[Federal Register Volume 69, Number 146 (Friday, July 30, 2004)]
[Notices]
[Pages 45721-45775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17444]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

[CMS-1360-N]
RIN 0938-AM82


Medicare Program; Inpatient Rehabilitation Facility Prospective 
Payment System for Fiscal Year 2005

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

ACTION: Notice.

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SUMMARY: This notice updates prospective payment rates for inpatient 
rehabilitation facilities for Federal fiscal year (FY) 2005 as 
authorized under section 1886(j)(3)(C) of the Social Security Act (the 
Act). Section 1886(j)(5) of the Act requires the Secretary to publish 
in the Federal Register on or before August 1 before each fiscal year, 
the classifications and weighting factors for the inpatient 
rehabilitation facility (IRF) case-mix groups and a description of the 
methodology and data used in computing the prospective payment rates 
for that fiscal year.

DATES: Effective Date: The updated IRF prospective payment rates are 
effective for discharges occurring on or after October 1, 2004, and on 
or before September 30, 2005 (FY 2005).

FOR FURTHER INFORMATION CONTACT: Pete Diaz, (410) 786-1235, Jeanette 
Kranacs, (410) 786-9385, or Robert Kuhl, (410) 786-4597.

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Table of Contents

I. Background
    A. Requirements of the Statute for Updating the Prospective 
Payment System (PPS) for Inpatient Rehabilitation Facilities (IRFs)
    B. Inpatient Rehabilitation Facility Prospective Payment--
General Overview
    C. Classification System for the Inpatient Rehabilitation 
Facility Prospective Payment System
    D. Inpatient Rehabilitation Facility Market Basket Index
    E. Area Wage Adjustment
    F. Update of Payment Rates Under the Prospective Payment System 
for Inpatient Rehabilitation Facilities for Fiscal Year 2005
    G. Examples of Computing the Total Adjusted Inpatient 
Rehabilitation Facility Prospective Payments
    H. Outlier Payment Provision
II. Future Updates
III. Collection of Information Requirements
IV. Waiver of Proposed Rulemaking
V. Regulatory Impact Analysis
    A. Introduction
    1. Executive Order 12866
    2. Regulatory Flexibility Act (RFA)
    3. Impact on Rural Hospitals
    1. Unfunded Mandates Reform Act
    5. Executive Order 13132
    6. Overall Impact
    B. Anticipated Effects of the Notice
    1. Budgetary Impact
    2. Impact on Providers
    3. Calculation of the Estimated FY 2004 IRF Prospective Payments
    4. Calculation of the Estimated FY 2005 IRF Prospective Payments

I. Background

A. Requirements of the Statute for Updating the Prospective Payment 
System (PPS) for Inpatient Rehabilitation Facilities (IRFs)

    On August 7, 2001, we published a final rule entitled ``Medicare 
Program; Prospective Payment System for Inpatient Rehabilitation 
Facilities (CMS-1069-F)'' in the Federal Register (66 FR 41316), that 
established a prospective payment system (PPS) for inpatient 
rehabilitation facilities (IRFs) as authorized under section 1886(j) of 
the Social Security Act (the Act) and codified at subpart P of part 412 
of the Medicare regulations. In the August 7, 2001, final rule, we set 
forth the per discharge Federal rates for fiscal year (FY) 2002 that 
provided payment for the inpatient operating and capital costs to IRFs 
for the covered rehabilitation services they furnished (that is, 
routine, ancillary, and capital costs), but not costs of approved 
educational activities, bad debts, and other services or items

