Federal Register, Volume 69 Issue 154 (Wednesday, August 11, 2004)

[Federal Register Volume 69, Number 154 (Wednesday, August 11, 2004)]
[Rules and Regulations]
[Pages 48916-49781]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17943]

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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 Parts 403, 412, et al.

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

Federal Register / Vol. 69, No. 154 / Wednesday, August 11, 2004 /
Rules and Regulations

[[Page 48916]]

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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-F]
RIN 0938-AM80

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

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

ACTION: Final rule.

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SUMMARY: We are revising 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 that was
enacted on December 8, 2003. In addition, in the Addendum to this final
rule, we describe the changes to the amounts and factors used to
determine the rates for Medicare hospital inpatient services for
operating costs and capital-related costs. These changes are applicable
to discharges occurring on or after October 1, 2004. We also are
setting forth rate-of-increase limits as well as policy changes for
hospitals and hospital units excluded from the IPPS that are paid in
full or in part on a reasonable cost basis subject to these limits.
Among the policy changes that we are making 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 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: The provisions of this final rule are effective on October 1,
2004.

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 Issuesp; 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, Pub. L. 105-33
BIPA--Medicare, Medicaid, and SCHIP [State Children's Health
Insurance Program] Benefits Improvement and Protection Act of 2000,
Pub. L. 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, Pub. L. 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,
Pub. L. 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

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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, Pub. L. 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, Pub. L. 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. Summary of the Provisions of the May 18, 2004 Proposed Rule
1. Changes to the DRG Reclassifications and Recalibrations of
Relative Weights
2. Changes to the Hospital Wage Index
3. Other Decisions and Changes to the PPS for Inpatient
Operating and GME Costs
4. Changes to the PPS for Capital-Related Costs
5. Changes for Hospitals and Hospital Units Excluded from the
IPPS
6. Changes to QIO Disclosure of Information Requirements
7. 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
D. Public Comments Received in response to the May 18, 2004 IPPS
Proposed Rule
II. Changes to DRG Classifications and Relative Weights
A. Background
B. DRG Reclassifications
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 Implant
b. Cardiac Resynchronization Therapy and Heart Failure
c. Combination Cardiac Pacemaker Devices and Lead Codes
d. Treatment of Venous Bypass Graft [Conduit] with
Pharmaceutical Substance
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 Fusions
b. Multiple Level Spinal Fusion
c. Insertion of Spinal Disc Prostheses and Other Spiral Devices
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
e. Intestinal Transplantation
f. Cochlear Implants
g. Artificial Hearts
h. Left Atrial Appendage Devices: DRG Assignment for New Code
37.90
i. Carotid Artery Stents
j. Acute Intermittent Porphyria
C. Recalibration of DRG Weights
D. LTC-DRG Reclassifications and Relative Weights for LTCHs for
FY 2005
1. Background
2. Changes in the LTC-DRG Classifications
a. Background
b. Patient Classifications into DRGs
3. Development of the 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 FY 2005 LTC-DRG Relative Weights
5. Out of Space Comments Relating to the LTCH PPS Payments Rates
E. Add-On Payments for New Services and Technologies
1. Background
2. Other Provisions of Section 503 of Pub. L. 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

[[Page 48918]]

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. 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. Occupational Mix Adjustment to FY 2005 Index
1. Development of Data for the Occupational Mix Adjustment
2. Calculation of the Occupational Mix Adjustment Factor and the
Occupational Mix Adjusted Wage Index
D. Worksheet S-3 Wage Data for the FY 2005 Wage Index Update
E. Verification of Worksheet S-3 Wage Data
F. Computation of the Unadjusted Wage Index
G. Computation of the FY 2005 Blended Wage Index
H. 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. Wage Index Adjustment Based on Commuting Patterns of Hospital
Employees
(1) Data
(2) Qualifying Counties
(3) The Adjustment
(4) Automatic Adjustments
4. FY 2005 Reclassifications
I. Requests for Wage Index Data Corrections
1. Worksheet S-3 Wage Data
2. Occupational Mix Data
3. All FY 2005 Wage Index Data
J. Revision of the Labor-Related Share of the Wage Index
IV. Other Decisions and Changes to the IPPS for Operating Costs and
GME Costs
A. Postacute Care Transfer Payment Policy
1. Background
2. 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
1. Revised MSAs
2. Transition Period for DSH Payments to Redesignated Hospitals
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. Regulation Change
F. 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:
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. Counting Beds and Patient Days for Purposes of Calculating
the IME Adjustment and DSH Adjustment
4. Technical Changes
L. Payment to Disproportionate Share Hospitals (DSHs)
1. Background
2. Enhanced DSH Adjustment for Rural Hospitals and Urban
Hospitals with Fewer Than 100 Beds
3. Counting Beds and Patient Days for the IME and DSH
Adjustments
a. Provisions of the FY 2004 Proposed Rule, Responses to Public
Comments, and Provisions of the FY 2005 Final Rule
1. Unoccupied Beds
2. Observation Services and Swing-bed Skilled Nursing Services
3. Dual-Eligible Patient Days
4. Medicare+Choice (M+C) Days
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
7. Geographic Reclassifications for (SNFs)
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 Pub. L. 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 Pub. L. 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 Possilbe 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. IME Adjustment Formula Multiplier for Redistributed FTE Slots
and the 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. CMS Evaluation Form
n. Application Process and CMS Central and Regional Office
Mailing Addresses for Receiving 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. Changes to the PPS for Capital-Related Costs
A. Background
B. Payments to Hospitals Located in Puerto Rico
C. Exception Payment for Extraordinary Circumstances

[[Page 48919]]

D. Treatment of Hospitals Previously Reclassified for the
Operating IPPS Standardized Amounts
E. Geographic Classification and Definition of Large Urban Area
1. Core-based Statistical Areas
2. Metropolitan Divisions
VI. 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 and Corrections
a. Change Related to Establishment of Payments for Excluded
Hospitals
b. Technical Correction Related to Long-Term Care Hospitals
7. Report of Adjustment (Exceptions) Payments
B. Criteria for Classification of Hospitals-Within-Hospitals
C. Critical Access Hospitals (CAHs)
1. Background
2. Payment Amounts for 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. Continued Participation by CAHs in Counties Reclassified as
Urban Based on the 2000 Census
11. Technical Changes in Part 489
VII. Changes to the Disclosure of Information Requirements for
Quality Improvement Organizations (QIOs)
A. Background
B. Provisions of the May 18, 2004 Proposed. Regulations
C. Technical Changes
VIII. 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
1. Background
2. Implementation
3. Provisions of the Proposed Regulations
B. Compliance with Bloodborne Pathogens Standards
1. Background
2. Provisions of the Proposed Regulations
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
B. Collection of Information Requirements
C. Waiver of Proposed Rulemaking for Technical Correction to
LTCH Regulations

Regulation Text

Addendum--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

I. Summary and Background
II. Changes to Prospective Payment Rates for Hospital Inpatient
Operating Costs for FY 2005
A. Calculation of the Adjusted Standardized Amount
1. Standardization of Base-Year Costs or Target Amounts
2. Computing the Average Standardized Amount
3. Updating the Average Standardized Amount
4. Other Adjustments to the Average Standardized Amount
a. Recalibration of DRG Weights and Updated Wage Index--Budget
Neutrality Adjustment
b. Reclassified Hospitals--Budget Neutrality Adjustment
c. Outliers
d. Section 410A of Pub.L. 108-173 Rural Community Hospital
Demonstration Program Adjustment
5. FY 2005 Standardized Amount
B. Adjustments for Area Wage Levels and Cost-of-Living
1. Adjustment for Area Wage Levels
2. Adjustment for Cost-of-Living in Alaska and Hawaii
C. DRG Relative Weights
D. Calculation of Prospective Payment Rates for FY 2005
1. Federal Rate
2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs)
a. Calculation of Hospital-Specific Rate
b. Updating the FY 1982, FY 1987, and FY 1996 Hospital-Specific
Rates for FY 2005
3. General Formula for Calculation of Prospective Payment Rates
for Hospitals Located in Puerto Rico Beginning On or After October
1, 2004 and Before October 1, 2005
a. Puerto Rico Rate
b. National Rate
III. Changes to Payment Rates for Acute Care Hospital Inpatient
Capital-Related Costs for FY 2005
A. Determination of Federal Hospital Inpatient Capital-Related
Prospective Payment Rate Update
1. Capital Standard Federal Rate Update
a. Description of the Update Framework
b. Comparison of CMS and MedPAC Update Recommendation
2. Outlier Payment Adjustment Factor
3. Budget Neutrality Adjustment Factor for Changes in DRG
Classifications and Weights and the Geographic Adjustment Factor
4. Exceptions Payment Adjustment Factor
5. Capital Standard Federal Rate for FY 2005
6. Special Capital Rate for Puerto Rico Hospitals
B. Calculation of Inpatient Capital-Related Prospective Payments
for FY 2005
C. Capital Input Price Index
1. Background
2. Forecast of the CIPI for FY 2005
IV. Changes to Payment Rates for Excluded Hospitals and Hospital
Units: Rate-of-Increase Percentages
V. Payment for Blood Clotting Factor Administered to Hemophilia
Inpatients

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 3A1--FY 2005 and 3-Year* Average Hourly Wage
for Urban Areas by MSA
Table 3A2--FY 2005 3-Year* Average Hourly Wage for
Urban Areas by CBSA
Table 3B1--FY 2005 and 3-Year* Average Hourly Wage
for Rural Areas by MSA
Table 3B2--FY 2005 and 3-Year* Average Hourly Wage
for Rural Areas by CBSA
Table 4A1--Wage Index and Capital Geographic
Adjustment Factor (GAF) for Urban Areas by MSA
Table 4A2--Wage Index and Capital Geographic
Adjustment Factor (GAF) for Urban Areas by CBSA
Table 4B1--Wage Index and Capital Geographic
Adjustment Factor (GAF) for Rural Areas by MSA
Table 4B2--Wage Index and Capital Geographic
Adjustment Factor (GAF) for Rural Areas by CBSA
Table 4C1--Wage Index and Capital Geographic
Adjustment Factor (GAF) for Hospitals That Are Reclassified by MSA
Table 4C2--Wage Index and Capital Geographic
Adjustment Factor (GAF) for Hospitals That Are Reclassified by CBSA
Table 4F1--Puerto Rico Wage Index and Capital
Geographic Adjustment Factor (GAF) by MSA
Table 4F2--Puerto Rico Wage Index and Capital
Geographic Adjustment Factor (GAF) by CBSA
Table 4G--Pre-Reclassified Wage Index for Urban Areas
Table 4H--Pre-Reclassified Wage Index for Rural Areas
Table 4J--Wage Index Adjustment for Commuting Hospital Employees
(Out-

[[Page 48920]]

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 March 2004 GROUPER
V21.0
Table 7B--Medicare Prospective Payment System Selected
Percentile Lengths of Stay: FY 2003 MedPAR Update March 2004 GROUPER
V22.0
Table 8A--Statewide Average Operating Cost-to-Charge Ratios-July
2004
Table 8B--Statewide Average Capital Cost-to-Charge Ratios--July
2004
Table 9A1--Hospital Reclassifications and
Redesignations by IndividualHospital--FY 2005 by MSA
Table 9A2--Hospital Reclassifications and
Redesignations by IndividualHospital--FY 2005 by CBSA-FY 2005
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)--July
2004
Table 11--FY 2005 LTC-DRGs, Relative Weights, Geometric Average
Length of Stay, and \5/6\ths 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 hospital units are located in 42 CFR parts 412 and 413.

[[Page 48921]]

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 at 100 percent of the Federal rate 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 100 percent of the Federal rate 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 100 percent of the Federal rate (May 7, 2004 LTCH
PPS final rule (69 FR 25674)). LTCHs may elect to be paid based on 100
percent of the Federal rate 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 final rule
implements amendments made by the following sections of Pub. L. 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 with payments made on or after July 1,
2004.
Section 405(d), which allows CAHs to elect to receive
payments under the

[[Page 48922]]

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 with 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 respective payment
methodology applicable to these distinct-part units. 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 must be 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) associated with that number of
discharges, 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
no more than 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 beginning 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 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 Medicare payment of
routine costs, as

[[Page 48923]]

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 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. Summary of the Provisions of the May 18, 2004 Proposed Rule

On May 18, 2004, we published a proposed rule in the Federal
Register (69 FR 28196) that set forth proposed changes to the Medicare
IPPS for operating costs and for capital-related costs in FY 2005 and
to implement the provisions of Pub. L. 108-173 specified in section
I.B. of this preamble. We also set 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. These changes were proposed to 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 proposed to
make:
1. Changes to the DRG Reclassifications and Recalibrations of Relative
Weights
As required by section 1886(d)(4)(C) of the Act, we proposed annual
adjustments to the DRG classifications and relative weights. Based on
analyses of Medicare claims data, we proposed to establish a number of
new DRGs and make changes to the designation of diagnosis and procedure
codes under other existing DRGs.
Among the proposed changes discussed were:
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 presented 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 hall meeting).
We proposed 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. Changes to the Hospital Wage Index
We proposed revisions to the wage index and the annual update of
the wage data. Specific issues addressed included the following:
The FY 2005 wage index update, using wage data from cost
reporting periods that began during FY 2001.
Revision of the 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 occupational mix adjustment to the wage index that we proposed
to apply beginning October 1, 2004.
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 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.
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 will be in effect for the FY 2005 wage index.
3. Other Decisions and Changes to the PPS for Inpatient Operating and
GME Costs
In the proposed rule, we discussed a number of provisions of the
regulations in 42 CFR parts 412 and 413 and set forth proposed changes
concerning the following:
Expansion of the current postacute care transfer policy.
Payments for inpatient care in providers that change
classification status during a patient stay.
Changes in the definitions of urban and rural areas for
geographic reclassification purposes.
Equalization of the standardized amount for urban and
rural hospitals.

[[Page 48924]]

The reporting of hospital quality data as a condition for
receiving the full annual payment update increase.
Revision of the regulations to reflect the revision of the
labor share of the wage index.
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.
Changes in the threshold amount for eligibility for new
medical services and technology add-on payments.
Revision to our policy on additional payments to hospitals
with high percentages of ESRD discharges.
Changes to the IME adjustment formula multipliers, and the
formula multiplier applicable to redistribution of unused numbers of
FTE resident slots.
Changes in DSH adjustment payments to rural and small
urban hospitals.
Payment adjustments for low-volume hospitals.
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.
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. Changes to the PPS for Capital-Related Costs
In the proposed rule, we discussed the payment requirements for
capital-related costs and proposed 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. Changes for Hospitals and Hospital Units Excluded From the IPPS
In the proposed rule, we discussed the following proposed revisions
and clarifications concerning excluded hospitals and hospital units and
CAHs:
Changes in the payment rate for new excluded hospitals.
Changes to the criteria for determining payments to
hospitals-within-hospitals.
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. Changes to QIO Disclosure of Information Requirements
In the proposed rule, we discussed 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. Changes Relating to Medicare Provider Agreements, Hospital
Conditions of Participation, and Fire Safety Requirements for Certain
Health Care Facilities
We proposed 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 are expected to 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 the May 18, 2004, 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 established the proposed threshold amounts for outlier
cases. In addition, we addressed 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 the proposed rule, as required by sections
1886(e)(4) and (e)(5) of the Act, we provided 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
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 was
addressed in Appendix B of the May 18, 2004,

[[Page 48925]]

proposed rule. 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: http://www.medpac.gov.

D. Public Comments Received in Response to the May 18, 2004 Proposed
Rule

We received over 30,000 timely items of correspondence containing
multiple comments on the May 18, 2004 proposed rule. Summaries of the
public comments and our responses to those comments are set forth below
under the appropriate heading.
Comment Period: One commenter indicated that, under the
Administrative Procedures Act (APA), 5 U.S.C. 553(b), the 60-day
comment period should have started from the date the proposed rule was
published in the Federal Register, not the date the rule was placed on
the CMS Web site.
Response: We believe publication of the proposed rule is fully
consistent with the law. The APA does not prescribe any specific length
for the comment period. In addition, the proposed rule was placed on
display at the Office of the Federal Register and a copy of the rule
also appeared on our Web site. The substance of the rule was fully
available on the Web site, as well as on display at the Office of the
Federal Register. Finally, we note that, in accordance with section
1886(d) of the Act, the Secretary is required to ensure that the
updated IPPS rates are in place at the beginning of the Federal fiscal
year, or by October 1, 2004. Our priority is to ensure that hospitals
receive their final updated rates for the new fiscal year.

II. 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 changes to the DRG
classification system and the recalibration of the DRG weights for
discharges occurring on or after October 1, 2004, are discussed below.

B. DRG Reclassifications

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 518 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.

[[Page 48926]]

[GRAPHIC] [TIFF OMITTED] TR11AU04.000

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.
[GRAPHIC] [TIFF OMITTED] TR11AU04.001

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.

[[Page 48927]]

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, the PRICER software calculates a base DRG payment. 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.
In the May 18, 2004, proposed rule, we proposed numerous changes to
the DRG classification system for FY 2005. The changes we proposed to
the DRG classification system for FY 2005, the public comments we
received concerning the proposed changes, the final DRG changes, and
the methodology used to recalibrate the DRG weights are set forth
below. The changes we are implementing in this final rule will be
reflected in the revised FY 2005 GROUPER version 22.0 and effective for
discharges occurring on or after October 1, 2003. Generally, our DRG
analysis in the May 18, 2004, proposed rule was based on data from the
December 2003 update of the FY 2003 MedPAR file.
Unless otherwise noted in this final rule, our DRG analysis is
based on data from the March 2004 update of the FY 2003 MedPAR file,
which contains hospital bills received through March 31, 2004, for
discharges in FY 2003.
2. MDC 1 (Diseases and Disorders of the Nervous System): Intracranial
Hemorrhage and Stroke With Infarction
In the May 18, 2004, proposed rule, we noted that it had 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 proposed to change the title of DRG 14
to read ``Intracranial Hemorrhage or Cerebral Infarction''.
We received one comment on this proposal in support of the DRG
title change. Therefore, we are adopting as final the proposed change
of the title of DRG 14 to ``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.
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 final 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

[[Page 48928]]

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 into 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: http://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
website.
In the May 18, 2004, proposed rule, 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:
[GRAPHIC] [TIFF OMITTED] TR11AU04.002

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
commenters' 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, in the May 18, 2004
proposed rule, we proposed to remove procedure code 37.66 from DRG 525
and assign it to DRG 103. We also proposed to change the title of DRG
103 to ``Heart Transplant or Implant of Heart Assist System''. The
proposed restructured DRG 103 included 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 proposed to
change the title of DRG 525 to ``Other Heart Assist System Implant.''
Comment: A number of commenters recommended that we continue to
examine the MedPAR data for code 37.66 and heart transplants to confirm
that the weight is accurate. Some of these commenters noted that the
weight might need to be increased in either the short term or next
year. One commenter who, we believe, did not have access to the
proposed rule, suggested the same proposed changes that were included
in the proposed rule.
Response: We will continue to evaluate the assignment of these
codes annually for clinical and resource coherence. We point out that
the relative weights are determined based on a formula and the formula
is based on historic hospital charges. To increase one weight in a
manner not consistent with the formula would skew other weights, in
addition to distorting our mandated budget neutrality provision.
Comment: Two commenters requested clarification concerning patients
who receive the implantable heart assist system as a bridge to
transplant and are discharged and subsequently return for a heart
transplant. The commenters

[[Page 48929]]

wanted to know if DRG 103 would be assigned in both cases.
Response: DRG 103 would be assigned to the case when a VAD is
implanted. It would also be assigned when the patient returns to the
hospital for a heart transplant. However, we take this opportunity to
clarify that only one DRG 103 payment will be made per admission. If a
patient has both the VAD and a heart transplant during the same
hospital admission, DRG 103 would be paid only once. Depending on the
circumstances, the case may qualify for cost outlier status, which is
designed to defray some of the additional expenses of the case.
Comment: One commenter suggested that the term ``Insertion'' in the
code title for 37.66 be changed to ``Implant'' to more accurately
reflect the resource intense nature of the VAD implant.
Response: We regret that we cannot accommodate this request. The
cardiac device code titles have been discussed at the two previous ICD-
9-CM Coordination and Maintenance Committee meetings (December 2003 and
April 2004). At those meetings, we asked for comments about the code
titles, and in response to public comment, we removed the term
``Implant'' and substituted ``Insertion'' in the title. As noted
elsewhere in this preamble, the codes in Table 6 of the Addendum are
not subject to comment. The codes themselves are final at the time the
proposed rule is published, which gives our industry partners the
opportunity to put them into their printed and electronic programs
without the concern that they may be changed later in the rulemaking
process.
Comment: One commenter urged CMS to retain a common DRG assignment
for procedure codes 37.65 and 37.66. The commenter believed that
assigning these two procedure codes to different DRGs would not ensure
that payment is adequate to allow hospitals to provide mechanical
circulatory support therapies, as clinically indicated, and in a cost-
efficient manner. The commenter further believed that payment for
implantable VADs (code 37.66) at a higher level than external VADs
(code 37.65) would create financial incentives unrelated to, and
potentially at odds with, clinical considerations, which would skew
device choice and increase Medicare program costs. The commenter stated
that the initial use of the least expensive device that can provide the
necessary therapeutic benefit leads to the best clinical outcomes and
the lowest total system costs. The commenter encouraged CMS to adopt a
prudent payment policy and an adequate test of whether a patient's
heart will recover before an implantable VAD procedure is undertaken.
Response: We reviewed data on DRG 525 in the FY 2003 MedPAR file
and are summarizing the findings below:
[GRAPHIC] [TIFF OMITTED] TR11AU04.003

We believe that the data on the length of stay and average charges
demonstrate considerable differences in the two VAD devices. The
implantable VAD (code 37.66) had a length of stay more than three times
longer than that of the external VAD (code 37.65), and charges that
average over $100,000 per case greater than those of the external VAD.
To comply with this commenter's suggestion and leave both codes in the
same DRG would result in overpayment of external VAD procedures and
underpayment of the implantable VADs. We do not find either alternative
acceptable.
We will continue to closely monitor DRGs 103 and 525 on an annual
basis, and will review our data using the specific procedure codes that
comprise these two DRGs.
Comment: One commenter stated that the MedPAR data on charges for
FY 2003 VAD cases used to develop and defend the proposal to assign
procedure codes 37.65 and 37.66 to different DRGs are an inadequate
basis for the proposal. The commenter stated that the FY 2003 data on
code 37.66 used in support of the proposal (to move these cases to DRG
103) must be comprised primarily of bridge-to-transplant cases, as the
use of VADs for destination therapy was only recently approved.
Therefore, the commenter believes, any destination therapy patients in
the data must have been clinical trial patients. The commenter asserted
that these clinical trial patients were a sicker group of patients than
would normally be found, and that they received more ancillary services
during the course of the trial than would be likely in normal clinical
practice. As a result, the data for these patients would be skewed to
higher average charges and longer lengths of stay.
Response: The data associated with code 37.66 reflect the insertion
of an implantable VAD. We do not have a method of capturing the intent
of the physician upon insertion of this device. When the chest is
opened and the device is inserted, we have no way of determining if
this patient requires the device as a bridge-to-transplant as the
patient awaits a donor organ, or if this VAD is to be considered
destination therapy. Code 37.66 captures only the procedure performed
and the device inserted.
The following table represents FY 2002 data in DRG 525.

[[Page 48930]]

[GRAPHIC] [TIFF OMITTED] TR11AU04.004

When we compare the above table containing FY 2002 data to the
previous table containing FY 2003 data, we find similar results in
length of stay and average charges for codes 37.63, 37.65, and 37.66.
The FY 2003 data show only one case with code 37.62: it is difficult to
draw any meaningful conclusions based on one case. These data represent
cases before bridge-to-transplant was a covered indication for VAD. As
the data in the 2 years are so similar, we believe that we have
correctly reassigned code 37.66 to DRG 103.
Comment: One commenter stated that DRG 525, as amended on October
1, 2003, to include every type of mechanical circulatory support device
requiring a sternotomy and multiple-day support, constituted a
clinically coherent group of surgeries encompassing a range of device
types and costs. The commenter stated that, as the device types in that
DRG grouping are available in the same hospital mechanical circulatory
support programs, blended reimbursement did not constitute a financial
impediment to proper clinical choice. The commenter stated that the FY
2003 iteration of DRG 525 should be preserved, which would allow the
dynamics of the clinical setting and the market to determine the choice
among available VADs.
Response: We are aware that reimbursement dynamics may have an
influence on the practice of medicine. However, we are also aware that
the placement of cases reporting code 37.66 in DRG 525 may cause a
financial hardship for hospitals. The movement of code 37.66 to DRG 103
is appropriate from the perspective of resource utilization, and will
also alleviate some of the disincentive to offer this procedure to
patients who meet the medical criteria for implantation.
Comment: One commenter noted that coverage of VAD procedures should
be limited to Medicare-certified transplant centers. The commenter also
noted that VAD implants assigned to DRG 103 are limited to those
[hospitals] using devices that are approved by the FDA for use outside
the inpatient hospital setting.
Response: Section 60--Durable Medical Equipment in the Medicare
Coverage Manual sets forth our requirements concerning the use of VADs.
The manual states:
The VAD must be used in accordance with the FDA approved
labeling instructions;
The patient is approved and listed as a candidate for
heart transplantation by a Medicare-approved heart transplant center;
and
The implanting site, if different than the Medicare-
approved transplant center, must receive the Medicare-approved heart
transplant center under which the patient is listed prior to
implantation of the VAD.
In conjunction with the data review of DRGs 103 and 525, we also
evaluated DRGs 104 and 105. DRGs 104 and 105 were restructured in FY
2003 by moving code 37.62 into them. We examined the MedPAR data and
found that the average charges for DRGs 104 and 105 were $113,667 and
$82,899, respectively, 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 proposed to remove code 37.62 from DRGs 104 and 105 and assign it
back into DRG 525. The average charges for code 37.62 in DRGs 104 and
105 ($124,559 and $166,129) more closely matched the average charges
reported for the 171 cases in DRG 525, absent code 37.66 ($168,388).
We indicated that the proposed new DRG 525 would consist of 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*
---------------------------------------------------------------------------

* 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.
---------------------------------------------------------------------------

37.62, Insertion of nonimplantable heart assist system
37.63, Repair of heart assist system
37.65, Implant of external heart assist system
We received one comment in support of this portion of our proposal.
Based on the rationale described above, we are adopting the proposed
changes to DRGs 103, 104, and 105 as final without modification.
b. Cardiac Resynchronization Therapy and Heart Failure
In the May 18, 2004 proposed rule, we addressed a request we had
received 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

[[Page 48931]]

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 implant.
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' determination based on review of this scenario as described
was 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.
For the analysis in the proposed rule, 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:
[GRAPHIC] [TIFF OMITTED] TR11AU04.005

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 did not propose a modification to DRG 535 or 536
for CRT-Ds.
Comment: Several commenters supported our proposal not to change
the current DRG structure of DRG 535 and DRG 536 for CRT-D devices. Our
proposal was in response to a manufacturer that had requested that CRT-
D cases be assigned to DRG 535 when the patient has heart failure as
either a principal diagnosis or a secondary diagnosis.
Response: After publication of the May 18, 2004 proposed rule, we
discussed the issue of coding cases implanted with a CRT-D at the June
2004 meeting of the American Hospital Association's Editorial Advisory
Board for Coding Clinical for ICD-9-CM. Discussions between coding
representatives from the American Hospital Association, the American
Health Information Management Association, the National Centers for
Health Statistics, and CMS did not identify diagnosis sequencing
problems for patients receiving a CRT-D, as was suggested by the
manufacturer. A number of problems in coding the implantation of these
devices using the procedure codes were discussed. In addition, we
learned that physicians are not clearly and consistently documenting
the types of devices being implanted. This is leading to a number of
questions from hospitals on how to assign the correct codes for an
implantable cardiac defibrillator (ICD) versus the newer CRT-D. As a
result of these further discussions, the Editorial Advisory Board for
Coding Clinical for ICD-9-CM is developing a series of questions and
answers to clearly illustrate to hospitals how the various devices,
leads, and generators are to be correctly coded.
We appreciate the support of the commenters for maintaining the
current DRG structure for DRGs 535 and 536 and not modifying them in
this final rule for one specific type of defibrillator.
Comment: One commenter, a national hospital organization, opposed
our recommendation not to alter the logic of DRG 535. The commenter
believed that resynchronization is not performed during an acute
exacerbation of congestive heart failure. Rather, the

