same class of hospital or unit for cost reporting periods 
ending during FY 1996, updated by the hospital market basket increase 
percentage to the fiscal year in which the hospital or unit first 
receives payments under section 1886 of the Act, as adjusted for 
differences in area wage levels.
     Under existing Sec.  413.40(c)(4)(v), for cost reporting 
periods following the hospital's or unit's first two 12-month cost 
reporting periods, the target amount is equal to the amount determined 
under section 1886(b)(7)(A)(i) of the Act for the preceding cost 
reporting period, updated by the applicable hospital market basket 
increase percentage to the third cost reporting period.
    The proposed amounts included in the following table reflect the 
proposed updated 110 percent of the national median target amounts of 
new excluded psychiatric hospitals and units for cost reporting periods 
beginning during FY 2005. These figures are updated with the most 
recent data available to reflect the proposed projected market basket 
increase percentage of 3.3 percent. This projected percentage change in 
the market basket reflects the average change in the price of goods and 
services purchased by hospitals to furnish inpatient hospital services 
(as projected by the Office of the Actuary of CMS based on its 
historical experience with the IPPS). For a new provider, the labor-
related share of the target amount is multiplied by the appropriate 
geographic area wage index, without regard to IPPS reclassifications, 
and added to the nonlabor-related share in order to determine the per 
case limit on payment under the statutory payment methodology for new 
providers.

------------------------------------------------------------------------
                                    Proposed  FY 2005   Proposed FY 2005
Class of excluded hospital or unit     labor-related    nonlabor-related
                                          share              share.
------------------------------------------------------------------------
Psychiatric.......................         $7,534.70          $2,994.67
------------------------------------------------------------------------

    Effective for cost reporting periods beginning on or after October 
1, 2002, this payment limitation was no longer applicable to new LTCHs 
because they are paid 100 percent of the Federal rate. Accordingly, it 
is no longer necessary to publish an updated cap for new LTCHs.
    Effective for cost reporting periods beginning on or after October 
1, 2002, this payment limitation is also no longer applicable to new 
rehabilitation hospitals and units because they are paid 100 percent of 
the Federal prospective rate under the IRF PPS. Therefore, it is also 
no longer necessary to update the payment limitation for new 
rehabilitation hospitals or units.

[[Page 28323]]

3. Implementation of a PPS for IRFs
    Section 1886(j) of the Act, as added by section 4421(a) of Public 
Law 105-33, provided for the phase-in of a case-mix adjusted PPS for 
inpatient hospital services furnished by a rehabilitation hospital or a 
rehabilitation hospital unit (referred to in the statute as 
rehabilitation facilities) for cost reporting periods beginning on or 
after October 1, 2000, and before October 1, 2002, with a fully 
implemented PPS for cost reporting periods beginning on or after 
October 1, 2002. Section 1886(j) of the Act was amended by section 125 
of Public Law 106-113 to require the Secretary to use a discharge as 
the payment unit under the PPS for inpatient hospital services 
furnished by rehabilitation facilities and to establish classes of 
patient discharges by functional-related groups. Section 305 of Public 
Law 106-554 further amended section 1886(j) of the Act to allow 
rehabilitation facilities, subject to the blend methodology, to elect 
to be paid the full Federal prospective payment rather than the 
transitional period payments specified in the Act.
    On August 7, 2001, we issued a final rule in the Federal Register 
(66 FR 41316) establishing the PPS for inpatient rehabilitation 
facilities, effective for cost reporting periods beginning on or after 
January 1, 2002. There was a transition period for cost reporting 
periods beginning on or after January 1, 2002 and ending before October 
1, 2002. For cost reporting periods beginning on or after October 1, 
2002, payments are based entirely on the Federal prospective payment 
rate determined under the IRF PPS.
4. Implementation of a PPS for LTCHs
    In accordance with the requirements of section 123 of Public Law 
106-113, as modified by section 307(b) of Public Law 106-554, we 
established a per discharge, DRG-based PPS for LTCHs as described in 
section 1886(d)(1)(B)(iv) of the Act for cost reporting periods 
beginning on or after October 1, 2002, in a final rule issued on August 
30, 2002 (67 FR 55954). The LTCH PPS uses information from LTCH 
hospital patient records to classify patients into distinct LTC-DRGs 
based on clinical characteristics and expected resource needs. Separate 
payments are calculated for each LTC-DRG with additional adjustments 
applied.
    We published in the Federal Register on May 7, 2004, a final rule 
(69 FR 25673) that updated the payment rates for the LTCH PPS and made 
policy changes effective for a new LTCH PPS rate year of July l, 2004 
through June 30, 2005. The 5-year transition period from reasonable 
cost-based reimbursement to the fully Federal prospective rate will end 
with cost reporting periods beginning on or after October 1, 2005 and 
before October 1, 2006.
5. Development of a PPS for IPFs
    Section 124 of the Medicare, Medicaid and SCHIP Balanced Budget 
Refinement Act of 1999 (BBRA) requires the development of a per diem 
prospective payment system (PPS) for payment of inpatient hospital 
services furnished in psychiatric hospitals and psychiatric units of 
acute care hospitals (inpatient psychiatric facilities (IPFs)). We 
published a proposed rule to implement the IPF PPS on November 28, 2003 
(68 FR 66920). On January 30, 2004, we published a proposed rule to 
implement the IPF PPS on November 28, 2003 (68 FR 66920). On January 
30, 2004, we published a notice to extend the comment period for 30 
additional days (69 FR 4464). The comment period closed on March 26, 
2004.
    Under the proposed rule, we would compute a Federal per diem base 
rate to be paid to all IPFs 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 neutraility. The Federal 
per diem base rate would be adjusted to reflect certain characteristics 
such as age, specified DRGs, and selected high-cost comorbidities, and 
certain facility characteristics such as wage index adjustment, rural 
location, and indirect teaching costs.
    The November 28, 2003 proposed rule assumed an April 1, 2004 
effective date for the purpose of ratesetting and calculating impacts. 
However, we are still in the process of analyzing public comments and 
developing a final rule for publication. The effective date of the IPF 
PPS would occur 5 months following publication of the final rule.
6. Technical Changes Related to Establishment of Payments for Excluded 
Hospitals
    We have become aware of a number of technical errors in the 
existing regulations governing how we determine payments to hospitals 
that are excluded from the IPPS. The existing regulations under Sec.  
413.40 set forth requirements for establishing the ceiling on the rate 
of increase in operating costs per case for hospital inpatient services 
furnished to Medicare beneficiaries that will be recognized as 
reasonable for purposes of determining the amount of Medicare payments. 
The rate-of-increase ceiling applicable to cost reporting periods has 
been adjusted a number of times since it was first applied for hospital 
cost reporting periods beginning on or after October 1, 1982. In 
revising the regulations over the years to reflect the different 
applicable adjustments for cost reporting periods for specific 
providers, we have inadvertently overlooked updating or conforming 
Sec.  413.40 to reflect various statutory changes. We note that, 
although we erroneously omitted the technical changes in the regulation 
text, we did, in fact comply with the changes required by the statute 
when determining the rate-of-increase ceiling. Therefore, we are 
proposing to make several changes to Sec.  413.40(c)(4)(iii) in order 
to conform it to section 1886(b)(3)(J) of the Act. These proposed 
changes are as follows: (1) In Sec.  413.40(c)(4)(iii)(A)(1) and 
(c)(4)(iii)(B)(4)(i), the phrase ``on or after October 1, 2001'', 
should read ``during FY 2001''; and in Sec.  413.40(c)(4)(iii)(A)(2), 
the phrase ``on or after October 1, 2000'' should read ``during FY 
2001''. In order to include pertinent changes that were erroneously 
omitted from the regulatory text and to conform the text to section 
1886(b)(2)(A) of the Act, we are proposing to delete the phrase ``and 
ending before October 1, 2000'' in Sec.  413.40(d)(4)(i) because, in 
section 1886(b)(2)(A) of the Act, there is no ending date for the 
continuous improvement bonus payment. In addition, at Sec.  
413.40(d)(4)(ii), we propose to delete the word ``ending'' from the 
introductory phrase so that the phrase would read, ``For cost reporting 
periods beginning on or after October 1, 2000 and before September 30, 
2001.'' The word ``ending'' in the existing language at best limits the 
provision to cost reporting periods beginning on October 1, 2000. The 
provision was intended to apply to cost reporting periods beginning 
during all of FY 2001.

B. Criteria for Classification of Hospitals-Within-Hospitals

[If you choose to comment on the issues in this section, please include 
the caption ``Hospitals-Within-Hospitals'' at the beginning of your 
comment.]
    Existing regulations at Sec.  412.22(e) define a hospital-within-a-
hospital as a hospital that occupies space in a building as another 
hospital, or in one or more separate buildings located on the same 
campus as buildings used by another hospital. Moreover, existing Sec.  
412.22(f) provides for the grandfathering of hospitals-within-hospitals 
that were in existence on or before September 30, 1995.
    One of the goals of our hospital-within-hospital regulations at 
Sec.  412.22(e) has been to prevent a LTCH

[[Page 28324]]

co-located with an acute care hospital to function as a unit of that 
hospital, a situation precluded under section 1886(d)(1)(B) of the Act. 
This policy protects the integrity of the IPPS by ensuring that costly, 
long-stay patients who could reasonably continue treatment in that 
setting would not be unnecessarily discharged to an onsite LTCH, a 
behavior that would skew and undermine the Medicare IPPS DRG system. 
Further, there is concern that the hospital-within-hospital 
configuration could result in patient admission, treatment, and 
discharge patterns that are guided more by attempts to maximize 
Medicare payments than by patient welfare. We believe that the 
unregulated linking of an IPPS hospital and a hospital excluded from 
the IPPS could lead to two Medicare payments for what was essentially 
one episode of patient care.
    In the September 1, 1994 IPPS final rule (59 FR 45389), we first 
discussed hospitals-within-hospitals, describing them as entities that 
were manipulating the conditions of participation (COPs) for hospitals 
under Medicare, set forth in regulations at 42 CFR Part 482, to permit 
them to receive exclusion from the prospective payment systems. 
Specifically, these hospitals have begun to organize what they 
themselves refer to as the ``hospital-within-a-hospital'' model. Under 
this model, an entity may operate in space leased from a hospital, and 
have most or all services furnished under arrangements by employees of 
the lessor hospital. The newly organized entity may be operated by a 
corporation formed and controlled by the lessor hospital, or by a third 
entity that controls both. In either case, the new entity seeks State 
licensure and Medicare participation as a hospital, demonstrates that 
it has an average length of stay of over 25 days, and obtains an 
exclusion from the IPPS. The effect of this process is to extend the 
long-term care hospital exclusion to what is, for all practical 
purposes, a ``long-term care unit.'' We noted that the averaging 
concept that underlies the IPPS recognizes that some patients will stay 
longer and consume more resources than expected, while others will have 
shorter, less costly stays. We envisioned that abuse of the PPSs could 
result if an acute care hospital under the IPPS ``diverted all long-
stay cases to the excluded unit, leaving only shorter, less costly 
cases to be paid for under the IPPS. In such cases, hospitals would 
profit inappropriately from prospective payments.'' Further, we stated 
that we believed that the ``exclusion of long-term care `units' was 
inconsistent with the statutory scheme.'' Section 1886(d)(1)(B) of the 
Act clearly provides for an exclusion of LTCHs from the acute care 
IPPS. While the statute also provides for an exclusion for psychiatric 
units and rehabilitation units, it does not provide for an exclusion of 
long-term care units. (59 FR 45389)
    In addition, in that September 1, 1994 final rule, we proceeded to 
establish ``separateness and control'' regulations at (then) Sec.  
412.23(e) that required the two hospitals to have separate medical and 
administrative governance and decisionmaking and also ensured that each 
hospital operated as a separate facility. We believed at that time that 
such rules were sufficient solutions to our concerns about these new 
entities and, therefore, we did not preclude common ownership of the 
host and the LTCH at that time.
    In the ensuing decade, we have revisited the issue of hospitals-
within-hospitals several times (for example, 60 FR 45836, September 1, 
1995; 62 FR 46012, August 29, 1997; 67 FR 56010, August 30, 2002; 67 FR 
45463, August 1, 2003) during which we clarified and amplified the 
separateness and control requirements. In the August 29, 1997 IPPS 
final rule, we extended the application of these rules beyond LTCHs to 
include other classes of facilities that might seek exclusion from the 
IPPS as hospitals-within-hospitals, such as IRFs. In addition, in the 
August 29, 1997 final rule, we also established a ``grandfathering'' 
provision for hospitals-within-hospitals in existence prior to 
September 30, 1995, at Sec.  412.22(f), and in the August 1, 2003 IPPS 
final rule, we clarified and codified the requirements for 
``grandfathered'' hospitals-within-hospitals (68 FR 45463).
    As stated earlier, presently, a hospital-within-a-hospital must 
meet the separateness and control criteria set forth at Sec.  
412.22(a). In order to be excluded from the IPPS, the hospital-within-
a-hospital must have a separate governing body, a separate chief 
medical officer, a separate medical staff, and a separate chief 
executive officer. Regarding the performance of basic hospital 
functions (Sec.  412.22(e)(5)), currently, the hospital must meet at 
least one of the following criteria: (i) The hospital performs the 
basic functions through the use of employees or under contracts or 
other agreements with entities other than the hospital occupying space 
in the same building or on the same campus, or a third entity that 
controls both hospitals; (ii) for the same period of at least 6 months 
immediately preceding the first cost reporting period for which 
exclusion is sought, the cost of the services that the hospital 
obtained under contracts or other agreements with the hospital 
occupying space in the same building or on the same campus, or with a 
third entity that controls both hospitals, is no more than 15 percent 
of the hospital's total inpatient operating costs, as defined in Sec.  
412.2(c) (that is, inpatient operating costs include operating costs 
for routine services, such as costs of room, board, and routine nursing 
services; operating costs for ancillary services such as laboratory or 
radiology; special care unit operating costs; malpractice insurance 
costs related to serving inpatients; and preadmission services); or 
(iii) for the same period of at least 6 months immediately preceding 
the first cost reporting period for which exclusion is sought, the 
hospital has an inpatient population of whom at least 75 percent were 
referred to the hospital from a source other than another hospital 
occupying space in the same building or on the same campus or with a 
third entity that controls both hospitals.
    It is our experience that the vast majority of hospitals-within-
hospitals have elected to meet the second of the three criteria at 
Sec.  412.22(e)(5), that is, the cost of the services that the hospital 
obtained from the co-located hospital or with a third entity that 
controls both hospitals is no more than 15 percent of its total 
inpatient operating costs. In establishing the 15-percent rule, we 
originally believed that we would be able to detect a true corporate 
identity and actual function and to guard against an arrangement that 
could undermine the statutory preclusion of long-term care units. We 
sought to distinguish admissions to independently operating facilities 
from what were, in effect, transfers of patients from one unit of the 
corporation to another unit of the corporation without a truly distinct 
and separate corporate identity. Our underlying policy rationale was 
that, if an entity could not be separately identified, it effectively 
would be functioning as a mere unit of the parent entity in violation 
of the statutory prohibition on long-term care units. We explained in 
the September 1, 1994 rule (59 FR 45390) that ``if an entity is 
effectively part of another hospital and the principles of the 
prospective payment system do apply well to the organization as a 
whole, then it would not be appropriate to exclude part of that 
organization from the prospective payment system.''
    Although we have periodically revisited the phenomenon of 
hospitals-within-hospitals in our rules and we have revised or 
clarified some related

[[Page 28325]]

issues, we have not proposed significant changes in our policies in 
this area for some time. This is despite the significant changes that 
have been made in the payment systems for Medicare-certified, excluded 
hospitals and units. Medicare payments to two types of IPPS-excluded 
hospitals, LTCHs and IRFs, are now made on a prospective basis. We 
believe that, in part, the new LTCH PPS is one of the reasons for the 
rapidly increasing number of LTCH hospitals-within-hospitals. In its 
June 2003 Report to the Congress, MedPAC identified hospitals-within-
hospitals as the fastest growing type of LTCHs, and specified that the 
number had grown from 10 in 1993 to 114 in 2002, an average annual 
increase of approximately 30 percent (p. 85). In the August 30, 2002 
final rule that implemented the PPS for LTCHs, we noted that ``* * * we 
remain extremely concerned about rapid growth in LTCH hospitals-within-
hospitals and will be collecting data on the relationship among host 
hospitals, hospitals-within-hospitals, and parent corporations in order 
to determine the need for additional regulation'' (67 FR 56010). We 
indicated that if, as a consequence of these monitoring activities, we 
determine the need to revisit existing regulations dealing with 
ownership and control of hospitals-within-hospitals, we would follow 
the notice and comment rulemaking process (67 FR 56011).
    The LTCH PPS was implemented for cost reporting periods beginning 
on or after October 1, 2002. We have gathered considerable anecdotal 
information from inquiries from the provider community, fiscal 
intermediaries, and, particularly, from the survey and certification 
divisions of our CMS Regional Offices.
    We believe that existing policies regarding hospitals-within-
hospitals do not sufficiently protect the Medicare program from the 
problems that we envisioned in the September 1, 1994 final rule. We 
also question the effectiveness of the ``separateness and control'' 
requirements alone because entities have used complex arrangements 
among corporate affiliates, and obtained services from those 
affiliates, thereby impairing or diluting the separateness of the 
corporate entity. While technically remaining within the parameters of 
the rule, these arrangements have intermingled corporate interests so 
that the corporate distinctness has been lost.
    In corporate law, several standards are used to determine how much 
separateness is sufficient for a corporate autonomy to be recognized. 
The courts have applied a number of tests and considered a number of 
factors in determining when a parent corporate autonomy is liable for 
the acts of its subsidiary, including the parent corporate autonomy's 
exercise of control over the decisionmaking of the subsidiary; the 
subsidiary's actions as an alter ego of the parent corporate autonomy, 
such that recognition of a distinct corporate entity would lead to 
fraud or an injustice or would defeat public policy and the 
interrelatedness of operations. While we do not believe that it is 
necessary to apply any single test that might be used in the context of 
assigning liability, we believe that some of the same considerations 
apply when trying to determine whether there is functional separateness 
among related or affiliated organizations.
    The requirement for separate governing bodies, separate medical 
boards, separate medical officers, and separate chief executive 
officers in co-located hospitals under the same ownership does not 
prevent, on a practical level, the establishment of admission, 
treatment, and discharge policies that maximize payments. Some of these 
co-located facilities are under common ownership, either nonprofit or 
for profit, and, therefore, the payments generated from care delivered 
at both settings affect their mutual interests.
    Even when the hospital-within-a-hospital and the host hospital are 
separately owned, we believe that there may be incentives to 
prematurely discharge patients to a postacute care setting in spite of 
the fact that the acute care hospital could continue to provide the 
appropriate level of care. We find this situation even more troubling 
regarding LTCHs, in particular, because LTCHs are certified as acute 
care hospitals and the sole statutory and regulatory distinction 
between LTCHs and acute care hospitals is the greater than 25-day 
average length of stay criterion at Sec.  412.23(e)(2). In many parts 
of the country, there are no LTCHs and appropriate care for patients 
who could otherwise be treated in LTCHs is being delivered in acute 
care hospitals, often followed by postacute care at SNFs. Because a 
similar level of care is often available in either an acute care 
hospital or a LTCH, we believe that, when an acute care hospital and a 
LTCH are co-located, there are significant inducements for patients to 
be moved to the provider setting that generates the highest Medicare 
payments.
    This movement of patients is facilitated by the fact of co-location 
because, rather than arranging for the patient to be admitted to 
another offsite facility and transporting the patient by ambulance to 
another hospital, all that may actually be required to ``discharge'' 
the patient from one hospital and admit the patient to another is 
wheeling the patient down the hall or on and off an elevator.
    Although co-location of Medicare providers, at best, may embody the 
positive economic benefits of sharing expensive medical equipment and 
provide a measure of convenience for patient families, at worst, co-
location and patient-shifting can serve to undermine the basic premise 
of the IPPS DRG classification system and generate inappropriate 
Medicare payments. This is the case because payment for specific 
diagnoses is determined by setting DRG weights that represent a 
national averaging of hospital costs for each diagnosis. In addition, 
the Federal standardized payment amount was based on the average cost 
of a patient across all hospitals. This assumes that, on average, both 
high-cost and low-cost patients are treated at a hospital. Although 
Medicare might pay a hospital less than was expended for a particular 
case, over a period of time, the hospital would also receive more than 
was expended for other cases. However, an acute care hospital that 
consistently discharges a higher cost patient to a postacute care 
setting for the purpose of lowering its costs undercuts the foundation 
of the IPPS DRG system, which is based on averages. In this 
circumstance, the hospital would recoup larger payments from the 
Medicare system than is intended under the DRG system because the 
course of acute treatment has not been completed. At the same time, the 
patient, still under active treatment for an acute illness, will be 
admitted to a LTCH, thereby generating a second admission and Medicare 
payment that would not have taken place but for the fact of co-
location.
    We believe that the 15-percent policy is being sidestepped through 
creative corporate reconfigurations. Therefore, if the LTCH is 
nominally complying with the 15-percent requirement, it has not been 
required to meet the basic hospital function requirements at existing 
Sec.  412.22(e)(5)(iii). Thus, it is free to accept even 100 percent of 
patients from the onsite host, and share the same basic hospital 
functions as the host. Reliance on meeting the 15-percent criterion has 
enabled the creation of LTCH hospitals-within-hospitals that rely upon 
affiliated entities both for their operations and for their patient 
referrals. This results in a situation very similar to the hospital-
within-hospital serving as a LTCH unit of the acute care hospital, 
which is precluded by the statute.

[[Page 28326]]

    One of the reasons we are proposing revisions to the existing 
criteria for hospitals-within-hospital is because we believe that 
determining whether a hospital has complied with the 15-percent 
criterion is burdensome for a fiscal intermediary on an ongoing basis. 
Presently, review of corporate arrangements represents a snapshot in 
time that may assess a particular set of business transactions but does 
not provide relevant details to reveal the extent of the unity of 
interests between the parties over time. Further, the widespread 
existence of such complex configurations, as well as the ongoing 
creation of new business arrangements, convinces us that a hospital-
within-a-hospital's compliance with Sec.  412.22(e)(5)(ii) may be 
fluid, unreliable, or, in some cases, nonexistent.
    Another reason we are proposing revisions to the existing criteria 
for hospitals-within-hospitals because the concerns that we expressed 
in 1994 and 1995, when excluded hospitals were paid under the 
reasonable cost-based TEFRA system, are even more compelling with the 
implementation of PPSs for LTCHs and IRFs, because now one episode of 
care for a beneficiary could generate two full Medicare prospective 
payments, one under the IPPS, and another under the applicable excluded 
hospital PPS. In addition, the substantial increase in the number of 
hospitals-within-hospitals adds further urgency to reevaluation of the 
existing hospital-within-a-hospital policies. Therefore, it is 
incumbent upon us to revise our regulations in order to offer the 
greatest possible protection against potential abuses.
    Accordingly, for qualification purposes, we are proposing to delete 
the 15-percent criterion at Sec.  412.22(e)(5)(i) and the rarely 
elected criterion at Sec.  412.22(e)(5)(i) that requires the hospital-
within-a-hospital to perform basic hospital functions, which includes 
nursing services, medical records, pharmacy services, radiology, 
laboratory services, infection control, and discharge planning, through 
the use of employees or under contracts or other agreements with 
entities other than the host hospital or a third entity that controls 
them both. Because we believe that efficient use of excess space at a 
hospital and the sharing of medical facilities and services may 
represent the strongest argument for the existence of hospitals-within-
hospitals, from the standpoint of efficiency and cost reduction, we do 
not believe that these criteria should be maintained.
    We are proposing that all hospitals-within-hospitals would be 
required to comply only with the criterion set forth at the existing 
Sec.  412.22(e)(5)(iii), which requires that at least 75 percent of the 
admissions to the hospital-within-a-hospital be referred from a source 
other than the host hospital. We believe that this ``functional 
separateness'' test (62 FR 46014, August 29, 1997) directly addresses 
our concern that the excluded hospital not function either as a vehicle 
to generate more favorable Medicare reimbursement for each provider or 
as a de facto unit. Compliance with the 75-percent criterion is a 
requirement that we can verify without the involvement of corporate 
attorneys and a yearly reevaluation of corporate documents and 
transactions. The goal of the proposed provisions is to diminish the 
possibility that a hospital-within-a-hospital could actually be 
functioning as a unit of an acute care hospital and generating 
unwarranted payments under the much more costly LTCH PPS.
    Therefore, under our proposed policy, a hospital must demonstrate 
that it has a separate governing body, a separate chief medical 
officer, and a separate chief executive officer, and that at least 75 
percent of its admissions originate from a source other than its host 
hospital, in order to be totally excluded from the IPPS. Fiscal 
intermediaries would reevaluate compliance with these regulations 
annually. In implementing our belief that separation and control can 
best be objectively determined by limiting compliance to the 75-percent 
criterion as the single ``performance of hospital functions'' test, we 
are proposing several policy options that are detailed below that, if 
not met, notwithstanding compliance with the separate governance and 
control requirements under existing Sec.  412.22(e)(1) through (4), 
could result in the either total discontinuance of IPPS-exclusion 
payment status or Medicare payment adjustments for hospital-within-a-
hospital patients from the host hospitals.
    As noted above, DRG weights and hence payments under the IPPS are 
established annually based on the average concept that recognizes that, 
for patients with a particular diagnosis, some will stay longer and 
consume more hospital resources than expected, while others will have 
shorter, less costly stays. Under the IPPS, a full DRG payment is 
triggered on the first day of admission to the acute care hospital. 
Medicare adopted an IPPS transfer policy at Sec.  412.4(b) in order to 
pay appropriately for cases that were discharged to other IPPS 
hospitals prior to the hospitals delivering full treatment to a 
beneficiary. We also promulgated the postacute care transfer policy at 
Sec. Sec.  412.4(c) and (d) to discourage premature transfers or 
discharges from IPPS hospitals for particular DRGs to postacute care 
settings, including LTCHs (63 FR 40977, July 31, 1998, 68 FR 45469, 
August 1, 2003). The issues that we addressed in formulating the acute 
and postacute care transfer policies are similar to those we are 
raising as our present concerns: that the incentives of the IPPS could 
result in acute care hospitals shifting a portion of the cost of 
services that should reasonably be treated in that setting to other 
providers; that the acute care hospitals would still collect a full DRG 
payment under the IPPS for less than a full course of treatment; and 
that an additional and unnecessary Medicare payment would be made to 
the second provider. We believe that the potential for linking clinical 
decisions to the highest Medicare payments is even stronger when the 
acute care hospital and a postacute care provider are co-located and, 
even more so, if they are also under common ownership.
    Therefore, we are also proposing to revise Sec.  412.22(e), 
effective October 1, 2004, to preclude common ownership (wholly or in 
part) of hospitals-within-hospitals and host hospitals (proposed new 
Sec.  412.22(e)(2)(ii)). However, we are also proposing to 
``grandfather'' those hospitals-within-hospitals that were under common 
ownership with their host hospitals prior to June 30, 2004, and to 
continue to pay them as hospitals excluded from the IPPS, as long as 
they comply with the existing control criteria at Sec.  412.22(e)(1) 
through (4) (as set forth in proposed new Sec.  412.22(e)(2)(i)) and 
with the proposed mandatory 75-percent criterion (as set forth in 
proposed new Sec.  412.22(e)(2)(iii)).
    In addition, in this proposed rule, we are presenting, for public 
comment, three payment options that we believe would diminish the 
possibility of a hospital-within-a-hospital actually functioning as a 
unit of an acute care hospital and at the same time generating 
unwarranted payments under the more costly LTCH PPS.
    Option 1. Under the first option, as discussed earlier, in order 
for a hospital-within-a-hospital to receive payment as an IPPS-excluded 
hospital, we are proposing to retain as the only qualifying criterion 
that the hospital-within-a-hospital have at least 75 percent of its 
admissions from a source other than the host hospital (existing Sec.  
412.22(e)(5)(iii)). The hospital-within-a-hospital would still be 
required to demonstrate that it meets the separateness and control 
criteria at Sec.  412.22(a). Under this option, a hospital-within-
hospital that admitted

[[Page 28327]]

more than 25 percent of its patients from the host hospital would not 
be paid as an IPPS-excluded hospital for any of its patients. The 
hospital or unit that does not meet the criteria under this option 
would receive payment as an acute care hospital for all of its 
patients.
    As stated earlier, we believe that compliance with the 75-percent 
criterion under this option is a requirement that fiscal intermediaries 
would be able to evaluate annually in an efficient manner without the 
involvement of corporate attorneys and a yearly reevaluation of 
corporate documents and transactions. Further, we believe that this 
option would ensure increased protections to the Medicare program and 
greatly diminish opportunities for maximizing Medicare payments under 
the PPS.
    Option 2. Under the second option, as proposed earlier, we would 
require the hospital to meet the existing qualifying 75-percent 
criterion under Sec.  412.22(e)(5)(iii). However, under this option, we 
would allow a hospital-within-a-hospital that failed to meet the 75-
percent criterion to be excluded from the IPPS to be paid as a PPS-
excluded hospital only for the patients admitted to the hospital-
within-a-hospital from providers other than the host hospital. For 
example, no payments would be made to a LTCH for those patients that 
had been transferred to the LTCH from the host hospital because it 
failed to meet this criterion. Payments for patients referred from the 
host acute care hospital would only be paid to the host under the IPPS. 
We would treat services provided by the hospital-within-a-hospital as 
services furnished ``under arrangement.'' Therefore, in keeping with 
our existing policy at Sec.  411.15(m) that restricts separate Medicare 
payment to hospital services furnished under arrangements, we would 
make payment only to the acute care hospital from which the patients 
were referred for ``under arrangements'' furnished by the hospital-
within-a-hospital.
    Option 3. Under the third option, as proposed earlier, we would 
require that the hospital-within-a-hospital must meet the existing 
qualifying 75-percent criterion under Sec.  412.22(e)(iii). However, 
under this option, we would pay the hospital-within-a-hospital directly 
for services, even for services provided to patients admitted to the 
hospital-within-a-hospital from the co-located acute care hospital. 
However, the payment to the hospital-within-a-hospital for those 
patients would be the lesser of what would be paid under the IPPS for 
that DRG, or what would be paid to the hospital-within-a-hospital under 
the applicable excluded hospital payment system. Payments to the 
hospital-within-a-hospital for patients admitted to the hospital-
within-a-hospital from another hospital that was not the co-located 
hospital would be made under the hospital-within-a-hospital payment 
system with no adjustment. Therefore, for example, a LTCH that was a 
hospital-within-a-hospital and failed to meet the 75-percent criterion 
would be paid the lesser of the IPPS payment or the LTCH PPS payment 
for its patients that were admitted from its host hospital. However, 
for patients admitted from other hospitals, the LTCH hospital-within-a-
hospital would be paid under the LTCH PPS with no adjustment.
    We believe that adoption of any of these three options is within 
the broad discretion conferred on the Secretary by section 123 of 
Public Law 106-113 (BBRA) and by section 307 of Public Law 106-554 
(BIPA), which grant the Secretary the authority to develop a per 
discharge PPS for payment of inpatient hospital services by LTCHs and 
to provide for appropriate adjustments to the LTCH PPS.
    We are proposing to revise the existing separateness and control 
regulations at Sec.  412.22(e) for hospitals-within-hospitals and to 
require that in order to be excluded from the IPPS, all hospitals-
within-hospitals must admit no more than 25 percent of their patients 
from the onsite host hospital. We are also proposing to preclude common 
ownership of host hospitals and excluded hospitals, while 
grandfathering existing hospitals-within-hospitals and hosts that are 
under common ownership, as long as they comply with the proposed 
mandatory 75-percent criterion. We are further seeking comments on the 
options presented if the hospital-within-a-hospital fails to meet the 
75-percent criterion that would either require that all of the 
hospital's Medicare payment would be made under the IPPS or, 
alternatively, to allow a hospital-within-a-hospital to still be paid 
as an excluded hospital for its admissions from onsite providers while 
applying specific payment adjustments for patients admitted from the 
host hospital.
    We are soliciting comments on the three options presented and 
whether they provide sufficient protection against the phenomenon of 
inadequate separateness and control as described in this proposed rule. 
We want to emphasize that, under any of the options, nowhere is a 
change in physician clinical decisionmaking or a change in the manner 
in which a physician or hospital practices medicine intended. The 
policy options outlined in this proposed rule would simply address the 
appropriate level of payments once those decisions have been made.
    Technical Change. In Sec.  412.22(e) of our regulations, we refer 
to a hospital-within-a-hospital as a hospital that ``occupies space in 
a building also used by another hospital, or in one or more entire 
buildings located on the same campus as buildings used by another 
hospital'' (emphasis added). The reference to ``entire'' buildings is 
incorrect. We should have referred to ``separate'' buildings. 
Therefore, we are proposing to correct this error.

C. Critical Access Hospitals (CAHs)

[If you choose to comment on issues in this section, please include the 
caption ``Critical Access Hospitals'' at the beginning of your 
comment.]
1. Background
    Section 1820 of the Act provides for the establishment of Medicare 
Rural Hospital Flexibility Programs, under which individual States may 
designate certain facilities as critical access hospitals (CAHs). 
Facilities that are so designated and meet the CAH conditions of 
participation in 42 CFR Part 485, Subpart F, will be certified as CAHs 
by CMS. Regulations governing payments to CAHs for services to Medicare 
beneficiaries are located in 42 CFR Part 413.
2. Payment Amounts for Inpatient CAH Services (Section 405(a) of Public 
Law 108-173 and Sec. Sec.  413.70 and 413.114 of the Regulations)
    Prior to the enactment of Public Law 108-173, section 1814(l) of 
the Act provides that the Medicare payment amount for inpatient 
services furnished by a CAH is the reasonable costs of the CAH in 
providing the services. Section 1834(g)(1) of the Act provides that the 
Medicare amount of payment for outpatient services furnished by a CAH 
is made on a reasonable cost basis, unless the CAH makes an election, 
under section 1834(g) of the Act, to receive a payment amount that is 
the sum of the reasonable cost of hospital outpatient facility services 
plus 115 percent of the amount otherwise paid for professional 
services. Section 1883(a)(3) of the Act provides for payment to a CAH 
for covered skilled nursing facility services furnished under an 
agreement entered into under section 1883 of the Act on the basis of 
the reasonable costs of such services. Regulations implementing these 
provisions are set forth in Sec.  413.70(a), for inpatient CAH 
services; in

[[Page 28328]]

Sec.  413.70(b), for payment under the standard method for the 
reasonable costs of facility services, and outpatient CAH services; in 
Sec.  413.70(b)(3), for the optional method of payment for outpatient 
services (reasonable costs for facility services plus fee schedule for 
professional services); and in Sec.  413.114, for SNF services of a CAH 
with a swing-bed agreement.
    Section 405(a) of Public Law 108-173 amended sections 1814(l), 
1834(g)(1), and 1883(a)(3) of the Act to provide that, effective for 
services furnished during cost reporting periods beginning on or after 
January 1, 2004, the amount of the payment for inpatient, outpatient, 
and SNF services, respectively, furnished by a CAH is equal to 101 
percent of the reasonable cost of the CAH in providing these services.
    We are proposing to revise Sec. Sec.  413.70(a)(1), (b)(2), and 
(b)(3) and Sec.  413.114 of our regulations to incorporate the change 
in the payment percentage made by section 405(a) of Public Law 180-173. 
We also are proposing to make a technical correction to Sec.  
413.70(b)(2)(i) to remove paragraphs (b)(2)(i)(C) and (D). We are 
proposing to delete these paragraphs to conform the regulations to 
provisions of the outpatient hospital PPS.
    We note that in the IPPS final rule published in the Federal 
Register on August 1, 2001 (66 FR 39936), we added a new paragraph 
(a)(1)(iv) to Sec.  413.70. However, when the change was incorporated 
into the Code of Federal Regulations, paragraphs (a)(1)(i), (a)(1)(ii), 
and (a)(1)(iii) were inadvertently omitted. Our proposed revision of 
Sec.  413.70(a)(1) would correct the omission of these three 
paragraphs.
3. Condition for Application of Special Professional Service Payment 
Adjustment (Section 405(d) of Public Law 108-173 and Sec.  413.70(b) of 
the Regulations)
    As stated earlier, section 1834(g) of the Act provides for two 
methods of payment for outpatient CAH services. Under the provisions of 
section 1834(g) of the Act, a CAH will be paid under a reasonable cost 
method unless it elects payment under an optional method. Under the 
reasonable cost payment method, facility services are paid on a 
reasonable cost payment basis by the fiscal intermediary to the CAH, 
and physician and other professional services to CAH outpatients are 
paid for under the physician fee schedule, with payments being made by 
the carrier. Under the optional method (frequently referred to as 
``method 2''), CAHs submit bills for both facility and professional 
services to the fiscal intermediary. If a CAH elects the optional 
method of billing for outpatient services, Medicare payment for its 
facility services are made at the same level as would apply under the 
reasonable cost reimbursement method, but services of professionals to 
outpatients are paid for at 115 percent of the amounts that would 
otherwise be paid for under the physician fee schedule. To make the 
optional method election feasible and to help prevent possible 
duplicate billing, we require practitioners furnishing services to 
outpatients of a CAH to agree to reassign to the CAH their rights to 
bill the Medicare program for those services.
    Existing regulations at Sec.  413.70(b) set forth these payment 
options and specify that an election of the optional method, once made 
for a cost reporting period, remains in effect for all of that period 
and applies to all services furnished to CAH outpatients during that 
period. This means that, under existing regulations, a CAH may elect 
the optional method payment only if all of its practitioners agree to 
reassign their billing rights for outpatient services to the CAH.
    Section 405(d)(1) of Public Law 108-173 amended section 1834(g)(2) 
of the Act by adding a sentence after paragraph (B) to specify that the 
Secretary may not require, as a condition for a CAH to make an election 
of the optional method of payment, that each physician or other 
practitioner providing professional services in the CAH must assign 
billing rights with respect to the services. However, the optional 
payment method does not apply to those physicians and practitioners who 
have not assigned such billing rights. In other words, section 405(d) 
amended the Medicare law to authorize CAHs to elect the optional 
payment method even if some practitioners do not reassign to the CAH 
their rights to bill for professional services to CAH outpatients. 
However, it also specifies that the 15-percent increase in payment for 
those services is not available for professional services for which 
billing rights are not reassigned.
    The provisions of section 405(d)(1) of Public Law 108-173 are 
effective for cost reporting periods beginning on or after July 1, 
2004. However, section 405(d)(2)(B) also states, in a special rule of 
application, that in the case of a CAH that made an election before 
November 1, 2003, the provisions of section 405(d)(1) are effective for 
cost periods beginning on or after July 1, 2001.
    Consistent with section 405(d)(2)(B), we do not intend to attempt 
recovery of certain amounts paid improperly in the past to CAHs for 
professional services that the CAHs billed under the optional payment 
method, even though the CAHs had not obtained reassignments of billing 
rights from all physicians and other practitioners furnishing 
professional services to their outpatients, as required by Sec.  413.70 
as in effect at that time. However, we are proposing to clarify that 
the special rule of application in section 405(d)(2)(B) is not to be 
interpreted to permit a CAH to obtain payment under the optional 
payment method for any cost reporting period based on an election made 
for a prior period or on an optional payment method election that was 
withdrawn or revoked prior to the start of the cost reporting period 
for which it was made.
    To illustrate the application of section 405(d)(2)(B), assume that 
on October 1, 2002, a CAH elected method 2 for its cost reporting 
period starting on January 1, 2003, but did not obtain reassignments 
from all physicians treating its outpatients, as required by 
regulations in effect at that time. Under section 405(d)(2)(B), CMS 
would not recover any amounts from the CAH for payments for services 
furnished during that cost reporting period (January 1, 2003, through 
December 31, 2004) that are attributable to that election, even though 
the election was inappropriate at the time it was made. Assume further 
that the same CAH recognized its error and did not make a method 2 
election for its cost reporting period beginning January 1, 2004, thus 
receiving payment under method 1. The fact that the election of October 
1, 2002, was made prior to November 1, 2003, is not material in this 
case and cannot be interpreted to justify method 2 payment for the cost 
reporting period beginning January 1, 2004, because that method 2 
election related to an earlier cost reporting period and not to the 
cost reporting period beginning January 1, 2004. The same result would 
occur if the CAH had elected method 2 on October 1, 2003, but 
subsequently revoked that election on October 15, 2004.
    We are proposing to revise Sec. Sec.  413.70(b)(3)(i) to reflect 
the changes made by section 405(d) of Public Law 108-173. We would 
specify in Sec.  413.70(b)(3)(i) that a CAH may elect to be paid for 
outpatient services in any cost reporting period beginning on or after 
July 1, 2004, under the method described in Sec. Sec.  413.70(b)(3)(ii) 
and (b)(3)(iii). In Sec.  413.70(b)(3)(i)(A), we would clarify that 
such an election is to be made at least 30 days before the start of the 
cost reporting period for which the election is made. In Sec.  
413.70(b)(3)(i)(B), we would specify

[[Page 28329]]

that the provision applies to all services furnished to outpatients 
during that cost reporting period by a physician or other practitioner 
who has reassigned his or her rights to bill for those services to the 
CAH in accordance with the reassignment regulations under 42 CFR part 
424, Subpart F. In that paragraph, we also would specify that if a 
physician or other practitioner does not reassign his or her billing 
rights to the CAH in accordance with 42 CFR Part 424, Subpart F, 
payment for the physician's or practitioner's services to CAH 
outpatients will be made on a fee schedule or other applicable basis 
specified in 42 CFR Part 414, Subpart B. We would also add a new 
paragraph (C) to Sec.  413.70(b)(3)(i) to state that, in case of a CAH 
that made an election under Sec.  413.70(b)(3) before November 1, 2003, 
for a cost reporting period beginning before December 1, 2004, the 
rules in paragraph (b)(3)(i)(B) are effective for cost reporting 
periods beginning on or after July 1, 2001. We are also proposing in 
Sec.  413.70(b)(3)(i)(B) to clarify that an election effective only for 
any cost reporting period for which it was made for the optional method 
does not apply to an election that was withdrawn or revoked before the 
start of the cost reporting period for which it was made.
4. Coverage of Costs for Certain Emergency Room On-Call Providers 
(Section 405(b) of Public Law 108-173 and Sec. Sec.  413.70(b)(4) and 
485.618 of the Regulations)
    Under existing regulations at Sec.  413.70(b)(4), which implement 
section 1834(g)(5) of the Act, Medicare payments to a CAH may include 
the costs of compensation and related costs of on-call emergency room 
physicians who are not present on the premises of a CAH, are not 
otherwise furnishing services, and are not on-call at any other 
provider or facility when determining the reasonable cost of outpatient 
CAH services.
    Section 405(b) of Public Law 108-173 amended section 1834(g)(5) of 
the Act to expand the reimbursement of on-call emergency room providers 
beyond physicians to include physician assistants, nurse practitioners, 
and clinical nurse specialists for the costs associated with covered 
Medicare services furnished on or after January 1, 2005.
    We are proposing to revise Sec.  413.70(b)(4)(i) and (ii) to 
include the expanded list of emergency room on-call providers for whom 
reimbursement for reasonable compensation and related costs in a CAH 
would be available. We also are making a conforming change to Sec.  
485.618(d) governing the standard for emergency room personnel who are 
on call under the CAH conditions of participation.
5. Authorization of Periodic Interim Payments for CAHs (Section 405(c) 
of Public Law 108-173 and Proposed Sec.  413.64(h)(2)(vi) and Sec.  
413.70(d) of the Regulations)
    Section 1815(e)(2) of the Act provides that payments may be made on 
a periodic interim payment (PIP) basis for specified covered Medicare 
services. Section 405(c)(1) of Public Law 108-173 amended section 
1815(e)(2) by adding a new subsection (E) to provide for payments for 
inpatient services furnished by CAHs on a PIP basis, effective for 
payments made on or after July 1, 2004. Section 405(c)(2) of Public Law 
108-173 directs the Secretary to develop alternative methods for the 
timing of the payments under the PIP method.
    We have already established in existing regulations under Sec.  
413.64(h) provisions for making payments under the PIP method to 
providers for certain Medicare covered services. The principles and 
rules of Sec.  413.64 have been incorporated into regulations governing 
payment on a PIP basis to acute care IPPS hospitals as well as to other 
providers, such as SNFs and LTCHs, that are paid on a prospective 
basis. We believe these principles and rules could be equally applied 
to CAHs. Therefore, in this proposed rule, to implement the provisions 
of section 405(c) of Public Law 108-173, we are proposing to add a new 
Sec.  413.64(h)(2)(vi) to specify inpatient services furnished by CAHs 
as an additional type of covered service for which PIP is available, 
effective for payments made on or after July 1, 2004.
    It has been our longstanding policy under Sec.  413.64(h)(6) that 
payment will be made biweekly under the PIP method, unless the provider 
requests a longer fixed interval (not to exceed 1 month) between 
payments. We believe that this provision grants adequate flexibility 
for the timing of payments under the PIP method to all qualifying 
providers, including CAHs. Under our proposed policy for CAHs, if a CAH 
chooses to receive its payments less frequently than biweekly, it could 
inform its Medicare fiscal intermediary. Section 413.64(h)(6) does not 
provide for the payments to be made more frequently than biweekly to 
providers for which PIP is currently available. We believe this is 
equally appropriate for the payments for inpatient services furnished 
by CAHs.
    In summary, we are proposing to apply the same rules and procedures 
for payments under the PIP method that we apply to acute care hospitals 
and certain other Medicare providers. Therefore, CAHs, in applying for 
and receiving payments for inpatient services under the PIP provision, 
would be operating under the same rules as other providers for which 
PIP is available under Sec.  413.64(h), including the flexibility 
discussed above of the timing of their payments as provided for under 
Sec.  413.64(h)(6). We also are proposing to establish a new paragraph 
(d) under Sec.  413.70 to provide that, for payments on or after July 
l, 2004, a CAH may elect to receive PIP for inpatient services 
furnished by CAHs, subject to the provisions of Sec.  413.64(h). The 
new Sec.  413.70(d) summarizes the application of the PIP provisions 
under Sec.  413.64(h)(6) for CAH inpatient services and notes the 
availability of accelerated payments for CAHs that are not receiving 
PIPs.
    Technical Changes to Sec.  413.64. We are proposing to use this 
opportunity to remove Sec. Sec.  413.64(h)(3)(iv) and 413.64(h)(4), 
which contain an outdated requirement that a provider must repay any 
outstanding current financing payments before being permitted to be 
paid under the PIP method. Current financing payments have not been 
available since 1973.
6. Revision of the Bed Limit for CAHs (Section 405(e) of Public Law 
108-173 and Sec. Sec.  485.620(a) and 485.645(a)(2) of the Regulations)
    Prior to the enactment of Public Law 108-173, sections 
1820(c)(2)(B)(iii) and 1820(f) of the Act restricted CAHs to 15 acute 
care beds and a total of 25 beds if the CAH had been granted swing-bed 
approval. The number of beds used at any time for acute care inpatient 
services could not exceed 15 beds.
    Section 405(e) of Public Law 108-173 amended sections 
1820(c)(2)(B)(iii) and 1820(f) of the Act to allow CAHs a maximum of 25 
acute care beds for inpatient services, regardless of the swing-bed 
approval. This amendment is effective on January 1, 2004 and applies to 
CAHs designated before, on, or after this date. However, section 
405(e)(3) of Public Law 108-173 also notes that any election made in 
accordance with the regulations promulgated to carry out the bed size 
amendments only applies prospectively.
    We interpret this provision to mean that the increased bed size 
limitation is to be applied prospectively after April 1, 2004, 
regardless of when the CAH was designated. Accordingly, we implemented 
this provision via a survey and certification letter on January 1, 
2004. (See Survey and Certification

[[Page 28330]]

Letter No. 0414, issued December 11, 2003.) Therefore, effective 
January 1, 2004, this provision allows any currently participating CAH, 
or applicant for CAH approval, to maintain up to 25 inpatient beds. If 
swing-bed approval has been granted, all 25 beds can be used 
interchangeably for acute care or swing-bed services. However, no CAH 
will be considered to have had 25 acute care beds prior to January 1, 
2004. We are proposing to amend our regulations at Sec. Sec.  
485.620(a) and 485.645(a)(2) to reflect the increase in the number of 
beds permitted in a CAH, in accordance with the amendments made by 
section 405(e) of Public Law 108-173.
7. Authority To Establish Psychiatric and Rehabilitation Distinct Part 
Units of CAHs (Section 405(g)(1) of Public Law 108-173 and Proposed New 
Sec.  485.646 of the Regulations)
    As stated earlier, sections 1820(c)(2)(B) and 1861(mm) of the Act 
set forth the criteria for designating a CAH. Under this authority, the 
Secretary has established in regulations the minimum requirements a CAH 
must meet to participate in Medicare (42 CFR Part 485, Subpart F). The 
CAH designation is targeted to small rural hospitals with a low patient 
census and short patient stays.
    Under the law in effect prior to Public Law 108-173, CAHs are 
excluded from operating distinct part units (that is, separate sections 
of hospitals that are dedicated to providing inpatient rehabilitation 
or psychiatric care and are paid under payment methods different from 
those used for the acute care areas of the hospitals). The statute 
(section 1886(d)(l)(B) of the Act) and implementing regulations under 
42 CFR Part 412, Subpart B require distinct part units to be units of 
``subsection (d) hospitals,'' which are hospitals paid under the IPPS. 
Because CAHs are not ``subsection (d) hospitals'' paid under IPPS, but 
instead are paid for inpatient care on a reasonable cost basis under 
section 1814(l) of the Act, they are effectively prohibited from having 
distinct part units.
    Section 405(g)(1) of Public Law 108-173 modified the statutory 
requirements for CAHs under section 1814(l) and section 1820(c)(2) of 
the Act to allow CAHs to establish distinct part rehabilitation and 
psychiatric units of up to 10 beds each, which will not be included in 
the revised total 25 CAH bed count under section 405(e) of Public Law 
108-173 (discussed in detail in section VI.D.6. of this preamble. In 
addition, as explained more fully below, the average 96-hour stay does 
not apply to the 10 beds in the distinct part units and inpatient 
admissions; days of inpatient care in these distinct part units are not 
taken into account in determining the facility's compliance with the 
requirement for a facility-wide average length of stay that does not 
exceed 96 hours.
    Section 405(g)(1) of Public Law 108-173 provides under section 
1820(c)(2)(E)(i) of the Act that a distinct part rehabilitation or 
psychiatric unit of a CAH must meet the conditions of participation 
that would otherwise apply to the distinct part unit of a hospital if 
the distinct part unit were established by a subsection (d) hospital in 
accordance with the matter following clause (v) of section 
1886(d)(1)(B) of the Act, including any applicable regulations adopted 
by the Secretary. CAHs will now be permitted to operate distinct-part 
psychiatric and rehabilitation units, and it is clear that the law, 
consistent with this change, requires the same level of health and 
safety protection for patients in distinct part units of a CAH that is 
currently required for patients in distinct part units operated by an 
acute care hospital.
    The amendments to section 405(g)(1) are effective for the cost 
reporting periods beginning on or after October 1, 2004.
    As CAHs were excluded from operating distinct part units prior to 
the enactment of section 405(g), the CAH conditions of participation 
did not address the necessary requirements and standards for operating 
such units. As noted previously, section 1820(c)(2)(E)(i) of the Act 
makes it clear that the requirements, including conditions of 
participation, for operating these units in a CAH are to be the same as 
is currently required for these units operated by an acute care 
hospital. Accordingly, we are proposing that, in accordance with the 
requirements of section 405(g), a rehabilitation or psychiatric 
distinct part unit of a CAH must meet all of the hospital conditions of 
participation at 42 CFR Part 482, Subparts A, B, C, and D and the 
criteria for exclusion from the IPPS at 42 CFR Part 412 as described 
below. These requirements will only apply to the services provided in 
the distinct part unit of a CAH and not the entire CAH.
    Currently, psychiatric distinct part units of hospitals are subject 
to specific Medicare regulations established in 42 CFR 412.27 regarding 
the types of patients admitted, the scope of services furnished, and 
the qualifications of staff. For example, psychiatric distinct part 
units may admit only patients whose condition requires inpatient 
hospital care for a psychiatric principal diagnosis. The regulations at 
Sec.  412.27(b) further requires a hospital that wishes to establish a 
psychiatric distinct part unit to furnish, through the use of qualified 
personnel, psychological services, social work services, psychiatric 
nursing, and occupational and recreational therapy. The hospital must 
maintain medical records for the unit that permit determination of the 
degree and intensity of services to individuals treated in the unit. 
Inpatient psychiatric services must be under the supervision of a 
clinical director, service chief, or equivalent who is qualified to 
provide the leadership required for an intensive treatment program, and 
who is board certified in psychiatry (42 CFR 412.27(d)(2)). The 
distinct part unit must have a director of social services, a qualified 
director of psychiatric nursing services who is a registered nurse with 
a master's degree in psychiatric or mental health nursing, or its 
equivalent from an accredited school of nursing, or is qualified by 
education and experience in the care of individuals with mental 
illness. There must also be an adequate number of registered nurses to 
provide 24-hour coverage as well as licensed practical nurses and 
mental health workers. These and other applicable requirements are set 
forth in greater detail in Sec.  412.27.
    Rehabilitation distinct part units of hospitals are currently 
subject to criteria in 42 CFR 412.29. This section specifies that such 
a unit must meet either the requirements for new units (Sec.  
412.30(a)) or those for existing units (Sec.  412.30(c)). In addition, 
the units must furnish through qualified personnel rehabilitation 
nursing, physical and occupational therapy, and as needed, speech 
therapy and social services or psychological services, and orthotics 
and prosthetics. The unit must have a director of rehabilitation 
services who is trained or experienced in medical management of 
inpatients who require rehabilitation services and is a doctor of 
medicine or a doctor of osteopathy. Rehabilitation distinct part units 
may treat only patients likely to benefit significantly from an 
intensive inpatient program, utilizing services such as physical, 
occupational, or speech therapy. These and other applicable 
requirements are set forth in greater detail in Sec. Sec.  412.29 and 
412.30.
    To implement the requirements of section 1820(c)(2)(E)(i) of the 
Act, as added by section 405(g)(1) of Public Law 108-173, we are 
proposing to add a new Sec.  485.647 to 42 CFR Part 485, Subpart F. In 
proposed Sec.  485.647(a)(1), we would specify that if a CAH provides

[[Page 28331]]

inpatient psychiatric services in a distinct part unit, the services 
provided in that unit must comply with the hospital requirements 
specified in Subparts A, B, C, and D of Part 482, with the common 
requirements for IPPS-excluded units in Sec.  412.25(a)(2) through (f), 
and with the additional requirements of Sec.  412.27 for psychiatric 
units excluded from the IPPS. In proposed Sec.  485.647(a)(2), we would 
specify that if a CAH provides inpatient rehabilitation services in a 
distinct part unit, the services provided in that unit must comply with 
the hospital requirements specified in Subparts A, B, C, and D of Part 
482, with the common requirements for IPPS-excluded units in Sec.  
412.25(a)(2) through (f), and with the additional requirements of 
Sec. Sec.  412.29 and 412.30, which relate specifically to 
rehabilitation units excluded from the IPPS. To provide for consistent 
application of section 405(g)(1) and avoid any confusion, we also are 
proposing to revise Sec.  412.22, which contains the common 
requirements for excluded hospital units, to state that, for purposes 
of 42 CFR Part 412, Subpart B, the term ``hospital'' includes a CAH.
    As noted earlier, sections 1820(c)(2)(E)(ii) and (c)(2)(E)(iii) of 
the Act, as added by section 405(g)(1) of the MMA, provide that each 
distinct part unit of a CAH may have up to 10 beds and that, in 
determining the number of beds a CAH has for purposes of compliance 
with the 25-bed limit described earlier, the beds in a distinct part 
unit are not to be taken into account. We interpret the exclusion of 
these beds from consideration for purposes of the 25-bed limit as also 
indicating that the admissions and lengths of stay in distinct part 
unit beds are not to be considered in determining the facility-wide 
average length stay of a CAH for purposes of the 96-hour limitation on 
CAH's average length of inpatient stay. These rules would be codified 
in paragraphs (b)(1) through (b)(3) of proposed Sec.  485.647.
    Section 1820(c)(2)(E)(iv) of the Act, as added by section 405(g)(1) 
of Public Law 108-173, imposes severe sanctions on CAHs that fail to 
operate their distinct part units in compliance with applicable 
requirements. That section states that if a psychiatric or 
rehabilitation unit of a CAH does not meet the requirements of section 
1820(c)(2)(E)(i) with respect to a cost reporting period, no payment 
may be made to the CAH for services furnished in that unit for that 
period. Payment to the CAH for services in the unit may resume only 
after the unit has demonstrated to CMS that the unit meets the 
requirements of Sec.  485.645. We are proposing to codify this 
requirement by adding a new paragraph (g) to Sec.  412.25.70, which 
contains the common requirements for excluded units.
    Section 405(g)(1) of Public Law 108-173 amended section 1814(l) of 
the Act by adding a new paragraph (2) to that provision. New section 
1814(l)(2) states that, in the case of a distinct-part psychiatric or 
rehabilitation unit of a CAH, the amount of payment for inpatient CAH 
services of such a unit is to equal the amount that would be paid if 
these services were inpatient hospital services of a psychiatric or 
rehabilitation unit, respectively, of the kind described in the matter 
following clause (v) of section 1886(d)(1)(B) of the Act. To implement 
the requirements of section 1814(1)(2) of the Act, we are proposing 
that, for CAHs that establish rehabilitation or psychiatric distinct 
part units, or both, in their facility, Medicare payment for inpatient 
services provided in those units would be made under the applicable 
existing payment methodology described below for IRFs and IPFs.
    Presently, IRFs are paid under a per discharge PPS that became 
effective for cost reporting periods beginning on or after January 1, 
2002. The regulations governing the IRF PPS are located under 42 CFR 
Part 412, Subpart P (Sec. Sec.  412.600 through 412.632).
    At this time psychiatric hospitals and units that are excluded from 
the IPPS are paid for their inpatient operating costs on a reasonable 
cost basis, subject to a hospital-specific limit. However, as required 
by statute, a per diem PPS for Medicare payments for inpatient hospital 
services furnished in psychiatric hospitals and units (referred to as 
inpatient psychiatric facilities (IPFs)) was proposed in the Federal 
Register on November 28, 2003 (68 FR 66920). We are in the process of 
developing the final rule for this proposed rule. When finalized, the 
IPF PPS will replace the reasonable cost based payment system currently 
in effect.
    To clarify the requirements of section 1814(1)(2) of the Act 
regarding payment for inpatient CAH services of a distinct part 
psychiatric or rehabilitation unit of a CAH, we are proposing to revise 
the title and first sentence of paragraph (a)(1) of Sec.  413.70, and 
to add a new paragraph (a)(4) to that section, to clarify that payment 
for inpatient services of a CAH distinct part unit is not made in 
accordance with the otherwise applicable rules for payment for 
inpatient CAH services, but under other rules described in new Sec.  
413.70(e). We propose also in new paragraph Sec.  413,70(e), that 
payment for inpatient services of distinct part rehabilitation units of 
CAHs is made in accordance with regulations governing the IRF PPS at 42 
CFR Part 412, Subpart F (Sec. Sec.  412.600 through 412.632). We also 
would state that payment for inpatient services of distinct part 
psychiatric units of CAHs is made in accordance with regulations 
governing IPPS-excluded psychiatric units of hospitals at 42 CFR 
413.40.
8. Waiver Authority for Designation of a CAH as a Necessary Provider
    Section 405(h) of Public Law 108-173 amended section 
1820(c)(B)(i)(II) of the Act by adding language that terminates a 
State's authority to waive the location requirement for a CAH by 
designating the CAH as a necessary provider, effective January 1, 2006. 
Currently, a CAH is required to be located more than a 35-mile drive 
(or in the case of mountainous terrain or secondary roads, a 15-mile 
drive) from a hospital or another CAH, unless the CAH is certified by 
the State as a necessary provider of health care services to residents 
in the area. Under this provision, after January 1, 2006, States will 
no longer be able to designate a CAH based upon a determination it is a 
necessary provider of health care.
    In addition, section 405(h) of Public Law 108-173 amended section 
1820(h) of the Act to include a grandfathering provision for CAHs that 
are certified as necessary providers prior to January 1, 2006. Under 
this provision, any CAH that is designated as a necessary provider in 
its State's rural health plan prior to January 1, 2006, will be 
permitted to maintain its necessary provider designation.
    In this proposed rule, we are proposing to revise our regulations 
at Sec.  485.610(c) to incorporate the amendments made by section 
405(h) of Public Law 108-173.
9. Payment for Clinical Diagnostic Laboratory Tests
    Medicare payment for clinical diagnostic laboratory tests provided 
to the outpatients of CAHs was established through the regulatory 
process and published in the Federal Register as part of the FY 2004 
IPPS final rule (68 FR 45346, August 1, 2003). Payment to a CAH for 
clinical diagnostic laboratory tests for outpatients is made on a 
reasonable cost basis only if the individuals for whom the tests are 
performed are outpatients of the CAH and are physically present at the 
CAH at the time specimens are collected. Otherwise, payment for these 
tests is made on a fee schedule basis.