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that are outside the scope of the IRF PPS. Covered rehabilitation 
services include services for which benefits are provided under the 
fee-for-service Part A (Hospital Insurance Program) of the Medicare 
program.
    Annual updates to the IRF PPS rates are required by section 
1886(j)(3)(C) of the Act. In the August 1, 2002, notice (67 FR 49928), 
we set forth the per discharge Federal rates for FY 2003. In the August 
1, 2003, final rule (68 FR 45674), we set forth the per discharge 
Federal rates for FY 2004.
    In this notice, we set forth the prospective payment rates 
applicable for IRFs for discharges occurring during FY 2005. In 
establishing these payment rates, we update the IRF per discharge 
payment rates that were published in the August 1, 2003, final rule.
    Section 1886(j)(5) of the Act requires the Secretary to publish in 
the Federal Register, on or before August 1 of the preceding fiscal 
year, the classifications and weighting factors for the IRF case-mix 
groups (CMGs) and a description of the methodology and data used in 
computing the prospective payment rates for the upcoming fiscal year. 
The statute also permits the Secretary to adjust the classification and 
weighting factors for the IRF CMGs from time to time. However, we 
continue to perform research on potential improvements to the methods 
used to establish the CMGs, facility adjustments (such as, teaching, 
rural, and low-income adjustments), and comorbidities. Because 
sufficient data from this research supporting potential improvements 
are currently not available, we are not making any adjustments at this 
time. Thus, in this notice, we are using the same classifications and 
weighting factors for the IRF CMGs that were originally set forth in 
the August 7, 2001, final rule and republished in the August 1, 2003, 
final rule. Further, the case and facility level adjustments described 
in the August 7, 2001, final rule will apply to the FY 2005 IRF PPS 
payment rates described in this notice.
    Accordingly, the CMGs, comorbidity tiers, and the corresponding 
relative weights presented in the August 7, 2001, final rule will be 
used as the basis for developing the FY 2005 IRF PPS payment rates set 
forth in this notice.
    Specifically, we multiply an increase factor, described in section 
II.D of this notice, by the FY 2004 IRF standard payment amount. Then 
we apply the budget neutral wage adjustment to develop the FY 2005 
standard payment conversion factor. The FY 2005 standard payment 
conversion factor is then multiplied by the relative weights presented 
in Table 1 of this notice, and in the August 7, 2001, final rule, to 
develop the FY 2005 Federal unadjusted IRF PPS payment rates.

B. Inpatient Rehabilitation Facility Prospective Payment--General 
Overview

    Section 4421 of the Balanced Budget Act of 1997 (BBA) (Pub. L. 105-
33), as amended by section 125 of the Medicare, Medicaid, and SCHIP 
Balanced Budget Refinement Act of 1999 (BBRA) (Pub. L. 106-113), and by 
section 305 of the Medicare, Medicaid, and SCHIP Benefits Improvement 
and Protection Act of 2000 (BIPA) (Pub. L. 106-554), provides for the 
implementation of a per discharge PPS, through new section 1886(j) of 
the Act, for IRFs--inpatient rehabilitation hospitals and 
rehabilitation units. Although a complete discussion of the IRF PPS 
provisions appears in the August 7, 2001, final rule, we provide below 
a general description of the IRF PPS.
    The IRF PPS uses information from the Inpatient Rehabilitation--
Patient Assessment Instrument (IRF-PAI), to classify patients into 
distinct CMGs based on clinical characteristics and expected resource 
needs. The CMGs were constructed using rehabilitation impairment 
categories, functional status (both motor and cognitive), age, 
comorbidities, and other factors that we deemed appropriate to improve 
the explanatory power of the groups.
    Payment for services furnished to a Medicare patient consists of a 
predetermined, per-discharge amount for each CMG with applicable case 
and facility level adjustments. Payments under the IRF PPS encompass 
inpatient operating and capital costs of furnishing covered 
rehabilitation services (that is, routine, ancillary, and capital 
costs) but not costs of approved educational activities, bad debts, and 
other services or items outside the scope of the IRF PPS.
    The IRF PPS is comprised of 100 distinct CMGs, and each CMG is 
associated with a specific payment rate. The existence of a comorbidity 
may affect the calculation of the Federal prospective payment rate. In 
general, Federal prospective payment rates are established using a 
standard payment conversion factor. A set of relative payment weights 
(which account for the relative difference in resource use across the 
CMGs) are applied to the standard payment conversion factor. The 
resulting payment rate may then be modified due to the application of a 
number of facility level and case level adjustments. The facility level 
adjustments include those that account for geographic variations in 
wages (wage index), the percentage of low-income patients (LIPs), and 
location in a rural area. Case level adjustments include those that 
apply for transfers, short-stays, interrupted stays, outliers, and 
cases in which the beneficiary expires.
    For cost reporting periods beginning on or after January 1, 2002, 
and before October 1, 2002, section 1886(j)(1) of the Act and 42 CFR 
412.626 of the regulations provided that IRFs transition into the PPS 
by receiving a ``blended payment.'' For cost reporting periods 
beginning on or after January 1, 2002, and before October 1, 2002, 
these blended payments consisted of 66\2/3\ percent of the Federal IRF 
PPS rate and 33\1/3\ percent of the payment the IRF would have been 
paid had the IRF PPS not been implemented. However, during the 
transition period, an IRF with a cost reporting period beginning on or 
after January 1, 2002, and before October 1, 2002, could elect to 
bypass this blended payment and be paid 100 percent of the Federal IRF 
PPS rate. For cost reporting periods beginning on or after October 1, 
2002 (FY 2003), payments for all IRFs consist of 100 percent of the 
Federal IRF PPS payment rate.