[[Page 48932]]

commenter indicated, the patient returns at a later date once the
congestive heart failure becomes more stabilized. The commenter added
that, at that time, the patient often manifests associated arrhythmias
that require the resynchronization. The commenter believed that, as a
result, under the current proposal, this case would possibly not group
to DRG 535 if the congestive heart failure were not sequenced as the
principal diagnosis.
Response: The commenter stated that the hospital might not list
congestive heart failure as the principal diagnosis in the case
described. However, if this were a planned second admission for the
implantation of a CRT-D for congestive heart failure, the hospital
would assign congestive heart failure as the principal diagnosis. The
associated arrhythmias would be listed as a secondary diagnosis. This
case would be assigned to DRG 535. If the admission were equally due to
both the congestive heart failure and the arrhythmias, the hospital
could choose either one as the principal diagnosis. Once again, the
hospital could select congestive heart failure as the principal
diagnosis and DRG 535 would be assigned. It would not be appropriate to
change the DRG logic for DRG 535 to capture congestive heart failure as
either the principal diagnosis or secondary diagnosis for CRT-D
patients when appropriate coding would lead to the correct DRG
assignment. Therefore, it would not be appropriate to modify the logic
for DRGs 535 and 536 for congestive heart failure at this time.
Comment: Commenters who supported our proposal of maintaining the
current DRG structure for DRGs 535 and 536 suggested that coders should
follow the ICD-9-CM Official guidelines for Coding and Reporting
(available on the following Web site: http://www.cdc.gov/nchs/icd9.htm)
when sequencing the principal diagnosis for admissions involving
cardiac resynchronization. The commenters indicated that, if the reason
for the admission is heart failure, that condition would be sequenced
as the principal diagnosis. The commenter added that when two
conditions are equally responsible for the admission, the ICD-9-CM
Official Guidelines for Coding and Reporting allow either condition to
be sequenced as the principal diagnosis. The commenters further stated
that, in that case, the condition resulting in the higher-weighted DRG
adjustment would likely be sequenced as the principal diagnosis. The
commenter recommended that CMS continue to analyze the data in DRGS 535
and 536 and seek additional clinical input regarding the typical
principal diagnosis for patients being admitted to evaluate the need
for a CRT-D device. The commenters added that further revisions to
these DRGs may be warranted in the future.
Response: We agree with the commenters that coders should follow
the ICD-9-CM Official Guidelines for Coding and Reporting. We also
agree that although we are currently maintaining the structure of DRGs
535 and 536, we will continue to examine data for these procedures in
future years to ensure that assignment of cases to these DRGs remains
appropriate.
Comment. One commenter indicated that its hospital was assigning
the following codes for heart failure cases where the existing
automatic cardioverter/defibrillator pulse generator is replaced and
the pocket in which the device is implanted is revised:
37.98 Replacement of automatic cardioverter/defibrillator
pulse generator only.
37.99 Other operations of heart and pericardium.
The commenter stated that when the hospital submits a claim with
the code for the replacement of the generator (code 37.98), the case is
assigned to DRG 115 (Permanent Cardiac Pacemaker Implant With Acute
Myocardial Infarction, Heart Failure, or Shock or ACID Lead or
Generator Procedures). When the hospital submits a claim with codes for
both the generator replacement (code 37.98) and the pocket revision
(code 37.99), the case is assigned to DRG 111 (Major Cardiovascular
Procedures Without CC). The commenter was concerned because DRG 111 has
a lower relative weight than DRG 115. The commenter believed that DRG
111 does not adequately reimburse the hospital for the replacement of
the pulse generator device.
The commenter requested that we consider modifying the DRG logic
when both codes are submitted, modify the surgical hierarchy, or
develop separate codes for revisions and relocations of defibrillator
generators.
Response: We are addressing the issue of the surgical hierarchy
surfaced by the commenter in section II.B.11. of this final rule. We
have carefully evaluated the other issues raised by the commenter, and
we concur that assigning procedures such as the revision or relocation
of defibrillator pockets to a vague code such as code 37.99 does not
allow these procedures to be clearly identified. We believe that
grouping disparate procedures such as repositioning of leads, removal
without replacement of pulse generator, and revision or relocation of
pockets within one code makes the DRG refinements difficult. We will
discuss this topic at the October 7-8, 2004 meeting of the ICD-9-CM
Coordination and Maintenance Committee. We will give consideration to
creating one or more new codes to more clearly identify these
procedures. With these more precise codes, we should be able to modify
the DRG logic to resolve this issue.
Comment: Several commenters requested that we restructure DRG 515
(Cardiac Defibrillator Implant without Cardiac Catheterization) by
splitting it into two DRGs based on the presence of acute myocardial
infarction (AMI), heart failure, or shock. One commenter pointed out
that we previously split DRG 514 (Cardiac Defibrillator with Cardiac
Catheterization) into two DRGs based on these conditions. In FY 2004,
we created DRGs 535 and 536 (Cardiac Defibrillator Implant with Cardiac
Catheterization With and Without AMI/Heart Failure/Shock,
respectively). The commenter commended us for splitting DRG 514 into
these two new DRGs and asked that we now split DRG 515 in a similar
manner.
The commenter stated that there was significant difference in
hospital charges associated with cases in DRG 515 with and without
these principal diagnoses. The commenter stated that it was important
to ensure more appropriate payment for all defibrillator cases and
better align the DRG payment logic across all pacemaker and
defibrillator cases based on important differences in hospital resource
requirements.
The commenter pointed out that, in the FY 2004 IPPS rule, we
indicated that we did not believe the number of cases within DRG 515,
or the differences in charges for cases with and without a principal
diagnosis of acute myocardial infarction, heart failure, or shock, were
sufficient to merit the creation of two separate DRGs. The commenter
stated there was an increase in defibrillator implants assigned to DRG
515 in FY 2003 based on changes in medical science and practice
patterns, and speculated that a large number of cases now assigned to
DRG 515 are for patients with a principal diagnosis of acute myocardial
infarction, heart failure, or shock. The commenter believed that these
patients will have significant differences in hospital charges and
lengths of stay as compared to those cases in DRG 515 without these
principal diagnoses. In addition, the commenter mentioned that other
DRGs within MDC 5 are split based on the principal diagnosis or the
presence of complications or comorbidities. In

[[Page 48933]]

summation, the commenter requested that we split DRG 515 into two
separate new DRGs based on the principal diagnoses of acute myocardial
infarction, heart failure, or shock. The commenter believed the split
is justified based on the large number of cases in DRG 515, the large
percentage of cases that include a principal diagnosis of acute
myocardial infarction, heart failure, or shock, and the significantly
higher charges and length of patient stays associated with these cases.
Another commenter made a similar request to split DRG 515 into two
separate new DRGs based on the principal diagnosis of acute myocardial
infarction, heart failure, or shock. The commenter stated that we had
split DRG 514 into two DRGs (DRGs 535 and 536), and this split has
worked well in the facility environment to accurately capture charges
and assign appropriate DRGs to cases.
Response: We have performed additional analysis of our FY 2003
MedPAR claims data for DRG 515 using the March 2004 update of the
files. We found that 32 percent (4,191) of cases reported for DRG 515
contained a principal diagnosis of acute myocardial infarction, heart
failure, or shock. These cases had average charges of $84,688, as
compared to average charges of $77,554 for all cases in DRG 515.
Therefore, DRG 515 cases with a principal diagnosis of acute myocardial
infarction, heart failure, or shock had average charges that were
$7,134 (9 percent) higher than those for all cases in DRG 515. The data
also show that patients with a principal diagnosis of acute myocardial
infarction, heart failure, or shock have average lengths of stay of
6.056 days compared to 4.73 days for all cases in DRG 515. Therefore,
cases in DRG 515 with a principal diagnosis of acute myocardial
infarction, heart failure, or shock have an average length of stay that
is only 1.326 days longer than that for all cases in DRG 515.
The data that we included in the May 18, 2004, proposed rule (69 FR
28208) showed significantly larger differences between DRGs 535 and 536
in average lengths of stay and charges. DRG 535 had an average length
of stay of 9.5 days and average charges of $110,663.57. DRG 536 had an
average length of stay of 5.47 days and average charges of $89,493.85.
The difference in average charges was $21,169.72.
As a result of this analysis, we find that the requested split of
DRG 515 would not result in cases with as significantly different
lengths of stay or charges as compared to the difference between DRGs
535 and 536. In addition, our current data show only 4,191 cases that
would be assigned to a new DRG for Cardiac Defibrillator Implant
without Cardiac Catheterization with a principal diagnosis of acute
myocardial infarction, heart failure, or shock. Given the limited
number of cases in DRG 515 and the relatively small differences between
average charges and length of stay for the two DRGs suggested by the
commenter, we have decided that a modification of DRG 515 is not
warranted at this time. However, we will examine the data in the future
to determine if changes are warranted.
In summary, we are not making changes to DRG 535 or DRG 536 for
CRT-D cases at this time. In addition, DRG 515 will remain unchanged
for FY 2005. However, we will continue to study data on these DRGs to
consider whether future DRG refinements are warranted.
c. Combination Cardiac Pacemaker Devices and Lead Codes
In the May 18, 2004, proposed rule, we discussed a comment we had
received 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
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 consulted our medical advisors and they agreed that these
recommended procedure code combinations also describe pacemaker device
and lead implantations and should be included under DRGs 115 and 116.
Therefore, we proposed to add the recommended procedure code
combinations to the list of procedure code combinations under DRGs 115
and 116.
Comment: Several commenters, including those from organizations
representing hospitals and coders, supported our proposal to add the
pacemaker device and lead procedure code combinations to DRGs 115 and
116 as specified above. The commenters agreed that these combinations
indicate that a complete pacemaker unit, including a pacemaker unit and
leads, is implanted.
Response: We appreciate the commenters' support for our proposal.
In summary, we are adopting, as final without modification, our
proposal to add the procedure code combinations of pacemaker devices
and lead procedure codes included above and specified in the proposed
rule to the list of procedure code combinations under DRGs 115 and 116.
d. Treatment of Venous Bypass Graft [Conduit] with Pharmaceutical
Substance
In the May 18, 2004, proposed rule, we included in Table 6B of the
Addendum a new ICD-9-CM procedure code 00.16 (Pressurized treatment of
venous bypass graft [conduit] with pharmaceutical substance) that was
approved, effective on October 1, 2004. We received a number of
comments on this new code.
Comment: A number of comments from physicians applauded our
decision to create new procedure code 00.16. The commenters stated
that, upon approval by the Food and Drug Administration (FDA) of this
procedure, the code will be used to recognize the E2F Decoy
(edifoligide) procedure. This procedure will be performed on patients
undergoing bypass vein graft procedures if the FDA finds the procedure
to be safe and effective. The commenters stated that they are currently
performing this procedure on a number of their patients, and asked that
Medicare payments that are in addition to that for the cardiac bypass
procedure be made to offset resource utilization and costs incurred by
hospitals.
Response: We appreciate the commenters' support for the creation of

[[Page 48934]]

this procedure code. We proposed to classify this procedure as a non-
O.R. procedure in Table 6B of the Addendum to the proposed rule. The
``N'' under the O.R. column in Table 6B means that the code will not be
considered an O.R. procedure and therefore, will not affect the DRG
assignment. While the commenters suggested that extra payment be made
for this procedure in addition to that for the cardiac bypass
procedure, they did not suggest a means to do so. Furthermore, because
procedure code 00.16 will not begin to be used until October 1, 2004,
we have no data for this new procedure. Accordingly, in this final
rule, we are retaining as final the proposed classification of
procedure code 00.16 as a non-O.R., ICD-9-CM procedure code. Code 00.16
will not affect the DRG assignment.
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 were few reports of codes 49.75 and 49.76 in the
MedPAR data and we did not anticipate a significant increase in
utilization of these procedures, we proposed that these two codes would
only be removed from paired DRGs 157 and 158 and reassigned to paired
DRGs 146 and 147 under MDC 6 (Diseases and Disorders of the Digestive
System). We also proposed that all other MDC and DRG assignments for
codes 49.75 and 49.76 would remain the same.
Comment: Two commenters agreed with our proposal and suggested that
the recommendation be adopted as a final change. One commenter
recommended that CMS continue to monitor the cost of these cases for
future consideration of the creation of a new DRG. This commenter
stated that CMS has limited reassignment of codes 49.75 and 49.76 to
only one pair of DRGs. Specifically, these procedures were assigned to
DRGs 157 and 158 and will be reassigned to DRGs 146 and 147. The
commenter took issue with this limited correction and urged CMS to
create a new DRG for ``Complex Anal/Rectal Procedure with Implant''.
Response: As noted above, codes 49.75 and 49.76 are arrayed in four
MDCs and six DRGs within those MDCs. To clarify the proposed rule, we
proposed to move these codes within MDC 6, but we did not propose to
change any other DRG assignment. With an appropriate principal
diagnosis, and absent any other surgical procedure that would
reconfigure the case, these codes will continue to be assigned to the
other four DRGs in the other three MDCs.
We point out that this reassignment of cases in MDC 6 will double
the payment for cases now classified to DRG 146, and will more than
double the payment for cases now classified to DRG 147 based on the
increases in the relative weights.
With regard to the suggestion to create a specific DRG for this
procedure, we remind the commenter that the DRG structure is a system
of averages, and is based on groups of patients with similar
characteristics. It has not been our past practice to create a DRG
based on one device from one manufacturer. We will continue to monitor
these two procedure codes and the DRGs to which they are assigned for
the annual IPPS updates. However, for FY 2005, we are adopting the
proposal to reassign cases reporting codes 49.75 and 49.76 in MDC 6 to
DRGs 146 and 147 as final, without further modification.
5. MDC 8 (Diseases and Disorders of the Musculoskeletal System and
Connective Tissue)
a. 360 Degree Spinal Fusions
In the May 18, 2004 proposed rule, we discussed a comment we had
received 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

[[Page 48935]]

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:
[GRAPHIC] [TIFF OMITTED] TR11AU04.006

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 results of our
examination are summarized in the following table.
[GRAPHIC] [TIFF OMITTED] TR11AU04.007

These data clearly showed that cases with code 81.61 have
significantly lower 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 proposed to remove code 81.61 from DRG
496 and reassign it to DRGs 497 and 498.
Comment: Several commenters supported our proposal to remove code
81.61 from DRG 496 and reassign it to DRGs 497 and 498. One commenter
representing a major hospital organization stated that patients
receiving two surgical approaches have a longer recovery period and use
more hospital resources. The commenter believed that there is confusion
regarding the use of code 81.61 that stems from physicians who do not
use the term ``360 degree spinal fusion'' in the medical record, and
hospital coders who need to review the operative report to determine
which surgeries, in fact, qualify for code 81.61. The commenter agreed
that code 81.61 should be moved from DRG 496 to DRGs 497 and 498.
However, the commenter recommended that data for code 81.61 be reviewed
in the future once coding practices have improved. Another commenter
representing a national organization of health information managers
also supported our proposal to remove code 81.61 from DRG 496 and
reassign it to DRGs 497 and 498. The commenter stated that MedPAR data
indicate that this procedure is less expensive than other procedures
classified to DRG 496.
Response: We agree with the commenters that code 81.61 should be
removed from DRG 496 and reassigned to DRGs 497 and 498. We also agree
that the data for code 81.61 should be reviewed in the future to
determine if additional DRG revisions are warranted.
Comment: Several commenters opposed our proposal to remove
procedure code 81.61 from DRG 496 and to reassign it to DRGs 497 and
498. The commenters believed that CMS' reasoning was flawed in three
areas: clinical coherence, accurate coding, and the incentive for more
efficient care.
First, the commenters believed that CMS did not fully address the
clinical coherence of the cases, electing instead to make its proposal
largely on the basis of charge coherence, alone. The commenters further
believed that the combination of anterior and posterior fusions in a
single surgery is the most appropriate for defining clinical
characteristic of all cases currently included in DRG 496. The
commenters stated that except for the number of incisions, a 360-degree
(anterior and posterior) fusion is clinically comparable to all other
anterior and posterior fusions because of the patient and the surgical
characteristics.
Second, the commenters expressed concerns that a significant number
of 360-degree single-incision spinal fusion cases were inaccurately
coded. The commenters pointed out that the data we used to examine the
reporting of code 81.61 (which was created on October 1, 2002)
represented only the first year of the use of the code. The commenters
suggested that a significant number of 360-degree single-incision
spinal fusion cases were incorrectly coded as involving a two-incision
approach. Thus, these cases should have been correctly assigned to DRG
496, but were mislabeled as involving a two-incision approach. One
commenter stated that, as a manufacturer, it provides a coding hotline
for hospitals with questions related to spinal cases. For the period
January 2003 through April 2004, 20 percent (113 out of 563) of the
total calls related to accurate coding of this procedure.
One commenter stated that a high rate of coding errors is not
surprising in the first year of use, given that code 81.61 just became
effective for FY 2003, that 360-degree spinal fusion is a complex
topic, and that misinformation may

[[Page 48936]]

have been given. The commenter recommended that consideration of a
reclassification be held for at least another year or two to ensure
that a sufficient volume of more accurate data can be collected and
analyzed.
Third, with regard to the issue of DRGs serving as an incentive for
more efficient care, the commenters believed that CMS proposed the
reassignment of code 81.61 to avoid lowering the relative weight for
DRG 496 in the future. They stated that, by contrast, CMS has often
maintained in the past that the DRG weighting process allows changes in
the resource intensity of specific types of cases (whether upward or
downward) to be reflected over time, as technology evolves. The
commenters indicated that the single-incision method may be less time-
consuming, use fewer hospital resources, and allow patients to enjoy a
shorter recovery period. The commenters stated that collection and
analysis of additional and more accurate data may well show this.
However, the commenters recommended that we leave code 81.61 in DRG 496
as a financial incentive for providers to perform the lower-resource
procedure. The commenters believed this would lead to the reduction of
the relative weight for DRG 496 as more providers performed the less
expensive procedure (single-incision anterior/posterior fusion). The
commenters stated that the weighting process in DRG 496 is ideally
designed to accomplish the goal of having hospitals perform a procedure
that requires less resources.
Response: We do not agree with the commenters' suggestions that our
analysis did not fully address the clinical coherence of the cases or
that our analysis was based largely on charge coherence alone. As we
stated in the proposed rule, anterior and posterior fusions of the
spine using one incision are quite different from those fusions
involving two incisions of the spine. The patient endures a more
extensive surgery when incisions to the spine are made using approaches
from both the front and back of the patient. The surgery and recovery
time are longer when two incisions are made into the patient. While we
agree that the charge data support our proposal, we disagree that we
ignored clinical differences in these two approaches.
We acknowledge that there have been a number of questions
concerning the use of code 81.61. This code has been discussed at the
Editorial Advisory Board on Coding Clinic for ICD-9-CM. Based on some
of the records sent to the Board, it would appear that some hospitals
are incorrectly applying this code. The Board is attempting to develop
additional educational material to include in future issues of Coding
Clinic for ICD-9-CM.
However, as we discussed in the proposed rule, cases reported with
code 81.61 had average charges that are significantly lower than spinal
fusions using two approaches. Approximately 30 percent (829) of the
2,706 DRG 496 cases reported code 81.61. The 360-degree spinal fusion
cases had average charges that were only 68 percent of those for all
cases in DRG 496. The average charge for all cases in DRG 496 was
$74,967.33, while the average charge for DRG 496 cases with code 81.61
was only $50,659.69. There were also significant differences in the
length of stay. The average length of stay for all cases in DRG 496 was
8.0 days, while it was only 4.7 days for cases with code 81.61.
While there may be some confusion in the correct coding of 360
degree spinal fusions with a single incision, there are significant
differences in the charges of those reported cases with 360 degree
spinal fusion, single incision approach. If we were to keep code 81.61
in DRG 496, the result would be a lowering of the weight for DRG 496 in
future years. We discussed this issue with our medical advisors who
agreed that the data and clinical similarities support our proposal to
remove code 81.61 from DRG 496 and reassign it to DRGs 497 and 498. The
nature of the surgery and the charges are similar to other cases in
DRGs 497 and 498.
We believe that the commenters' argument that leaving code 81.61 in
DRG 496 would subsequently lead to a lowering of the relative weight
for DRG 496 because it would increasingly consist of cases involving a
single incision approach that would have lower charges seems to confirm
CMS' suggestion that the single incision-approaches are significantly
less resource intensive as well as less surgically invasive than the
two-incision approaches. Therefore, we do not believe these cases
belong in DRG 496 along with the more extensive surgeries.
Comment: One commenter opposed moving code 81.61 from DRG 496 and
into DRGs 497 and 498. The commenter stated that the amount of time it
takes to perform a single incision 360-degree spinal fusion is similar
to that of performing an anterior and posterior spinal fusion with two
approaches. The commenter stated that any extra time in completing the
surgery involves turning the patient over so that the separate approach
(incision) can be made. The commenter stated that, in his hospital, the
length of stay for one incision versus two incision approaches to
spinal fusion does not vary significantly.
Response: While the commenter's hospital may have similar length of
stays for patients who have single versus two incision approaches to
spinal fusion, our national data show a significant difference. As
stated earlier, the average length of stay for DRG 496 was 8.0 days,
while that for cases with code 81.61 was 4.7 days. We believe the data
support this DRG change.
Therefore, we are adopting as final our proposal to remove code
81.61 from DRG 496 and reassign it to DRGs 497 and 498. We will examine
data for cases reporting 81.61 in future years to determine if
additional DRG modifications are needed.
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

[[Page 48937]]

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 final 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 believed it was more
prudent not to propose the establishment of new DRGs based on the
number of levels of vertebrae involved in a spinal fusion procedure in
the May 18, 2004, proposed rule.
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, in the May 18, 2004, proposed rule, we indicated that while
we would continue to study this area, we did not propose to redefine
the spinal fusion DRGs based on the number of levels of vertebrae
fused.
Comment: Several commenters supported our proposal not to modify
the spinal fusion DRGs to differentiate between the number of levels of
vertebrae involved in a spinal fusion procedure. The commenters agreed
that we should wait until we received sufficient data with the new
multilevel spinal fusion codes to propose any new DRG revisions for
using these codes.
Response: We agree with the commenters that it would be premature
to propose DRG revisions to the spinal fusion DRGs based on the new
multiple level spinal fusion codes. Furthermore, as stated in the
proposed rule, no other surgical DRG is split based on the number of
procedures performed. To so do would have the potential of dramatically
increasing the number of DRGs. Therefore, it would be prudent to wait
for claims data prior to considering such a departure from the current
DRG structure.
Comment: One commenter who supported our recommendation expressed
concern that our decision was grounded in part on the expectation that
a ``more conservative'' surgical approach for back pain (that is spinal
disc replacement) will be available soon. (In the proposed rule, we
noted that new codes for spinal disc prosthesis procedures, codes 84.60
through 84.69, will go into effect on October 1, 2004). The commenter
stated that FDA has not approved some of the spinal disc prostheses.
The commenter believed that this new technology may not become a
medically accepted procedure in the clinical community. The commenter
believed that we were implying that we would defer a decision on
modification of the spinal fusion DRGs until such time as the FDA
formally approves spinal disc prosthesis procedures. The commenter
recommended that the spinal fusion DRGs should not be modified at this
point; that CMS should wait for data using the multiple level spinal
fusion codes prior to proposing modifications of the spinal fusion
DRGs; and that CMS not wait to make any modifications to these DRGs
based upon FDA approval of spinal disc prostheses.
Response: We agree with the commenter that we should wait to
evaluate claims data with the new multilevel spinal fusion codes before
using these codes to revise the DRG structure. While we mentioned that
new codes were created for FY 2005 for other types of spinal
procedures, such as spinal disc prostheses, we did not mean to imply
that we would defer analysis on multilevel spinal fusion until such
time as the FDA reviews and approves other specific types of procedures
and devices. We acknowledge that different types of procedures should
be considered independently.
In this final rule, we are maintaining the current DRG structure
for the spinal fusion DRGs. We will wait for claims data on the new
codes to become available before we consider proposing future revisions
to the spinal fusion DRGs.
c. Insertion of Spinal Disc Prostheses and Other Spinal Devices
In the May 18, 2004, proposed rule, we included in Table 6B of the
Addendum new codes that were created to capture the insertion of spinal
disc prostheses and other spinal devices (codes 84.59 through 84.69).
We proposed to assign these new codes to DRGs 499 and 500 (Back and
Neck Procedures Except Spinal Fusion with and without CC, respectively)
within MDC 8. Shortly after publication of the proposed rule, we
discovered errors of omission in the assignment of these codes within
the MDCs in Table 6B. These codes should have also included DRG
assignments within MDC 1, MDC 21, and MDC 24, in addition to the
specified assignment to MCD 8. We corrected these errors of omission in
a correction notice published on June 25, 2004 (69 FR 35716). The
correction notice showed the following additional DRG assignments for
these codes:
MDC 1, DRGs 531 and 532 (Spinal Procedures With and Without CC,
respectively).
MDC 21, DRGs 442 and 443 (Other Procedure for Injuries With and
Without CC, respectively).
MDC 24, DRG 486 (Other Procedures for Multiple Significant Trauma).
The official ICD-9-CM code conversion table showed code 80.51
(Excision of intervertebral disc) as the predecessor code for codes
84.60 through 84.69. There was no predecessor code listed for code
84.59. Code 80.51 was assigned to DRGs 499 and 500 in MDC 8. It was
also assigned to DRGs 531 and 532 in MDC 1, DRGs 442 and 443 in MDC 21,
and DRG 486 in MDC 24.
By correcting the proposed DRG assignment information for codes
84.59 and 84.60 through 84.69, we clearly indicated our proposal of
assigning these codes 84.59 and 84.60 through 84.69 to DRGs 531 and 532
in MDC 1; DRGs 499 and 500 in MDC 8; DRGs 442 and 443 within MDC 21;
and DRG 486 in MDC 24.
Comment: Several commenters that are developing spinal disc
prosthesis devices described these spinal disc prostheses devices as
minimally invasive alternatives to spinal fusion. The commenters
indicated that there is controversy among spine surgeons as to the
cause, or causes, of back pain. However, they stated that many surgeons
believe degeneration of the nucleus and annular destruction is a major
source of pain. The commenters stated that if patients fail
conservative