[[Page 28332]]

    We published this final rule to clarify our policy in this area and 
ensure that all relevant issues were publicly noted. For reasons which 
are set forth in detail in the FY 2004 IPPS final rule, we do not agree 
that providing reasonable cost payment to individuals who are not 
present at the CAH when the specimen is collected is appropriate. We 
believe that extending reasonable cost payment in these instances is 
inconsistent with Medicare law and regulations and duplicates existing 
coverage. It also creates confusion for beneficiaries and others by 
blurring the distinction between CAHs and other types of providers (for 
example, SNFs and HHAs) and increases the costs of providing care to 
Medicare patients without enhancing either the quality or the 
availability of that care.
    Following publication of the FY 2004 IPPS final rule, we received a 
number of letters and statements in Open Door Calls indicating that 
some commenters continue to believe that this policy will impose a 
hardship on Medicare beneficiaries in rural areas. Several of these 
commenters argued that it might cause frail elderly nursing home 
patients to have to be moved to a CAH to have blood drawn or other 
specimen collection performed instead of sending a laboratory 
technician to the patient's bedside for the same purpose. We agree with 
the commenters that this would not be an appropriate result. However, 
we would note that there are also alternative ways in which specimen 
collection and travel are payable under Medicare (for example, the 
laboratory benefit under Part B or HAAs that have laboratory provider 
numbers). Therefore, we do not expect beneficiaries to face reduced 
access to services under this policy.
    In response to continuing claims of potential access problems, we 
invited commenters to submit further, more specific comments that 
provide specific information on actual, rather than merely potential or 
anticipated access problems. In response, we received many 
communications asserting that these problems would occur, but no 
credible documentation that they actually are occurring. As a result of 
these responses, we are not proposing any further change in policy on 
this issue at this time. We would like to renew our request for 
specific, verifiable documentation as to any actual access problems 
being generated by this policy, and will review carefully any such 
documentation we receive to determine whether current policy should be 
reconsidered.
10. Proposed Technical Changes in Part 489
    In several sections of Part 489, we have discovered a need to 
update cross-references to conform them to the redesignation of the 
Medicare transfer rules from Sec.  489.24(d) to Sec.  489.24(d). 
Specifically, we are proposing to correct the cross-reference to 
``Sec.  489.24(d)'' in Sec. Sec.  489.20(m) and 489.53(b)(2) to read 
``Sec.  489.24(e)''.

VII. Proposed Changes to the Disclosure of Information Requirements for 
Quality Improvement Organizations (QIOs)

[If you choose to comment on issues in this section, please include the 
caption ``Quality Improvement Organizations'' at the beginning of your 
comment.]

A. Background

    Section 1152 of the Act defines a utilization and quality control 
peer review organization (now referred to as a quality improvement 
organization (QIO)). Section 1153 provides for contracts with such 
organizations to review items and services furnished by physicians, 
other practitioners, and providers to Medicare patients to verify that 
the items and services are reasonable, medically necessary, and 
allowable under the Act; meet professionally recognized standards of 
health care; and are furnished in the appropriate setting. Section 1154 
of the Act outlines the functions of a QIO, which include 
responsibility for: (1) Collecting and maintaining information 
necessary to carry out its responsibilities; (2) examining pertinent 
records maintained by the practitioner or provider verifying the 
medical necessity and quality of services provided by any practitioner 
or provider of health care services to Medicare patients; (3) ensuring 
that health care practitioners and providers maintain evidence of 
medical necessity and quality of health care services provided to 
Medicare patients; and (4) exchanging information with intermediaries, 
carriers, and other public or private review organizations as 
appropriate. Section 1160 of the Act provides that information acquired 
by QIOs in the exercise of their duties and functions must be held in 
confidence. Information cannot be disclosed except as allowed under 
section 1160 of the Act and the existing regulations governing the 
release of QIO peer review information in 42 CFR Part 480. 
Specifically, Part 480 sets forth the policies and procedures for 
disclosure of information collected, acquired, or generated by a QIO 
(or the review component of a QIO subcontractor) in the performance of 
its responsibilities under the Act and the Medicare regulations, as 
well as the acquisition and maintenance of information needed by a QIO 
to comply with its responsibilities under the Act.
    QIOs assist institutions and practitioners seeking to improve the 
quality of care given to Medicare beneficiaries. CMS aims to ensure 
that adequate protections of information collected by QIOs are in place 
and, at the same time, to ensure that the quality improvement 
activities of these institutions and practitioners are not 
unnecessarily hindered by regulations. It has come to our attention 
that the existing regulations omit information disclosure procedures 
that would allow for the effective and efficient exchange of 
information that is an essential part of quality improvement 
activities. In addition, it has come to our attention that, although 
the QIO does not need the consent of the institution to release 
nonconfidential information, the existing 30-day advance notice 
requirement to an institution prior to releasing public information or 
any other nonconfidential information that identifies an institution, 
when an institution consents to or requests the release of information, 
impedes the ability of QIOs to conduct quality improvement work. If the 
institution requests or consents to the release of the information, the 
institution is already aware of the QIO's intention to disclose the 
nonconfidential information. Therefore, we see no reason to require the 
additional 30-day advance notice. Likewise, there is no reason to 
require a 30-day notice for practitioners who request the release of 
information for quality improvement activities or other permissible 
releases under the regulations.

B. Provisions of the Proposed Regulations

    We are proposing to make several changes in the regulations in Part 
480 to expedite the exchange of information and minimize delays and 
expenditures currently required of QIOs, institutions, and 
practitioners as discussed below.
    Existing Sec.  480.105(a) requires that a QIO must notify an 
identified institution of its intent to disclose nonconfidential 
information about the institution and provide a copy of the information 
at least 30 calendar days before the disclosure. Section 480.105 also 
includes certain notice requirements a QIO must meet before disclosing 
confidential information that identifies practitioners and physicians. 
Section 480.106 presently includes several exceptions to these notice

[[Page 28333]]

requirements. We are proposing to revise Sec.  480.106 to establish 
additional exceptions to the notice requirements in Sec.  480.105(a) 
and (b)(2). We are proposing to specify that the notice requirements in 
Sec.  480.105(a) and (b)(2) would not apply if (1) the institution or 
practitioner has requested, in writing, that the QIO make the 
disclosure; (2) the institution or practitioner has provided written 
consent for the disclosure; or (3) the information is public 
information as defined in Sec.  480.101 and specified in Sec.  480.120.
    Existing Sec.  480.133(a)(2)(iii) specifies that a QIO may disclose 
to any person, agency, or organization confidential information on a 
particular practitioner or reviewer with the consent of that 
practitioner or reviewer, provided that the information does not 
identify other individuals. We are proposing to revise Sec.  
480.133(a)(2)(iii) to allow for the release of information at the 
written request of the practitioner or reviewer, in addition to 
information releasable with the consent of the practitioner or reviewer 
under the existing provision. Specifically, the proposed revised Sec.  
480.133(a)(2)(iii) would provide that a QIO may disclose confidential 
information about a particular practitioner or reviewer at the written 
request of, or with the written consent of that practitioner or 
reviewer. The recipient of the information would have the same 
redisclosure rights and responsibilities as the requesting or 
consenting practitioner or reviewer would, under the authority of 
Subpart B of Part 480. We are proposing a similar revision to Sec.  
480.140 relating to the release of quality review study information. 
Specifically, we are proposing to revise Sec.  480.140 by adding a new 
paragraph (d) (the existing paragraphs (d) and (e) would be 
redesignated as paragraphs (e) and (f), respectively) to provide that a 
QIO may disclose quality review study information with identifiers of 
particular practitioners or institutions at the written request of, or 
with the written consent of, the identified practitioner(s) or 
institution(s). The recipient of the information would have the same 
redisclosure rights and responsibilities as the requesting or 
consenting practitioner or reviewer would, under the authority of 
Subpart B of Part 480. We believe that these proposed revisions would 
reduce the existing burden on practitioners, institutions, and QIOs 
and, at the same time, ensure that necessary protections on information 
remain in place. These proposed revisions would allow QIOs, 
institutions, and practitioners to share vital information in an 
effective manner and further our efforts to ensure the highest quality 
of care possible for Medicare beneficiaries.

C. Technical Changes

    We are proposing to revise the title of Part 480 under Subchapter F 
of Chapter IV of 42 CFR to conform it to a previous regulatory change 
in the name of the organization conducting medical reviews under 
Medicare from a peer review organization to a quality improvement 
organization. The proposed new title is ``Part 480--Acquisition, 
Protection, and Disclosure of Quality Improvement Organization 
Information''.
    In a final rule published in the Federal Register on November 24, 
1999 (64 FR 66279), we redesignated Part 476 as Part 480. However, as 
part of the redesignation process, we inadvertently failed to make 
appropriate changes to the cross-references in various sections under 
the redesignated Part 480. In this proposed rule, we are proposing to 
correct those cross-references.

VIII. Proposed Policy Changes Relating to Medicare Provider Agreements 
for Compliance With Bloodborne Pathogens Standards, Hospital Conditions 
of Participation, and Fire Safety Requirements for Certain Health Care 
Facilities

A. Conditions of Participation for Discharge Planning

[If you choose to comment on issues in this section, please include the 
caption ``Discharge Planning'' at the beginning of your comment.]
1. Background
    As part of the definition of ``hospital,'' sections 1861(e)(1) 
through (e)(8) of the Act set forth specific requirements that a 
hospital must meet to participate in the Medicare program. Section 
1861(e)(9) of the Act specifies that a hospital also must meet other 
requirements as the Secretary finds necessary in the interest of the 
health and safety of individuals who are furnished services in 
hospitals. Implementing regulations for section 1861(c) of the Act, 
setting forth the conditions of participation (CoPs) that a hospital 
must meet to participate in the Medicare program, are located in 42 CFR 
Part 482.
    The purposes of these CoPs are to protect patient health and safety 
and to ensure that high quality care is furnished to all patients in 
Medicare-participating hospitals. In accordance with section 1864 of 
the Act, State survey agencies conduct surveys of hospitals to 
determine compliance with the Medicare CoPs, using interpretive 
guidelines and survey procedures found in the State Operations Manual 
(SOM), CMS Publication No. 7. In accordance with section 1865 of the 
Act and the implementing regulations at 42 CFR 488.5 and 488.6, 
hospitals accredited by the Joint Commission on Accreditation of 
Healthcare Organizations (JCAHO), the American Osteopathic Association 
(AOA), or other national accreditation organizations are not routinely 
surveyed by States for compliance with the CoPs, but are deemed to meet 
most of the hospital CoPs based on their accreditation. However, all 
hospitals that participate in the Medicare program are required to be 
in compliance with the CoPs, regardless of their accreditation status. 
Under section 1905(a) of the Act, the hospital CoPs also apply to 
hospitals participating in Medicaid (Sec.  440.10(a)(3)(iii) and Sec.  
482.1(a)(5)).
    Under Sec.  489.10(d), a Medicare provider agreement is subject to 
the State survey agency's determination of whether a hospital meets the 
CoPs. The State survey agency makes corresponding recommendations to 
CMS about the hospital's certification; that is, whether the hospital 
has met the standards or requirements necessary to provide Medicare and 
Medicaid services and receives Federal and State reimbursement.
    Section 4321(a) of Public Law 105-33 (BBA) amended section 
1861(ee)(2) of the Act to require that Medicare-participating 
hospitals, as part of the discharge planning process, share with each 
patient, as appropriate, a list of available home health services 
through individuals and entities, including Medicare-certified home 
health agencies (HHAs) that participate in Medicare, serve the 
geographic area in which the patient resides, and request to be listed 
by the hospital as available. In addition, section 4321(a) prohibits 
hospitals from limiting or steering patients to any specific HHA or 
qualified provider that may provide posthospital home health services 
and requires hospitals to identify (in a form and manner specified by 
the Secretary) any HHA or other entity to whom the individual is 
referred in which the hospital has a disclosable financial interest 
consistent with section 1866(a)(1)(S) of the Act or which has a 
financial interest in the hospital if the patient is referred to that 
entity.
    Congress enacted section 4321 of Public Law 105-33 to protect 
patient choice and enable Medicare beneficiaries to make more informed 
choices about the providers from which

[[Page 28334]]

they receive certain Medicare services. We believe that this provision 
was intended to address concerns that some hospitals were referring 
patients only to HHAs in which they had a financial interest, and that 
shared financial relationships were influencing referrals to other 
entities. Hospitals essentially have a captive patient population and, 
through the discharge planning process, can influence a patient's 
choice regarding who provides posthospitalization services.
    Congress also enacted section 926 of Public Law 108-173 (MMA) to 
improve the administration of the Medicare program by protecting 
patient choice and enabling Medicare beneficiaries to make more 
informed choices about the providers from which they receive Medicare 
services. Section 926(a) of Public Law 108-173 requires the Secretary 
to publicly provide information that enables hospital discharge 
planners, Medicare beneficiaries, and the public to identify SNFs that 
are participating in the Medicare program. Section 926(b) of Public Law 
108-173 amended section 1861(ee)(2)(D) of the Act to require Medicare-
participating hospitals, as part of the discharge planning process, to 
include a discharge planning evaluation of a patient's likely need for 
posthospital extended care services and the availability of these 
services through facilities that participate in the Medicare program 
and that serve the geographic area in which the patient resides. The 
amendments to the Act made by section 926(b) of Public Law 108-173 
apply to discharge plans made on or after a date specified by the 
Secretary, which may be no later than 6 months after the Secretary 
provides for the availability of information required by section 926(a) 
of Public Law 108-173.
2. Implementation
    We implemented the requirements of section 4321(a) of Public Law 
105-33 relating to information on HHAs through a HCFA (now CMS) 
directive that was issued to the Regional Offices and State survey 
agencies on October 31, 1997. Enforcement has been carried out through 
the State agency survey and certification process. We note that even 
though it was not a requirement under section 4321(a) to provide 
currently available information on HHAs to the public (as now required 
under section 1861(ee)(2)(D) of the Act, as amended), we have 
established a ``Home Health Compare'' link on the CMS Web site, 
www.medicare.gov, that identifies HHAs that are currently participating 
in the Medicare or Medicaid program.
    We are now proposing to incorporate in our regulations under Sec.  
482.43 the requirements of section 4321(a) of Public Law 105-53 
relating to providing information on HHAs to hospital patients as part 
of the discharge planning process. We note that we had previously 
issued a proposed rule on December 19, 1997 (62 FR 66726) to implement 
the provisions of section 4321(a) of Public Law 105-33. However, 
section 902 of Public Law 108-173 now requires us to finalize rules 
within 3 years after publication of the proposed rule, except under 
``exceptional circumstances.'' While it is not clear whether Congress 
intended this policy to apply retroactively, out of an abundance of 
caution, we are issuing a new proposed rule because of the length of 
time that has elapsed since the issuance of the 1997 proposed rule. 
Moreover, the provisions of Public Law 108-173 contain information 
requirements for SNFs substantially similar to the ones required for 
HHAs. In developing this second proposed rule, we have taken into 
consideration the issues raised in the public comments we received on 
the December 19, 1997 proposed rule relating to HHAs.
    Information on SNFs related to the requirement imposed by section 
926(a) of Public Law 108-173 is currently available to the public and 
can be accessed at the CMS Web site, www.medicare.gov, by clicking on 
the ``Nursing Home Compare'' link or by calling 1-800-MEDICARE (800-
633-4227). Nursing Home Compare, launched in November 2002, meets the 
statutory requirement of section 926(a) by enabling hospital discharge 
planners, Medicare beneficiaries, and the public to identify the 17,000 
nursing homes that participate in the Medicare or Medicaid program. 
Nursing Home Compare can be used to locate a nursing home by State and 
county, by proximity (city or zip code), or by name. In addition, 
Nursing Home Compare provides detailed information about the past 
performance of every Medicare-certified and Medicaid-certified nursing 
home in the country. The data on this Web site describe nursing home 
characteristics, quality measures, inspection results, and nursing 
staff information. The Nursing Home Compare tool received 9.3 million 
page views in 2003 and was the most popular tool on www.medicare.gov. 
If an interested individual does not have access to the Internet, the 
individual can call 1-800-MEDICARE (800-633-4227) and request a 
printout of the nursing homes in a designated area.
    We are proposing to amend the regulations at Sec.  482.43 to 
incorporate the provisions of section 4321(a) of Public Law 105-33 and 
section 926(b) of Public Law 108-173 into the hospital CoPs. 
Specifically, we are proposing to add new paragraphs (c)(6), (c)(7), 
and (c)(8) to include the requirement for hospitals to provide lists of 
Medicare-certified HHAs and SNFs as part of the discharge planning 
process. The discharge planning evaluation would be required to include 
a list of Medicare-certified HHAs that have requested to be placed on 
the list as available to the patient and that serve the geographic area 
in which the patient resides. We are proposing to require the SNF list 
to include Medicare-certified SNFs located in the geographic area in 
which the patient requests. We are not requiring that the list of 
Medicare-certified SNFs contain those SNFs that are just located in the 
area in which the patient resides. Because many available Medicare-
certified SNFs are not located in proximity to where the patient 
resides, especially in rural areas, we believe that a requirement that 
restricts a patient to SNFs in areas where the patient resides is too 
restrictive and would limit the availability of posthospital extended 
care services to Medicare beneficiaries.
    Section 4321(a) of Public Law 105-33 requires listing the 
availability of home health services through individuals and entities. 
We have received inquiries regarding the identity of those individuals 
and entities. We are proposing that, because section 1861(m) of the Act 
identifies home health services as ``specific items or services 
furnished to an individual, who is under the care of a physician, by an 
HHA, or by others under arrangements with an HHA,'' section 4321(a) is 
referring to Medicare-participating HHAs.
    We are proposing that the hospital present the list of HHAs or SNFs 
only to patients for whom home health care or posthospital extended 
care services are indicated as appropriate, as determined by the 
discharge planning evaluation. We do not expect that patients without a 
need for home health care or posthospital extended care services would 
receive the list. In addition, we are proposing to require the hospital 
to document in the patient's medical record that a list of HHAs or SNFs 
was presented to the patient or an individual acting on the patient's 
behalf. Hospitals would not have to duplicate the list in the patient's 
medical record. The information in the medical record would serve as 
documentation that the requirement was met. The hospital would have the 
flexibility to determine

[[Page 28335]]

exactly how and where in the patient's medical record this information 
would be documented.
    We are proposing that a hospital have the flexibility to implement 
the requirement to present the lists in a manner that is most efficient 
and least burdensome in its particular setting. A hospital can simply 
print a list from the Home Health Compare or Nursing Home Compare site 
on the CMS Web site, www.medicare.gov or develop and maintain its own 
list of HHAs and SNFs. When the patient requires home health services, 
the CMS Web site list would be printed based on the geographic area in 
which the patient resides. When the patient requires posthospital 
extended care services, the CMS Web site list would be printed based on 
the geographic area requested by the patient. Or, in the rare instance 
when a hospital does not have Internet access, the hospital can call 1-
800-MEDICARE (1-800-633-4227) to request a printout of a list of HHAs 
or SNFs in the desired geographic area. Information on this Web site 
should not be construed as an endorsement or advertisement for any 
particular HHA or SNF.
    If a hospital chooses to develop its own list of HHAs or SNFs, the 
hospital would have the flexibility of designing the format of the 
list. However, the list should be utilized neither as a recommendation 
nor endorsement by the hospital of the quality of care of any 
particular HHA or SNF. If a HHA or SNF does not meet all of the 
criteria, (Medicare-certified and is located in the geographic area in 
which the patient resides or in the geographic area requested by the 
patient) for inclusion on the list, we are not proposing to require the 
hospital to place that HHA or SNF on the list. In addition, in 
accordance with the provisions of the Act, we are proposing that HHAs 
must request to be listed by the hospital as available. Also, we are 
proposing that the list must be legible and current (updated at least 
annually), and that the listed information be shared with the patient 
or an individual acting on the patient's behalf at least once during 
the discharge planning process. However, we would specify that 
information regarding the availability of HHAs or SNFs may need to be 
presented more than once during the discharge planning process to meet 
the patient's need for additional information or as the patient's needs 
and condition change.
    We are proposing to require that, as part of the discharge planning 
process, the hospital must inform the patient or the patient's family 
of their freedom to choose among participating Medicare providers of 
posthospital services and must, when possible, respect patient and 
family preferences when they are expressed (proposed Sec.  
482.43(c)(7)). In addition, the hospital may not use the discharge plan 
to specify or otherwise limit the patient's choice of qualified 
providers that may provide home health care or posthospital extended 
care services. The intent of this proposed provision is to provide the 
patient with the freedom of choice to determine which HHA or SNF will 
provide care in accordance with section 1802 of the Act, which states 
that beneficiaries may obtain health services from any Medicare-
participating provider.
    Finally, we are proposing to require the hospital to identify in 
each discharge plan those HHAs or SNFs to which the patient is referred 
that the hospital has a disclosable financial interest or HHAs or SNFs 
that have a financial interest in the hospital (proposed Sec.  
482.43(c)(8)). For the purposes of implementing section 4321(a) of 
Public Law 105-33, we are proposing to define a disclosable ``financial 
interest'' as any financial interest that a hospital is required to 
report according to the provider enrollment process, which is governed 
by section 1124 of the Act and implementing regulations located in 42 
CFR Part 420, Subpart C, and manual provisions. If a hospital refers 
patients about to be discharged and in need of posthospital services 
only to entities it owns or controls, the hospital would be infringing 
on the rights of the patient to choose the facility he or she would 
like to go to for services. The proposed disclosable financial interest 
requirement is an effort to increase the beneficiary's awareness of the 
actual or potential financial incentives for a hospital as a result of 
the referral. To allow hospitals the flexibility of determining how 
these financial interests are disclosed to the patient, we are not 
requiring a specific form or manner in which the hospital must disclose 
financial interest. The hospital could simply highlight or otherwise 
identify those entities in which a financial interest exists directly 
on the HHA and SNF lists. Or, the hospital could choose to maintain a 
separate list of those entities in which a financial interest exists.
    Hospitals and managed care organizations (MCOs) have expressed 
concern as to whether the change made by section 4321(a) of Public Law 
105-33 was intended to apply to patients in managed care plans. MCO 
members are limited as to what services they may obtain from sources 
other than through the MCO. We believe that providing MCO members with 
a standardized list of all HHAs or SNFs in the requested geographic 
area could be misleading and potentially financially harmful because 
MCO enrollees may be liable for services that they obtain from 
providers other than the MCO, and patients may interpret a list of HHAs 
or SNFs that are not available to them under their health plan to mean 
that they are authorized by the MCO. This does not mean that Medicare 
MCO members in particular are denied the freedom of choice they are 
entitled to under section 1802 of the Act. Medicare beneficiaries 
exercise their freedom of choice when they voluntarily enroll in the 
MCO and agree to adhere to the plan's coverage provisions.
    The list provided to MCO patients should include available and 
accessible HHAs or SNFs in a network of the patient's MCO. Hospitals 
also have the option, in the course of discussing discharge planning 
with patients, to determine whether the beneficiary has agreed to 
excluded services or benefits or coverage limitations through 
enrollment in a MCO. If this is the case, the hospital could inform the 
patient of the potential consequences of going outside the plan for 
services.
    We also have received many inquiries about how the requirements 
contained in section 4321(a) of Public Law 105-33 are monitored and 
enforced. Once codified in the hospital CoPs, a hospital's obligations 
under both section 4321(a) of Public Law 105-33 and section 926(b) of 
Public Law 108-173 would be monitored as part of the hospital survey 
and certification process. Anyone aware of instances in which patients 
are inappropriately influenced or steered toward a particular HHA or 
SNF in a way that violated the regulation would have the opportunity to 
file a complaint with the State survey agency. The State survey agency 
would then investigate and follow up with the complainant. 
Noncompliance with the hospital CoPs may result in a hospital losing 
its ability to participate in the Medicare program.
    Requiring hospitals to provide a list of Medicare-certified HHAs or 
SNFs would provide patients with more options and assist them in making 
informed decisions about the providers from which they receive Medicare 
services. Specifically, the intent of the proposed modifications to the 
discharge planning CoPs is to provide the patient with the freedom of 
choice to determine which HHA or SNF available in the geographic area 
in which the patient resides or the geographic area requested by the 
patient, would provide them care in accordance with section 1802 of the 
Act,

[[Page 28336]]

which states that beneficiaries may obtain health services from any 
Medicare participating provider.

B. Compliance With Bloodborne Pathogens Standards

[If you choose to comment on issues in this section, please include the 
caption ``Bloodborne Pathogens Standards'' at the beginning of your 
comment.]
    Section 1866(a)(1) of the Act sets forth provider agreement 
requirements that Medicare-participating hospitals must meet. 
Implementing regulations for these requirements are set forth at 42 CFR 
489.20.
    Section 947 of Public Law 108-173 amended section 1866(a)(1) of the 
Act to require that, by July 1, 2004, hospitals not otherwise subject 
to the Occupational Safety and Health Act (OSHA) (or a State 
occupational safety and health plan that is approved under section 
18(b) of that Act) must comply with the OSHA bloodborne pathogens (BBP) 
standards at 29 CFR 1910.1030 as part of their Medicare provider 
agreements. These OSHA standards can be found on OSHA's Web site at 
http://www.osha.gov/SLTC/bloodbornepathogens/. Section 947, which 
applies to hospitals participating in Medicare as of July 1, 2004, was 
enacted to ensure that all hospital employees who may come into contact 
with human blood or other potentially infectious materials in the 
course of their duties are provided proper protection from bloodborne 
pathogens. Section 947 further provides that a hospital that fails to 
comply with OSHA's BBP standards may be subject to a civil money 
penalty. The civil money penalty will be imposed and collected in the 
same manner that civil money penalties are imposed and collected under 
section 1128A(a) of the Act. However, failure to comply with the BBP 
standards will not lead to termination of a hospital's provider 
agreement.
    Currently, most hospitals are subject either to the OSHA BBP 
standards or to other BBP standards (generally, State standards) that 
meet or exceed the OSHA standards. However, non-Federal public 
hospitals located in States that do not have their own BBP standards 
are not subject to OSHA standards, including the OSHA BBP standards. 
Twenty-six States and the District of Columbia, and Guam do not have 
their own BBP standards under an OSHA-approved State plan. Therefore, 
an estimated 600,000 employees of hospitals located in those 26 States, 
the District of Columbia, and Guam are not afforded the same 
protections from BBPs as employees of all other hospitals in the United 
States. The States and territories that would be affected by the change 
made by section 947 of Public Law 108-173 are Alabama, Arkansas, 
Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Kansas, 
Louisiana, Maine, Massachusetts, Mississippi, Missouri, Montana, 
Nebraska, New Hampshire, North Dakota, Ohio, Oklahoma, Pennsylvania, 
Rhode Island, South Dakota, Texas, West Virginia, Wisconsin, District 
of Columbia, and Guam.
    We are proposing to incorporate the provisions of Public Law 108-
173 in Sec.  489.20 of the Medicare regulations governing provider 
agreements by adding a new paragraph (t). Paragraph (t) would specify 
that hospitals not otherwise subject to the OSHA BBP standards must 
comply with the OSHA BBP standards at 29 CFR 1910.1030 as part of their 
Medicare provider agreement. The proposed regulations would further 
specify that if a hospital fails to comply with OSHA's BBP standards, 
the hospital may be subject to a civil money penalty. The civil money 
penalty would be imposed and collected in the same manner that civil 
money penalties are imposed and collected under section 1128A(a) of the 
Act. However, failure to comply with the BBP standards would not lead 
to termination of a hospital's provider agreement. The proposed 
regulations would also refer to the Federal Civil Penalties Inflation 
Adjustment Act. This reference is intended to alert the reader that the 
civil money penalty amounts under section 1128A(a) of the Act may, 
under the Federal Civil Penalties Inflation Adjustment Act, be 
increased to adjust for inflation.

C. Fire Safety Requirements for Certain Health Care Facilities

[If you choose to comment on issues in this section, please include the 
caption ``Life Safety Code'' at the beginning of your comment.]
1. Background
    On January 10, 2003, we published a final rule in the Federal 
Register (68 FR 1374) that adopted the 2000 edition of the Life Safety 
Code (LSC) published by the National Fire Protection Association (NFPA) 
as the fire safety requirements (with specified exceptions) that we are 
applying to the following types of providers participating in the 
Medicare and Medicaid programs: long-term care facilities, hospitals, 
intermediate care facilities for the mentally retarded (ICF/MRs), 
ambulatory surgical centers (ASCs), hospices that provide inpatient 
services, religious nonmedical health care institutions, CAHs, and 
Programs of All-Inclusive Care for the Elderly (PACE).
    In addition to adopting the 2000 edition of the LSC, we stated our 
intent to delete references to all previous editions of the LSC. 
However, as a result of a technical error, the reference to previous 
editions of the LSC in Sec.  483.70(a)(1) of the regulations for long-
term care facilities was not deleted. Allowing long-term care 
facilities to comply with the 1967, 1973, and 1981 editions of the LSC 
would not adequately protect long-term care facility patients from the 
threat of fire and other emergencies. These editions do not recognize 
newer technology, nor the advances in fire safety that have been 
developed in the ensuing years. In addition, the existing conflicting 
regulatory language is confusing and contrary to the best interests of 
long-term care facilities and their patients. Therefore, in this 
proposed rule, we are proposing to correct this technical error. We are 
not proposing to make any substantive policy change.
    In the January 10, 2003 final rule, we also specified that we were 
not adopting the provisions of Chapter 19.3.6.3.2, exception number 2 
of the LSC regarding the use of roller latches for application to 
religious nonmedical health care institutions, hospices, hospitals, 
long-term care facilities, PACE programs, ICF/MRs and CAHs. We prohibit 
the use of roller latches in existing and new buildings, except for 
ASCs under Chapter 20 and Chapter 21 of the LSC, and provide for the 
replacement of existing roller latches, phased in over a 3-year period 
beginning March 11, 2003. We indicated that allowing health care 
facilities to continue using roller latches would not adequately 
protect patients in those facilities. Through fire investigations, 
roller latches have proven to be an unreliable door latching mechanism 
requiring extensive on-going maintenance to operate properly. Many 
roller latches in fire situations failed to provide adequate protection 
to patients in their room during an emergency. Roller latches that are 
not maintained pose a threat to the health and safety of patients and 
staff. We added that we had found through our online survey, 
certification, and reporting (OSCAR) system data that doors that 
include roller latches are consistently one of our most cited 
deficiencies. In fact, in SNFs, roller latches in corridor doors are 
consistently the number one cited deficiency under the life safety 
requirements.
    We have learned that the language regarding the date when these 
facilities must be in compliance with the

[[Page 28337]]

prohibition on the use of roller latch may be misinterpreted and needs 
to be clarified. In this proposed rule, we are proposing to clarify our 
intent by revising the regulations as discussed under section VIII.C.2. 
of this preamble. We are not proposing to make any substantive policy 
changes.
    The flexibility of the January 10, 2003 final rule would remain the 
same. The Secretary has broad authority to grant waivers to facilities 
under section 1819(d)(2)(B) and section 1919(d)(2)(B) of the Act. The 
proposed amendments in this proposed rule would continue to allow the 
Secretary to grant waivers on a case-by-case basis if the safety of the 
patients would not be compromised and if specific provisions of the LSC 
would result in unreasonable hardship on the provider. The Secretary 
also may accept a State's fire and safety code instead of the LSC if 
the State's fire and safety code adequately protects patients. Further, 
the NFPA's Fire Safety Evaluation System (FSES), an equivalency system, 
provides alternatives to meeting various provisions of the LSC, thereby 
achieving the same level of fire protection as the LSC.
2. Proposed Changes to the Regulations
    We are proposing to revise Sec.  483.70(a) to delete references to 
the 1967, 1973, and 1981 editions of the LSC.
    We are proposing to revise the following regulations applicable to 
the specified facilities to clarify that the facility must be in 
compliance with Chapter 19.2.9, Emergency Lighting, beginning March 13, 
2006. In addition, we would also specify that, beginning March 13, 
2006, Chapter 19.3.6.3.2, exception number 2 (concerning roller 
latches), does not apply to the facility.
    a. For religious nonmedical health care institutions: Sec.  
403.744(a) and (c).
    b. For hospices, Sec.  418.100(d)(1), (d)(4), and new (d)(5).
    c. For PACE programs, Sec.  460.72(b)(1)(i), (b)(3), and new 
(b)(4).
    d. For hospitals, Sec.  482.41(b).
    e. For long-term care facilities, Sec.  483.70(a).
    f. For ICF/MRs, Sec.  483.470(j).
    g. For CAHs, Sec.  485.623(d)(1), (d)(5), and new (d)(6).

IX. MedPAC Recommendations

[If you choose to comment on issues in this section, please include the 
caption ``MedPAC Recommendations'' at the beginning of your comment.]
    We are required by section 1886(e)(4)(B) of the Act to respond to 
MedPAC's IPPS recommendations in our annual proposed IPPS rule. We have 
reviewed MedPAC's March 1, 2004 ``Report to the Congress: Medicare 
Payment Policy'' and have given it careful consideration in conjunction 
with the proposals set forth in this document. For further information 
relating specifically to the MedPAC report or to obtain a copy of the 
report, contact MedPAC at (202) 653-7220, or visit MedPAC's Web site 
at: www.medpac.gov.
    We note that MedPAC's recommendations in its March 1, 2004 report 
included only one recommendation concerning Medicare inpatient hospital 
payment policies. MedPAC's Recommendation 3A-1 states that Congress 
should increase payment rates for the IPPS by the projected rate of 
increase in the hospital market basket for FY 2005. We note that 
section 501(a)(3) of Public Law 108-173 requires that the payment rates 
for the IPPS be increased by the market basket percentage increase for 
all hospitals during FYs 2005, 2006, and 2007, except that it also 
provides for reducing the update by 0.4 percentage points for any 
hospital that fails to submit data on a list of 10 quality indicators. 
We discuss this recommendation further in Appendix B of this proposed 
rule in the context of our recommendation concerning the update factor 
for inpatient hospital operating costs and for hospitals and hospital 
distinct-part units excluded from the IPPS.

X. Other Required Information

A. Requests for Data From the Public

    In order to respond promptly to public requests for data related to 
the prospective payment system, we have established a process under 
which commenters can gain access to raw data on an expedited basis. 
Generally, the data are available in computer tape or cartridge format; 
however, some files are available on diskette as well as on the 
Internet at http://www.hcfa.gov/stats/pufiles.htm. Data files and the 
cost for each file, if applicable, are listed below. Anyone wishing to 
purchase data tapes, cartridges, or diskettes should submit a written 
request along with a company check or money order (payable to CMS-PUF) 
to cover the cost to the following address: Centers for Medicare & 
Medicaid Services, Public Use Files, Accounting Division, P.O. Box 
7520, Baltimore, MD 21207-0520, (410) 786-3691. Files on the Internet 
may be downloaded without charge.
1. CMS Wage Data
    This file contains the hospital hours and salaries for FY 2001 used 
to create the proposed FY 2005 prospective payment system wage index. 
The file will be available by the beginning of February for the NPRM 
and the beginning of May for the final rule.

------------------------------------------------------------------------
                                                          Wage     PPS
                    Processing year                       data    fiscal
                                                          year     year
------------------------------------------------------------------------
2004                                                       2001     2005
2003                                                       2000     2004
2002                                                       1999     2003
2001                                                       1998     2002
2000                                                       1997     2001
1999                                                       1996     2000
1998                                                       1995     1999
1997                                                       1994     1998
1996                                                       1993     1997
1995                                                       1992     1996
1994                                                       1991     1995
1993                                                       1990     1994
1992                                                       1989     1993
1991                                                       1988     1992
------------------------------------------------------------------------

    These files support the following:
     NPRM published in the Federal Register.
     Final Rule published in the Federal Register.
    Media: Diskette/most recent year on the Internet.
    File Cost: $165.00 per year.
    Periods Available: FY 2005 PPS Update.
2. CMS Hospital Wages Indices (Formerly: Urban and Rural Wage Index 
Values Only)
    This file contains a history of all wage indices since October 1, 
1983.
    Media: Diskette/most recent year on the Internet.
    File Cost: $165.00 per year.
    Periods Available: FY 2005 PPS Update.
3. PPS SSA/FIPS MSA State and County Crosswalk
    This file contains a crosswalk of State and county codes used by 
the Social Security Administration (SSA) and the Federal Information 
Processing Standards (FIPS), county name, and a historical list of 
Metropolitan Statistical Areas (MSAs).
    Media: Diskette/Internet.
    File Cost: $165.00 per year.
    Periods Available: FY 2005 PPS Update.
4. Reclassified Hospitals New Wage Index (Formerly: Reclassified 
Hospitals by Provider Only)
    This file contains a list of hospitals that were reclassified for 
the purpose of assigning a new wage index. Two versions of these files 
are created each year. They support the following:
     NPRM published in the Federal Register.
     Final Rule published in the Federal Register.
    Media: Diskette/Internet.

[[Page 28338]]

    File Cost: $165.00 per year.
    Periods Available: FY 2005 PPS Update.
5. PPS-IV to PPS-XII Minimum Data Set
    The Minimum Data Set contains cost, statistical, financial, and 
other information from Medicare hospital cost reports. The data set 
includes only the most current cost report (as submitted, final 
settled, or reopened) submitted for a Medicare participating hospital 
by the Medicare fiscal intermediary to CMS. This data set is updated at 
the end of each calendar quarter and is available on the last day of 
the following month.
    Media: Tape/Cartridge.
    File Cost: $770.00 per year.

------------------------------------------------------------------------
                                                  Periods
                                                 beginning    and before
                                                on or after
------------------------------------------------------------------------
PPS-IV........................................     10/01/86     10/01/87
PPS-V.........................................     10/01/87     10/01/88
PPS-VI........................................     10/01/88     10/01/89
PPS-VII.......................................     10/01/89     10/01/90
PPS-VIII......................................     10/01/90     10/01/91
PPS-IX........................................     10/01/91     10/01/92
PPS-X.........................................     10/01/92     10/01/93
PPS-XI........................................     10/01/93     10/01/94
PPS-XII.......................................     10/01/94     10/01/95
------------------------------------------------------------------------

    (Note: The PPS-XIII, PPS-XIV, PPS-XV, PPS-XVI, PPS-XVII, PPS-XVIII, 
and PPS-XIX Minimum Data Sets are part of the PPS-XIII, PPS-XIV, PPS-
XV, PPS-XVI, PPS-XVII, PPS-XVIII, and PPS-XIX Hospital Data Set Files 
(refer to item 7 below).)
6. PPS-IX to PPS-XII Capital Data Set
    The Capital Data Set contains selected data for capital-related 
costs, interest expense and related information and complete balance 
sheet data from the Medicare hospital cost report. The data set 
includes only the most current cost report (as submitted, final settled 
or reopened) submitted for a Medicare certified hospital by the 
Medicare fiscal intermediary to CMS. This data set is updated at the 
end of each calendar quarter and is available on the last day of the 
following month.
    Media: Tape/Cartridge.
    File Cost: $770.00 per year.

------------------------------------------------------------------------
                                                  Periods
                                                 beginning   and before.
                                                on or after
------------------------------------------------------------------------
PPS-IX........................................     10/01/91    10/01/92.
PPS-X.........................................     10/01/92    10/01/93.
PPS-XI........................................     10/01/93    10/01/94.
PPS-XII.......................................     10/01/94     10/01/95
------------------------------------------------------------------------

    (Note: The PPS-XIII, PPS-XIV, PPS-XV, PPS-XVI, PPS-XVII, PPS-XVIII, 
and PPS-XIX Capital Data Sets are part of the PPS-XIII, PPS-XIV, PPS-
XV, PPS-XVI, PPS-XVII, PPS-XVIII, and PPS-XIX Hospital Data Set Files 
(refer to item 7 below).)
7. PPS-XIII to PPS-XIX Hospital Data Set
    The file contains cost, statistical, financial, and other data from 
the Medicare Hospital Cost Report. The data set includes only the most 
current cost report (as submitted, final settled, or reopened) 
submitted for a Medicare-certified hospital by the Medicare fiscal 
intermediary to CMS. The data set is updated at the end of each 
calendar quarter and is available on the last day of the following 
month.
    Media: Diskette/Internet.
    File Cost: $2,500.00.

------------------------------------------------------------------------
                                                  Periods
                                                 beginning   and before.
                                                on or after
------------------------------------------------------------------------
PPS-XIII......................................     10/01/95    10/01/96.
PPS-XIV.......................................     10/01/96    10/01/97.
PPS-XV........................................     10/01/97    10/01/98.
PPS-XVI.......................................     10/01/98    10/01/99.
PPS-XVII......................................     10/01/99    10/01/00.
PPS-XVIII.....................................     10/01/00    10/01/01.
PPS-XIX.......................................     10/01/01     10/01/02
------------------------------------------------------------------------

8. Provider-Specific File
    This file is a component of the PRICER program used in the fiscal 
intermediary's system to compute DRG payments for individual bills. The 
file contains records for all prospective payment system eligible 
hospitals, including hospitals in waiver States, and data elements used 
in the prospective payment system recalibration processes and related 
activities. Beginning with December 1988, the individual records were 
enlarged to include pass-through per diems and other elements.
    Media: Diskette/Internet.
    File Cost: $265.00.
    Periods Available: FY 2005 PPS Update.
9. CMS Medicare Case-Mix Index File
    This file contains the Medicare case-mix index by provider number 
as published in each year's update of the Medicare hospital inpatient 
prospective payment system. The case-mix index is a measure of the 
costliness of cases treated by a hospital relative to the cost of the 
national average of all Medicare hospital cases, using DRG weights as a 
measure of relative costliness of cases. Two versions of this file are 
created each year. They support the following:
     NPRM published in the Federal Register.
     Final rule published in the Federal Register.
    Media: Diskette/most recent year on Internet.
    Price: $165.00 per year/per file.
    Periods Available: FY 1985 through FY 2005.
10. DRG Relative Weights (Formerly Table 5 DRG)
    This file contains a listing of DRGs, DRG narrative descriptions, 
relative weights, and geometric and arithmetic mean lengths of stay as 
published in the Federal Register. The hard copy image has been copied 
to diskette. There are two versions of this file as published in the 
Federal Register:
     NPRM.
     Final rule.
    Media: Diskette/Internet.
    File Cost: $165.00.
    Periods Available: FY 2005 PPS Update.
11. PPS Payment Impact File
    This file contains data used to estimate payments under Medicare's 
hospital inpatient prospective payment systems for operating and 
capital-related costs. The data are taken from various sources, 
including the Provider-Specific File, Minimum Data Sets, and prior 
impact files. The data set is abstracted from an internal file used for 
the impact analysis of the changes to the prospective payment systems 
published in the Federal Register. This file is available for release 1 
month after the proposed and final rules are published in the Federal 
Register.
    Media: Diskette/Internet.
    File Cost: $165.00.
    Periods Available: FY 2005 PPS Update.
12. AOR/BOR Tables
    This file contains data used to develop the DRG relative weights. 
It contains mean, maximum, minimum, standard deviation, and coefficient 
of variation statistics by DRG for length of stay and standardized 
charges. The BOR tables are ``Before Outliers Removed'' and the AOR is 
``After Outliers Removed.'' (Outliers refers to statistical outliers, 
not payment outliers.)
    Two versions of this file are created each year. They support the 
following:
     NPRM published in the Federal Register.
     Final rule published in the Federal Register.
    Media: Diskette/Internet.
    File Cost: $165.00.
    Periods Available: FY 2005 PPS Update.
13. Prospective Payment System (PPS) Standardizing File
    This file contains information that standardizes the charges used 
to

[[Page 28339]]

calculate relative weights to determine payments under the prospective 
payment system. Variables include wage index, cost-of-living adjustment 
(COLA), case-mix index, disproportionate share, and the Metropolitan 
Statistical Areas (MSAs). The file supports the following:
     NPRM published in the Federal Register.
     Final rule published in the Federal Register.
    Media: Internet.
    File Cost: No charge.
    Periods Available: FY 2005 PPS Update.
    For further information concerning these data tapes, contact the 
CMS Public Use Files Hotline at (410) 786-3691.
    Commenters interested in obtaining or discussing any other data 
used in constructing this rule should contact James Hart at (410) 786-
9520.

B. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to evaluate fairly whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    Therefore, we are soliciting public comments on each of these 
issues for the information collection requirements discussed below.
    The following information collection requirements in this proposed 
rule and the associated burdens are subject to the PRA.

Section 412.22 Excluded Hospitals and Hospital Units: General Rules

    In summary, this section outlines the requirements for excluded 
hospitals and hospital units. This section states that a LTCH that 
occupies space in a building used by another hospital, or in one or 
more separate buildings located on the same campus as buildings used by 
another hospital must notify its fiscal intermediary and CMS in writing 
of its co-location.
    The collection requirement has not changed. While this requirement 
is subject to the PRA, this requirement is currently approved in OMB 
No. 0938-0897, with a current expiration date of July 31, 2006.

Section 412.25 Excluded Hospital Units: Common Requirements

    In summary, this section proposes to apply the excluded hospital 
unit requirements to psychiatric or rehabilitation CAH units that are 
now permitted under the provisions of Public Law 108-173. This section 
states that if a psychiatric rehabilitation unit of a CAH does not meet 
the applicable requirements, payment will not be made and will resume 
only after the unit has demonstrated to CMS that it meets the 
applicable requirements.
    We believe the collection requirements are exempt as defined in 5 
CFR 1320.4, information collections conducted or sponsored during the 
conduct of a criminal or civil action, or during the conduct of an 
administrative action or investigation, or audit. We also believe the 
collection requirements to be exempt as defined in 5 CFR 1320.3(c)(4) 
because we believe this would affect less than 10 persons.

Section 412.64 Federal Rates for Inpatient Operating Costs for Federal 
Fiscal Years 2005 and Subsequent Fiscal Years

    In summary, this section outlines the proposed requirements and 
process for determining the adjustment of the wage index to account for 
the commuting patterns of hospital workers. This section states that a 
hospital may waive the application of the wage index adjustment by 
notifying CMS in writing within 45 days after the publication of the 
annual notice of proposed rulemaking for the IPPS.
    The burden associated with this requirement is the time and effort 
for the hospital to prepare a written notice asking to waive the 
application of the wage index adjustment and send the notice to CMS.
    The burden associated with this requirement is estimated to be 30 
minutes per hospital. Therefore, we estimate it would take 5 total 
annual hours (30 minutes x 10 hospitals seeking a waiver).

Section 412.103 Special Treatment: Hospitals Located in Urban Areas and 
That Apply for Reclassification as Rural

    In summary, this section outlines the requirements and process for 
a rural hospital to become reclassified. This section states that a 
prospective payment hospital that is located in an urban area may be 
reclassified as a rural hospital if it submits an application in 
accordance with this section.
    We are proposing to revise this section; however, the collection 
requirement remains the same. While this requirement is subject to the 
PRA, this requirement is currently approved in OMB No. 0938-0573, with 
a current expiration date of October 31, 2005.

Section 412.101 Special Treatment: Inpatient Hospital Payment 
Adjustment for Low-Volume Hospitals

    In summary, this section outlines the proposed requirements for 
determining a payment adjustment for low-volume hospitals. This section 
states that in order to qualify for the higher incremental costs 
adjustment, the hospital must provide its fiscal intermediary with 
evidence that it meets the distance requirement to make a determination 
that the hospital meets the distance requirement specified in this 
section.
    The burden associated with this requirement is the time and effort 
for the hospital to provide the fiscal intermediary with evidence that 
it meets the specified distance requirement.
    The burden associated with this requirement is estimated to be 1 
hour per hospital. Therefore, we estimate it would take 500 total 
annual hours (1 hour x 500 hospitals seeking the incremental costs 
adjustment).