C. Classification System for the Inpatient Rehabilitation Facility 
Prospective Payment System

    As previously stated, in this notice, we are using the same case-
mix classification system that was set forth in the August 7, 2001, 
final rule. It is our intention to pursue the development of 
refinements to the case-mix classification system that will improve the 
ability of the PPS to more accurately pay IRFs. We awarded a contract 
to the Rand Corporation (RAND) to conduct additional research that will 
provide us with the data necessary to address the feasibility of 
developing and implementing refinements. When the study has been 
completed, we plan to review various approaches so that we can propose 
an appropriate methodology to develop and apply refinements. Any 
specific refinement proposal resulting from this research will be 
published in the Federal Register for public review and comment.
    Below Table 1, Relative Weights for Case-Mix Groups (CMGs), 
presents the CMGs, comorbidity tiers, and the corresponding Federal 
relative weights. We also present the average length of stay for each 
CMG. As we discussed in the August 7, 2001, final rule, the average 
length of stay for each CMG is used to determine when an IRF discharge 
meets the definition of a transfer, which results in a per diem

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case level adjustment. Because these data elements are not changing as 
a result of this notice, Table 1 shown below is identical to Table 1 
that was published in the August 7, 2001, final rule (66 FR 41394-
41396), and the August 1, 2003, final rule (68 FR 45704-45708). The 
relative weights reflect the inclusion of cases with an interruption of 
stay (patient returns on day of discharge or either of the next 2 
days). The methodology we used to construct the data elements in Table 
1 is described in detail in the August 7, 2001, final rule (66 FR 
41350-41353).
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D. Inpatient Rehabilitation Facility Market Basket Index and Labor-
Related Share

    Section 1886(j)(3)(C) of the Act requires the Secretary to 
establish an increase factor that reflects changes over time in the 
prices of an appropriate mix of goods and services included in the 
covered IRF services, which is referred to as a market basket index. 
Accordingly, in updating the FY 2005 payment rates set forth in this 
notice, we apply an appropriate increase factor to the FY 2004 IRF PPS 
payment rates that is equal to the IRF market basket. In constructing 
the IRF market basket, we use the methodology set forth in the August 
1, 2003 final rule (68 FR 45685-45688). For this notice, the projected 
FY 2005 IRF market basket increase factor is 3.1 percent.
    In addition, we have used the methodology described in the August 
1, 2003 final rule (68 FR 45688-45689) to update the labor-related 
share for FY 2005. In FY 2004, we updated the 1992 market basket data 
to 1997. We believe that the 1997 market basket data is still the most 
accurate base year data available. Therefore, for FY 2005, we continue 
to use the 1997-based excluded hospital market basket with capital 
costs to determine the FY 2005 labor-related share. As shown in Table 2 
the total FY 2005 labor-related share is 72.359 percent.
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E. Area Wage Adjustment