[[Page 48938]]

treatment, spinal fusion is currently the primary treatment option. The
commenters further stated that fusing one or more levels in the spine
results in increased stress and strain and the potential breakdown at
adjacent disc levels. In addition, the commenters stated that partial
and total spinal disc replacement prosthesis devices were designed to
replace the degenerated nucleus or disc and restore the normal disc
function and anatomy. They believed these devices have the potential of
decreasing stress, which is redistributed to adjacent levels of the
spine when spinal fusions are performed. The commenters indicated that
fusion surgery patients have poor return to work results, that recovery
periods are extended, and that the spinal disc prosthesis devices
reduce this recovery period.
The commenters objected to the proposed assignment of the new
spinal disc prosthesis codes (84.60 through 84.69) to DRGs 499 and 500
in MDC 8. The commenters stated that since total and partial spinal
disc prostheses will be used for patients who would very likely be
candidates for spinal fusion, the procedures should be assigned to DRGs
497 and 498 for those in the lumbar spine and to DRGs 519 and 520 for
those implanted in the cervical spine. One commenter compared the
implantation of a total spinal disc prosthesis device in the lumbar
spine to that of fusion of the lumbar spine with the use of a BAK cage.
The commenter stated that both use an anterior approach to the surgery,
and both involve implanting devices in the anterior part of the spine.
One procedure involves implanting the spinal disc prosthesis; the other
involves implanting a BAK cage while fusing the spine.
The commenters stated that the costs of treating these types of
patients with spinal disc prosthesis devices are also similar to the
costs for those patients in the spinal fusion DRGs. One commenter
stated that the operating room time would be similar, with the total
lumbar disc prosthesis devices taking about 111 minutes and the lumbar
fusion with a BAK cage taking 114 minutes. The commenter presented
information to show a patient stay of 3.7 days for the total lumbar
disc prosthesis procedures versus 4.3 days for the lumbar fusion with
BAK cages. One commenter stated that the cost of the total disc
prosthesis is approximately $10,585, compared to $4,800 for a BAK cage
used in a lumbar fusion.
Response: Based on advice from our medical advisors, we disagree
with the suggestion that patients having partial and total spinal disc
prosthesis procedures are clinically similar to patients assigned to
the spinal fusion DRGs. To mix these two distinctly different
approaches to the treatment of back pain would violate the principal of
clinical cohesiveness of DRGs. DRGs 497, 498, 519, and 520 include only
procedures that involve fusion of the spine. DRGs 499 and 500 include a
number of other procedures performed on the spine and explicitly
exclude spinal fusion procedures. Currently, spinal disc prosthesis
procedures are assigned to code 80.51 (Excision of intervertebral
disc). The new, more specific codes (84.60 through 84.69) will go into
effect on October 1, 2004. As stated earlier, code 80.51 is assigned to
DRGs 499 and 500 within MDC 8. Our proposal of assigning the new spinal
disc prosthesis codes to DRGs 499 and 500 would maintain current
practice based on the assignment of the predecessor code 80.51. Our
medical advisors also stated that it would be inappropriate to move the
partial and total spinal disc procedures to the spinal fusion DRGs
because the implantation of these disc devices do not involve fusion of
the spine. We do not yet have any charge data on these new types of
spinal procedures because the codes are being implemented on October 1,
2004. Thus, it would also be premature to assign these new procedures
to the fusion DRGs.
In this final rule, we are assigning the total and partial spinal
disc procedures and other spinal devices (codes 84.59 and codes 84.60
through 84.69) to DRGs 499 and 500 within MDC 8 as proposed. We will
continue to monitor data on these procedures as their use increases to
determine if future DRG modifications are needed.
d. Kyphoplasty
In the May 18, 2004, proposed rule, in Table 6B of the Addendum, we
included new ICD-9-CM codes that go into effect October 1, 2004. Among
these new codes are codes 81.65 (Vertebroplasty) and 81.66
(Kyphoplasty). We added these new codes to better differentiate between
the surgical procedures of vertebroplasty and kyphoplasty. Both
procedures are currently assigned to code 78.49 (Other repair or
plastic operation on bone) and are assigned to the DRGs 223 and 234 in
MDC 8, DRGs 442 and 443 in MDC 21, and DRG 486 in MDC 24.
In the May 18, 2004, proposed rule, we proposed to assign both new
codes 81.65 and 81.66 to the same DRGs to which code 78.49 is assigned.
Comment: Several commenters supported the creation of the new
procedure codes for kyphoplasty and vertebroplasty. However, some of
the commenters opposed the assignment of code 81.66 to DRGs 233 and 234
in MDC 8. The commenters stated that kyphoplasty is a significantly
more resource intensive procedure than vertebroplasty and requires
special inflatable bone tamps and bone cement. The commenters further
stated that while kyphoplasty involves internal fixation of the spinal
fracture and restoration of vertebral height, vertebroplasty involves
only fixation. The commenters indicated that kyphoplasty procedures are
more akin to spinal fusion and should be assigned to DRGs 497 and 498
(Spinal Fusion Except Cervical With and without CC, respectively) in
MDC 8. The commenters did not object to the DRG assignments for MDC 21
or MDC 24 for kyphoplasty, or to the proposed DRG assignments for
81.65.
Response: Commenters supported the creation of the new procedure
codes for kyphoplasty and vertebroplasty. The commenters indicated that
kyphoplasty is more resource intensive than vertebroplasty and is more
similar to resources used in a spinal fusion. However, we do not have
data to support this claim because the new codes will not be
implemented until October 1, 2004. We believe that it would be
premature to consider DRG refinements using these new ICD-9-CM
procedure codes at this time.
Therefore, we are adopting, as final, our proposed assignment of
new codes 81.65 and 81.66 to DRGs 223 and 234 in MDC 8, DRGs 442 and
443 in MDC 21, and DRG 486 in MDC 24, as indicated in Table 6B of the
Addendum to this final rule. We will take the commenters'
recommendation into consideration when we conduct our annual reviews of
MedPAR data.
6. MDC 15 (Newborns and Other Neonates With Conditions Originating in
the Perinatal Period)
In the May 18, 2004, proposed rule, we indicated that 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 pointed 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

[[Page 48939]]

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. In the
May 18, 2004, IPPS proposed rule, we indicated that we did not plan to
conduct a more extensive analysis involving major revisions to these
DRGs.
Comment: Commenters, including several national hospital
associations, supported our proposal not to undertake a major revision
to MDC 15 at this time, but instead to address specific errors brought
to our attention by providers and other commenters. One commenter, a
national organization representing health information managers and
coders, agreed with our approach to updating MDC 15 without undertaking
a major revision. The commenter stated it believed a comprehensive
revision of MDC 15 should not be undertaken without broad input from
all types of hospitals that provide care for neonates to ensure the
appropriateness of these DRG revisions across all institutions treating
newborns. The commenter indicated that, given CMS' limited data and
experience with newborn cases, it supported CMS' decision not to
conduct a major overhaul of the newborn DRGs. However, the commenter
agreed that CMS should address specific, individual requests for
modifications to the newborn DRGs on a case-by-case basis.
One commenter who supported our proposal indicated that there are
challenges to developing DRG classifications systems and applications
appropriate to children. The commenter acknowledged the practical
difficulties of CMS assuming a larger role in this area, given the
difference between the Medicare population and that of newborns and
children. The commenter stated that there are evolving alternative DRG
classification systems for children. The commenter agreed that a broad-
based fundamental restructuring of the neonatal DRGs would be a huge
and complex undertaking and indicated that there are other DRG
classification systems that are attempting at varying levels of
sophistication to do this restructuring for the neonatal and pediatric
patient populations. The commenter supported our approach of responding
to specific requests for updating MDC 15 on a case-by-case basis.
Response: We appreciate the commenters' support for our decision to
perform only limited updates to MDC 15 based on specific requests for
modification. We will continue to address specific requests for
modification of the newborn DRGs on an individual basis.
In the IPPS final rule for FY 2004 (68 FR 45360), we added heart
failure 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,
in the May 18, 2004, proposed rule, we proposed to add the heart
failure codes listed above to DRGs 387 and 389 as major problems.
Comment: Several commenters supported the addition of the
combination codes, including heart failure, to the list of major
problems under DRGs 387 and 389 because there are a number of other
heart failure codes already listed as major problems under DRGs 387 and
389.
Response: We appreciate the support of the commenters for our
proposal.
In this final rule, we are adopting, as final without modification,
the proposed revisions to add the specified combination codes to the
list of major problems under DRGs 387 and 389.
7. MDC 20 (Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental
Disorders): Drug-Induced Dementia
In the May 18, 2004, proposed rule, we discussed a request that we
had received 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 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 did not
propose a new DRG classification for the principal diagnosis code
292.82.
Comment: Several commenters supported our proposal not to modify
DRGs 521 through 523 by removing code 292.82. One commenter
representing hospital coders disagreed with our proposal to retain code
292.82 in DRGs 521 through 523. The commenter stated that DRGs 521
through 523 are described as alcohol/drug abuse and dependence DRGs.
The

[[Page 48940]]

commenter further indicated that drug-induced dementia could be caused
by an adverse effect of a prescribed medication or a poisoning. The
commenter did not believe that assignment of drug-induced dementia to
DRGs 521 through 523 was appropriate if the drug-induced dementia is
related to an adverse effect or poisoning due to a prescribed drug. The
commenter recommended that admissions for drug-induced dementia be
classified to DRGs 521 through 523 only if there is a secondary
diagnosis indicating alcohol/drug abuse or dependence.
The commenter further recommended that drug-induced dementia that
is due to the adverse effect of drugs be classified to the same DRGs as
other types of dementia, such as DRG 429 (Organic Disturbances and
Mental Retardation). The commenter stated that when drug-induced
dementia is caused by a poisoning, either accidental or intentional,
the appropriate poisoning code would be sequenced as the principal
diagnosis and, therefore, these cases would likely already be assigned
to DRGs 449 and 450 (Poisoning and Toxic Effects of Drugs, Age Greater
Than 17, With and Without CC, respectively) and DRG 451 (Poisoning and
Toxic Effects of Drugs, Age 0-17). The commenter suggested that these
DRG assignments would be the appropriate DRG assignments for drug-
induced dementia due to a poisoning.
Response: We have considered the issues raised by the commenters
relating to the DRG assignment for code 292.82 and the suggested
alternatives for DRG assignment based on sequencing of the principal
diagnosis and reporting of additional secondary diagnoses. We
acknowledge that patients do develop drug-induced dementia from drugs
that are prescribed as well as from drugs that are not prescribed.
However, we still believe that dementia developed as a result of use of
a drug is appropriately assigned to DRGs 521 through 523, as mentioned
by the commenters who supported the current assignment. We also agree
that if the drug-induced dementia is caused by a poisoning, either
accidental or intentional, the appropriate poisoning code should be
sequenced as the principal diagnosis. As the commenter stated, these
cases would be assigned to DRGs 449 through 451.
We will continue to evaluate the DRG assignment for this code
during the next year and further consider the alternative DRG
structures suggested by the commenters, if warranted. We will also
further examine the use of secondary diagnoses as a means of better
classifying patients with drug-induced dementia and consider
alternative DRG assignments such as those mentioned by the commenters.
We also encourage hospitals to examine the coding for these types of
cases to determine if there are any coding or sequencing errors.
We are adopting as final our proposal to maintain the current
structure of DRGs 521 through 523. However, we will continue to examine
the issue to determine whether any changes to the structure of these
DRGs are warranted.
8. MDC 22 (Burns): Burn Patients on Mechanical Ventilation
In the May 18, 2004, proposed rule (69 FR 28211), we discussed
concerns that had been 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.
As we indicated in the May 18, 2004, proposed rule, 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 48941]]

[GRAPHIC] [TIFF OMITTED] TR11AU04.008

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, in the May 18,
2004, proposed rule, we proposed to modify the burn DRGs 504 through
509 under MDC 22 to recognize this impact. We also proposed to modify
DRG 504 and DRG 505 so that code 96.72 will be assigned to these DRGs
when there is a principal or secondary 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 also proposed to modify the titles of DRGs 504
and 505 to reflect the proposed changes in reporting code 96.72 as
follows:

[[Page 48942]]

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 did not propose 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
recommended 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 solicited 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 solicited comments on our proposal not to include DRGs 510 and 511
in this proposed revision.
Comment: Several commenters supported our recommended changes for
the burn DRGs 504 through 509 under MDC 22. The commenters agreed that
utilizing long-term mechanical ventilation of 96 or more hours (code
96.72) would assist in identifying the more expensive burn patients.
One commenter stated that the proposed DRG changes would be greatly
beneficial to burn center hospitals and to patients who have suffered
burn injuries. The commenters supported the proposal to move cases
reporting code 96.72 that are currently assigned to DRGs 506 through
509 into DRGs 504 and 505. The commenter also agreed with our proposal
that cases assigned to DRGs 510 and 511 that also report code 96.72
should not be reassigned to DRGs 504 and 505, because the data cited
appeared to indicate incorrect principal diagnoses were reported in
these cases. The commenters also recommended that consideration be
given to further refinements of DRGs 504 and 505. The commenters
recommended that in the future CMS consider further DRG splits for
cases in DRGs 504 and 505 that have extensive third degree burns with
an inhalation injury and 96+ hours of mechanical ventilation or perhaps
creating a new DRG specifically for these patients.
Response: We appreciate the commenters' support of our proposal. As
we indicated in the May 18, 2004, proposed rule and in our discussion
of the reporting of code 96.72 in the August 1, 2002, IPPS final rule
(67 FR 49996), we did not have data on cases of reported burns among
patients who receive mechanical ventilation until the FY 2003 MedPAR
data became available. In the FY 2003 IPPS final rule, we had asked
hospitals to examine their coding and reporting practices and to begin
reporting code 96.72 when burn patients were on long-term mechanical
ventilation. Hospitals have now increased their reporting of code 96.72
among burn cases when patients were on long-term mechanical
ventilation. With these improved data, in the proposed rule, we were
able to identify the impact that mechanical ventilation had on the
treatment of burn patients.
In the proposed rule, we discussed our concern that hospitals may
have a sequencing problem for some reported cases of minor burns in
which the patient was on long-term mechanical ventilation. We suggested
that some of these patients may have been admitted to the hospital for
an inhalation injury as opposed to a minor burn. The American Hospital
Association (AHA) has reviewed our data and shares our concern. The AHA
has informed us that it is drafting instructional material that will
appear in Coding Clinic for ICD-9-CM to assist hospitals in sequencing
the principal diagnosis for burn cases in which the patients have an
inhalation injury and a minor skin burn.
We will continue to analyze cases assigned to the burn DRGs to
determine if additional DRG refinements, such as the alternative
suggestions mentioned by the commenters, are necessary.
Comment: Another commenter representing hospital coders expressed
its support of the proposed restructuring of the burn DRGs to account
for the use of mechanical ventilation. The commenter shared our concern
about possible errors in the sequencing of diagnoses on claims
resulting in a nonextensive burn being reported as the principal
diagnosis instead of the more serious inhalation or respiratory
condition that was the actual reason for the inpatient admission. The
commenter asked that we encourage hospitals to review admissions
assigned to DRG 510 or 511 that have a code for mechanical ventilation
(codes 96.70 through 96.72) assigned in order to identify any coding
errors. The commenter recommended that hospitals identify cases in
which poor medical record documentation resulted in miscoding of the
reason for the inpatient admission or mechanical ventilation for burn
patients. The commenter further recommended that hospitals use these
cases as the basis for physician education to improve documentation
practices.
Response: We appreciate the commenter's support of the proposed DRG
changes for burn patients on mechanical ventilation. As we indicated in
the proposed rule, we agree with the commenters' suggestion that
hospitals should review their medical records for cases assigned to DRG
510 or 511 that had a code for mechanical ventilation to determine if
there are coding errors. We agree that it is important for hospitals to
have good medical record documentation in order to code accurately.
After analysis of the public comments received, we are adopting, as
final, our proposed changes to the burn DRGs. In summary, we are
modifying DRGs 504 and 505 so that cases in which there is a principal
diagnosis of extensive third degree burns or full thickness burns with
code 96.72 reported are assigned to these two DRGs, rather than to DRGs
506 through 509. We are also changing the title of DRG 504 to
``Extensive Burns or Full Thickness Burns With Mechanical Ventilation
96+ Hours With Skin Graft'' and the title of DRG 505 to ``Extensive
Burns or Full Thickness Burns With Mechanical Ventilation 96+ Hours
Without Skin Graft''. We will continue to follow these DRGs to
determine if additional changes are needed.
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 above and in the
proposed rule, we were concerned about an underreporting of code 96.72
and wanted to encourage increased reporting of this code.
In the May 18, 2004, proposed rule, we indicated that we had
examined cases in the MedPAR file in which code 96.72 was reported
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:

[[Page 48943]]

[GRAPHIC] [TIFF OMITTED] TR11AU04.009

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 did not believe that the very
limited number of cases (22) warranted a proposed DRG modification.
Therefore, we did not propose any modification for DRG 482. In the May
18, 2004, IPPS proposed rule, we indicated that we will continue to
monitor cases assigned to this DRG.
We did not receive any comments on our proposal not to modify DRG
482 and, therefore, are not making any changes to the DRG in this final
rule.
In the proposed rule we stated that in DRG 483, 19,669 cases were
reported with code 96.72. However, we noted that 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
was 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 had a major procedure performed in addition to the
tracheostomy had 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.
[GRAPHIC] [TIFF OMITTED] TR11AU04.010

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 had 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, in the May 18, 2004,
proposed rule, we proposed 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 proposed 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 solicited 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).
Comment: Some commenters supported our proposed changes to DRG 483.
One commenter stated that, based on the data presented by CMS, the
proposal appears to be a reasonable approach to distinguish the more
expensive cases in DRG 483. The commenter also stated that hospitals
are not always reporting code 96.72 due to space limitations (that is,
the electronic billing system limits the number of procedures that can
be reported to six procedure codes). The commenter stated that patients
in this patient population (undergoing procedures with procedure code
96.72) may have several significant

[[Page 48944]]

O.R. procedures that may be sequenced before code 96.72, resulting in
code 96.72 not appearing on the claim.
Response: We appreciate the commenters' support of our proposed DRG
revision as a reasonable approach to distinguish the more expensive
cases from the less expensive cases in DRG 483. We continue to
encourage hospitals to report code 96.72 for patients on mechanical
ventilation for 96+ hours.
Comment: Some commenters opposed our DRG change because of issues
surrounding our proposed inclusion of DRG 483 as a DRG that would
qualify for payment as a post-acute care transfer case.
Response: We are responding to the specific comments received
regarding the proposed inclusion of DRG 483 under the postacute care
transfer discussion in section IV.A. of the preamble of this final
rule. The commenters did not provide other specific objections to the
proposed deletion of DRG 483 and the proposed creation of new DRGs 541
and 542.
Comment: Several commenters requested clarification of what
procedures would be classified as major O.R. procedures in relationship
to our proposed changes to DRG 483.
Response: As we stated in the May 18, 2004 proposed rule, a major
O.R. procedure is a procedure whose code is included on the list that
would be assigned to DRG 468, except for tracheostomy codes 31.21 and
31.29. These are the procedure codes listed as O.R. procedures in
Appendix E of the Diagnosis Related Groups Definitions Manual. The
reporting of a major procedure with a procedure code from Appendix E,
along with an unrelated principal diagnosis, results in a case being
assigned to DRG 468. Major O.R. procedures do not include prostatic or
nonextensive procedures, or both, which are assigned to DRGs 476 and
477.
Currently, the reporting of an additional major O.R. procedure code
does not affect the DRG assignment for cases assigned to DRG 483. In
the proposed rule, we proposed to modify this logic by deleting DRG 483
and creating two new DRGs 541 and 452 that are split on the basis of
the performance of a major O.R. procedure (in addition to tracheostomy
codes 31.21 and 31.29).
Comment: Several commenters agreed that the CMS data support the
subdivision of DRG 483 based on the presence of an additional major
O.R. procedure. They agreed that this approach helps to identify the
more expensive patients within DRG 483. One commenter stated that the
proposed modifications were valuable. Another commenter stated that the
proposed DRG revisions will better reflect the costs of furnishing care
to these two categories of patients.
Response: We agree with the commenters that subdividing the cases
assigned to DRG 483 based on the presence of an additional major O.R.
procedure helps to identify the more expensive patients. We also agree
that the proposed new DRGs should lead to more equitable payment for
the more expensive tracheostomy cases. Therefore, we are proceeding
with finalizing our proposal of deleting DRG 483 and replacing it with
DRGs 541 and 542.
Comment: One commenter expressed concern regarding the proposed
creation of a new DRG for mechanical ventilation as a pre-MDC for all
patients undergoing more than 96 hours of mechanical ventilation. The
commenter suggested that we delete DRG 475 (Respiratory System
Diagnoses with Ventilator Support) from MDC 4 and move all of these
cases reporting code 96.72 to a new DRG for mechanical ventilation in
the pre-MDC section.
Response: Patients undergoing more than 96 hours of mechanical
ventilation are captured through code 96.72. Currently, patients with a
respiratory system diagnosis listed in MDC 4 who receive mechanical
ventilation are assigned to DRG 475. Cases are assigned to DRG 475 if
one of the following procedure codes is reported:
96.70, Continuous mechanical ventilation of unspecified
duration.
96.71, Continuous mechanical ventilation for less than 96
consecutive hours.
96.72, Continuous mechanical ventilation for 96
consecutive hours or more.
In the August 1, 2002, final rule (67 FR 49996), we discussed the
reporting of code 96.72. We pointed out the importance of hospitals
accurately reporting the use of long-term mechanical ventilation (code
96.72). 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. As
discussed previously, in this final rule, we are modifying DRG 483 to
differentiate between patients with and without other major O.R.
procedures (in addition to the tracheostomy). We are also modifying the
burn DRGs to better classify those patients on long-term mechanical
ventilation.
As stated in the May 4, 2001, proposed rule (66 FR 22646):
``Central to the success of the Medicare inpatient hospital prospective
payment system is that DRGs have remained a clinical description of why
the patient required hospitalization.'' Thus, the central
classification criteria for DRG assignment has been the reason the
patient was admitted (that is, the principal diagnosis for medical
patients and the procedures performed for surgical patients). For a
medical patient admitted for respiratory disease, the use of mechanical
ventilation was used as a classification criteria because the
mechanical ventilation was directly associated with the reason for
hospital admission. The one exception to this rule is for patients who
received a tracheostomy for long-term mechanical ventilation. These are
catastrophic patients who, in general, have serious disease in multiple
organ systems. Tracheostomies are performed on patients when it is
anticipated that the patients will remain on mechanical ventilation for
an extended period. The tracheostomy patients with long-term mechanical
ventilation were all assigned to the same DRG regardless of their
reason for admission. As we discussed previously, we are subdividing
the patients assigned to DRG 483 into two new DRG 541 and 542 based on
the presence of an additional major O.R. procedure.
We believe it would not be appropriate to classify mechanical
ventilation patients who do not receive a tracheostomy in the same
manner as long-term mechanical ventilation patients who receive a
tracheostomy. The patients who do not receive a tracheostomy tend to
require mechanical ventilation for shorter periods and do not use the
level of resources required by tracheostomy patients.
The reason for admission for patients with short-term mechanical
ventilation can vary greatly and include degenerative nervous system
diseases, short-term acute disease, trauma, and terminal care. Further,
the resource requirements for patients on short-term mechanical
ventilation vary greatly, depending on the patient's reason for
admission. We believe it is more appropriate to classify patients with
short-term mechanical ventilation based on their reason for admission
and to provide additional payments for patients with extreme resource
use through outlier payments. Therefore, we are not accepting the
commenter's request that we delete DRG 475 and create a new DRG in the
Pre-MDC section for mechanical ventilation. We will maintain DRG 475 as
it is currently configured.
In summary, in this final rule, we are deleting DRG 483 and
establishing the

[[Page 48945]]

following new DRGs 541 and 542 as replacements:
DRG 541 (Tracheostomy With Mechanical Ventilation 96+
Hours or Principal Diagnosis Except Face, Mouth, and Neck Diagnoses
With Major O.R. Procedure)
DRG 542 (Tracheostomy With Mechanical Ventilation 96+
Hours or Principal Diagnosis Except Face, Mouth, and Neck Diagnoses
Without Major O.R. Procedure)
10. Medicare Code Editor (MCE) Changes
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 the May 18, 2004, IPPS
proposed rule (69 FR 28213), we proposed 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.
In the proposed rule, we stated that we had 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. Chapter 13.5 of the Program Integrity
Manual (PIM) states that contractor discretion exists to cover
diagnoses for which coverage is not explicitly precluded by a national
coverage decision. 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 provisions
in interpretive manuals. If an NCD or coverage provision in an
interpretive manual states that a given 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.
In the proposed rule, we indicated that we agreed that we need to
make conforming changes relating to stem cell transplants. Therefore,
we proposed 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 remissionThe 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
Diagnosis 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

[[Page 48946]]

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] [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
250.50, Diabetes with ophthalmic manifestations, type II
[non-insulin dependent type] [NIDDM type] [adult-onset type] or
unspecified type, not stated as uncontrolled
250.51, Diabetes with ophthalmic manifestations, type I
[insulin dependent type] [IDDM] [juvenile type], not stated as
uncontrolled
250.52, Diabetes with ophthalmic manifestations, type II
[non-insulin dependent type] [NIDDM type] [adult-onset type] or
unspecified type, uncontrolled
250.53, 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

Note: The proposed rule contained inadvertent typographical
errors in the above list on four diabetes codes at 250.50 through
250.53. These errors have been corrected in this list in the final
rule.

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

[[Page 48947]]

We received one comment in support of our proposal to restructure
Edit 11 in the MCE. Therefore, we are adopting the proposal as final.
In addition, it has come to our attention that two of the new codes
created for use for discharges effective October 1, 2004, should also
be included on Edit 11 in order to conform to current coverage policy.
These changes were not included in the proposed rule. However, the
addition of these codes is not a change in CMS policy. Rather, it is
simply a procedural change that is necessary to effectuate CMS'
existing coverage policy and to facilitate the appropriate payment (or
non-payment) of claims reporting these codes. Therefore, we are making
the following additional changes to the MCE:
In the ``Non-Covered Procedures'' section of Edit 11, we
are adding code 00.62 (Percutaneous angioplasty or atherectomy of
intracranial vessel(s)) to the list of procedure codes that are always
considered noncovered procedures.
ICD-9-CM O.R. procedure code 00.61 (Percutaneous
angioplasty or atherectomy of precerebral (extracranial vessel(s)) is
identified as a ``Non-Covered Procedure'' except when the following
non-O.R. procedure and secondary diagnosis are also present:
Non-O.R. Procedure: 00.63 (Percutaneous insertion of carotid artery
stent(s); and
Secondary Diagnosis: V70.7 (Examination of participant in clinical
trial).
We are making these changes in Version 22.0 of the MCE software
program.
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, in the May 18,
2004, proposed rule, we proposed to add the following diagnosis codes
to Edit 6:
289.52, Splenic sequestration
517.3, Acute chest syndrome (inadvertently erroneously
cited as 571.3 in the May 18, 2004 proposed rule)
785.52, Septic shock
Coding conventions in the ICD-9-CM Diagnostic Tabular List specify
that etiologic conditions be coded first.
We received two comments in support of our proposal to add three
diagnosis codes to Edit 6 of the MCE. However, both commenters pointed
out a typographical error in one of the citations of the diagnosis
codes. Code 571.3 should have read 517.3.
We are adopting, as final, our proposed additions of the diagnosis
codes to Edit 6, with the correction of the one code number cited.
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).
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. In the May 18, 2004, IPPS
proposed rule (69 FR 28197), we indicated that we will now be able to
make the necessary system changes before the start of FY 2005.
Therefore, we proposed 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)
We received one comment in support of our proposed removal of codes
V53.01 and V53.02 from Edit 9 in the MCE. Therefore, we are adopting,
as final, our proposed removal of the two codes from Edit 9.
11. Surgical Hierarchies
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

[[Page 48948]]

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, in the May 18,
2004 proposed rule, we proposed modifications of the surgical hierarchy
as set forth below.
We proposed 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 proposed 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 proposed 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).
In the proposed rule, we were unable to test the effects of the
proposed revisions to the surgical hierarchy and to reflect these
changes in the proposed relative weights because the revised GROUPER
software was unavailable at the time the proposed rule was completed.
Rather, we simulated most major classification changes to approximate
the placement of cases under the proposed reclassification, and then
determined the average charge for each DRG. These average charges
served as our best estimate of relative resource used for each surgical
class. We have now tested the proposed surgical hierarchy changes after
the revised GROUPER was received and are reflecting the final changes
in the DRG relative weights in this final rule. Further, as discussed
in section II.C. of this preamble, the final recalibrated weights are
somewhat different from the proposed weights because they are based on
more complete data.
We have tested the proposed revisions using the March 2004 update
of the FY 2003 MedPAR file and the revised GROUPER software and have
found that the revisions are supported by the data, and no additional
changes are indicated except those discussed below pertaining to the
implementation of new DRG 543 (Craniotomy with Implantation of
Chemotherapeutic Agent or Acute Complex Central Nervous System
Principal Diagnosis). (For a complete description of this change see
the discussion under ``Other Issues'' in section II.B.16 of this
preamble.) Due to the implementation of DRG 543, we also are reordering
the following DRGs in MDC 1 (Disease and Disorders of the Nervous
System): DRG 543 above DRGs 1 (Craniotomy Age > 17 With CC) and 2
(Craniotomy Age> 17 Without CC). Therefore, we are adopting these
changes as final.
Comment: One commenter requested a change in the surgical hierarchy
for a case where procedure code 37.99 (Other operations on heart and
pericardium) and code 37.98 (Replacement of an automatic cardioverter/
defibrillator pulse generator only) is reported during the same
admission. This case is assigned to either DRG 110 (Major
Cardiovascular Procedures With CC) or DRG 111 (Major Cardiovascular
Procedures Without CC). The commenter requested that this case be
reassigned to DRG 115 (Permanent Cardiac Pacemaker Implant with AMI,
Heart Failure, or Shock or AICD Lead or Generator Procedure) because it
has a higher DRG weight than DRG 110 or DRG 111.
Response: The surgical hierarchy places a patient with multiple
procedures in the most resource intensive class of DRGs, but not
necessarily in the most resource intensive DRG. In the scenario
described by the commenter, there are two surgical classes, one
including DRGs 110 and 111 and the other including DRG 115 and DRG 116
(Other Permanent Cardiac Pacemaker Implant). The average charges for
the class containing DRGs 110 and 111 are approximately $16,604 more
than for the class containing DRGs 115 and 116. As a result, the class
containing DRGs 110 and 111 is ordered higher in the surgical group
than the class containing DRGs 115 and 116. As a result, the case is
assigned to either DRG 110 or DRG 111.
12. Refinement of Complications and Comorbidities (CC) List
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. In the May 18, 2004, proposed rule, we did not
propose to delete any of the diagnosis codes on the CC list.
Comment: One commenter requested that ICD-9-CM codes 996.64
(Infection due to indwelling urinary catheter) and 599.0 (Urinary tract
infection) be removed from the CC List so that hospitals are not
rewarded with higher payment when they allow patients to develop
urinary tract infections. The commenter pointed out that these
conditions are often avoidable complications of hospitalization, and
that hospitals allow these infections to occur in order to receive
higher payments from Medicare.