Section 412.211 Puerto Rico Rates for Federal Fiscal Year 2004 and 
Subsequent Fiscal Years

    In summary, this section outlines the requirements and process for 
determining the adjusted prospective payment rate for inpatient 
hospital services in Puerto Rico. This section states that a hospital 
may waive the application of the proposed wage index adjustment for 
commuting hospital employees by notifying CMS in writing within 45 days 
after the publication of the annual notice of proposed rulemaking for 
the inpatient prospective payment system.
    The burden associated with this requirement is the time and effort 
for the hospital to prepare a written notice asking to waive the 
application of the wage index adjustment and send the notice to CMS.
    The burden associated with this requirement is estimated to be 30 
minutes per hospital. Therefore, we estimate it would take 5 total 
annual hours (30 minutes x 10 hospitals seeking a waiver).

[[Page 28340]]

Section 412.234 Criteria for All Hospitals in an Urban County Seeking 
Redesignation to Another Urban Area

    In summary, this section outlines the requirements for determining 
an urban hospital's redesignation to another urban area. This section 
states that hospitals must submit appropriate wage data to the fiscal 
intermediary as outlined.
    We are proposing to revise this section. However, the collection 
requirement remains the same. While this requirement is subject to the 
PRA, this requirement is currently approved in OMB No.0938-0907, with a 
current expiration date of December 31, 2005.

Section 413.70 Payment for Services of a CAH

    In summary, this section outlines the requirements for a CAH to 
make an election to be paid for outpatient facility services plus the 
fee schedule for professional services under an optional single payment 
method. This section states that a CAH may make this election in any 
cost reporting period. This election must be made in writing, made on 
an annual basis, and delivered to the fiscal intermediary servicing the 
CAH at least 30 days before the start of each affected cost reporting 
period.
    We are proposing to revise this section. However, the collection 
requirement remains the same. While this requirement is subject to the 
PRA, this requirement is currently approved in OMB No. 0938-0050, with 
a current expiration date of November 30, 2005.

Section 413.78 Direct GME Payments: Determinations of the Total Number 
of FTE Residents

    In summary, this section outlines the requirements for the 
determination of the total number of FTE residents in determining 
direct GME payments to hospitals. Currently, this section states that, 
for residents who spend time in nonprovider settings, there must be a 
written agreement between the hospital and the outside entity that 
states that the resident's compensation for training time spent outside 
of the hospital setting is to be paid by the hospital. This section 
proposes to remove the written agreement requirement.
    This requirement is exempt from the PRA in accordance with Public 
Law 99-272 or Public Law 108-173, or both.

Section 413.79 Direct GME Payments: Determination of the Weighted 
Number of FTE Residents

    In summary, this section outlines the requirements for the 
determination of the weighted number of FTE residents for direct GME 
payments to hospitals. This section proposes that a hospital seeking an 
adjustment to the limit on its unweighted resident count under section 
422 of Public Law 108-173 must provide documentation justifying the 
adjustment. In addition, the section states that a hospital wishing to 
receive a temporary adjustment to its FTE resident cap because it is 
participating in a Medicare GME affiliated group must submit the 
Medicare GME affiliation agreement to the CMS fiscal intermediary and 
to CMS's Central Office. This section specifies the information that a 
request must contain.
    These requirements are exempt from the PRA in accordance with 
Public Law 99-272 or Public Law 108-173, or both.

Section 413.80 Determination of Weighting Factors for Foreign Medical 
Graduates

    In summary, this section specifies the information that a hospital 
must submit to the fiscal intermediary to include foreign medical 
graduates in its FTE count for a particular cost reporting period.
    This requirement is exempt from the PRA in accordance with Public 
Law 99-272 or Public Law 108-173, or both.

Section 413.83 Adjustment of a Hospital's Target Amount or Prospective 
Payment Hospital-Specific Rate

    In summary, this section outlines the requirements for seeking an 
adjustment to the hospital's target amount or hospital-specific rate. 
This section states that a hospital may request that the intermediary 
review the classification of operating costs that were previously 
misclassified for purposes of adjusting the hospital's target amount or 
hospital-specific rate. A hospital's request for review must include 
sufficient documentation demonstrating that an adjustment is warranted. 
This section also specifies the terms in which the information should 
be provided.
    This requirement is exempt from the PRA in accordance with Public 
Law 99-272 or Public Law 108-173, or both.

Section 480.106 Exceptions to QIO Notice Requirements

    In summary, we are proposing to revise this section to add 
exceptions to the notice requirements for disclosure of QIO information 
to any person, agency, or organization. The notice requirements would 
not apply if the institution or practitioner has requested, in writing, 
that the QIO make the disclosure; the institution or practitioner has 
provided, in writing, consent for the disclosure; or the information is 
public information.
    The burden associated with these requirements is the time and 
effort for the institution or practitioner to provide a written request 
that the QIO make the disclosure or consent to the disclosure.
    We believe the collection requirements are exempt as defined in 5 
CFR 1320.4, information collections conducted or sponsored during the 
conduct of a criminal or civil action, or during the conduct of an 
administrative action or investigation, or audit. We also believe the 
collection requirements to be exempt as defined in 5 CFR 1320.3(c)(4) 
because we believe this would affect less than 10 persons.

Section 480.133 Disclosure of Information about Practitioners, 
Reviewers and Institutions

    In summary, this section outlines the requirements concerning the 
disclosure of QIO information about practitioners, reviewers, and 
institutions. This section states that a QIO may disclose information 
on a particular practitioner or reviewer at the written request of or 
with the written consent of that practitioner or reviewer, with the 
recipient subject to the same rights and responsibilities on 
redisclosure as the requesting or consenting practitioner or reviewer.
    We believe the collection requirements are exempt as defined in 5 
CFR 1320.4, information collections conducted or sponsored during the 
conduct of a criminal or civil action, or during the conduct of an 
administrative action or investigation, or audit. We also believe the 
collection requirements to be exempt as defined in 5 CFR 1320.3(c)(4) 
because we believe this would affect less than 10 persons.

Section 480.140 Disclosure of Quality Review Study Information

    In summary, this section outlines the requirements concerning the 
disclosure of quality review study information. This section states 
that a QIO may disclose quality review study information with 
identifiers of particular practitioners or institutions, or both, at 
the written request of, or with the written consent of, the identified 
practitioner(s) or institution(s). The consent or request must specify 
the information that is to be disclosed and the intended recipient of 
the information. The recipient would be subject to the same rights and 
responsibilities on redisclosure as the requesting or consenting 
practitioner or institution.
    We believe the collection requirements are exempt as defined in 5 
CFR 1320.4, information collections conducted or sponsored during the

[[Page 28341]]

conduct of a criminal or civil action, or during the conduct of an 
administrative action or investigation, or audit. We also believe the 
collection requirements to be exempt as defined in 5 CFR 1320.3(c)(4) 
because we believe this would affect less than 10 persons.

Section 482.43 Condition of Participation: Discharge Planning

    In summary, this section outlines the requirements of the discharge 
planning process. This section states that the hospital must include in 
the discharge plan, a list of HHAs or SNFs that are available to the 
patient, that participate in the Medicare program, that serve the 
geographic area, and that request to be listed by the hospital as 
available and to maintain documentation. This section also specifies 
other information that the discharge plan must contain.
    The burden associated with these requirements is the time and 
effort for the hospital to provide a list to beneficiaries, for whom 
home health care or posthospital extended care services are necessary, 
and document the patient's medical record.
    The burden associated with these requirements is estimated to be 5 
minutes per hospital per discharge. Therefore, we estimate the total 
national burden to be 327,684 hours annually to comply with these 
requirements (652 discharges per hospital per year x 6,031 hospitals x 
5 minutes each).
    We have submitted a copy of this proposed rule to OMB for its 
review of the information collection requirements described above. 
These requirements are not effective until they have been approved by 
OMB.
    If you comment on any of these information collection and record 
keeping requirements, please mail copies directly to the following:
    Centers for Medicare & Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Regulations Development and 
Issuances Group, Attn: Dawn Willinghan, CMS-1428-P, Room C5-14-03, 7500 
Security Boulevard, Baltimore, MD 21244-1850; and Office of Information 
and Regulatory Affairs, Office of Management and Budget, Room 10235, 
New Executive Office Building, Washington, DC 20503, Attn: Brenda 
Aguilar, CMS Desk Officer.
    Comments submitted to OMB may also be e-mailed to the following 
address: e-mail: [email protected], or faxed to OMB at (202) 395-
6974.

C. Public Comments

    Because of the large number of items of correspondence we normally 
receive on a proposed rule, we are not able to acknowledge or respond 
to them individually. However, in preparing the final rule, we will 
consider all comments concerning the provisions of this proposed rule 
that we receive by the date and time specified in the DATES section of 
this preamble and respond to those comments in the preamble to that 
rule.

                 Crosswalk of Contents of Sec.   413.86
------------------------------------------------------------------------
          Existing section                  Proposed new section.
------------------------------------------------------------------------
Sec.   413.86(a)...................  Sec.   413.75(a).
Sec.   413.86(a)(1)................  Sec.   413.75(a)(1).
Sec.   413.86(a)(2)................  Sec.   413.75(a)(2).
Sec.   413.86(b)...................  Sec.   413.75(b).
Sec.   413.86(c)...................  Sec.   413.75(c).
Sec.   413.86(d)...................  Sec.   413.76.
Sec.   413.86(d), introductory text  Sec.   413.76, introductory text.
Sec.   413.86(d)(1)................  Sec.   413.76(a).
Sec.   413.86(d)(2)................  Sec.   413.76(b).
Sec.   413.86(d)(3)................  Sec.   413.76(c).
Sec.   413.86(d)(3)(i).............  Sec.   413.76(c)(1).
Sec.   413.86(d)(3)(ii)............  Sec.   413.76(c)(2).
Sec.   413.86(d)(3)(iii)...........  Sec.   413.76(c)(3).
Sec.   413.86(d)(3)(iv)............  Sec.   413.76(c)(4).
Sec.   413.86(d)(3)(v).............  Sec.   413.76(c)(5).
Sec.   413.86(d)(4)................  Sec.   413.76(d).
Sec.   413.86(d)(5)................  Sec.   413.76(e).
Sec.   413.86(d)(5)(i).............  Sec.   413.76(e)(1).
Sec.   413.86(d)(5)(ii)............  Sec.   413.76(e)(2).
Sec.   413.86(d)(6)................  Sec.   413.76(f).
Sec.   413.86(e)...................  Sec.   413.77.
Sec.   413.86(e)(1)................  Sec.   413.77(a).
Sec.   413.86(e)(1)(i).............  Sec.   413.77(a)(1).
Sec.   413.86(e)(1)(i)(A)..........  Sec.   413.77(a)(1)(i).
Sec.   413.86(e)(1)(i)(B)..........  Sec.   413.77(a)(1)(ii).
Sec.   413.86(e)(1)(ii)............  Sec.   413.77(a)(2).
Sec.   413.86(e)(1)(ii)(A).........  Sec.   413.77(a)(2)(i).
Sec.   413.86(e)(1)(ii)(B).........  Sec.   413.77(a)(2)(ii).
Sec.   413.86(e)(1)(ii)(C).........  Sec.   413.77(a)(2)(iii).
Sec.   413.86(e)(1)(iii)...........  Sec.   413.77(a)(3).
Sec.   413.86(e)(1)(iv)............  Sec.   413.77(a)(4).
Sec.   413.86(e)(1)(v).............  Sec.   413.77(a)(5).
Sec.   413.86(e)(2), introductory    Sec.   413.77(b), introductory
 text.                                text.
Sec.   413.86(e)(2)(i).............  Sec.   413.77(b)(1).
Sec.   413.86(e)(2)(ii)............  Sec.   413.77(b)(2).
Sec.   413.86(e)(3), introductory    Sec.   413.77(c), introductory
 text.                                text.
Sec.   413.86(e)(3)(i).............  Sec.   413.77(c)(1).
Sec.   413.86(e)(3)(ii)............  Sec.   413.77(c)(2).
Sec.   413.86(e)(4), introductory    Sec.   413.77(d), introductory
 text.                                text--NEW.
Sec.   413.86(e)(4)(i),              Sec.   413.77(d)(1), introductory
 introductory text.                   text.
Sec.   413.86(e)(4)(i)(A),           Sec.   413.77(d)(1)(i),
 introductory text.                   introductory text.
Sec.   413.86(e)(4)(i)(A)(1).......  Sec.   413.77(d)(1)(i)(A).

[[Page 28342]]

 
Sec.   413.86(e)(4)(i)(A)(2).......  Sec.   413.77(d)(1)(i)(B).
Sec.   413.86(e)(4)(i)(A)(3).......  Sec.   413.77(d)(1)(i)(C).
Sec.   413.86(e)(4)(i)(B)..........  Sec.   413.77(d)(1)(ii).
Sec.   413.86(e)(4)(ii),             Sec.   413.77(d)(2), introductory
 introductory text.                   text--NEW.
Sec.   413.86(e)(4)(ii)(A).........  Sec.   413.77(d)(2)(i).
Sec.   413.86(e)(4)(ii)(B).........  Sec.   413.77(d)(2)(ii).
Sec.   413.86(e)(4)(ii)(C),          Sec.   413.77(d)(2)(iii),
 introductory text.                   introductory text.
Sec.   413.86(e)(4)(ii)(C)(1)......  Sec.   413.77(d)(2)(iii)(A).
Sec.   413.86(e)(4)(ii)(C)(1)(i)...  Sec.   413.77(d)(2)(iii)(A)(1).
Sec.   413.86(e)(4)(ii)(C)(1)(ii)..  Sec.   413.77(d)(2)(iii)(A)(2).
Sec.   413.86(e)(4)(ii)(C)(1)(iii).  Sec.   413.77(d)(2)(iii)(A)(3).
Sec.   413.86(e)(4)(ii)(C)(2),       Sec.   413.77(d)(2)(iii)(B),
 introductory text.                   introductory text--NEW.
Sec.   413.86(e)(4)(ii)(C)(2)(i)...  Sec.   413.77(d)(2)(iii)(B)(1).
Sec.   413.86(e)(4)(ii)(C)(2)(ii)..  Sec.   413.77(d)(2)(iii)(B)(2).
Sec.   413.86(e)(4)(ii)(C)(2)(iii).  Sec.   413.77(d)(2)(iii)(B)(3)--
                                      NEW.
Sec.   413.86(e)(4)(ii)(C)(2)(iv)..  Sec.   413.77(d)(2)(iii)(B)(4)--
                                      NEW.
                                     Sec.   413.77(d)(2)(iiii)(B)(5)--
                                      NEW.
Sec.   413.86(e)(4)(ii)(C)(3)......  Sec.   413.77(d)(2)(iii)(C)--NEW.
Sec.   413.86(e)(5)................  Sec.   413.77(e).
Sec.   413.86(e)(5)(i).............  Sec.   413.77(e)(1).
Sec.   413.86(e)(5)(i)(A)..........  Sec.   413.77(e)(1)(i).
Sec.   413.86(e)(5)(i)(B),           Sec.   413.77(e)(1)(ii),
 introductory text.                   introductory text.
Sec.   413.86(e)(5)(i)(B)(1).......  Sec.   413.77(e)(1)(ii)(A).
Sec.   413.86(e)(5)(i)(B)(2).......  Sec.   413.77(e)(1)(ii)(B).
Sec.   413.86(e)(5)(i)(C)..........  Sec.   413.77(e)(1)(iii).
Sec.   413.86(e)(5)(ii)............  Sec.   413.77(e)(2).
Sec.   413.86(e)(5)(iii)...........  Sec.   413.77(e)(3).
                                     Sec.   413.77(f)--NEW.
Sec.   413.86(f)...................  Sec.   413.78.
Sec.   413.86(f), introductory text  Sec.   413.78, introductory text.
Sec.   413.86(f)(1)................  Sec.   413.78(a).
Sec.   413.86(f)(2)................  Sec.   413.78(b).
Sec.   413.86(f)(3), introductory    Sec.   413.78(c), introductory
 text.                                text.
Sec.   413.86(f)(3)(i).............  Sec.   413.78(c)(1).
Sec.   413.86(f)(3)(ii)............  Sec.   413.78(c)(2).
Sec.   413.86(f)(4), introductory    Sec.   413.78(d), introductory
 text.                                text.
Sec.   413.86(f)(4)(i).............  Sec.   413.78(d)(1).
Sec.   413.86(f)(4)(ii)............  Sec.   413.78(d)(2).
Sec.   413.86(f)(4)(iii)...........  Sec.   413.78(d)(3).
Sec.   413.86(f)(4)(iv)............  Sec.   413.78(d)(4).
                                     Sec.   413.78(e), introductory
                                      text--NEW.
                                     Sec.   413.78(e)(1)--NEW.
                                     Sec.   413.78(e)(2)--NEW.
                                     Sec.   413.78(e)(3)--NEW.
Sec.   413.86(g), introductory text  Sec.   413.79.
Sec.   413.86(g), introductory text  Sec.   413.79, introductory text.
Sec.   413.86(g)(1)................  Sec.   413.79(a).
Sec.   413.86(g)(1)................  Sec.   413.79(a) introductory text--
                                      NEW.
Sec.   413.86(g)(1)................  Sec.   413.79(a)(1)--NEW.
Sec.   413.86(g)(1)................  Sec.   413.79(a)(2)--NEW.
Sec.   413.86(g)(1)................  Sec.   413.79(a)(3)--NEW.
Sec.   413.86(g)(1)................  Sec.   413.79(a)(4)--NEW.
Sec.   413.86(g)(1)................  Sec.   413.79(a)(5)--NEW.
Sec.   413.86(g)(1)(i).............  Sec.   413.79(a)(6).
Sec.   413.86(g)(1)(ii)............  Sec.   413.79(a)(7).
Sec.   413.86(g)(1)(iii),            Sec.   413.79(a)(8), introductory
 introductory text.                   text.
Sec.   413.86(g)(1)(iii)(A)........  Sec.   413.79(a)(8)(i).
Sec.   413.86(g)(1)(iii)(B)........  Sec.   413.79(a)(8)(ii).
Sec.   413.86(g)(1)(iv)............  Sec.   413.79(a)(9).
Sec.   413.86(g)(2)................  Sec.   413.79(b)(1).
Sec.   413.86(g)(3)................  Sec.   413.79(b)(2).
                                     Sec.   413.79(c)(1), introductory
                                      text--NEW.
                                     Sec.   413.79(c)(1)(i) through
                                      (iii)--NEW.
Sec.   413.86(g)(4), introductory    Sec.   413.79(c)(2), introductory
 text.                                text.
Sec.   413.86(g)(4)(i).............  Sec.   413.79(c)(2)(i).
Sec.   413.86(g)(4)(ii)............  Sec.   413.79(c)(2)(ii).
Sec.   413.86(g)(4)(iii)...........  Sec.   413.79(c)(2)(iii).
Sec.   413.86(g)(4)(iv)............  Sec.   413.79(c)(2)(iv).
Sec.   413.86(g)(4)(v).............  Sec.   413.79(c)(2)(v).
                                     Sec.   413.79(c)(3)(i) through
                                      (ii)--NEW.
                                     Sec.   413.79(c)(4)--NEW.
                                     Sec.   413.79(c)(5)--NEW.

[[Page 28343]]

 
Sec.   413.86(g)(5), introductory    Sec.   413.79(d), introductory
 text.                                text.
Sec.   413.86(g)(5)(i).............  Sec.   413.79(d)(1).
Sec.   413.86(g)(5)(ii)............  Sec.   413.79(d)(2).
Sec.   413.86(g)(5)(iii)...........  Sec.   413.79(d)(3).
Sec.   413.86(g)(5)(iv)............  Sec.   413.79(d)(4).
Sec.   413.86(g)(5)(v).............  Sec.   413.79(d)(5).
Sec.   413.86(g)(5)(vi)............  Sec.   413.79(d)(6).
Sec.   413.86(g)(5)(vii)...........  Sec.   413.79(d)(7).
Sec.   413.86(g)(6), introductory    Sec.   413.79(e), introductory
 text.                                text.
Sec.   413.86(g)(6)(i).............  Sec.   413.79(e)(1).
Sec.   413.86(g)(6)(i)(A)..........  Sec.   413.79(e)(1)(i).
Sec.   413.86(g)(6)(i)(B)..........  Sec.   413.79(e)(1)(ii).
Sec.   413.86(g)(6)(i)(C)..........  Sec.   413.79(e)(1)(iii).
Sec.   413.86(g)(6)(i)(D)..........  Sec.   413.79(e)(1)(iv).
Sec.   413.86(g)(6)(i)(E)..........  Sec.   413.79(e)(1)(v).
Sec.   413.86(g)(6)(ii),             Sec.   413.79(e)(2), introductory
 introductory text.                   text.
Sec.   413.86(g)(6)(ii)(A).........  Sec.   413.79(e)(2)(i).
Sec.   413.86(g)(6)(ii)(B).........  Sec.   413.79(e)(2)(ii).
Sec.   413.86(g)(6)(iii)...........  Sec.   413.79(e)(3).
Sec.   413.86(g)(6)(iv)............  Sec.   413.79(e)(4).
Sec.   413.86(g)(7)................  Sec.   413.79(f).
Sec.   413.86(g)(7)(i).............  Sec.   413.79(f)(1).
Sec.   413.86(g)(7)(ii)............  Sec.   413.79(f)(2).
Sec.   413.86(g)(7)(iii)...........  Sec.   413.79(f)(3).
Sec.   413.86(g)(7)(iv)............  Sec.   413.79(f)(4).
Sec.   413.86(g)(7)(v).............  Sec.   413.79(f)(5).
Sec.   413.86(g)(8), introductory    Sec.   413.79(g), introductory
 text.                                text.
Sec.   413.86(g)(8)(i),              Sec.   413.79(g)(1), introductory
 introductory text.                   text.
Sec.   413.86(g)(8)(i)(A)..........  Sec.   413.79(g)(1)(i).
Sec.   413.86(g)(8)(i)(B)..........  Sec.   413.79(g)(1)(ii).
Sec.   413.86(g)(8)(ii)............  Sec.   413.79(g)(2).
Sec.   413.86(g)(8)(iii)...........  Sec.   413.79(g)(3).
Sec.   413.86(g)(8)(iv)............  Sec.   413.79(g)(4).
Sec.   413.86(g)(8)(v).............  Sec.   413.79(g)(5).
Sec.   413.86(g)(9)................  Sec.   413.79(h).
Sec.   413.86(g)(9)(i),              Sec.   413.79(h)(1), introductory
 introductory text.                   text.
Sec.   413.86(g)(9)(i)(A)..........  Sec.   413.79(h)(1)(i).
Sec.   413.86(g)(9)(i)(B)..........  Sec.   413.79(h)(1)(ii).
Sec.   413.86(g)(9)(ii),             Sec.   413.79(h)(2), introductory
 introductory text.                   text.
Sec.   413.86(g)(9)(ii)(A).........  Sec.   413.79(h)(2)(i).
Sec.   413.86(g)(9)(ii)(B).........  Sec.   413.79(h)(2)(ii).
Sec.   413.86(g)(9)(iii),            Sec.   413.79(h)(3), introductory
 introductory text.                   text.
Sec.   413.86(g)(9)(iii)(A),         Sec.   413.79(h)(3)(i),
 introductory text.                   introductory text.
Sec.   413.86(g)(9)(iii)(A)(1).....  Sec.   413.79(h)(3)(i)(A).
Sec.   413.86(g)(9)(iii)(A)(2).....  Sec.   413.79(h)(3)(i)(B).
Sec.   413.86(g)(9)(iii)(B),         Sec.   413.79(h)(3)(ii),
 introductory text.                   introductory text.
Sec.   413.86(g)(9)(iii)(B)(1).....  Sec.   413.79(h)(3)(ii)(A).
Sec.   413.86(g)(9)(iii)(B)(2).....  Sec.   413.79(h)(3)(ii)(B).
Sec.   413.86(g)(10), introductory   Sec.   413.79(i), introductory
 text.                                text.
Sec.   413.86(g)(10)(i)............  Sec.   413.79(i)(1).
Sec.   413.86(g)(10)(ii)...........  Sec.   413.79(i)(2).
Sec.   413.86(g)(10)(iii)..........  Sec.   413.79(i)(3).
Sec.   413.86(g)(11), introductory   Sec.   413.79(j), introductory
 text.                                text.
Sec.   413.86(g)(11)(i)............  Sec.   413.79(j)(1).
Sec.   413.86(g)(11)(ii)...........  Sec.   413.79(j)(2).
Sec.   413.86(g)(11)(iii)..........  Sec.   413.79(j)(3).
Sec.   413.86(g)(12), introductory   Sec.   413.79(k), introductory
 text.                                text.
Sec.   413.86(g)(12)(i),             Sec.   413.79(k)(1), introductory
 introductory text.                   text.
Sec.   413.86(g)(12)(i)(A).........  Sec.   413.79(k)(1)(i).
Sec.   413.86(g)(12)(i)(B).........  Sec.   413.79(k)(1)(ii).
Sec.   413.86(g)(12)(ii),            Sec.   413.79(k)(2), introductory
 introductory text.                   text.
Sec.   413.86(g)(12)(ii)(A)........  Sec.   413.79(k)(2)(i).
Sec.   413.86(g)(12)(ii)(B),         Sec.   413.79(k)(2)(ii),
 introductory text.                   introductory text.
Sec.   413.86(g)(12)(ii)(B)(1),      Sec.   413.79(k)(2)(ii)(A),
 introductory text.                   introductory text.
Sec.   413.86(g)(12)(ii)(B)(1)(i)..  Sec.   413.79(k)(2)(ii)(A)(1).
Sec.   413.86(g)(12)(ii)(B)(1)(ii).  Sec.   413.79(k)(2)(ii)(A)(2).
Sec.   413.86(g)(12)(ii)(B)(2).....  Sec.   413.79(k)(2)(ii)(B).
Sec.   413.86(g)(12)(iii)..........  Sec.   413.79(k)(3).
Sec.   413.86(g)(12)(iv),            Sec.   413.79(k)(4), introductory
 introductory text.                   text.
Sec.   413.86(g)(12)(iv)(A)........  Sec.   413.79(k)(4)(i).
Sec.   413.86(g)(12)(iv)(B),         Sec.   413.79(k)(4)(ii),
 introductory text.                   introductory text.
Sec.   413.86(g)(12)(iv)(B)(1).....  Sec.   413.79(k)(4)(ii)(A).

[[Page 28344]]

 
Sec.   413.86(g)(12)(iv)(B)(2).....  Sec.   413.79(k)(4)(ii)(B).
Sec.   413.86(g)(12)(v),             Sec.   413.79(k)(5), introductory
 introductory text.                   text.
Sec.   413.86(g)(12)(v)(A).........  Sec.   413.79(k)(5)(i).
Sec.   413.86(g)(12)(v)(B).........  Sec.   413.79(k)(5)(ii).
Sec.   413.86(g)(12)(v)(C).........  Sec.   413.79(k)(5)(iii).
Sec.   413.86(g)(12)(vi)...........  Sec.   413.79(k)(6).
Sec.   413.86(g)(13)...............  Sec.   413.79(l).
Sec.   413.86(h)...................  Sec.   413.80.
Sec.   413.86(h)(1), introductory    Sec.   413.80(a), introductory
 text.                                text.
Sec.   413.86(h)(1)(i).............  Sec.   413.80(a)(1).
Sec.   413.86(h)(1)(ii)............  Sec.   413.80(a)(2).
Sec.   413.86(h)(2)................  Sec.   413.80(b).
Sec.   413.86(h)(3)................  Sec.   413.80(c).
Sec.   413.86(h)(4)................  Sec.   413.80(d).
Sec.   413.86(h)(5)................  Sec.   413.80(e).
Sec.   413.86(h)(6)................  Sec.   413.80(f).
Sec.   413.86(i)...................  Sec.   413.81.
Sec.   413.86(i)(1), introductory    Sec.   413.81(a), introductory
 text.                                text.
Sec.   413.86(i)(1)(i).............  Sec.   413.81(a)(1).
Sec.   413.86(i)(1)(ii)............  Sec.   413.81(a)(2).
Sec.   413.86(i)(2)................  Sec.   413.81(b).
Sec.   413.86(i)(3)(i).............  Sec.   413.81(c)(1).
Sec.   413.86(i)(3)(ii)............  Sec.   413.81(c)(2).
Sec.   413.86(j), introductory text  Sec.   413.80(g), introductory
                                      text.
Sec.   413.86(j)(1)................  Sec.   413.80(g)(1).
Sec.   413.86(j)(2)................  Sec.   413.80(g)(2).
Sec.   413.86(j)(3)................  Sec.   413.80(g)(3).
Sec.   413.86(j)(4)................  Sec.   413.80(g)(4).
Sec.   413.86(j)(5)................  Sec.   413.80(g)(5).
Sec.   413.86(j)(6)................  Sec.   413.80(g)(6).
Sec.   413.86(j)(7)................  Sec.   413.80(g)(7).
Sec.   413.86(k)...................  Sec.   413.82.
Sec.   413.86(k)(1)................  Sec.   413.82(a).
Sec.   413.86(k)(2)................  Sec.   413.82(b).
Sec.   413.86(k)(3)................  Sec.   413.82(c).
Sec.   413.86(l)...................  Sec.   413.83.
Sec.   413.86(l)(1)................  Sec.   413.83(a).
Sec.   413.86(l)(1)(i).............  Sec.   413.83(a)(1).
Sec.   413.86(l)(1)(ii)............  Sec.   413.83(a)(2).
Sec.   413.86(l)(2)(iii)...........  Sec.   413.83(a)(3).
Sec.   413.86(l)(2)................  Sec.   413.83(b).
Sec.   413.86(l)(2)(i).............  Sec.   413.83(b)(1).
Sec.   413.86(l)(2)(ii)............  Sec.   413.83(b)(2).
Sec.   413.86(l)(2)(iii)...........  Sec.   413.83(b)(3).
------------------------------------------------------------------------


    Note to Readers: Proposed redesignated Sec. Sec.  413.77, 413.78 
and 413.79 are the only three sections of the proposed redesignated 
Sec. Sec.  413.75 through 413.83 that contain proposed policy 
changes, as discussed in section IV. O. of the preamble of this 
proposed rule. Therefore, we will only consider public comments on 
the following paragraphs of the proposed redesignated sections:
     Sections 413.77(d) introductory text, (d)(2), 
(d)(2)(iii)(B), (d)(2)(iii)(B)(3), (d)(2)(iii)(B)(4), 
(d)(2)(iii)(B)(5), (d)(2)(iii)(C), and (f).
     Sections 413.78(e), (e)(1), (e)(2), and (e)(3).
     Section 413.79(a), (c)(1), (c)(2), (c)(3), (c)(4), and 
(c)(5).
    The remaining portions of the proposed redesignated Sec. Sec.  
413.75 through 413.83 contain only coding, cross-reference, and 
conforming redesignation changes. For these remaining portions, we 
will consider comments on redesignation, coding, and cross-reference 
changes only.

List of Subjects

42 CFR Part 403

    Health insurance, Hospitals, Incorporation by reference, 
Intergovernmental relations, Medicare, Reporting and recordkeeping 
requirements.

2 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 418

    Health facilities, Hospice care, Incorporation by reference, 
Medicare, Reporting and recordkeeping requirements.

42 CFR Part 460

    Aged, Health, Incorporation by reference, Medicare, Medicaid, 
Reporting and recordkeeping requirements.

42 CFR Part 480

    Medicare Program; Utilization and quality control, Quality 
Improvement Organizations (QIOs).

42 CFR Part 482

    Grant program-health, Hospitals, Medicaid, Medicare, Reporting and 
recordkeeping requirements.

42 CFR Part 483

    Grant program-health, Health facilities, Health professions, Health 
records, Medicaid, Medicare, Nursing

[[Page 28345]]

homes, Nutrition, Reporting and recordkeeping requirements, Safety.

42 CFR Part 485

    Grant programs-health, Health facilities, Medicaid, Medicare, 
Reporting and record keeping requirements.

42 CFR Part 489

    Health facilities, Medicare, Reporting and record keeping 
requirements.

    For the reasons stated in the preamble of this proposed rule, the 
Centers for Medicare & Medicaid Services is proposing to amend 42 CFR 
chapter IV as follows:
    A. Part 403 is amended as follows:

PART 403--SPECIAL PROGRAMS AND PROJECTS

    1. The authority citation for part 403 continues to read as 
follows:

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

    2. Section 403.744 is amended by--
    A. Revising paragraph (a)(1).
    B. Revising paragraph (c).
    C. Removing paragraph (c)(1) and paragraph (c)(2).
    The revision reads as follows:


Sec.  403.744  Condition of Participation: Life safety from fire.

    (a) General. An RNHCI must meet the following conditions:
    (1) Except as otherwise provided in this section--
    (i) The RNHCI must meet the applicable provisions of the 2000 
edition of the Life Safety Code of the National Fire Protection 
Association. The Director of the Office of the Federal Register has 
approved the NFPA 101[reg] 2000 edition of the Life Safety Code, issued 
January 14, 2000, for incorporation by reference in accordance with 5 
U.S.C. 552(a) and 1 CFR part 51. A copy of the Code is available for 
inspection at the CMS Information Resource Center, 7500 Security 
Boulevard, Baltimore, MD and at the National Archives and Records 
Administration (NARA). For information on the availability of this 
material at NARA, call 202-741-6030, or go to: http://www.archives.gov/federal_register/code_of_federal_regulations/ibr_locations.html. 
Copies may be obtained from the National Fire Protection Association, 1 
Batterymarch Park, Quincy, MA 02269. If any changes in this edition of 
the Code are incorporated by reference, CMS will publish notice in the 
Federal Register to announce the changes.
    (ii) Chapter 19.3.6.3.2, exception number 2 of the adopted Life 
Safety Code does not apply to an RNHCI.
* * * * *
    (c) Phase-in period. Beginning March 13, 2006, an RNHCI must be in 
compliance with Chapter 19.2.9, Emergency Lighting. Beginning March 13, 
2006, Chapter 19.3.6.3.2, exception number 2 does not apply to RNHCIs.
    B. Part 412 is amended as follows:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

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

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

    2. Section 412.2 is amended by adding a new paragraph (b)(3) to 
read as follows:


Sec.  412.2  Basis for payment.

* * * * *
    (b) Payment in full.
* * * * *
    (3) If a patient is admitted to an acute care hospital and then the 
acute care hospital meets the criteria at Sec.  412.23(e) to be paid as 
a LTCH, during the course of the patient's hospitalization, Medicare 
considers all the days of the patient stay in the facility (days prior 
to and after the designation of LTCH status) to be a single episode of 
LTCH care. Medicare will not make payment under subpart H for any part 
of the hospitalization. Payment for the entire patient stay (days prior 
to and after the designation of LTCH status) will be made in accordance 
with the requirements specified in Sec.  412.521. The requirements of 
this paragraph (b)(3) apply only to a patient stay in which a patient 
is in an acute care hospital and that hospital is designated as a LTCH 
on or after October 1, 2004.
* * * * *
    3. Section 412.4 is amended by revising paragraph (d) to read as 
follows:


Sec.  412.4  Discharges and transfers.

* * * * *
    (d) Qualifying DRGs.
    (1) For purposes of paragraph (c) of this section, and subject to 
the provisions of paragraph (d)(2) of this section, the qualifying DRGs 
must meet the following criteria for both of the 2 most recent fiscal 
years for which data are available:
    (i) The DRG must have a geometric mean length of stay of at least 3 
days.
    (ii) The DRG must have at least 14,000 cases identified as 
postacute care transfer cases.
    (iii) The DRG must have at least 10 percent of the postacute care 
transfers occurring before the geometric mean length of stay for the 
DRG.
    (iv) If the DRG is one of a paired DRG based on the presence or 
absence of a comorbidity or complication, one of the DRGs meets the 
criteria specified under paragraphs (d)(1)(i) through (d)(1)(iii) of 
this section.
    (v) To initially qualify, the DRG must meet the criteria specified 
in paragraphs(d)(1)(i) through (d)(1)(iv) of this section and must have 
a decline in the geometric mean length of stay for the DRG during the 
most recent 5-year period of at least 7 percent. Once a DRG initially 
qualifies, the DRG is subject to the criteria specified under 
paragraphs (d)(1)(i) through (d)(1)(iv) of this section for each 
subsequent fiscal year.
    (2) Effective October 1, 2004, if a DRG fails to meet the 
qualifying criteria under paragraph (d)(1) of this section, the 
qualifying DRG must meet the following criteria for both of the 2 most 
recent fiscal years for which data are available:
    (i) The DRG must have a geometric mean length stay of at least 3 
days.
    (ii) The DRG must have at least 5,000 cases identified as postacute 
care transfer cases.
    (iii) The DRG must have a percentage of the postacute care transfer 
cases occurring before the geometric mean length of stay of at least 2 
standard deviations above the geometric mean length of stay across all 
DRGs.
    (iv) If the DRG is one of a paired DRG based on the presence or 
absence of a comorbidity or complication, one of the DRGs meets the 
criteria specified under paragraph (d)(2)(i) through (d)(2)(iii) of 
this section.
    (v) To initially qualify, the DRG meets the criteria specified in 
paragraph (d)(2)(i) through (d)(2)(iv) of this section and must either 
have experienced a decline in its geometric mean length of stay during 
the most recent 5-year period of at least 7 percent, or contain only 
cases that would have been included in a DRG to which the policy 
applied in the prior year. Once a DRG initially qualifies, the DRG is 
subject to the criteria specified under paragraphs (d)(2)(i) through 
(d)(2)(iv) for each subsequent fiscal year.
* * * * *
    4. Section 412.22 is amended by--
    A. Adding a sentence at the end of paragraph (a).
    B. Revising paragraph (e).
    The addition and revision read as follows:

[[Page 28346]]

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

    (a) Criteria. * * * For purposes of this subpart, the term 
``hospital'' includes a critical access hospital (CAH).
* * * * *
    (e) Hospitals-within-hospitals. Except as provided in paragraph (f) 
of this section, a hospital that occupies space in a building also used 
by another hospital, or in one or more separate buildings located on 
the same campus as buildings used by another hospital, must meet the 
following criteria in order to be excluded from the prospective payment 
systems specified in Sec.  412.1(a)(1):
    (1) For cost reporting periods beginning on or after October 1, 
1987, and before October 1, 2004--
    (i) Separate governing body. The hospital has a governing body that 
is separate from the governing body of the hospital occupying space in 
the same building or on the same campus. The hospital's governing body 
is not under the control of the hospital occupying space in the same 
building or on the same campus, or of any third entity that controls 
both hospitals.
    (ii) Separate chief medical officer. The hospital has a single 
chief medical officer who reports directly to the governing body and 
who is responsible for all medical staff activities of the hospital. 
The chief medical officer of the hospital is not employed by or under 
contract with either the hospital occupying space in the same building 
or on the same campus or any third entity that controls both hospitals.
    (iii) Separate medical staff. The hospital has a medical staff that 
is separate from the medical staff of the hospital occupying space in 
the same building or on the same campus. The hospital's medical staff 
is directly accountable to the governing body for the quality of 
medical care provided in the hospital, and adopts and enforces by laws 
governing medical staff activities, including criteria and procedures 
for recommending to the governing body the privileges to be granted to 
individual practitioners.
    (iv) Chief executive officer. The hospital has a single chief 
executive officer through whom all administration authority flows, and 
who exercises control and surveillance over all administrative 
activities of the hospital. The chief executive officer is not employed 
by, or under contract with, either the hospital occupying space in the 
same building or on the same campus or any third entity that controls 
both hospitals.
    (v) Performance of basic hospital functions. The hospital meets one 
of the following criteria:
    (A) The hospital performs the basic functions specified in 
Sec. Sec.  482.21 through 482.27, 482.30, 482.42, 482.43, and 482.45 of 
this chapter through the use of employees or under contracts or other 
agreements with entities other than the hospital occupying space in the 
same building or on the same campus, or a third entity that controls 
both hospitals. Food and dietetic services and housekeeping, 
maintenance, and other services necessary to maintain a clean and safe 
physical environment could be obtained under contracts or other 
agreements with the hospital occupying space in the same building or on 
the same campus, or with a third entity that controls both hospitals.
    (B) For the same period of at least 6 months used to determine 
compliance with the criterion regarding the age of patients in Sec.  
412.23(d)(2) or the length-of-stay criterion in Sec.  412.23(e)(2), or 
for hospitals other than children's or long-term care hospitals, for a 
period of at least 6 months immediately preceding the first cost 
reporting period for which exclusion is sought, the cost of the 
services that the hospital obtains under contracts or other agreements 
with the hospital occupying space in the same building or on the same 
campus, or with a third entity that controls both hospitals, is no more 
than 15 percent of the hospital's total inpatient operating costs, as 
defined in Sec.  412.2(c). For purposes of this paragraph (e)(1)(v)(B), 
however, the costs of preadmission services are those specified under 
Sec.  413.40(c)(2) rather than those specified under Sec.  412.2(c)(5).
    (C) For the same period of at least 6 months used to determine 
compliance with the criterion regarding the age of inpatients in Sec.  
412.23(d)(2) or the length-of-stay criterion in Sec.  412.23(e)(2), or 
for hospitals other than children's or long-term care hospitals, for 
the period of at least 6 months immediately preceding the first cost 
reporting period for which exclusion is sought, the hospital has an 
inpatient population of whom at least 75 percent were referred to the 
hospital from a source other than another hospital occupying space in 
the same building or on the same campus.
    (2) Effective for cost reporting periods beginning on or after 
October 1, 2004, the hospital must meet the following:
    (i) Governance and control requirements. The hospital meets the 
criteria under paragraphs (e)(1)(i) through (e)(1)(iv) of this section.
    (ii) Ownership interest and control. The hospital must not be 
owned, wholly or in part, by a person or party that has any ownership 
interest in the hospital occupying space in the same building or on the 
same campus, or of any third party entity that controls both hospitals. 
However, hospitals that were excluded from the prospective payment 
systems specified in Sec.  412.1(a) as of June 30, 2004, will be deemed 
to these criteria.
    (iii) Admissions criteria. For the same period of at least 6 months 
used to determine compliance with the criterion regarding the age of 
inpatients in Sec.  412.23(d)(2) or the length-of-stay criterion in 
Sec.  412.23(e)(2), or for hospitals other than children's or long-term 
care hospitals, for the period of at least 6 months immediately 
preceding the first cost reporting period for which exclusion is 
sought, the hospital has an inpatient population of whom at least 75 
percent were referred to the hospital from a source other than another 
hospital occupying space in the same building or on the same campus.
    (3) Notification of co-located status. A long-term care hospital 
that occupies space in a building used by another hospital, or in one 
or more separate buildings located on the same campus as buildings used 
by another hospital that meets the criteria of (e)(1) or (e)(2) of this 
section must notify its fiscal intermediary and CMS in writing of its 
co-location within 60 days of its first cost reporting period that 
begins on or after October 1, 2002.
* * * * *
    5. Section 412.25 is amended by adding a new paragraph (g), to read 
as follows:


Sec.  412.25  Excluded hospital units: Common requirements.

* * * * *
    (g) CAH units not meeting applicable requirements. If a psychiatric 
or rehabilitation unit of a CAH does not meet the requirements of Sec.  
485.645 with respect to a cost reporting period, no payment may be made 
to the CAH for services furnished in that unit for that period. Payment 
to the CAH for services in the unit may resume only after the unit has 
demonstrated to CMS that the unit meets the requirements of Sec.  
485.645.
    6. Section 412.63 is amended by--
    A. Revising the heading of the section.
    B. Revising paragraph (a).
    C. Adding introductory text to paragraph (b).
    D. Revising paragraph (c)(1), (c)(5), and (c)(6)
    E. Revising paragraph (u).
    The revisions and addition read as follow:

[[Page 28347]]

Sec.  412.63  Federal rates for inpatient operating costs for Federal 
fiscal years 1984 through 2004.

    (a) General rule. (1) CMS determines a national adjusted 
prospective payment rate for inpatient operating costs for each 
inpatient hospital discharge in Federal fiscal years 1985 through 2004 
involving inpatient hospital service of a hospital in the United 
States, subject to the PPS, and determines a regional adjusted PPS rate 
for operating costs for such discharges in each region for which 
payment may be made under Medicare Part A.
    (2) Each such rate is determined for hospitals located in urban or 
rural areas within the United States and within each such region, 
respectively, as described under paragraphs (b) through (u) of this 
section.
* * * * *
    (b) Geographic classifications. Effective for fiscal years 1985 
through 2004, the following rules apply.
* * * * *
    (c) Updating previous standardized amounts. (1) For discharges 
occurring in fiscal year 1985 through fiscal year 2003, CMS computes 
average standardized amounts for hospitals in urban areas and rural 
areas within the United States, and in urban areas and rural areas 
within each region. For discharges occurring in fiscal year 2004, CMS 
computes an average standardized amount for hospitals located in all 
areas.
* * * * *
    (5) For fiscal years 1987 through 2004, CMS standardizes the 
average standardized amounts by excluding an estimate of indirect 
medical education payments.
    (6) For fiscal years 1988 through 2003, CMS computes average 
standardized amounts for hospitals located in large urban areas, other 
urban areas, and rural areas. The term large urban area means an MSA 
with a population of more than 1,000,000 or an NECMA, with a population 
of more than 970,000 based on the most recent available population data 
published by the Census Bureau. For fiscal year 2004, CMS computes an 
average standardized amount for hospitals located in all areas.
* * * * *
    (u) Applicable percentage change for fiscal year 2004. The 
applicable percentage change for fiscal year 2004 is the percentage 
increase in the market basket index for prospective payment hospitals 
(as defined in Sec.  413.40(a) of this subchapter) for hospitals in all 
areas.
* * * * *
    7. A new Sec.  412.64 is added to Subpart D to read as follows:


Sec.  412.64  Federal rates for inpatient operating costs for Federal 
fiscal year 2005 and subsequent fiscal years.

    (a) General rule. CMS determines a national adjusted prospective 
payment rate for inpatient operating costs for each inpatient hospital 
discharge in Federal fiscal year 2005 and subsequent fiscal years 
involving inpatient hospital services of a hospital in the United 
States subject to the prospective payment system for which payment may 
be made under Medicare Part A.
    (b) Geographic classifications. (1) For purposes of this section, 
the following definitions apply:
    (i) The term region means one of the 9 metropolitan divisions 
comprising the 50 States and the District of Columbia, established by 
the Executive Office of Management and Budget for statistical and 
reporting purposes.
    (ii) The term urban area means--
    (A) A Metropolitan Statistical Area, as defined by the Executive 
Office of Management and Budget; or
    (B) The following New England counties, which are deemed to be 
parts of urban areas under section 601(g) of the Social Security 
Amendments of 1983 (Public Law 98-21, 42 U.S.S. 1395ww (note)): 
Litchfield County, Connecticut; York County, Maine; Sagadahoc County, 
Maine; Merrimack County, New Hampshire; and Newport County, Rhode 
Island.
    (C) The term rural area means any area outside an urban area.
    (D) The phrase hospital reclassified as rural means a hospital 
located in a county that, in FY 2004, was part of an MSA, but was 
redesignated as rural after September 30, 2004, as a result of the most 
recent census data and implementation of the new MSA definitions 
announced by OMB on June 6, 2003.
    (2) For hospitals within an MSA that crosses census division 
boundaries, the MSA is deemed to belong to the census division in which 
most of the hospitals within the MSA are located.
    (3) For discharges occurring on or after October 1, 2004, a 
hospital located in a rural county adjacent to one or more urban areas 
is deemed to be located in an urban area and receives the Federal 
payment amount for the urban area to which the greater number of 
workers in the county commute if the rural county would otherwise be 
considered part of an urban area, under the standards for designating 
MSAs if the commuting rates used in determining outlying counties were 
determined on the basis of the aggregate number of resident workers who 
commute to (and, if applicable under the standards, from) the central 
county or central counties of all adjacent MSAs. These EOMB standards 
are set forth in the notice of final revised standards for 
classification of MSAs published in the Federal Register on December 
27, 2000 (65 FR 82228), announced by EOMB on June 6, 2003, and 
available from CMS, 7500 Security Boulevard, Baltimore, Maryland 21244.
    (4) For purposes of this section, any change in an MSA designation 
is recognized on October 1 following the effective date of the change. 
Such a change in MSA designation may occur as a result of redesignation 
of an MSA by the Executive Office of Management and Budget.
    (c) Computing the standardized amount. CMS computes an average 
standardized amount that is applicable to all hospitals located in all 
areas, updated by the applicable percentage increase specified in 
paragraph (d) of this section.
    (d) Applicable percentage change for fiscal year 2005 and for 
subsequent fiscal years.
    (1) Subject to the provisions of paragraph (d)(2) of this section, 
the applicable percentage change for fiscal year 2005 and for 
subsequent years for updating the standardized amount is the percentage 
increase in the market basket index for prospective payment hospitals 
(as defined in Sec.  413.40(a) of this subchapter) for hospitals in all 
areas.
    (2) For fiscal years 2005, 2006, and 2007, the applicable 
percentage change specified in paragraph (d)(1) of this section is 
reduced by 0.4 percentage points in the case of a ``subsection (d) 
hospital,'' as defined under section 1886(d)(1)() of the Act, that does 
not submit quality data on a quarterly basis to CMS, as specified by 
CMS. Any reduction of the percentage change will apply only to the 
fiscal year involved and will not be taken into account in computing 
the applicable percentage increase for a subsequent fiscal year.
    (e) Maintaining budget neutrality. (1) CMS makes an adjustment to 
the standardized amount to ensure that--
    (i) Changes to the DRG classifications and recalibrations of the 
DRG relative weights are made in a manner so that aggregate payments to 
hospitals are not affected; and
    (ii) The annual updates and adjustments to the wage index under 
paragraph (h) of this section are made in a manner that ensures that 
aggregate payments to hospitals are not affected.
    (2) CMS also makes an adjustment to the rates to ensure that 
aggregate payments after implementation of reclassifications under 
subpart L of this part are equal to the aggregate prospective payments 
that would have

[[Page 28348]]

been made in the absence of these provisions.
    (f) Adjustment for outlier payments. CMS reduces the adjusted 
average standardized amount determined under paragraph (c) through (e) 
of this section by a proportion equal to the proportion estimated by 
CMS) to the total amount of payments based on DRG prospective payment 
rates that are additional payments for outlier cases under subpart F of 
this part.
    (g) Computing Federal rates for inpatient operating costs for 
hospitals located in all areas. For each discharge classified within a 
DRG, CMS establishes for the fiscal year a national prospective payment 
rate for inpatient operating costs based on the standardized amount for 
the fiscal year and the weighting factor determined under Sec.  
412.60(b) for that DRG.
    (h) Adjusting for different area wage levels. CMS adjusts the 
proportion of the Federal rate for inpatient operating costs that are 
attributable to wages and labor-related costs for area differences in 
hospital wage levels by a factor (established by CMS based on survey 
data) reflecting the relative level of hospital wages and wage-related 
costs in the geographic area (that is, urban or rural area as 
determined under the provisions of paragraph (b) of this section) of 
the hospital compared to the national average level of hospital wages 
and wage-related costs. The adjustment described in this paragraph (h) 
also takes into account the earnings and paid hours of employment by 
occupational category.
    (1) The wage index is updated annually.
    (2) CMS determines the proportion of the Federal rate that is 
attributable to wages and labor-related costs from time to time, 
employing a methodology that is described in the annual regulation 
updating the system of payment for inpatient hospital operating costs.
    (3) For discharges occurring on or after October 1, 2004, CMS 
employs 62 percent as the proportion of the rate that is adjusted for 
the relative level of hospital wages and wage-related costs, unless 
employing that percentage would result in lower payments for the 
hospital than employing the proportion determined under the methodology 
described in paragraph (h)(2) of this section.
    (i) Adjusting the wage index to account for commuting patterns of 
hospital workers.
    (1) General criteria. For discharges occurring on or after October 
1, 2004, CMS adjusts the hospital wage index for hospitals located in 
qualifying counties to recognize the commuting patterns of hospital 
employees. A qualifying county is a county that meets all of the 
following criteria:
    (i) Hospital employees in the county commute to work in an MSA (or 
MSAs) with a wage index (or wage indices) higher than the wage index of 
the MSA or rural statewide area in which the county is located.
    (ii) At least 10 percent of the county's hospital employees commute 
to an MSA (or MSAs) with a higher wage index (or wage indices).
    (iii) The 3-year average hourly wage of the hospital(s) in the 
county equals or exceeds the 3-year average hourly wage of all 
hospitals in the MSA or rural statewide area in which the county is 
located.
    (2) Amount of adjustment. A hospital located in a county that meets 
the criteria under paragraphs (i)(l)(i) through (i)(1)(iii) of this 
section will receive an increase in its wage index that is equal to a 
weighted average of the difference between the prereclassified wage 
index of the MSA (or MSAs) with the higher wage index (or wage indices) 
and the prereclasssified wage index of the MSA or rural statewide area 
in which the qualifying county is located, weighted by the overall 
percentage of the hospital employees residing in the qualifying county 
who are employed in any MSA with a higher wage index.
    (3) Process for determining the adjustment.
    (i) CMS will use the most accurate data available, as determined by 
CMS, to determine the out-migration percentage for each county.
    (ii) CMS will include, in its annual proposed and final notices of 
updates to the hospital inpatient prospective payment system, a listing 
of qualifying counties and the hospitals that are eligible to receive 
the adjustment to their wage indexes for commuting hospital employees, 
and the wage index increase applicable to each qualifying county.
    (iii) Any wage index adjustment made under this paragraph (i) is 
effective for a period of 3 fiscal years, except that hospitals in a 
qualifying county may elect to waive the application of the wage index 
adjustment. A hospital may waive the application of the wage index 
adjustment by notifying CMS in writing within 45 days after the 
publication of the annual notice of proposed rulemaking for the 
hospital inpatient prospective payment system.
    (iv) A hospital in a qualifying county that receives a wage index 
adjustment under this paragraph (g) is not eligible for 
reclassification under Subpart L of this part.
    (j) Wage index assignment for rural referral centers for FY 2005.
    (1) CMS makes an exception to the wage index assignment of a rural 
referral center for FY 2005 if the rural referral center meets the 
following conditions:
    (i) The rural referral center was reclassified for FY 2004 by the 
MGCRB to another MSA, but, upon applying to the MGCRB for FY 2005, was 
found to be ineligible for reclassification because its average hourly 
wage was less than 84 percent (but greater than 82 percent) of the 
average hourly wage of the hospitals geographically located in the MSA 
to which the rural referral center applied for reclassification for FY 
2005.
    (ii) The hospital may not qualify for any geographic 
reclassification under subpart L of this part, effective for discharges 
occurring on or after October 1, 2004.
    (2) CMS will assign a rural referral center that meets the 
conditions of paragraph (j)(1) of this section the wage index value of 
the MSA to which it was reclassified by the MGCRB in FY 2004.
    (k) Midyear corrections to the wage index.
    (1) CMS makes a midyear correction to the wage index for an area 
only if a hospital can show that--
    (i) The intermediary or CMS made an error in tabulating its data; 
and
    (ii) The hospital could not have known about the error, or did not 
have the opportunity to correct the error, before the beginning of the 
Federal fiscal year.
    (2) A midyear correction to the wage index is effective 
prospectively from the date the change is made to the wage index.
    (l) Judicial decision. If a judicial decision reverses a CMS denial 
of a hospital's wage data revision request, CMS pays the hospital by 
applying a revised wage index that reflects the revised wage data as if 
CMS's decision had been favorable rather than unfavorable.
    8. Section 412.87 is amended by revising paragraph (b)(3) to read 
as follows:


Sec.  412.87  Additional payment for new medical services and 
technologies: General provisions.