    Section 1886(j)(6) of the Act requires the Secretary to adjust the 
proportion (as estimated by the Secretary from time to time) of 
rehabilitation facilities' costs that are attributable to wages and 
wage-related costs for area differences in wage levels by a factor 
(established by the Secretary) reflecting the relative hospital wage 
level in the geographic area of the rehabilitation facility compared to 
the national average wage level for those facilities. Not later than 
October 1, 2001, and at least every 36 months thereafter, the Secretary 
is required to update the factor under the preceding sentence on the 
basis of information available to the Secretary (and updated as 
appropriate) of the wages and wage-related costs incurred in furnishing 
rehabilitation services. Any adjustments or updates made under section 
1886(j)(6) of the Act must be made in a budget neutral manner.
    In the August 1, 2003, final rule, we established an IRF wage index 
based on FY 1999 acute care hospital wage data to adjust the FY 2004 
IRF payment rates. For the FY 2005 IRF PPS payment rates set forth in 
this notice, we are using an IRF wage index based on more recent FY 
2000 acute care hospital wage data. The methodology for calculating the 
wage index remains the same and can be found at 66 FR 41358.
    To calculate the wage-adjusted facility payments for the payment 
rates set forth in this notice, the Federal prospective payment is 
multiplied by the labor-related share (72.359 percent) to determine the 
labor-related portion of the Federal prospective payments. This labor-
related portion is then multiplied by the applicable IRF wage index 
shown in Table 3A for urban areas and Table 3B for rural areas.

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BILLING CODE 4120-01-C

    In addition, because any adjustment or update to the IRF wage index 
made under section 1886(j)(6) of the Act must be made in a budget 
neutral manner, we have calculated a budget neutral wage adjustment 
factor as established in the August 1, 2003 final rule and codified at 
42 CFR 412.624(e)(1). We use the following steps to ensure that the FY 
2005 IRF standard payment conversion factor reflects the update to the 
wage indices and to the labor-related share in a budget neutral manner:
    Step 1. We determine the total amount of the FY 2004 IRF PPS rates 
using the FY 2004 standard payment conversion factor and the labor-
related share and the wage indices from FY 2004 (as published in the 
August 1, 2003 final rule).
    Step 2. We then calculate the total amount of IRF PPS payments 
using the FY 2004 standard payment conversion factor and the updated FY 
2005 labor-related share and wage indices described above.
    Step 3. We divide the amount calculated in step 1 by the amount 
calculated in step 2, which equals the FY 2005 budget neutral wage 
adjustment factor of 1.0035.
    Step 4. We then apply the FY 2005 budget neutral wage adjustment 
factor from step 3 to the FY 2004 IRF PPS standard payment conversion 
factor after the application of the market basket update, described 
above, to determine the FY 2005 standard payment conversion factor.

F. Update of Payment Rates Under the Prospective Payment System for 
Inpatient Rehabilitation Facilities for Fiscal Year 2005

    Once we calculate the IRF market basket increase factor and 
determine the budget neutral wage adjustment factor, this calculation 
enables us to determine the updated Federal prospective payments for FY 
2005. In accordance with Sec.  412.624(c)(3)(ii), we apply the market 
basket increase factor (3.1 percent) to the standard payment conversion 
factor for FY 2004 ($12,525) which equals $12,913. Then, we apply the 
budget neutral wage adjustment of 1.0035 to $12,913, which results in a 
final updated standard payment conversion factor for FY 2005 of 
$12,958. The FY 2005 standard payment conversion factor is applied to 
each CMG weight shown in Table 1, Relative Weights for Case-Mix Groups 
(CMGs), to compute the unadjusted IRF prospective payment rates for FY 
2005 shown in Table 4.
    Table 4, Federal Prospective Payments for Case-Mix Groups (CMGs) 
for FY 2005, displays the CMGs, and the comorbidity tiers, for FY 2005.
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G. Examples of Computing the Total Adjusted Inpatient Rehabilitation 
Facility Prospective Payments