[[Page 48949]]

Response: We do not agree with the assertion that hospitals allow
urinary tract infections to occur in Medicare patients in order to
receive higher payment rates. While it is true that some urinary tract
infections are preventable through the use of improved sterile
technique, reduced indwelling catheter duration, more appropriate use
of broad spectrum antibiotics and improved patient mobilization, among
others, we do not believe there is a direct causal link between
substandard hospital care and the presence of urinary tract infection
in general.
Particularly in the elderly Medicare population, urinary tract
infections occur in diverse clinical scenarios that lead to
colonization and ultimately overt clinical infection within the urinary
tract. General debilitation, various acute illnesses, immobility,
impaired host defense mechanisms, dehydration and the post-surgical
state are but a few of the situations in which urinary tract infections
may occur, and which do in fact require higher resource utilization
when they occur. Therefore, we are not removing codes 996.64 and 599.0
from the CC List.
In this final rule, as we proposed, we are not deleting any of the
diagnosis codes on the CC list for FY 2005.
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:
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.
---------------------------------------------------------------------------

In the May 18, 2004, proposed rule, we proposed 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 proposed these changes in
accordance with the principles established when we created the CC
Exclusions List in 1987.
We received no comments on the proposed changes. Therefore, we will
adopt the CC Exclusions List as proposed.
Tables 6G and 6H in the Addendum to this final rule contain the
revisions to the CC Exclusions List that will 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 will 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 will 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 final 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 2005 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
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

[[Page 48950]]

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.
---------------------------------------------------------------------------

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, in the May 18, 2004 proposed
rule, we did not propose to move any procedures from DRG 477 to one of
the surgical DRGs in this final rule.
We did not receive any comments on our proposal not to move any
procedures from DRG 477 to one of the surgical DRGs and, therefore, are
adopting our proposal as final.
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), in the May 18, 2004 proposed rule, we proposed 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 indicated that we agreed and, therefore, proposed this
change. In addition, we proposed 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 final 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 did not propose to move any procedure codes from DRG 476 to DRGs
468 or 477, or from DRG 477 to DRGs 468 or 476.
We did not receive any comments on this proposal and, therefore,
are adopting it as final.
c. Adding Diagnosis or Procedure Codes to MDCs
Based on our review this year, we did not propose to add any
diagnosis codes to MDCs. We did not receive any comments on this
proposal. Therefore, we are adopting our proposal as final and are
making no changes to MDCs other than those specified in other portions
of this section II. of the preamble of this final rule.
14. Pancreatic Islet Cell Transplantation in Clinical Trials
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) of Public Law 108-173 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) of Public Law 108-173 defines
transplantation and appropriate related

[[Page 48951]]

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.
As we indicated in the May 18, 2004, proposed rule, while the DRG
payment will cover the transplant injection and the subsequent hospital
stay, we considered establishing an add-on payment to the DRG payment
amount to reimburse the acquisition costs associated with islet cell
procurement (69 FR 28218). 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. Because the
procurement and processing system for islet cell transplants is not the
same as for solid organ transplants, we proposed not paying 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 believed it would be 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.
We proposed that the add-on payment would be a single amount that
includes pre-transplant tests and services, pancreas procurement, and
islet isolation services. In addition, we proposed to use an 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 solicited 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 had some data available regarding the cost of
pancreas procurement, in the proposed rule we specifically asked for
any other data that supported the costs of acquisition and the costs of
isolation cell resource centers. We stated that, because of
insufficient data, we were unable to publish a proposed acquisition
amount in the FY 2005 proposed rule. However, we indicated that, after
analyzing data submitted during the comment period, other data acquired
by CMS, and any suggested changes from the methodology proposed, the
final organ acquisition payment amount would be announced in the FY
2005 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. Patients with Type II islet diabetes are
not included in this trial. 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 should 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). We note that
this third scenario reflects incorrect coding practice. However, in
this final rule we are modifying the structure of DRG 315 so that
patients receiving infusions of islet cells without any other surgical
intervention will be appropriately assigned to this DRG.
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, as indicated in the proposed rule, 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). As the GROUPER software program does not
recognize codes for islet cell transplantation as O.R. procedure codes,
the presence of these codes did not modify the DRG assignment in these
four cases.
We were 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 did not
propose that cases involved in the clinical trial be assigned to one
specific DRG for payment purposes. As we believe that these cases will
have been assigned to DRGs 302, 315, and 468, we proposed to establish
an add-on payment for cases in these three DRGs containing procedure
codes 52.84 or 52.85. As stated earlier, we were not able to establish
the amount of this add-on until we had determined procurement costs for
the islet cells. We solicited information from transplant centers and
organ procurement organizations on costs for these types of
transplantations.
Comment: Several commenters noted that the assignment of DRG 315,
as currently constructed, to patients participating in the clinical
trial does not reflect appropriate coding practice, as a laparotomy
code for hepatic vessel catheterization should not be recorded.
Response: The commenters are correct in their assessment.
Therefore, we are modifying the structure of DRG 315 so that patients
receiving infusions of islet cells without any other surgical

[[Page 48952]]

intervention will appropriately be assigned to DRG 315. We are aware
that patients will often require more than one admission for islet cell
transplantation. We are making this modification in order to recognize
the surgical aspects of islet cell transplantation in the absence of
any other surgical procedure.
The logic for DRG 315 is modified as follows:
O.R. Procedures
This list remains the same as V21.0 of the GROUPER.
or
Non-O.R. Procedures
52.84, Autotransplantation of cells of islets of Langerhans
52.85, Allotransplantation of cells of islets of Langerhans
or
Principal Diagnosis
This list remains the same as V21.0 of GROUPER.
and
Non-O.R. Procedure
This list remains the same as V21.0 of GROUPER.
Comment: One commenter stated that it was not clinically
appropriate to categorize islet cell transplants into DRG 315, as these
transplants do not involve either the kidney or the urinary tract
directly. Rather, the islet cells are transplanted into the patient's
liver. The commenter indicated that islet transplants have no relevance
to the genito-urinary system, but rather to the
hepatopancreaticobiliary system. Therefore, the commenter believed that
the proposed classification to DRG 315 is clinically inappropriate.
Response: DRGs are diagnosis related groups. Each surgical DRG is
comprised of procedure codes in combination with a principal diagnosis
that causes the case to be assigned to a particular major diagnostic
category (MDC). Because there are so many procedures in most DRGs, it
is impossible to capture the purpose of all procedures in the title.
Comment: Some commenters suggested that the most appropriate
resolution is to create a new DRG for islet transplants performed
alone. The commenters mentioned that solid organ transplants are
classified into their own DRGs, and that this precedent should be
continued.
Response: DRGs are created based on the need of the program to
identify clinical coherence and resource consumption. Ideally, both
components will be part of the decision making process in DRG creation.
In this case, we have no substantial data upon which to determine an
appropriate relative weight for the resources that will be utilized in
all islet cell transplant cases. In addition, there may be different
scenarios in which patients are transfused with islet cells. These
cases could include patients receiving a kidney transplant during the
same admission, or cases in which the islet cells comprise the only
procedure during the admission. As cases will be varied in this
clinical trial, we prefer to have MedPAR data and case histories prior
to creating specific new DRGs for these cases.
Comment: Some commenters believed that the most closely related DRG
from a clinical as well as resource perspective is DRG 513 (Pancreas
Transplant). The commenters noted that the diagnoses are the same for
islet and pancreas transplants, and that the patient populations
involved in these two procedures are virtually identical in terms of
comorbidities and the nature of their primary disease. In addition, the
technical aspects of islet transplants are of a surgical nature,
whether performed in an operating room or in the interventional
radiology suite. One commenter noted that pancreas transplants are in
reality just another method of transplanting the insulin producing
islet cells since the other functions of the pancreas are superfluous.
Response: While the patient populations requiring intervention are
similar, we do not believe that one can equate an operation of the
magnitude of a pancreas transplant with a less intensive islet cell
transplantation in which the portal vein is accessed and islet cells
infused through a catheter. It is only because the technical aspects of
islet transplants are of a surgical nature that we have modified
surgical DRG 315 to reflect the transfusion of islet cells.
Comment: One commenter suggested that the most appropriate DRG for
simultaneous kidney and islet cell transplantation would be DRG 512
(Simultaneous Pancreas/Kidney Transplant), as the resource allocation
and patient population involved in both types of admissions are
comparable. The commenter noted that so few of these combination
procedures have been performed that no assumption can be projected
based on the experience to date.
Response: We do not agree that an islet cell transplantation is the
equivalent of a pancreas transplantation. Cases involving simultaneous
kidney and islet cell transplantation will group to DRG 302, and will
receive an add-on payment for the infusion of the islet cells.
Comment: Some commenters believed CMS should pay for islet
acquisition services as a cost pass-through. Several of these
commenters stated that they found insufficient justification to pay for
islet cell transplants through an add-on when pancreata used for solid
organ transplantation are paid as a cost pass-through. These commenters
stated that the costs of procuring a pancreas used for solid organ
transplantation are the same as procuring a pancreas for islet cell
transplantation. One commenter agreed that payment through an add-on is
the best approach.
Response: We continue to believe that reimbursing acquisition costs
as an add-on to the DRG is an appropriate reimbursement mechanism.
However, we have decided that reimbursing pancreata procured for islet
cells as an add-on while the acquisition of all other organs are
reimbursed as a cost pass-through may be premature at this time.
Accordingly, we will pay for organ acquisition costs as a cost pass-
through. Costs associated with the procurement of the pancreata will be
included in the islet acquisition costs center of the transplant center
cost report. We will continue to study the appropriateness of paying
for pancreata used for islets as an add-on in the future. Islet
isolation will be paid as an add-on as proposed. We discuss this add-on
below.
Comment: Some commenters were concerned that pre-transplant costs
would not be appropriately reflected in the proposed add-on
methodology. These commenters recommended that the pre-transplant costs
be paid as a cost-pass through.
Response: After additional analysis, we agree that it may be
difficult to ensure an appropriate payment amount for pre-transplant
costs in an add-on methodology. Therefore, pre-transplant costs will be
handled in the same manner as they are for all other solid organ
transplantation and will be included in the islet acquisition cost
center of the cost report. Pre-transplant costs will not be included as
an add-on to the DRG payment.
Comment: Some commenters believed that islet isolation services
should be paid on a cost pass-through rather than as an add-on. One
commenter mentioned that islet centers have differing arrangements with
transplant centers on how the isolation is performed. The commenters
added that these same centers have differing processes in isolating the
islet cells. Some commenters also indicated that there are
inconsistencies in the isolation center data provided to CMS for use in

[[Page 48953]]

developing the add-on payment and expressed concerns about the validity
of these data.
Response: We continue to believe that paying for islet isolation
services as an add-on amount to the DRG is appropriate in the context
of this clinical trial. We derived the isolation add-on amount through
analysis of direct costs data submitted by 10 of the prominent
isolation centers in the country. These centers may well have differing
arrangements and differing processes, but despite these differences,
the costs and components of costs showed reasonable similarities. The
differences were also notable, but we were able to adjust for these
differences. In addition to including direct costs, we added
actuarially-derived overhead amounts that are used in the hospital
payment methodology and provided a 20-percent capital adjustment for
building and equipment and a market basket adjustment to take the
payment amount to a FY 2005 funding level. Historically, capital costs
are approximately 10 percent of the total hospital costs. However, we
recognize that the isolation centers are equipment intensive, and to
account for that equipment, we are doubling that rate so that capital
costs are 20 percent of the total isolation payment. We believe that 20
percent is sufficient to account for capital at the isolation centers.
In future years, we would like to obtain capital costs amortized on a
per isolation basis. The varying processes and arrangements are all
included in our computation, and $18,848 will be paid as the islet
isolation add-on to the DRG payment.
Comment: One commenter wanted to be sure that costs of transporting
islet cells to and from the islet isolation center are included in the
add-on payment.
Response: Shipping costs from the OPO to the islet isolation center
are included in procurement costs. The islet isolation centers did not
provide data on shipping to the transplant centers; however, we have
included an actuarially based overhead amount that we believe is
sufficient to cover these costs.
Comment: Some commenters noted that more than one infusion of islet
cells is typically required to establish insulin independence and
believed that this argued in favor of payment on a cost pass-through
basis rather than as an add-on amount.
Response: We recognize that normally two or more infusions are
required for islet transplants. We also understand that it is extremely
rare for two infusions to be performed at the same time. Accordingly,
we have constructed our payment mechanism to pay one DRG for the
infusion and one islet isolation add-on amount per discharge under most
circumstances for allograft islet cell transplants. However, in those
rare instances in which two infusions occur during the same hospital
stay, two add-on payments for isolation of the islet cells can be made
along with the single DRG payment. The cost associated with the
procurement of two pancreata will be paid as an acquisition cost on a
reasonable cost basis. We will issue billing instructions on this issue
Comment: Some commenters asked for guidance on the appropriate
methodology for OPOs to use in identifying costs incurred in procuring
pancreata for islet cell transplantation. Some OPOs have indicated that
they currently are providing pancreata for islet cell transplantation
but do not receive their full standard acquisition charge (SAC) for the
organ.
Response: In some cases, OPOs have been billing pancreata for islet
cell transplant at a lower tissue rate. This is an improper billing
method. The quality and resources required to procure the organ are
identical, and a full charge should be made. Organs that are determined
to be nonviable can be billed at a lesser research rate .
Comment: One commenter indicated that the costs included in
pancreas acquisition at OPOs vary, making an add-on payment
impractical.
Response: As mentioned above, we will continue paying acquisition
costs as a cost pass-through. However, all OPOs should have included in
their costs direct donor hospital charges, surgeon retrieval fee,
registry fees, donor testing, and transportation. These costs should
not be shifted to another organization.
Comment: One commenter noted that it was unclear how physicians'
services involved in the oversight of the isolation process would to be
paid since it does not appear that there is an existing CPT code for
these services.
Response: The commenter is correct that there is no CPT code for
the physician's oversight services at the isolation center. CPT codes
are for direct patient care services; the services at the isolation
center do not meet that level of patient participation. In a similar
vein, the medical directors at OPOs do not bill for their services
using a CPT code. Rather, they are paid by the OPO both for organ
retrieval and medical director services. We have included physician
costs in the salary portion of the isolation portion of the add-on
amount.
Comment: One commenter believed that the costs associated with the
isolation portion of the add-on amount should be between $30,000 and
$40,000. This commenter further explained that isolation centers incur
cost and time to develop improvements to the islet isolation technology
and pointed out the startup costs associated with an FDA approved
isolation center.
Response: As noted earlier, we have calculated the islet isolation
portion of the add-on amount as $18,848. We suspect that the $30,000 to
$40,000 estimate referenced by the commenter included costs
attributable to research and other services, which are not considered
to be routine and reasonably necessary for patient care.
Comment: One commenter suggested two levels of add-on payments to
account for the difference in expenses for autograft versus allograft
islet cells transplants. While the proposed add-on methodology included
the cost of pre-transplant tests and services, organ procurement and
islet isolation services, autograft transplants have no associated
organ procurement costs, as the islet cells are taken from the
patient's own pancreas. Autograft transplants still require pre-
transplant services and the actual islet isolation procedure itself.
Response: Our original understanding was that autograft transplants
would not be included in the NIH study. After review of the legislation
and accompanying Conference Report and consultation with NIH, we
believe that an autograft should not occur in this trial. However, in
the unlikely event that an autograft islet cell transplant is performed
as part of the study on a Medicare beneficiary, we will provide an
autograft add-on amount that includes payment for isolation but not for
organ procurement. No acquisition cost of the pancreas will be provided
because the cost of removal of the organ is included in the DRG payment
for the native pancreatectomy procedure itself. The isolation add-on
amount will be $18,848 for an autograft islet cell transplant.
In this rule we are finalizing our proposed payment methodology for
acquisition costs associated with procuring pancreata for islet cells
with modification. We will pay for the organ acquisition costs as a
cost pass-through rather than as an add-on payment to the DRG as
proposed. In addition, we are finalizing our proposal to pay for islet
isolation services as an add-on.
15. Changes to the ICD-9-CM Coding System
As described in section II.B.1. of this preamble, the ICD-9-CM is a
coding system used for the reporting of diagnoses and procedures
performed on

[[Page 48954]]

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 Official Version of the ICD-9-CM contains the list of valid
diagnosis and procedure codes. (The Official Version of the ICD-9-CM is
available from the Government Printing Office on CD-ROM for $25.00 by
calling (202) 512-1800.) The Official Version of the ICD-9-CM is no
longer available in printed manual form from the Federal Government; it
is only available on CD-ROM. Users who need a paper version are
referred to one of the many products available from publishing houses.
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,
December 4-5, 2003, and April 1-2, 2004, 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 of the Addendum to this 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/. The minutes of the diagnoses codes discussions at
the 2003 meetings are found at: http://www.cdc.gov/nchs/icd9.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/. 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
final 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 the May 18, 2004,
proposed rule, we only solicited comments on the proposed
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, in the May 18,
2004, proposed rule, we solicited 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. Under the
proposal, 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

[[Page 48955]]

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 indicated that 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 website. 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 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 have
rescheduled the second Committee meeting for 2004 for October 7-8,
2004. Those who wish to have a coding issue discussed at the October
Committee meeting will be required to submit their request by August 7,
2004. The Department will continue this process to accommodate all
requesters who submit appropriate requests in a timely manner.
In the May 18, 2004 proposed rule, we proposed 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 also proposed the following process for
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
requester 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 stated that 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 will 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. We indicated that our proposal was designed to carry
out that intention, while minimizing the additional administrative
costs associated with mid-year changes to the ICD-9-CM codes.
Comment: Several comments expressed concerns about the impact the
April 1 ICD-9-CM coding update will have on providers. While the
commenters acknowledged the requirement was mandated by section 503(a)
of Public Law 108-173, the commenters urged CMS to carefully consider
the number of these mid-year coding updates. The commenters stated that
these changes will have a significant impact on providers' systems. One
commenter representing a large hospital organization recommended that
codes being considered for the April 1 update be limited only to new
technologies that present a strong and convincing case for new
technology add-on payment. The commenter recommended that the annual
April 1 update be limited to as few codes as possible for the following
reasons:
The addition of a significant number of new codes outside
the traditional October 1 implementation will result in doubling the
costs associated with the purchase of new code books and updating
encoder software programs, requiring hospitals to purchase new code
books twice a year. The commenter stated that at least one publisher
has already announced that two editions of the code books will be
published every year.
Many health plans, including Medicare, require a
significant lead-time to incorporate new codes into their systems. The
commenter expressed concern that some payers will not be able to
support a large number of codes being implemented outside the
traditional October 1 update.
A considerable amount of education and coder training
takes place every year with the introduction of new and updated codes.
Introducing a large number of new codes on a twice-yearly basis, rather
than annually, will increase this burden.
The commenter urged that the new codes be released with a 5-month
lead-time as is the case now for ICD-9-CM updates. Currently the public
is notified in May of the same year for ICD-9-CM codes being
implemented on October 1. The commenter requested that the public be
notified by November of codes that will be implemented on April 1.
The commenter pointed out that, by tradition, new ICD-9-CM codes
have been published in the Federal Register, as part of the annual IPPS
proposed rule. The commenter urged CMS to develop a process for the
wide dissemination of new and modified ICD-9-CM codes for April 1
implementation. The commenter requested that this process be published
in the IPPS final rule to inform users of the process.
These comments were supported by organizations representing State
hospitals and coding specialists. The commenters agreed with CMS'
proposal to use the public meetings of the ICD-9-CM Coordination and
Maintenance Committee to consider requests for an April 1
implementation date for a new ICD-9-CM code. The commenters agreed that
these updates should primarily focus on new technology

[[Page 48956]]

issues. When an individual or organization requests implementation of
an ICD-9-CM code on April 1, the commenters agreed that the requestor
should make a strong and convincing case as to why a new code is needed
in April for purposes of the new technology process.
Response: We agree that section 503(a) of Public Law 108-173
requires that ICD-9-CM codes needed to capture new technology must be
implemented on April 1 and October 1 of each year. We also agree that
the April updates will be disruptive to current provider systems. Any
April updates must be carefully considered and evaluated in order to
capture new technology in an expedited manner. Those commenters who
request an April implementation of a new ICD-9-CM code must make a
strong and convincing case at the ICD-9-CM Coordination and Maintenance
Committee as to why a new code is needed in April for purposes of the
new technology process. The public will be provided an opportunity to
discuss this request. Comments regarding the publication and
dissemination of codes to be implemented on April 1 are discussed
below.
Comment: One commenter called the twice a year updates of ICD-9-CM
an important step forward in allowing new products to enter the market
more quickly and receive adequate payment sooner. The commenter
expressed some concerns about CMS' proposed approach to these updates.
The commenter stated that, by using the April updates for new
technology, we would not have a true twice yearly coding update, but
rather an opportunity for only a small group of services or
technologies to receive more prompt coding updates. The commenter
stated that the April update should be an open opportunity for any
coding updates to be considered.
Response: We agree with the commenter that the process for
discussing updates to ICD-9-CM should be an open process. This has been
the practice of the ICD-9-CM Coordination and Maintenance Committee
since it was established in 1985. As previously stated, we will provide
the opportunity for a requestor to make a clear and convincing case for
the need to update specific ICD-9-CM codes in April. The public will be
provided an opportunity to discuss the merits of any codes under
consideration for the April updates.
Comment: Several commenters requested details on how the public
will be notified of the April ICD-9-CM code updates. They requested
clarification as to whether the current publication processes will be
used. One commenter representing a national organization of codes and
health information managers urged CMS to provide information on April 1
code updates at least 4 months prior to implementation. Other
commenters representing hospital organizations urged CMS to provide
updates 5 months ahead of implementation, or by November of the prior
year.
Response: Current addendum and code title information is published
on the CMS Web page at: http://www.cms.hhs.gov/paymentsystems/icd9 /icd9.
Summary tables showing new, revised, and deleted code titles are also
posted on the following CMS Web page: http://www.cms.hhs.gov/medlearn/icd9code.asp. Information on ICD-9-CM diagnosis codes can be found at:
http://www.cdc.gov/nchs/icd9.htm. Information on new, revised, and
deleted ICD-9-CM codes is also provided to the AHA for publication in
the Coding Clinic for ICD-9-CM. AHA also distributes information to
publishers and software vendors.
CMS also sends copies of all ICD-9-CM coding changes to its
contractors for use in updating their systems and providing education
to providers.
We agree that these same means of disseminating information on new,
revised, and deleted ICD-9-CM codes should be used to notify providers,
publishers, software vendors, contractors, and others of changes to the
ICD-9-CM codes that will be implemented in April. We will continue to
provide the information in this manner.
Currently, code titles are also published in the IPPS proposed and
final rules. The code titles are adopted as part of the ICD-9-CM
Coordination and Maintenance Committee process. The code titles are not
subject to comment in the proposed or final rules. We will continue to
publish the October code updates in this manner within the IPPS
proposed and final rules. However, we do not publish a mid-year IPPS
rule, so the April 1 code updates will not be published in a mid-year
IPPS rule. We will assign the new procedure code to the same DRG in
which its predecessor code was assigned so there will be no DRG impact
as far as DRG assignment. This mapping was specified by Public Law 108-
173. Any proposed coding updates will be available through the websites
indicated above and through the Coding Clinic for ICD-9-CM. Publishers
and software vendors currently obtain code changes through these
sources in order to update their code books and software systems. We
will strive to have the April 1 updates available through these
websites 5 months prior to implementation (that is, early November of
the previous year), as is the case for the October 1 updates. Code book
publishers are evaluating how they will provide any code updates to
their subscribers. Some publishers may decide to publish mid-year book
updates. Others may decide to sell an addendum that lists the changes
to the October 1 code book. Coding personnel should contact publishers
to determine how they will update their books. CMS and its contractors
will also consider developing provider education articles concerning
this change to the effective date of certain ICD-9-CM codes.
Comment: Commenters requested clarification as to whether the April
1 updates would be limited to procedure codes. The commenters supported
our proposed approach for implementing the new legislative requirement
to update ICD-9-CM codes twice a year. Specifically, they agreed that
limiting the implementation of new codes on April 1 to those for which
a strong and convincing case is made for an expedited implementation is
the best approach and will reduce the additional administrative costs
associated with twice-yearly updates to the coding system. The
commenters acknowledged that the section of 503(a) of Public Law 108-
173 that includes the requirement for updating ICD-9-CM codes twice a
year is primarily related to the recognition of new technology under
the IPPS, but the language in the legislation does not limit the
requirement to procedure codes. The commenters stated that CMS'
proposed approach requires the requestor of a code proposal to identify
the reason why a new code is needed on April 1 for purposes of the new
technology process. One commenter stated that this requirement seems to
preclude diagnosis code updates. Another commenter requested
clarification in the final rule as to whether new diagnosis codes are
intended to be included in the April 1 update.
Response: We agree that section 503(a) of Pub. L. 108-173 did not
limit ICD-9-CM code updates to procedure codes. The legislation covered
all of ICD-9-CM, which includes both diagnoses and procedures codes.
Therefore, consideration will be given to updates to both the diagnosis
and procedure parts of ICD-9-CM on April 1 if a strong and convincing
case can be made that either a diagnosis or procedure code is necessary
to capture a new technology. We acknowledge that it may be necessary to
recognize a new disease, such as SARS, on April 1 so that a new
technology directed toward the disease can be more easily