* * * * *
    (b) Eligibility criteria. * * *
    (3) The DRG prospective payment rate otherwise applicable to 
discharges involving the medical service or technology is determined to 
be inadequate, based on application of a threshold amount to estimated 
charges incurred with respect to such discharges. To determine whether 
the

[[Page 28349]]

payment would be adequate, CMS will determine whether the charges of 
the cases involving a new medical service or technology will exceed a 
threshold amount that is the lesser of 75 percent of the standardized 
amount (increased to reflect the difference between cost and charges) 
or 75 percent of one standard deviation beyond the geometric mean 
standardized charge for all cases in the DRG to which the new medical 
service or technology is assigned (or the case-weighted average of all 
relevant DRGs if the new medical service or technology occurs in many 
different DRGs). Standardized charges reflect the actual charges of a 
case adjusted by the prospective payment system payment factors 
applicable to an individual hospital, such as the wage index, the 
indirect medical education adjustment factor, and the disproportionate 
share adjustment factor.


Sec.  412.88  [Amended]

    9. Section 412.88 is amended by removing paragraph (c).
    10. A new Sec.  412.101 is added to read as follows:


Sec.  412.101  Special treatment: Inpatient hospital payment adjustment 
for low-volume hospitals.

    (a) General considerations.
    (1) CMS provides an additional payment to a qualifying hospital for 
the higher incremental costs associated with a low volume of 
discharges. The amount of any additional payment for a qualifying 
hospital is calculated in accordance with paragraph (b) of this 
section.
    (2) In order to qualify for this adjustment, a hospital must have 
500 or fewer discharges during the fiscal year, as reflected in its 
cost report specified in paragraph (a)(3) of this section, and be 
located more than 25 road miles from the nearest inpatient acute care 
prospective payment system hospital.
    (3) The fiscal intermediary makes the determination of the 
discharge count for purposes of determining a hospital's qualification 
for the adjustment and the amount of the adjustment based on the 
hospital's most recent submitted cost report.
    (4) In order to qualify for the adjustment, a hospital must provide 
its fiscal intermediary with sufficient evidence that it meets the 
distance requirement specified under paragraph (a)(2) of this section. 
The fiscal intermediary will base its determination of whether the 
distance requirement is satisfied upon the evidence presented by the 
hospital and other relevant evidence, such as maps, mapping software, 
and inquiries to State and local police, transportation officials, or 
other government officials.
    (b) Determination of the adjustment amount. The maximum low-volume 
adjustment is 25 percent. Each qualifying hospital's low-volume 
adjustment is calculated as follows: 1.25-(.0005*D), where 0http://www.archives.gov./federal--register/code--of--federal--regulations/
ibr--locations.html. Copies may be obtained from the National Fire 
Protection Association, 1 Batterymarch Park, Quincy, MA 02269. If any 
changes in this edition of the Code are incorporated by reference, CMS 
will publish notice in the Federal Register to announce the changes.

[[Page 28369]]

    (ii) Chapter 19.3.6.3.2, exception number 2 of the adopted edition 
of the LSC does not apply to a hospice.
* * * * *
    (4) Beginning March 13, 2006, a hospice must be in compliance with 
Chapter 9.2.9, Emergency Lighting.
    (5) Beginning March 13, 2006, Chapter 19.3.6.3.2, exception number 
2 does not apply to hospices.
* * * * *
    E. Part 460 is amended as follows:

PART 460--PROGRAMS OF ALL-INCLUSIVE CARE FOR THE ELDERLY (PACE)

    1. The authority citation for part 460 continues to read as 
follows:

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

Subpart E--PACE Administrative Requirements

    2. Section 460.72 is amended by--
    A. Revising paragraph (b)(1).
    B. Revising paragraph (b)(3).
    C. Adding paragraph (b)(4).
    The revision and addition read as follows:


Sec.  460.72  Physical environment.

* * * * *
    (b) Fire safety. (1) General rule. Except as otherwise provided in 
this section--
    (i) A PACE center must meet the applicable provisions of the 2000 
edition of the Life Safety Code (LSC) of the National Fire Protection 
Association that apply to the type of setting in which the center is 
located. The Director of the Office of the Federal Register has 
approved the NFPA 101[reg] 2000 edition of the Life Safety Code, issued 
January 14, 2000, for incorporation by reference in accordance with 5 
U.S.C. 552(a) and 1 CFR part 51. A copy of the Code is available for 
inspection at the CMS Information Resource Center, 7500 Security 
Boulevard, Baltimore, MD and at the National Archives and Records 
Administration (NARA). For information on the availability of this 
material at NARA, call 202-741-6030, or go to: http://www.archives.gov./federal--register/code--of--federal--regulations/
ibr--locations.html. Copies may be obtained from the National Fire 
Protection Association, 1 Batterymarch Park, Quincy, MA 02269. If any 
changes in this edition of the Code are incorporated by reference, CMS 
will publish notice in the Federal Register to announce the changes.
    (ii) Chapter 19.3.6.3.2, exception number 2 of the adopted edition 
of the LSC does not apply to PACE centers.
* * * * *
    (3) Beginning March 13, 2006, a PACE center must be in compliance 
with Chapter 9.2.9, Emergency Lighting.
    (4) Beginning March 13, 2006, Chapter 19.3.6.3.2, exception number 
2 does not apply to PACE centers.
* * * * *
    F. The title of Part 480 under Subchapter F is revised to read as 
follows:

PART 480--ACQUISITION, PROTECTION, AND DISCLOSURE OF QUALITY 
IMPROVEMENT ORGANIZATION INFORMATION

    G. Part 480 is amended as follows:
    1. The authority citation for Part 480 continues to read:

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

    2. Section 480.106 is amended by adding a new paragraph (c) to read 
as follows:


Sec.  480.106  Exceptions to QIO notice requirements.

* * * * *
    (c) Other. The notification requirements in Sec.  480.105(a) and 
(b)(2) do not apply if:
    (1) The institution or practitioner has requested, in writing, that 
the QIO make the disclosure;
    (2) The institution or practitioner has provided, in writing, 
consent for the disclosure; or
    (3) The information is public information as defined in Sec.  
480.101(b) and specified under Sec.  480.120.
    3. Section 480.133 is amended by revising paragraph (a)(2)(iii) to 
read as follows:


Sec.  480.133  Disclosure of information about practitioners, reviewers 
and institutions.

    (a) * * *
    (2) Disclosure to others. * * *
    (iii) A QIO may disclose to any person, agency, or organization 
information on a particular practitioner or reviewer at the written 
request of or with the written consent of that practitioner or 
reviewer. The recipient of the information has the same redisclosure 
rights and responsibilities as the requesting or consenting 
practitioner or reviewer as provided under this Subpart B.
* * * * *
    4. Section 480.140 is amended by redesignating paragraphs (d) and 
(e) as paragraphs (e) and (f), respectively, and adding a new paragraph 
(d) to read as follows:


Sec.  480.140  Disclosure of quality review study information.

* * * * *
    (d) A QIO may disclose quality review study information with 
identifiers of particular practitioners or institutions, or both, at 
the written request of, or with the written consent of, the identified 
practitioner(s) or institution(s).
    (1) The consent or request must specify the information that is to 
be disclosed and the intended recipient of the information.
    (2) The recipient of the information has the same redisclosure 
rights and responsibilities as the requesting or consenting 
practitioner or reviewer as provided under this Subpart B.
* * * * *
    5. Cross-Reference Changes


Sec. Sec.  480.101, 480.104, 480.105, 480.106, 480.120, 480.121, 
480.130, 480.132, 480.133, 480.136, 480.137, 480.138, 480.141, 
480.142  [Amended]

    In the table below, for each section indicated in the left column, 
remove the cross-reference indicated in the middle column from wherever 
it appears in the section, and add the cross-reference in the right 
column:

----------------------------------------------------------------------------------------------------------------
                Section                            Remove                                Add.
----------------------------------------------------------------------------------------------------------------
480.101(b), under the definition         Sec.   476.132(c)(3)......  Sec.   480.132(c)(3).
 ``Patient representative''
Sec.   480.104(a)(1)...................  Sec.   476.105............  Sec.   480.105.
Sec.   480.104(a)(2)...................  Sec.   476.106............  Sec.   480.106.
Sec.   480.104(a)(2)...................  Sec.   476.107............  Sec.   480.107.
Sec.   480.104(d)......................  Sec.   476.120(a)(6)......  Sec.   480.120(a)(6).
Sec.   480.105(a)......................  Sec.   476.106............  Sec.   480.106.
Sec.   480.105(b)(1)...................  Sec.   476.132............  Sec.   480.132.
Sec.   480.105(b)(2)...................  Sec.  Sec.   476.137 and    Sec.  Sec.   480.137 and 480.138.
                                          476.138.
Sec.   480.105(b)(2)...................  Sec.   476.106............  Sec.   480.106.
Sec.   480.106(a)......................  Sec.   476.105............  Sec.   480.105.

[[Page 28370]]

 
Sec.   480.106(b)......................  Sec.   476.105............  Sec.   480.105.
Sec.   480.120, introductory text......  Sec.  Sec.   476.104 and    Sec.  Sec.   480.104 and 480.105.
                                          476.105.
Sec.   480.120(a)(5)...................  Sec.   476.139............  Sec.   480.139.
Sec.   480.121.........................  Sec.   476.105............  Sec.   480.105.
Sec.   480.121.........................  Sec.   476.120............  Sec.   480.120.
Sec.   480.130.........................  Sec.  Sec.   476.139(a)     Sec.  Sec.   480.139(a) and 480.140.
                                          and 476.140.
Sec.   480.132(b)(2)...................  Sec.   476.139(a).........  Sec.   480.139(a).
Sec.   480.132(b)(3)...................  Sec.   476.140............  Sec.   480.140.
Sec.   480.133(a)(2)(ii)...............  Sec.  Sec.   476.137 and    Sec.  Sec.   480.137 and 480.138.
                                          476.138.
Sec.   480.133(b)(2)...................  Sec.   476.139(a).........  Sec.   480.139(a).
Sec.   480.133(b)(3)...................  Sec.   476.140............  Sec.   480.140.
Sec.   480.136(a), introductory text...  Sec.  Sec.   476.139(a)     Sec.  Sec.   480.139(a) and 480.140.
                                          and 476.140.
Sec.   480.137(a), introductory text...  Sec.  Sec.   476.139(a)     Sec.  Sec.   480.139(a) and 480.140.
                                          and 476.140.
Sec.   480.138(b)(2)...................  Sec.  Sec.   476.139(a)     Sec.  Sec.   480.139(a) and 480.140.
                                          and 476.140.
Sec.   480.141.........................  Sec.  Sec.   476.104 and    Sec.  Sec.   480.104 and 480.105.
                                          476.105.
Sec.   480.142(b)......................  Sec.   476.137............  Sec.   480.137
----------------------------------------------------------------------------------------------------------------

    H. Part 482 is amended as follows:

PART 482--CONDITIONS OF PARTICIPATION FOR HOSPITALS

    1. The authority citation for part 482 continues to read as 
follows:

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

    2. Section 482.41 is amended by-revising paragraph (b).


Sec.  Sec.  482.41  Conditions of participation: Physical environment.

* * * * *
    (b) Standard: Life safety from fire. (1) Except as otherwise 
provided in this section--
    (i) The hospital must meet the applicable provisions of the 2000 
edition of the Life Safety Code of the National Fire Protection 
Association. The Director of the Office of the Federal Register has 
approved the NFPA 101[reg] 2000 edition of the Life Safety Code, issued 
January 14, 2000, for incorporation by reference in accordance with 5 
U.S.C. 552(a) and 1 CFR part 51. A copy of the Code is available for 
inspection at the CMS Information Resource Center, 7500 Security 
Boulevard, Baltimore, MD and at the National Archives and Records 
Administration (NARA). For information on the availability of this 
material at NARA, call 202-741-6030, or go to: http://www.archives.gov/federal_register/code_of_federal_regulations/ibr_locations.html. 
Copies may be obtained from the National Fire Protection Association, 1 
Batterymarch Park, Quincy, MA 02269. If any changes in this edition of 
the Code are incorporated by reference, CMS will publish notice in the 
Federal Register to announce the changes.
    (ii) Chapter 19.3.6.3.2, exception number 2 of the adopted edition 
of the LSC does not apply to hospitals.
    (2) After consideration of State survey agency findings, CMS may 
waive specific provisions of the Life Safety Code which, if rigidly 
applied, would result in unreasonable hardship upon the facility, but 
only if the waiver does not adversely affect the health and safety of 
the patients.
    (3) The provisions of the Life Safety Code do not apply in a State 
where CMS finds that a fire and safety code imposed by State law 
adequately protects patients in hospitals.
    (4) Beginning March 13, 2006, a hospital must be in compliance with 
Chapter 19.2.9, Emergency Lighting.
    (5) Beginning March 13, 2006, Chapter 19.3.6.3.2, exception number 
2 does not apply to hospitals.
    (6) The hospital must have procedures for the proper routine 
storage and prompt disposal of trash.
    (7) The hospital must have written fire control plans that contain 
provisions for prompt reporting of fires; extinguishing fires; 
protection of patients, personnel and guests; evacuation; and 
cooperation with fire fighting authorities.
    (8) The hospital must maintain written evidence of regular 
inspection and approval by State or local fire control agencies.
* * * * *
    3. Section 482.43 is amended by adding new paragraphs (c)(6), 
(c)(7), and (c)(8) to read as follows:


Sec.  482.43  Conditions of participation: Discharge planning.

* * * * *
    (c) * * *
    (6) The hospital must include in the discharge plan a list of HHAs 
or SNFs that are available to the patient, that are participating in 
the Medicare program, and that serve the geographic area (as defined by 
the HHA) in which the patient resides, or in the case of a SNF, in the 
geographic area requested by the patient. HHAs must request to be 
listed by the hospital as available.
    (i) This list must only be presented to patients for whom home 
health care or post-hospital extended care services are indicated and 
appropriate as determined by the discharge planning evaluation.
    (ii) The hospital must document in the patient's medical record 
that the list was presented to the patient or to the individual acting 
on the patient's behalf.
    (7) The hospital, as part of the discharge planning process, must 
inform the patient or the patient's family of their freedom to choose 
among participating Medicare providers of home health services and 
posthospital extended care services and must, when possible, respect 
patient and family preferences when they are expressed. The hospital 
must not exclude qualified providers that are available to the patient.
    (8) The discharge plan must identify any HHA or SNF to which the 
patient is referred in which the hospital has a disclosable financial 
interest, as specified by the Secretary, and any HHA or SNF that has a 
disclosable financial interest in a hospital under Medicare. Financial 
interests that are disclosable under Medicare are determined in 
accordance with the provisions of Part 420, Subpart C, of this chapter.
    I. Part 483 is amended as follows:

PART 483--REQUIREMENTS FOR STATES AND LONG TERM CARE FACILITIES

    The authority citation for part 483 continues to read as follows:

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


[[Page 28371]]


    2. Section 483.70 is amended by revising paragraph (a) to read as 
follows.


Sec.  483.70  Physical environment.

* * * * *
    (a) Life safety from fire.
    (1) Except as otherwise provided in this section--
    (i) The facility must meet the applicable provisions of the 2000 
edition of the Life Safety Code of the National Fire Protection 
Association. The Director of the Office of the Federal Register has 
approved the NFPA 101[reg] 2000 edition of the Life Safety Code, issued 
January 14, 2000, for incorporation by reference in accordance with 5 
U.S.C. 552(a) and 1 CFR part 51. A copy of the Code is available for 
inspection at the CMS Information Resource Center, 7500 Security 
Boulevard, Baltimore, MD and at the National Archives and Records 
Administration (NARA). For information on the availability of this 
material at NARA, call 202-741-6030, or go to: http://www.archives.gov./federal--register/code--of--federal--regulations/
ibr--locations.html. Copies may be obtained from the National Fire 
Protection Association, 1 Batterymarch Park, Quincy, MA 02269. If any 
changes in this edition of the Code are incorporated by reference, CMS 
will publish notice in the Federal Register to announce the changes.
    (ii) Chapter 19.3.6.3.2, exception number 2 of the adopted edition 
of the LSC does not apply to long-term care facilities.
    (2) After consideration of State survey agency findings, CMS may 
waive specific provisions of the Life Safety Code which, if rigidly 
applied, would result in unreasonable hardship upon the facility, but 
only if the waiver does not adversely affect the health and safety of 
the patients.
    (3) The provisions of the Life Safety Code do not apply in a State 
where CMS finds, in accordance with applicable provisions of sections 
1819(d)(2)(B)(ii) and 1919(d)(2)(B)(ii) of the Act, that a fire and 
safety code imposed by State law adequately protects patients, 
residents and personnel in long term care facilities.
    (4) Beginning March 13, 2006, a long-term care facility must be in 
compliance with Chapter 19.2.9, Emergency Lighting.
    (5) Beginning March 13, 2006, Chapter 19.3.6.3.2, exception number 
2 does not apply to long-term care facilities.
* * * * *
    3. Section 483.470 is amended by revising paragraph (j) to read as 
follows:


Sec.  483.470  Condition of participation: Physical environment.

* * * * *
    (j) Standard: Fire protection.
    (1) General. Except as otherwise provided in this section--
    (i) The facility must meet the applicable provisions of either the 
Health Care Occupancies Chapters or the Residential Board and Care 
Occupancies Chapter of the 2000 edition of the Life Safety Code of the 
National Fire Protection Association. The Director of the Office of the 
Federal Register has approved the NFPA 101[reg] 2000 edition of the 
Life Safety Code, issued January 14, 2000, for incorporation by 
reference in accordance with 5 U.S.C. 552(a) and 1 CFR part 51. A copy 
of the Code is available for inspection at the CMS Information Resource 
Center, 7500 Security Boulevard, Baltimore, MD and at the National 
Archives and Records Administration (NARA). For information on the 
availability of this material at NARA, call 202-741-6030, or go to: 
http://www.archives.gov./federal--register/code--of--federal--
regulations/ibr--locations.html. Copies may be obtained from the 
National Fire Protection Association, 1 Batterymarch Park, Quincy, MA 
02269. If any changes in this edition of the Code are incorporated by 
reference, CMS will publish notice in the Federal Register to announce 
the changes.
    (ii) Chapter 19.3.6.3.2, exception number 2 of the adopted LSC does 
not apply to a facility.
    (2) The State survey agency may apply a single chapter of the LSC 
to the entire facility or may apply different chapters to different 
buildings or parts of buildings as permitted by the LSC.
    (3) A facility that meets the LSC definition of a residential board 
and care occupancy must have its evacuation capability evaluated in 
accordance with the Evacuation Difficulty Index of the Fire Safety 
Evaluation System for Board and Care facilities (FSES/BC).
    (4) If CMS finds that the State has a fire and safety code imposed 
by State law that adequately protects a facility's clients, CMS may 
allow the State survey agency to apply the State's fire and safety code 
instead of the LSC.
    (5) Beginning March 13, 2006, a facility must be in compliance with 
Chapter 19.2.9, Emergency Lighting.
    (6) Beginning March 13, 2006, Chapter 19.3.6.3.2, exception number 
2 does not apply to a facility.
    (7) Facilities that meet the LSC definition of a health care 
occupancy. After consideration of State survey agency recommendations, 
CMS may waive, for appropriate periods, specific provisions of the Life 
Safety Code if the following requirements are met:
    (i) The waiver would not adversely affect the health and safety of 
the clients.
    (ii) Rigid application of specific provisions would result in an 
unreasonable hardship for the facility.
* * * * *
    J. Part 485 is amended as follows:

PART 485--CONDITIONS OF PARTICIPATION: SPECIALIZED PROVIDERS

    1. The authority citation for Part 485 continues to read as 
follows:

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

    2. Section 485.610 is amended by revising paragraph (c) to read as 
follows:


Sec.  485.610  Condition of participation: Status and location.

* * * * *
    (c) Standard: Location relative to other facilities or necessary 
provider certification. The CAH is located more than a 35-mile drive 
(or, in the case of mountainous terrain or in areas with only secondary 
roads available, a 15-mile drive) from a hospital or another CAH, or 
before January 1, 2006, the CAH is certified by the State as being a 
necessary provider of health care services to residents in the area. A 
CAH that is designated as a necessary provider as of January 1, 2006, 
will maintain its necessary provider designation after January 1, 2006.
    3. Section 485.618 is amended by--
    A. Revising paragraph (d)(1) introductory text.
    B. In paragraph (d)(2)(iv), removing the cross-reference 
``paragraph (d)(2)(ii)'' and adding in its place the cross-reference 
``paragraph (d)(2)(iii)''.
    C. In paragraph (d)(3), removing the cross-reference ``paragraph 
(d)(2)(ii)'' and adding in its place the cross-reference ``paragraph 
(d)(2)(iii)''.
    The revision reads as follows:


Sec.  485.618  Condition of participation: Emergency services.

* * * * *
    (d) Standard: Personnel. (1) Except as specified in paragraph 
(d)(2) of this section, there must be a doctor of medicine or 
osteopathy, a physician assistant, a nurse practitioner, or a clinical 
nurse specialist with training or experience in emergency care on call 
and immediately available by telephone

[[Page 28372]]

or radio contact, and available onsite within the following timeframes:
* * * * *
    4. Section 485.620 is amended by revising paragraph (a) to read as 
follows:


Sec.  485.620  Condition of participation: Number of beds and average 
length of stay.

    (a) Standard: Number of beds. Except as permitted for CAHs having 
distinct part units under Sec.  485.646, the CAH maintains no more than 
25 inpatient beds after January 1, 2004, that can be used for either 
inpatient or swing-bed services.
* * * * *
    5. Section 485.623 is amended by--
    A. Revising paragraph (d)(1)
    B. Revising paragraph (d)(5).
    C. Adding a new paragraph (d)(6).
    The revisions and addition read as follows.


Sec.  485.623  Condition of participation: Physical plant and 
environment.

* * * * *
    (d) Standard: Life safety from fire.
    (1) Except as otherwise provided in this section--
    (i) The CAH must meet the applicable provisions of the 2000 edition 
of the Life Safety Code of the National Fire Protection Association. 
The Director of the Office of the Federal Register has approved the 
NFPA 101[reg] 2000 edition of the Life Safety Code, issued January 14, 
2000, for incorporation by reference in accordance with 5 U.S.C. 552(a) 
and 1 CFR part 51. A copy of the Code is available for inspection at 
the CMS Information Resource Center, 7500 Security Boulevard, 
Baltimore, MD and at the National Archives and Records Administration 
(NARA). For information on the availability of this material at NARA, 
call 202-741-6030, or go to: http://www.archives.gov./federal--
register/code--of--federal--regulations/ibr--locations.html. Copies may 
be obtained from the National Fire Protection Association, 1 
Batterymarch Park, Quincy, MA 02269. If any changes in this edition of 
the Code are incorporated by reference, CMS will publish notice in the 
Federal Register to announce the changes.
    (ii) Chapter 19.3.6.3.2, exception number 2 of the adopted edition 
of the Life Safety Code does not apply to a CAH.
* * * * *
    (5) Beginning March 13, 2006, a critical access hospital must be in 
compliance with Chapter 9.2.9, Emergency Lighting.
    (6) Beginning March 13, 2006, Chapter 19.3.6.3.2, exception number 
2 does not apply to critical access hospitals.
    6. Section 485.645 is amended by republishing the introductory text 
of paragraph (a) and revising paragraph (a)(2) to read as follows:


Sec.  485.645  Special requirements for CAH providers of long-term care 
services (``swing-beds'').

* * * * *
    (a) Eligibility. A CAH must meet the following eligibility 
requirements:
* * * * *
    (2) The facility provides not more than 25 inpatient beds. Any bed 
of a unit of the facility that is licensed as a distinct-part SNF at 
the time the facility applies to the State for designation as a CAH is 
not counted under paragraph (a) of this section.
* * * * *
    7. A new Sec.  485.647 is added in subpart F to read as follows:


Sec.  485.647  Condition of participation: psychiatric and 
rehabilitation distinct part units.

    (a) Conditions.
    (1) If a CAH provides inpatient psychiatric services in a distinct 
part unit, the services furnished by the distinct part unit must comply 
with the hospital requirements specified in Subparts A, B, C, and D of 
Part 482 of this subchapter, the common requirements of Sec.  
412.25(a)(2) through (f) of Part 412 of this chapter for hospital units 
excluded from the prospective payment systems, and the additional 
requirements of Sec.  412.27 of Part 412 of this chapter for excluded 
psychiatric units.
    (2) If a CAH provides inpatient rehabilitation services in a 
distinct part unit, the services furnished by the distinct part unit 
must comply with the hospital requirements specified in Subparts A, B, 
C, and D of Part 482 of this subchapter, the common requirements of 
Sec.  412.25(a)(2) through (f) of Part 412 of this chapter for hospital 
units excluded from the prospective payments systems, and the 
additional requirements of Sec. Sec.  412.29 and Sec.  412.30 of Part 
412 of this chapter related specifically to rehabilitation units.
    (b) Eligibility requirements.
    (1) To be eligible to receive Medicare payments for psychiatric or 
rehabilitation services as a distinct part unit, the facility provides 
no more than 10 beds in the distinct part unit.
    (2) The beds in the distinct part are excluded from the 25 
inpatient-bed count limit specified in Sec.  485.620(a).
    (3) The average annual 96-hour length of stay requirement specified 
under Sec.  485.620(b) does not apply to the 10 beds in the distinct 
part units specified in paragraph (b)(1) of this section, and 
admissions and days of inpatient care in the distinct part units are 
not taken into account in determining the CAH's compliance with the 
limits on the number of beds and length of stay in Sec.  485.620.
    K. Part 489 is amended as follows:

PART 489--PROVIDER AGREEMENT AND SUPPLIER APPROVAL

    1. The authority citation for part 489 continues to read as 
follows:

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

    2. Section 489.20 is amended as follows:
    A. In paragraph (m), the cross-reference ``Sec.  489.24(d)'' is 
removed and the cross-reference ``Sec.  489.24(e)'' is added in its 
place.
    B. A new paragraph (t) is added.


Sec.  489.20  Basic commitments.

* * * * *
    (t) Hospitals that are not otherwise subject to the Occupational 
Safety and Health Act of 1970 (or a State occupational safety and 
health plan that is approved under section 18(b) of the Occupational 
Safety and Health Act) must comply with the bloodborne pathogens (BBP) 
standards under 29 CFR 1910.1030. A hospital that fails to comply with 
the BBP standards may be subject to a civil money penalty in accordance 
with section 17 of the Occupational Safety and Health Act of 1970, 
including any adjustments of the civil money penalty amounts under the 
Federal Civil Penalties Inflation Adjustment Act, for a violation of 
the BBP standards. A civil money penalty will be imposed and collected 
in the same manner as civil money penalties under section 1128A(a) of 
the Social Security Act.


Sec.  489.53  [Amended]

    3. In Sec.  489.53 (b)(2), the cross-reference ``489.24 (d)'' is 
removed and the cross-reference ``489.24 (e)'' is added in its place.

(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Program)

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


[[Page 28373]]


    Dated: May 4, 2004.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services
    Dated: May 7, 2004.
Tommy G. Thompson,
Secretary.
[Editorial Note: The following Addendum and appendixes will not 
appear in the Code of Federal Regulations.]

Addendum--Proposed Schedule of Standardized Amount Effective With 
Discharges Occurring on or After October 1, 2004 and Update Factors and 
Rate-of-Increase Percentages Effective With Cost Reporting Periods 
Beginning On or After October 1, 2004

[If you choose to comment on issues in this section, please include the 
caption ``Operating Payment Rates'' at the beginning of your comment.]

I. Summary and Background

    In this Addendum, we are setting forth the proposed amounts and 
factors for determining prospective payment rates for Medicare hospital 
inpatient operating costs and Medicare hospital inpatient capital-
related costs. We are also setting forth proposed rate-of-increase 
percentages for updating the target amounts for hospitals and hospital 
units excluded from the IPPS.
    For discharges occurring on or after October 1, 2004, except for 
SCHs, MDHs, and hospitals located in Puerto Rico, each hospital's 
payment per discharge under the IPPS will be based on 100 percent of 
the Federal national rate, which will be based on the national adjusted 
standardized amount. This amount reflects the national average hospital 
costs per case from a base year, updated for inflation.
    SCHs are paid based on whichever of the following rates yields the 
greatest aggregate payment: the Federal national rate; the updated 
hospital-specific rate based on FY 1982 costs per discharge; the 
updated hospital-specific rate based on FY 1987 costs per discharge; or 
the updated hospital-specific rate based on FY 1996 costs per 
discharge.
    Under section 1886(d)(5)(G) of the Act, MDHs are paid based on the 
Federal national rate or, if higher, the Federal national rate plus 50 
percent of the difference between the Federal national rate and the 
updated hospital-specific rate based on FY 1982 or FY 1987 costs per 
discharge, whichever is higher. MDHs do not have the option to use 
their FY 1996 hospital-specific rate.
    For hospitals in Puerto Rico, the payment per discharge is based on 
the sum of 25 percent of a Puerto Rico rate that reflects base year 
average costs per case of Puerto Rico hospitals and 75 percent of the 
Federal national rate. (See section II.D.3. of this Addendum for a 
complete description.)
    As discussed below in section II. of this Addendum, we are 
proposing to make changes in the determination of the prospective 
payment rates for Medicare inpatient operating costs for FY 2005. The 
proposed changes, to be applied prospectively effective with discharges 
occurring on or after October 1, 2004, affect the calculation of the 
Federal rates. In section III. of this Addendum, we discuss our 
proposed changes for determining the prospective payment rates for 
Medicare inpatient capital-related costs for FY 2005. Section IV. of 
this Addendum sets forth our proposed changes for determining the rate-
of-increase limits for hospitals excluded from the IPPS for FY 2004. 
Section V. of this Addendum sets forth policies on payment for blood 
clotting factor administered to hemophilia patients. The tables to 
which we refer in the preamble of this proposed rule are presented in 
section VI. of this Addendum.

II. Proposed Changes to Prospective Payment Rates for Hospital 
Inpatient Operating Costs for FY 2005

    The basic methodology for determining prospective payment rates for 
hospital inpatient operating costs is set forth at existing Sec.  
412.63 and proposed new Sec.  412.64. The basic methodology for 
determining the prospective payment rates for hospital inpatient 
operating costs for hospitals located in Puerto Rico is set forth at 
existing Sec. Sec.  412.210 and 412.212 and proposed new Sec.  412.211. 
Below, we discuss the factors used for determining the prospective 
payment rates.
    In summary, the proposed standardized amounts set forth in Tables 
1A, 1B, 1C, and 1D of section VI. of this Addendum reflect--
     The requirements of section 401 of Public Law 108-173, 
equalizing the standardized amounts for urban and other areas at the 
level computed for urban hospitals during FY 2004, updated by the 
applicable percentage increase required under section 501(a) of Public 
Law 108-173;
     The requirements of section 403 of Public Law 108-173, 
establishing two labor-related shares that are applicable to the 
standardized amounts depending on whether the hospital's payments would 
be higher with a lower (in the case of a wage index below 1.0000) or 
higher (in the case of a wage index above 1.0000) labor share;
     Updates of 3.3 percent for all areas (that is, the full 
market basket percentage increase of 3.3 percent, as required by 
section 501(a) of Public Law 108-173), and reflecting the requirements 
of section 501(b) of Public Law 108-173, to reduce the applicable 
percentage increase by 0.4 percentage points for hospitals that fail to 
submit data in a form and manner specified by the Secretary, relating 
to the quality of inpatient care furnished by the hospital;
     An adjustment to ensure the proposed DRG recalibration and 
wage index update and changes are budget neutral, as provided for under 
sections 1886(d)(4)(C)(iii) and (d)(3)(E) of the Act, by applying new 
budget neutrality adjustment factors to the standardized amount;
     An adjustment to ensure the effects of geographic 
reclassification are budget neutral, as provided for in section 
1886(d)(8)(D) of the Act, by removing the FY 2004 budget neutrality 
factor and applying a revised factor;
     An adjustment to apply the new outlier offset by removing 
the FY 2004 outlier offsets and applying a new offset;
     An adjustment to ensure the effects of the rural community 
hospital demonstration required under section 410A of Public Law 108-
173 are budget neutral, as required under section 410A(c)(2) of Public 
Law 108-173.

A. Calculation of the Adjusted Standardized Amount

1. Standardization of Base-Year Costs or Target Amounts
    The national standardized amount is based on per discharge averages 
of adjusted hospital costs from a base period (section 1886(d)(2)(A) of 
the Act) or, for Puerto Rico, adjusted target amounts from a base 
period (section 1886(d)(9)(B)(i) of the Act), updated and otherwise 
adjusted in accordance with the provisions of section 1886(d) of the 
Act. The preamble to the September 1, 1983 interim final rule (48 FR 
39763) contained a detailed explanation of how base-year cost data 
(from cost reporting periods ending during FY 1981) were established in 
the initial development of standardized amounts for the IPPS. The 
September 1, 1987 final rule (52 FR 33043, 33066) contains a detailed 
explanation of how the target amounts were determined, and how they are 
used in computing the Puerto Rico rates.
    Sections 1886(d)(2)(B) and (d)(2)(C) of the Act require us to 
update base-year per discharge costs for FY 1984 and then standardize 
the cost data in order to remove the effects of certain sources of cost 
variations among hospitals. These effects include case-mix, differences 
in area wage levels, cost-of-living adjustments for Alaska and Hawaii, 
indirect medical education

[[Page 28374]]

costs, and costs to hospitals serving a disproportionate share of low-
income patients.
    Under sections 1886(d)(2)(H) and (d)(3)(E) of the Act, the 
Secretary estimates from time-to-time the proportion of costs that are 
wages and wage-related costs. The standardized amount is divided into 
labor-related and nonlabor-related amounts; only the proportion 
considered the labor-related amount is adjusted by the wage index. The 
current labor-related share is 71.1 percent. The current labor-related 
share in Puerto Rico is 71.3 percent.
    Section 403 of Public Law 108-173 revises the proportion of the 
standardized amount that is considered labor-related. Specifically, 
section 403 requires that 62 percent of the standardized amount be 
adjusted by the wage index, unless doing so would result in lower 
payments to a hospital than would otherwise be made (section 403(b) 
extends this provision to the Puerto Rico standardized amounts). As a 
consequence, we are adjusting 62 percent of the national and Puerto 
Rico standardized amount by the wage index for all hospitals whose wage 
indexes are less than or equal to 1.0000; otherwise, the wage index is 
applied to 71.1 percent of the standardized amount.
2. Computing the Average Standardized Amount
    Sections 1886(d)(2)(D) and (d)(3) of the Act previously required 
the Secretary to compute two average standardized amounts for 
discharges occurring in a fiscal year: one for hospitals located in 
large urban areas and one for hospitals located in other areas. In 
addition, under sections 1886(d)(9)(B)(iii) and (d)(9)(C)(i) of the 
Act, the average standardized amount per discharge was determined for 
hospitals located in large urban and other areas in Puerto Rico. In 
accordance with section 1886(b)(3)(B)(i) of the Act, the large urban 
average standardized amount was 1.6 percent higher than the other area 
average standardized amount.
    Section 402(b) of Public Law 108-7 required that, effective for 
discharges occurring on or after April 1, 2003, and before October 1, 
2003, the Federal rate for all IPPS hospitals would be based on the 
large urban standardized amount. Subsequently, Public Law 108-89, 
extended section 402(b) of Public Law 108-7 beginning with discharges 
on or after October 1, 2003 and before March 31, 2004. Finally, section 
401(a) of Public Law 108-173 requires that, beginning with fiscal year 
2004 and thereafter, an equal standardized amount is to be computed for 
all hospitals at the level computed for large urban hospitals during FY 
2003, updated by the applicable percentage update. This provision in 
effect makes permanent the equalization of the standardized amounts at 
the level of the previous standardized amount for large urban 
hospitals. Section 401(c) also equalizes the Puerto Rico-specific urban 
and other area rates. Accordingly, we are providing in this proposed 
rule for a single national standardized amount, and a single Puerto 
Rico standardized amount, for FY 2005 and thereafter.
3. Updating the Average Standardized Amount
    In accordance with section 1886(d)(3)(A)(iv) of the Act, we are 
proposing to update the equalized standardized amount for FY 2005 by 
the full estimated market basket percentage increase for hospitals in 
all areas, as specified in section 1886(b)(3)(B)(i)(XIX) of the Act, as 
amended by section 501 of Public Law 108-173. The percentage change in 
the market basket reflects the average change in the price of goods and 
services purchased by hospitals to furnish inpatient care. The most 
recent forecast of the hospital market basket increase for FY 2005 is 
3.3 percent. Thus, for FY 2005, the proposed update to the average 
standardized amount equals 3.3 percent for hospitals in all areas.
    As discussed above in section IV.E. of this proposed rule, section 
501(b) of Public Law 108-173 amended section 1886(b)(3)(B) of the Act 
to add a new subclause (vii) to revise the mechanism used to update the 
standardized amount for payment for inpatient hospital operating costs. 
Specifically, the amendment provides for a reduction of 0.4 percentage 
points to the update percentage increase (also known as the market 
basket update) for each of FYs 2005 through 2007 for any ``subsection 
(d) hospital'' that does not submit data on a set of 10 quality 
indicators established by the Secretary as of November 1, 2003. The 
statute also provides that any reduction will apply only to the fiscal 
year involved, and will not be taken into account in computing the 
applicable percentage increase for a subsequent fiscal year. This 
measure establishes an incentive for hospitals to submit data on 
quality measures established by the Secretary. The standardized amount 
in Tables 1A through 1D of section VI. of this addendum reflect these 
differential amounts.
    Although the update factors for FY 2005 are set by law, we are 
required by section 1886(e)(3) of the Act to report to the Congress our 
initial recommendation of update factors for FY 2005 for both IPPS 
hospitals and hospitals excluded from the IPPS. Our recommendation on 
the update factors (which is required by sections 1886(e)(4)(A) and 
(e)(5)(A) of the Act) is set forth as Appendix B of this proposed rule.
4. Other Adjustments to the Average Standardized Amount
    As in the past, we are proposing to adjust the FY 2005 standardized 
amount to remove the effects of the FY 2004 geographic 
reclassifications and outlier payments before applying the FY 2005 
updates. We then apply the new offsets for outliers and geographic 
reclassifications to the standardized amount for FY 2005.
    We do not remove the prior year's budget neutrality adjustments for 
reclassification and recalibration of the DRG weights and for updated 
wage data because, in accordance with section 1886(d)(4)(C)(iii) of the 
Act, estimated aggregate payments after the changes in the DRG relative 
weights and wage index should equal estimated aggregate payments prior 
to the changes. If we removed the prior year adjustment, we would not 
satisfy this condition.
    Budget neutrality is determined by comparing aggregate IPPS 
payments before and after making the changes that are required to be 
budget neutral (for example, reclassifying and recalibrating the DRGs, 
updating the wage data, and geographic reclassifications). We include 
outlier payments in the payment simulations because outliers may be 
affected by changes in these payment parameters.
    We are also proposing to adjust the standardized amount this year 
by an amount estimated to ensure that aggregate IPPS payments do not 
exceed the amount of payments that would have been made in the absence 
of the rural community hospital demonstration required under section 
410A of Public Law 108-173. This demonstration is required to be budget 
neutral under section 410A(c)(2) of Public Law 108-173.
a. Recalibration of DRG Weights and Updated Wage Index--Budget 
Neutrality Adjustment
    Section 1886(d)(4)(C)(iii) of the Act specifies that, beginning in 
FY 1991, the annual DRG reclassification and recalibration of the 
relative weights must be made in a manner that ensures that aggregate 
payments to hospitals are not affected. As discussed in section II. of 
the preamble, we normalized the recalibrated DRG weights by an 
adjustment factor, so that the average

[[Page 28375]]

case weight after recalibration is equal to the average case weight 
prior to recalibration. However, equating the average case weight after 
recalibration to the average case weight before recalibration does not 
necessarily achieve budget neutrality with respect to aggregate 
payments to hospitals because payments to hospitals are affected by 
factors other than average case weight. Therefore, as we have done in 
past years, we are proposing to make a budget neutrality adjustment to 
ensure that the requirement of section 1886(d)(4)(C)(iii) of the Act is 
met.
    Section 1886(d)(3)(E) of the Act requires us to update the hospital 
wage index on an annual basis beginning October 1, 1993. This provision 
also requires us to make any updates or adjustments to the wage index 
in a manner that ensures that aggregate payments to hospitals are not 
affected by the change in the wage index. For FY 2005, we are proposing 
to apply an occupational mix adjustment to the wage index. We describe 
our proposed occupational mix adjustment in section III.C. of this 
proposed rule. Since section 1886(d)(3)(E) of the Act requires us to 
update the wage index on a budget neutral basis, we are including the 
effects of this proposed occupational mix adjustment on the wage index 
in our budget neutrality calculations.
    Section 4410 of Public Law 105-33 provides that, for discharges on 
or after October 1, 1997, the area wage index applicable to any 
hospital that is not located in a rural area may not be less than the 
area wage index applicable to hospitals located in rural areas in that 
State. This provision is required by section 4410(b) of Public Law 105-
33 to be budget neutral. Therefore, we include the effects of this 
provision in our calculation of the wage update budget neutrality 
factor.
    Section 1886(d)(5)(K)(ii)(III) of the Act previously required that 
we adjust the rates to ensure that any add-on payments for new 
technology under section 1886(d)(5)(K) of the Act be budget neutral. 
However, section 503(d)(2) of Public Law 108-173 has repealed this 
requirement. We discuss this provision in section II.E. of this 
proposed rule. In accordance with this provision, we are proposing no 
budget neutrality adjustment to account for approval of new 
technologies for add-on payments in FY 2005.
    To comply with the requirement that DRG reclassification and 
recalibration of the relative weights be budget neutral, and the 
requirement that the updated wage index be budget neutral, we used FY 
2003 discharge data to simulate payments and compared aggregate 
payments using the FY 2004 relative weights and wage index to aggregate 
payments using the proposed FY 2005 relative weights and wage index. 
The same methodology was used for the FY 2004 budget neutrality 
adjustment (although the FY 2004 adjustment included the effects of new 
technology add-on payments).
    Based on this comparison, we computed a proposed budget neutrality 
adjustment factor equal to 0.998969. We also are proposing to adjust 
the Puerto Rico-specific standardized amount for the effect of DRG 
reclassification and recalibration. We computed a proposed budget 
neutrality adjustment factor for Puerto Rico-specific standardized 
amount equal to 0.999326. These budget neutrality adjustment factors 
are applied to the standardized amounts without removing the effects of 
the FY 2004 budget neutrality adjustments.
    In addition, we are proposing to apply these same adjustment 
factors to the hospital-specific rates that are effective for cost 
reporting periods beginning on or after October 1, 2004. (See the 
discussion in the September 4, 1990 final rule (55 FR 36073)).
b. Reclassified Hospitals--Budget Neutrality Adjustment
    Section 1886(d)(8)(B) of the Act provides that, effective with 
discharges occurring on or after October 1, 1988, certain rural 
hospitals are deemed urban. In addition, section 1886(d)(10) of the Act 
provides for the reclassification of hospitals based on determinations 
by the MGCRB. Under section 1886(d)(10) of the Act, a hospital may be 
reclassified for purposes of the wage index.
    Under section 1886(d)(8)(D) of the Act, the Secretary is required 
to adjust the standardized amount to ensure that aggregate payments 
under the IPPS after implementation of the provisions of sections 
1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal to the 
aggregate prospective payments that would have been made absent these 
provisions. (Neither the wage index reclassifications provided under 
section 508 of Public Law 108-173, nor the wage index adjustments 
provided under section 505 of Public Law 108-173, are budget neutral. 
Section 508(b) provides that the wage index reclassifications approved 
under section 508(a) ``shall not be effected in a budget neutral 
manner.'' Section 505(a) similarly provides that any increase in a wage 
index under that section shall not be taken into account ``in computing 
any budget neutrality adjustment with respect to such index under'' 
section 1886(d)(8)(D) of the Act.) To calculate this budget neutrality 
factor, we used FY 2003 discharge data to simulate payments, and 
compared total IPPS payments prior to any reclassifications under 
sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act to total IPPS 
payments after such reclassifications. Based on these simulations, we 
are proposing to apply an adjustment factor of 0.994295 to ensure that 
the effects of this reclassification are budget neutral.
    The proposed adjustment factor is applied to the standardized 
amount after removing the effects of the FY 2004 budget neutrality 
adjustment factor. We note that the proposed FY 2005 adjustment 
reflects proposed FY 2005 wage index reclassifications approved by the 
MGCRB or the Administrator, and the effects of MGCRB reclassifications 
approved in FY 2003 and FY 2004 (section 1886(d)(10)(D)(v) of the Act 
makes wage index reclassifications effective for 3 years).
c. Outliers
    Section 1886(d)(5)(A) of the Act provides for payments in addition 
to the basic prospective payments, for ``outlier'' cases involving 
extraordinarily high costs. To qualify for outlier payments, a case 
must have costs above a fixed-loss cost threshold amount (a dollar 
amount by which the costs of a case must exceed payments in order to 
qualify for outlier payment). To determine whether the costs of a case 
exceed the fixed-loss threshold, a hospital's cost-to-charge ratio is 
applied to the total covered charges for the case to convert the 
charges to costs. Payments for eligible cases are then made based on a 
marginal cost factor, which is a percentage of the costs above the 
threshold.
    Under section 1886(d)(5)(A)(iv) of the Act, outlier payments for 
any year must be projected to be not less than 5 percent nor more than 
6 percent of total operating DRG payments plus outlier payments. 
Section 1886(d)(3)(B) of the Act requires the Secretary to reduce the 
average standardized amount by a factor to account for the estimated 
proportion of total DRG payments made to outlier cases. Similarly, 
section 1886(d)(9)(B)(iv) of the Act requires the Secretary to reduce 
the average standardized amounts applicable to hospitals in Puerto Rico 
to account for the estimated proportion of total DRG payments made to 
outlier cases.
    i. Proposed FY 2005 outlier fixed-loss cost threshold. In the 
August 1, 2003 IPPS final rule (68 FR 45476-45478), we established a 
threshold for FY 2004 that was equal to the prospective payment rate 
for the DRG, plus any IME and DSH payments and any additional payments

[[Page 28376]]

for new technology, plus $31,000. The marginal cost factor (the percent 
of costs paid after costs for the case exceed the threshold) was 80 
percent.
    To calculate the proposed FY 2005 outlier thresholds, we simulated 
payments by applying proposed FY 2005 rates and policies using cases 
from the FY 2003 MedPAR file. Therefore, in order to determine the 
appropriate proposed FY 2005 threshold, it was necessary to inflate the 
charges on the MedPAR claims by 2 years, from FY 2003 to FY 2005. We 
are proposing to use a 2-year average annual rate of change in charges 
per case to inflate FY 2003 charges to approximate FY 2005 charges. The 
2-year average annual rate of change in charges per case from FY 2000 
to FY 2001, and from FY 2001 to FY 2002, was 12.5978 percent annually 
or 26.8 percent over 2 years.
    We are proposing to continue to use the 2-year average annual rate 
of change in charges per case to establish the proposed FY 2005 
threshold. The 2-year average annual rate of change in charges per case 
from FY 2001 to FY 2002, and from FY 2002 to FY 2003, was 14.5083 
percent annually, or 31.1 percent over 2 years. As we have done in the 
past, we are using hospital cost-to-charge ratio from the most recently 
Provider Specific File, in this case the December 2003 update. This 
file includes cost-to-charge ratios reflecting implementation of 
changes we made last year to the policy affecting the applicable cost-
to-charge ratios (68 FR 34494). As of October 1, 2003, fiscal 
intermediaries use either the most recent settled or the most recent 
tentative settled cost report, whichever is from the latest reporting 
period. Because in the past cost-to-charge ratios were taken from the 
latest settled cost reports and for some hospitals there were delays in 
settling their cost reports, the cost-to-charge ratios on the Provider 
Specific File may have been from cost reporting periods that were 
several years prior. This change results in more up-to-date and, 
generally, lower cost-to-charge ratios.
    Using this methodology, we are proposing to establish a fixed-loss 
cost outlier threshold equal to the prospective payment rate for the 
DRG, plus any IME and DSH payments, and any add-on payments for new 
technology, plus $35,085. This single threshold would be applicable to 
qualify for both operating and capital outlier payments. We also are 
proposing to maintain the marginal cost factor for cost outliers at 80 
percent.
    This proposed outlier threshold for FY 2005 may be higher than 
might have been anticipated on the basis of the more up-to-date and, 
generally, lower cost-to-charge ratios that we are now employing. We 
believe that a significant factor in this result may be the 2-year 
average annual rates of change that we are employing to update charges 
in the MedPAR data from FY 20003 to FY 2005. As we discussed above, we 
are employing the 2-year average annual rate of change in charges per 
case from FY 2001 to FY 2002, and from FY 2002 to FY 2003, which is 
14.5083 percent annually, or 31.1 percent over 2 years. These rates of 
increase derive from the period before the changes we made last year to 
the policy affecting the applicable cost-to-charge ratios (68 FR 
34494). In fact, they derive from the years just prior to the adoption 
of the policy changes, when some hospitals were increasing charges at a 
rapid rate in order to increase their outlier payments. Therefore, they 
represent rates of increase that may be higher than the rates of 
increase under our new policy. We have always used actual data from 
prior years, rather than projections, to update charges for purposes of 
determining the outlier threshold. In light of the increase in the 
proposed outlier threshold for FY 2005, compared to the threshold 
previously in effect, we welcome comments on the data we are using to 
update charges for purposes of computing the threshold. We especially 
encourage commenters to provide any recommendations for data that might 
better reflect current trends in charge increases.
    ii. Other changes concerning outliers. As stated in the September 
1, 1993 final rule (58 FR 46348), we establish outlier thresholds that 
are applicable to both hospital inpatient operating costs and hospital 
inpatient capital-related costs. When we modeled the combined operating 
and capital outlier payments, we found that using a common set of 
thresholds resulted in a lower percentage of outlier payments for 
capital-related costs than for operating costs. We project that the 
proposed thresholds for FY 2005 would result in outlier payments equal 
to 5.10 percent of operating DRG payments and 5.03 percent of capital 
payments based on the Federal rate.
    In accordance with section 1886(d)(3)(B) of the Act, we reduced the 
proposed FY 2005 standardized amount by the same percentage to account 
for the projected proportion of payments paid to outliers.
    The proposed outlier adjustment factors to be applied to the 
standardized amount for FY 2005 are as follows:

------------------------------------------------------------------------
                                             Operating
                                           standardized       Capital
                                              amounts      Federal rate
------------------------------------------------------------------------
National................................        0.948994        0.949706
Puerto Rico.............................        0.974692       0.9747329
------------------------------------------------------------------------

    We apply the outlier adjustment factors after removing the effects 
of the FY 2004 outlier adjustment factors on the standardized amount.
    To determine whether a case qualifies for outlier payments, we 
apply hospital-specific cost-to-charge ratios to the total covered 
charges for the case. Operating and capital costs for the case are 
calculated separately by applying separate operating and capital cost-
to-charge ratios. These costs are then combined and compared with the 
fixed-loss outlier threshold.
    The June 9, 2003 outlier final rule (68 FR 34494) eliminated the 
application of the statewide average for hospitals whose cost-to-charge 
ratios fall below 3 standard deviations from the national mean cost-to-
charge ratio. However, for those hospitals for which the fiscal 
intermediary computes operating cost-to-charge ratios greater than 
1.460 or capital cost-to-charge ratios greater than 0.173, or hospitals 
for whom the fiscal intermediary is unable to calculate a cost-to-
charge ratio (as described at Sec.  412.84(i)(3)), we are still using 
statewide average ratios to calculate costs to determine whether a 
hospital qualifies for outlier payments.\7\ Table 8A in section VI. of 
this Addendum contains the statewide average operating cost-to-charge 
ratios for urban hospitals and for rural hospitals for which the fiscal 
intermediary is unable to compute a hospital-specific cost-to-charge 
ratio within the above range. These statewide average ratios would 
replace the ratios published in the August 1, 2003 IPPS final rule (68 
FR 45637). Table 8B in section VI. of this Addendum contains the 
proposed comparable statewide average capital cost-to-charge ratios. 
Again, the proposed cost-to-charge ratios in Tables 8A and 8B would be 
used during FY 2005 when hospital-specific cost-to-charge ratios based 
on the latest settled cost report are either not available or are 
outside the range noted above.
---------------------------------------------------------------------------

    \7\ These figues represent 3.0 standard deviations from the mean 
of the log distribution of cost-to-charge ratios for all hospitals.
---------------------------------------------------------------------------

    iii. FY 2003 and FY 2004 outlier payments. In the August 1, 2003 
IPPS final rule (68 FR 45478), we stated that, based on available data, 
we estimated that actual FY 2003 outlier payments would be 
approximately 6.5 percent of actual total DRG payments. This estimate 
was computed based on

[[Page 28377]]

simulations using the FY 2002 MedPAR file (discharge data for FY 2002 
bills). That is, the estimate of actual outlier payments did not 
reflect actual FY 2003 bills, but instead reflected the application of 
FY 2003 rates and policies to available FY 2002 bills.
    Our current estimate, using available FY 2003 bills, is that actual 
outlier payments for FY 2003 were approximately 5.7 percent of actual 
total DRG payments. Thus, the data indicate that, for FY 2003, the 
percentage of actual outlier payments relative to actual total payments 
is higher than we projected before FY 2003 (and, thus, exceeds the 
percentage by which we reduced the standardized amounts for FY 2003). 
Nevertheless, consistent with the policy and statutory interpretation 
we have maintained since the inception of the IPPS, we do not plan to 
make retroactive adjustments to outlier payments to ensure that total 
outlier payments for FY 2003 are equal to 5.1 percent of total DRG 
payments.
    We currently estimate that actual outlier payments for FY 2004 will 
be approximately 4.4 percent of actual total DRG payments, 0.7 
percentage points lower than the 5.1 percent we projected in setting 
outlier policies for FY 2004. This estimate is based on simulations 
using the FY 2003 MedPAR file (discharge data for FY 2003 bills). We 
used these data to calculate an estimate of the actual outlier 
percentage for FY 2004 by applying FY 2004 rates and policies, 
including an outlier threshold of $31,000 to available FY 2003 bills.
d. Section 410A Rural Community Hospital Demonstration Program 
Adjustment
    Section 410A of Public Law 108-173 requires the Secretary to 
establish a demonstration that will modify reimbursement for inpatient 
services for up to fifteen small rural hospitals. Section 410A(c)(2) 
requires that ``in conducting the demonstration program under this 
section, the Secretary shall ensure that the aggregate payments made by 
the Secretary do not exceed the amount which the Secretary would have 
paid if the demonstration program under this section was not 
implemented.'' As discussed in section IV.P. of this proposed rule, we 
are proposing to satisfy this requirement by adjusting national IPPS 
rates by a factor that is sufficient to account for the added costs of 
this demonstration. We estimate that the average additional annual 
payment that will be made to each participating hospital under the 
demonstration will be approximately $1,120,000. We based this estimate 
on the recent historical experience of the difference between inpatient 
cost and payment for hospitals that would be eligible for the 
demonstration. For 15 participating hospitals, the total annual impact 
of the demonstration program is estimated to be $16,820,148. We 
estimate that there will be an average decrease in payment per 
discharge of approximately $0.83. The required adjustment as a result 
of the demonstration to the Federal rate in calculating Medicare 
inpatient prospective payments is 0.999818.
    In order to achieve budget neutrality, we are proposing to adjust 
national IPPS rates by an amount sufficient to account for the added 
costs of this demonstration. We are proposing, in other words, to apply 
budget neutrality across the payment system as a whole rather than 
merely across the participants of this demonstration. We believe that 
the language of the statutory budget neutrality requirement permits the 
agency to implement the budget neutrality provision in this manner. 
This is because the statutory language requires ``aggregate payments 
made by the Secretary do not exceed the amount which the Secretary 
would have paid if the demonstration * * * was not implemented,'' but 
does not identify the range across which aggregate payments must be 
held equal. We invite public comment on this proposal.
5. Proposed FY 2005 Standardized Amount
    The adjusted standardized amount is divided into labor and nonlabor 
portions. Tables 1A and 1B in section VI. of this Addendum contain the 
national standardized amount that we are proposing to apply to all 
hospitals, except hospitals in Puerto Rico. The amounts shown in the 
two tables differ only in that the labor-related share applied to the 
standardized amounts in Table 1A is 71.1 percent, and the labor-related 
share applied to the standardized amounts in Table 1B is 62 percent. As 
described in section II.A.1. of this Addendum, we are proposing to 
implement section 403 of Public Law 108-173, which provides that the 
labor-related share is 62 percent, unless the application of that 
percentage would result in lower payments to a hospital than would 
otherwise be made. The effect of this provision is that the labor-
related share of the standardized amount is 62 percent for all 
hospitals whose wage indexes are less than or equal to 1.0000. However, 
the labor-related share of the standardized amount remains 71.1 percent 
(reflecting the Secretary's current estimate of the proportion of costs 
that are wages and wage-related costs) for hospitals whose wage indexes 
are greater than 1.0000. In addition, both tables include standardized 
amounts reflecting the full 3.3 percent update for FY 2005, and 
standardized amounts reflecting the 0.4 percentage point reduction to 
the update applicable for hospitals that fail to submit quality data 
consistent with section 501(b) of Public Law 108-173. (Tables 1C and 1D 
show the new standardized amounts for Puerto Rico, reflecting the 
different labor shares that apply, that is, 71.3 percent or 62 
percent.)
    The following tables illustrate the proposed changes from the FY 
2004 national average standardized amount. The first column shows the 
proposed changes from the 2004 standardized amounts for hospitals that 
satisfy the quality data submission requirement for receiving the full 
update (3.3 percent). The second column shows the proposed changes for 
hospitals receiving the reduced update (2.9 percent). The first row in 
the table shows the updated (through FY 2003) average standardized 
amount after restoring the FY 2004 offsets for outlier payments and 
geographic reclassification budget neutrality. The DRG reclassification 
and recalibration and wage index budget neutrality factor is 
cumulative. Therefore, the FY 2004 factor is not removed from the 
amount in the table. We have added separate rows to this table to 
reflect the different labor-related shares that apply to hospitals.