    We will adjust the Federal prospective payments, described above, 
to account for geographic wage variation, low-income patients and, if 
applicable, facilities located in rural areas.
    To illustrate the methodology that we will use for adjusting the 
Federal prospective payments, we provide the following example. One 
beneficiary is in rehabilitation facility A and another beneficiary is 
in rehabilitation facility B.
    Rehabilitation facility A's disproportionate share hospital (DSH) 
adjustment is 5 percent, with a low-income patient (LIP) adjustment of 
1.0239 and a wage index of 0.8946, and the facility is located in a 
rural area with an adjustment of 1.1914 percent.
    Rehabilitation facility B's DSH is 15 percent, with a LIP 
adjustment of 1.0700 and a wage index of 1.4414, and the facility is 
located in an urban area. Both Medicare beneficiaries are classified to 
CMG 0111 (without comorbidities). This CMG represents a stroke with 
motor scores in the 27 to 33 range and the patient is between 82 and 88 
years old. To calculate each IRF's total adjusted Federal prospective 
payment, we compute the wage-adjusted Federal prospective payment and 
multiply the result by the appropriate LIP adjustment and the rural 
adjustment (if applicable). The following table illustrates the 
components of the adjusted payment calculation.

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    Thus, the adjusted payment for facility A will be $ 24,634.33, and 
the adjusted payment for facility B will be $ 30,862.89.
    The FY 2005 IRF PPS rates set forth in this notice will apply to 
all discharges on or after October 1, 2004 and on or before September 
30, 2005.

H. Outlier Payment Provision

    Section 1886(j)(4) of the Act provides the Secretary with the 
authority to make payments in addition to the basic IRF prospective 
payments for cases incurring extraordinarily high costs. In the August 
7, 2001 IRF PPS final rule, we codified at Sec.  412.624(e)(4) of the 
regulations the provision to make an adjustment for additional payments 
for outlier cases that have extraordinarily high costs relative to the 
costs of most discharges. Providing additional payments for outliers 
strongly improves the accuracy of the IRF PPS in determining resource 
costs at the patient and facility level. These additional payments 
reduce the financial losses that would otherwise be caused by treating 
patients who require more costly care and, therefore, reduce the 
incentives to underserve these patients.
    Under Sec.  412.624(e)(4), we make outlier payments for any 
discharges if the estimated cost of a case exceeds the adjusted IRF PPS 
payment for the CMG plus the adjusted threshold amount ($11,211 which 
is then adjusted for each IRF by the facility's wage adjustment, its 
low-income patient adjustment, and its rural adjustment, if 
applicable). We calculate the estimated cost of a case by multiplying 
the IRF's overall cost-to-charge ratio by the Medicare allowable 
covered charge. In accordance with Sec.  412.624(e)(4), we pay outlier 
cases 80 percent of the difference between the estimated cost of the 
case and the outlier threshold (the sum of the adjusted IRF PPS payment 
for the CMG and the adjusted threshold amount).
    In the August 1, 2003, final rule, we stated that we will continue 
to pay outlier cases at 80 percent of the difference between the 
estimated cost of the case and the outlier threshold (the sum of the 
adjusted IRF PPS payment for the CMG and the adjusted threshold amount) 
(68 FR 45692). However, using the methodology stated in the August 1, 
2003, final rule (68 FR 45692-45693), we will apply a ceiling to an 
IRF's cost-to-charge ratios (CCR). Also, in the August 1, 2003, final 
rule (68 FR 45693-45694), we stated the methodology we will use to 
adjust IRF outlier payments and the methodology we will use to make 
these adjustments. We indicated that the methodology is codified in 
Sec.  412.624(e)(4) and Sec.  412.84(i)(3).
    On February 6, 2004, CMS issued manual instructions in Change 
Request 2998 stating that we would set forth the upper threshold 
(ceiling) and the national CCRs applicable to IRFs in each year's 
annual notice of prospective payment rates published in the Federal 
Register. The upper threshold CCR for IRFs for FY 2005 is 1.461.
    In addition, we are updating the national urban and rural CCRs for 
IRFs. Pursuant to Sec.  412.624(e)(4) and Sec.  412.84(i)(3), the 
national CCR is applied to the following situations:
     New IRFs that have not yet submitted their first Medicare 
cost report.
     IRFs whose operating or capital CCR is in excess of 3 
standard deviations above the corresponding national geometric mean.
     Other IRFs for whom the fiscal intermediary obtains 
accurate data with which to calculate either an operating or capital 
CCR (or both) are not available.
    The national CCR based on the facility location of either urban or 
rural will be

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used in each of the three situations cited above. Specifically, for FY 
2005, we have estimated a national CCR of 0.636 for rural IRFs and 
0.531 for urban IRFs. For new facilities, these national ratios will be 
used until the facility's actual CCR can be computed using the first 
tentative settled or final settled cost report data, which will then be 
used for the subsequent cost report period.