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identified. We anticipate that most, if not all, requests for April 1
ICD-9-CM code updates will apply to procedure codes, as the commenters
have stated. While it is unlikely that there will be many such disease
code requests for an April 1 update, we will not restrict any such
requests for consideration.
Comment: Commenters representing national and state hospital
associations as well as other organizations suggested that providing
twice-yearly updates to the ICD-9-CM is only a temporary solution to
meeting the coding needs of providers who may need to report new
technology. The organizations stated that a more permanent and long-
term-solution would be the implementation of ICD-10-CM and ICD-10-PCS
as quickly as possible. Several other commenters recommended moving
forward with the implementation of ICD-10 as quickly as possible. One
commenter urged DHHS to adopt and implement ICD-10-CM and ICD-10-PCS as
quickly as possible in the United States. The commenter further stated
that the sooner the health care industry and CMS begin to use and
collect data more closely representing actual diagnosis and procedures,
the better the picture of our health services and healthcare services
will be; reimbursement will be more accurate; and there will be less
administrative burden on health care providers and on CMS. One
commenter asked that the regulatory process for implementing ICD-10 be
started by the end of 2004. Another commenter stated that ICD-9-CM is
becoming increasingly difficult to update and progress should be made
on implementing ICD-10.
Response: We acknowledge that there are some concerns with the ICD-
9-CM code set. The National Committee on Vital and Health Statistics
(NCVHS) has recommended that DHHS, under its HIPAA responsibilities,
prepare a notice of proposed rulemaking regarding the proposed adoption
of ICD-10 as a HIPAA standard to replace ICD-9-CM. We are assessing the
NCVHS recommendations.
DHHS has been actively working on the development of new coding
systems to replace the ICD-9-CM. In December 1990, the 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.
16. Other Issues
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.
In the May 18, 2004, proposed rule, we indicated that we had
received further comments (discussed below) 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 had 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.
In the May 18, 2004, proposed rule, we discussed our examination of
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 indicated that we still do
not believe a proposal to modify the DRG assignment of unruptured
cerebral aneurysm cases is warranted.
We received one comment on this issue from an organization
representing hospitals. The commenter agreed that no change is
warranted for the DRG assignment of unruptured aneurysm cases at this
time.
(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.
In the May 18, 2004, proposed rule, we discussed our examination of
more

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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 charges for these cases in DRGs 1 and 2
were approximately $61,866 and $47,189, respectively. The average
charges for these cases were 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 stent 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 Diagnosis or With Use of a High Dose
Chemotherapeutic Agent), or DRG 481 (Bone Marrow Transplant). In the
proposed rule, we stated that we had examined these alternatives, and
had 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, in the May 18, 2004 proposed rule, we did not
propose to adopt any of these changes.
As discussed in the May 18, 2004 proposed rule, 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 FY 2003 MedPAR data
suggested 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 did not propose a specific change. However, we
stated that we would 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.
In our proposed rule (69 FR 28221), we invited comments and
suggestions regarding the appropriate DRG assignment for this
technology.
Comment: One comment agreed with the current DRG assignment of DRG
1 or 2 for GLIADEL[reg] cases.
Response: We appreciate the commenter's support for the current DRG
assignment for these cases.
Comment: Four commenters supported the reassignment of Gliadel[reg]
cases to DRG 528 (Intracranial Vascular Procedure With a Principal
Diagnosis of Hemorrhage). The commenters stated that the average cost
of a patient receiving Gliadel[reg] chemotherapy wafer treatment is
consistent with the average DRG 528 payments to providers. The
commenters also believed that treatment using the Gliadel[reg] wafer is
clinically consistent with the treatment under procedures currently
assigned to DRG 528.
Response: As we stated in the May 18, 2004 proposed rule (69 FR
28222), we do not believe that the GLIADEL[reg] cases meet the clinical
coherence criteria for inclusion in DRG 528. DRG 528 includes
hemorrhage or ruptured cerebral aneursym cases. While the surgical
approach may be similar to GLIADEL[reg], cases assigned to DRG 528
involve patients who have an acute condition with a high severity of
illness and a significantly higher rate of mortality during surgery
than GLIADEL[reg] cases (20.6 percent for DRG 528 cases compared to
3.15 for GLIADEL[reg] cases). In addition, the average charges for
cases in DRG 528, approximately $97,540, are significantly higher than
the average charges for GLIADEL[reg] cases in DRG 1, approximately
$61,866. Thus, we do not believe that GLIADEL[reg] cases and those
assigned to DRG 528 are clinically coherent and similar in resource
use. We continue to believe that reassigning GLIADEL[reg] cases to DRG
528 is inappropriate and would result in overpayment for GLIADEL[reg]
cases.
Comment: One commenter suggested that we reassign GLIADEL[reg]
cases to DRG 528 for FY 2005 and eventually create a DRG for
intracerebral therapies. The commenter proposed a new DRG that would
include implantation of a chemotherapeutic agent and seven new drugs
that are currently in FDA Phase II and III clinical trials and are
expected to receive FDA approval in 2 to 5 years. According to the
commenter, the new drugs are also indicated for glioblastoma multiforme
and the mode of therapy is

[[Page 48959]]

chemotherapy, radiotherapy, or brachytherapy.
Response: As we discussed above, we do not believe assignment to
DRG 528 is appropriate. We review DRG assignments every year and will
determine the appropriate assignment of the new technologies when it is
appropriate to do so.
Comment: Many commenters encouraged CMS to reassign Gliadel[reg]
chemotherapy wafer treatment to a new or higher paying DRG. The
commenters believed that higher payment would ensure access to life-
extending treatment for patients suffering from malignant brain tumors.
These commenters offered no specific recommendations on reassignment of
these cases to other DRGs.
Response: In this final rule, we are creating a new DRG that would
include implantation of chemotherapeutic agent (procedure code 00.10)
cases or cases in which an acute complex central nervous system
diagnosis was reported as the principal diagnosis. An example of an
acute complex diagnosis is an intracranial abscess. GLIADEL[reg]
chemotherapy wafer cases would be reassigned to this new DRG.
Although we did not propose this specific solution to the issue of
payment for GLIADEL[reg] in the proposed rule, we indicated that we
would continue to consider appropriate changes to the DRG assignment of
cases involving GLIADEL[reg]. Furthermore, we believe that the creation
of a new DRG for cases involving implantation of a chemotherapeutic
agent or cases with an acute complex central nervous system diagnosis
as the principal diagnosis ensures that GLIADEL[reg] cases are assigned
to a DRG that is clinically coherent and reflects the resources used to
treat these cases and appropriately addresses the concerns of those
commenters who raised questions regarding the DRG assignment for these
cases.
The new DRG 543 (Craniotomy with Implantation of Chemotherapeutic
Agent or Acute Complex Central Nervous System Principal Diagnosis) is
being placed in MDC 1. It was created from existing DRGs 1 and 2
(Craniotomy Age >17 With and Without CC, respectively) by removing
three types of patients based on their principal diagnosis. Therefore,
new DRG 543 will contain patients who undergo a craniotomy procedure
with a principal diagnosis belonging to one of the following three
categories:
1. Patients with a major central nervous system infection, such as
bacterial meningitis, encephalitis, or an intracranial abscess.
2. Patients with a subarachnoid hemorrhage, intracranial
hemorrhage, or an acute stroke.
3. Patients with central nervous system trauma resulting in brain
laceration or brain injury associated with an open head wound.
In addition, new DRG 543 will include cases involving treatment
using chemotherapeutic agents and devices implanted in the brain, such
as implantable chemotherapeutic wafers.
The cases remaining in DRGs 1 and 2 will be the following types of
patients:
1. Patients with chronic central nervous system conditions such as
malignancies, degenerative conditions, and cerebrovascular disease
without acute infarct.
2. Patients with subdural hematoma not associated with an open head
wound.
3. Patients with lesser degrees of central nervous system trauma,
such as skull fracture or other injury but without brain laceration.
Patients in new DRG 543 would, on average, consume more resources
because they require greater pre-operative and post-operative care, and
in many cases require more complicated operative procedures. The FY
2003 MedPAR data for the new DRG includes 5,413 cases with overall
average charges of approximately $63,409. These charges are similar to
the current average charges for Gliadel[reg] cases in DRG 1 of
approximately $61,866.
For FY 2005, we will be implementing new DRG 543 with the following
logic:
Craniotomy procedure from DRGs 1 and 2 and procedure code
00.10, Implantation of chemotherapeutic agent; or
Craniotomy procedure from DRGs 1 and 2 and principal
diagnosis of acute complex central nervous system listed below.

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BILLING CODE 4121-01-C
(3) DRG 3 (Craniotomy Age 0-17)
In the May 18, 2004, proposed rule, we addressed a comment we had
received 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 complications or comorbidities present, instead. We
stated that this analysis would require supplemental data from non-
MedPAR sources.
We noted in the proposed rule that the primary focus of updates to
the Medicare DRG classification system is on 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 did not believe a proposal to address the commenter's
request was warranted. We indicated that we are aware that the Medicare
DRGs are sometimes used to classify other patient populations. We
advised 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.
Comment: One commenter agreed that there does not appear to be a
need to address DRG 3 at this time. However, the commenter noted that
other payers, such as many Medicaid payers, reimburse based on DRG
groupings and requested that we consider those payers when addressing
proposed changes to the DRG system in the future.
Response: For this final rule, we will not be making any changes to
DRG 3. Decisions about the use of DRGs in Medicaid are made by the
states. As we stated previously, the primary focus of our updates to
the Medicare DRG classification system is on changes relating to the
Medicare patient population.
b. Coronary Stent Procedures
In the May 18, 2004, proposed rule, we addressed recommendations
that we had received 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)
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 appreciated 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

[[Page 48972]]

adequate reimbursement of cases requiring multiple stents. We also
agree that the recommendation has some merits and deserves further
study. However, as stated in the proposed rule, we believed that it was
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 for a little over a 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. In the proposed rule, we indicated that we would
consider this recommendation as we evaluate the current DRG structure
once adequate data on the current stenting DRGs become available. We
also stated in the proposed rule that we believe it is still premature
to undertake such a thorough restructuring of the stent DRGs.
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, as we stated in the proposed rule,
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 existing 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. As we stated in the proposed
rule, we believe that this recommendation may have merit, and we will
conduct a full analysis of the recommendation in comparison to the
other recommendation for DRG revision and 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 in the May 18,
2004 proposed rule, we used the December update of FY 2003 MedPAR data.
(As stated in the June 25, 2004 correction notice (69 FR 35921), there
have been a total of approximately 11,084 cases in DRG 526, and 48,097
cases in DRG 527, with adjustments made for transfers to other
facilities.) For computation of the final FY 2005 relative weights, we
are using the March FY 2004 update of the FY 2003 MedPAR data file for
cases in these two DRGs. No foreign data have been used to compute the
relative weights for DRGs 526 and 527 in FY 2005.
We received a number of comments concerning coronary stents, both
bare and drug-eluting in response to the May 18, 2004, proposed rule.
As noted above, we had discussed two external recommendations for
refinement or restructuring of the current coronary stent DRGs (69 FR
28222). At that time, we indicated that we believed that arguments for
change might have merit. However, as there was not an adequate database
upon which to structure a DRG revision, and because the two proposals
were so dissimilar, we indicated that we would continue to monitor the
coronary stent DRGs and would review the DRG structure once adequate
data became available. We will continue to review the data carefully
and will assess whether a revised DRG structure is appropriate when we
have more than 11 months of data experience. The FDA approved the drug-
eluting stent for use in April 2003. Therefore, our MedPAR payment data
collection began at that time.

[[Page 48973]]

Comment: Two commenters supported the complex vs. noncomplex case-
mix DRG pairs option. The commenters suggested that the complexities be
based on diagnoses of congestive heart failure, cerebral vascular
disease, renal failure, AMI, and the presence of a multiple vessel
procedure. (We believe that the commenter intended the latter
complexity to be the presence of 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) in the same inpatient episode.)
Response: We take this opportunity to clarify that we did not offer
a choice between two options in the proposed rule. We discussed the two
options that had been suggested to us. However, we determined that it
was premature to undertake a thorough restructuring of the four current
stent DRGs, both because the recommendations differed so completely
from each other and because we lacked data of adequate historical
duration with which to make a comprehensive analysis.
We note that FDA is in the process of determining the efficacy of
drug-eluting stents in high-risk patient clinical trials, and acute
myocardial infarction (AMI) has been identified as one of the high-risk
triggers. We do not believe it is appropriate to further use high-risk
triggers such as AMI to structure the stent DRGs until FDA's work is
complete.
Comment: One commenter recommended restructuring of the four
existing stent DRGs (DRG 516, 517, 526, and 527) by complex and
noncomplex components. Specifically, the commenter suggested replacing
the existing DRG structure that distinguishes between ``with and
without AMI'' and the presence of bare or drug-eluting stents with a
structure distinguishing between ``with and without complexity.'' In
performing its analysis, the commenter reviewed charges within each of
the four stent DRGs and then stratified the cases into groups with and
without the following comorbidities or procedural characteristics: a
principal diagnosis of AMI, or any secondary diagnosis of congestive
heart failure, renal failure, cerebrovascular disease, or cases
including code 36.05, reflecting multiple vessel procedure. The
commenter classified cases with the above characteristics as
``complex'' and cases without these characteristics as ``noncomplex.''
The commenter included the following table for comparison purposes:
[GRAPHIC] [TIFF OMITTED] TR11AU04.023

The commenter's conclusion was that a diagnosis of AMI, by itself,
was not an accurate reflection of the most resource-intensive
procedures associated with coronary stenting.
Response: We appreciate the considerable thought and study that
went into the analysis that was submitted. However, in reviewing the
comparison, we identified the similarities of the mean charges between
the current DRGs and the proposed complex DRGs, and the fact that in
every single comparison, the mean charges go down in the complex DRGs.
For example, according to the table, current DRG 516 has mean charges
of $41,788, while the proposed complex revision of DRG 516 has mean
charges of $41,762. This is a decrease of $26. Also, current DRG 526
has mean charges of $51,746, while the proposed complex revision of DRG
526 has mean charges of $51,054. This is a decrease of $692. These
results indicate to us that the current DRG structure is accurate in
terms of resource consumption.
In addition, we note that under the commenter's proposal, the
number of cases in the complex DRG categories, while the number of
noncomplex cases decreases. There would be a shift in the number of
cases per DRG, but each case would have lower average charges per case,
which would reduce the relative weight of all four DRGs. We are
hesitant to adopt this approach, given the comments and concerns that
reimbursement for stenting procedures is already under funded.
Comment: One commenter supported our proposal to maintain temporary
DRGS 526 and 527.
Response: We appreciate the commenter's support of these temporary
DRGs. In the FY 2003 IPPS final rule (67 FR 50004), we stated that we
expect that when claims data are available that reflect the use of
drug-eluting stents, we would combine drug-eluting stents cases with
other stent cases in DRGs 516 and 517. A change of that nature would be
subject to an analysis of the claims data to determine whether these
data reflect a significant reduction in the use of bare stents, due to
the overwhelming industry acceptance of the more efficacious drug-
eluting stent. At this time, with only 11 months of claims data, we
believe that changes to these DRG pairs would be premature. We will
continue our analysis and monitor the data for these cases.
Comment: One commenter expressed concern that the relative weights

[[Page 48974]]

published in Table 5 of the Addendum to the proposed rule (69 FR 28642)
were inadequate to cover the costs of procedures involving this
technology and might provide financial incentives for hospitals to use
less effective technologies (such as bare metal stents) or more
invasive coronary artery bypass graft (CABG) procedures for Medicare
beneficiaries.
Response: We note that the relative weights listed in Table 5 of
the proposed rule are based on MedPAR hospital charge data as of the
December 2003 update of the files, which were not as complete for FY
2003 as the data are now. The relative weights in this final rule are
based on the March FY 2004 update of the FY 2003 MedPAR file, and
reflect a more comprehensive picture of hospital charges. The final
weight for DRG 516 is 2.6457, for DRG 517 is 2.1106, for DRG 526 is
2.9741, and for DRG 527 is 2.3282.
We also point out that the DRG base rate computed using relative
weights is only part of the formula used to determine what each
hospital is paid for each case. Additional payment is made to each
hospital based on its unique structure, including indirect medical
education, area wage levels, disproportionate share adjustment, and any
applicable cost-of-living adjustments in Alaska and Hawaii. Hospitals
may also receive outlier payments for certain cases involving
extraordinary high costs.
We are concerned by the comment regarding the provision of CABG
procedures when less appropriate to the patient than drug-eluting
therapy. One commenter believed the conversion from CABG to drug-
eluting stent therapy has already begun and cited MedPAR data to prove
its point. These data show that during the first quarter of full drug-
eluting stent availability (July, August, and September 2003), Medicare
CABG discharges declined 9.3 percent from the same quarter in the
previous year. The commenter also noted a corresponding increase in
stenting procedures.
In addition, it has come to our attention that there may be some
coding errors that are contributing to an erroneous data and
reimbursement case-mix profile for hospitals. Specifically, it has been
suggested that some hospitals may be reluctant to include a code for
vessel angioplasty in conjunction with stent placement. Apparently some
hospital staff have expressed concerns that a ``true'' angioplasty is
not being performed, and that they will therefore be censured by
regulatory agencies for erroneous coding. Therefore, these hospitals
have instructed their coding staff not to include a code describing
angioplasty of a vessel and only to include a code for insertion of a
stent or stents.
This action is not proper. The AHA publication, Coding Clinic for
ICD-9-CM, Fourth Quarter, 1996, specifically instructs that a code for
angioplasty, by any technique, be used when an angioplasty is performed
in the placement of a stent or stents (page 63). Therefore, the correct
coding for insertion of coronary stent(s) requires two codes. One code
describes the angioplasty: 36.01 (Single vessel percutaneous
transluminal coronary angioplasty [PTCA] or coronary atherectomy
without mention of thrombolytic agent); 36.02 (Single vessel
percutaneous transluminal coronary angioplasty [PTCA] or coronary
atherectomy with mention of thrombolytic agent); or 36.03 (Open chest
coronary artery angioplasty, or 36.05. The second code describes which
stent was inserted: either 36.06 (Insertion of non drug-eluting
coronary artery stent(s)) or 36.07 (Insertion of drug-eluting coronary
artery stent(s)). Failure to record the angioplasty procedure will
result in assignment of the case to the medical DRG instead of the
correct surgical DRG. This erroneous coding action will have an impact
on many levels. It will result in incorrect data in the database, which
in turn will result in an erroneous base upon which future DRG relative
weights are calculated. In addition, in the short term, it will result
in reduced revenue to the hospitals because of the incorrect DRG
assignment for all cases in which incorrect coding occurs.
Comment: One commenter indicated that there is a disincentive for
the insertion of multiple drug-eluting stents placed during the same
inpatient admission. This commenter indicated that there might be
pressures on physicians to bring patients back for an additional stent
procedure on a subsequent admission. Another commenter suggested that,
as an interim approach, code 36.05 be used as a trigger for DRG
assignment to a newly created DRG, or act as a trigger for an add-on
payment for each stent. The commenter's justification for this
suggestion was that, because current medical practice indicates that
over 85 percent of balloon angioplasties currently involve a concurrent
insertion of a stent, code 36.05 could serve as a good surrogate code
until such time as new codes are created and available for use.
Response: One of the suggestions received that we discussed in the
proposed rule recommended that two new DRGs be created based on
multiple-vessel procedures with drug-eluting stent(s) and the presence
or absence of an AMI. The suggester's argument was that the presence of
code 36.05, which shows treatment of multiple vessels, also indicates
that more than one stent was inserted. We considered this assertion in
the proposed rule because we recognize that current ICD-9-CM codes do
not adequately describe the insertion of more than one stent. However,
as we discussed in the proposed rule, we believe that the presence of
code 36.05 only indicates that more than one vessel was surgically
treated. It does not indicate that more than one stent was placed in
all cases. We reiterate that no conclusions can be drawn regarding the
number of stents inserted based upon the number of vessels treated.
Therefore, we are not prepared to make DRG adjustments based on the
commenter's assertion. In addition, we are not prepared to assume that
the presence of code 36.05 is solely responsible for any higher charges
associated with these cases.
We do believe that there is a need to further identify the
insertion of multiple stents and will work with industry
representatives to conceptualize the most appropriate ICD-9-CM
procedure code or codes to capture this data. The topic of a new code
or codes for multiple stent insertion will be addressed at the October
7, 2004 ICD-9-CM Coordination and Maintenance Committee meeting at CMS'
headquarters in Baltimore, MD.
Comment: One commenter expressed concern about the implication of
maintaining separate and distinct DRGs for drug-eluting stents and
encouraged CMS to consider fully the impact on less expensive
technologies, such as intravascular brachytherapy (IVBT). IVBT is the
use of vascular radiation delivered inside an artery to reduce the
incidence of restenosis. The commenter noted that the DRG system should
not create financial incentives to use drug-eluting stents when the
clinical outcomes and costs of other treatments are similar or better
in the appropriate patient populations.
Response: As we have stated above in response to other comments, in
the absence of more complete data and without thorough evaluation, we
are reluctant to undertake any restructuring of these four DRGs (516,
517, 526, and 527) for FY 2005. Therefore, these DRGs will continue to
be structured as they currently are. In the upcoming fiscal year, as in
the past, we will be closely monitoring our own data, outside data, and
any FDA decision on the efficacy of stent placement in a high-risk AMI
population. We will also consider

[[Page 48975]]

alternative therapies, such as IVBT, as part of that process.
c. Severe Sepsis
In the May 18, 2004, proposed rule, we addressed a comment we had
received 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, in the May 18, 2004, proposed rule, we did
not propose any change to the current DRG structure for sepsis.
Comment: Several commenters agreed with our proposal not to create
a new DRG for severe sepsis. Some of the commenters mentioned coding
problems that exist with new codes 995.90 through 995.94 that were
created to capture Systemic Inflammatory Response Syndrome (SIRS). The
commenters acknowledged that the codes were specifically created to
capture severe sepsis. However, they indicated that there has been much
confusion among coders in their use. The commenters mentioned coding
notes included in the ICD-9-CM book that appear to be contradictory.
The commenters agreed that it was not appropriate to modify the DRGs at
this time, given the uncertainty about the use of the SIRS codes and
the accuracy of the reported data.
One commenter recommended continued monitoring of the population
with severe sepsis in the future. Another commenter supported our
proposal not to create a new DRG for severe sepsis, given the data and
information provided.
Response: We agree with the commenters that there has been
confusion in the correct use of the SIRS codes based on use of the ICD-
9-CM code book. The related section of the ICD-9-CM code book is being
revised on October 1, 2004, to help resolve this confusion. Additional
coding instructions are also being developed on the correct use of
these codes. These instructions will be published in the American
Hospital Association's Coding Clinic for ICD-9-CM. These actions should
lead to more consistency in identifying and reporting cases of severe
sepsis. Once this information is available, CMS will review the data to
determine any needed modifications to the DRG to better capture severe
sepsis. We agree with the commenters that we should not create a new
DRG for severe sepsis based on the currently available data, and that
we should continue to monitor the population with severe sepsis in
order to better characterize resource utilization in these patients.
Comment: One commenter expressed disagreement with our decision not
to modify the DRGs to capture severe sepsis. The commenter asserted
that using the accepted definition of severe sepsis--``a systemic
inflammatory response to infection associated with acute organ
dysfunction''--was adequate to identify patients for the purpose of
creating new DRGs. The commenter also asserted that severe sepsis is
common, deadly, and costly; that it involves extensive use of intensive
care unit resources; and that it is inadequately represented by the use
of ICD-9-CM procedure code 00.11(Infusion of diotrecogin alfa
(activated)).
Response: We agree with the commenter that severe sepsis is a
common, deadly, and costly clinical entity. We also acknowledge that
the current coding for all forms of sepsis is problematic. We believe
that the creation of code 00.17 (Infusion of vasopressor agent), which
goes into effect on October 1, 2004, in combination with code 00.11 and
the SIRS codes 995.90 through 995.94, will help to better identify
patients with severe sepsis. We also note, as mentioned above, that
improved and modified coding instructions and guidelines will be
available in October 2004. However, we continue to believe that a
separate DRG for severe sepsis is not appropriate at this time based on
the available data. We believe that the defining criteria for severe
sepsis, using the currently available ICD-9-CM codes, are not specific,
accurate, or unique enough to warrant a new DRG classification.
However, we anticipate receiving data using the new and modified codes
and instructions and will consider this issue again in the future.
Comment: One commenter disagreed with our decision not to create a
new DRG for severe sepsis. The commenter urged CMS to ``recognize
severe sepsis as a clinically coherent condition associated with high
mortality and a patient population displaying similar characteristics
in terms of outcome and costs incurred for treatment, which thereby
deserves its own DRG.'' The commenter asserted that the current DRG for
sepsis uses the clinically obsolete term ``septicemia.'' The commenter
also stated that severe sepsis cases now classify to 339 different
DRGs; however, these DRGs do not distinguish between cases with and
without severe sepsis. The commenter believed that payment for cases in
which severe sepsis occurs is inadequate and urged us to work closely
with the Critical Care Work Group in the development of a new DRG.
Response: We agree with the commenter that severe sepsis cases fall
into a wide spectrum of DRGs, and therein lies the problem. The ICD-9-
CM coding system has lacked the requisite specificity and accuracy
needed to identify patients with severe sepsis. While new codes were
created specifically for this purpose (codes 995.90 through 995.94),
coders have had difficulty in consistently using the codes. We have
worked closely with the Centers for Disease Control and Prevention to
make refinements to the coding notes and instructions so that these
codes can be more consistently applied. These revised notes and
instructions will go into effect on October 1, 2004. We believe that
when more consistent data are submitted, we will have the necessary
information to propose further refinements in the DRGs to better
capture severe sepsis. As mentioned before, CMS will closely monitor
the classification of patients with severe sepsis in the near future,
particularly with regard to the use of other codes commonly reported
for patients with severe sepsis such as new

[[Page 48976]]

code 00.17 (Infusion of vasopressor agent) and code 00.11 (Infusion of
diotrecogin alfa (activated)). We will also work closely with the
American Hospital Association and the American Health Information
Management Association on their efforts to provide education to coders
in the correct use of the severe sepsis codes (SIRS codes 995.90
through 995.94).
Comment: One commenter believed that CMS was shortsighted in its
failure to create a new DRG for severe sepsis. The commenter also noted
that severe sepsis is a widespread and deadly disease that has been
defined since 1992, and that severe sepsis cases currently classify
into 339 DRGs. The commenter asserted that grouping these cases
together in at least one DRG would enhance hospitals and practitioners'
ability to understand the disease and its treatment as well as to
evaluate the costs of care. This commenter further asserted that only a
small proportion of patients with severe sepsis and organ dysfunction
are assigned to DRG 416 (Septicemia Age >17) and DRG 417 (Septicemia
Age 0-17), and that a large number of surgical cases with severe sepsis
are ignored. The commenter also noted that cases of severe sepsis that
develop after admission typically are classified in other DRGs.
This commenter mentioned the set of proposed criteria put forth by
another commenter to define severe sepsis (``a systemic inflammatory
response syndrome associated with organ dysfunction, hypoperfusion, or
hypotension'') and asserted that this definition has been widely
accepted within the international clinical community, that it is
encompassed by code 995.92 (Systemic inflammatory response syndrome due
to infectious process with organ dysfunction), and that it should be
used to identify patients for classification to a new DRG.
Response: As mentioned earlier, we recognize that severe sepsis is
a widespread and deadly disease that accompanies a wide spectrum of
other diagnoses. We also recognize that it frequently develops after
admission, and that it is a frequent complication of surgical cases. In
addition, we recognize that current coding practices are problematic,
and we look forward to better refining our ability to identify patients
with severe sepsis by using codes 00.11 and 00.17 and the SIRS series
of codes. We look forward to working with groups represented by the
commenters in the future to optimize the DRG system to best serve this
important Medicare patient population.
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.
As indicated in the May 18, 2004, proposed rule, we 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. As part of CMS' coverage decisions, we are considering whether
to restrict the use of complex defibrillators to patients for whom they
are medically necessary, that is, the population at low-moderate risk
for sudden cardiac death.
Given the potential increase of implantable defibrillator use in
our population, in the May 18, 2004, proposed rule, we solicited input
on how to encourage physicians to use the simpler, less costly device
when advanced devices are not medically preferred. We also solicited
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 solicited 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 final rule. We
discuss comments regarding payments for these devices in that section.
e. Intestinal Transplantation
Even though we did not address the issue of DRG payment for
intestinal transplantation in the May 18, 2004, proposed rule, we
received a comment from an institution that performs intestinal
transplantation.
Comment: The commenter expressed concern that the current payment
policy utilizes a relatively low weight DRG that imposes a significant
financial burden on health care providers. The commenter requested a
new DRG for each of three main types of intestinal transplantation:
isolated intestine, liver plus intestine, and multivisceral (liver,
stomach, duodenum, pancreas, and small bowel).
Due to the small patient population associated with these
transplantations, the commenter suggested that CMS lower the number of
cases required to create a new DRG. In addition, the commenter
suggested that CMS utilize