 Comparison of FY 2004 Standardized Amounts to Proposed FY 2005 Single Standardized Amount With Full Update and
                                                 Reduced Update
----------------------------------------------------------------------------------------------------------------
                                            Full update  (3.3 percent)       Reduced update  (2.9 percent).
----------------------------------------------------------------------------------------------------------------
FY 2004 Base Rate (after removing          Labor: $3,331.33...........  Labor: $3,331.33
 reclassification budget neutrality and    Nonlabor: $1,354.09........  Nonlabor: $1,354.09.
 outlier offset).
Proposed FY 2005 Update Factor...........  1.033......................  1.029.

[[Page 28378]]

 
Proposed FY 2005 DRG Recalibrations and    0.998969...................  0.998969.
 Wage Index Budget Neutrality Factor.
Proposed FY 2005 Reclassification Budget   0.994295...................  0.994295.
 Neutrality Factor.
Adjusted for Blend of FY 2004 DRG          Labor: $3,418.04...........  Labor: $3,404.81
 Recalibration and Wage Index Budget       Nonlabor: $1,389.33........  Nonlabor: $1,383.95.
 Neutrality Factors*.
Proposed FY 2005 Outlier Factor..........  0.948994...................  0.948994.
Proposed Rural Demo Budget Neutrality      0.999818...................  0.999818.
 Factor.
Proposed Rate for FY 2005 (after           Labor: $2,828.03...........  Labor: $2,817.08
 multiplying FY 2004 base rate by above    Nonlabor: $1,733.30........  Nonlabor: $1,726.59.
 factors) where the wage index is less
 than or equal to 1.0000.
Proposed Rate for FY 2005 (after           Labor: $3,243.10...........  Labor: $3,230.55
 multiplying FY 2004 base rate by above    Nonlabor: $1,318.22........  Nonlabor: $1,313.12
 factors) where the wage index is greater
 than 1.0000.
----------------------------------------------------------------------------------------------------------------
*In order to calculate this adjustment correctly, it is necessary to multiply on the DRG recalibration and wage
  index budget neutrality factor of 1.002608 (1.002588 from October 1, 2003 through March 31, 2004; 1.002628
  from April 1, 2004 through September 30, 2004) and divide off the factor of 1.002628 from the second half of
  FY 2004. This is to account for the fact that it was necessary to employ different budget neutrality
  adjustments for the first and second halves of FY 2004 due to the extension of the extension of the
  standardized amount equalization, effective April 1, 2004.

    Under section 1886(d)(9)(A)(ii) of the Act, the Federal portion of 
the Puerto Rico payment rate is based on the discharge-weighted average 
of the national large urban standardized amount (as set forth in Table 
1A). The labor and nonlabor portions of the national average 
standardized amounts for Puerto Rico hospitals are set forth in Table 
1C of section VI. of this Addendum. This table also includes the Puerto 
Rico standardized amounts. The labor share applied to the Puerto Rico 
standardized amount is 71.3 percent, or 62 percent, depending on which 
is more advantageous to the hospital. (Section 403(b) of Public Law 
108-173 provides that the labor-related share for hospitals in Puerto 
Rico will be 62 percent, unless the application of that percentage 
would result in lower payments to the hospital.)

B. Adjustments for Area Wage Levels and Cost-of-Living

    Tables 1A through 1D, as set forth in section VI. of this Addendum, 
contain the labor-related and nonlabor-related shares that we are 
proposing to use to calculate the prospective payment rates for 
hospitals located in the 50 States, the District of Columbia, and 
Puerto Rico. This section addresses two types of adjustments to the 
standardized amounts that are made in determining the proposed 
prospective payment rates as described in this Addendum.
1. Adjustment for Area Wage Levels
    Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act require 
that we make an adjustment to the labor-related portion of the national 
and Puerto Rico prospective payment rates, respectively, to account for 
area differences in hospital wage levels. This adjustment is made by 
multiplying the labor-related portion of the adjusted standardized 
amounts by the appropriate wage index for the area in which the 
hospital is located. In section III. of the preamble to this proposed 
rule, we discuss the data and methodology for the proposed FY 2005 wage 
index. The proposed FY 2005 wage index is set forth in Tables 4A, 4B, 
4C, and 4F of section VI. of this Addendum.
2. Adjustment for Cost-of-Living in Alaska and Hawaii
    Section 1886(d)(5)(H) of the Act authorizes an adjustment to take 
into account the unique circumstances of hospitals in Alaska and 
Hawaii. Higher labor-related costs for these two States are taken into 
account in the adjustment for area wages described above. For FY 2005, 
we are proposing to adjust the payments for hospitals in Alaska and 
Hawaii by multiplying the nonlabor portion of the standardized amount 
by the appropriate adjustment factor contained in the table below. If 
the Office of Personnel Management releases revised cost-of-living 
adjustment factors before July 1, 2004, we will publish them in the 
final rule and use them in determining FY 2005 payments.

 Table of Cost-of-Living Adjustment Factors, Alaska and Hawaii Hospitals
------------------------------------------------------------------------
                                                              Cost of
                                                              living
                          Area                              adjustment
                                                              factor.
------------------------------------------------------------------------
Alaska-All areas........................................         1.25.
Hawaii:                                                           .
  County of Honolulu....................................         1.25.
  County of Hawaii......................................         1.165.
  County of Kauai.......................................         1.2325.
  County of Maui........................................         1.2375.
  County of Kalawao.....................................         1.2375
------------------------------------------------------------------------
(The above factors are based on data obtained from the U.S. Office of
  Personnel Management.)

C. DRG Relative Weights

    As discussed in section II. of the preamble, we have developed a 
classification system for all hospital discharges, assigning them into 
DRGs, and have developed relative weights for each DRG that reflect the 
resource utilization of cases in each DRG relative to Medicare cases in 
other DRGs. Table 5 of section VI. of this Addendum contains the 
relative weights that we are proposing to use for discharges occurring 
in FY 2005. These factors have been recalibrated as explained in 
section II. of the preamble of this proposed rule.

D. Calculation of Proposed Prospective Payment Rates for FY 2005

General Formula for Calculation of Proposed Prospective Payment Rates 
for FY 2005
    The proposed operating prospective payment rate for all hospitals 
paid under the IPPS located outside of Puerto Rico, except SCHs and 
MDHs, equals the Federal rate based on the corresponding amounts in 
Table 1A or Table 1B in section VI. of this Addendum.

[[Page 28379]]

    The proposed prospective payment rate for SCHs equals the higher of 
the applicable Federal rate (from Table 1A or Table 1B) or the 
hospital-specific rate as described below. The proposed prospective 
payment rate for MDHs equals the higher of the Federal rate, or the 
Federal rate plus 50 percent of the difference between the Federal rate 
and the hospital-specific rate as described below. The proposed 
prospective payment rate for Puerto Rico equals 25 percent of the 
Puerto Rico rate plus 75 percent of the applicable national rate from 
Table 1C or Table 1D in section VI. of this Addendum.
1. Federal Rate
    For discharges occurring on or after October 1, 2004 and before 
October 1, 2005, except for SCHs, MDHs, and hospitals in Puerto Rico, 
payment under the IPPS is based exclusively on the Federal rate.
    The Federal rate is determined as follows:
    Step 1--Select the appropriate average standardized amount 
considering the applicable wage index (Table 1A for wage indexes 
greater than 1.0000 and Table 1B for wage indexes less than or equal to 
1.0000) and whether the hospital has submitted qualifying quality data 
(full update for qualifying hospitals, update minus 0.4 percent for 
nonqualifying hospitals).
    Step 2--Multiply the labor-related portion of the standardized 
amount by the applicable wage index for the geographic area in which 
the hospital is located or the area to which the hospital is 
reclassified (see Tables 4A, 4B, and 4C of section VI. of this 
Addendum).
    Step 3--For hospitals in Alaska and Hawaii, multiply the nonlabor-
related portion of the standardized amount by the appropriate cost-of-
living adjustment factor.
    Step 4--Add the amount from Step 2 and the nonlabor-related portion 
of the standardized amount (adjusted, if appropriate, under Step 3).
    Step 5--Multiply the final amount from Step 4 by the relative 
weight corresponding to the appropriate DRG (see Table 5 of section VI. 
of this Addendum).
    The Federal rate as determined in Step 5 may then be further 
adjusted if the hospital qualifies for either the IME or DSH 
adjustment.
2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs)
a. Calculation of Hospital-Specific Rate
    Section 1886(b)(3)(C) of the Act provides that SCHs are paid based 
on whichever of the following rates yields the greatest aggregate 
payment: the Federal rate; the updated hospital-specific rate based on 
FY 1982 costs per discharge; the updated hospital-specific rate based 
on FY 1987 costs per discharge; or the updated hospital-specific rate 
based on FY 1996 costs per discharge.
    Section 1886(d)(5)(G) of the Act provides that MDHs are paid based 
on whichever of the following rates yields the greatest aggregate 
payment: the Federal rate or the Federal rate plus 50 percent of the 
difference between the Federal rate and the greater of the updated 
hospital-specific rates based on either FY 1982 or FY 1987 costs per 
discharge. MDHs do not have the option to use their FY 1996 hospital-
specific rate.
    Hospital-specific rates have been determined for each of these 
hospitals based on either the FY 1982 costs per discharge, the FY 1987 
costs per discharge or, for SCHs, the FY 1996 costs per discharge. For 
a more detailed discussion of the calculation of the hospital-specific 
rates, we refer the reader to the September 1, 1983 interim final rule 
(48 FR 39772); the April 20, 1990 final rule with comment (55 FR 
15150); the September 4, 1990 final rule (55 FR 35994); and the August 
1, 2000 final rule (65 FR 47082). In addition, for both SCHs and MDHs, 
the hospital-specific rate is adjusted by the proposed budget 
neutrality adjustment factor (that is, by 0.998969) as discussed in 
section II.A.4.a. of this Addendum. The resulting rate would be used in 
determining the payment rate an SCH or MDH would receive for its 
discharges beginning on or after October 1, 2004.
b. Updating the FY 1982, FY 1987, and FY 1996 Hospital-Specific Rates 
for FY 2005
    We are proposing to increase the hospital-specific rates by 3.3 
percent (the hospital market basket percentage increase) for SCHs and 
MDHs for FY 2005. Section 1886(b)(3)(C)(iv) of the Act provides that 
the update factor applicable to the hospital-specific rates for SCHs is 
equal to the update factor provided under section 1886(b)(3)(B)(iv) of 
the Act, which, for SCHs in FY 2005, is the market basket rate of 
increase. Section 1886(b)(3)(D) of the Act provides that the update 
factor applicable to the hospital-specific rates for MDHs also equals 
the update factor provided under section 1886(b)(3)(B)(iv) of the Act, 
which, for FY 2005, is the market basket rate of increase.
3. General Formula for Calculation of Proposed Prospective Payment 
Rates for Hospitals Located in Puerto Rico Beginning On or After 
October 1, 2004 and Before October 1, 2005
    Section 504 of Public Law 108-173 changes the current blend of 50 
percent the Puerto Rico national prospective payment rate and 50 
percent of the Puerto Rico-specific prospective payment rate to 62.5 
percent Puerto Rico national and 37.5 percent Puerto Rico-specific 
effective for discharges occurring on or after April 1, 2004 and before 
October 1, 2004. Effective for discharges occurring on or after October 
1, 2004, the effective blend is 75 percent of the Puerto Rico national 
prospective payment rate and 25 percent of the Puerto Rico-specific 
rate.
a. Puerto Rico Rate
    The Puerto Rico prospective payment rate is determined as follows:
    Step 1--Select the appropriate average standardized amount 
considering the applicable wage index (Table 1C for wage indexes 
greater than 1.0000 and Table 1D for wage indexes less than or equal to 
1.0000).
    Step 2--Multiply the labor-related portion of the standardized 
amount by the appropriate Puerto Rico-specific wage index (see Table 4F 
of section VI. of the Addendum).
    Step 3--Add the amount from Step 2 and the nonlabor-related portion 
of the standardized amount.
    Step 4--Multiply the result in Step 3 by 25 percent.
    Step 5--Multiply the amount from Step 4 by the appropriate DRG 
relative weight (see Table 5 of section VI. of the Addendum).
b. National Rate
    The national prospective payment rate is determined as follows:
    Step 1--Select the appropriate average standardized amount 
considering the applicable wage index (Table 1C for wage indexes 
greater than 1.0000 and Table 1D for wage indexes less than or equal to 
1.0000).
    Step 2--Add the amount from Step 1 and the nonlabor-related portion 
of the national average standardized amount.
    Step 3--Multiply the result in Step 2 by 75 percent.
    Step 4--Multiply the amount from Step 3 by the appropriate DRG 
relative weight (see Table 5 of section VI. of the Addendum).
    The sum of the Puerto Rico rate and the national rate computed 
above equals the prospective payment for a given discharge for a 
hospital located in Puerto Rico. This rate may then be

[[Page 28380]]

further adjusted if the hospital qualifies for either the IME or DSH 
adjustment.

III. Proposed Changes to Payment Rates for Acute Care Hospital 
Inpatient Capital-Related Costs for FY 2005

    The PPS for acute care hospital inpatient capital-related costs was 
implemented for cost reporting periods beginning on or after October 1, 
1991. Effective with that cost reporting period, hospitals were paid 
during a 10-year transition period (which extended through FY 2001) to 
change the payment methodology for Medicare acute care hospital 
inpatient capital-related costs from a reasonable cost-based 
methodology to a prospective methodology (based fully on the Federal 
rate).
    The basic methodology for determining Federal capital prospective 
rates is set forth in regulations at Sec. Sec.  412.308 through 
412.352. Below we discuss the factors that we are proposing to use to 
determine the capital Federal rate for FY 2005, which would be 
effective for discharges occurring on or after October 1, 2004. The 10-
year transition period ended with hospital cost reporting periods 
beginning on or after October 1, 2001 (FY 2002). Therefore, for cost 
reporting periods beginning in FY 2002, all hospitals (except ``new'' 
hospitals under Sec. Sec.  412.304(c)(2) and 412.324(b)) are paid based 
on 100 percent of the capital Federal rate.
    For FY 1992, we computed the standard Federal payment rate for 
capital-related costs under the IPPS by updating the FY 1989 Medicare 
inpatient capital cost per case by an actuarial estimate of the 
increase in Medicare inpatient capital costs per case. Each year after 
FY 1992, we update the capital standard Federal rate, as provided at 
Sec.  412.308(c)(1), to account for capital input price increases and 
other factors. The regulations at Sec.  412.308(c)(2) provides that the 
capital Federal rate is adjusted annually by a factor equal to the 
estimated proportion of outlier payments under the capital Federal rate 
to total capital payments under the capital Federal rate. In addition, 
Sec.  412.308(c)(3) requires that the capital Federal rate be reduced 
by an adjustment factor equal to the estimated proportion of payments 
for (regular and special) exception under Sec.  412.348. Section 
412.308(c)(4)(ii) requires that the capital standard Federal rate be 
adjusted so that the effects of the annual DRG reclassification and the 
recalibration of DRG weights and changes in the geographic adjustment 
factor are budget neutral.
    For FYs 1992 through 1995, Sec.  412.352 required that the capital 
Federal rate also be adjusted by a budget neutrality factor so that 
aggregate payments for inpatient hospital capital costs were projected 
to equal 90 percent of the payments that would have been made for 
capital-related costs on a reasonable cost basis during the fiscal 
year. That provision expired in FY 1996. Section 412.308(b)(2) 
describes the 7.4 percent reduction to the capital rate that was made 
in FY 1994, and Sec.  412.308(b)(3) describes the 0.28 percent 
reduction to the capital rate made in FY 1996 as a result of the 
revised policy of paying for transfers. In FY 1998, we implemented 
section 4402 of Public Law 105-33, which requires that, for discharges 
occurring on or after October 1, 1997, and before October 1, 2002, the 
unadjusted capital standard Federal rate is reduced by 17.78 percent. 
As we discussed in the August 1, 2002 IPPS final rule (67 FR 50102) and 
implemented in Sec.  412.308(b)(6)), a small part of that reduction was 
restored effective October 1, 2002.
    To determine the appropriate budget neutrality adjustment factor 
and the regular exceptions payment adjustment during the 10-year 
transition period, we developed a dynamic model of Medicare inpatient 
capital-related costs; that is, a model that projected changes in 
Medicare inpatient capital-related costs over time. With the expiration 
of the budget neutrality provision, the capital cost model was only 
used to estimate the regular exceptions payment adjustment and other 
factors during the transition period. As we explained in the August 1, 
2001 IPPS final rule (66 FR 39911), beginning in FY 2003, an adjustment 
for regular exception payments is no longer necessary because regular 
exception payments were only made for cost reporting periods beginning 
on or after October 1, 1991, and before October 1, 2001 (see Sec.  
412.348(b)). Because, effective with cost reporting periods beginning 
in FY 2002, payments are no longer being made under the regular 
exception policy, we no longer use the capital cost model. The capital 
cost model and its application during the transition period are 
described in Appendix B of the August 1, 2001 IPPS final rule (66 FR 
40099).
    In accordance with section 1886(d)(9)(A) of the Act, under the IPPS 
for acute care hospital operating costs, hospitals located in Puerto 
Rico are paid for operating costs under a special payment formula. 
Prior to FY 1998, hospitals in Puerto Rico were paid a blended capital 
rate that consisted of 75 percent of the applicable standardized amount 
specific to Puerto Rico hospitals and 25 percent of the applicable 
national average standardized amount. However, effective October 1, 
1997, in accordance with section 4406 of Public Law 105-33, operating 
payments to hospitals in Puerto Rico are based on a blend of 50 percent 
of the applicable standardized amount specific to Puerto Rico hospitals 
and 50 percent of the applicable national average standardized amount. 
In conjunction with this change to the operating blend percentage, 
effective with discharges on or after October 1, 1997, we also revised 
the methodology for computing capital payments to hospitals in Puerto 
Rico and computing capital payments based on a blend of 50 percent of 
the Puerto Rico capital rate and 50 percent of the capital Federal 
rate.
    As we discuss in section VI. of this Addendum to the proposed rule, 
section 504 of Public Law 108-173 increases the national portion of the 
operating IPPS payment for Puerto Rico hospitals from 50 percent to 
62.5 percent and decreases the Puerto Rico portion of the operating 
IPPS payments from 50 percent to 37.5 percent for discharges occurring 
on or after April 1, 2004 through September 30, 2004 (see the March 26, 
2004 One-Time Notification (Change Request 3158)). In addition, section 
504 of Public Law 108-173 provides that the national portion of 
operating IPPS payments for Puerto Rico hospitals is equal to 75 
percent and the Puerto Rico portion of operating IPPS payments is equal 
to 35 percent for discharges occurring on or after October 1, 2004. 
Consistent with this change in operating IPPS payment to hospitals in 
Puerto Rico for FY 2005, as we discuss in section V.B. of this Addendum 
to this proposed rule, we are proposing to revise methodology for 
computing capital IPPS payments to hospitals located in Puerto Rico. We 
are proposing that we would compute capital payments to hospitals 
located in Puerto Rico based on a blend of 25 percent of the Puerto 
Rico capital rate and 75 percent of the capital Federal rate for 
discharges occurring on or after October 1, 2004.
    Section 412.374 provides for the use of a blended payment system 
for payments to Puerto Rico hospitals under the PPS for acute care 
hospital inpatient capital-related costs. Accordingly, under the 
capital IPPS, we compute a separate payment rate specific to Puerto 
Rico hospitals using the same methodology used to compute the national 
Federal rate for capital-related costs.

[[Page 28381]]

A. Determination of Proposed Federal Hospital Inpatient Capital-Related 
Prospective Payment Rate Update

    In the final IPPS rule published in the Federal Register on August 
1, 2003 (68 FR 45346), we established a capital Federal rate of $415.47 
for FY 2004. However, a correction notice to the FY 2004 IPPS final 
rule issued in the Federal Register on October 6, 2003 (68 FR 57731) 
contains corrections and revisions to the wage index and geographic 
adjustment factor (GAF). In conjunction with the change to the wage 
index and GAF corrections, we established a revised capital PPS 
standard Federal rate of $414.18 effective for discharges occurring in 
FY 2004. Furthermore, the One-Time Notification (Change Request 3158), 
issued on March 26, 2004, implemented various changes in operating IPPS 
payments required by sections 401, 402 and 504 of Public Law 108-173. 
As a result of these changes to payments under the operating IPPS, the 
fixed loss amount for determining the cost outlier threshold was 
revised effective for discharges occurring on or after April 1, 2004, 
through September 30, 2004. Because the regulations at Sec.  412.312(c) 
establish a unified outlier methodology for inpatient operating and 
capital-related costs, a single set of thresholds are used to identify 
outlier cases under both the operating IPPS and the capital IPPS. As a 
result of the revision to the fixed loss amount used for determining 
the cost outlier threshold effective for discharges occurring on or 
after April 1, 2004, through September 30, 2004, we established a new 
capital IPPS standard Federal rate of $413.48 effective for discharges 
occurring on or after April 1, 2004, through September 30, 2004.
    Because there are two capital IPPS standard Federal rates in effect 
during FY 2004 ($414.18 from October 2003 through March 2004 and 
$413.48 from April 2004 through September 2004), we are proposing to 
use an average of the rates effective for the first half of FY 2004 
(October 1, 2003 through March 31, 2004) ($414.18) and the second half 
FY 2004 (April 1, 2004 through September 30, 2004) ($413.48) to 
determine the proposed FY 2005 capital Federal rate. (The proposed 
average is $413.83 (($414.18 + $413.48)/2.) As a result of the changes 
that we are proposing to the factors used to determine the proposed 
capital Federal rate that are explained in this Addendum, the proposed 
FY 2005 capital standard Federal rate is $416.59.
    In the discussion that follows, we explain the factors that were 
used to determine the proposed FY 2005 capital Federal rate. In 
particular, we explain why the proposed FY 2005 capital Federal rate 
has increased 0.67 percent compared to the FY 2004 capital Federal 
rate. We also estimate aggregate capital payments will remain constant 
from FY 2004 to FY 2005. We are projecting aggregate capital PPS to 
remain unchanged primarily due to a projected decrease in Medicare Part 
A (fee-for-service) admissions. We are projecting a decrease in 
Medicare Part A enrollment, in part, because we are projecting an 
increase in Medicare managed care (M+C) enrollment as a result of 
implementing several sections of Public Law 108-173.
    Total payments to hospitals under the IPPS are relatively 
unaffected by changes in the capital prospective payments. Since 
capital payments constitute about 10 percent of hospital payments, a 1-
percent change in the capital Federal rate yields only about 0.1 
percent change in actual payments to hospitals. Aggregate payments 
under the capital PPS are estimated to increase in FY 2005 compared to 
FY 2004.
1. Proposed Capital Standard Federal Rate Update
a. Description of the Update Framework
    Under Sec.  412.308(c)(1), the capital standard Federal rate is 
updated on the basis of an analytical framework that takes into account 
changes in a capital input price index (CIPI) and several other policy 
adjustment factors. Specifically, we have adjusted the projected CIPI 
rate of increase as appropriate each year for case-mix index-related 
changes, for intensity, and for errors in previous CIPI forecasts. The 
proposed update factor for FY 2005 under that framework is 0.7 percent 
based on the best data available at this time. The proposed update 
factor is based on a projected 0.7 percent increase in the CIPI, a 0.0 
percent adjustment for intensity, a 0.0 percent adjustment for case-
mix, a 0.0 percent adjustment for the FY 2003 DRG reclassification and 
recalibration, and a forecast error correction of 0.0 percent. We 
explain the basis for the FY 2005 CIPI projection in section III.C. of 
this Addendum. Below we describe the proposed policy adjustments that 
have been applied.
    The case-mix index is the measure of the average DRG weight for 
cases paid under the IPPS. Because the DRG weight determines the 
prospective payment for each case, any percentage increase in the case-
mix index corresponds to an equal percentage increase in hospital 
payments.
    The case-mix index can change for any of several reasons:
     The average resource use of Medicare patients changes 
(``real'' case-mix change);
     Changes in hospital coding of patient records result in 
higher weight DRG assignments (``coding effects''); and
     The annual DRG reclassification and recalibration changes 
may not be budget neutral (``reclassification effect'').
    We define real case-mix change as actual changes in the mix (and 
resource requirements) of Medicare patients as opposed to changes in 
coding behavior that result in assignment of cases to higher weighted 
DRGs but do not reflect higher resource requirements. In the update 
framework for the PPS for operating costs, we adjust the update upwards 
to allow for real case-mix change, but remove the effects of coding 
changes on the case-mix index. We also remove the effect on total 
payments of prior year changes to the DRG classifications and relative 
weights, in order to retain budget neutrality for all case-mix index-
related changes other than patient severity. (For example, we adjusted 
for the effects of the FY 2003 DRG reclassification and recalibration 
as part of our update for FY 2005.) We have adopted this case-mix index 
adjustment in the capital update framework as well.
    For FY 2005, we are projecting a 1.0 percent total increase in the 
case-mix index. We estimate that the real case-mix increase would equal 
1.0 percent in FY 2005. The net adjustment for change in case-mix is 
the difference between the projected total increase in case-mix and the 
projected increase in real case-mix change. Therefore, the net 
adjustment for case-mix change in FY 2005 is 0.0 percentage points.
    We estimate that FY 2003 DRG reclassification and recalibration 
would result in a 0.0 percent change in the case-mix when compared with 
the case-mix index that would have resulted if we had not made the 
reclassification and recalibration changes to the DRGs. Therefore, we 
are making a 0.0 percent adjustment for DRG reclassification and 
recalibration in the update for FY 2005 to maintain budget neutrality.
    The capital update framework contains an adjustment for forecast 
error. The input price index forecast is based on historical trends and 
relationships ascertainable at the time the update factor is 
established for the upcoming year. In any given year, there may be 
unanticipated price fluctuations that may result in differences between 
the actual increase in prices and the forecast used in calculating the 
update

[[Page 28382]]

factors. In setting a prospective payment rate under the framework, we 
make an adjustment for forecast error only if our estimate of the 
change in the capital input price index for any year is off by 0.25 
percentage points or more. There is a 2-year lag between the forecast 
and the measurement of the forecast error. A forecast error of 0.0 
percentage points was calculated for the FY 2003 update. That is, 
current historical data indicate that the forecasted FY 2003 CIPI used 
in calculating the FY 2003 update factor (0.7 percent) slightly 
overstated the actual realized price increases (0.6 percent) by 0.1 
percentage points. This slight overprediction was mostly due to an 
underestimation of the interest rate cuts by the Federal Reserve Board 
in 2003, which impacted the interest component of the CIPI. However, 
since this estimation of the change in the CIPI is less than 0.25 
percentage points, it is not reflected in the update recommended under 
this framework. Therefore, we are making a 0.0 percent adjustment for 
forecast error in the update for FY 2005.
    Under the capital PPS system framework, we also make an adjustment 
for changes in intensity. We calculate this adjustment using the same 
methodology and data that are used in the framework for the operating 
PPS. The intensity factor for the operating update framework reflects 
how hospital services are utilized to produce the final product, that 
is, the discharge. This component accounts for changes in the use of 
quality-enhancing services, for changes in within-DRG severity, and for 
expected modification of practice patterns to remove noncost-effective 
services.
    We calculate case-mix constant intensity as the change in total 
charges per admission, adjusted for price level changes (the CPI for 
hospital and related services) and changes in real case-mix. The use of 
total charges in the calculation of the intensity factor makes it a 
total intensity factor, that is, charges for capital services are 
already built into the calculation of the factor. Therefore, we have 
incorporated the intensity adjustment from the operating update 
framework into the capital update framework. Without reliable estimates 
of the proportions of the overall annual intensity increases that are 
due, respectively, to ineffective practice patterns and to the 
combination of quality-enhancing new technologies and within-DRG 
complexity, we assume, as in the operating update framework, that one-
half of the annual increase is due to each of these factors. The 
capital update framework thus provides an add-on to the input price 
index rate of increase of one-half of the estimated annual increase in 
intensity, to allow for within-DRG severity increases and the adoption 
of quality-enhancing technology.
    We have developed a Medicare-specific intensity measure based on a 
5-year average. Past studies of case-mix change by the RAND Corporation 
(``Has DRG Creep Crept Up? Decomposing the Case Mix Index Change 
Between 1987 and 1988'' by G. M. Carter, J. P. Newhouse, and D. A. 
Relles, R-4098-HCFA/ProPAC (1991)) suggest that real case-mix change 
was not dependent on total change, but was usually a fairly steady 1.0 
to 1.4 percent per year. We use 1.4 percent as the upper bound because 
the RAND study did not take into account that hospitals may have 
induced doctors to document medical records more completely in order to 
improve payment.
    We calculate case-mix constant intensity as the change in total 
charges per admission, adjusted for price level changes (the CPI for 
hospital and related services), and changes in real case-mix. As we 
noted above, in accordance with Sec.  412.308(c)(1)(ii), we began 
updating the capital standard Federal rate in FY 1996 using an update 
framework that takes into account, among other things, allowable 
changes in the intensity of hospital services. For FYs 1996 through 
2001, we found that case-mix constant intensity was declining and we 
established a 0.0 percent adjustment for intensity in each of those 
years. For FYs 2001 and 2002, we found that case-mix constant intensity 
was increasing and we established a 0.3 percent adjustment and 1.0 
percent adjustment for intensity, respectively.
    Using the methodology described above, for FY 2005 we examined the 
change in total charges per admission, adjusted for price level changes 
(the CPI for hospital and related services), and changes in real case-
mix for FYs 1999 through 2003. We found that, over this period and in 
particular the last 4 years of this period (FYs 2000 through 2003), the 
charge data appear to be skewed. More specifically, we found a dramatic 
increase in hospital charges for FYs 2000 through 2003 without a 
corresponding increase in hospital case-mix index. These findings are 
similar to the considerable increase in hospitals charges we found when 
we were determining the intensity factor in the FY 2004 update 
recommendation as discussed in the August 1, 2003 final rule (69 FR 
45482). If hospitals were treating new or different types of cases, 
which would result in an appropriate increase in charges per discharge, 
then we would expect hospitals' case-mix to increase proportionally.
    As we discussed in the August 1, 2003 final rule (68 FR 45482), 
because our intensity calculation relies heavily upon charge data and 
we believe that this charge data may be inappropriately skewed, we 
established a 0.0 percent adjustment for intensity for FY 2004. In that 
same final rule, we stated that we believe that it is appropriate to 
propose a zero intensity adjustment until we believe that any increase 
in charges can be tied to intensity rather then to attempts to maximize 
outlier payments. As discussed above, based on the most recent 
available data, we believe that the charge data used to make this 
determination may still be inappropriately skewed. Since our intensity 
calculation relies heavily upon charge data (which may be 
inappropriately skewed), we are proposing a 0.0 percent adjustment for 
intensity for FY 2005 in this proposed rule. We note that, in past FYs 
(1996 through 2000) when we found intensity to be declining, we 
believed a zero (rather then negative) intensity adjustment was 
appropriate. Similarly, we believe that it is appropriate to propose a 
zero intensity adjustment for FY 2005 until we believe that any 
increase in charges can be tied to intensity rather than to attempts to 
maximize outlier payments.
    Above we described the basis of the components used to develop the 
proposed 0.7 percent capital update factor for FY 2005 as shown in the 
table below.

    CMS's Proposed FY 2005 Update Factor to the Capital Federal Rate
------------------------------------------------------------------------
                                                                     .
------------------------------------------------------------------------
Capital Input Price Index......................................     0.7.
Intensity......................................................     0.0.
Case-Mix Adjustment Factors:.
  Projected Case-Mix Change....................................      1.0
  Real Across DRG Change.......................................    -1.0.
                                                                --------
    Subtotal...................................................     0.0.
Effect of FY 2003 Reclassification and Recalibration...........      0.0
Forecast Error Correction......................................     0.0.
                                                                --------
  Total Proposed Update........................................      0.7
------------------------------------------------------------------------

b. Comparison of CMS and MedPAC Update Recommendation
    In the past, MedPAC has included update recommendations for capital 
PPS in a Report to Congress. In its March 2004 Report to Congress, 
MedPAC did not make an update recommendation for capital PPS payments 
for FY 2005. However, in that same report, MedPAC made an update

[[Page 28383]]

recommendation for hospital inpatient and outpatient services (page 
87). MedPAC reviews inpatient and outpatient services together since 
they are so closely interrelated. MedPAC's recommendation of the full 
market basket update for both the inpatient and outpatient PPSs is 
based on their assessment of beneficiaries' access to care, volume 
growth, access to capital, quality, and the relationship of Medicare 
payments to costs in the hospital sector.

2. Outlier Payment Adjustment Factor

    Section 412.312(c) establishes a unified outlier methodology for 
inpatient operating and inpatient capital-related costs. A single set 
of thresholds is used to identify outlier cases for both inpatient 
operating and inpatient capital-related payments. Section 412.308(c)(2) 
provides that the standard Federal rate for inpatient capital-related 
costs be reduced by an adjustment factor equal to the estimated 
proportion of capital related outlier payments to total inpatient 
capital-related PPS payments. The outlier thresholds are set so that 
operating outlier payments are projected to be 5.1 percent of total 
operating DRG payments.
    In the August 1, 2003 IPPS final rule (68 FR 45482), we estimated 
that outlier payments for capital in FY 2004 would equal 4.79 percent 
of inpatient capital-related payments based on the FY 2004 capital 
Federal rate. Accordingly, we applied an outlier adjustment factor of 
0.9521 to the FY 2004 capital Federal rate. However, as we noted above, 
we published a correction notice in the Federal Register on October 6, 
2003 (68 FR 57731), which established revised rates and factors for FY 
2004. In that same correction notice (68 FR 57734), we estimated that 
outlier payments for capital in FY 2004 would equal 4.77 percent of 
inpatient capital-related payments based on the FY 2004 capital Federal 
rate. Accordingly, we established a revised outlier adjustment of 
0.9523 for use in determining the FY 2004 capital Federal rate. In 
addition, as we noted above, a One-Time Notification (Change Request 
3158) issued on March 26, 2004, implemented various changes in 
operating IPPS payments required by sections 401, 402, and 504 of 
Public Law 108-173, effective for discharges on or after April 1, 2004, 
through September 30, 2004. As a result of changes made to payments 
under the operating IPPS, the rates and some of the factors, including 
the outlier adjustment, under the capital IPPS were also revised 
effective for discharges on or after April 1, 2004, through September 
30, 2004. The revised outlier adjustment effective for the second half 
of FY 2004 (April 2004 through September 2004) is 0.9508.
    Based on the thresholds as set forth in section II.A.4.c. of this 
Addendum, we estimate that outlier payments for capital would equal 
5.03 percent of inpatient capital-related payments based on the 
proposed capital Federal rate in FY 2005. Therefore, we are proposing 
an outlier adjustment factor of 0.9497 to the capital Federal rate. 
Thus, the percentage of capital outlier payments to total capital 
standard payments for FY 2005 is higher than the percentages estimated 
for the first half (4.77 percent for October 2003 through March 2004) 
and the second half (4.92 percent for April 2004 through September 
2004) of FY 2004.
    The outlier reduction factors are not built permanently into the 
capital rates; that is, they are not applied cumulatively in 
determining the capital Federal rate. As we discussed above, there were 
two outlier adjustment factors applied during FY 2004 (0.9523 from 
October 2003 through March 2004 and 0.9508 from April 2004 through 
September 2004). The proposed FY 2005 outlier adjustment of 0.9497 is a 
-0.19 percent change from the average FY 2004 outlier adjustment of 
0.9515 (the mean of the factors for the first half of FY 2004 (0.9523) 
and the second half of FY 2004 (0.9508) calculated from unrounded 
numbers). The proposed net change in the outlier adjustment to the 
capital Federal rate for FY 2005 is 0.9981 (0.9497/0.9515). Thus, the 
proposed outlier adjustment decreases the FY 2005 capital Federal rate 
by 0.19 percent compared with the average FY 2004 outlier adjustment.
3. Budget Neutrality Adjustment Factor for Changes in DRG 
Classifications and Weights and the Geographic Adjustment Factor
    Section 412.308(c)(4)(ii) requires that the capital Federal rate be 
adjusted so that aggregate payments for the fiscal year based on the 
capital Federal rate after any changes resulting from the annual DRG 
reclassification and recalibration and changes in the geographic 
adjustment factor (GAF) are projected to equal aggregate payments that 
would have been made on the basis of the capital Federal rate without 
such changes.
    Since we implemented a separate geographic adjustment factor for 
Puerto Rico, we apply separate budget neutrality adjustments for the 
national geographic adjustment factor and the Puerto Rico geographic 
adjustment factor. We apply the same budget neutrality factor for DRG 
reclassifications and recalibration nationally and for Puerto Rico. 
Separate adjustments were unnecessary for FY 1998 and earlier fiscal 
years since the geographic adjustment factor for Puerto Rico was 
implemented in FY 1998.
    In the past, we used the actuarial capital cost model (described in 
Appendix B of the August 1, 2001 IPPS final rule (66 FR 40099)) to 
estimate the aggregate payments that would have been made on the basis 
of the capital Federal rate with and without changes in the DRG 
classifications and weights and in the GAF to compute the adjustment 
required to maintain budget neutrality for changes in DRG weights and 
in the GAF. During the transition period, the capital cost model was 
also used to estimate the regular exception payment adjustment factor. 
As we explain in section III.A.4. of this Addendum, beginning in FY 
2002, an adjustment for regular exception payments is no longer 
necessary. Therefore, we are no longer using the capital cost model. 
Instead, we are using historical data based on hospitals' actual cost 
experiences to determine the exceptions payment adjustment factor for 
special exceptions payments.
    To determine the proposed factors for FY 2005, we compared 
(separately for the national capital rate and the Puerto Rico capital 
rate) estimated aggregate capital Federal rate payments based on the FY 
2004 DRG relative weights and the average FY 2004 GAF (that is, the 
mean of the GAFs applied from October 2003 through March 2004 and the 
GAFs applied from April 2004 through September 2004) to estimated 
aggregate capital Federal rate payments based on the proposed FY 2005 
relative weights and the proposed FY 2005 GAF. For the first half of FY 
2004 (October 1, 2003 through March 31, 2004), the budget neutrality 
adjustment factors were 0.9908 for the national capital rate and 0.9974 
for the Puerto Rico capital rate (see the October 6, 2003 correction 
notice). For the second half of FY 2004 (April 1, 2004 through 
September 30, 2004), the budget neutrality adjustment factor was 
revised to 0.9907 for the national capital rate. The budget neutrality 
factor for the Puerto Rico capital rate remained unchanged (0.9974). In 
making the comparison, we set the regular and special exceptions 
reduction factors to 1.00.
    To achieve budget neutrality for the changes in the national GAF, 
based on calculations using updated data, we are proposing to apply an 
incremental budget neutrality adjustment of 1.0018 for FY 2005 to the 
average of the previous cumulative FY 2004

[[Page 28384]]

adjustments of 0.9908 ((0.99083 + 0.99072)/2), yielding a proposed 
cumulative adjustment of 0.9925 through FY 2005 (calculations were done 
with unrounded numbers). For the Puerto Rico GAF, we are proposing to 
apply an incremental budget neutrality adjustment of 0.9989 for FY 2005 
to the average of the previous cumulative FY 2004 adjustment of 0.9974, 
yielding a proposed cumulative adjustment of 0.9963 through FY 2005.
    We then compared estimated aggregate capital Federal rate payments 
based on the FY 2004 DRG relative weights and the average FY 2004 GAF 
to estimated aggregate capital Federal rate payments based on the 
proposed FY 2005 DRG relative weights and the proposed FY 2005 GAF. The 
proposed incremental adjustment for DRG classifications and changes in 
relative weights is 0.9997 both nationally and for Puerto Rico. The 
proposed cumulative adjustments for DRG classifications and changes in 
relative weights and for changes in the GAF through FY 2005 are 0.9922 
nationally and 0.9960 for Puerto Rico. The following table summarizes 
the adjustment factors for each fiscal year:
BILLING CODE 4120-03-U
[GRAPHIC] [TIFF OMITTED] TP18MY04.407


BILLING CODE 4120-03-C
    The methodology used to determine the proposed recalibration and 
geographic (DRG/GAF) budget neutrality adjustment factor for FY 2005 is 
similar to that used in establishing budget neutrality adjustments 
under the PPS for operating costs. One difference is that, under the 
operating PPS, the budget neutrality adjustments for the effect of 
geographic reclassifications are determined separately from the effects 
of other changes in the hospital wage index and the DRG relative 
weights. Under the capital PPS, there is a single DRG/GAF budget 
neutrality adjustment factor (the national capital rate and the Puerto 
Rico capital rate are determined separately) for changes in the GAF 
(including geographic reclassification) and the DRG relative weights. 
In addition, there is no adjustment for the effects that geographic 
reclassification has on the other payment parameters, such as the 
payments for serving low-income patients, indirect medical education 
payments, or the large urban add-on payments.

[[Page 28385]]

    In the August 1, 2003 IPPS final rule (68 FR 45346), we calculated 
a GAF/DRG budget neutrality factor of 1.00591 for FY 2004. As we noted 
above, as a result of the revisions to the GAF effective for FY 2004 in 
the October 6, 2003 correction notice, we calculated a GAF/DRG budget 
neutrality factor of 1.00256 for discharges occurring in FY 2004. As we 
also noted above, as a result of implementing sections 401, 402, and 
504 of Public Law 108-173, we calculated a GAF/DRG budget neutrality 
factor of 1.00245 for discharges occurring on or after April 1, 2004 
through September 30, 2004. Furthermore, as noted above, the average of 
capital rates and factors in effect for the first half (October 2003 
through March 2004) and second half (April 2004 through September 2004) 
of FY 2004 was used in determining the FY 2005 capital rates.
    For FY 2005, we are proposing a GAF/DRG budget neutrality factor of 
1.0015. The GAF/DRG budget neutrality factors are built permanently 
into the capital rates; that is, they are applied cumulatively in 
determining the capital Federal rate. This follows from the requirement 
that estimated aggregate payments each year be no more or less than 
they would have been in the absence of the annual DRG reclassification 
and recalibration and changes in the GAF. The proposed incremental 
change in the adjustment from FY 2004 to FY 2005 is 1.0015. The 
proposed cumulative change in the capital Federal rate due to this 
adjustment is 0.9922 (the product of the incremental factors for FY 
1993, FY 1994, FY 1995, FY 1996, FY 1997, FY 1998, FY 1999, FY 2000, FY 
2001, FY 2002, FY 2003, average FY 2004 and the proposed incremental 
factor for FY 2005: 0.9980 x 1.0053 x 0.9998 x 0.9994 x 0.9987 x 0.9989 
x 1.0028 x 0.9985 x 0.9979 x 0.9934 x 0.9956 x 1.0025 x 1.0015=0.9922).
    This proposed factor accounts for DRG reclassifications and 
recalibration and for changes in the GAF. It also incorporates the 
effects on the GAF of FY 2005 geographic reclassification decisions 
made by the MGCRB compared to FY 2004 decisions. However, it does not 
account for changes in payments due to changes in the DSH and IME 
adjustment factors or in the large urban add-on.

4. Exceptions Payment Adjustment Factor

    Section 412.308(c)(3) requires that the capital standard Federal 
rate be reduced by an adjustment factor equal to the estimated 
proportion of additional payments for both regular exceptions and 
special exceptions under Sec.  412.348 relative to total capital PPS 
payments. In estimating the proportion of regular exception payments to 
total capital PPS payments during the transition period, we used the 
actuarial capital cost model originally developed for determining 
budget neutrality (described in Appendix B of the August 1, 2001 IPPS 
final rule (66 FR 40099)) to determine the exceptions payment 
adjustment factor, which was applied to both the Federal and hospital-
specific capital rates.
    An adjustment for regular exception payments is no longer necessary 
in determining the FY 2005 capital Federal rate because, in accordance 
with Sec.  412.348(b), regular exception payments were only made for 
cost reporting periods beginning on or after October 1, 1991 and before 
October 1, 2001. Accordingly, as we explained in the August 1, 2001 
IPPS final rule (66 FR 39949), in FY 2002 and subsequent fiscal years, 
no payments will be made under the regular exceptions provision. 
However, in accordance with Sec.  412.308(c), we still need to compute 
a budget neutrality adjustment for special exception payments under 
Sec.  412.348(g). We describe our methodology for determining the 
special exceptions adjustment used in calculating the FY 2005 capital 
Federal rate below.
    Under the special exceptions provision specified at Sec.  
412.348(g)(1), eligible hospitals include SCHs, urban hospitals with at 
least 100 beds that have a disproportionate share percentage of at 
least 20.2 percent or qualify for DSH payments under Sec.  
412.106(c)(2), and hospitals with a combined Medicare and Medicaid 
inpatient utilization of at least 70 percent. An eligible hospital may 
receive special exceptions payments if it meets (1) a project need 
requirement as described at Sec.  412.348(g)(2), which, in the case of 
certain urban hospitals, includes an excess capacity test as described 
at Sec.  412.348(g)(4); (2) an age of assets test as described at Sec.  
412.348(g)(3); and (3) a project size requirement as described at Sec.  
412.348(g)(5).
    Based on information compiled from our fiscal intermediaries, six 
hospitals have qualified for special exceptions payments under Sec.  
412.348(g). Since we have cost reports ending in FY 2003 for all of 
these hospitals, we calculated the proposed adjustment based on actual 
cost experience. Using data from cost reports ending in FY 2003 from 
the March 2004 update of the HCRIS data, we divided the capital special 
exceptions payment amounts for the six hospitals that qualified for 
special exceptions by the total capital PPS payment amounts (including 
special exception payments) for all hospitals. Based on the data from 
cost reports ending in FY 2003, this ratio is rounded to 0.0004. 
Because we have not received all cost reports ending in FY 2003, we 
also divided the FY 2003 special exceptions payments by the total 
capital PPS payment amounts for all hospitals with cost reports ending 
in FY 2002. This ratio also rounds to 0.0004. Because special 
exceptions are budget neutral, we are proposing to offset the capital 
Federal rate by 0.04 percent for special exceptions payments for FY 
2005. Therefore, the proposed exceptions adjustment factor is equal to 
0.9996 (1-0.0004) to account for special exceptions payments in FY 
2005.
    In the August 1, 2003 IPPS final rule (68 FR 45384) for FY 2004, we 
estimated that total (special) exceptions payments would equal 0.05 
percent of aggregate payments based on the capital Federal rate. 
Therefore, we applied an exceptions adjustment factor of 0.9995 (1-
0.0005) in determining the FY 2004 capital Federal rate. (We note that 
the special exceptions adjustment factor for FY 2004 was not revised in 
either the October 6, 2003 correction notice or the March 26, 2004 One-
Time Notification.) As we stated above, we estimate that exceptions 
payments in FY 2005 would equal 0.04 percent of aggregate payments 
based on the FY 2005 capital Federal rate. Therefore, we are proposing 
to apply an exceptions payment adjustment factor of 0.9996 to the 
capital Federal rate for FY 2005. The proposed exceptions adjustment 
factor for FY 2005 is 0.01 percent higher than the factor for FY 2004 
published in the August 1, 2003 IPPS final rule (68 FR 45346). The 
exceptions reduction factors are not built permanently into the capital 
rates; that is, the factors are not applied cumulatively in determining 
the capital Federal rate. Therefore, the proposed net change in the 
exceptions adjustment factor used in determining the proposed FY 2005 
capital Federal rate is 1.0001 (0.9996/0.9995).

5. Proposed Capital Standard Federal Rate for FY 2005

    In the August 1, 2003 IPPS final rule (68 FR 45346) we established 
a capital Federal rate of $415.47 for FY 2004. As we noted above, as a 
result of the revisions to the GAF for FY 2004, in the October 6, 2003 
correction notice, we established a capital Federal rate of $414.18 for 
discharges occurring in FY 2004. As we also discussed above, a One-Time 
Notification issued on March 26, 2004, which implemented various

[[Page 28386]]

changes in operating IPPS payments required by sections 401, 402, and 
504 of Public Law 108-173, resulted in a revised capital Federal rate 
of $413.48 effective for discharges occurring on or after April 1, 2004 
through September 30, 2004. Because there are two capital IPPS standard 
Federal rates in effect during FY 2004 ($414.18 from October 2003 
through March 2004 and $413.48 from April 2004 through September 2004), 
we are proposing to use an average of the rates effective for the first 
half ($414.18) and the second half ($413.48) of FY 2004 of $413.83 
(($414.18 + $413.48)/2) in determining the proposed FY 2005 capital 
Federal rate. In this proposed rule, we are proposing to establish a 
capital Federal rate of $416.59 for FY 2005. The proposed capital 
Federal rate for FY 2005 was calculated as follows:
     The proposed FY 2005 update factor is 1.007; that is, the 
update is 0.7 percent.
     The proposed FY 2005 budget neutrality adjustment factor 
that is applied to the capital standard Federal payment rate for 
changes in the DRG relative weights and in the GAF is 1.0015.
     The proposed FY 2005 outlier adjustment factor is 0.9497.
     The proposed FY 2005 (special) exceptions payment 
adjustment factor is 0.9996.
    Because the proposed capital Federal rate has already been adjusted 
for differences in case-mix, wages, cost-of-living, indirect medical 
education costs, and payments to hospitals serving a disproportionate 
share of low-income patients, we are proposing to make no additional 
adjustments in the capital standard Federal rate for these factors, 
other than the budget neutrality factor for changes in the DRG relative 
weights and the GAF.
    We are providing a chart that shows how each of the proposed 
factors and adjustments for FY 2005 affected the computation of the 
proposed FY 2005 capital Federal rate in comparison to the average FY 
2004 capital Federal rate. The proposed FY 2005 update factor has the 
effect of increasing the capital Federal rate by 0.70 percent compared 
to the average FY 2004 Federal rate. The proposed GAF/DRG budget 
neutrality factor has the effect of increasing the capital Federal rate 
by 0.15 percent. The proposed FY 2005 outlier adjustment factor has the 
effect of decreasing the capital Federal rate by 0.19 percent compared 
to the average FY 2004 capital Federal rate and the proposed FY 2005 
exceptions payment adjustment factor has the effect of increasing the 
capital Federal rate by 0.01 percent compared to the exceptions payment 
adjustment factor for the FY 2004 capital Federal rate. The combined 
effect of all the proposed changes is to increase the capital Federal 
rate by 0.67 percent compared to the average FY 2004 capital Federal 
rate.