II. Future Updates

    Medicare payments to IRFs are based on a predetermined national 
payment rate per discharge. Annual updates to these payment rates are 
required by section 1886(j)(3)(C) of the Act. These updates are based 
on increases to the IRF market basket amount. For FY 2005, the update 
is established at the market basket amount. The IRF market basket, or 
input price index, developed by our Office of the Actuary (OACT), is 
just one component in determining a change to the IRF cost per 
discharge amount. It captures only the pure price change of inputs 
(labor, materials, and capital) used by an IRF to produce a constant 
quantity and quality of care. Other factors also contribute to the 
change in costs per discharge, which include changes in case-mix, 
intensity, and productivity.
    An update framework, used in combination with the market basket, 
seeks to enhance the system for updating payments by addressing factors 
beyond changes in pure input price. Such a framework has been used 
under the inpatient hospital PPS for years by both CMS and the Medicare 
Payment Advisory Commission (MedPAC).
    In general, an update framework in the context of the IRF PPS would 
provide a tool for measuring and understanding changes in cost per 
discharge. This has the potential to support the continued accuracy of 
IRF payments and ensure that the IRF PPS keeps pace with changing 
economic and health care market trends. Accordingly, we are examining 
the potential for developing and using an update framework under the 
IRF PPS. It has the potential to provide information useful to policy 
makers in determining the magnitude of the annual updates.

III. Collection of Information Requirements

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

IV. Waiver of Proposed Rulemaking

    We ordinarily publish a proposed notice in the Federal Register to 
provide a period for public comment before the provisions of a notice 
such as this take effect. We can waive this procedure, however, if we 
find good cause that a notice-and-comment procedure is impracticable, 
unnecessary, or contrary to the public interest and we incorporate a 
statement of finding and its reasons in the notice issued. We find it 
is unnecessary to undertake notice and comment rulemaking as the 
statute requires annual updates, and this notice does not make any 
substantive changes in policy, but merely reflects the application of 
previously established methodologies. Therefore, under 5 U.S.C. 
553(b)(B), for good cause, we waive notice and comment procedures.

