Federal Register, Volume 69 Issue 96 (Tuesday, May 18, 2004)

[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. InFUSE^TM (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. InFUSE^TM 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. Acticon^TM Neosphincter
i. TandemHeart^TM Percutaneous Left Ventricular Assist
System
j. Aquadex^TM 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.

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:

[[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. InFUSE^TM (Bone
Morphogenetic Proteins (BMPs) for Spinal Fusions)
InFUSE^TM 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
InFUSE^TM for add-on payments under Sec. 412.88, effective
for FY 2004. This approval was on the basis of using
InFUSE^TM 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 InFUSE^TM 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 InFUSE^TM 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 InFUSE^TM 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 InFUSE^TM, 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 InFUSE^TM include costs
for the interbody fusion device (the LT cage, identified by procedure
code 84.51), used in the spinal fusion procedure with the
InFUSE^TM 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 InFUSE^TM. 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 InFUSE^TM. This is due to the
fact that the LT cage is still required by the FDA when
InFUSE^TM 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. InFUSE^TM 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
InFUSE^TM 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 InFUSE^TM 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 InFUSE^TM when used in spinal fusions (refer
to section III.E.3.b. of this preamble).
In cases of open tibia fractures, InFUSE^TM 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 InFUSE^TM. The
manufacturer contends that this use is severely limited due to the
greatly increased costs for treating these cases with
InFUSE^TM at the time of wound debridement and closure. The
manufacturer has conducted a clinical trial and is awaiting FDA
approval for the use of InFUSE^TM 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 InFUSE^TM 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
InFUSE^TM 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,
InFUSE^TM 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
InFUSE^TM for open tibia fractures meets the cost criterion.
InFUSE^TM 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 InFUSE^TM for single-level
spinal fusions. We must still determine whether it is appropriate to
approve add-on payments for InFUSE^TM in cases of open tibia
fractures in light of the cost and substantial improvement criteria.
Therefore, we invite comments on whether use of InFUSE^TM 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
InFUSE^TM 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 InFUSE^TM for spinal fusions to
cases where InFUSE^TM 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
InFUSE^TM 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
Soletra^TM 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
Soletra^TM, 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 Soletra^TM device.
Since most patients would receive two Soletra^TM devices if
the Kinetra[reg] device is not implanted, data regarding the cost of
Soletra^TM give a good measure of the actual costs that will
be incurred. Medtronic submitted data for 104 cases that involved the
Soletra^TM 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 Soletra^TM in DRGs 1 and 2 were $69,018 and
$44,779, respectively. The mean standardized charge for these
Soletra^TM cases according to Medtronic's data was $50,839.
We used the same procedure codes to identify 187 cases involving
the Soletra^TM 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 Soletra^TM 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, Soletra^TM, 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 Soletras^TM 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 Soletra^TM
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. Acticon^TM Neosphincter
American Medical Systems submitted an application for approval of
the Acticon^TM Neosphincter for new technology add-on
payments for FY 2005. The Acticon^TM Neosphincter is a small,
fluid-filled prosthesis that is completely implanted within the body.
The Acticon^TM 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 Acticon^TM Neosphincter does not meet this
criterion.
Although we are proposing not to approve this application because
Acticon^TM 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
Acticon^TM 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 Acticon^TM Neosphincter meets the cost
criterion.
The applicant states in its application that the
Acticon^TM 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 Acticon^TM 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
Acticon^TM Neosphincter avoids the life-altering and
disfiguring consequences of a permanent stoma. Another commenter noted
that the implant of the Acticon^TM 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 Acticon^TM Neosphincter is no
longer new. Therefore, we are proposing that it is not eligible for
add-on payments for new technologies.
i. TandemHeart^TM Percutaneous Left Ventricular Assist System
Brigham and Women's Hospital submitted an application for approval
of the TandemHeart^TM 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
TandemHeart^TM 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 TandemHeart^TM 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 TandemHeart^TM 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
TandemHeart^TM 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 TandemHeart^TM pVAD is
reflected within the FY 2003 MedPAR file. The manufacturer stated that
approximately 60 TandemHeart^TM pVADs have been used since
FDA approved the Cardiac Arrest Transseptal Cannula Set in May 2003.
Therefore, the costs of the TandemHeart^TM pVAD are not
adequately reflected within the DRGs. As a result, we consider the
TandemHeart^TM pVAD to be new under our criterion.
As stated above, according to the manufacturer, approximately 60
TandemHeart^TM 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
TandemHeart^TM 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 TandemHeart^TM
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 TandemHeart^TM
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
TandemHeart^TM 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. Aquadex^TM 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.

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

[[Page 28799]]

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 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 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