 Comparison of Factors and Adjustments: FY 2004 Capital Federal Rate 1 and Proposed FY 2005 Capital Federal Rate
----------------------------------------------------------------------------------------------------------------
                                                                           Proposed FY                 Percent
                                                             FY 2004 \1\      2005         Change       change
----------------------------------------------------------------------------------------------------------------
Update factor \2\.........................................        1.0070        1.0070       1.0070         0.70
GAF/DRG Adjustment Factor \2\.............................        1.0025        1.0015       1.0015         0.15
Outlier Adjustment Factor \3\.............................        0.9515        0.9497       0.9981        -0.19
Exceptions Adjustment Factor \3\..........................        0.9995        0.9996       1.0001         0.01
Capital Federal Rate......................................     $413.83       $416.59         1.0067         0.67
----------------------------------------------------------------------------------------------------------------
\1\ Because there are two capital IPPS standard Federal rates in effect during FY 2004 ($414.18 from October
  2003 through March 2004 and $413.48 from April 2004 through September 2004), an average of the rates and
  factors effective for the first half (October 2003 through March 2004) and the second half (April 2004 through
  September 2004)) of FY 2004 were used.
\2\ The update factor and the GAF/DRG budget neutrality factors are built permanently into the capital rates.
  Thus, for example, the incremental change from FY 2004 to FY 2005 resulting from the application of the
  proposed 1.0015 GAF/DRG budget neutrality factor for FY 2005 is 1.0015.
\3\ The outlier reduction factor and the exceptions adjustment factor are not built permanently into the capital
  rates; that is, these factors are not applied cumulatively in determining the capital rates. Thus, for
  example, the net change resulting from the application of the proposed FY 2005 outlier adjustment factor is
  0.9497/0.9515, or 0.9981.

6. Special Capital Rate for Puerto Rico Hospitals

    As discussed above, beginning in FY 1998, hospitals in Puerto Rico 
are currently paid based on 50 percent of the Puerto Rico capital rate 
and 50 percent of the capital Federal rate. The Puerto Rico capital 
rate is derived from the costs of Puerto Rico hospitals only, while the 
capital Federal rate is derived from the costs of all acute care 
hospitals participating in the PPS (including Puerto Rico). Section 504 
of Public Law 108-173 increases the national portion of the operating 
IPPS payment for Puerto Rico hospitals from 50 percent to 75 percent 
and decreases the Puerto Rico portion of the operating IPPS payments 
for hospitals located in Puerto Rico from 50 percent to 37.5 percent 
for discharges occurring on or after April 1, 2004, through September 
30, 2004. In addition, section 504 of Public Law 108-173 provides that 
the national portion of operating IPPS payments for Puerto Rico 
hospitals is equal to 75 percent and the Puerto Rico portions of the 
operating IPPS payments is equal to 37.5 percent for discharges 
occurring on or after October 1, 2004. As discussed in section V.B. of 
the preamble of this proposed rule, under the broad authority of 
section 1886(g) of the Act, we are proposing for FY 2005 to increase 
the national portion of the capital IPPS payment to hospitals located 
in Puerto Rico from 50 percent to 75 percent, as well. Therefore, for 
discharges occurring on or after October 1, 2004, capital payments to 
hospitals in Puerto Rico would be based on a blend of 25 percent of the 
Puerto Rico capital rate and 75 percent of the capital Federal rate.
    To adjust hospitals' capital payments for geographic variations in 
capital costs, we apply a GAF to both portions of the blended capital 
rate. The GAF is calculated using the operating PPS wage index and 
varies, depending on the MSA or rural area in which the hospital is 
located. We use the Puerto Rico wage index to determine the GAF for the 
Puerto Rico part of the capital-blended rate and the national wage 
index to determine the GAF for the national part of the blended capital 
rate.
    Because we implemented a separate GAF for Puerto Rico in FY 1998, 
we also apply separate budget neutrality adjustments for the national 
GAF and for the Puerto Rico GAF. However, we apply the same budget 
neutrality factor for DRG reclassifications and recalibration 
nationally and for Puerto Rico. As we stated above in section III.A.4. 
of this Addendum, for Puerto

[[Page 28387]]

Rico the proposed GAF budget neutrality factor is 0.9989, while the 
proposed DRG adjustment is 0.9997, for a proposed combined cumulative 
adjustment of 0.9960.
    In computing the payment for a particular Puerto Rico hospital, the 
Puerto Rico portion of the capital rate (currently 50 percent; 25 
percent proposed for FY 2005 and thereafter) is multiplied by the 
Puerto Rico-specific GAF for the MSA in which the hospital is located, 
and the national portion of the capital rate (currently 50 percent; 75 
percent proposed for FY 2005 and thereafter) is multiplied by the 
national GAF for the MSA in which the hospital is located (which is 
computed from national data for all hospitals in the United States and 
Puerto Rico). In FY 1998, we implemented a 17.78 percent reduction to 
the Puerto Rico capital rate as a result of Public Law 105-33. In FY 
2003, a small part of that reduction was restored.
    For FY 2004, before application of the GAF, the special capital 
rate for Puerto Rico hospitals was $203.17 for discharges occurring on 
or after October 1, 2003 through March 31, 2004 (see the October 6, 
2003 correction notice) and $202.96 for discharges occurring on or 
after April 1, 2004 through September 30, 2004 (see the March 26, 2004 
One-Time Notification). With the changes we are proposing to the 
factors used to determine the capital rate, the proposed FY 2005 
special capital rate for Puerto Rico is $200.52.

B. Calculation of Inpatient Capital-Related Prospective Payments for FY 
2005

    Because the 10-year capital PPS transition period ended in FY 2001, 
all hospitals (except ``new'' hospitals under Sec.  412.324(b) and 
under Sec.  412.304(c)(2)) are paid based on 100 percent of the capital 
Federal rate in FY 2005. The applicable proposed capital Federal rate 
was determined by making adjustments as follows:
     For outliers, by dividing the proposed capital standard 
Federal rate by the proposed outlier reduction factor for that fiscal 
year; and
     For the payment adjustments applicable to the hospital, by 
multiplying the hospital's proposed GAF, disproportionate share 
adjustment factor, and IME adjustment factor, when appropriate.
    For purposes of calculating payments for each discharge during FY 
2005, the capital standard Federal rate is adjusted as follows: 
(Standard Federal Rate) x (DRG weight) x (GAF) x (Large Urban Add-on, 
if applicable) x (COLA adjustment for hospitals located in Alaska and 
Hawaii) x (1 + Disproportionate Share Adjustment Factor + IME 
Adjustment Factor, if applicable). The result is the adjusted capital 
Federal rate.
    Hospitals also may receive outlier payments for those cases that 
qualify under the thresholds established for each fiscal year. Section 
412.312(c) provides for a single set of thresholds to identify outlier 
cases for both inpatient operating and inpatient capital-related 
payments. The proposed outlier thresholds for FY 2005 are in section 
II.A.4.c. of this Addendum. For FY 2005, a case qualifies as a cost 
outlier if the cost for the case plus the IME and DSH payments is 
greater than the prospective payment rate for the DRG plus $35,085.
    An eligible hospital may also qualify for a special exceptions 
payment under Sec.  412.348(g) for up through the 10th year beyond the 
end of the capital transition period if it meets: (1) a project need 
requirement described at Sec.  412.348(g)(2), which in the case of 
certain urban hospitals includes an excess capacity test as described 
at Sec.  412.348(g)(4); and (2) a project size requirement as described 
at Sec.  412.348(g)(5). Eligible hospitals include sole community 
hospitals, urban hospitals with at least 100 beds that have a DSH 
patient percentage of at least 20.2 percent or qualify for DSH payments 
under Sec.  412.106(c)(2), and hospitals that have a combined Medicare 
and Medicaid inpatient utilization of at least 70 percent. Under Sec.  
412.348(g)(8), the amount of a special exceptions payment is determined 
by comparing the cumulative payments made to the hospital under the 
capital PPS to the cumulative minimum payment level. This amount is 
offset by: (1) Any amount by which a hospital's cumulative capital 
payments exceed its cumulative minimum payment levels applicable under 
the regular exceptions process for cost reporting periods beginning 
during which the hospital has been subject to the capital PPS; and (2) 
any amount by which a hospital's current year operating and capital 
payments (excluding 75 percent of operating DSH payments) exceed its 
operating and capital costs. Under Sec.  412.348(g)(6), the minimum 
payment level is 70 percent for all eligible hospitals.
    During the transition period, new hospitals (as defined under Sec.  
412.300) were exempt from the capital PPS for their first 2 years of 
operation and were paid 85 percent of their reasonable costs during 
that period. Effective with the third year of operation through the 
remainder of the transition period, under Sec.  412.324(b) we paid the 
hospital under the appropriate transition methodology. If the hold-
harmless methodology were applicable, the hold-harmless payment for 
assets in use during the base period would extend for 8 years, even if 
the hold-harmless payments extend beyond the normal transition period. 
As discussed in section VI.A. of the preamble of this proposed rule, 
under Sec.  412.304(c)(2), for cost reporting periods beginning on or 
after October 1, 2002, we pay a new hospital 85 percent of their 
reasonable costs during the first 2 years of operation unless it elects 
to receive payment based on 100 percent of the capital Federal rate. 
Effective with the third year of operation, we pay the hospital based 
on 100 percent of the capital Federal rate (that is, the same 
methodology used to pay all other hospitals subject to the capital 
PPS).

C. Capital Input Price Index

1. Background
    Like the operating input price index, the capital input price index 
(CIPI) is a fixed-weight price index that measures the price changes 
associated with capital costs during a given year. The CIPI differs 
from the operating input price index in one important aspect--the CIPI 
reflects the vintage nature of capital, which is the acquisition and 
use of capital over time. Capital expenses in any given year are 
determined by the stock of capital in that year (that is, capital that 
remains on hand from all current and prior capital acquisitions). An 
index measuring capital price changes needs to reflect this vintage 
nature of capital. Therefore, the CIPI was developed to capture the 
vintage nature of capital by using a weighted-average of past capital 
purchase prices up to and including the current year.
    We periodically update the base year for the operating and capital 
input prices to reflect the changing composition of inputs for 
operating and capital expenses. The CIPI was last rebased to FY 1997 in 
the August 1, 2002 final rule (67 FR 50044).
2. Forecast of the CIPI for Federal Fiscal Year 2005
    Based on the latest forecast by Global Insight, Inc. (first quarter 
of 2004), we are forecasting the CIPI to increase 0.7 percent in FY 
2005. This reflects a projected 1.2 percent increase in vintage-
weighted depreciation prices (building and fixed equipment, and movable 
equipment) and a 3.0 percent increase in other capital expense prices 
in FY 2005, partially offset by a 2.5 percent decline in vintage-
weighted

[[Page 28388]]

interest expenses in FY 2005. The weighted average of these three 
factors produces the 0.7 percent increase for the CIPI as a whole in FY 
2005.

IV. Proposed Changes to Payment Rates for Excluded Hospitals and 
Hospital Units: Rate-of-Increase Percentages

[If you choose to comment on issues in this section, please include the 
caption ``Excluded Hospitals Rate of Increase'' at the beginning of 
your comment.]
    As discussed in section VI. of the preamble of this proposed rule, 
in accordance with section 1886(b)(3)(H)(i) of the Act and effective 
for cost reporting periods beginning on or after October 1, 2002, 
payments to existing psychiatric hospitals and units, rehabilitation 
hospitals and units, and long-term care hospitals excluded from the 
IPPS are no longer subject to limits on a hospital-specific target 
amount (expressed in terms of the inpatient operating cost per 
discharge) that are set for each hospital, based on the hospital's own 
historical cost experience trended forward by the applicable rate-of-
increase percentages (update factors).
    Effective for cost reporting periods beginning on or after October 
1, 2002, rehabilitation hospitals and units are paid 100 percent of the 
IRF PPS Federal rate. Effective for cost reporting periods beginning on 
or after October 1, 2002, LTCHs also are no longer paid on a reasonable 
cost basis, but are paid under a LTCH DRG-based PPS. As part of the 
payment process for LTCHs, we established a 5-year transition period 
from reasonable cost-based reimbursement to a fully Federal PPS. 
However, a LTCH may elect to be paid based on 100 percent of the 
Federal prospective payment rate. We have proposed, but not finalized, 
an IPF PPS under which psychiatric hospitals and units would no longer 
be paid on a reasonable cost basis but would be paid on a prospective 
per diem basis. (68 FR 66920, November 28, 2003)
    In accordance with existing Sec. Sec.  413.40(c)(4)(ii) and 
(d)(1)(i) and (ii), where applicable, excluded psychiatric hospitals 
and units continue to be paid on a reasonable cost basis, payments are 
based on their Medicare inpatient operating costs, not to exceed the 
ceiling (as defined in Sec.  413.40(a)(3)). In addition, LTCHs that are 
paid under a blend methodology will have the TEFRA portion subject to 
the ceiling as well.
    Section 1886(b)(7) of the Act had established a payment limitation 
for new rehabilitation hospitals and units, psychiatric hospitals and 
units, and long-term care hospitals that first received payment as a 
hospital or unit excluded from the IPPS on or after October 1, 1997. 
However, effective for cost reporting periods beginning on or after 
October 1, 2002, this payment limitation is no longer applicable to new 
rehabilitation hospitals or units because they are paid 100 percent of 
the Federal prospective rate under the IRF PPS. Also, effective for 
cost reporting periods beginning on or after October 1, 2002, new LTCHs 
are paid based on 100 percent of the fully Federal prospective rate. In 
contrast, those ``new'' LTCHs that meet the definition of ``new'' under 
Sec.  412.40(f)(2)(ii) and that have their first cost reporting periods 
beginning on or after October 1, 1997 and before October 1, 2002, may 
be paid under the LTCH PPS transition methodology. Since those 
hospitals by definition would have been considered new before October 
1, 2002, they would have been subject to the updated payment limitation 
on new hospitals that was published in the FY 2003 IPPS final rule (67 
FR 50103). A discussion of how the payment limitation was calculated 
can be found in the August 29, 1997 final rule with comment period (62 
FR 46019); the May 12, 1998 final rule (63 FR 26344); the July 31, 1998 
final rule (63 FR 41000); and the July 30, 1999 final rule (64 FR 
41529).
    The amount of payment for a ``new'' psychiatric hospital or unit 
would be determined as follows:
     Under existing Sec.  413.40(f)(2)(ii), for the first 12-
month cost reporting periods beginning on or after October 1, 1997, the 
amount of payment for a new hospital or unit that was not paid as an 
excluded hospital or unit before October 1, 1997, is the lower of: (1) 
The hospital's net inpatient operating costs per case; or (2) 110 
percent of the national median of the target amounts for the same class 
of excluded hospitals and units, adjusted for differences in wage 
levels and updated to the first cost reporting period in which the 
hospital receives payment. The second 12-month cost reporting period is 
subject to the same target amount applied to the first cost reporting 
period.
     In the case of a hospital that received payments under 
Sec.  413.40(f)(2)(ii) as a newly created hospital or unit, to 
determine the hospital's or unit's target amount for the hospital's or 
unit's third 12-month cost reporting period, the payment amount 
determined under Sec.  413.40(f)(2)(ii)(A) for the preceding cost 
reporting period is updated to the third cost reporting period.
    The amounts included in the following table reflect the proposed 
updated 110 percent of the national median target amounts of new 
excluded psychiatric hospitals and units for cost reporting periods 
beginning during FY 2005. These figures are updated with the most 
recent data available to reflect the projected market basket increase 
percentage of 3.3 percent. This projected percentage change in the 
market basket reflects the average change in the price of goods and 
services purchased by hospitals to furnish inpatient hospital services 
(as projected by CMS' Office of the Actuary based on its historical 
experience with the IPPS). For a new provider, the labor-related share 
of the target amount is multiplied by the appropriate geographic area 
wage index, without regard to IPPS reclassifications, and added to the 
nonlabor-related share in order to determine the per case limit on 
payment under the statutory payment methodology for new providers.

------------------------------------------------------------------------
                                    Proposed  FY 2005  Proposed  FY 2005
Class of excluded hospital or unit     labor-related    nonlabor-related
                                          share              share.
------------------------------------------------------------------------
Psychiatric.......................         $7,534.70          $2,994.67
------------------------------------------------------------------------

    This payment limitation is no longer applicable to new LTCHs that 
meet the definition of Sec.  412.23(e)(4) since they will be paid 100 
percent of the Federal rate. (Section 412.23(e)(4) states that for 
purposes of payment under the LTCH PPS, a new LTCH is a provider of 
inpatient services that meets the qualifying criteria in paragraphs 
(e)(1) and (e)(2) of this section and, under present or previous 
ownership (or both), its first cost reporting period as a LTCH begins 
on or after October 1, 2002). Under the LTCH PPS, new LTCHs are based 
on 100 percent of the fully Federal prospective rate (they may not 
participate in the 5-year transition from cost-based reimbursement to

[[Page 28389]]

prospective payment). In contrast, those ``new'' LTCHs that meet the 
definition of ``new'' under Sec.  413.40(f)(2)(ii) and that have their 
first cost reporting periods beginning on or after October 1, 1997, and 
before October 1, 2002, may be paid under the LTCH PPS transition 
methodology. Because those hospitals by definition would have been 
considered new before October 1, 2002, they would have been subject to 
the updated payment limitation on new hospitals that was published in 
the FY 2003 IPPS final rule (67 FR 50103). Under existing regulations 
at Sec.  413.40(f)(2)(ii), the ``new'' hospital would be subject to the 
same cap in its second cost reporting period; this cap would not be 
updated for the new hospital's second cost reporting year. Thus, since 
the same cap is to be used for the ``new'' LTCH's first two cost 
reporting periods, it is no longer necessary to publish an updated cap.

V. Payment for Blood Clotting Factor Administered to Hemophilia 
Inpatients

[If you choose to comment on issues in this section, please include the 
caption ``Payment for Blood Clotting Factor'' at the beginning of your 
comment.]
    In December 2002, the Department implemented a policy that 
established the Single Drug Pricer (SDP) to correct identified 
discrepancies, further the legislative goal of establishing a uniform 
payment allowance as a reflection of the average wholesale price (AWP), 
and otherwise apply the existing stature and regulation more accurately 
and efficiently (CMS Program Memorandum AB-02-174, December 3, 2002, 
which can be accessed at: http://www.cms.hhs.gov/manuals). Under the 
SDP, CMS will establish prices centrally, thereby resulting in greater 
consistency in drug pricing nationally. The SDP instruction applies to 
blood clotting factors furnished to hospital inpatients. The payment 
allowance for the single national drug price for each Medicare covered 
drug is based on 95 percent of the AWP, except for drugs billed to 
durable medical equipment regional carriers (DMERCs) and hospital 
outpatient drugs billed to fiscal intermediaries. We are publishing 
this notice here because we previously have addressed the add-on 
payment for the costs of administering blood clotting factor in the 
IPPS annual rule (see the August 1, 2000 IPPS final rule (65 FR 47116).
    On a quarterly basis, CMS will furnish three SDP files to all 
fiscal intermediaries. Each fiscal intermediary must accept the SDP 
files and process claims for any drug identified on the files on the 
basis of the price shown on the applicable file. Previously, the fiscal 
intermediary performed annual update calculations based on the most 
recent AWP data available to the carrier. The fiscal intermediary 
should use the SDP to price the blood clotting factors.

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Appendix A--Regulatory Analysis of Impacts

[If you choose to comment on issues in this section, please include 
the caption ``Impact Analyses'' at the beginning of your comment.]

I. Background and Summary

    We have examined the impacts of this proposed rule as required 
by Executive Order 12866 (September 1993, Regulatory Planning and 
Review) and the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, 
the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), and 
Executive Order 13132.
    Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net 
benefits (including potential economic, environmental, public health 
and safety effects, distributive impacts, and equity). A regulatory 
impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 
year).
    We have determined that this proposed rule is a major rule as 
defined in 5 U.S.C. 804(2). Based on the overall percentage change 
in payments per case estimated using our payment simulation model (a 
4.9 percent increase), we estimate that the total impact of these 
proposed changes for FY 2005 payments compared to FY 2004 payments 
to be approximately a $4.3 billion increase. As a result, total IPPS 
payments will increase from approximately $100 billion to 
approximately $104.3 billion. This amount does not reflect changes 
in hospital admissions or case-mix intensity, which would also 
affect overall payment changes.
    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 
$5 million to $25 million in any 1 year. For purposes of the RFA, 
all hospitals and other providers and suppliers are considered to be 
small entities. Individuals and States are not included in the 
definition of a small entity.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis for any proposed rule that may have a 
significant impact on the operations of a substantial number of 
small rural hospitals. This analysis must conform to the provisions 
of section 603 of the RFA. With the exception of hospitals located 
in certain New England counties, for purposes of section 1102(b) of 
the Act, we previously defined a small rural hospital as a hospital 
with fewer than 100 beds that is located outside of a Metropolitan 
Statistical Area (MSA) or New England County Metropolitan Area 
(NECMA). However, under the new labor market definitions that we are 
proposing to adopt, we no longer employ NECMAs to define urban areas 
in New England. Therefore, we now define a small rural hospital as a 
hospital with fewer than 100 beds that is located outside of an MSA. 
Section 601(g) of the Social Security Amendments of 1983 (Pub. L. 
98-21) designated hospitals in certain New England counties as 
belonging to the adjacent NECMA. Thus, for purposes of the IPPS, we 
continue to classify these hospitals as urban hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4) also requires that agencies assess anticipated costs and 
benefits before issuing any proposed rule (or a final rule that has 
been preceded by a proposed rule) that may result in an expenditure 
in any 1 year by State, local, or tribal governments, in the 
aggregate, or by the private sector, of $100 million. This proposed 
rule would not mandate any requirements for State, local, or tribal 
governments.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on 
State and local governments, preempts State law, or otherwise has 
Federalism implications. We have reviewed this proposed rule in 
light of Executive Order 13132 and have determined that it would not 
have any negative impact on the rights, roles, and responsibilities 
of State, local, or tribal governments.
    In accordance with the provisions of Executive Order 12866, this 
proposed rule was reviewed by the Office of Management and Budget.
    The following analysis, in conjunction with the remainder of 
this document, demonstrates that this proposed rule is consistent 
with the regulatory philosophy and principles identified in 
Executive Order 12866, the RFA, and section 1102(b) of the Act. The 
proposed rule would affect payments to a substantial number of small 
rural hospitals as well as other classes of hospitals, and the 
effects on some hospitals may be significant.

II. Objectives

    The primary objective of the IPPS is to create incentives for 
hospitals to operate efficiently and minimize unnecessary costs 
while at the same time ensuring that payments are sufficient to 
adequately compensate hospitals for their legitimate costs. In 
addition, we share national goals of preserving the Medicare Trust 
Fund.
    We believe the changes in this proposed rule would further each 
of these goals while maintaining the financial viability of the 
hospital industry and ensuring access to high quality health care 
for Medicare beneficiaries. We expect that these proposed changes 
would ensure that the outcomes of this payment system are reasonable 
and equitable while avoiding or minimizing unintended adverse 
consequences.

III. Limitations of Our Analysis

    The following quantitative analysis presents the projected 
effects of our proposed policy changes, as well as statutory changes 
effective for FY 2005, on various hospital groups. We estimate the 
effects of individual policy changes by estimating payments per case 
while holding all other payment policies constant. We use the best 
data available, but we do not attempt to predict behavioral 
responses to our proposed policy changes, and we do not make 
adjustments for future changes in such variables as admissions, 
lengths of stay, or case-mix. As we have done in previous proposed 
rules, we are soliciting comments and information about the 
anticipated effects of these proposed changes on hospitals and our 
methodology for estimating them. Any comments that we receive in 
response to this proposed rule will be addressed in the final rule.

IV. Hospitals Included in and Excluded From the IPPS

    The prospective payment systems for hospital inpatient operating 
and capital-related costs encompass nearly all general short-term, 
acute care hospitals that participate in the Medicare program. There 
were 39 Indian Health Service hospitals in our database, which we 
excluded from the analysis due to the special characteristics of the 
prospective payment method for these hospitals. Among other short-
term, acute care hospitals, only the 47 such hospitals in Maryland 
remain excluded from the IPPS under the waiver at section 1814(b)(3) 
of the Act.
    As of April 2004, there are 3,904 IPPS hospitals to be included 
in our analysis. This represents about 65 percent of all Medicare-
participating hospitals. The majority of this impact analysis 
focuses on this set of hospitals. There are also approximately 898 
critical access hospitals (CAHs). These small, limited service 
hospitals are paid on the basis of reasonable costs rather than 
under the IPPS. There are also 1,194 specialty hospitals and units 
that are excluded from the IPPS. These specialty hospitals include 
psychiatric hospitals and units, rehabilitation hospitals and units, 
long-term care hospitals, children's hospitals, and cancer 
hospitals. The impacts of our proposed policy changes on these 
hospitals are discussed below.

V. Impact on Excluded Hospitals and Hospital Units

    As of April 2004, there were 1,194 specialty hospitals excluded 
from the IPPS. Of these 1,194 specialty hospitals, 478 psychiatric 
hospitals, 80 children's, 11 cancer hospitals, and less than 10 
percent of the LTCHs are being paid on a reasonable cost basis 
subject to the rate-of-increase ceiling under Sec.  413.40. The 
remaining providers--216 rehabilitation, and approximately 90 
percent of the 331 LTCHs are paid 100 percent of the Federal rate 
under the IRF and LTCH PPS', respectively. In addition, there were 
1,381 psychiatric units (paid on a reasonable cost basis) and 999 
rehabilitation units (paid under the IRF PPS) in hospitals otherwise 
subject to the IPPS. Under Sec.  413.40(a)(2)(i)(A), the rate-of-
increase ceiling is not applicable to the 47 specialty hospitals and 
units in Maryland that are paid in accordance with the waiver at 
section 1814(b)(3) of the Act.
    In the past, hospitals and units excluded from the IPPS have 
been paid based on their reasonable costs subject to limits as 
established by the Tax Equity and Fiscal Responsibility Act of 1982 
(TEFRA). Hospitals that continue to be paid based on

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their reasonable costs are subject to TEFRA limits for FY 2005. For 
these hospitals, the proposed update is the percentage increase in 
the excluded hospital market basket, currently estimated at 3.3 
percent.
    Inpatient rehabilitation facilities (IRFs) are paid under a 
prospective payment system (IRF PPS) for cost reporting periods 
beginning on or after January 1, 2002. For cost reporting periods 
beginning during FY 2005, the IRF PPS is based on 100 percent of the 
adjusted Federal IRF prospective payment amount, updated annually. 
Therefore, these hospitals would not be impacted by this proposed 
rule.
    Effective for cost reporting periods beginning on or after 
October 1, 2002, LTCHs are paid under an LTCH PPS, based on the 
adjusted Federal prospective payment amount, updated annually. LTCHs 
will receive a blended payment (Federal prospective payment and a 
reasonable cost-based payment) over a 5-year transition period. 
However, under the LTCH PPS, an LTCH may also elect to be paid at 
100 percent of the Federal prospective rate at the beginning of any 
of its cost reporting periods during the 5-year transition period. 
For purposes of the update factor, the portion of the LTCH PPS 
transition blend payment based on reasonable costs for inpatient 
operating services would be determined by updating the LTCH's TEFRA 
limit by the estimate of the excluded hospital market basket (or 3.3 
percent).
    Section 124 of the Medicare, Medicaid and SCHIP Balanced Budget 
Refinement Act of 1999 (BBRA) requires the development of a per diem 
prospective payment system (PPS) for payment of inpatient hospital 
services furnished in psychiatric hospitals and psychiatric units of 
acute care hospitals (inpatient psychiatric facilities (IFPs)). We 
published a proposed rule to implement the IPF PPS on November 28, 
2003 (68 FR 66920). On January 30, 2004, we published a notice to 
extend the comment period for 30 additional days (69 FR 4464). The 
comment period closed on March 26, 2004.
    Under the proposed rule, CMS would compute a Federal per diem 
base rate to be paid to all IPFs 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. The 
Federal per diem base rate would be adjusted to reflect certain 
patient characteristics such as age, specified DRGs, and selected 
high-cost comorbidities, and certain facility characteristics such 
as a wage index adjustment, rural location, and indirect teaching 
costs.
    The November 28, 2003 proposed rule assumed an April 1, 2004 
effective date for the purpose of ratesetting and calculating 
impacts. However, we are still in the process of analyzing public 
comments and developing a final rule for publication. The effective 
date of the IPF PPS would occur 5 months following publication of 
the final rule.
    The impact on excluded hospitals and hospital units of the 
update in the rate-of-increase limit depends on the cumulative cost 
increases experienced by each excluded hospital or unit since its 
applicable base period. For excluded hospitals and units that have 
maintained their cost increases at a level below the rate-of-
increase limits since their base period, the major effect is on the 
level of incentive payments these hospitals and hospital units 
receive. Conversely, for excluded hospitals and hospital units with 
per-case cost increases above the cumulative update in their rate-
of-increase limits, the major effect is the amount of excess costs 
that will not be reimbursed.
    We note that, under Sec.  413.40(d)(3), an excluded hospital or 
unit whose costs exceed 110 percent of its rate-of-increase limit 
receives its rate-of-increase limit plus 50 percent of the 
difference between its reasonable costs and 110 percent of the 
limit, not to exceed 110 percent of its limit. In addition, under 
the various provisions set forth in Sec.  413.40, certain excluded 
hospitals and hospital units can obtain payment adjustments for 
justifiable increases in operating costs that exceed the limit. At 
the same time, however, by generally limiting payment increases, we 
continue to provide an incentive for excluded hospitals and hospital 
units to restrain the growth in their spending for patient services.

VI. Quantitative Impact Analysis of the Proposed Policy Changes Under 
the IPPS for Operating Costs

A. Basis and Methodology of Estimates

    In this proposed rule, we are announcing policy changes and 
payment rate updates for the IPPS for operating and capital-related 
costs. Based on the overall percentage change in payments per case 
estimated using our payment simulation model (a 4.9 percent 
increase), we estimate the total impact of these proposed changes 
for FY 2005 payments compared to FY 2004 payments to be 
approximately a $4.3 billion increase. This amount does not reflect 
changes in hospital admissions or case-mix intensity, which would 
also affect overall payment changes.
    We have prepared separate impact analyses of the proposed 
changes to each system. This section deals with proposed changes to 
the operating prospective payment system. Our payment simulation 
model relies on the most recent available data to enable us to 
estimate the impacts on payments per case of certain changes we are 
proposing in this proposed rule. However, there are other changes we 
are proposing for which we do not have data available that would 
allow us to estimate the payment impacts using this model. For those 
proposed changes, we have attempted to predict the payment impacts 
of those proposed changes based upon our experience and other more 
limited data.
    The data used in developing the quantitative analyses of changes 
in payments per case presented below are taken from the FY 2003 
MedPAR file and the most current Provider-Specific File that is used 
for payment purposes. Although the analyses of the changes to the 
operating PPS do not incorporate cost data, data from the most 
recently available hospital cost report were used to categorize 
hospitals. Our analysis has several qualifications. First, we do not 
make adjustments for behavioral changes that hospitals may adopt in 
response to the proposed policy changes, and we do not adjust for 
future changes in such variables as admissions, lengths of stay, or 
case-mix. Second, due to the interdependent nature of the IPPS 
payment components, it is very difficult to precisely quantify the 
impact associated with each proposed change. Third, we draw upon 
various sources for the data used to categorize hospitals in the 
tables. In some cases, particularly the number of beds, there is a 
fair degree of variation in the data from different sources. We have 
attempted to construct these variables with the best available 
source overall. However, for individual hospitals, some 
miscategorizations are possible.
    Using cases in the FY 2003 MedPAR file, we simulated payments 
under the operating IPPS given various combinations of payment 
parameters. Any short-term, acute care hospitals not paid under the 
IPPSs (Indian Health Service hospitals and hospitals in Maryland) 
were excluded from the simulations. The impact of payments under the 
capital IPPS, or the impact of payments for costs other than 
inpatient operating costs, are not analyzed in this section. 
Estimated payment impacts of proposed FY 2005 changes to the capital 
IPPS are discussed in section VIII. of this Appendix.
    The proposed changes discussed separately below are the 
following:
     The effects of the proposed annual reclassification of 
diagnoses and procedures and the recalibration of the DRG relative 
weights required by section 1886(d)(4)(C) of the Act.
     The effects of applying a lower labor-related share for 
hospitals with wage indexes less than or equal to 1.0, as required 
under section 403 of Public Law 108-173.
     The effects of the proposed adoption of the new MSAs as 
announced by OMB in June 2003.
     The effects of the proposed changes in hospitals' wage 
index values reflecting wage data from hospitals' cost reporting 
periods beginning during FY 2001, compared to the FY 2000 wage data.
     The effects of adjusting hospitals' wage data to 
reflect the occupational mix based on our survey of hospitals.
     The effect of the proposed wage and DRG recalibration 
budget neutrality factors.
     The effects of geographic reclassifications by the 
MGCRB that will be effective in FY 2005.
     The effects of the proposed implementation of section 
505 of Public Law 108-173, which provides for an increase in a 
hospital's wage index if the hospital qualifies by meeting a 
threshold percentage of residents of the county where the hospital 
is located who commute to work at hospitals in areas with higher 
wage indexes.
     The total change in payments based on proposed FY 2005 
policies and MMA-imposed changes relative to payments based on FY 
2004 policies.
    To illustrate the impacts of the proposed FY 2005 changes, our 
analysis begins with an FY 2005 baseline simulation model using: the 
proposed update of 3.3 percent; the FY 2004 DRG GROUPER (version 
21.0); the MSA designations for hospitals based on OMB's MSA 
definitions prior to June 2003; the FY 2004 wage index; and no MGCRB

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reclassifications. Outlier payments are set at 5.1 percent of total 
operating DRG and outlier payments.
    The baseline simulation model also reflects changes enacted by 
Public Law 108-173 to the IME and DSH adjustments. Section 402 
provides that, for discharges occurring on or after April 1, 2004, 
all hospitals that qualify will receive DSH payments using the prior 
(before April 1, 2004) DSH adjustment formula for urban hospitals 
with 100 or more beds. Except for urban hospitals with 100 or more 
beds and rural referral centers, the DSH adjustment is capped at 12 
percent. Section 502 modifies the IME adjustment for midway through 
FY 2004 and provides a new schedule of formula multipliers for FYs 
2005 and thereafter.
    Section 501(b) provides that, for FYs 2005 through 2007, the 
update factors will be reduced by 0.4 percentage point for any 
hospital that does not submit quality data. For purposes of the FY 
2005 simulations in this proposed impact analysis, we are assuming 
all hospitals will qualify for the full update. Hospitals are not 
required to begin submitting these data in order to qualify for a 
full update until July 2004, and we are therefore unable to 
determine the rate of compliance with this requirement of receiving 
the full update.
    Each proposed and statutory policy change is then added 
incrementally to this baseline model, finally arriving at an FY 2005 
model incorporating all of the proposed changes. This allows us to 
isolate the effects of each proposed change.
    Our final comparison illustrates the percent change in payments 
per case from FY 2004 to FY 2005. Five factors not discussed 
separately above have significant impacts here. The first is the 
update to the standardized amount. In accordance with section 
1886(b)(3)(B)(i) of the Act, we are proposing to update the 
standardized amount for FY 2005 using the most recently forecasted 
hospital market basket increase for FY 2005 of 3.3 percent. 
(Hospitals that fail to comply with the quality data submission 
requirement to receive the full update will receive an update 
reduced by 0.4 percentage points to 2.9 percent.) Under section 
1886(b)(3)(B)(iv) of the Act, the updates to the hospital-specific 
amounts for sole community hospitals (SCHs) and for Medicare-
dependent small rural hospitals (MDHs) are also equal to the market 
basket increase, or 3.3 percent.
    A second significant factor that impacts changes in hospitals' 
payments per case from FY 2004 to FY 2005 is the change in MGCRB 
status from one year to the next. That is, hospitals reclassified in 
FY 2004 that are no longer reclassified in FY 2005 may have a 
negative payment impact going from FY 2004 to FY 2005; conversely, 
hospitals not reclassified in FY 2004 that are reclassified in FY 
2005 may have a positive impact. In some cases, these impacts can be 
quite substantial, so if a relatively small number of hospitals in a 
particular category lose their reclassification status, the 
percentage change in payments for the category may be below the 
national mean. However, this effect is alleviated by section 
1886(d)(10)(D)(v) of the Act, which provides that reclassifications 
for purposes of the wage index are for a 3-year period.
    A third significant factor is that we currently estimate that 
actual outlier payments during FY 2004 will be 4.4 percent of total 
DRG payments. When the FY 2004 final rule was published, we 
projected FY 2004 outlier payments would be 5.1 percent of total DRG 
plus outlier payments; the average standardized amounts were offset 
correspondingly. The effects of the lower than expected outlier 
payments during FY 2004 (as discussed in the Addendum to this 
proposed rule) are reflected in the analyses below comparing our 
current estimates of FY 2004 payments per case to estimated FY 2005 
payments per case (with outlier payments projected to equal 5.1 
percent of total DRG payments).
    Fourth, as noted above, sections 402 and 502 of Public Law 108-
173 establish higher DSH and IME payments, respectively. As a 
result, payments for these factors will be higher in FY 2005 than in 
FY 2004.
    Fifth, section 508 of Public Law 108-173 established a one-time 
appeal process for hospitals to be reclassified in order to receive 
a higher wage index for a period of 3 years beginning with 
discharges on or after April 1, 2004.

B. Analysis of Table I

    Table I displays the results of our analysis. The table 
categorizes hospitals by various geographic and special payment 
consideration groups to illustrate the varying impacts on different 
types of hospitals. The top row of the table shows the overall 
impact on the 3,904 hospitals included in the analysis. This number 
is 145 fewer hospitals than were included in the impact analysis in 
the FY 2004 final rule (68 FR 45661). There are 94 new CAHs that 
were excluded from this year's analysis. The remaining 51 cases 
represent hospitals that have closed or hospitals for which we have 
no data.
    The next four rows of Table I contain hospitals categorized 
according to their geographic location: all urban, which is further 
divided into large urban and other urban; and rural. We previously 
defined a small rural hospital as a hospital with fewer than 100 
beds that is located outside of an MSA or NECMA. However, under the 
new labor market definitions that we are proposing to adopt, we no 
longer employ NECMAs to define urban areas in New England. 
Therefore, we will now define a small rural hospital as a hospital 
with fewer than 100 beds that is located outside of an MSA. There 
are 2,696 hospitals located in urban areas (MSAs or NECMAs) included 
in our analysis. Among these, there are 1,424 hospitals located in 
large urban areas (populations over 1 million), and 1,272 hospitals 
in other urban areas (populations of 1 million or fewer). In 
addition, there are 1,208 hospitals in rural areas. The next two 
groupings are by bed-size categories, shown separately for urban and 
rural hospitals. The final groupings by geographic location are by 
census divisions and are also shown separately for urban and rural 
hospitals.
    The second part of Table I shows hospital groups based on 
hospitals' FY 2005 payment classifications, including any 
reclassifications under section 1886(d)(10) of the Act. For example, 
the rows labeled urban, large urban, other urban, and rural show 
that the number of hospitals paid based on these categorizations 
after consideration of geographic reclassifications are 2,624, 
1,405, 1,219, and 1,280, respectively.
    The next three groupings examine the impacts of the final 
changes on hospitals grouped by whether or not they have GME 
residency programs (teaching hospitals that receive an IME 
adjustment) or receive DSH payments, or some combination of these 
two adjustments. There are 2,787 nonteaching hospitals in our 
analysis, 916 teaching hospitals with fewer than 100 residents, and 
201 teaching hospitals with 100 or more residents.
    In the DSH categories, hospitals are grouped according to their 
DSH payment status, and whether they are considered urban or rural 
for DSH purposes. Previously, hospitals in the rural DSH categories 
in the impact table represented hospitals that were not reclassified 
for purposes of the standardized amount. (However, they may have 
been reclassified for purposes of the wage index.) However, 
reclassification for purposes of the standardized amount has been 
terminated as a result of the equalization of the standardized 
amounts. As a result, there are no longer cases in which 
reclassifications change the status of rural hospitals for DSH 
purposes. There is little or no impact from the termination of 
standardized amount reclassification under the operating IPPS, since 
there are few concrete cases in which change from rural to urban 
status now would have any effect under the revised DSH payment 
formulas. The next category groups hospitals considered urban after 
geographic reclassification, in terms of whether they receive the 
IME adjustment, the DSH adjustment, both, or neither.
    The next five rows examine the impacts of the proposed changes 
on rural hospitals by special payment groups (SCHs, rural referral 
centers (RRCs), and Medicare dependant hospitals (MDHs)), as well as 
rural hospitals not receiving a special payment designation. There 
were 137 RRCs, 454 SCHs, 211 MDHs, and 73 hospitals that are both 
SCH and RRC.
    The next two groupings are based on type of ownership and the 
hospital's Medicare utilization expressed as a percent of total 
patient days. These data are taken primarily from the FY 2001 
Medicare cost report files, if available (otherwise FY 2000 data are 
used). Data needed to determine ownership status were unavailable 
for 68 hospitals. Similarly, the data needed to determine Medicare 
utilization were unavailable for 173 hospitals. The next two rows 
compare the impacts on those hospitals that converted from urban 
MSAs to rural CBSAs and for the hospitals that converted from rural 
MSAs to urban CBSAs.
    The next series of groupings concern the geographic 
reclassification status of hospitals. The first grouping displays 
all hospitals that were reclassified by the MGCRB for FY 2005. The 
next two groupings separate the hospitals in the first group by 
urban and rural status. The final row in Table I contains hospitals 
located in rural counties

[[Page 28800]]

but deemed to be urban under section 1886(d)(8)(B) of the Act.

                             Table I.--Impact Analysis of Proposed Changes for FY 2005 Operating Prospective Payment System
                                                         [Percent Changes in Payments per Case]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Core                            DRG &
                                                      DRG      Labor     based      New      Occupa-      wage        MGCRB          Out-       All  FY
                                         No. of      recal     share     stat.     wage      tional      index    reclassifica-   migration      2005
                                        hosps.\1\     \2\      split     areas   data \5\    mix \6\    changes      tion \8\      data \9\     changes
                                                                \3\       \4\                             \7\                                    \10\
                                              (1)       (2)       (3)       (4)       (5)         (6)        (7)           (8)           (9)        (10)
--------------------------------------
By Geographic Location:
    All hospitals....................       3,904       0.1       0.5       0.0       0.0         0.0        0.0           0.0           0.0         4.9
    Urban hospitals..................       2,696       0.0       0.5       0.1       0.0         0.0        0.0          -0.3           0.0         4.7
    Large urban areas (populations          1,424       0.0       0.3       0.1       0.0         0.0       -0.1          -0.4           0.0         4.5
     over 1 million).................
    Other urban areas (populations of       1,272       0.1       0.7       0.1       0.0         0.0        0.1          -0.2           0.1         5.0
     1 million or fewer).............
    Rural hospitals..................       1,208       0.2       1.1      -0.2       0.0         0.0        0.2           1.9           0.0         6.0
Bed Size (Urban):
    0-99 beds........................         684       0.2       0.5       0.4       0.0         0.0        0.3          -0.4           0.1         5.7
    100-199 beds.....................         966       0.1       0.5      -0.1       0.0         0.0        0.0          -0.3           0.1         4.6
    200-299 beds.....................         500       0.0       0.4       0.1      -0.2         0.0       -0.2          -0.2           0.0         4.4
    300-499 beds.....................         415       0.0       0.5       0.1       0.1         0.0        0.1          -0.3           0.0         4.8
    500 or more beds.................         131       0.0       0.3       0.0      -0.1         0.0       -0.1          -0.4           0.0         4.9
Bed Size (Rural):
    0-49 beds........................         549       0.4       1.0      -0.1       0.2         0.0        0.5           0.4           0.1         6.3
    50-99 beds.......................         393       0.3       0.9      -0.2       0.1         0.0        0.3           1.0           0.1         6.1
    100-149 beds.....................         163       0.2       1.2      -0.3       0.1         0.1        0.3           2.6           0.1         6.0
    150-199 beds.....................          57       0.2       1.3      -0.3      -0.1         0.1        0.0           3.2           0.0         5.9
    200 or more beds.................          46       0.1       1.1      -0.1      -0.1         0.0       -0.1           2.9           0.0         5.6
Urban by Region:
    New England......................         137       0.2       0.0      -0.4      -0.2         0.0       -0.2          -0.3           0.0         3.6
    Middle Atlantic..................         397       0.0       0.3       0.2      -0.7         0.0       -0.8          -0.1           0.1         3.7
    South Atlantic...................         419       0.1       0.5       0.2       0.1         0.0        0.1          -0.3           0.0         5.0
    East North Central...............         450       0.0       0.3       0.0       0.1         0.0        0.1          -0.3           0.0         4.7
    East South Central...............         175       0.1       1.2       0.2       0.1         0.0        0.2          -0.3           0.1         5.5
    West North Central...............         160       0.1       0.6       0.1       0.2         0.0        0.2          -0.5           0.0         5.1
    West South Central...............         346       0.0       0.9       0.0       0.5         0.0        0.5          -0.5           0.0         5.7
    Mountain.........................         140       0.0       0.2       0.2      -0.4         0.0       -0.4          -0.1           0.0         3.8
    Pacific..........................         421       0.1       0.0       0.1       0.1         0.0        0.2          -0.3           0.1         4.9
    Puerto Rico......................          51      -0.4       6.2      -0.1      -0.2         0.0       -0.7          -0.5           0.0        14.3
Rural by Region:
    New England......................          34       0.2       0.3       0.3       0.3         0.0        0.3           1.3           0.0         3.9
    Middle Atlantic..................          57       0.3       1.0      -0.4      -0.2         0.0        0.0           1.8           0.0         4.2
    South Atlantic...................         176       0.2       1.1      -0.7      -0.1         0.1        0.1           2.0           0.0         5.8
    East North Central...............         160       0.2       0.8      -0.1       0.1         0.0        0.2           1.4           0.0         4.5
    East South Central...............         192       0.2       2.0       0.0      -0.3         0.1       -0.1           2.8           0.1         9.4
    West North Central...............         206       0.3       0.8      -0.1       0.3         0.0        0.5           1.3           0.0         5.7
    West South Central...............         228       0.2       1.7       0.0       0.1         0.1        0.4           3.0           0.1         7.2
    Mountain.........................          93       0.3       0.4      -0.2       0.2         0.0        0.4           0.5           0.1         4.4
    Pacific..........................          62       0.2       0.0       0.0       0.3         0.0        0.5           0.8           0.1         4.5
By Payment Classification:
    Urban hospitals..................       2,624       0.0       0.5       0.1       0.0         0.0        0.0          -0.3           0.0         4.7
    Large urban areas (populations          1,405       0.0       0.3       0.1       0.0         0.0       -0.1          -0.4           0.0         4.5
     over 1 million).................
    Other urban areas (populations of       1,219       0.1       0.7       0.1       0.0         0.0        0.1          -0.2           0.1         5.0
     1 million or fewer).............
    Rural areas......................       1,280       0.3       1.0      -0.2       0.0         0.0        0.2           1.7           0.0         5.9
Teaching Status:
    Non-teaching.....................       2,787       0.1       0.7       0.1       0.0         0.0        0.1           0.3           0.1         5.2
    Fewer than 100 Residents.........         916       0.0       0.5       0.1       0.1         0.0        0.0          -0.2           0.0         4.8
    100 or more Residents............         201       0.0       0.2      -0.1      -0.2         0.0       -0.3          -0.3           0.0         4.5
Urban DSH:
    Non-DSH..........................       1,156       0.1       0.4       0.1       0.0         0.0        0.0          -0.1           0.0         4.7
    100 or more beds.................       1,465       0.0       0.5       0.0       0.0         0.0       -0.1          -0.3           0.0         4.7
    Less than 100 beds...............         335       0.3       0.7       0.9       0.0         0.0        0.4          -0.4           0.1         7.0
Rural DSH:
    Sole Community (SCH).............         482       0.3       0.6      -0.1       0.1         0.0        0.3           0.4           0.0         4.9
    Referral Center (RRC)............         157       0.2       1.3      -0.2      -0.1         0.1        0.0           3.6           0.0         6.1
    Other Rural:
        100 or more beds.............          68       0.3       1.7       0.2      -0.2         0.1        0.1           1.1           0.1         8.9
        Less than 100 beds...........         241       0.4       1.8      -0.3      -0.1         0.1        0.2           1.2           0.1        10.1
Urban teaching and DSH:
    DSH..............................         800       0.0       0.4       0.0       0.0         0.0       -0.1          -0.3           0.0         4.6
        Teaching and no DSH..........         250       0.1       0.3       0.0       0.1         0.0        0.0          -0.3           0.1         4.8
        No teaching and DSH..........       1,000       0.1       0.6       0.2       0.0         0.0        0.1          -0.2           0.1         5.1
        No teaching and no DSH.......         574       0.1       0.4       0.2      -0.1         0.0        0.0          -0.3           0.0         4.6
Rural Hospital Types:
    Non special status hospitals.....         400       0.4       1.6      -0.1       0.0         0.1        0.3           1.1           0.1         8.6
    RRC..............................         137       0.2       1.7      -0.3      -0.1         0.1        0.0           4.6           0.0         6.4
    SCH..............................         454       0.2       0.4      -0.1       0.1         0.0        0.2           0.2           0.0         4.0
    Medicare-dependent hospitals              211       0.4       1.6      -0.2       0.3         0.1        0.6           0.9           0.1         8.1
     (MDH)...........................

[[Page 28801]]

 
    SCH and RRC......................          73       0.1       0.5      -0.2       0.1         0.0        0.1           1.4           0.0         4.5
Type of Ownership:
    Voluntary........................       2,343       0.1       0.5       0.1       0.0         0.0        0.0           0.0           0.0         4.7
    Proprietary......................         717       0.0       0.7      -0.1       0.1         0.0        0.1           0.0           0.0         5.3
    Government.......................         776       0.1       0.7       0.1      -0.1         0.0        0.0           0.2           0.1         5.4
    Unknown..........................          68      -0.1       0.7       0.0       0.1         0.0        0.1          -0.5           0.0         5.1
Medicare Utilization as a Percent of
 Inpatient Days:
    0-25.............................         227      -0.1       0.2       0.1      -0.1         0.0       -0.3          -0.2           0.0         4.4
    25-50............................       1,122       0.0       0.4       0.0       0.1         0.0        0.0          -0.3           0.0         4.7
    50-65............................       1,445       0.1       0.7       0.1       0.0         0.0        0.1           0.2           0.1         5.1
    Over 65..........................         937       0.1       0.7       0.0      -0.1         0.0        0.0           0.3           0.0         4.9
    Unknown..........................         173       0.0       0.4       0.1      -0.1         0.0       -0.2          -0.2           0.0         4.8
Rural Converted to Urban.............         164       0.2       1.2       3.6      -0.3         0.0        0.0           1.2           0.0         6.4
Urban Converted to Rural.............          69       0.2       0.7      -0.2      -0.1         0.0        0.1           0.3           0.0         4.8
Hospitals Reclassified by the
 Medicare Geographic Classification
 Review Board: FY 2005
 Reclassifications:
    All Reclassified Hospitals.......         485       0.2       0.9       0.3       0.0         0.0        0.1           3.7           0.0         5.2
    Nonreclassified Hospitals........       3,326       0.1       0.5       0.0       0.0         0.0        0.0          -0.5           0.0         4.8
    All Reclassified Urban Hospitals.         118       0.1       0.6       1.1       0.0         0.0        0.0           3.8           0.0        14.3
    Urban Nonreclassified Hospitals..       2,486       0.0       0.4       0.0       0.0         0.0        0.0          -0.5           0.0         4.7
    All Reclassified Rural Hospitals.         367       0.2       1.1      -0.2       0.0         0.0        0.2           3.7           0.0         5.9
    Rural Nonreclassified Hospitals..         840       0.3       1.0      -0.2       0.1         0.0        0.3          -0.3           0.1         6.2
    Other Reclassified Hospitals               93       0.2       0.5       0.4      -0.3         0.0       -0.1          -0.3           0.0        4.4
     (Section 1886(D)(8)(B)).........
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Because data necessary to classify some hospitals by category were missing, the total number of hospitals in each category may not equal the
  national total. Discharge data are from FY 2003, and hospital cost report data are from reporting periods beginning in FY 2001 and FY 2000.
\2\ This column displays the payment impact of the recalibration of the DRG weights based on FY 2003 MedPAR data and the DRG reclassification changes,
  in accordance with section 1886(d)(4)(C) of the Act.
\3\ This column displays the payment impact of applying a lower labor-related share for hospitals with wage indexes less than or equal to 1.0, as
  required under section 403 of Public Law 108-173.
\4\ This column displays the impact of the proposed adoption of the new MSAs as announced by OMB in June 2003.
\5\ This column displays the impact of updating the wage index with wage data from hospitals' FY 2001 cost reports.
\6\ This column displays the effects of adjusting hospitals' wage data to reflect the occupational mix based on our survey of hospitals.
\7\ This column shows the payment impact of the budget neutrality adjustment factor for DRG and wage index changes, in accordance with sections
  1886(d)(4)(C)(iii) and 1886(d)(3)(E) of the Act. Thus, it represents the combined impacts shown in columns 2, 3, 4 and 5, and the proposed FY 2005
  budget neutrality factor of 0.994295 (the change to the labor-related share shown in column 3 is not included in the budget neutrality calculation).
\8\ Shown here are the effects of geographic reclassifications by the Medicare Geographic Classification Review Board (MGCRB). The effects demonstrate
  the FY 2005 payment impact of going from no reclassifications to the reclassifications scheduled to be in effect for FY 2005. Reclassification for
  prior years has no bearing on the payment impacts shown here.
\9\ This column displays the impact of the proposed implementation of section 505 of Public Law 108-173, which provides for an increase in a hospital's
  wage index if the hospital qualifies by meeting a threshold percentage of residents of the county where the hospital is located who commute to work at
  hospitals in counties with higher wage indexes.
\10\ This column shows changes in payments from FY 2004 to FY 2005. It incorporates all of the changes displayed in columns 3, 7, 8 and 9 (the changes
  displayed in columns 2, 4, 5 and 6 are included in column 7). It also reflects the impact of the FY 2005 update, changes in hospitals'
  reclassification status in FY 2005 compared to FY 2004, and the changes in payments as a result of implementing Section 508 of the MMA. The sum of
  these impacts may be different from the percentage changes shown here due to rounding and interactive effect.