V. Regulatory Impact Analysis

A. Introduction

    The August 7, 2001 final rule established the IRF PPS for the 
payment of Medicare services for cost reporting periods beginning on or 
after January 1, 2002. We incorporated a number of elements into the 
IRF PPS, such as case-level adjustments, a wage adjustment, an 
adjustment for the percentage of low-income patients, a rural 
adjustment, and outlier payments. This notice sets forth updates of the 
IRF PPS rates contained in the August 7, 2001 final rule.
    The purpose of this notice is not to initiate policy changes with 
regard to the IRF PPS; rather, it is to provide an update to the IRF 
payment rates for discharges during FY 2005. We note that some 
individual providers may experience larger increases in payments than 
others due to the distributional impact of the FY 2005 wage indices.
    In constructing these impacts, we do not attempt to predict 
behavioral responses, and we do not make adjustments for future changes 
in such variables as discharges or case-mix. We note that certain 
events may combine to limit the scope or accuracy of our impact 
analysis, because such an analysis is future-oriented and, thus, 
susceptible to forecasting errors due to other changes in the 
forecasted impact time period. Some examples of such possible events 
are newly legislated general Medicare program funding changes by the 
Congress, or changes specifically related to IRFs. In addition, changes 
to the Medicare program may continue to be made as a result of the BBA, 
the BBRA, the BIPA, or new statutory provisions. Although these changes 
may not be specific to the IRF PPS, the nature of the Medicare program 
is such that the changes may interact, and the complexity of the 
interaction of these changes could make it difficult to predict 
accurately the full scope of the impact upon IRFs.
    We have examined the impacts of this notice as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review), 
the Regulatory Flexibility Act (RFA) and Impact on Small Hospitals 
(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.
1. Executive Order 12866
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely reassigns responsibility of duties) directs agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year).
    We estimate that the cost to the Medicare program for IRF services 
in FY 2005 will increase by $170 million over FY 2004 levels. The 
updates to the IRF labor-related share and wage indices are made in a 
budget neutral manner. Thus, updating the IRF labor-related share and 
the wage indices to FY 2005 have no overall effect on estimated costs 
to the Medicare program. Therefore, this estimated cost to the Medicare 
program is due to the application of the updated IRF market basket of 
3.1 percent. Because the combined distributional effects and the cost 
to the Medicare program are greater than $100 million, this update 
notice is considered a major rule as defined above.
2. Regulatory Flexibility Act (RFA)
    The RFA requires agencies to analyze the economic impact of our 
regulations on small entities. If we determine that the regulation will 
impose a significant burden on a substantial number of small entities, 
we must examine options for reducing the burden. For purposes of the 
RFA, small entities include small businesses, nonprofit organizations, 
and governmental agencies. Most hospitals are considered small 
entities, either by nonprofit status or by having receipts of $6 
million to $29 million in any 1 year. (For details, see the Small 
Business Administration's regulation that set forth size standards for 
health care industries at 65 FR 69432.) Because we lack data on 
individual hospital

[[Page 45773]]

receipts, we cannot determine the number of small proprietary IRFs. 
Therefore, we assume that all IRFs (approximate total of 1,200 IRFs of 
which approximately 60 percent are nonprofit facilities) are considered 
small entities for the purpose of the analysis that follows. Medicare 
fiscal intermediaries and carriers are not considered to be small 
entities. Individuals and States are not included in the definition of 
a small entity.
    This notice establishes a 3.1 percent increase to the Federal PPS 
rates. We do not expect an incremental increase of 3.1 percent to the 
Medicare Federal rates to have a significant effect on the overall 
revenues of IRFs. Most IRFs are units of hospitals that provide many 
different types of services (for example, acute care, outpatient 
services) and the rehabilitation component of their business is 
relatively minor in comparison. In addition, IRFs provide services to 
(and generate revenues from) patients other than Medicare 
beneficiaries.
3. Impact on Rural Hospitals
    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis for any notice that will have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area (MSA) and has fewer than 100 beds.
    As indicated above, this notice establishes a 3.1 percent increase 
to the Federal PPS rates. We do not expect an incremental increase of 
3.1 percent to the Federal rates to have a significant effect on 
overall revenues or operations since most rural hospitals provide many 
different types of services (for example, acute care, outpatient 
services) and we believe that the rehabilitation component of their 
business is relatively minor in comparison.
4. Unfunded Mandates Reform Act
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in an expenditure in any 1 year by 
State, local, or tribal governments, in the aggregate, or by the 
private sector, of at least $110 million. This notice will not have an 
effect on the governments mentioned nor will it affect private sector 
costs.
5. Executive Order 13132
    We examined this notice in accordance with Executive Order 13132 
and determined that it will not have any negative impact on the rights, 
roles, or responsibilities of State, local, or tribal governments.
6. Overall Impact
    For the reasons stated above, we have not prepared an analysis 
under the RFA and section 1102(b) of the Act because we believe that 
the effect of this notice will not increase burden but will benefit 
most IRFs through the increase in the payment rates as shown in the 
regulatory impact analysis below.