[[Page 48977]]

data on non-Medicare patients and the pediatric population to
supplement current MedPAR data.
Response: We have been monitoring intestinal transplantation cases
since October 2000, when Medicare issued a national coverage decision
for this transplant, to determine whether it may be appropriate to
establish a new DRG. An ICD-9-CM procedure code 46.97 (Transplant of
intestine) was created in October 1, 2000, to uniquely capture isolated
intestinal transplantation. Acquisition cost centers were established
for intestines and multivisceral organs to be paid on a reasonable cost
basis. Based on our past annual reviews, we did not find a sufficient
number of cases to warrant the creation of a new DRG. The commenter
provided some rationale for the absence of cases, including the time
lag between the actual transplant date and the submission of the bill
and the limited patient population involved.
If an intestinal transplantation alone is performed on a patient
with a principal diagnosis in MDC 6 (Diseases and Disorders of the
Digestive System), the case would be assigned to either DRG 148 (Major
Small & Large Bowel Procedures With CC) or DRG 149 (Major Small & Large
Bowel Procedures Without CC). If an intestinal transplantation was
performed and the patient required a tracheostomy, the case would be
assigned to DRG 483 (Tracheostomy With Mechanical Ventilation 96+ Hours
or Principal Diagnosis Except Face, Mouth & Neck Diagnosis). In cases
where multiple surgical procedures are performed, the case is assigned
to the DRG associated with the most resource-intensive surgical class.
If an intestinal and liver transplantation were performed
simultaneously, the case would be assigned to DRG 480 (Liver
Transplant). It is not uncommon that a liver transplant would be
performed with an intestinal transplant. If a multivisceral
transplantation is performed, the case is also assigned to DRG 480.
Based on our review of the FY 2003 MedPAR data, we identified six
cases with procedure code 46.97 all performed at one facility. We are
concerned that only one facility's data is contained in the MedPAR file
when there are five Medicare-approved intestinal transplant centers. Of
the six cases, three cases were assigned to DRG 148, with total charges
ranging from $839,802 to $903,518 and an average length of stay of 36
days. Two cases were assigned to DRG 483. One case was assigned to DRG
154 (Stomach, Esophageal, & Duodenal Procedures Age >17 With CC)
because, in addition to the intestinal transplantation, there was
another operation on the stomach. The total charge for the one case in
DRG 154 was $1,105,627, with a length of stay of 32 days.
We are open to receiving non-MedPAR data but would limit the data
to Medicare patients, rather than using non-Medicare data as suggested
by the commenter. We believe that, if we received data from the five
approved intestinal transplant centers regarding all Medicare patients
receiving intestinal transplantations during the fiscal year, the
minimum requirement of cases may be met. When we receive sufficient
data, we will again consider a separate intestinal transplant DRG.
We agree that payment for isolated intestinal transplant is too low
in DRGs 148 and 149. The average payments for DRGs 148 and 149 are
approximately $15,314 and $6,567, respectively. As mentioned earlier,
it is not uncommon for an intestinal transplant to be performed in
conjunction with transplants of other organs, such as the liver. As a
matter of fact, intestinal transplants are assigned to DRG 480 now
since these patients frequently have both an intestinal transplant and
a liver transplant. Therefore, DRG 480 already contains cases with
intestinal transplants. Therefore, we would not be disrupting the
clinical cohesiveness of DRG 480 by adding intestinal transplant.
Furthermore, intestinal transplantation has become a definitive
treatment for patients with short gut syndrome and intestinal diseases
who no longer can be maintained on total parenteral nutrition (TPN).
Liver failure may be induced by TPN. The average charges for DRG 480
are approximately $157,129. While the total charges for intestinal
transplantation are higher than the average charges for DRG 480, we
believe that DRG 480 is a better assignment of these cases.
Given this practice, we are moving intestinal transplantation cases
out of DRGs 148 and 149 and into DRG 480 (Liver Transplant), effective
FY 2005. ICD-9-CM procedure code 46.97 will be assigned to pre-MDC, DRG
480. The title for DRG 480 will change to ``Liver Transplant and/or
Intestinal Transplant''. The result of this reassignment would move
intestinal transplant cases from a weight of 3.3871 in DRG 148 and
1.4352 in DRG 149 to a weight of 9.8696. We are aware that, with this
change, the three main types of intestinal transplantation; isolated
intestine, liver plus intestine, and multivisceral, will be assigned to
DRG 480. We will continue to monitor intestinal transplantation to
determine appropriate assignment of these cases.
f. Cochlear Implants
Even though we did not specifically address issues relating to the
DRG payment for cochlear implants in the May 18, 2004, proposed rule,
we received public comments on this area.
Comment: One commenter expressed concern about the low
reimbursement for cochlear implants. Cochlear implants are currently
assigned to DRG 49 (Major Head and Neck Procedures). The commenter
stated that cochlear implants represent the only procedure in DRG 49
involving implantation of a high cost medical device. It was stated
that the acquisition cost alone represent 85 percent of the total cost
of the procedure. The commenter noted that although CMS has
acknowledged the disparity between payment and cost and vowed to
further evaluate possible reclassification options for cochlear
implants, nothing has been done to mitigate this payment shortfall.
Response: Although cochlear implants was not addressed in our May
18, 2004 proposed rule, we have continued to monitor these cases. In
our analysis of the FY 2003 MedPAR file, we found 120 cochlear implant
cases with average charges of approximately $44,366. There were a total
of 1,602 cases assigned to DRG 49 with average charges of approximately
$24,971. Cochlear implant cases represent more than 7 percent of the
total cases in DRG 49.
We have been unable to identify an alternative DRG assignment for
these cases. As we discussed in the August 1, 2003, final rule (68 FR
45367), we continue to believe that assignment of cochlear implant
cases to DRG 482 (Tracheostomy for Face, Mouth and Neck Diagnoses) is
inappropriate. A tracheostomy must be performed in order for the case
to be assigned to this DRG. We remain reluctant to create a new DRG for
specific, low-volume procedures. Doing so would create a proliferation
of DRGs and a loss of some of the efficiency incentives inherent in the
current system.
g. Artificial Hearts
Comment: One commenter requested that newly created procedure codes
37.52 (Implantation of total replacement heart system), 37.53
(Replacement or repair of thoracic unit of total replacement heart
system), and 37.54 (Replacement or repair of other implantable
component of total replacement heart system) be assigned to DRG 103
instead of DRG 525.

[[Page 48978]]

Response: Codes 37.52, 37.53, and 37.54 are not new codes. They
were created for the October 1, 2003 ICD-9-CM update. In the proposed
rule, CMS discussed the restructuring of DRG 525 (69 FR 28208) and
further listed the codes that were included in that DRG. Codes 37.52,
37.53, and 37.54 are part of that list. We did not propose the addition
of codes 37.52, 37.53, or 37.54 to DRG 525 for FY 2005. These codes
were assigned to DRG 525 upon their formation, as it is our practice to
assign all codes to DRGs when they are created. We take this
opportunity to note that Medicare does not cover the use of an
artificial heart as a permanent replacement for a human heart or as a
temporary life-support system until a human heart becomes available for
transplant. Therefore, we believe that a DRG reassignment would be
inappropriate at this time. No DRG assignment changes will be made to
codes 37.52, 37.53, or 37.54 for FY 2005.
h. Left Atrial Appendage Devices: DRG Assignment for New Code 37.90
The issue of the DRG assignment of new code 37.90 (Insertion of
left atrial appendage device) was not presented as a topic in the May
18, 2004, proposed rule. At the April 1, 2004, ICD-9-CM Coordination
and Maintenance Committee meeting, we discussed these devices. A new
code was created for use in upcoming clinical trials and was fast-
tracked so that the code could be used beginning October 1, 2004, for
discharges for FY 2005. The new code is listed in Table 6B of the
Addendum (69 FR 28672 in the proposed rule). Table 6B represents a
listing of approved final new codes. The codes themselves are not
subject to comment but their assignment regarding placement as an O.R.
procedure and the MDC and DRG placement are open to comment. As
discussed elsewhere in this preamble, the announcement of the adoption
of the codes as final in the IPPS proposed rule is included in the ICD-
9-CM Coordination and Maintenance Committee meeting process.
Background: Atrial fibrillation is a common heart rhythm disorder
that can lead to cardiovascular blood clot formation leading to
increased risk of stroke. According to product literature, nearly all
strokes are from embolic clots arising in the left atrial appendage of
the heart; an appendage for which there is no useful function. Standard
therapy uses anticoagulation drugs. However, these drugs may be
contraindicated in certain patients and may cause complications such as
bleeding. The underlying concept behind the left atrial appendage
device is to block off the left atrial appendage so that blood clots
formed therein cannot travel to other sites in the vascular system. The
device is implanted using a percutaneous catheter procedure under
fluoroscopy through the femoral vein. Implantation is performed in a
hospital catheterization laboratory using standard transseptal
technique, with the patient generally under local anesthesia. The
procedure takes approximately one hour, and most patients stay
overnight in the hospital.
We received several comments concerning the proposal to assign new
code 37.90 to DRG 518 (Percutaneous Cardiovascular Procedure Without
Coronary Artery Stent or AMI).
Comment: All of the commenters discussed the surgical technique
required for insertion of the device and cited the risk and complexity
of the procedure, especially due to the transseptal catheterization
required. The commenters noted that because comparatively simple
procedures are already grouped to DRG 518, DRG 518 does not reflect the
resources used in this procedure. The commenters suggested that
insertion of a left atrial appendage device more closely resembles the
insertion of an atrial septal defect occluder.
Response: Insertion of an atrial septal defect occluder would be
coded to the 35.xx series of ICD-9-CM procedure codes. DRG 108 includes
code 35.52 (Repair of atrial septal defect with prosthesis, closed
technique) which may be similar to insertion of the left atrial
appendage device. Codes in the 35.xx series are assigned to DRG 108
(Other Cardiothoracic Procedures). We reviewed the MedPAR data and
found the following:
[GRAPHIC] [TIFF OMITTED] TR11AU04.024

Because code 37.90 was created for use beginning on October 1,
2004, we have no data history regarding its utilization. However, given
that the atrial appendage device is percutaneously inserted, and that
most of the procedures in DRG 108 are open chest procedures, we do not
believe that DRG 108 is the most appropriate clinical placement for new
code 37.90. In addition, review of the data in the table above shows a
large variance between the hospital charges and length of stay between
DRG 518 and DRG 108. According to one manufacturer, the projected
length of stay for insertion of an atrial appendage is overnight for
observation purposes. The many open chest procedures in DRG 108, some
requiring the use of cardiopulmonary bypass, would also seem to
indicate that DRG 108 is not the best choice for clinical coherence. We
are disinclined to assign this new code to such a resource intensive
DRG without appropriate data to reinforce and justify such a decision.
Therefore, we are maintaining the assignment of code 37.90 to DRG 518
in this final rule.
Review of code 35.52 (Repair of atrial septal defect with
prosthesis, closed technique) in the table above shows a decided
similarity to the cases found in DRG 518. We will analyze the placement
of code 35.52 as part of next year's proposed rule. We will analyze
these cases for both clinical coherence and charge data as part of the
process of identifying the most appropriate DRG assignment for code
35.52.
i. Carotid Artery Stents
DRG Assignment for New Codes
At the April 1, 2004, ICD-9-CM Coordination and Maintenance
Committee meeting, we discussed creation of a new code or codes to
identify carotid artery stenting, along with a concomitant percutaneous
angioplasty or atherectomy (PTA) code for delivery of the stent(s).
This subject was addressed in response to the need to identify carotid
artery stenting for use

[[Page 48979]]

in clinical trials in the upcoming fiscal year. Public comment
confirmed the need for specific codes for this procedure.
Implementation of the code was fast-tracked so that the code could be
used beginning October 1, 2004, for discharges in FY 2005 for patients
who are enrolled in an FDA-approved clinical trial and are using on-
label FDA approved stents and embolic protection devices.
The newly created codes 00.61 (Percutaneous angioplasty or
atherectomy of precerebral (extracranial vessel(s)) and 00.63
(Percutaneous insertion of carotid artery stent(s)) were published in
Table 6B, New Procedure Codes in the proposed rule (69 FR 28671). Table
6B in the proposed rule represents final codes and the codes themselves
were not subject to comment, as the notice and comments are part of the
ICD-9-CM Coordination and Maintenance Committee process. However, their
assignment regarding placement as an OR procedure, as well as MDC and
DRG placement, were open to public comment.
New code 00.61 was assigned to four MDCs and seven DRGs. The most
likely scenario will have cases being assigned to MDC 1 (Diseases and
Disorders of the Nervous System in DRGs 533 (Extracranial Procedures
With CC) and 534 (Extracranial Procedures Without CC). Cases could also
be assigned to MDC 5 (Diseases and Disorders of the Circulatory
System), MDC 21 (Injuries, Poisoning, and Toxic Effects of Drugs), and
MDC 24 (Multiple Significant Trauma). The less likely DRG assignments
can be reviewed in Table 6B in the Addendum to this final rule.
Background: Stroke is the third leading cause of death in the
United States and the leading cause of serious, long-term disability.
Approximately 70 percent of all strokes occur in people age 65 and
older. The carotid artery is located in the neck and is the principal
artery supplying the head and neck with blood. Accumulation of plaque
in the carotid artery can lead to stroke either by decreasing the blood
flow to the brain or by having plaque break free and lodge in the brain
or in other arteries to the head. The PTA procedure involves inflating
a balloon-like device in the narrowed section of the carotid artery to
reopen the vessel. A carotid stent is then placed in the artery to
prevent the vessel from closing and to prevent pieces of plaque from
entering the bloodstream.
Effective July 1, 2001, Medicare covers PTA of the carotid artery
concurrent with carotid stent placement when furnished in accordance
with the FDA-approved protocols governing Category B Investigational
Device Exemption (IDE) clinical trials. PTA of the carotid artery, when
provided solely for the purpose of carotid artery dilation concurrent
with carotid stent placement, is considered to be a reasonable and
necessary service only when provided in the context of such clinical
trials, and therefore is considered a covered service for the purposes
of these trials. Performance of PTA in the carotid artery when used to
treat obstructive lesions outside of approved protocols governing
Category B IDE clinical trials remains a noncovered service.
We received several comments concerning the proposed assignment of
new code 00.61 to MDC 1, DRG 533 and DRG 534.
Comment: All commenters suggested that instead of code 00.61
grouping to both DRGs 533 and 534, the cases should only be assigned to
DRG 533. Commenters have suggested that the patients in Category B IDE
clinical trials will not have the kinds of CCs that would assure
assignment to DRG 533. Commenters cited other complications such as
bilateral occlusion, certain anatomical conditions such as a
``surgically hostile neck,'' and complex diseases, as complications in
their cases. However, most of the CCs cited by the commenters are not
able to be captured using current ICD-9-CM codes, and therefore would
not contribute to the assignment of these cases to DRG 533.
All of the commenters stated that the payment for DRG 534 is
inadequate, but did not furnish data regarding the cost of the stent(s)
and the embolic protection devices, possibly because these devices are
still in the trial stage and no hospital costs have yet been
established. Two commenters stated that they knew of reports that a
number of sites in one of the clinical trials have indicated a
reluctance to enroll patients due to the low level of payment under DRG
534. One commenter reviewed cases in the FY 2002 MedPAR data file and
noted that the cases are primarily clinical trial cases that do not
include a charge for the carotid stent and embolic protection device.
Therefore, the commenter added, the reported hospital charges
significantly understate the charges that would be associated with the
carotid stenting procedure in a nonclinical trial setting.
Response: As we have created code 00.61 for use beginning October
1, 2004, we have no data history regarding its utilization.
In FY 2003, any carotid stenting procedures performed would have
been assigned to DRG 5. Insertion of a carotid stent or stents was a
procedure for which there was no specific coverage decision. In
addition, the ICD-9-CM codes describing insertion of a stent were
nonspecific, and the codes used to describe that procedure also applied
to many other procedures for which there was a coverage decision. The
commenter is correct that any cases in our data may have been performed
within the setting of a clinical trial. In FY 2004, we restructured DRG
5, splitting all those cases into DRGs 533 and 534, and ordered the
DRGs based on the presence or absence of CCs. When we reviewed the
available MedPAR data, we used the following proxy: Principal diagnosis
code 433.10 (Occlusion and stenosis of carotid artery, without mention
of cerebral infarction), and procedure codes 39.50 (Angioplasty or
atherectomy of noncoronary vessel), plus code 39.90 (Insertion of
nondrug-eluting, noncoronary artery stent(s)). The following table
shows the results of our review:

[[Page 48980]]

[GRAPHIC] [TIFF OMITTED] TR11AU04.025

When we evaluated the data in the above table, we found relative
weights have increased for DRG 533 over the past two reporting periods
compared to the cases in DRG 5. In addition, we found that, although
the hospital charges had increased between reporting years 2002 and
2003, the charges were within the mean and .75 standard deviation. As
the DRG system is one of averages, we are reassured that this payment
structure is appropriate.
The FDA has not given final approval to the safety and efficacy of
carotid PTA with stenting as clinical trials are still ongoing. CMS has
not yet approved this procedure and device under Medicare, outside of
the clinical trial setting. To reiterate, specific codes were recently
created and have not yet been put into use in hospitals. We believe
that the data that we have reviewed in DRGs 5, 533, and 534 are
reasonably correct regarding hospital charges for this procedure. We
believe that adjusting the IPPS system for a specific device that has
not been used outside the clinical trial setting, without
substantiating data, obviates the intent of the diagnosis-related
groups. Therefore, we believe the assignment of code 00.61 to DRGs 533
and 534 as proposed is appropriate at this time. We will continue to
monitor DRGs 533 and 534 and procedure codes 00.61 in combination with
00.63 in upcoming annual DRG reviews.
At the April 1, 2004, ICD-9-CM Coordination and Maintenance
Committee Meeting, we also created procedure codes 00.62 (Percutaneous
angioplasty or atherectomy of intracranial vessel(s), 00.64
(Percutaneous insertion of other precerebral (extracranial) artery
stent(s), and 00.65 (Percutaneous insertion of intracranial vascular
stent(s). We assigned procedure code 00.62 to the same MDCs and DRGs as
code 00.61, mimicking the DRG assignment for predecessor codes.
Comment: One commenter encouraged CMS to assign intracranial
angioplasty cases containing procedure code 00.62 to DRGs 1 and 2
instead of DRGs 533 and 534. The commenter believed that DRGs 1 and 2
better reflect the grouping logic for clinical homogeneity and resource
utilization.
Response: When new ICD-9-CM codes are created, they are
automatically assigned to an MDC and a DRG(s). We generally assign new
codes to the predecessor DRGs until we have compelling MedPAR data that
indicate otherwise. In the case of code 00.62, the point is moot.
Medicare does not cover PTA of intracranial vessels, and we are not
aware of any clinical trials during the upcoming fiscal year. We refer
readers to the discussion of changes to Edit 11 (Non-Covered
Procedures) of the Medicare Code Editor under section II.B.10. of this
preamble. Therefore, in the absence of compelling evidence, we are not
making any changes to the MDC or DRG assignments of code 00.62.
In addition, it has come to our attention that there may be some
coding errors that are contributing to an erroneous reimbursement case-
mix profile for hospitals. Specifically, it has been suggested that
some hospitals may be reluctant to include a code for vessel
angioplasty in conjunction with stent placement. Apparently, some
hospital staff have expressed concerns that a ``true'' angioplasty is
not being performed, and that, therefore, they will be censured by
regulatory agencies for erroneous coding. As a result, these hospitals
have instructed their coding staff not to include a code describing
angioplasty of a vessel, and to only include a code for insertion of a
stent or stents.
This is incorrect. The AHA publication Coding Clinic for ICD-9-CM
specifically instructs that a code for angioplasty, by any technique,
is performed in the placement of a stent or stents (Fourth Quarter,
1996, page 63). Therefore, the correct coding for insertion of coronary
stent(s) requires two codes. One code describes the angioplasty with
00.61, and the second code describes the stent insertion with code
00.63. To fail to record the angioplasty procedure will result in
assignment of the case to the medical DRG instead of the correct
surgical DRG. This erroneous coding action will have an impact on many
levels. It will result in incorrect data in the database, which in turn
will result in an erroneous base upon which future DRG relative weights
are calculated. In addition, in the short term, it will result in
reduced revenue to the hospital because of the incorrect DRG assignment
for all cases in which this occurs. To reiterate, the correct procedure
coding for insertion of a carotid stent combines codes 00.61 and 00.63.

[[Page 48981]]

j. Acute Intermittent Porphyria
In the May 18, 2004 IPPS proposed rule, we did not present as an
issue the DRG assignment of the code used for acute intermittent
porphyria. However, we did receive one comment concerning this
condition.
Comment: One commenter requested that we give consideration to
assignment of a DRG to an orphan biologic intended to treat acute
intermittent porphyria. This condition is a rare metabolic disorder
affecting fewer than 1,000 persons in the United States. The drug
manufacturer was concerned that Medicare hospitalization payments do
not accurately reflect the cost of the treatment. The condition is
coded to Code 277.1 (Disorders of porphyrin metabolism) and is assigned
to DRG 299 (Inborn Errors of Metabolism).
Response: The DRG assignment of code 277.1 was not an issue that
was addressed in the May 18, 2004 proposed rule. We will take this
comment into consideration in the future as we conduct analysis of the
MedPAR data for next year's proposed rule.

C. Recalibration of DRG Weights

As we proposed, in this final rule, we used 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 have recalibrated
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 final rule include discharges occurring between October 1,
2002, and September 30, 2003, based on bills received by CMS through
March 31, 2004, from all hospitals subject to the IPPS and short-term
acute care hospitals in Maryland (which are under a waiver from the
IPPS under section 1814(b)(3) of the Act). The FY 2003 MedPAR file
includes data for approximately 11,740,557 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 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.
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 new weights are normalized by an adjustment factor of 1.46795
so that the average case weight after recalibration is equal to the
average case weight before recalibration. This 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 used that same case threshold in
recalibrating the final DRG weights for FY 2005. Using the FY 2003
MedPAR data set, there are 41 DRGs that contain fewer than 10 cases. We
computed 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 final rule, we are making a
budget neutrality adjustment to ensure that the requirement of section
1886(d)(4)(C)(iii) of the Act is met.
Comment: Two commenters addressed the proposed DRG weights for
three DRGs. One commenter was appreciative of the increased proposed
DRG weight for DRG 36 (Retinal Procedures). The current DRG weight is
0.6298 and the proposed weight was 0.6766. Another commenter expressed
concern that the proposed weights for DRGs 535 (Cardiac Defibrillator
Implant With Cardiac Catheterization With AMI, Heart Failure, or Shock)
and DRG 536 (Cardiac Defibrillator Implant With Cardiac Catheterization
Without AMI, Heart Failure or Shock) believes this would not cover the
cost of the Cardiac Resynchronization Therapy Defibrillator (CRT-D),
much less the procedure and nursing care costs associated with these
procedures. The commenter believed that the DRG weight data are
problematic because they are based on hospital charges. The commenter
stated that hospitals do not like to mark up the cost of an item at
$34,000. The commenter inquired whether CMS has evaluated the cost of
the CRT-Ds from the claims which was calculated using the cost-to-
charge ratio compared to outside data on the cost of the CRT-Ds.
Response: In the process of recalibration of the DRG weights, we

[[Page 48982]]

consider the most recent charge data available. Both high and low cost
technologies are absorbed gradually into the data that are used to
determine the DRG weight.