C. Impact of the Proposed Changes to the DRG Reclassifications and 
Recalibration of Relative Weights (Column 2)

    In column 2 of Table I, we present the combined effects of the 
DRG reclassifications and recalibration, as discussed in section II. 
of the preamble to this proposed rule. Section 1886(d)(4)(C)(i) of 
the Act requires us annually to make appropriate classification 
changes and to recalibrate the DRG weights in order to reflect 
changes in treatment patterns, technology, and any other factors 
that may change the relative use of hospital resources.
    We compared aggregate payments using the FY 2004 DRG relative 
weights (GROUPER version 21.0) to aggregate payments using the 
proposed FY 2005 DRG relative weights (GROUPER version 22.0). We 
note that, consistent with section 1886(d)(4)(C)(iii) of the Act, we 
have applied a budget neutrality factor to ensure that the overall 
payment impact of the DRG changes (combined with the wage index 
changes) is budget neutral. This proposed budget neutrality factor 
of 0.994295 is applied to payments in Column 7. Because this is a 
combined DRG reclassification and recalibration and wage index 
budget neutrality factor, it is not applied to payments in this 
column.
    The major DRG classification changes we are proposing include: 
reassigning the procedure code for left ventricular assist devices 
(LVADs) from DRG 525 to DRG 103 (now titled ``Heart Transplant or 
Implant of Heart Assist System''); reassigning the procedure codes 
involving artificial anal sphincters from DRGs 157 and 158 to DRGs 
146 (Rectal Resection With CC) and 147 (Rectal Resection Without 
CC); modifying the ventilation by reassigning all those cases to 
DRGs 504 and 505; splitting the DRG 483 into two new DRGs based on 
the presence or absence of major OR procedures, DRG 541 
(Tracheostomy with Mechanical Ventilation 96+ Hours or Principal 
Diagnosis Except Face, Mouth and Neck Diagnoses With Major Operating 
Room Procedure) and 542 (Tracheostomy with Mechanical Ventilation 
96+ Hours or Principal Diagnosis Except Face, Mouth and Neck 
Diagnoses Without Major Operating Room Procedure). In the aggregate, 
these proposed changes would result in 0.1 percent change in overall 
payments to hospitals. On average, the impacts of these changes on 
any particular hospital group are very small. The largest impact is 
a 0.2 percent increase among rural hospitals. This is likely 
primarily attributable to a 1.46 percent increase in DRG 127 (Heart 
Failure and Shock). This high-volume DRG comprises a 
disproportionate percentage of cases in small rural hospitals. Ten 
Puerto Rico hospitals also experience case mix declines of greater 
than 1 percent in this

[[Page 28802]]

column, leading to a 0.4 percent decrease overall for this row.

D. Impact of the Change in the Labor-Related Share

    Section 403 of the MMA provides that, for discharges occurring 
on or after October 1, 2004, a hospital's labor-related share of the 
standardized amount will be decreased to 62 percent of the 
standardized amount unless such a change will result in lower total 
payments to the hospital. This provision also applies to the labor-
related share of the standardized amount for hospitals in Puerto 
Rico. The overall impact of implementing this provision is a 0.5 
percent payment increase to all hospitals (approximately $500 
million). Large urban hospitals would experience a 0.3 percent 
increase while other urban hospitals would experience a 0.7 percent 
increase. Rural hospitals are expected to benefit from this 
provision with a 1.1 percent increase in payments in FY 2005.
    Among regions, hospitals in Puerto Rico experience the largest 
increase of 6.2 percent (due to the relatively low national wage 
index levels in Puerto Rico). The smallest change among urban 
hospitals is in the New England and Pacific regions with a 0.0 
percent change. The largest increase among rural regions is expected 
to be East South Central, with a 2.0 percent increase in payments.

E. Impact of Changing to New Labor Market Areas (Core Based 
Statistical Areas) From MSAs (Column 4)

    In accordance with the broad discretion under section 
1886(d)(3)(E) of the Act, we currently define hospital labor market 
areas based on the definitions of Metropolitan Statistical Areas 
(MSAs), Primary MSAs (PMSAs), and New England County Metropolitan 
Areas (NECMAs) issued by OMB. On June 6, 2003, OMB announced new 
Core Based Statistical Areas (CBSAs), comprised of MSAs and the new 
Micropolitan Statistical Areas based on Census 2000 data. CMS is 
proposing to adopt the new MSA definitions, including the 49 new 
Metropolitan areas designated under the new definitions. We are also 
proposing to adopt MSA definitions in New England in place of 
NECMAs. We are not adopting the newly defined Micropolitan 
Statistical Areas for use in the payment system: as a result, 
Micropolitan Statistical Areas will remain part of the statewide 
rural areas for purposes of IPPS payments. (However, as discussed in 
section III.B.1.d. of the preamble to this proposed rule, we are 
proposing a special transition policy for hospitals that were 
formerly in urban areas, but are now in areas considered rural or 
Micropolitan under the OMB definitions.) There are 46 counties with 
72 hospitals that are currently in an MSA that would be treated as 
rural under our proposal to update the MSA definitions using only 
the new MSAs. To help alleviate the decreased payments for currently 
urban hospitals that would become rural, we are proposing to allow 
them to maintain their assignment to the MSA where they are 
currently located for the 3-year period including FY 2005, FY 2006, 
and FY 2007.
    The impact of these changes to the new CBSAs is isolated in 
column 4 by holding the other payment parameters constant in this 
simulation. That is, column 4 shows the percentage changes in 
payments when going from a model using the current MSA designations 
to a model using the new CBSA designations (for Metropolitan areas 
only). Overall, the new CBSAs would lead to a zero percent change. 
Urban hospitals' wage indexes would increase by 0.1 percent. Rural 
hospitals would experience a 0.2 percent decrease in overall 
payments as a result of this provision. Among regions, the largest 
impact of updating the wage data is seen in the rural South Atlantic 
region (a 0.7 percent decrease). Rural hospitals in the Middle 
Atlantic would experience the next largest impact, with a 0.4 
percent decrease.
    Among urban hospitals, New England would experience a 0.4 
percent decrease. These impacts result primarily from dividing the 
previously amalgamated Boston NECMA into four Metropolitan Divisions 
and several other small Metropolitan Statistical Areas. The counties 
that previously comprised the Boston MSA now form all or part of the 
Boston-Quincy, MA Metropolitan Division, the Cambridge-Newton-
Framingham, MA Metropolitan Division, the Essex County, MA 
Metropolitan Division, the Rockingham County-Strafford County 
Metropolitan Division, the Manchester-Nashua Metropolitan 
Statistical Area, the Providence-New Bedford-Fall River, RI-MA 
Metropolitan Statistical Area, and the Worcester, MA Metropolitan 
Statistical Area. The Rockingham County-Strafford County 
Metropolitan Division, Manchester-Nashua MSA, and Boston-Quincy 
Metropolitan Division experience 9.4, 6.9, and 5.7 percent 
decreases, respectively.
    As described in section III of the preamble to this proposed 
rule, to help alleviate the decreased payments for currently urban 
hospitals that would become rural, we are proposing to allow them to 
maintain their assignment to the MSA where they are currently 
located for the 3-year period including FY 2005, FY 2006, and FY 
2007. The impact upon these hospitals is shown in the row labeled 
``Urban to Rural Hospitals.'' Conversely, the row labeled ``Rural to 
Urban Hospitals'' displays formerly rural hospitals that are now in 
MSAs under the new definitions.

F. Impact of Proposed Wage Index Changes (Columns 5 and 6)

    Section 1886(d)(3)(E) of the Act requires that, beginning 
October 1, 1993, we annually update the wage data used to calculate 
the wage index. In accordance with this requirement, the proposed 
wage index for FY 2005 is based on data submitted for hospital cost 
reporting periods beginning on or after October 1, 2000 and before 
October 1, 2001. The impact of the new data on hospital payments is 
isolated in column 5 by holding the other payment parameters 
constant in this simulation. That is, column 5 shows the percentage 
changes in payments when going from a model using the FY 2004 wage 
index, based on FY 2000 wage data, to a model using the FY 2005 pre-
reclassification wage index, based on FY 2001 wage data. The wage 
data collected on the FY 2001 cost report is the same as the FY 2000 
wage data that were used to calculate the FY 2004 wage index. 
However, for the FY 2005 wage index, we added an occupational mix 
adjustment to the wage index. The occupational mix adjustment is 
based on data collected on the Medicare Wage Index Occupational Mix 
Survey, Form-CMS-10079. The data collection period for the survey 
was calendar year 2003 through February 7, 2004. The effects of the 
occupational mix adjustment are shown in the next column (6).
    Column 5 shows the impacts of updating the wage data using FY 
2001 cost reports. Overall, the new wage data would lead to a 0.0 
percent change. Urban hospitals' wage indexes would not change (0.0 
percent), and rural hospitals' wage indexes would also remain the 
same (0.0 percent). Among regions, the largest declines from 
updating the wage data are seen in urban Middle Atlantic and 
Mountain regions (a 0.7 and 0.4 percent decreases, respectively). In 
the Middle Atlantic, there are 352 hospitals (New York, 
Pennsylvania, and New Jersey) that are experiencing a drop in their 
wage index relative to last year with the introduction of the new 
wage data. Kingston, NY experiences a drop of 5.8 percent, while 
Buffalo sees a 2.8 percent drop. Additionally, two of the areas are 
divisions of New York City, including the Manhattan area (New York-
Wayne-White Plains, NY) and Suffolk-Nassau, NY. While these areas do 
not necessarily experience a significant drop (2.5 and 1.5 percent), 
they include a large number of inpatient hospitals. Pittsburgh, PA, 
Rochester, NY, and Allentown, PA also see decreases due to this 
change. We note that this is due to below average increases in their 
average hourly wage and not as a result of real average hourly wage 
declines. Urban hospitals in the West South Central region would 
experience the next largest impact, with a 0.5 percent increase. The 
rural East South Central and Middle Atlantic regions experience 0.3 
and 0.2 percent decreases, respectively while the Pacific, West 
South Central, and New England regions each experience a 0.3 percent 
increase.
    The national average hourly wage increased 6.41 percent compared 
to FY 2004. Therefore, the only manner in which to maintain or 
exceed the previous year's wage index was to match the national 6.41 
increase in average hourly wage. Of the 3,887 hospitals with wage 
index values in both FYs 2004 and 2005, 1,937, or 49.8 percent, also 
experienced an average hourly wage increase of 6.41 percent or more.
    The following chart compares the shifts in wage index values for 
hospitals for FY 2005 relative to FY 2004. Among urban hospitals, 89 
would experience an increase of between 5 percent and 10 percent and 
45 would experience an increase of more than 10 percent. A total of 
7 rural hospitals would experience increases greater than 5 percent, 
but none would experience increases of greater than 10 percent. On 
the negative side, 36 urban hospitals would experience decreases in 
their wage index values of at least 5 percent, but less than 10 
percent. Two urban hospitals would experience decreases in their 
wage index values greater than 10 percent.

[[Page 28803]]

    The following chart shows the projected impact for urban and 
rural hospitals.

------------------------------------------------------------------------
                                                             No. of
                                                            hospitals
      Percentage change in area wage index values      -----------------
                                                         Urban    Rural.
------------------------------------------------------------------------
Increase more than 10 percent.........................       45       0.
Increase more than 5 percent and less than 10 percent.       89       7.
Increase or decrease less than 5 percent..............    2,625   1,609.
Decrease more than 5 percent and less than 10 percent.       36       0.
Decrease more than 10 percent.........................        2        1
------------------------------------------------------------------------

    The next column (6) shows the impacts on the calculation of the 
FY 2005 wage index of adjusting for occupational mix. Section 
1886(d)(3)(E) of the Act provides for the collection of data every 3 
years on the occupational mix of employees for each short-term, 
acute care hospital participating in the Medicare program, in order 
to construct an occupational mix adjustment to the wage index, 
beginning with the FY 2005 wage index. A complete discussion of the 
initial collection of these data and the occupational mix adjustment 
that we are proposing to apply, beginning October 1, 2004 (the FY 
2005 wage index), appears under section III.C. of this preamble. The 
calculation of the wage index now includes a blended rate of 90 
percent of an unadjusted wage index and 10 percent of a wage index 
adjusted for occupational mix. We project an overall change increase 
of 0.0 percent for all hospitals. The biggest change is in the rural 
urban hospitals in the South Atlantic, East South Central, and West 
South Central regions, which are projected to experience a 0.1 
percent increase for FY 2005.

G. Combined Impact of Proposed DRG and Wage Index Changes, 
Including Budget Neutrality Adjustment (Column 7)

    The impact of the DRG reclassifications and recalibration on 
aggregate payments is required by section 1886(d)(4)(C)(iii) of the 
Act to be budget neutral. In addition, section 1886(d)(3)(E) of the 
Act specifies that any updates or adjustments to the wage index are 
to be budget neutral. As noted in the Addendum to this proposed 
rule, we compared simulated aggregate payments using the FY 2004 DRG 
relative weights and wage index to simulated aggregate payments 
using the proposed FY 2005 DRG relative weights and blended wage 
index.
    We computed a proposed wage and recalibration budget neutrality 
factor of 0.994295. The 0.0 percent impact for all hospitals 
demonstrates that these proposed changes, in combination with the 
budget neutrality factor, are budget neutral. In Table I, the 
combined overall impacts of the effects of both the DRG 
reclassifications and recalibration and the updated wage index are 
shown in column 7. The proposed changes in this column are the sum 
of the final changes in columns 2, 5, and 6 combined with the budget 
neutrality factor and the wage index floor for urban areas required 
by section 4410 of Pub. L. 105-33, to be budget neutral (the change 
to the labor share in column 3 is not subject to budget neutrality. 
There also may be some variation of plus or minus 0.1 percentage 
point due to rounding.
    Among urban regions, the largest impacts are in the Middle 
Atlantic and Puerto Rico, with 0.8 and 0.7 percent declines, 
respectively. The West South Central region experiences the largest 
increase of 0.5 percent. Among rural regions, the West North Central 
and Pacific regions benefit the most with 0.5 percent increases, 
while East South Central is the only region to experience a decline 
(0.1 percent).

H. Impact of MGCRB Reclassifications (Column 8)

    Our impact analysis to this point has assumed hospitals are paid 
on the basis of their actual geographic location (with the exception 
of ongoing policies that provide that certain hospitals receive 
payments on bases other than where they are geographically located, 
such as hospitals in rural counties that are deemed urban under 
section 1886(d)(8)(B) of the Act). The changes in column 8 reflect 
the per case payment impact of moving from this baseline to a 
simulation incorporating the MGCRB decisions for FY 2005. These 
decisions affect hospitals' standardized amount and wage index area 
assignments.
    By February 28 of each year, the MGCRB makes reclassification 
determinations that will be effective for the next fiscal year, 
which begins on October 1. The MGCRB may approve a hospital's 
reclassification request for the purpose of using another area's 
wage index value. The proposed FY 2005 wage index values incorporate 
all of the MGCRB's reclassification decisions for FY 2005. The wage 
index values also reflect any decisions made by the CMS 
Administrator through the appeals and review process through 
February 28, 2004. Additional changes that result from the 
Administrator's review of MGCRB decisions or a request by a hospital 
to withdraw its application will be reflected in the final rule for 
FY 2005.
    The overall effect of geographic reclassification is required by 
section 1886(d)(8)(D) of the Act to be budget neutral. Therefore, we 
applied an adjustment of 0.994295 to ensure that the effects of 
reclassification are budget neutral. (See section II.A.4.b. of the 
Addendum to this proposed rule.)
    As a group, rural hospitals benefit from geographic 
reclassification. Their payments would rise 1.9 percent in column 8. 
Payments to urban hospitals would decline 0.3 percent. Hospitals in 
other urban areas would experience an overall decrease in payments 
of 0.2 percent, while large urban hospitals would also lose 0.4 
percent. Among urban hospital groups (that is, bed size, census 
division, and special payment status), payments generally would 
decline.
    A positive impact is evident among most of the rural hospital 
groups. The smallest increases among the rural census divisions are 
0.5 percent in the Mountain region and 1.3 percent each for the New 
England and West North Central regions. The largest increases are in 
the rural East South Central region, with an increase of 2.8 percent 
and in the West South Central region that would experience an 
increase of 3.0 percent.
    Among all the hospitals that were reclassified for FY 2005 
(including hospitals that received wage index reclassifications in 
FY 2003 or FY 2004 that extend for 3 years), the MGCRB changes are 
estimated to provide a 3.7 percent increase in payments. Urban 
hospitals reclassified for FY 2005 are expected to receive an 
increase of 3.8 percent, while rural reclassified hospitals are 
expected to benefit from the MGCRB changes with a 3.7 percent 
increase in payments. Payments to urban and rural hospitals that did 
not reclassify are expected to decrease slightly due to the MGCRB 
changes, decreasing by 0.5 percent for urban hospitals and 0.3 
percent for rural hospitals.

I. Impacts of Implementing the Wage Index Adjustment for Out-
Migration (Column 9)

    Section 505 of Public Law 108-173 established new section 
1886(d)(13) of the Act. Section 1886(d)(13) requires that the 
Secretary establish a new process to make adjustments to the 
hospital wage index based on commuting patterns of hospital 
employees. The process provides for an increase in the wage index 
for hospitals located in certain counties that have a relatively 
high percentage of hospital employees who reside in the county but 
work in a different area with a higher wage index. Hospitals located 
in counties that qualify for the payment adjustment would receive an 
increase in the wage index that is equal to a weighted average of 
the difference between the wage index of the resident county and the 
higher wage index work area(s) weighted by the overall percentage of 
workers who are employed in an area with a higher wage index. Using 
our proposed criteria, 224 counties and 411 hospitals qualify to 
receive a commuting adjustment.
    Due to the statutory formula to calculate the adjustment and the 
small number of counties that qualify, the impact on hospitals would 
be minimal, with an overall impact on all hospitals of 0.0 percent. 
However, some regions would experience a discernible impact. For 
example, urban hospitals in the Middle Atlantic region would 
experience a 0.1 percent increase due to this provision. This is due 
in part to the fact that a hospital in that region would experience 
the largest increase for any hospital under this provision. A 
hospital located in Ulster County, New York would receive an 
increase in its wage index value of 0.1014. Hospital employees 
living in Ulster County commute to Albany, Columbia, Dutchess, 
Greene, New York, Orange, Rockland, Sullivan, and Westchester 
counties. Dutchess, New York, Orange, Rockland and Westchester 
counties are located in higher wage index areas. Thus, for FY 2005, 
this hospital's wage index would increase from 0.8874 to 0.9888.

J. All Changes (Column 10)

    Column 10 compares our estimate of payments per case, 
incorporating all changes reflected in this proposed rule for FY 
2005 (including statutory changes), to our estimate of payments per 
case in FY 2004. This

[[Page 28804]]

column includes all of the proposed policy changes. Because the 
reclassifications shown in column 8 do not reflect FY 2004 
reclassifications, the impacts of FY 2005 reclassifications only 
affect the impacts from FY 2004 to FY 2005 if the reclassification 
impacts for any group of hospitals are different in FY 2005 compared 
to FY 2004.
    Column 10 reflects all FY 2005 changes relative to FY 2004, 
shown in columns 2 through 9 and those not applied until the final 
rates are calculated. The average increase for all hospitals is 
approximately 4.9 percent. This increase includes the effects of the 
3.3 percent market basket update. It also reflects the 0.7 
percentage point difference between the projected outlier payments 
in FY 2004 (5.1 percent of total DRG payments) and the current 
estimate of the percentage of actual outlier payments in FY 2004 
(4.4 percent), as described in the introduction to this Appendix and 
the Addendum to this proposed rule. As a result, payments are 
projected to be 0.7 percent lower in FY 2004 than originally 
estimated resulting in a 0.7 percent higher increase for FY 2005 
than would otherwise occur. It also includes the impact of adjusting 
the labor share, shown in column 3, of approximately 0.5 percent. 
The remaining 0.4 percent increase is attributable to the indirect 
medical education formula changes for teaching hospitals; changes in 
payments due to the wage reclassifications under section 508 of the 
MMA, in effect for the whole year; and increased payments to Puerto 
Rico hospitals as a result of section 504 of the MMA, which changed 
the mix of the Federal standardized amount and the Puerto Rico-
specific standardized amount. The overall increase also reflects 
changes to payments that resulted from implementing other changes as 
required by Public Law 108-173. These changes are discussed in other 
rules and in many sections of the preamble to this proposed rule.
    Section 213 of Public Law 106-554 provides that all SCHs may 
receive payment on the basis of their costs per case during their 
cost reporting period that began during 1996. For FY 2005, eligible 
SCHs receive 100 percent of their 1996 hospital-specific rate. The 
impact of this provision is modeled in column 10 as well. 
Additionally, section 402 of Public Law 108-173 increases the 
disproportionate share hospital (DSH) adjustment for certain 
hospitals that serve a disproportionate share of low-income Medicare 
and Medicaid patients, which includes rural hospitals and urban 
hospitals with fewer than 100 beds, sole community hospitals, rural 
referral centers, and rural hospitals with less than 500 beds. The 
increase in DSH payments became effective for discharges occurring 
on or after April 1, 2004. As provided in the new Medicare law, the 
cap on DSH payment adjustments increase from 5.25 percent to 12 
percent for urban hospitals fewer than 100 beds, sole community 
hospitals, and rural hospitals with less than 500 beds. There is no 
cap on rural referral centers, large urban hospitals over 100 beds, 
or rural hospitals over 500 beds.
    We are no longer required to ensure that any add-on payments for 
new technology under section 1886(d)(5)(K) of the Act are budget 
neutral. However, we are still providing an estimate of the payment 
increases here, as they will have a significant impact on total 
payments made in FY 2005. As discussed in section II.E. of the 
preamble of this proposed rule, we are proposing to maintain the new 
technology status of the InFUSETM Bone Graft/LT-
CAGETM Lumbar Tapered Fusion Device for spinal fusions. 
We estimate the total add-on payments associated with cases 
involving this new device for FY 2005 would be $4.7 million. In 
addition, several other technologies may receive approval if we 
receive appropriate supplemental data from the applicants (as 
discussed in the preamble) and after public comments are taken into 
consideration for approval or denial of the technologies for FY 
2005. If we receive the necessary supplemental data for all of the 
devices that could be approved were to be approved, the total 
estimated increase in payments for FY 2005 could be $369 million.
    There might also be interactive effects among the various 
factors comprising the payment system that we are not able to 
isolate. For these reasons, the values in column 10 may not equal 
the sum of the changes described above.
    The overall change in payments per case for hospitals in FY 2005 
would increase by 4.9 percent. Hospitals in urban areas would 
experience a 4.7 percent increase in payments per case compared to 
FY 2004. Hospitals in rural areas, meanwhile, would experience a 6.0 
percent payment increase. Hospitals in large urban areas would 
experience a 4.5 percent increase in payments and hospitals in other 
urban areas would experience a 5.0 percent increase in payments.
    Among urban census divisions, the largest payment increase would 
be 14.3 percent in Puerto Rico. This is due largely to the change in 
calculation of their payment rate to 75 percent of the National 
amount and the increase to the standardized amount to large urban 
hospitals. Additionally, the change to CBSAs makes all hospitals in 
Puerto Rico classify as urban hospitals instead of rural. (Because 
of these changes, we have deleted from Table I, the column included 
in prior years that shows the impacts on rural Puerto Rico 
hospitals.) Hospitals in the urban East South Central and West South 
Central regions would experience overall increases of 5.5 percent 
and 5.7 percent, respectively. The smallest increase would occur in 
the New England region, with an increase of 3.6 percent.
    Among rural regions in column 10, no hospital category would 
experience overall payment decreases. The East South Central and 
West South Central regions would benefit the most, with 9.4 and 7.2 
percent increases, respectively. The smallest increase would occur 
in the New England region, with 3.9 percent increases in payments.
    Among special categories of rural hospitals in column 10, those 
hospitals receiving payment under the hospital-specific methodology 
(SCHs, MDHs, and SCH/RRCs) would experience payment increases of 4.0 
percent, 8.1 percent, and 4.5 percent, respectively. This outcome is 
primarily related to the fact that, for hospitals receiving payments 
under the hospital-specific methodology, there were several 
increases to payments made in relation to implementation of the 
Public Law 108-173.
    Hospitals that were reclassified for FY 2005 are estimated to 
receive a 5.2 percent increase in payments. Urban hospitals 
reclassified for FY 2005 are anticipated to receive an increase of 
4.3 percent, while rural reclassified hospitals are expected to 
benefit from reclassification with a 5.9 percent increase in 
payments. Those hospitals located in rural counties but deemed to be 
urban under section 1886(d)(8)(B) of the Act are expected to receive 
an increase in payments of 4.4 percent.

         Table II.--Impact Analysis of Proposed Changes for FY 2005 Operating Prospective Payment System
                                               [Payments per Case]
----------------------------------------------------------------------------------------------------------------
                                                                    Average  FY     Average  FY
                                                     Number of     2004  payment   2005  payment    All FY 2005
                                                     hospitals     per case \1\    per case \1\       changes
                                                             (1)             (2)             (3)            (4).
-------------------------------------------------
By Geographic Location:.
    All hospitals...............................           3,904            7812            8193            4.9.
    Urban hospitals.............................           2,696            8121            8504            4.7.
    Large urban areas (populations over 1                  1,424            8513            8896            4.5.
     million)...................................
    Other urban areas (populations of 1 million            1,272            7684            8067            5.0.
     of fewer)..................................
    Rural hospitals.............................           1,208            6110            6475            6.0.
Bed Size (Urban):.
    0-99 beds...................................             684            5812            6142            5.7.
    100-199 beds................................             966            6914            7233            4.6.

[[Page 28805]]

 
    200-299 beds................................             500            7967            8316            4.4.
    300-499 beds................................             415            8839            9266            4.8.
    500 or more beds............................             131           10221           10718            4.9.
Bed Size (Rural):.
    0-49 beds...................................             549            5199            5527            6.3.
    50-99 beds..................................             393            5751            6100            6.1.
    100-149 beds................................             163            6048            6412            6.0.
    150-199 beds................................              57            6636            7027            5.9.
    200 or more beds............................              46            7837            8275            5.6.
Urban by Region:.
    New England.................................             137            8688            8997            3.6.
    Middle Atlantic.............................             397            8809            9136            3.7.
    South Atlantic..............................             419            7762            8147            5.0.
    East North Central..........................             450            7830            8195            4.7.
    East South Central..........................             175            7482            7896            5.5.
    West North Central..........................             160            8008            8416            5.1.
    West South Central..........................             346            7632            8063            5.7.
    Mountain....................................             140            8066            8376            3.8.
    Pacific.....................................             421            9612           10080            4.9.
    Puerto Rico.................................              51            3525            4028           14.3.
Rural by Region:.
    New England.................................              34            8037            8354            3.9.
    Middle Atlantic.............................              57            6138            6398            4.2.
    South Atlantic..............................             176            6087            6439            5.8.
    East North Central..........................             160            5998            6266            4.5.
    East South Central..........................             192            5241            5735            9.4.
    West North Central..........................             206            6514            6883            5.7.
    West South Central..........................             228            5514            5913            7.2.
    Mountain....................................              93            6918            7219            4.4.
    Pacific.....................................              62            8934            9336            4.5.
By Payment Classification:.
    Urban hospitals.............................           2,624            8148            8533            4.7.
    Large urban areas (populations over 1                  1,405            8530            8915            4.5.
     million)...................................
    Other urban areas (populations of 1 million            1,219            7716            8101            5.0.
     of fewer)..................................
    Rural areas.................................           1,280            6104            6462            5.9.
Teaching Status:.
    Non-teaching................................           2,787            6542            6880            5.2.
    Fewer than 100 Residents....................             916            8172            8561            4.8.
    100 or more Residents.......................             201           12131           12672            4.5.
Urban DSH:.
    Non-DSH.....................................           1,156            7020            7347            4.7.
    100 or more beds............................           1,465            8695            9101            4.7.
    Less than 100 beds..........................             335            5540            5927            7.0.
Rural DSH:                                                   482            6592            6914            4.9.
    Sole Community (SCH)........................
    Referral Center (RRC).......................             157            6735            7147            6.1.
    Other Rural:.
        100 or more beds........................              68            5131            5588            8.9.
        Less than 100 beds......................             241            4483            4937           10.1.
Urban teaching and DSH:                                      800            9558            9997            4.6.
    Both teaching and DSH.......................
    Teaching and no DSH.........................             250            8015            8399            4.8.
    No teaching and DSH.........................           1,000            6963            7315            5.1.
    No teaching and no DSH......................             574            6512            6810            4.6.
Rural Hospital Types:.
    Non special status hospitals................             400            4754            5163            8.6.
    RRC.........................................             137            6179            6572            6.4.
    SCH.........................................             454            7181            7467            4.0.
    Medicare-dependent hospitals (MDH)..........             211            4434            4792            8.1.
    SCH and RRC.................................              73            7676            8019            4.5.
Type of Ownership:.
    Voluntary...................................           2,343            7926            8298            4.7.
    Proprietary.................................             717            7125            7503            5.3.
    Government..................................             776            7958            8385            5.4.
    Unknown.....................................              68            7853            8256            5.1.

[[Page 28806]]

 
Medicare Utilization as a Percent of Inpatient
 Days:.
    0-25........................................             227           10405           10866            4.4.
    25-50.......................................           1,122            8578            8985            4.7.
    50-65.......................................           1,445            6956            7307            5.1.
    Over 65.....................................             937            6900            7240            4.9.
    Unknown.....................................             173            9887           10358            4.8.
    Rural Converted to Urban....................             164            6473            6888            6.4.
    Urban Converted to Rural....................              69            6097            6387            4.8.
Hospitals Reclassified by the Medicare
 Geographic Classification Review Board: FY 2005
 Reclassifications:.
    All Reclassified Hospitals..................             485            7316            7699            5.2.
    All Nonreclassified Hospitals...............           3,326            7909            8291            4.8.
    All Reclassified Urban Hospitals............             118            8258            8612            4.3.
    Urban Nonreclassified Hospitals.............           2,486            8151            8538            4.7.
    All Reclassified Rural Hospitals............             367            6816            7215            5.9.
    Rural Nonreclassified Hospitals.............             840            5402            5734            6.2.
    Other Reclassified Hospitals (Section                     93            5971            6237            4.4
     1886(d)(8)(B)).............................
----------------------------------------------------------------------------------------------------------------
\1\ These payment amounts per case do not reflect any estimates of annual case-mix increase.

    Table II presents the projected impact of the proposed changes 
for FY 2005 for urban and rural hospitals and for the different 
categories of hospitals shown in Table I. It compares the estimated 
payments per case for FY 2004 with the average estimated per case 
payments for FY 2005, as calculated under our models. Thus, this 
table presents, in terms of the average dollar amounts paid per 
discharge, the combined effects of the changes presented in Table I. 
The percentage changes shown in the last column of Table II equal 
the percentage changes in average payments from column 10 of Table 
I.

VII. Impact of Other Proposed Policy Changes

    In addition to those proposed changes discussed above that we 
are able to model using our IPPS payment simulation model, we are 
proposing various other changes in this proposed rule. Generally, we 
have limited or no specific data available with which to estimate 
the impacts of these proposed changes. Our estimates of the likely 
impacts associated with these other proposed changes are discussed 
below.

A. Impact of Proposed Change to Postacute Care Transfer Payment 
Policy

    Existing regulations at Sec.  412.4(b) define transfers from one 
acute care hospital to another, and Sec.  412.4(c) defines transfers 
to certain postacute care providers. The per diem rate paid to a 
transferring hospital is calculated by dividing the full DRG payment 
by the geometric mean length of stay for the DRG. The transferring 
hospital receives a per diem payment for cases that are transferred 
prior to the geometric mean length of stay for the DRG (Sec.  
412.4(f)(1)). Under section IV.A. of the preamble of this proposed 
rule, we discuss our proposal to provide alternate criteria for 
determining which DRGs are included within the scope of the 
postacute care transfer policy. The occasion for this proposed 
revision is our decision to delete DRG 483, and to assign the cases 
that previously were included within DRG 483 to two new DRGs, 541 
and 542. As a result of these proposed revised criteria, three 
additional DRGs would fall within the scope of the policy. These are 
the two proposed new DRGs, 541 and 542, along with DRG 430. We 
estimate that the net effect of these proposed changes will be to 
reduce Medicare program payments by approximately $25 million per 
year. The proposed change is entirely due to the effect of adding 
DRG 430 to the policy. The proposed inclusion of proposed new DRGs 
541 and 542 will have no effect on payments, because all of the 
cases included within those proposed DRGs were previously included 
within DRG 483 and, thus, already fall within the policy.

B. Impact of Proposed LTC-DRG Reclassifications and Relative Weights 
for LTCHs

    In section II.D. of the preamble of this proposed rule, we 
discuss the proposed changes in the LTC-DRG relative weights for FY 
2005 on the proposed version 22.0 of the CMS GROUPER. We estimate 
that the proposed changes would result in an aggregate decrease in 
LTCH payments of approximately a $55 million based on LTCH cases in 
the FY 2003 MedPAR file. As we discuss in further detail in the 2005 
LTCH PPS rate year final rule published on May 7, 2004, based on an 
analysis of LTCH claims data in the FY 2003 MedPAR file. We have 
found that the average LTC-DRG relative weight has increased due to 
an increase of cases being assigned to LTC-DRGs with higher relative 
weights. This increase may be attributable to a number of factors, 
including improvements in coding practices, which are typically 
found when moving from a reasonable cost-based payment system to a 
PPS. The impact of including cases with relatively lower charges 
into LTC-DRGs that have a relatively higher relative weight in the 
GROUPER version 21.0 (FY 2004) is a decrease in the average relative 
weight for those LTC-DRGs in proposed GROUPER version 22.0. We 
believe that the proposed changes in the LTC-DRG relative weights, 
which include a number of proposed LTC-DRGs with lower proposed 
relative weights, would result in a slight decrease in LTCH PPS 
payments.

C. Impact of Proposed Policy on Payments for Inpatient Care in 
Providers That Change Classification Status During a Patient Stay

    In section IV.B. of the preamble to this proposed rule, we 
discuss our proposal to change our policy to preclude making more 
than one payment under Medicare for cases in which a Medicare 
provider changes its Medicare payment classification during a 
patient's stay. Although this situation may occur in other settings, 
this payment issue is most prevalent for services furnished to 
cross-over patients in a newly established LTCH. Currently, when 
this situation arises, Medicare makes two payments for what is 
essentially only one beneficiary episode of care, one under the IPPS 
and one under the LTCH PPS. The intent of this proposed policy is to 
eliminate the Medicare payments for the single episode of care of 
such patients. While we believe that this proposed policy may 
generate savings for the Medicare program, we do not have readily 
available data to precisely estimate the effect of this proposed 
change. Because these proposed revisions would only affect new 
hospitals, we are unable to estimate the number of hospitals that 
would be affected. Furthermore, we cannot estimate the specific

[[Page 28807]]

DRGs that would be affected at those hospitals.

D. Impact on Proposed Policy Reporting of Hospital Quality Data for 
Annual Hospital Payment Update

    In section IV.E. of the preamble to this proposed rule, we 
discuss the implementation of section 501(a) of Public Law 108-173, 
which provides that, the update factor for the operating payments 
for FY 2005 and subsequent fiscal years is the market basket 
percentage increase. Section 501(b) also provides that, for FYs 2005 
through 2007, the update factor will be the market basket percentage 
increase minus 0.4 percentage points for any hospital that does not 
submit quality data as specified in the law. We are unable to 
precisely estimate the effect of this provision because, while 
receiving the full update for those years is conditional upon the 
submission of quality data by a hospital, submission of the data is 
not mandated unconditionally. Furthermore, hospitals will not begin 
to submit the quality data until very late in the process of 
developing the final rule for FY 2005. The Congressional Budget 
Office, in its analysis of Public Law 108-173, assumed that a 
significant number of hospitals would not provide the data required 
for a full payment update, and therefore estimated savings to the 
Medicare program of approximately $100 million per year. However, 
there has been a steady increase in the number of hospitals that are 
voluntarily submitting the specified quality data under the National 
Voluntary Hospital Reporting Initiative. We have also made efforts 
to ensure that QIOs provide assistance to all hospitals that wish to 
submit data. Therefore, we believe that a high proportion of 
hospitals will respond to the incentive provided by section 501(b) 
and submit quality data in order to receive the full update. For 
purposes of this proposed rule, we are assuming that no appreciable 
savings will result from this provision.

E. Impact of Proposed Policy on Threshold Criteria for Add-On 
Payments for New Technology and Medical Services

    In section IV.H. of the preamble of this proposed rule, we 
discuss our proposal to revise the threshold amount for determining 
whether a new technology or medical service is an appropriate 
candidate for an add-on payment if it is inadequately paid otherwise 
under the DRG system. Furthermore, we are no longer required to 
ensure that any add-on payments for new technology under section 
1886(d)(5)(K) of the Act are budget neutral. However, these payments 
will have a significant impact on total payments made in FY 2005. As 
discussed in section II.E. of the preamble of this proposed rule, we 
are proposing to maintain the new technology status of the INFUSE 
TM Bone Graft/LT-CAGE TM Lumbar Tapered Fusion 
Device for spinal fusions. We estimate the total add-on payments 
associated with cases involving this new device for FY 2005 would be 
$4.7 million. In addition, several other technologies may receive 
approval if we receive appropriate supplemental data from the 
applicants (as discussed in the preamble) and other interested 
parties. Therefore, if we approve all the devices that may warrant 
approval, the total estimated increase in payments for FY 2005 could 
be $369 million.

F. Impact of Proposed Policy on Additional Payments to Hospitals 
With High Percentage of End-Stage Renal Disease Discharge

    In section IV.J. of the preamble of this proposed rule, we 
discuss our proposal to revise our regulations to state that, in 
determining whether a hospital qualifies for additional Medicare 
payments for hospitals with high percentages of ESRD discharges, 
only discharges involving ESRD Medicare beneficiaries who have 
received a dialysis treatment during an inpatient hospital stay are 
to be counted.
    This proposed revision to the policy would reduce the number of 
hospitals that will qualify for this additional payment. 
Specifically, discharges of Medicare ESRD beneficiaries who have not 
received dialysis treatment during the course of their hospital 
stays will no longer be counted in determining whether hospitals 
meet the threshold for receiving this additional payment. Some 
hospitals that have previously qualified for this extra payment 
would not qualify under this proposed revised policy. Therefore, the 
effect of this change would be a reduction in Medicare program 
expenditures. However, we are unable to quantify the level of 
program savings because we lack data on the proportion of the 
discharges previously counted toward the threshold determination 
under this provision that involved Medicare ESRD beneficiaries who 
did not receive dialysis services during their hospital stays. 
Overall program expenditures under this provision have been 
approximately $15 million annually to approximately 41 hospitals. We 
estimate that, the savings due to this policy change will only be 
some proportion of that figure since some portion of these 
hospitals, which currently qualify for the adjustment, will no 
longer qualify for these payments under the revised criteria.

G. Impact of Proposed Policy on Payment Adjustments for Low-Volume 
Hospitals

    In section IV.M. of the preamble of this proposed rule, we 
discuss our proposal to implement section 406 of Public Law 108-173, 
which provides for a new payment adjustment to account for the 
higher costs per discharge of low-volume hospitals under the IPPS.
    Based on the empirical analysis, we are limiting the adjustment 
to hospitals with 500 or fewer discharges. It is difficult to 
estimate precisely the impact of this provision. While there were 
approximately 400 hospitals with 500 or fewer total discharges in 
the most recent year for which we have data, many of these hospitals 
may qualify for CAH status under the revised bed count threshold 
(under section 405(e) of Pub. L. 108-173). Furthermore, we have not 
yet determined which hospitals satisfy the requirement that the 
hospital be located more than 25 road miles from another subsection 
(d) hospital. We are proposing to require that a hospital that 
wishes to qualify for the adjustment must provide its fiscal 
intermediary with evidence that it meets this distance requirement. 
Until intermediaries are able to make these determinations, we are 
unable to determine how many hospitals qualify for the adjustment.
    However, the aggregate impact of this provision is likely to be 
relatively small. Hospitals with fewer than 500 total discharges in 
a year are likely to have correspondingly few Medicare discharges, 
perhaps 200 Medicare discharges or fewer. The largest percentage 
adjustments under the proposed formula that we have developed would 
be realized by the smallest hospitals. For example, a hospital with 
50 total discharges will receive an adjustment on each Medicare 
discharge (probably 20 to 25 Medicare discharges annually) of 22.5 
percent. A hospital with 499 total discharges would receive an 
adjustment of only 0.05 percent on each Medicare discharge. The 
Congressional Budget Office's estimated that this provision would 
increase Medicare program expenditures by less than $50 million 
annually. In the absence of a more precise estimate for the reasons 
indicated above, we agree with the Congressional Budget Office's 
determination.

H. Impact of Proposed Policy on MGCRB Hospital Reclassifications

    Sections 1886(d)(2)(D) and (d)(3) of the Act previously required 
the Secretary to compute two average standardized amounts for 
discharges occurring in a fiscal year: one for hospitals located in 
large urban areas and one for hospitals located in other areas. In 
addition, under sections 1886(d)(9)(B)(iii) and (d)(9)(C)(i) of the 
Act, the average standardized amount per discharge was determined 
for hospitals located in large urban and other areas in Puerto Rico. 
In accordance with section 1886(b)(3)(B)(i) of the Act, the large 
urban average standardized amount was 1.6 percent higher than the 
other area average standardized amount.
    Section 402(b) of Public Law 108-7 required that, effective for 
discharges occurring on or after April 1, 2003, and before October 
1, 2003, the Federal rate for all IPPS hospitals would be based on 
the large urban standardized amount. Subsequently, Public Law 108-
89, extended section 402(b) of Public Law 108-7 beginning with 
fiscal year 2004 and thereafter, and equal standardized amount is to 
be computed for all hospitals at the level computed for large urban 
hospitals during FY 2003, updated by the applicable percentage 
update. This provision in effect makes permanent the equalization of 
the standardized amounts at the level of the previous standardized 
amount for large urban hospitals. As a result of this legislative 
change, the standardized amount reclassification criterion is no 
longer necessary or appropriate. Therefore, as discussed in section 
IV.N. of this proposed rule, we are proposing to remove all 
standardize amount criteria provisions from the regulations 
governing geographic reclassification. Specifically, we are 
proposing to remove the provisions that contain the criterion 
requiring individual hospitals and urban hospital groups to 
demonstrate that their costs are more comparable to the average 
amount they would be paid if they were reclassified than

[[Page 28808]]

the amount they would be paid if they were reclassified than the 
amount they would be paid under their current classification.
    In conjunction with this change, we are proposing under the 
Secretary's general authority to make exceptions that any hospital 
whose urban county group application under Sec.  412.234 would have 
been approved by the MGCRB for FY 2004 and FY 2005, but for the 
failure to meet the requirements in Sec.  412.234(c), will be 
assigned the wage index for the MSA identified in the FY 2004 and FY 
2005 group application (in cases where the group identified more 
than one preference, the hospital will be assigned the wage index 
that is most advantageous).
    For our proposal to remove all standardized amount criteria 
provisions from the regulations, we are unable to quantify the 
impact of this change precisely. The deletion of the standardized 
amount criterion may allow more hospital group applications to 
qualify for reclassification. However, we cannot determine how many 
groups would be affected by this change, and, of those, how many 
groups would actually organize to apply under the revised standard. 
This change would not affect the aggregate level of Medicare 
expenditures since reclassification decisions are budget neutral 
under section 1886(d)(8)(B) of the Act. However, the exercise of the 
Secretary's exception authority to assign a new wage index to 
certain hospitals that failed to be approved for reclassification in 
FY 2004 and FY 2005 is not budget neutral. Our review of the group 
reclassification applications for those years indicates that only a 
very small number of hospitals would qualify for a new wage index 
assignment under this proposed exception. While we are unable to be 
certain about the exact number of hospitals that would qualify, we 
believe that the aggregate impact on program payments would be in 
the range of $10 million to $20 million annually for the three years 
during which this exception would be in place.
    In addition, we are unable to quantify the precise impact of the 
proposed change precisely to the average hourly wage threshold for 
rural referral centers. Only a limited number of rural referral 
centers are actually located in urban areas. Effective October 1, 
2000, if a hospital located in what is now an urban area was ever a 
rural referral center, it is reinstated to rural referral center 
status (65 FR 47089). We are unable to determine how many of these 
rural referral centers that would not otherwise have qualified for 
reclassification would now be able to meet the 82 percent threshold. 
However, this change would not affect the aggregate level of 
Medicare expenditures since reclassification decisions are budget 
neutral under section 1886(d)(8)(B) of the Act. The exercise of the 
Secretary's exception authority to assign a new wage index to 
certain rural referral centers that failed to be approved for 
reclassification in FY 2005 is not budget neutral. Our review of the 
reclassification applications indicates that only a very small 
number of hospitals would qualify for a new wage index assignment 
under this proposed exception. While we are unable to be certain 
about the exact number of hospitals that would qualify, we believe 
that the aggregate impact on program payments would be in the range 
of $10 million to $20 million for the one-year during which this 
exception would be in effect.
    Further, we anticipate that our proposed use of the authority in 
section 1886(d)(5)(I)(i) of the statute, to provide special 
protection to a small number of hospitals in States with fewer than 
10 people per square mile (as determined using 2000 census data) 
would only increase Medicare program expenditures by $3 million to 
$5 million at the maximum. We believe that Medicare expenditures 
associated with this change would not exceed this level because many 
of the SCHs in the States where the exception would be applied have 
already qualified for reclassification effective for discharges on 
or after October 1, 2004. Furthermore, these hospitals are 
relatively small, and some of them are paid under their hospital 
specific rates, which restricts the gain from reclassification in 
most cases to capital PPS payments and payments for outpatient 
services.

I. Impact of Proposed Policy on Payment for Direct Costs of 
Graduate Medical Education

1. Redistribution of Unused Resident Slots

    As discussed in section IV.O.2.b. of this preamble, section 422 
of Public Law 108-173 added a new section 1886(h)(7) to the Act that 
provides for reductions in the statutory FTE resident caps under 
Medicare for certain hospitals and authorizes a ``redistribution'' 
of the FTE resident slots resulting from the reduction in the FTE 
resident caps to other hospitals.
    For purposes of this proposed rule, we have estimated the impact 
of section 422 on hospitals for FY 2005, making assumptions about 
update factors, geographic (locality) adjustment factors, and the 
number of unused residency positions for each hospital. For purposes 
of calculating the impact for direct GME payments, we used the 
projected national average per resident amount (PRA) for FY 2005 of 
$82,249, as determined in accordance with existing Sec.  
413.86(e)(4)(ii)(B) (proposed to be redesignated as Sec.  
413.77(d)(2)(ii) in this proposed rule), since section 
1886(h)(7)(B)(v) of the Act requires that a hospital that receives 
an increase in its direct GME FTE resident cap under section 
1886(h)(7)(B) of the Act will receive direct GME payments with 
respect to those additional FTE residents using the locality-
adjusted national average PRA. Based on our analysis of hospitals' 
FTE resident caps and FTE resident counts from the Hospital Cost 
Report Information System (HCRIS) for the most recent cost reporting 
periods ending on or before September 30, 2002, and making 
assumptions for hospitals that submit a timely request to use their 
cost report that includes July 1, 2003, we estimate that 
approximately 2,600 FTE resident slots that were previously unfilled 
(and therefore, no direct GME or IME payments were made for those 
slots) would be redistributed to and filled by hospitals that 
request an increase to their FTE residents caps under section 
1886(h)(7)(B). (We note that this estimate of 2,600 slots is not 
necessarily the same as the estimate we would ultimately use to 
redistribute resident positions under section 1886(h)(7)(B)). Since 
payments for direct GME are determined based on a hospital's 
Medicare inpatient utilization, for purposes of this impact, we have 
applied a factor of .35 as the average Medicare inpatient 
utilization. Accordingly, for FY 2005, we estimate an increase of 
$75.6 million in direct GME payments.
    For purposes of estimating the impact on IME payments, we used 
an IME formula multiplier of 0.66, since section 1886(d)(5)(B)(ix) 
states that for a hospital whose FTE resident cap is increased as a 
result of a redistribution of unused resident positions, the IME 
adjustment factor is to be calculated using a formula multiplier of 
0.66 with respect to any additional residents counted by the 
hospital as a result of that increase in the hospital's FTE resident 
cap. Based on an estimate of unused resident positions using FTE 
resident data from HCRIS for the most recent cost reporting periods 
ending on or before September 30, 2002, and making assumptions for 
hospitals that submit a timely request to use their cost report that 
includes July 1, 2003, we estimate that for FY 2005, IME payments 
would increase by approximately $66.5 million. Thus, since section 
422 is not effective until the fourth quarter of FY 2005 (that is, 
July 1, 2005), the estimated total increase in Medicare payments for 
FY 2005 attributable to section 422 is $35.53 million ([$75.6 
million + $66.5 million] divided by 4).

2. Per Resident Amount: Extension of Update Limitation on High-Cost 
Programs

    In section IV.O.4. of the preamble of this proposed rule, we 
discuss our proposal to implement section 711 of Public Law 108-173, 
which freezes the annual CPI-U inflation factors to hospital-
specific PRAs for direct GME payments for those PRAs that exceed the 
established ceiling for FYs 2004 through 2013. Under existing 
regulations, for FY 2005, if a hospital's PRA for the previous cost 
reporting period would be greater than 140 percent of the locality-
adjusted national average PRA for that same previous cost reporting 
period, the hospital's PRA would be updated for inflation, except 
that the CPI-U applied for a 12-month period is reduced by 2 
percentage points. Under the new provisions of section 711 of Pub. 
L. 108-173 for FY 2005, if a hospital-specific PRA for the previous 
cost period would be greater than 140 percent of the locality-
adjusted national average PRA for that same previous cost reporting 
period, the hospital-specific PRA would be frozen at the FY 2004 
PRA, and not updated for inflation. Therefore, the impact in direct 
GME payments for FY 2005 (attributable to section 711 of the Public 
Law 108-173) is the difference between updating the PRAs by the 
applicable CPI-U inflation factor minus 2 percentage points, and not 
updating the PRAs by any CPI-U inflation factor. We have calculated 
an impact for this provision, but the resulting savings are 
negligible (less than $100,000).

3. Residents Training in Nonhospital Settings

    In section IV.O.5. of the preamble of this proposed rule, we 
discuss our proposal to implement section 713 of Public Law 108-173, 
which, through a moratorium, allows hospitals to count allopathic or 
osteopathic

[[Page 28809]]

family practice residents training in nonhospital settings for IME 
and direct GME without regard to the financial arrangements between 
the hospital and the teaching physician practicing in the 
nonhospital setting in which the resident is assigned. We are unable 
to quantify the impact of these provisions because we do not know 
the number of residents or programs that are affected by these 
changes.
    In addition, under IV.O.5. of this preamble, we discuss our 
proposed changes related to requirements for written agreements for 
residency training in nonhosital settings. We are proposing to 
revise the regulations to remove the requirement for a written 
agreement between the hospital and the nonhospital setting as a 
precondition for a hospital to count residents training in 
nonhospital settings for purposes of direct GME and IME payments. We 
are also proposing that, in order for the hospital to count 
residents training in a nonhospital setting, the hospital must pay 
for the nonhospital site training costs concurrently with the 
training that occurs during the cost reporting period. There is no 
monetary impact related to this proposed change because this 
proposal is administrative in nature, and does not affect a 
hospital's direct GME or IME payments.

J. Impact of Proposed Policy on Rural Community Hospital 
Demonstration Program

    In section IV.P. of the preamble of this proposed rule, we 
discuss our proposal to implement section 410A of Public Law 108-173 
requiring the Secretary to establish a demonstration that will 
modify reimbursement for inpatient services for up to 15 small rural 
hospitals. Section 410A(c)(2) requires that ``in conducting the 
demonstration program under this section, the Secretary shall ensure 
that the aggregate payments made by the Secretary do not exceed the 
amount which the Secretary would have paid if the demonstration 
program under this section was not implemented.'' As discussed in 
section IV.P. of this proposed rule, we are proposing to satisfy 
this requirement by adjusting national IPPS rates by a factor that 
is sufficient to account for the added costs of this demonstration. 
We estimate that the average additional annual payment that would be 
made to each participating hospital under the demonstration would be 
approximately $1,120,000. We based this estimate on the recent 
historical experience of the difference between inpatient cost and 
reasonable cost payment for hospitals that would be eligible for the 
demonstration. For 15 participating hospitals, the total annual 
impact of the demonstration program is estimated to be $16,820,148. 
We estimate that there will be an average decrease in payment per 
discharge of approximately $0.83 in order to achieve budget 
neutrality. We describe the budget neutrality adjustment required 
for this purpose in the Addendum to this proposed rule.

K. Impact of Proposed Criteria for Hospitals-Within-Hospitals

    In section VI.B. of the preamble of this proposed rule, we 
discuss three options for revising and strengthening the criteria to 
be used to classify hospitals-within-hospitals for purposes of 
payments that are excluded from the IPPS. The intent of our policies 
requiring separateness of administrative and medical governance and 
decision-making between the hospital-within-a-hospital and its host 
has been to discourage patient shifting between the excluded 
hospital-within-a-hospital and its host for financial rather than 
medical purposes. In 2002, there were 114 hospitals-within-
hospitals, and these entities are increasing at an average annual 
rate of 30 percent (MedPAC, June 2003, p.85). To the extent that 
these proposed revisions would eliminate hospital-within-hospital 
arrangements that circumvented our existing requirements, the 
Medicare program would avoid making unnecessary payments under the 
more costly excluded hospital PPSs. We cannot estimate the numbers 
of existing entities that would be affected by these proposed 
revisions, nor can we estimate the specific DRGs that would be 
affected at those hospitals. In addition, we do not know the number 
of new applications for this status that would be subject to review 
under these new proposed standards. Therefore, we are unable to 
quantify the effect these propose changes would have upon Medicare 
expenditures. However, we believe that this proposed change in 
policy would likely result in a savings to the Medicare program.