B. Anticipated Effects of the Notice

    We discuss below the impacts of this notice on the Federal budget 
and on IRFs.
1. Budgetary Impact
    Section 1886(j)(3)(C) of the Act requires annual updates to the IRF 
PPS payment rates. We project that updating the IRF PPS for discharges 
occurring on or after October 1, 2004 and on or before September 30, 
2005 will cost the Medicare program $170 million. The budgetary impact 
is the result of the application of the updated IRF market basket of 
3.1 percent.
2. Impact on Providers
    For the impact analyses shown in the August 7, 2001 final rule, we 
simulate payments for 1,024 facilities. To construct the impact 
analyses set forth in this notice, we use the latest available data. 
For FY 2005, we used 1999 and 2000 Medicare claims and Functional 
Independence Measure (FIM) data for the same facilities that were used 
in constructing the impact analyses provided in the August 7, 2001 IRF 
PPS final rule (66 FR 41364-41365, and 41372) which was effective for 
cost reporting periods beginning on or after January 1, 2002. We still 
do not have enough post-IRF PPS data to determine the distributional 
impact on providers. Further, we will need a sufficient amount of these 
data to be able to rely on them as the basis for the impact analysis. 
Because IRFs began to be paid under the IRF PPS based on their cost 
report start date that occurred on or after January 1, 2002, sufficient 
Medicare claims data will not be available for those facilities whose 
cost report start date occurs later in the calendar year. The estimated 
distributional impacts among the various classification of IRFs for 
discharges occurring on or after October 1, 2004 and on or before 
September 30, 2005 is reflected in Table 6, Projected Impact of FY 2005 
Update to the IRF PPS, of this notice. These impacts reflect the 
updated IRF wage adjustment and the application of the 3.1 percent IRF 
market basket increase.
3. Calculation of the Estimated FY 2004 IRF Prospective Payments
    To estimate payments under the IRF PPS for FY 2004, we multiplied 
each facility's case-mix index by the facility's number of Medicare 
discharges, the FY 2004 standard payment conversion factor, the 
applicable wage index, a low-income patient adjustment, and a rural 
adjustment (if applicable). The adjustments include the following:
    The wage adjustment, calculated as follows:

((1-Labor Share) + (Labor Share x Wage Index)) = (.27641 + (.72359 x 
Wage Index))

    The disproportionate share adjustment, calculated as follows:

(1 + Disproportionate Share Percentage) raised to the power of .4838)

    The rural adjustment, if applicable, calculated by multiplying 
payments by 1.1914.
4. Calculation of the Estimated FY 2005 IRF Prospective Payments
    To calculate FY 2005 payments, we use the payment rates described 
in this notice that reflect the 3.1 percent market basket increase 
factor. Further, we use the same facility level adjustments described 
above.
    Table 6 illustrates the aggregate impact of the estimated FY 2005 
updated payments among the various classifications of facilities 
compared to the estimated IRF PPS payment rates applicable for FY 2004.
    The first column, Facility Classification, identifies the type of 
facility. The second column identifies the number of facilities for 
each classification type, and the third column lists the number of 
cases. The fourth column indicates the impact of the budget neutral 
wage adjustment. The last column reflects the combined changes 
including the update to the FY 2004 payment rates by 3.1 percent and 
the budget neutral wage adjustment (including the FY 2005 labor-related 
share and the FY 2005 wage indices).
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[GRAPHIC] [TIFF OMITTED] TN30JY04.051

    As Table 6 illustrates, all IRFs will benefit from the 3.1 percent 
market basket increase that is applied to FY 2004 IRF PPS payment rates 
to develop the FY 2005 rates. However, there may be distributional 
impacts among various IRFs due to the application of the updates to the 
labor-related share and wage indices in a budget neutral manner.
    To summarize, all facilities will receive a 3.1 percent increase in 
their unadjusted IRF PPS payments. The estimated positive impact for 
all IRFs reflected in Table 6 is due to the effect of the update to the 
IRF market basket index.

[[Page 45775]]

    In accordance with the provisions of Executive Order 12866, this 
notice was reviewed by the Office of Management and Budget (OMB).

    Authority: Section 1886 (j) of the Social Security Act (42 
U.S.C. 1395ww(j)) (Catalog of Federal Domestic Assistance Program 
No. 93.773, Medicare--Hospital Insurance Program; and No. 93.774, 
Medicare--Supplementary Medical Insurance Program)

    Dated: June 24, 2004.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.

    Approved: July 27, 2004.
Tommy G. Thompson,
Secretary.
[FR Doc. 04-17444 Filed 7-29-04; 8:45 am]
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