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

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,
because 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 used 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 May 7,
2004, LTCH PPS final rule (69 FR 25674), 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 the May 18, 2004, IPPS proposed rule (69 FR 28225), we proposed
revisions to the LTC-DRG classifications and relative weights. We are
finalizing them in this IPPS final rule, to be effective October 1,
2004, through September 30, 2005, using the latest available data. The
final LTC-DRGs and relative weights for FY 2005 in this final rule are
based on the IPPS DRGs (GROUPER Version 22.0) discussed in section II.
of this final rule.
Comment: One commenter questioned whether the rate update cycle for
the LTCH PPS will revert from a July 1 through June 30 cycle to the
Federal fiscal year cycle (October 1 through September 30) since we
proposed to update the LTC-DRGs effective for discharges on or after
October 1, 2004.
Response: 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. As we
discussed in that same LTCH PPS final rule and as we discussed in the
May 18, 2004, IPPS proposed rule (69 FR 28225), because the patient
classification system utilized under the LTCH PPS is based directly on
the DRGs used under the IPPS for acute care hospitals, the annual
update of the LTC-DRG classifications and relative weights will
continue to remain linked to the annual reclassification and
recalibration of the CMS-DRGs used under the IPPS.
The most recent annual LTCH PPS payment rate update and policy
changes for the 2005 LTCH PPS rate year (July 1, 2004 through June 30,
2004) was published in the Federal Register on May 7, 2004 (69 FR 25674
through 25749). In that same LTCH PPS final rule, we established rate
updates and policy changes that were effective for discharges occurring
on or after July 1, 2004, including an update to the standard Federal
LTCH PPS rate, the LTCH PPS wage index and the LTCH PPS outlier
threshold. However, because the LTC-DRGS are linked to the IPPS DRGs,
the LTC-DRG classifications and relative weights established in the
August 1, 2003, final rule (68 FR 45374), which were effective
beginning in Federal FY 2004, remain in effect through September 30,
2004. The updated LTC-DRG classifications and relative weights
established for FY 2005 shown in Table 11 of this final rule will be
effective for LTCH discharges on or after October 1, 2004 and before
September 30, 2005. As we stated in the June 6, 2003 LTCH PPS final
rule, the rate update cycle for the LTCH PPS will continue to remain on
a July 1 through June 30 cycle while the annual update to the LTC-DRG
classifications and relative weights will remain on a Federal fiscal
year cycle (October 1 through September 30). Accordingly, the updated
LTCH PPS Federal rate ($36,833.69) and other payment factors (such as
the outlier threshold and wage index values) effective July 1, 2004
(see May 7, 2004, (69 FR 25674)), are applied in conjunction with the
LTC-DRGs and relative weights established in the August 1, 2003, IPPS
final rule (68 FR 45374) that are in effect through September 30, 2004,
for LTCH discharges occurring from July 1, 2004 through September 30,
2004. However, beginning with discharges occurring on or after October
1, 2004, the LTC-DRGs and relative weights established in this final
rule will be applied in conjunction with the LTCH PPS Federal rate
($36,833.69) and other payment factors (such as the outlier threshold
and wage index values) effective July 1, 2004, as established in the
May 7, 2004 LTCH PPS final rule (69 FR 25674), for discharges occurring
through June 30, 2005.
2. 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 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, as we proposed in the May 18, 2004, IPPS
proposed rule, we will use the IPPS GROUPER Version 22.0 for FY 2005 to
process LTCH PPS claims in this final rule. The changes to the IPPS DRG
classification system for FY 2005 (GROUPER Version 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

[[Page 48983]]

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 through 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 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 (Pub. L.
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 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 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

[[Page 48984]]

for each LTC-DRG that represents the resources needed by an average
inpatient LTCH case in that LTC-DRG. For example, cases in an LTC-DRG
with a relative weight of 2 will, on average, cost twice as much as
cases in an LTC-DRG with a weight of 1.
b. Data
To calculate the LTC-DRG relative weights for FY 2005 in this final
rule, we obtained total Medicare allowable charges from FY 2003
Medicare hospital bill data from the March 2004 update of the MedPAR
file, and we used 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 recalculated the FY
2005 LTC-DRG relative weights based on the best available data for this
final rule.
As we discussed in the May 18, 2004 proposed rule (69 FR 28227), 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 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 an LTC-DRG. As we explained
in the 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
25674), 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, in
the May 18, 2004, IPPS proposed rule, we used 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. For this final rule,
we used the latest available LTCH claims data from the March 2004
update of the FY 2003 MedPAR file.
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.
This 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 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.
Comment: MedPAC supported the use of the hospital-specific relative
value methodology for determining the LTC-DRG relative weights, stating
that ``[t]his method eliminates distortions in

[[Page 48985]]

weights due to systematic differences among hospitals in the level of
costs per case and in charge markups.'' The Commission believed that we
should explore the use of this methodology for the DRG relative weights
used under the IPPS.
Response: We appreciate MedPAC's support of the use of the
hospital-specific relative value methodology for determining the LTC-
DRG relative weights. As we discuss above, because by nature LTCHs
often specialize in certain types of care, we believe it is important
to remove any hospital-specific source of bias in measuring LTCHs'
average charges. Therefore, we have continued to use of the hospital-
specific relative value methodology for determining the final FY 2005
LTC-DRG relative weights shown in Table 11 of this final rule.
As discussed above, we believe that the LTCHs' charge data are
particularly vunerable to having a hospital-specific source of bias
when measuring LTCHs' average charges because of the small number of
LTCHs (approximately 300 hospitals with approximately 100,00 discharges
annually) and the relatively high degree of specialization of many
LTCHs. There are over 4,000 short-term acute care hospitals paid under
the IPPS, with approximately 11.9 million discharges annually, that
generally treat a wide range of conditions, rather than specializing in
one or two types of conditions. Therefore, although we agree with the
Commission that the hospital-specific relative value methodology
eliminates distortions in relative weights due to systematic
differences among hospitals' charges, we do not believe that it is
necessary to use the hospital-specific relative value methodology under
the IPPS since short-term acute care hospitals' charge data is not as
susceptible to having a hospital-specific source of bias when measuring
average charges.
Furthermore, as we discussed in the August 1, 2000, IPPS final rule
(65 FR 47103), in 1995 the MedPAC's predecessor, the Prospective
Payment Assessment Commission, made a similar recommendation to adopt
the hospital-specific relative value methodology under the IPPS. In the
June 2, 1995, proposed rule (60 FR 29246), we agreed with the
Commission's judgment that basing the IPPS DRG weights on standardized
charges results in weights that are somewhat distorted as measures of
the relative costliness of treating a typical case in each DRG, and
that the hospital-specific relative value method of setting weights may
reduce or eliminate distortions present in the current system. However,
in our discussion on DRG refinements under the IPPS in the same rule
(60 FR 29209), we reiterated our position published in the final rule
on September 1, 1992 (57 FR 39761), that we would not propose to make
significant changes to the DRG classification system under the IPPS,
unless we are able to either improve our ability to predict coding
changes by validating in advance the impact that potential DRG changes
may have on coding behavior, or to make methodological changes to
prevent building the inflationary effects of the coding changes into
future program payments. Without further evaluation, we do not believe
it would be appropriate to change the methodology for determining the
DRG relative weights under the IPPS at this time. The development of
the FY 2005 DRG relative weights used under the IPPS for short-term
acute care hospitals is discussed in section II.C. of this preamble.
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 30, 2002, LTCH PPS final rule (67 FR 55984) and in the
May 18, 2004, IPPS proposed rule (69 FR 28228), 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 final rule, using LTCH cases from the March 2004 update of the FY
2003 MedPAR file, we identified 172 LTC-DRGs that contained between 1
and 24 cases. This list of LTC-DRGs was then divided into one of the 5
low-volume quintiles, each containing a minimum of 34 LTC-DRGs (172/5 =
34 with 2 LTC-DRGs as the remainder). For FY 2005, as we described in
the May 18, 2004 IPPS proposed rule, we are making an assignment to a
specific low-volume quintile by sorting the low-volume LTC-DRGs in
ascending order by average charge. For this final rule, this results in
an assignment to a specific low volume quintile of the sorted 172 low-
volume LTC-DRGs by 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 low-volume LTC-DRG was used to
determine which low-volume quintile received the additional LTC-DRG.
After sorting the 172 low-volume LTC-DRGs in ascending order, we
grouped 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 are grouped into Quintile 5. Since the average charge of
the 103rd LTC-DRG in the sorted list is closer to the previous LTC-
DRG's average charge (assigned to Quintile 3) than to the average
charge of the 104th LTC-DRG in the sorted list (to be assigned to
Quintile 4), we placed it into Quintile 3. This process was repeated
through the remaining low-volume LTC-DRGs so that 3 low-volume
quintiles contain 34 LTC-DRGs and 2 low-volume quintiles contain 35
LTC-DRGs.
In order to determine the relative weights for the LTC-DRGs with
low volume for FY 2005, in accordance with the methodology described in
the August 30, 2002 LTCH PPS final rule (67 FR 55984) and cited in the
May 18, 2004 IPPS proposed rule, we used the five low-volume quintiles
described above. The composition of each of the five low-volume
quintiles shown below in Table 1 is used in determining the LTC-DRG
relative weights for FY 2005. We determine a relative weight and
(geometric) average length of stay for each of the five low-volume
quintiles using the formula that we apply to the regular LTC-DRGs (25
or more cases), as described below in section II.D.4. of this preamble.
We assign the same relative weight and average length of stay to each
of the LTC-DRGs that make up that 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.
BILLING CODE 4121-01-P

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BILLING CODE 4121-01-C
4. Steps for Determining the FY 2005 LTC-DRG Relative Weights
As we noted previously, the FY 2005 LTC-DRG relative weights are
determined in accordance with the methodology described in the August
1, 2003 IPPS final rule (68 FR 45367) and cited in the May 18, 2004
IPPS proposed rule (69 FR 28231). 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 FY 2005 LTC-DRG relative
weights can be determined. After grouping the cases in the appropriate
LTC-DRG, we calculate the relative weights for FY 2005 in this final
rule by first removing statistical outliers and cases with a length of
stay of 7 days or less. Next, we adjust the number of cases in each
LTC-DRG for the effect of short-stay outlier cases under Sec. 412.529.
The short-stay adjusted discharges and corresponding charges are used
to calculate ``relative adjusted weights'' in each LTC-DRG using the
hospital-specific relative value method described above.
Below we discuss in detail the steps for calculating the FY 2005
LTC-DRG relative weights.
Step 1--Remove statistical outliers.
The first step in the calculation of the 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 are removed prior
to calculating the 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 relative
weights could result in an inaccurate relative weight that does not
truly reflect relative resource use among the LTC-DRGs.
Step 2--Remove cases with a length of stay of 7 days or less.
The FY 2005 LTC-DRG relative weights 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 these stays do

[[Page 48990]]

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 FY 2005 LTC-DRG relative weights, the value of
many 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 FY 2005 LTC-DRG relative weights, we remove LTCH cases
with a length of stay of 7 days or less.
Comment: One commenter believes that it is inappropriate to exclude
cases with a length of stay of 7 days or less from the calculation of
the proposed LTC-DRG relative weights since it is not uncommon for very
resource intensive patients to expire within the first 7 days of the
stay. The commenter also suggested that we consider creating a separate
LTC-DRG for LTCH patients that expire within the first 7 days of the
stay.
Response: While we understand the commenters concerns, as we
discussed in the August 30, 2002, final rule (67 FR 55989) which
implemented the LTCH PPS, in calculating the LTC-DRG relative weights,
we exclude cases with a length of stay of 7 days or less because we
believe that, generally, cases with a length of stay of 7 days or less
do not belong in a LTCH. In general, LTCHs are defined by statute as
hospitals having an average length of stay of greater than 25 days.
LTCHs typically furnish extended medical and rehabilitative care for
patients who are clinically complex and have multiple or chronic
conditions. Generally, LTCH cases with very short lengths of stay (that
is, 7 days or less) are discharged from the LTCH before the patient
receives a full course of treatment, and therefore do not use the same
amount or type of resources as typical LTCH ``inlier'' cases (that is,
cases in which Medicare covered days exceed five-sixths of the
geometric average length of stay for the LTC-DRG and the patient is
discharged prior to receiving a LTCH PPS high cost outlier payment). We
believe that the length of stay of an ``inlier'' case is indicative of
a LTCH patient receiving a full course of treatment because such cases
include cases with stays that received a full LTC-DRG payment, which
represents the average resources used for that DRG (that is, the case
does not receive an adjusted short-stay outlier payment or a high-cost
outlier payment). LTCH discharges with very short lengths of stay (that
is, 7 days or less) often occur when it is determined, following
admission to a LTCH, that the beneficiary would receive more
appropriate care at another setting. Other circumstances that result in
cases with very short stays (that is, 7 days or less) would involve
patients who were either discharged to their home or who expired within
the first 7 days of being admitted to an LTCH. Because LTCH cases with
very short lengths of stay (that is, 7 days or less) do not use the
same amount or type of resources as typical LTCH inlier cases, our
simulations indicate that including these cases would significantly
bias payments against LTCH inlier cases to a point where LTCH inlier
cases would be underpaid.
As we also discussed in the August 30, 2002, LTCH PPS final rule
(65 FR 55989), the LTC-DRG relative weights reflect the average
resources used on representative cases of a specific type. Stays of 7
days or less generally do not fully receive or benefit from treatment
that is typical in a LTCH stay because the patient is discharged prior
to receiving a full course of treatment that a LTCH inlier patient
would receive. In addition, full resources are often not used in the
earlier stages of an admission to a LTCH because the patient is often
medically unstable, and initial efforts are focused on stabilizing the
patient before beginning treatment of the patient's additional
complications and comorbidities. If we did include stays of 7 days or
less in the calculation of the LTC-DRG relative weights, the value of
many relative weights would decrease for cases that do, in fact,
receive a full course of treatment, and, therefore, LTCH inlier
payments could decrease to a level that would not be appropriate (that
is, provide sufficient payment). We continue to believe that it is not
appropriate to compromise the integrity of the payment amounts for LTCH
inlier cases that actually benefit from and receive a full course of
treatment at a LTCH in order to include data from cases with stays of 7
days or less. Therefore, we disagree with the commenter that cases with
lengths of stay of 7 days or less should be included in the calculation
of the LTC-DRG relative weights. Accordingly, in this final rule, in
calculating the FY 2005 LTC-DRG relative weights, as we proposed, we
have removed cases with a length of stay of 7 days or less.
With regard to the commenter's suggestion that we create a separate
LTC-DRG for patients who expire, as we also discussed in the August 30,
2002, LTCH PPS final rule (67 FR 56002), we do not believe that a
separate LTC-DRG for patients who expire is necessary. We continue to
believe that the short-stay outlier policy at Sec. 412.529 adequately
addresses payments for patients who expire August 30, 2002, LTCH PPS
final rule (65 FR 56006), because a case with a length of stay up to
and including five-sixths of the average length of stay of the LTC-DRG
is paid under the short-stay outlier policy regardless of whether or
not the patient expires. Under the short-stay outlier policy (Sec.
412.529), generally a case is paid the least of 120 percent of the
estimated cost of the case, 120 percent of the LTC-DRG specific per
diem amount, or the full LTC-DRG payment.
We continue to believe that adjusted payments under the short-stay
outlier policy for cases that expire generally compensate for any
increased costs associated with treating a severely ill patient who
dies, including those who expire within 7 days of being admitted to a
LTCH. We note that one of the principles underlying prospective payment
is that it is a system of payments based on average costs that assumes
that some patient stays will consume more resources than the typical
stay, while other patients will demand fewer resources. Thus, an
efficiently operated hospital should be able to deliver care to its
Medicare patients for an overall cost that is at or below the amount
paid under the LTCH PPS. We continue to believe the LTCH PPS payment
adequately address payments for patients who expire, and therefore, we
are not adopting the commenter's suggestion to create a separate LTC-
DRG for LTCH patients that expire within the first 7 days of the stay.
Accordingly, in establishing the final FY 2005 LTC-DRG relative
weights, we continue to exclude cases with a length of stay of 7 days
or less and we continue to include the total charges of cases with a
length of stay of 8 days or more, including patients who expire, in the
LTC-DRG to which the case is assigned based on version 22.0 of the
GROUPER.
Step 3--Adjust charges for the effects of short-stay outliers.
The third step in the calculation of the 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

[[Page 48991]]

length of stay of the case to the average length of stay for the 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 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 LTC-DRG.
As we explained in the May 18, 2004 proposed rule (69 FR 28231),
counting short-stay outlier cases as full discharges with no adjustment
in determining the LTC-DRG relative weights would lower the LTC-DRG
relative weight for affected LTC-DRGs because the relatively lower
charges of the short-stay outlier cases would bring down the average
charge for all cases within an LTC-DRG. This would result in an
``underpayment'' to nonshort-stay outlier cases and an ``overpayment''
to short-stay outlier cases. Therefore, in this final rule, we adjust
for short-stay outlier cases under Sec. 412.529 in this manner because
it results in more appropriate payments for all LTCH cases.
Step 4--Calculate the FY 2005 LTC-DRG relative weights on an
iterative basis.
The process of calculating the 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 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 LTC-DRG, the FY 2005 LTC-DRG relative weight is calculated
by dividing the average of the adjusted hospital-specific relative
charge values (from above) for the LTC-DRG by the overall average
hospital-specific relative charge value across all cases for all LTCHs.
Using these recalculated LTC-DRG relative weights, each LTCH's average
relative weight for all of its cases (case-mix) is calculated by
dividing the sum of all the LTCH's 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 LTC-DRG relative weights
across all LTCHs. In this final 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 FY 2005 LTC-DRG relative weights to account for
nonmonotonically increasing relative weights.
As explained in section II.B. of this preamble, the FY 2005 CMS
DRGs, which the FY 2005 LTC-DRGs are based, contain ``pairs'' that are
differentiated based on the presence or absence of CCs. The 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 May 18, 2004 IPPS
proposed rule (69 FR 28232), 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 an LTC-DRG
means that cases classified into a ``without CC'' 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 LTC-DRGs.
For a case to be assigned to a 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 an 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 an LTC-DRG ``without CCs'' because 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 LTC-DRG ``with CCs'' of a ``with CC''/without
CC'' pair have a lower average charge than the corresponding 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 final rule, we
grouped both the cases ``with CCs'' and ``without CCs'' together for
the purpose of calculating the FY 2005 LTC-DRG relative weights in this
final 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'' LTC-DRG would
have a higher average charge than the ``with CC'' LTC-DRG. For this
final rule, using the LTCH cases in the March 2004 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 relative weights
for FY 2005 LTC-DRG pairs ``with and without CCs'' contains 2 pairs of
LTC-DRGs in which both the LTC-DRG ``with CCs'' and the 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, as discussed in the May 18, 2004, proposed rule, we combine the
LTCH cases and compute a new relative weight based on the case-weighted
average of the combined LTCH cases of the LTC-DRGs. The case-weighted
average charge is determined by dividing the total charges for all LTCH

[[Page 48992]]

cases by the total number of LTCH cases for the combined LTC-DRG. This
new relative weight is then assigned to both of the LTC-DRGs in the
pair. In this final rule, for FY 2005, LTC-DRGs 144 and 145 and LTC-
DRGs 444 and 445 are in this category.
The second category of nonmonotonically increasing relative weights
for LTC-DRG pairs with and without CCs consists of zero pairs of LTC-
DRGs that has fewer than 25 cases, and each LTC-DRG is grouped to
different low-volume quintiles in which the ``without CC'' LTC-DRG is
in a higher-weighted low-volume quintile than the ``with CC'' LTC-DRG.
For those pairs, as we discussed in the May 18, 2004, proposed rule (69
FR 28232), we 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 LTC-DRG. Based on the case-
weighted average LTCH charge, we determine which low-volume quintile
the ``combined LTC-DRG'' is grouped. Both LTC-DRGs in the pair are then
grouped into the same low-volume quintile, and thus have the same
relative weight. In this final rule, for FY 2005, there are no LTC-DRGs
that fall into this category.
The third category of nonmonotonically increasing relative weights
for LTC-DRG pairs with and without CCs consists of 10 pairs of LTC-DRGs
where one of the LTC-DRGs has fewer than 25 LTCH cases and is grouped
to a low-volume quintile and the other LTC-DRG has 25 or more LTCH
cases and has its own LTC-DRG relative weight, and the LTC-DRG
``without CCs'' has the higher relative weight. As discussed in the May
18, 2004 proposed rule (69 FR 28232), we remove the low-volume LTC-DRG
from the low-volume quintile and combine it with the other LTC-DRG for
the computation of a new relative weight for each of these LTC-DRGs.
This new relative weight is assigned to both LTC-DRGs, so they each
have the same relative weight. In this final rule, for FY 2005, the
following LTC-DRGs are in this category: LTC-DRGs 85 and 86; LTC-DRGs
101 and 102; LTC-DRGs 141 and 142; LTC-DRGs 170 and 171; LTC-DRGs 172
and 173; LTC-DRGs 175 and 175; LTC-DRGs 300 and 301; LTC-DRGs 318 and
319; LTC-DRGs 442 and 443; and LTC-DRGs 521, 522 and 523 (We note, 3
LTC-DRGs make up this non-monotonic ``pair'' of DRGs because the
``without CCs'' DRG is further divided into two DRGs based on the
presence or absence of rehabilitation therapy, so that there is one DRG
in this non-monotonic ``pair'' with CCs and two DRGs in this non-
monotonic ``pair'' without CCs).
Step 6--Determine an FY 2005 LTC-DRG relative weight for LTC-DRGs
with no LTCH cases.
As we stated above, we determine the relative weight for each LTC-
DRG using charges reported in the March 2004 update of the FY 2003
MedPAR file. Of the 520 LTC-DRGs for FY 2005, we identified 171 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 final rule, no
patients who would have been classified to those LTC-DRGs were treated
in LTCHs during FY 2003 and, therefore, no charge data were reported
for those LTC-DRGs. Thus, in the process of determining the LTC-DRG
relative weights, we are unable to determine weights for these 171 LTC-
DRGs using the methodology described in steps 1 through 5 above.
However, because patients with a number of the diagnoses under these
LTC-DRGs may be treated at LTCHs beginning in FY 2005, we assign
relative weights to each of the 171 ``no volume'' LTC-DRGs based on
clinical similarity and relative costliness to one of the remaining 349
(520 - 171 = 349) LTC-DRGs for which we are able to determine relative
weights, based on FY 2003 claims data.
As there are currently no LTCH cases in these ``no volume'' LTC-
DRGs, as we discussed in the May 18, 2004 proposed rule (69 FR 28233),
we determine relative weights for the 171 LTC-DRGs with no LTCH cases
in the FY 2003 MedPAR file used in this final rule by grouping them to
the appropriate low-volume quintile. This methodology is consistent
with our methodology used in determining relative weights to account
for the low-volume LTC-DRGs described above.
Our methodology for determining relative weights for the ``no
volume'' LTC-DRGs is as follows: We crosswalk the no volume LTC-DRGs by
matching them to other similar 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 relative weight for the applicable low-volume quintile to
the no volume LTC-DRG if the LTC-DRG to which it is crosswalked is
grouped to one of the low-volume quintiles. If the LTC-DRG to which the
no volume LTC-DRG is crosswalked is not one of the LTC-DRGs to be
grouped to one of the low-volume quintiles, we compare the relative
weight of the LTC-DRG to which the no volume LTC-DRG is crosswalked to
the relative weights of each of the five quintiles and we assign the no
volume LTC-DRG the relative weight of the low-volume quintile with the
closest weight. For this final rule, a list of the no volume FY 2005
LTC-DRGs and the FY 2005 LTC-DRG to which it is crosswalked in order to
determine the appropriate low-volume quintile for the assignment of a
relative weight for FY 2005 is shown below in Table 2.
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To illustrate this methodology for determining the relative weights
for the 171 LTC-DRGs with no LTCH cases, we are providing the following
examples, which refer to the no volume LTC-DRGs crosswalk information
for FY 2005 provided above in Table 2:

[[Page 48999]]

Example 1: There were no cases in the FY 2003 MedPAR file used
for this final rule for 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 LTC-DRG 178 (Uncomplicated Peptic Ulcer Without CC),
which is assigned to low-volume quintile 1 for the purpose of
determining the FY 2005 relative weights, would display similar
clinical and resource use. Therefore, we assign the same relative
weight of LTC-DRG 178 of 0.4586 (Quintile 1) for FY 2005 (Table 11
in the Addendum to this final rule) to LTC-DRG 163.
Example 2: There were no LTCH cases in the FY 2003 MedPAR file
used in this final rule for 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 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 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, LTC-DRG 91, with no LTCH cases, would need to be
grouped to a low-volume quintile. We identified that the low-volume
quintile with the closest weight to LTC-DRG 90 (0.7494; see Table 11
in the Addendum to this final rule) would be low-volume quintile 2
(0.8508; see Table 11 in the Addendum to this final rule).
Therefore, we assign LTC-DRG 91 a relative weight of 0. 8508 for FY
2005.

Furthermore, we are providing 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
are only including these six transplant LTC-DRGs in the GROUPER program
for administrative purposes. Because 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 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 relative weights in this final rule.
Table 11 in the Addendum to this final rule lists the LTC-DRGs and
their respective 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.
Comment: A few commenters believe that the budget neutrality
requirement found in section 123 of the Public Law 106-113 requires CMS
to adjust the LTC-DRG relative weights to ensure that total payments to
LTCHs are budget neutral for the proposed changes to the LTC-DRG
classifications and relative weights. Alternatively, the commenters
suggested that we make an adjustment to the LTCH PPS Federal rate to
account for the estimated $55 million reduction in LTCH PPS payments
which resulted from the proposed changes in the LTC-DRG classifications
and relative weights.
Response: In the May 18, 2004 proposed rule (69 FR 28806), we
estimated a $55 million aggregate decrease in LTCH PPS payments as a
result of the proposed changes in the LTC-DRG relative weights and
proposed version 22.0 GROUPER for FY 2005. We note that we incorrectly
estimated the impact of the change in the proposed LTC-DRGs for FY 2005
in the proposed rule because we failed to account for the change in DRG
classifications and the change in the geometric average length of stay
for each LTC-DRG. As discussed in section VII.B. of Appendix A to this
final rule, we are estimating that the impact of the change in LTC-DRGs
for FY 2005 (including changes in the DRG classifications, relative
weights and geometric average lent of stay) will result in
approximately a $14.9 million decrease in LTCH PPS payments. In that
same proposed rule, we explained that we found that based on an
analysis of the LTCH claims in the FY 2003 MedPAR files, the average
LTC-DRG relative weight across all LTC-DRGs has increased due to an
increase in the number of cases being assigned to higher weighted LTC-
DRGs. As a result, including cases with relatively lower charges into
LTC-DRGs that have a relatively higher relative weight in the GROUPER
version 21.0 (FY 2004) decreases the average relative weight in the
proposed GROUPER version 22.0 (FY 2005).
As we discussed in the August 30, 2002 LTCH PPS final rule (67 FR
55960), which implemented the LTCH PPS, section 123 of Public Law 106-
113 requires that the LTCH PPS, among other things, shall include an
adequate patient classification system that is based on DRGs and that
reflects the differences in patient resource use and costs, and shall
maintain budget neutrality. With respect to budget neutrality, we
interpreted section 123(a)(1) of Public Law 106-113 to require that
total payments under the LTCH PPS during FY 2003 will be projected to
equal estimated payments that would have been made for LTCHs' operating
and capital-related inpatient hospital costs had the LTCH PPS not have
been implemented. Consistent with this requirement, under Sec.
412.523(d)(2) an adjustment is made in determining the standard Federal
rate for FY 2003 so that aggregate payments under the LTCH PPS are
estimated to equal the amount that would have been paid to LTCHs under
the reasonable cost-based (TEFRA) payment system if the LTCH PPS were
not implemented. Therefore, in that same final rule (67 FR 56027
through 56037), in order to maintain budget neutrality, we adjusted the
LTCH PPS Federal rate for FY 2003 so that aggregate payments under the
LTCH PPS are estimated to equal the amount that would have been paid to
LTCHs under the reasonable cost-based (TERFA) payment system had the
LTCH PPS had not been implemented.
In addition, when we implemented the LTCH PPS in the August 30,
2002 LTCH PPS final rule, we provided subpart O of the regulations at
42 CFR, including Sec. 412.517, for an annual adjustment to the LTC-
DRG classifications and weighting factors to reflect changes in
treatment patterns, technology, number of discharges, and other factors
affecting the relative use of hospital resources. We do not believe
that section 123 of the Pub. L. 106-113 requires that the annual update
to the LTC-DRG classifications and relative weights maintain budget
neutrality. We believe we have satisfied the budget neutrality
requirement of section 123 of

[[Page 49000]]

the Pub. L. 106-113 by establishing the LTCH PPS Federal rate for FY
2003 under Sec. 412.523(d)(2) so that aggregate payment under the LTCH
PPS are projected equal to estimated aggregate payments under the
reasonable cost-based payment system if the LTCH PPS were not
implemented. Therefore, we disagree with the commenters that an
adjustment to the FY 2005 LTC-DRG relative weights or to the LTCH PPS
Federal rate is required as a result of the annual update to the LTC-
DRGs under Sec. 412.517 for FY 2005. Accordingly, we have updated the
LTC-DRG classifications and relative weights for FY 2005 (as shown in
Table 11 of Addendum to this final rule) without an adjustment for
budget neutrality. We note that this is our policy regardless of
whether the annual update to the LTC-DRG classifications and relative
weights results in higher or lower estimated aggregate payments. For
instance we estimate that the annual update to the LTC-DRG
classifications and relative weights from FY 2003 to FY 2004 resulted
in an estimated increase in LTCH PPS payments, yet the update to the
LTC-DRGs in the August 1, 2003 final rule for FY 2004 were not adjusted
to maintain budget neutrality. In either case, at this time we do not
make an adjustment to maintain budget neutrality for the effects of
changes in the LTC-DRG classifications and relative weights.
Accordingly, in developing the FY 2005 LTC-DRGs and relative weights
shown in Table 11 of this final rule, we have not applied an adjustment
for budget neutrality nor are we adjusting the 2005 LTCH PPS rate year
Federal rate established in the May 7, 2004, LTCH PPS final rule (69 FR
25674) to account for the estimated change in LTCH PPS payments which
result from the annual update to the LTC-DRG classifications and
relative weights for FY 2005.
The commenter raises the issue that it may be appropriate for
certain aspects of the LTCH PPS to maintain budget neutrality when they
are updated annually as they are in other PPSs, such as the annual
update to the DRGs and wage index. Under section 123 of Public Law 106-
113 and section 307 of Publicl Law 106-554, the Secretary generally has
broad authority in developing the LTCH PPS, including whether and how
to make adjustments to LTCH PPS payments. Specifically, section
307(b)(1) of Public Law 106-554 provides that ``the Secretary shall
examine and may provide for appropriate adjustments to the long-term
hospital payment system, including adjustments to DRG weights, area
wage adjustments, geographic classification, outliers, updates, and a
disproportionate share adjustment [* * *].'' We will consider whether
it is appropriate for use to propose a future revision to the LTCH PPS
regulations at subpart O of 42 CFR to maintain budget neutrality in the
annual update of some aspects of the LTCH PPS under our broad
discretionary authority under the statute to provide ``appropriate
adjustments to the long-term hospital payment system.'' Any changes to
the LTCH PPS regulations would be made in accordance with
Administrative Procedures Act guidelines.
5. Out of Scope Comments Relating to the LTCH PPS Payment Rates
Comment: A few commenters submitted comments that addressed aspects
of the existing LTCH PPS, including the standard Federal rate and
outlier methodology, which are not relevant to the LTCH policy
proposals set forth in the May 18, 2004 IPPS proposed rule.
Response: Because those comments pertain to specific aspects of the
existing LTCH PPS rather than to any specific proposed changes to the
LTCH PPS presented in the May 18, 2004 IPPS proposed rule, we are
unable to respond to those comments at this time. Rather, we believe it
is more appropriate to address those issues in the annual LTCH PPS
proposed and final rules, and we will consider the issues raised in
those comments in the context of future rulemaking for the LTCH PPS.