L. Impact of Proposed Policy Changes Related to CAHs

    In section VI.C.2. through VI.C.5. of the preamble of this 
proposed rule, we discuss our proposal to implement provisions in 
section 405 of Public Law 108-173 relating to payments to CAHs which 
include the percentage of change in the reasonable cost payment 
amount for certain services; the revised condition for a CAH's 
election of the optional payment method; the availability to CAHs of 
the periodic interim payment method (PIP); and expansion of types of 
emergency room providers who may be on call at CAHs.
    These changes, taken together with the increase in the number of 
beds permitted to CAHs for acute care inpatient services discussed 
below, increase the incentive for conversion to CAH status by 
allowing larger rural hospitals and those with specialized units to 
become CAHs without materially reducing the size and scope of their 
activities. The added 1 percent reimbursement and flexibility to 
allow some physicians to opt out of method 2 for CAH billing should 
also increase the rate of conversion, while at the same time 
increasing the cost of CAHs to the Medicare program. The two payment 
methods are described in detail in section V.I.D.3. of the preamble 
and at Sec.  413.70(b). The Congressional Budget Office's official 
estimate was that section 405 of Public Law 108-173 would increase 
Medicare program expenditures by approximately $100 million 
annually. We do not have the information to quantify the extent of 
the anticipated increase more precisely or to determine how much 
each provision of section 405 might contribute to that increase.
    In section VI.C.6. of this preamble, we discuss our proposal to 
our regulations to reflect the provisions of section 405(e) of Pub. 
L. 108-173, which provides for an increase in the number of beds 
permitted to CAHs for acute care inpatient services, from 15 to 25 
beds. We anticipate that both Medicare providers and beneficiaries 
would welcome this change. The increase in the number of beds would 
benefit CAHs that experience seasonal increases in patient census 
due to weather conditions and tourism. With the increase, more 
Medicare beneficiaries may have access to health care in their 
communities without the need to be transferred to another hospital 
because the CAH is at capacity for acute care beds. In addition, the 
bed size increase would eliminate an obstacle for some small rural 
hospitals that, except for the bed size restriction of 15 acute care 
beds, could qualify for CAH status. Although we anticipate that 
these changes would increase the rate at which hospitals convert to 
CAH status we do not have the information needed to make 
quantitative estimates of the extent of this increase.
    In section VI.C.7. of the preamble of this proposed rule, we 
discuss our proposal to implement section 405(g) of Public Law 108-
173, which grants authority for CAHs to establish psychiatric and 
rehabilitation distinct part units. This proposed rule would allow 
CAHs the option of providing rehabilitation and psychiatric services 
in such units.
    Although we view the anticipated results of the proposed 
regulations as beneficial to the Medicaid and Medicare programs as 
well as to Medicare and Medicaid beneficiaries and State 
governments, we recognize that some of the provisions could be 
controversial and that some affected entities may respond 
unfavorably. We also recognize that not all of the potential effects 
of these provisions can definitely be anticipated, especially in 
view of their interaction with other Federal, State, and local 
activities regarding outpatient services. In particular, considering 
the effects of our simultaneous efforts to improve the delivery of 
outpatient services, it is impossible to quantify meaningfully a 
projection of the future effect of these provisions on a CAH's 
operating costs or on the frequency of substantial noncompliance and 
termination procedures.
    We estimate that only those facilities that have the 
capabilities to operate a distinct part unit prior to becoming a CAH 
will elect to operate such a unit. Hospitals that currently operate 
a distinct part unit and wish to continue providing psychiatric and 
rehabilitation services to the community can continue to do so after 
converting to a CAH. Allowing a facility that converts to a CAH to 
continue providing inpatient rehabilitation and psychiatric services 
in rural areas would help to ensure availability of services that 
are disproportionately located in urban areas. Distinct-part units 
may be less common in rural areas due to the challenge of finding 
the resources needed to operate a distinct part unit. The United 
States General Accounting Office (GAO), in its September 2003 Report 
to Congress, entitled ``Modest Eligibility Expansion for Critical 
Access Hospital Program Should Be Considered,'' reported that a 
distinct part unit might provide a

[[Page 28810]]

financial benefit to the hospital because it enables the hospital to 
spread its fixed costs over more services. CAHs potentially can 
experience a net gain on their Medicare payments.
    Among the existing CAHs, 25 previously operated a distinct part 
unit but had to close it as part of becoming a CAH. GAO identified 
683 rural hospitals as ``potential CAHs'' based on their having an 
annual average of no more than 15 acute care patients per day. About 
14 percent (93) of these potential CAHs operate an inpatient 
psychiatric or rehabilitation distinct part unit, which they 
previously would have had to close to convert to CAH status. Among 
the potential CAHs that operate a distinct part, about half had a 
net loss on Medicare services, indicating they might benefit from 
CAH conversion.\8\
---------------------------------------------------------------------------

    \8\ Information from United States General Accounting Office's 
Report to Congress, ``Modest Eligibility Expansion for Critical 
Access Hospital Program Should be Considered,'' GAO-03-948, 
September 2003.
---------------------------------------------------------------------------

    Based on the GAO data, we estimate that approximately 50 
hospitals that currently operate distinct part units would not incur 
any additional expense to convert to a CAH and, in fact, may 
increase their revenue. Therefore, we are only estimating burden for 
current CAHs (approximately 27) that might want to operate a 
distinct part unit due to their previous experience in operating a 
distinct part unit.
    Inpatient psychiatric services in a CAH's distinct-part unit 
must be under the supervision of a clinical director, service chief, 
or equivalent who is qualified to provide the leadership required 
for an intensive treatment program, and who is board certified in 
psychiatry. The distinct part unit must also have a director of 
nursing services who is a registered nurse with a master's degree in 
psychiatric or mental health nursing or its equivalent from a school 
of accreditation by the National League of Nursing, who is qualified 
by education and experience in the care of persons with mental 
illness, and a director of social services. There must also be an 
adequate number of registered nurses to provide 24-hour coverage as 
well as licensed practical nurses and mental health workers.
    A rehabilitation distinct-part unit of a CAH would be required 
to provide rehabilitation nursing, physical and occupational 
therapy, and, as needed, speech therapy, social services or 
psychological services and orthotics and prosthetics. The distinct 
part unit also must have a director of rehabilitation who, among 
other requirements, is experienced in rehabilitation and is a doctor 
of medicine or a doctor of osteopathy.
    In addition, a CAH must comply with the common requirements for 
excluded units at Sec.  412.25. Therefore, both psychiatric and 
rehabilitation distinct part units would be required to meet those 
requirements, including written admission criteria that are applied 
uniformly to both Medicare and non-Medicare having patients and have 
admission and discharge records that are separately identified from 
those of the CAH in which it is located and are readily available. 
Both of these distinct part units also must have policies specifying 
that necessary clinical information be transferred to the unit and 
have utilization review standards applicable for the type of care 
offered in the unit. Psychiatric distinct part units would also have 
to meet requirements of Sec.  412.22, including maintenance of 
medical records that permit determination of the degree and 
intensity of the treatment provided to individuals who are furnished 
services in the unit. Each patient must also have an individual 
comprehensive treatment plan. Section 412.29 requires individuals 
having rehabilitation distinct part units to also have to meet the 
criteria of a preadmission screening procedure under which each 
prospective patient's condition and medical history are reviewed to 
determine whether the patient is likely to benefit significantly 
from an inpatient program. The unit must have also a plan of 
treatment for each inpatient. Notwithstanding the above discussion, 
we are not attributing burden for these requirements because they 
are industry standards for providing quality care and are already 
required conditions for both rehabilitation and psychiatric units.

------------------------------------------------------------------------
          Hours/estimated salary/number of CAHs             Annual cost
------------------------------------------------------------------------
           Estimated Costs for Psychiatric Distinct Part Units
------------------------------------------------------------------------
Clinical Director or service chief; annual salary of          $2,025,000
 $75,000 x 27 CAHs......................................
24-hours nursing coverage--1 RN per 12 hour shift (2 RNs       2,814,480
 total) = Annual salary of $52,120 x 2;.................
One LPN per 12 hour shift = Annual salary of $32,500 x 2       1,755,000
 = $65,000 x 27 CAHs;...................................
Director of nursing--Annual salary of $60,000 x 27 =           1,620,000
 $1,620,000.............................................
Director of social services--Annual salary of $53,000 x        1,431,000
 27 = $1,431,000........................................
Psychiatric aides--Annual salary of $25,650 x 2=$51,300        1,385,100
 x 27 CAHs..............................................
                                                         ---------------
    Total...............................................      11,050,580
---------------------------------------------------------
         Estimated Costs for Rehabilitation Distinct Part Units
------------------------------------------------------------------------
Director of Rehabilitation--Annual salary $75,000 x 27 =       2,025,000
 $2,025,000.............................................
Occupational Therapist--Annual salary $53,300 x 27 =           1,439,100
 $1,439,100.............................................
Physical Therapist--Annual salary $55,800 x 27 =               1,506,600
 $1,506,600.............................................
Speech Therapist--Annual salary $52,800 x 27 =                 1,425,600
 $1,425,600.............................................
Rehabilitation nurse--Annual salary $32,500 x 27 =......         877,500
                                                         ---------------
    Total...............................................       7,273,800
------------------------------------------------------------------------

    In section VI.C.8. of the preamble of this proposed rule, we are 
proposing to implement section 405(h) of Public Law 108-173 which 
terminates a State's authority to waive the location requirement of 
more than a 35-mile drive (or in the case of mountainous terrain or 
secondary roads, a 15-mile drive) for a CAH by designating the CAH 
as a necessary provider. We do not have the information to quantify 
the extent of the anticipated increase more precisely or to 
determine how much this provision might contribute to that increase.

M. Impact of Proposed Policy Change Regarding Disclosure of 
Information by QIOs.

    In section VII.A. of this proposed rule, we are proposing to 
revise our regulations to add provisions to allow QIOs to disclose 
information about practitioners and institutions and information 
from quality review studies if the practitioner or institution 
consents to or requests the disclosure of the information in 
writing. This disclosure would be in addition to the existing 
disclosure previously based on written consent of the institution or 
practitioner. In addition, we are proposing exceptions to the 30-day 
advance notice requirement to an institution or practitioner by a 
QIO of its intent to disclose confidential and nonconfidential 
information on a practitioner or an institution is at the request of 
or consent of the institution or practitioner. We are proposing to 
specify that the notification requirements would not apply if the 
institution or practitioner has requested in writing that the QIO 
make the disclosure, has provided written consent for the 
disclosure, or the information is public information.

[[Page 28811]]

    We believe that these proposed revisions would reduce the 
existing burden on practitioners, institutions, and QIOs and, at the 
same time, ensure that necessary protections on information are 
retained. These provisions would allow QIOs, institutions, and 
practitioners to share vital information in an effective manner and 
further our efforts to ensure the highest quality of care for 
Medicare beneficiaries.

N. Impact of Policy Change for Medicare Hospital Conditions of 
Participation for Discharge Planning

    In section VIII.A. of the preamble of this proposed rule, we 
discuss our proposal to amend the regulations at Sec.  482.43 to 
incorporate the provisions of section 4321(a) of Public Law 105-33 
and section 926(b) of Public Law 108-173 into the hospital 
conditions of participation. We are proposing to include the 
requirement for hospitals to provide lists of Medicare-certified 
HHAs and SNFs to patients or their representatives as part of the 
discharge planning process. We are proposing to require the SNF list 
to include Medicare-certified SNFs located in a geographic area 
chosen by the patient. We are not requiring that the list of 
Medicare-certified SNFs contain only those SNFs that are located in 
the area in which the patient resides. Because many available 
Medicare-certified SNFs are not located near where the patient 
resides, especially in rural areas, we believe that a requirement 
that restricts a patient to SNFs in areas where the patient resides 
is too restrictive and would limit the choices of posthospital 
extended care services for Medicare beneficiaries.
    The nature of the proposed regulatory provision is such that 
this minimal regulatory burden would be placed upon hospitals, HHAs 
and SNFs exclusively. Therefore, we did not consider any regulatory 
relief options. We also certify that this proposed provision would 
not have a significant economic impact on a substantial number of 
small entities or a significant impact on the operations of a 
substantial number of small rural hospitals.
    Compliance with section 4321(a) of the BBA and section 926(b) of 
Public Law 108-173 requires a hospital to collect on an initial and 
ongoing basis information to develop and maintain a current list of 
HHAs and SNFs available to Medicare beneficiaries. We anticipate 
that this effort would be minimal because hospitals currently access 
this information as an essential component of the discharge planning 
process. We do not anticipate that the operations of a substantial 
number of small rural hospitals would be significantly impacted. The 
impact would be even further minimized if a hospital chooses to 
access this information via the Home Health Compare or Nursing Home 
Compare tools on the CMS Web site, http://www.medicare.gov, or if 
the hospital calls 1-800-MEDICARE (1-800-633-4227) to request a 
printout of the HHAs or SNFs in the desired geographic area.
    The anticipated effects on patients would be an enhanced ability 
to make informed choices about the care they receive from HHAs or 
SNFs upon discharge from a hospital. Based on 2003 CMS data, there 
are approximately 6,000 Medicare-certified hospitals, 6,900 
Medicare-certified HHAs, and 17,000 SNFs.
    The requirements set forth in this proposed provision would 
place minimal burdens on hospitals, HHAs, and SNFs. A possible 
outcome of the implementation of all parts of the rule may be to 
influence hospital referral patterns, thus having an impact on HHAs 
and SNFs receiving post-hospitalization referrals. The information 
made available to maintain compliance with the statute and this 
proposed provision might impact patient choices about who furnishes 
Medicare services to them and, in turn, may have an indeterminable 
impact on entities that provide, or do not provide services to 
Medicare beneficiaries as a result.
    This proposed provision would improve our information campaign 
to assist beneficiaries in making informed choices for health care 
delivery. Patient choice under the Medicaid program may be similarly 
affected if the providers on these lists also participate in that 
program.
    We considered developing a standardized process, format, and 
timeframe for all hospitals to use in developing, maintaining, and 
updating a current list of HHAs and SNFs. Instead, we have chosen a 
less prescriptive approach. Hospitals have the flexibility to define 
a process for developing, maintaining, and updating their list of 
HHAs or SNFs in a manner that makes the most sense for both the 
hospital and the patients they serve. The hospital would have the 
flexibility to develop and maintain their own list of HHAs and SNFs, 
or simply print a list from the Home Health Compare or Nursing Home 
Compare site at the CMS Web site, http://www.medicare.gov, based on 
the geographic area requested by the patient. Or, in the rare 
instance when a hospital does not have Internet access, the hospital 
can call 1-800-MEDICARE (1-800-633-4227) to request a printout of 
the list of HHAs or SNFs in the desired geographic area. In this 
way, hospitals would be able to develop and implement systems and 
processes that are the most effective and efficient in providing 
quality care and meeting the needs of their patients, as well as 
complying with the requirements of the proposed regulation.
    In summary, this proposed provision would establish a process 
for implementing the statutory requirements under section 4321(a) of 
the BBA and section 926(b) of the MMA. This approach would enhance 
the information made available to Medicare beneficiaries and place 
minimal burdens on all entities that may be directly or indirectly 
affected.

O. Impact of Proposed Policy Changes Relating to Medicare Provider 
Agreements for Compliance with Bloodborne Pathogens Standards for 
Medicare-Participating Hospitals

    In section VIII.B. of the preamble to this proposed rule, we 
discuss our proposal to implement section 947 of Public Law 108-173 
under which hospitals not otherwise subject to the Occupational 
Safety and Health Act (OSHA) (or a State occupational safety and 
health plan that is approved under section 18(b) of that Act) must 
comply with the OSHA bloodborne pathogens standard as part of their 
Medicare provider agreements, effective July l, 2004.
    Given that the Occupational Safety and Health Administration 
(OSHA) has already prepared a Regulatory Impact and Regulatory 
Flexibility Analysis for the Bloodborne Pathogens standard that was 
published December 6, 1991 (56 FR 64004), we have included relevant 
portions of their analyses in our estimate. However, we have pulled 
out the numbers that are relevant to this regulation and up-dated 
the numbers to make them current as of January, 2004. Thus, the 
impact of this proposed rule on the public hospitals included in the 
26 States without state plans, as well as the District of Columbia, 
and Guam has been assessed.
    OSHA noted that most hospitals perform a great variety of 
services, and there are many different exposure scenarios. One 
frequently reported exposure was needlestick, with the greatest 
potential for exposure occurring during needle recapping. Other 
hospital procedures that are associated with frequent exposure 
include phlebotomy, IV line placement, bronchoscopy, intubation, 
airway suction, endoscopy, colonoscopy, and proctosigmoidoscopy. 
Areas with the greatest potential for exposure include the emergency 
room, surgical suite, hemodialysis center, and intensive care unit. 
Laundry workers and janitors may also be exposed, particularly when 
handling soiled linen or refuse.
    OSHA's standard for reducing worker exposure to bloodborne 
pathogens is based on the adoption of universal precautions as a 
method of infection control. This approach, which is fundamentally 
different from traditional procedures that isolate known infectious 
individuals and materials in the health care setting, assumes that 
all human blood and body fluids are potentially infectious for HIV, 
HBV, and other bloodborne pathogens. The rationale for this approach 
is that carriers of these diseases are not always identifiable in 
the health care setting, and that contaminated materials are not 
always properly labeled. Thus, the exposed worker can be at great 
risk without warning.
    OSHA estimated that 6,197 hospitals with a total of 2,386,165 
employees would be affected by the BBP standards. However, OSHA 
found that most hospitals had already implemented measures to 
protect workers from occupational exposure to blood and other 
potentially infectious materials, and that many were very close to 
full compliance with the standard. OSHA's estimates of the number of 
affected hospitals and the number of employees did not include state 
and local government hospitals located in states without 
occupational safety and health plans in place, that is, the 
hospitals that would be affected by our proposed rule.
    Net compliance costs were estimated for each provision of the 
standard based on OSHA surveys and information submitted in response 
to the rulemaking docket. The costs represented the additional costs 
of fully complying with the requirements of the standard, after 
deducting from total cost the current baseline activities that 
already voluntarily occurred at affected facilities. Personal 
protective equipment accounted for

[[Page 28812]]

the largest amount of net compliance costs. Training, vaccine and 
post-exposure follow-up, and housekeeping were also found to be 
significant cost components. One-time costs were annualized to 
reflect the opportunity cost of capital. OSHA estimated the total 
annual costs to the affected hospitals to be approximately 
$321,913,697 or $51,947 per hospital annually.
    The magnitude of cost increases associated with the standard was 
estimated to be relatively small, and OSHA stated that they should 
not create significant economic hardship for most affected 
hospitals. OSHA predicted that the costs would be passed through the 
system, with resultant minor price increases to patients, customers 
and other downstream recipients of health services. However, OSHA 
noted that without the BBP standards, the economic impact of 
inadequate protections from BBP would fall on hospital employees and 
the general public.
    OSHA stated that, in general, the economic impacts of the 
standard were not judged to be of sufficient magnitude to threaten 
the existence of any affected sector, nor were impacts judged 
sufficient to disrupt or otherwise adversely alter industry 
structure. OSHA did not believe that productivity of hospital 
employees would be significantly affected by the BBP requirements. 
OSHA stated that it believed familiarization with the requirements 
and techniques would restrict time lost and that any decrease in 
productivity would be offset by the peace of mind associated with a 
safer work setting.
    Based on OSHA'S conclusions, we did not deem it necessary to 
update the 1989 cost data used in their analysis. Although the costs 
of meeting the BBP standards would have increased over time, we note 
that at the time, OSHA found most hospitals had already implemented 
measures to protect workers from exposure to blood and other 
potentially infectious materials and that many hospitals were very 
close to full compliance. We expect that hospitals not covered under 
the BBP standards (that is, hospitals that would be affected by our 
proposed rule) also had implemented measures to protect their 
employees from exposure to blood and other potentially infectious 
materials and that many hospitals were already close to full 
compliance with the BBP standards. We also expect that in the 
intervening years, hospitals that would be affected by this proposed 
rule would have further increased their worker protections. It is 
likely that many of the hospitals that would be affected by this 
proposed rule are already very close to full compliance with the BBP 
standards.
    While smaller hospitals' limited ability to diversify could be a 
potential disadvantage in their attempts to pass compliance costs 
forward, OSHA concluded that it did not appear that they would lag 
behind larger hospitals to any significant extent in their ability 
to provide employees with protection against infectious hazards.
    On January 18, 2001, OSHA published a final rule that added two 
new recordkeeping requirements to the BBP standards (66 FR 48250). 
First, the amended standard requires employers to ``establish and 
maintain a sharps injury log for the recording of percutaneous 
injuries''. Second, any employer ``who is required to establish an 
Exposure Control Plan'' must ``solicit input from non-managerial 
employees responsible for direct patient care who are potentially 
exposed to injuries from contaminated sharps in the identification, 
evaluation, and selection of effective engineering and work practice 
controls and shall document the solicitation in the exposure-control 
plan.
    According to OSHA's analysis, the maximum total annual cost of 
the two requirements would be $33,892,653, consisting of $1,294,352 
associated with maintaining a sharps injury log and $32,598,300 
associated with soliciting and documenting employee input into the 
Exposure Control Plan. This would amount to $67 per hospital 
annually, which would not cause significant economic impact on 
either large or small affected establishments.
    The requirements set forth in this proposed rule would place 
minimal burden on hospitals. A possible outcome of the 
implementation of all parts of the rule may be to influence 
hospitals' use of proper mechanisms and supplies necessary to ensure 
employee protection from BBPs.
    The anticipated effects on employees would be the assurance that 
provisions are made to reduce the potential for contact with BBPs 
when performing work-related duties. Based on 2003 CMS data, there 
are approximately 6,000 Medicare-certified hospitals of which 849 
are non-federal, government-owned hospitals located in states that 
do not have their own health and safety standards.
    This proposed rule would improve the quality of working 
conditions for employees who care for Medicare beneficiaries in 
these non-federal, government-owned hospitals and would ensure 
hospital employee safety while performing their duties in Medicare 
participating hospitals while placing minimal burden on all affected 
entities directly and on entities that may be indirectly affected.

P. Impact of Proposed Fire Safety Requirements for Certain Health 
Care Facilities.

    In section VIII. of the preamble of this proposed rule, we 
discuss our proposal to clarify that long-term care facilities must 
be in compliance with Chapter 19.2.9, Emergency Lighting, beginning 
March 13, 2006. In addition, we also specify that beginning March 
13, 2006, Chapter 19.3.6.3.2, exception number 2 will no longer 
apply to these facilities.
    In the January 10, 2003 final rule adopting the 2000 edition of 
the Life Safety Code, we examined the overall economic impact and 
the impact on small entities and rural hospitals as required by 
Executive Order 12866 (September 1993, Regulatory Planning and 
Review), the Regulatory Flexibility Act (RFA) (September 16, 1980 
Pub. L. 96-354), section 1102(b) of the Social Security Act, the 
Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4) and Executive 
Order 13132. We also examined the anticipated effects of the rule. 
We determined that the 2003 final rule did not meet the criteria to 
be considered economically significant or to be a major rule. 
Furthermore, we examined the Federalism implication of the 2003 
final rule and determined that the rule would not have a substantial 
effect on State, local, or tribal governments. The correcting 
amendments in this proposed rule would merely bring the Code of 
Federal Regulations language into conformity with the analyses that 
we have already conducted and described in the Regulatory Impact 
Statement section of the 2003 final rule. (See 68 FR 1374, January 
10, 2003).

VIII. Impact of Proposed Changes in the Capital PPS

A. General Considerations

    Fiscal year 2001 was the last year of the 10-year transition 
period established to phase in the PPS for hospital capital-related 
costs. During the transition period, hospitals were paid under one 
of two payment methodologies: fully prospective or hold harmless. 
Under the fully prospective methodology, hospitals were paid a blend 
of the capital Federal rate and their hospital-specific rate (see 
Sec.  412.340). Under the hold-harmless methodology, unless a 
hospital elected payment based on 100 percent of the capital Federal 
rate, hospitals were paid 85 percent of reasonable costs for old 
capital costs (100 percent for SCHs) plus an amount for new capital 
costs based on a proportion of the capital Federal rate (see Sec.  
412.344). As we state in section V. of the preamble of this proposed 
rule, with the 10-year transition period ending with hospital cost 
reporting periods beginning on or after October 1, 2001 (FY 2002), 
beginning in FY 2002 capital prospective payment system payments for 
most hospitals are based solely on the capital Federal rate. 
Therefore, we no longer include information on obligated capital 
costs or projections of old capital costs and new capital costs, 
which were factors needed to calculate payments during the 
transition period, for our impact analysis.
    In accordance with Sec.  412.312, the basic methodology for 
determining a capital prospective payment system payment is:

(Standard Federal Rate) x (DRG weight) x (Geographic Adjustment 
Factor (GAF)) x (Large Urban Add-on, if applicable) x (COLA 
adjustment for hospitals located in Alaska and Hawaii) x (1 + 
Disproportionate Share (DSH) Adjustment Factor + Indirect Medical 
Education (IME) Adjustment Factor, if applicable).
    In addition, hospitals may also receive outlier payments for 
those cases that qualify under the threshold established for each 
fiscal year.
    The data used in developing the impact analysis presented below 
are taken from the December 2003 update of the FY 2003 MedPAR file 
and the December 2003 update of the Provider Specific File that is 
used for payment purposes. Although the analyses of the changes to 
the capital prospective payment system do not incorporate cost data, 
we used the December 2003 update of the most recently available 
hospital cost report data (FY 2001) to categorize hospitals. Our 
analysis has several qualifications. First, we do not make 
adjustments for behavioral changes that hospitals may adopt in 
response

[[Page 28813]]

to policy changes. Second, due to the interdependent nature of the 
PPS, it is very difficult to precisely quantify the impact 
associated with each change. Third, we draw upon various sources for 
the data used to categorize hospitals in the tables. In some cases 
(for instance, the number of beds), there is a fair degree of 
variation in the data from different sources. We have attempted to 
construct these variables with the best available sources overall. 
However, for individual hospitals, some miscategorizations are 
possible.
    Using cases from the December 2003 update of the FY 2003 MedPAR 
file, we simulated payments under the capital PPS for FY 2004 and FY 
2005 for a comparison of total payments per case. Any short-term, 
acute care hospitals not paid under the general IPPS (Indian Health 
Service Hospitals and hospitals in Maryland) are excluded from the 
simulations.
    As we explain in section III.A.4. of the Addendum of this 
proposed rule, payments will no longer be made under the regular 
exceptions provision under Sec. Sec.  412.348(b) through (e). 
Therefore, we are no longer using the actuarial capital cost model 
(described in Appendix B of the August 1, 2001 final rule (66 FR 
40099)). We modeled payments for each hospital by multiplying the 
capital Federal rate by the GAF and the hospital's case-mix. We then 
added estimated payments for indirect medical education, 
disproportionate share, large urban add-on, and outliers, if 
applicable. For purposes of this impact analysis, the model includes 
the following assumptions:
     We estimate that the Medicare case-mix index would 
increase by 1.0 percent in both FY 2004 and FY 2005.
     We estimate that the Medicare discharges will be 14.5 
million in FY 2004 and 14.0 million in FY 2005 for a 3.4 percent 
decrease from FY 2004 to FY 2005. (We are projecting a decrease in 
Medicare Part A fee-for-service admissions, in part, because we are 
projecting an increase in Medicare managed care enrollment as a 
result of the implementation of several provisions of Public Law 
108-173.
     The capital Federal rate was updated beginning in FY 
1996 by an analytical framework that considers changes in the prices 
associated with capital-related costs and adjustments to account for 
forecast error, changes in the case-mix index, allowable changes in 
intensity, and other factors. The proposed FY 2005 update is 0.7 
percent (see section III.A.1.a. of the Addendum to this proposed 
rule).
     In addition to the proposed FY 2005 update factor, the 
proposed FY 2005 capital Federal rate was calculated based on a GAF/
DRG budget neutrality factor of 1.0015, an outlier adjustment factor 
of 0.9497, and a (special) exceptions adjustment factor of 0.9996.

Results

    In the past, in this impact section we presented the 
redistributive effects that were expected to occur between ``hold-
harmless'' hospitals and ``fully prospective'' hospitals and a 
cross-sectional summary of hospital groupings by the capital PPS 
transition period payment methodology. We are no longer including 
this information because all hospitals (except new hospitals under 
Sec.  412.324(b) and under Sec.  412.304(c)(2)) are paid 100 percent 
of the capital Federal rate in FY 2005.
    We used the actuarial model described above to estimate the 
potential impact of our proposed changes for FY 2005 on total 
capital payments per case, using a universe of 3,871 hospitals. As 
described above, the individual hospital payment parameters are 
taken from the best available data, including the December 2003 
update of the FY 2003 MedPAR file, the December 2003 update to the 
Provider-Specific File, and the most recent cost report data from 
the December 2003 update of HCRIS. In Table III, we present a 
comparison of total payments per case for FY 2004 compared to FY 
2005 based on the proposed FY 2005 payment policies. Column 2 shows 
estimates of payments per case under our model for FY 2004. Column 3 
shows estimates of payments per case under our model for FY 2005. 
Column 4 shows the total percentage change in payments from FY 2004 
to FY 2005. The change represented in Column 4 includes the 0.7 
percent update to the capital Federal rate, a 1.0 percent increase 
in case-mix, changes in the adjustments to the capital Federal rate 
(for example, the effect of the new hospital wage index on the 
geographic adjustment factor), and reclassifications by the MGCRB, 
as well as changes in special exception payments. The comparisons 
are provided by: (1) Geographic location; (2) region; and (3) 
payment classification.
    The simulation results show that, on average, capital payments 
per case can be expected to increase 4.3 percent in FY 2005. In 
addition to the 0.7 percent increase due to the capital market 
basket update, this projected increase in capital payments per case 
is largely attributable to the proposed changes in the GAF values 
(which include the increase to hospital wage index values provided 
for by sections 505 and 508 of Pub. L. 108-173) and estimated 
increase in outlier payments in FY 2005. Our comparison by 
geographic location shows that urban hospitals are expected to 
experience a 4.6 percent increase in capital payments per case, 
while rural hospitals are only expected to experience a 2.1 percent 
increase in capital payments per case. This difference is mostly due 
to a projection that urban hospitals will experience a larger 
increase in payments due to changes in the proposed GAF values and 
larger projected increase in outlier payments from FY 2004 to FY 
2005 compared to rural hospitals.
    Most regions are estimated to receive an increase in total 
capital payments per case. Changes by region vary from a minimum 
increase of 0.7 percent (South Atlantic rural region) to a maximum 
increase of 5.5 percent (Pacific urban region). This relatively 
small increase in projected capital payments per discharge for 
hospitals located in the South Atlantic rural region is largely 
attributable to the proposed changes in the GAF values (that is, the 
proposed GAFs for most of these hospitals for FY 2005 are lower than 
the average of the GAFs for FY 2004) and a projected decrease in DSH 
payments (mostly because the rural hospitals that previously 
qualified for capital DSH payments because they reclassified for the 
purpose of the operating IPPS standardized amounts would no longer 
be eligible to receive capital DSH payments with the equalization of 
the operating IPPS standardized amounts, as discussed in section 
IV.D. of the preamble of this proposed rule). The relatively large 
increase in capital payments per discharge for hospitals located in 
the Pacific urban region is largely due to the proposed changes in 
the GAF values (that is, the proposed GAFs for most of these 
hospitals for FY 2005 are higher than the average of the GAFs for FY 
2004) and an increase in projected outlier payments.
    Hospitals located in Puerto Rico are expected to experience an 
increase in total capital payments per case of 8.0 percent. This 
relatively large increase in payment per case for hospitals located 
in Puerto Rico is largely due to the proposed change in the Federal 
portion (from 50 percent to 75 percent) of the blended payments to 
Puerto Rico hospitals beginning in FY 2005.
    By type of ownership, proprietary hospitals are projected to 
have the largest rate of increase of total payment changes (4.7 
percent). Similarly, payments to voluntary and government hospitals 
are expected to increase 4.3 percent. As noted above, this slightly 
larger projected increase in capital payments per case for 
proprietary hospitals is mostly due to the proposed changes in the 
GAF values for FY 2005.
    Section 1886(d)(10) of the Act established the MGCRB. 
Previously, hospitals could apply for reclassification for purposes 
of the standardized amount, wage index, or both. Section 401(c) of 
Public Law 108-173 equalized the standardized amounts under the 
operating IPPS. Therefore, beginning in FY 2005, there is no longer 
reclassification for the purposes of the standardized amounts; 
hospitals may apply for reclassification for purposes of the wage 
index in FY 2005. Reclassification for wage index purposes also 
affects the geographic adjustment factor because that factor is 
constructed from the hospital wage index.
    To present the effects of the hospitals being reclassified for 
FY 2005 compared to the effects of reclassification for FY 2004, we 
show the average payment percentage increase for hospitals 
reclassified in each fiscal year and in total. The reclassified 
groups are compared to all other nonreclassified hospitals. These 
categories are further identified by urban and rural designation.
    Hospitals reclassified for FY 2005 as a whole are projected to 
experience a 2.8 percent increase in payments. Payments to 
nonreclassified hospitals in FY 2005 are expected to increase 4.5 
percent. Hospitals reclassified during both FY 2004 and FY 2005 are 
projected to experience a slight increase in payments of 2.6 
percent. Hospitals reclassified during FY 2005 only are projected to 
receive an increase in payments of 4.9 percent. This increase is 
primarily due to proposed changes in the GAF (wage index).

[[Page 28814]]



                                Table III.--Comparison of Total Payments Per Case
                            [FY 2004 Payments Compared to Proposed FY 2005 Payments]
----------------------------------------------------------------------------------------------------------------
                                                                           Average  FY  Average  FY
                                                               Number of       2004         2005
                                                               hospitals    payments/    payments/     Change.
                                                                               case         case
----------------------------------------------------------------------------------------------------------------
By Geographic Location:.
    All hospitals...........................................        3,871          709          740          4.3
    Large urban areas (populations over 1 million)..........        1,411          790          838          6.1
    Other urban areas (populations of 1 million of fewer)...        1,253          704          723          2.7
    Rural areas.............................................        1,207          485          495          2.1
    Urban hospitals.........................................        2,664          750          784          4.6
        0-99 beds...........................................          674          540          563          4.4
        100-199 beds........................................          945          642          670          4.2
        200-299 beds........................................          499          736          766          4.2
        300-499 beds........................................          415          812          851          4.8
        500 or more beds....................................          131          934          982          5.2
    Rural hospitals.........................................        1,207          485          495          2.1
        0-49 beds...........................................          548          406          416          2.5
        50-99 beds..........................................          393          452          462          2.2
        100-149 beds........................................          163          492          501          1.9
        150-199 beds........................................           57          536          545          1.6
        200 or more beds....................................           46          610          622          2.0
By Region:
    Urban by Region.........................................        2,664          750          784          4.6
        New England.........................................          134          815          839          2.9
        Middle Atlantic.....................................          390          813          848          4.2
        South Atlantic......................................          407          720          752          4.4
        East North Central..................................          442          742          777          4.8
        East South Central..................................          175          677          709          4.7
        West North Central..................................          160          752          786          4.5
        West South Central..................................          344          698          734          5.2
        Mountain............................................          140          746          772          3.5
        Pacific.............................................          421          850          897          5.5
        Puerto Rico.........................................           51          321          346          8.0
    Rural by Region.........................................        1,207          485          495          2.1
        New England.........................................           34          618          629          1.9
        Middle Atlantic.....................................           57          511          516          1.0
        South Atlantic......................................          176          479          483          0.7
        East North Central..................................          160          514          522          1.4
        East South Central..................................          192          446          457          2.6
        West North Central..................................          206          500          517          3.3
        West South Central..................................          228          434          446          2.7
        Mountain............................................           92          486          500          2.9
        Pacific.............................................           62          558          578          3.6
By Payment Classification:
    All hospitals...........................................        3,871          709          740          4.3
    Large urban areas (populations over 1 million)..........        1,399          791          839          6.1
    Other urban areas (populations of 1 million or fewer)...        1,216          707          726          2.7
    Rural areas.............................................        1,256          484          494          2.0
    Teaching Status:
        Non-teaching........................................        2,759          588          610          3.8
        Fewer than 100 Residents............................          911          750          782          4.3
        100 or more Residents...............................          201        1,090        1,151          5.6
        Urban DSH:
            100 or more beds................................        1,457          786          822          4.7
            Less than 100 beds..............................          335          494          517          4.7
        Rural DSH:
            Sole Community (SCH/EACH).......................          478          440          451          2.4
            Referral Center (RRC/EACH)......................          149          548          558          1.8
            Other Rural:
                100 or more beds............................           64          464          470          1.3
                Less than 100 beds..........................          241          411          419          1.9
    Urban teaching and DSH:
        Both teaching and DSH...............................          800          862          903          4.9
        Teaching and no DSH.................................          250          773          808          4.5
        No teaching and DSH.................................          992          631          658          4.3
        No teaching and no DSH..............................          573          642          669          4.3
    Rural Hospital Types:
        Non special status hospitals........................          394          439          446          1.6
        RRC/EACH............................................          129          559          565          1.2
        SCH/EACH............................................          451          454          465          2.5
        Medicare-dependent hospitals (MDH)..................          209          408          419          2.7
        SCH, RRC and EACH...................................           70          551          566          2.9

[[Page 28815]]

 
Hospitals Reclassified by the Medicare Geographic
 Classification Review Board:
    Reclassification Status During FY 2004 and FY 2005:
        Reclassified During Both FY 2004 and FY 2005........          423          615          631          2.6
            Reclassified During FY 2005 Only................           62          547          574          4.9
            Reclassified During FY 2004 Only................          186          672          687          2.2
        FY 2005 Reclassifications:
            All Reclassified Hospitals......................          485          610          627          2.8
            All Nonreclassified Hospitals...................        3,325          724          757          4.5
            All Urban Reclassified Hospitals................          118          748          773          3.4
            Urban Nonreclassified Hospitals.................        2,486          752          787          4.7
            All Reclassified Rural Hospitals................          367          536          548          2.3
            Rural Nonreclassified Hospitals.................          839          433          441          1.8
        Other Reclassified Hospitals (Section 1886(D)(8)(B))           61          487          490          0.7
    Type of Ownership:
        Voluntary...........................................        2,322          727          758          4.3
        Proprietary.........................................          717          647          677          4.7
        Government..........................................          764          676          705          4.3
    Medicare Utilization as a Percent of Inpatient Days:
        0-25................................................          226          888          939          5.7
        25-50...............................................        1,122          772          809          4.8
        50-65...............................................        1,428          630          654          3.8
        Over 65.............................................          922          630          654          3.7
----------------------------------------------------------------------------------------------------------------

Appendix B: Recommendation of Update Factors for Operating Cost Rates 
of Payment for Inpatient Hospital Services

[If you choose to comment on issues in this section, please include 
the caption ``Update Factors'' at the beginning of your comment.]

I. Background

    Section 1886(e)(4)(A) of the Act requires that the Secretary, 
taking into consideration the recommendations of the Medicare 
Payment Advisory Commission (MedPAC), recommend update factors for 
inpatient hospital services for each fiscal year that take into 
account the amounts necessary for the efficient and effective 
delivery of medically appropriate and necessary care of high 
quality. Under section 1886(e)(5) of the Act, we are required to 
publish the proposed update factors recommended by the Secretary in 
the proposed rule, and the final update factors recommended by the 
Secretary in the final rule. Accordingly, this Appendix provides the 
recommendations of appropriate update factors for the IPPS 
standardized amount, the hospital-specific rates for SCHs and MDHs, 
and the rate-of-increase limits for hospitals and hospital units 
excluded from the IPPS. We also discuss our update framework and 
respond to MedPAC's recommendations concerning the update factors.

II. Secretary's Recommendations

    Section 1886(b)(3)(B)(i)(XIX) of the Act sets the FY 2005 
percentage increase in the operating cost standardized amount equal 
to the rate of increase in the hospital market basket for IPPS 
hospitals in all areas. Based on the Office of the Actuary's first 
quarter 2004 forecast of the FY 2005 market basket increase, the 
proposed update to the standardized amount is 3.3 percent (that is, 
the market basket rate of increase) for hospitals in all areas.
    Section 1886(b)(3)(B)(iv) of the Act sets the FY 2005 percentage 
increase in the hospital-specific rates applicable to SCHs and MDHs 
equal to the rate set forth in section 1886(b)(3)(B)(i) of the Act 
(that is, the same update factor as all other hospitals subject to 
the IPPS, or the rate of increase in the market basket). Therefore, 
the proposed update to the hospital-specific rate applicable to SCHs 
and MDHs is also 3.3 percent.
    Section 1886(b)(3)(B)(ii) of the Act sets the FY 2005 percentage 
increase in the rate-of-increase limits for hospitals and hospital 
units excluded from the IPPS (psychiatric hospitals and units (now 
referred to as inpatient psychiatric facilities (IPFs)), 
rehabilitation hospitals and units (now referred to as IRFs), LTCHs, 
cancer hospitals, and children's hospitals) equal to the market 
basket percentage increase. In the past, hospitals and hospital 
units excluded from the IPPS have been paid based on their 
reasonable costs subject to limits as established by TEFRA. However, 
some of these categories of excluded hospitals and units have begun 
to be paid under their own prospective payment systems. Hospitals 
and units that receive any hospital-specific payments will have 
those payments subject to TEFRA limits for FY 2005. For these 
hospitals, the proposed update is the percentage increase in the 
excluded hospital market basket (currently estimated at 3.3 
percent).
    IRFs are paid under the IRF PPS for cost reporting periods 
beginning on or after January 1, 2002. For cost reporting periods 
beginning during FY 2004, the Federal prospective payment for IRFs 
is based on 100 percent of the adjusted Federal IRF prospective 
payment amount, updated annually.
    Effective for cost reporting periods beginning during FY 2003, 
LTCHs are paid under the LTCH PPS under which they receive payment 
based on a 5-year transition period (see the August 30, 2002 final 
rule (67 FR 55954)). A LTCH may elect to be paid on 100 percent of 
the Federal prospective rate at the start of any of its cost 
reporting periods during the 5-year transition period. For purposes 
of the update factor, the portion of the LTCH PPS transition blend 
payment based on reasonable costs for inpatient operating services 
is determined by updating the LTCH's TEFRA limit by the current 
estimate of the excluded hospital market basket (or 3.3 percent).
    CMS recently published a proposed regulation regarding inpatient 
psychiatric facilities (IPFs) in which CMS would compute a Federal 
per diem base rate to be paid to all IPFs 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. The Federal per diem base rate would be adjusted to 
reflect certain patient characteristics such as age, specified DRGs, 
and selected high-cost comorbidities, and certain facility 
characteristics such as a wage index adjustment, rural location, and 
indirect teaching costs. The November 28, 2003 proposed rule assumed 
an April 1, 2004 effective date for the purpose of ratesetting and 
calculating impacts. However, we are still in the process of 
analyzing public comments and developing a final rule for 
publication. The effective date of the IPF PPS would occur 5 months 
following publication of the final rule.

[[Page 28816]]

III. Update Framework

    Consistent with current law, we are proposing an update 
recommendation equal to the full market basket percentage increase 
for the IPPS operating cost standardized amounts for FY 2005. We 
also have analyzed changes in hospital productivity, scientific and 
technological advances, practice pattern changes, changes in case-
mix, the effect of reclassification on recalibration, and forecast 
error correction. A discussion of this analysis is below.

A. Productivity

    Service level labor productivity is defined as the ratio of 
total service output to full-time equivalent employees (FTEs). While 
we recognize that productivity is a function of many variables (for 
example, labor, nonlabor material, and capital inputs), we use the 
portion of productivity attributed to direct labor since this update 
framework applies to operating payment. To recognize that we are 
apportioning the short-run output changes to the labor input and not 
considering the nonlabor inputs, we weight our productivity measure 
by the share of direct labor services in the market basket to 
determine the expected effect on cost per case.
    Our recommendation for the service productivity component is 
based on historical trends in productivity and total output for both 
the hospital industry and the general economy, and projected levels 
of future hospital service output. MedPAC's predecessor, the 
Prospective Payment Assessment Commission (ProPAC), estimated 
cumulative service productivity growth to be 4.9 percent from 1985 
through 1989 or 1.2 percent annually. At the same time, ProPAC 
estimated total output growth at 3.4 percent annually, implying a 
ratio of service productivity growth to output growth of 0.35.
    Absent a productivity measure specific to Medicare patients, we 
examined productivity (output per hour) and output (gross domestic 
product) for the economy. Depending on the exact time period, annual 
changes in productivity range from 0.30 to 0.35 percent of the 
change in output (that is, a 1.0 percent increase in output would be 
correlated with a 0.30 percent to a 0.35 percent change in output 
per hour).
    Under our framework, the recommended update is based in part on 
expected productivity--that is, projected service output during the 
year, multiplied by the historical ratio of service productivity to 
total service output, multiplied by the share of direct labor in 
total operating inputs, as calculated in the hospital market basket. 
This method estimates an expected productivity improvement in the 
same proportion to expected total service growth that has occurred 
in the past and assumes that, at a minimum, growth in FTEs changes 
proportionally to the growth in total service output. Thus, the 
recommendation allows for unit productivity to be smaller than the 
historical averages in years during which output growth is 
relatively low and larger in years during which output growth is 
higher than the historical averages. Based on the above estimates 
from both the hospital industry and the economy, we have chosen to 
employ the range of ratios of productivity change to output change 
of 0.30 to 0.35.
    The expected change in total hospital service output is the 
product of projected growth in total admissions (adjusted for 
outpatient usage), projected real case-mix growth, expected quality-
enhancing intensity growth, and net of expected decline in intensity 
due to reduction of cost-ineffective practice. Case-mix growth and 
intensity numbers for Medicare are used as proxies for those of the 
total hospital, since case-mix increases (used in the intensity 
measure as well) are unavailable for non-Medicare patients. 
Normally, the expected FY 2005 hospital output growth would be 
simply the sum of the expected change in intensity (zero percent), 
projected admissions change (0.9 percent), and projected real case-
mix growth (1.0 percent--a definition of real case mix growth 
appears below), or 1.9 percent. As discussed below and in relation 
to the proposed capital update, we believe our intensity estimate is 
skewed by hospitals' charge data. We are including only the 
projected changes in admissions and real case-mix in our calculation 
of productivity gains. However, the expected change in intensity is 
zero. Therefore, excluding the intensity estimate has no effect on 
the result. This results in an estimate of 1.9 percent.
    The share of direct labor services in the market basket 
(consisting of wages, salaries, and employee benefits) is 61.7 
percent. Multiplying the expected change in total hospital service 
output (1.9 percent) by the ratio of historical service productivity 
change to total service growth of 0.30 to 0.35 and by the direct 
labor share percentage of 61.7 provides our productivity standard of 
-0.8 to -0.7 percent. Because productivity gains hold down the rate 
of increase in hospitals' costs, this factor is applied as a 
negative offset to the market basket increase.

B. Intensity

    The intensity factor for the operating update framework reflects 
how hospital services are utilized to produce the final product, 
that is, the discharge. This component accounts for changes in the 
use of quality-enhancing services, changes in within-DRG severity, 
and expected modification of practice patterns to remove non-cost-
effective services. Under the capital IPPS framework, we also make 
an adjustment for changes in intensity. We calculate this adjustment 
using the same methodology and data that are used in the framework 
for the operating IPPS.
    We calculate case-mix constant intensity as the change in total 
Medicare charges per admission, adjusted for price level changes 
(the Consumer Price Index (CPI) for hospital and related services) 
and changes in real case-mix. The use of total charges in the 
calculation of the intensity factor makes it a total intensity 
factor, that is, charges for both operating and capital services are 
already built into the calculation of the factor.
    However, as discussed above in relation to the proposed capital 
update, because our intensity calculation relies heavily upon charge 
data and we believe that this charge data may be inappropriately 
inflated due to manipulation of charges to maximize outlier 
payments, we are proposing a zero percent adjustment for intensity 
in FY 2005. In past fiscal years (1996 through 2000) when we found 
intensity to be declining, we believed a zero (rather than negative) 
intensity adjustment was appropriate. Similarly, we believe that it 
is appropriate to propose a zero intensity adjustment for FY 2005 
until we determine that any increase in charges can be tied to 
intensity, rather than to attempts to maximize outlier payments.

C. Change in Case-Mix

    Our analysis takes into account projected changes in real case-
mix, less the changes attributable to improved coding practices. We 
define real case-mix change as actual changes in the mix (and 
resource requirements) of Medicare patients, as opposed to changes 
in coding behavior that result in assignment of cases to higher-
weighted DRGs but do not reflect greater resource requirements. For 
our FY 2005 update recommendation, we are projecting a 1.0 percent 
increase in the case-mix index. We do not believe changes in coding 
behavior will impact the overall case-mix in FY 2005. As such, for 
FY 2005, we estimate that real case-mix is equal to projected change 
in case-mix. Thus, we are recommending a 1.0 percent adjustment for 
case-mix.

D. Effect of FY 2003 DRG Reclassification and Recalibration

    We estimate that DRG reclassification and recalibration for FY 
2003 (GROUPER version 20.0) resulted in a zero percent change in the 
case-mix index when compared with the case-mix index that would have 
resulted if we had not made the reclassification and recalibration 
changes to the GROUPER (version 19.0). Therefore, we are 
recommending a zero percent adjustment for the effect of FY 2003 DRG 
reclassification and recalibration.

E. Forecast Error Correction

    We make a forecast error correction if the actual market basket 
changes differ from the forecasted market basket by 0.25 percentage 
points or more. There is a 2-year lag between the forecast and the 
measurement of forecast error. The estimated market basket 
percentage increase used to update the FY 2003 payment rates was 3.5 
percent. Our most recent data indicates the actual FY 2003 increase 
was 3.9 percent. The resulting forecast error in the FY 2003 market 
basket rate of increase is 0.4 percentage points. This underestimate 
was due largely to an underestimation of increases in the 
compensation components in the market basket. More specifically, the 
burden for benefit costs was expected to shift more to workers, 
given the soft job market. However, not as much of a shift occurred 
as was expected, and the measure for benefits increased faster than 
originally forecast. In addition, higher than expected growth in 
natural gas prices, mainly due to higher than expected demand last 
winter that depleted surplus reserves, caused the energy component 
to be underestimated.
    The following is a summary of the update range supported by our 
analyses:

[[Page 28817]]



                   HHS's FY 2005 Update Recommendation
------------------------------------------------------------------------
                                                                .
------------------------------------------------------------------------
Projected FY 2005 Market Basket Increase..............             3.3.
Policy Adjustment Factors.............................             0.0.
    Productivity......................................     -0.8 to -0.7
    Intensity.........................................             0.0.
                                                       -----------------
        Subtotal......................................    -0.8 to -0.7.
Case-Mix Adjustment Factors:.
    Projected Case-Mix Change.........................              1.0
    Real Across DRG Change............................            -1.0.
                                                       -----------------
        Subtotal......................................             0.0.
Effect of FY 2003 DRG Reclassification and                         0.0.
 Recalibration........................................
Forecast Error Correction.............................             0.4.
Total Recommendation Update...........................       2.9 to 3.0
------------------------------------------------------------------------

IV. MedPAC Recommendations for Assessing Payment Adequacy and Updating 
Payments in Traditional Medicare

    In the past, MedPAC has suggested specific adjustments to its 
update recommendation for each of the factors discussed under 
section III. of this Appendix. In its March 2004 Report to Congress, 
MedPAC assesses the adequacy of current payments and costs and the 
relationship between payments and an appropriate cost base, 
utilizing an established methodology used by the Commission in the 
past few years. MedPAC stresses that the issue at hand is whether 
payments are too high or too low, and not how they became either too 
high or too low.
    In the first portion of MedPAC's analysis on the assessment of 
payment adequacy, the Commission reviews the relationship between 
costs and payments (typically represented as a margin). Based on the 
latest cost report data available, MedPAC estimated an inpatient 
hospital Medicare operating margin for FY 2002 of 4.7 percent (down 
from 8.1 percent and 10.7 percent for FY 2001 and FY 2000, 
respectively).
    MedPAC also projects margins through FY 2003, making certain 
assumptions about changes in payments and costs. On the payment 
side, MedPAC applied the annual payment updates (as specified by law 
for FYs 2001 through 2003) and then modeled the effects of other 
policy changes that have affected the level of payments. On the cost 
side, MedPAC estimated the increases in cost per unit of output over 
the same time period at the rate of inflation as measured by the 
applicable market basket index generated by CMS, adjusted downward, 
anticipating improvements in productivity.
    In addition to considering the relationship between estimated 
payments and costs, MedPAC also considered the following three 
factors to assess whether current payments are adequate:
     Changes in access to or quality of care,
     Changes in the volume of services or number of 
providers; and
     Change in providers access to capital.
    MedPAC s assessment of aggregate Medicare payments finds that 
payments were at least adequate as of FY 2004.
    MedPAC's recommendation is to update payments under the IPPS by 
the full rate of increase in the hospital market basket for FY 2005. 
MedPAC focuses on the fact that it is extremely difficult to 
determine the status of cost growth among hospitals, given the 
complexity of ascertaining the impact of the implementation of 
provisions of Pub. L. 108-173. MedPAC believes it is sensible to 
refrain from applying their expected net effect based on their 
standard model, as there is a great deal of uncertainty regarding 
the costs and payments faced by providers. MedPAC is not abandoning 
its methodology regarding the update framework, but it has concluded 
that, under the circumstances, the current market conditions and 
factors that determine the cost behavior and outcomes of hospitals 
are too uncertain to rely on current trends for estimation.
    Response: As described above, we are recommending a full market 
basket update for FY 2005 consistent with current law. We believe 
this will appropriately balance incentives for hospitals to operate 
efficiently with the need to provide sufficient payments to maintain 
access to quality care for Medicare beneficiaries.
    Because the operating and capital prospective payment systems 
remain separate, CMS continues to use separate updates for operating 
and capital payments. The proposed update to the capital payment 
rate is discussed in section III. of the Addendum to this proposed 
rule.

[FR Doc. 04-10932 Filed 5-11-04; 1:00 pm]
BILLING CODE 4120-01-P