E. Add-On Payments for New Services and Technologies

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 FY 2005 DRG weights
in this final 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 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.''
In the May 18, 2004, proposed rule (69 FR 28237), we stated that
the 2-year to 3-year period of newness for a technology or medical
service 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 or
manufacturing issues). 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

[[Page 49001]]

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 updated Table 10 from the
October 6, 2003, Federal Register correction document, which contains
the thresholds that we used 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: http://www.cms.hhs.gov/providers/hipps/newtech.asp. In the May 18,
2004, proposed rule, we included preliminary thresholds for evaluating
applicants for new technology add-on payments for FY 2006. Table 10 of
this final rule contains the final thresholds that will be used to
evaluate applicants for new technology add-on payments for 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
final 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
this FY 2005 final rule at: http://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.
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
rulemaking 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

[[Page 49002]]

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 the 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. As
indicated in the May 18, 2004, proposed rule, we considered these
comments in our evaluation of each new application for FY 2005 in the
proposed rule. In the proposed rule, we 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 final rule. The comment
regarding the DRG assignment of the treatment for AIP is addressed in
section II.B.16.i. of this final rule.
Comment: We received several letters from commenters stating that
we should address the inequities in the DRG system with respect to
several drugs and technologies that appeared to go unnoticed by us,
according to the commenters. Specifically, payments for the treatment
of acute intermittent porphyria (AIP) were brought to our attention. We
received additional comments from physicians and a company concerning
new procedure code 00.16 (Pressurized treatment of venous bypass graft
(conduit) with pharmaceutical substance). The commenters requested that
we evaluate potential reimbursement scenarios for these new procedures.
Response: We discuss the method for applying for consideration for
the new technology add-on payment in section II.E.1. of this preamble.
The Medicare program pays for thousands of medical services, drugs and
technologies and may not necessarily be aware of all new technologies
that come to the market. We have implemented the new technology add-on
payment provision by providing a process by which applicants can
present these technologies to us for add-on payment consideration.
Commenters should also consider the application process for obtaining
new ICD-9-CM codes to further aid in obtaining specifically identifying
procedure codes in an effort to seek new technology add-on payments. We
discuss the DRG assignment of procedure code 00.16 in section
II.B.16.c. of this final rule. The comment regarding the DRG assignment
of the treatment for AIP is addressed in section II.B.16.i. of this
final rule.
Comment: Some commenters objected to the application of the newness
criterion in the proposed rule. These commenters asserted that CMS's
description of the criterion requiring a technology to be new was
inconsistent with the statute and the September 7, 2001 final rule.
Specifically, the commenters maintained that defining the period of new
as during the 2-year to 3-year period after FDA market approval would
``represent a significant shift, retroactively changing the conditions
under which companies have been developing innovative technologies and
filing new technology applications.'' These commenters further stated
that this makes the regulatory process unpredictable, ``potentially
having an adverse effect on patient access to breakthrough medical
technologies.'' The commenters urged us to ``reaffirm'' our September
7, 2001, policy and reevaluate the applications that CMS proposed to
deny on the newness issue.
Response: The intent of section 1886(d)(5)(K) of the Act and
regulations under Sec. 412.87(b)(2) is to pay for new medical services
and technologies for the first 2 to 3 years that a product comes on the
market, during the period when the costs of the new technology are not
yet fully reflected in the DRG weights. Generally, we use the FDA
approval as the indicator of the time when a technology begins to
become available on the market and data reflecting the costs of the
technology begin to become available for recalibration of the DRGs. In
some specific circumstances, we have recognized a date later than the
FDA approval as the appropriate starting point for the 2-year to 3-year
period. For example, we have recognized a later date where an applicant
could prove a delay in actual availability of a product after FDA
approval. The costs of the new medical service or technology, once paid
for by Medicare for this 2-year to 3-year period, are accounted for in
the MedPAR data that are used to recalibrate the DRG weights on an
annual basis. Therefore, it is appropriate to limit the add-on payment
window for those technologies that have passed this 2-to 3-year
timeframe.
We disagree that our statement of the policy in the proposed rule
is inconsistent with policy that was implemented in previous rules. In
the first year that new technology applications were considered in the
IPPS (that is, during calendar year 2002), we discussed several
applications and determined whether they could be considered new on the
basis of when FDA approval was granted to the technologies. Again in
our August 1, 2003 final rule for FY 2004, we denied applicants on the
basis that the technologies had gained FDA approval prior to FY 2001;
and thus, were not eligible for new technology add-on payments. In
these instances, we employed the actual date of FDA market approval,
not the date a separate ICD-9-CM code became available, since data
reflecting the costs associated with those technologies had already
been included in the DRG weights prior to the adoption of a separate
ICD-9-CM code.
Using the ICD-9-CM code alone is not an appropriate test of newness
because technologies that are new to the market are automatically
placed into the closest ICD-9-CM category when they first come on the
market, unless the

[[Page 49003]]

manufacturer requests the assignment of a new ICD-9-CM code because
existing codes do not adequately reflect or describe the medical
service or device. The services and technologies that have been placed
into existing ICD-9-CM codes have been paid for using those
descriptors. Therefore, while it may be impossible to actually identify
when a particular product was used because there is no unique code to
identify it amongst other products in the category, the product is
nonetheless used and paid for. In addition, hospital charges reflect
the services provided to patients receiving the new service or device
whether or not a specific code is assigned. Therefore, data containing
payments for these new technologies are already in our MedPAR database
and when DRG recalibration occurs these costs are accounted for.
Furthermore, assignment of new codes can occur for many reasons other
than the introduction of new procedures and technologies. For example,
new codes can simply reflect more refined and discriminating
descriptions of existing procedures and technologies.
If we were strictly to use the ICD-9-CM coding system for the
purposes of identifying what technologies are new, there would be an
incentive for nearly every product, service and surgical technique to
apply for a new, unique ICD-9-CM code. The ICD-9-CM system could not
absorb all these potential new codes. It would also be inappropriate to
pay more, in the form of new technology add-on payments, for most of
the codes, as the technology may have been in use prior to the
assignment of the new code for several years, or several decades in
some cases. For example, there is currently no procedural distinction
between a patient receiving a kidney transplant from a living or
cadaver donor. It is conceivable that this kidney transplant could be
broken out into several procedures, identifying the source of the
kidney (from living/deceased, relative/stranger, etc.), and each would
be a ``new'' procedure if we were to adopt the commenters' approach.
These procedures have been in use for up to half a century; and
therefore, clearly should not qualify as a new medical service or
technology simply because a new ICD-9-CM code has been assigned.
Another example that further exemplifies the limitations of this ICD-9-
CM-based approach is the esophageal permanent tube, which is a stent
implanted in a patient who cannot be medically treated and is unable to
swallow. If we create a new code, and use it to determine if the
esophageal permanent tube should qualify for new technology payment
under the commenters' approach, the technology could qualify as new,
although the procedure has been used for the last 20 years.
We also note that our existing interpretation does not hamper the
ability of patients to receive technologies that do not qualify for new
technology add-on payments. The IPPS will continue to pay for existing
and new medical services and technologies through the regular payment
mechanism established by the DRG payment methodology. Therefore,
patient access to these technologies is not adversely affected by this
interpretation, and this interpretation is not inconsistent with the
framework used to review new technology applications in previous years.
Comment: One commenter stated, ``we believe that the 2-to 3-year
clock should not start until a technology receives final approval by
the Food and Drug Administration.'' The commenter also submitted an
additional comment that stated that the ``date of ICD-9 code assignment
should start the add-on payment eligibility time clock, not the date of
FDA approval.''
Response: We note that the commenter's comments were somewhat
contradictory on the issue of newness. The timeframe that a new
technology can be eligible to receive new technology add-on payments
begins when data become available. Section 412.87(b)(2) clearly states
that ``a medical service or technology may be considered new within the
2 to 3 year after the point at which data begins to become available
reflecting the ICD-9-CM code assigned to the new service or technology
(depending on when a new code is assigned and data on the new service
or technology become available for DRG recalibration).'' Section
412.87(b)(2) also states ``***[a]fter 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 of this section.''
Therefore, regardless of whether a technology can be individually
identified by a separate ICD-9-CM code, if the costs of the technology
are included in the charge data, and the DRGs have been recalibrated
using that data, then the device can no longer be considered new for
the purposes of this provision.
Comment: A commenter suggested that CMS adopt a different strategy
for defining the newness criterion. The commenter believes that the
decision of whether a technology is new should involve consideration of
both the FDA approval date and the date of issuance of an ICD-9-CM
code. The commenter explained that if an ICD-9-CM code is issued within
12 months of FDA approval, the 2-to 3-year period of a technology being
considered new should begin from the date of issuance of the ICD-9-CM
code. If a code is issued more than 12 months after FDA approval, the
2-to 3-year period should begin from the FDA approval date. The
commenter noted that adoption of this interpretation would strike a
balance between the FDA approval date and the procedure code effective
date and is consistent with the preamble of the September 7, 2001
Federal Register (66 FR 46914) and the text of the regulation (42 CFR
412.87(b)(2)).
Response: We note that the time period does not necessarily start
with the approval date for the medical service or technology and does
not necessarily start with the issuance of a distinct code. Instead, it
begins with availability of the product on the market, which is when
data become available. We have consistently applied this standard, and
believe that it is most consistent with the purpose of new technology
add-on payments.
Comment: MedPAC recommended that we use a different approach to DRG
recalibration. In these instances, MedPAC recommends that we exclude
those cases involving a new technology from our DRG recalibration
method. Doing so ``would avoid overpaying for the technology by
including its costs in the base payment while also providing an add-on
payment'' during the overlapping 2-to 3-year period in question. MedPAC
further stipulates that this approach ``should be used for all cases
where the new technology can be tracked'' with an ICD-9-CM code or
where cases can be identified by other characteristics in our MedPAR
data. They also stressed the importance of maintaining a conservative
approach when CMS evaluates technologies for add-on payments. In
addition, they noted that paying indiscriminately for too many
technologies ``can be seen as unbundling of the DRG system'' which
would threaten the ``incentives for hospitals to be efficient and weigh
the benefits of new technologies against their costs.'' Moreover, they
noted that section 503(b)(1) of Public Law 108-173 changed the cost
criteria by lowering the threshold to qualify for add-on payments. As
such, MedPAC believes that the number of technologies that could
potentially be eligible to qualify will likely increase expenditures to
the program since these payments are no longer budget neutral.

[[Page 49004]]

Response: We appreciate MedPAC's recommendations and will consider
its suggestion regarding excluding the costs of cases involving new
technologies from DRG recalibration calculations in the future. We also
believe that we have consistently applied an appropriately high
standard of clinical improvement to restrict these types of payments to
relatively few technologies that are truly new. We will continue to
apply this high standard in our review of applications for new
technology add-on payments in the future.
Comment: A commenter noted that if ``CMS believes that it erred in
developing the payment period policy published in the September 7, 2001
final rule, then it should propose a policy change applying to all
applications for new technology add-on payments.'' The commenter also
stated, that ``the implementation of such a policy change should affect
only the applications received thereafter, and should not apply to any
applications currently under consideration.''
Response: We believe that the commenter, the manufacturer of InFUSE
^TM Bone Graft, wanted to ensure that if we made a change in
the policy, that change would be done through notice and comment
rulemaking and that the change would not be applied retroactively to
applicants that are currently under consideration. However, we note
that we have not made any changes to the policies implemented in the
September 7, 2001 final rule.
Comment: Several commenters urged us to be as clear as possible in
implementing section 503 of Public Law 108-173. The commenters stated
that transparency is necessary, particularly for ``small companies
doing a disproportionate amount of the medical device research and
development.'' Many commenters urged us to clearly state and adopt an
approach to the provision so there is ``a clear path to follow and a
reliable set of requirements to meet.'' Several commenters also noted
that, despite how we have been applying the definition of new, many of
the companies that have applied or could apply for new technology add-
on payments do not neatly fall into a standard definition because
different manufacturers follow different pathways. These commenters
stated, ``many device manufacturers, especially small device
entrepreneurs, lack the nationwide marketing, distribution, and
reputation of the larger companies in the industry. These small
companies are most affected by the so-called 'payment lag' during which
new products are under-reimbursed.***'' In addition, commenters stated,
despite or because of these problems of distribution, the rates of
adoption and utilization of new products should be accounted for before
we decide technologies are no longer new. In addition, commenters call
for CMS to ``clarify what the bar is for a device to represent a
substantial [clinical] improvement.'' Commenters stated that
determinations of what represents a substantial clinical improvement
have been largely subjective, but that, ``for future generations of
add-on applicants, an elaborated definition would be helpful.''
Response: As stated previously, we have used as our uniform
standard, the date of FDA approval in combination with market
availability to evaluate new technology applications. We also note that
in our evaluation of previous new technology applications, we have
stated whether or not the applicants have met the substantial clinical
improvement criterion as part of the basis for our approval or
disapproval of the application. We follow the guidelines, as listed in
the September 7, 2001 final rule, to make these determinations as they
apply to improving the quality of care for the elderly Medicare
population. However, as discussed in response to several of the other
comments, we may need to consider revising our policies in the future
to make the process more streamlined as more technologies apply for the
new technology add-on payments. We will also consider the commenter's
views concerning the payment lag for new products as we continue to
develop policy in this area. However, at this time we believe that the
2-to 3-years timeframe remains an appropriate standard for determining
when the costs of new technologies have been incorporated into the DRG
weights.
Comment: Several commenters urged CMS to adopt a uniform standard
for reviewing new technology add-on payment applications that is
consistent between both the IPPS and the OPPS. Additionally, one
commenter believes that CMS is inconsistent in its use of external data
for verifying or amending payment rates. The commenter recommended that
CMS should acknowledge that different types of data are appropriate for
different uses such as revisions to APCs in the outpatient setting and
adjustment of DRG relative weights in the inpatient setting. The
commenter added that data requirements for determining eligibility for
a new technology add-on payment should not be the same as for adjusting
DRG relative weights. The commenter also recommended that external data
provided for DRG assignments or payments for new technologies may be
appropriately proprietary in these cases and the commenter believes CMS
should release such data in a summary format agreed to by the companies
and should not make the data available for public inspection without
the companies' consent. The commenter also suggested that CMS should
not require identification of a hospital by its Medicare provider
number in cases where there may be a confidentiality agreement between
the manufacturer or data vendor and the hospital submitting the data.
The commenter recommended that CMS use pseudo-identifiers as an
alternative to actual provider numbers. The commenter also proposed
that CMS allow the use of external data from recent timeframes without
corresponding MedPAR data, particularly for procedures involving new
technologies and codes. The commenter explained that external data from
private vendors has only a 60-90 day time lag compared to MedPAR, which
has a lengthier time lag. The commenter further recommended that when
determining the price of a drug or device CMS should accept the
disclosure of discounts and rebates at the estimated aggregate level
since the company may not know the final price paid by the hospital for
a given product. Finally, the commenter recommended that CMS should
request that medical technology companies offer the HCPCS codes and
ICD-9-CM codes that seem most clinically appropriate to the procedure
since this information would be most helpful to CMS and allow companies
to target their resources in providing external data. Another commenter
expressed that companies will not make the best data available ``unless
CMS agrees to hold it confidential.''
Another commenter encouraged CMS to expand its acceptance of
external data in order to ease the process of establishing adequate
initial inpatient payment for new technology procedures at or as close
as possible to the time of FDA approval. The commenter also urged CMS
to accept external data as part of the recalibration of the DRG
weights. The commenter also recommended that CMS apply reasonable
standards that take into account the limited amount of data that may be
available for new technologies and the difficulties involved in
collecting such data in determining whether external data provides an
acceptable basis for making a new DRG assignment or adjustment of the
DRG weights.
One commenter, a company that gathers data on hospital services,
noted

[[Page 49005]]

that its data could be used to project national trends and establish
Medicare policies. The commenter also noted that there are instances
where its data are more detailed than MedPAR. The commenter believes
CMS should work with the industry to develop criteria for making use of
external data. The commenter was also concerned about the difficulty of
obtaining MedPAR data. The commenter explained that CMS no longer makes
available quarterly updates to the MedPAR and that the MedPAR data used
to develop the FY 2005 proposed rule were not made available in a
timely manner.
Response: We note that we have followed many of these examples when
reviewing previous technologies. In the case of Xigris([reg]), we
worked very closely with the applicant to review the applicant's data
in order to identify a cohort of cases that would be appropriate
candidates to receive the new drug. For FY 2005, we have also worked
very closely with the applicants to help them identify what data
requirements needed to be met and to help them to determine the best
strategies to meet these requirements. We note, however, that
applicants should weigh the advantages of submitting additional data in
support of an application for new technology add-on payments with the
need to preserve the confidentiality of certain proprietary data. We
thank the commenters for their other comments and recommendations
regarding accepting non-MedPAR data. We intend to take these comments
into consideration and review the feasibility of adopting one or more
of these approaches at some time in the future. Because we did not make
any proposals regarding the use of external data in the May 18, 2004
proposed rule, we are not making any changes at this time. However, we
will consider the comments in developing future proposals.
We also note that we offer two annual updates of the MedPAR data
used for determining the rates in FY 2005. One update is based on the
data used for the proposed rule. This update is usually issued in May.
The second update is based on the data used in the final rule and is
usually issued in September. Information on purchasing the MedPAR data
used in determining the rates for FY 2005 can be found on our Web site
at http://www.cms.hhs.gov/data/order/default.asp. Finally, we note,
that in the interests of providing the most accurate and complete data
files and due to time and work constraints, we are no longer able to
issue quarterly updates of the MedPAR to the public.
Comment: Commenters in general contended that they ``cannot meet
the public's demands to adopt new technologies * * * because their
ability to access capital is deteriorating''. Commenters stated that
since very few new technologies have qualified for this add-on payment,
hospitals continue to underutilize and potentially limit use of
clinically important new technologies in the absence of these higher
payments. Commenters again urged CMS to increase the payment for new
technology add-on payments from 50 percent of the cost of the device to
80 percent of the costs. They stated that to do so would be in line
with the Conference Committee Agreement accompanying Public Law 108-173
which states, ``the Secretary should consider increasing the percent of
payment associated with the add-on payments up to the marginal rate
used for the inpatient outlier.'' (108 Cong., 2d Sess., 212(2003)).
Commenters further stated that CMS ``apparently believes that this
outlier payment level strikes the appropriate balance between ensuring
that providers are not unduly at financial risk for expensive cases * *
*'', yet has offered no explanation for why this payment level would
not be appropriate for the new technology add-on payment as well.
Response: We note that we have made substantial changes to the
application threshold in the last year, reducing the cost threshold to
qualify for new technology add-on payments twice. In addition, we have
eliminated the budget neutrality provision, thus increasing the total
moneys spent to pay for deserving, new technologies. While the
conference report to the MMA recommended that the Secretary should
consider changing the payment factor, we will not make such a change
this year. Rather, we will analyze the impacts of the other MMA
changes, especially the reduction in the cost threshold and the
elimination of the budget neutrality of the add-on payments, before we
consider making changes in the payment percentage. We will continue to
consider the conference report's recommendation and will determine
whether to proceed with a change in the light of our continuing
analysis.
Comment: Commenters urged CMS to adopt an approach to the public
meetings required by the MMA in a manner that is similar to the ICD-9
Coordination and Maintenance Committee meetings. Commenters noted that
a specific agenda and preliminary opinions are released to the public
prior to these meetings and urged CMS to present preliminary opinions
on substantial clinical improvement prior to the public meeting on this
topic.
Response: We have traditionally not provided our opinion on
substantial clinical improvement of applicants for new technology add-
on payments until the final rule. We note that if all the criteria are
met prior to the publication of the proposed rule, we would prefer to
make our preliminary determinations available at that time. However, to
date we have not been able to make a sound determination regarding
substantial clinical improvement until after the publication of the
proposed rule.
Section 503(b)(2) of Public Law 108-173 requires CMS to consider
public comments regarding whether an applicant for new technology
payments meets the substantial clinical improvement criterion. Comments
must be received and considered prior to the publication of the
proposed rule for the annual IPPS update. This requirement, which was
implemented for the first time through the new technology town hall
meeting held in March of this year, and the subsequent comment period
is further evidence that we do take the issue of substantial clinical
improvement into account prior to the publication of the proposed rule.
However, the MMA provision does not require the type of procedure
recommended by the commenter, but merely the opportunity for
presentation of comments, recommendations, and data to CMS.
We designed the town hall-styled meeting this spring to provide a
forum for public comment on the applicants. This format appeared to be
received well by most of the attendees. We accepted comments and topics
from attendees and presenters at the meeting, as well as accepting
comments on substantial clinical improvement of the applicants after
the meeting. If presenters would like a more detailed agenda to be
published prior to the rule, we welcome them to register to attend the
annual meeting and provide the information requested in the Federal
Register notice announcing the meeting (this includes personal
information for registration purposes as well as topics to be presented
at the meeting). If we have this information well in advance of the
meeting, the agenda will reflect all issues that have been raised
regarding the assessment of the substantial clinical improvement
criterion for each applicant. We welcome further input on how to better
incorporate input prior to the announcement of the next town hall
meeting on this topic.
In the May 18, 2004 proposed rule (69 FR 28236), we also evaluated
whether new technology add-on payments will

[[Page 49006]]

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 reconsidered one application for new technology add-on
payments that was denied last year. Finally, we presented 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, in the May 18, 2004 proposed rule, we
proposed that Xigris[reg] would not continue to receive new technology
add-on payments in FY 2005. During the period of 2 years and 8 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
proposed that FY 2004 would be the final year for Xigris[reg] to
receive add-on payments.
Prior to the publication of the May 18, 2004, proposed rule, we
received no public comments regarding the continuation of add-on
payments for Xigris[reg]. During the 60-day comment period for the
proposed rule, we received 3 comments on this application.
Comment: The manufacturer submitted comments that were highly
critical of CMS' proposal to discontinue add-on payments for
Xigris[reg]. The commenter brought up several points, which it
believes, show that CMS is in violation of the statutory provisions.
First, the manufacturer expressed opposition to the proposal to
terminate the new technology add-on payments. It agreed that it was
important to consider when a product comes on the market, but stated,
``[w]hether a technology is `new' is not salient in determining whether
a third year of add-on payments should continue.'' It stated that the
costs of the drug had not been adequately accounted for as required by
statute and that the period during which it was eligible to receive
add-on payments should continue another year, until 3 full years of
add-on payments had been made. It stated, that ``the fact that costs of
a new technology or service may be included in the Medicare hospital
discharge database (MedPAR) starting at the time an item or service is
introduced into the marketplace is irrelevant. What matters is the
ability to examine 2 years of cost data for cases coded as having used
the new technology or service.'' Further, it argued, ``these cost data
cannot be identified and collected until the ICD code is assigned and
used in the coding of cases.'' It also stated that, since this 3-year
maximum period had not yet ended, the costs of the cases could not have
adequately been accounted for in our DRG recalibration using only data
from FY 2003. It further stated that we should wait to remove them from
add-on payment status until data from the FY 2004 MedPAR are available
to recalibrate the DRGs. The manufacturer also stated that ``the point
of the legislative changes was to improve the old way of doing business
* * *. It is unfortunate that CMS proposes to take the path of least
resistance because it is the Medicare beneficiaries who will ultimately
suffer.''
Another commenter stated that our proposal to deny additional add-
on payments in FY 2005 will deny Medicare beneficiaries the access to
Xigris[reg]. An additional commenter noted that, particularly because
CMS was unable to implement the systems changes necessary to pay the
new technology add-on payment for Xigris[reg] until 8 months after the
new code and higher payment were allowed, many hospitals were unclear
as to the significance of correctly coding the new ICD-9-CM code
identifying Xigris[reg], and therefore, the data for the first year of
add-on payments do not adequately reflect the actual use of the drug.
Response: As stated previously, when we determine the newness
criterion for new technology add-on applications, we use the date of
FDA approval to determine that data including the technology are being
incorporated into DRG recalibration, except in those rare cases where
evidence can be presented that demonstrates that the product could not
be marketed immediately after FDA approval. We have used this method of
determining newness since we began reviewing new technology
applications. While there was no clearly distinguishable code assigned
to Xigris[reg] prior to the implementation of the new ICD-9-CM code
00.11 on October 1, 2002, treatment with Xigris[reg] was identified
prior to that time by procedure code 99.19. While this may not suit the
applicant in terms of the ability to track specific cases that involved
the use of Xigris[reg], the drug was being used for more than 10 months
prior to the assignment of code 00.11 and the costs associated with the
drug were, therefore, clearly included in the FY 2003 MedPAR update.
Additionally, we note that the manufacturer itself was able to identify
patients that would or could use Xigris(r), as discussed in the May 9,
2002 proposed rule. There we stated, ``Lilly also submitted detailed
ICD-9-CM diagnosis and procedure codes for a subset of * * * patients
with billing data. * * *'' (67 FR 31428). Because the manufacturer was
able to identify a subset of patients without billing data at that
time, we have met the criteria set forth by the manufacturer itself in
being able to identify ``2 years of cost data for cases coded as having
used the new technology. * * *'' The data we have captured since
including the data used for the FY 2003 proposed rule analysis, have
adequately accounted for costs associated with these cases. Including
the 2 subsequent years during which Xigris[reg] was eligible to receive
new technology add-on payments, this makes a total of 3 years of data
that CMS has used to incorporate the costs associated with the drug
into the weights of the DRGs into which these cases fall.
In the FY 2004 annual update, we estimated that there would be
3,000 cases involving Xigris[reg] in the relevant DRGs and we note that
there are now 4,313 cases involving the drug in the March update of the
FY 2003 MedPAR. We have conducted an analysis of the FY 2002 MedPAR to
determine the frequency of these cases in the DRGs in

[[Page 49007]]

which Xigris[reg] has been used. We have identified 593 cases using
procedure code 99.19 in these 5 DRGs, which is significantly lower than
the most recent 2 years of data. Additionally, we recognize that this
code included other drugs and that not all 593 cases reporting this
code in these 5 DRGs necessarily involved Xigris[reg]. However, this
low number of cases is consistent with what we would expect, given that
the initial ICD-9-CM code did not drive DRG placement or payments. It
is also consistent with the reasoning behind our of approval
Xigris[reg] for new technology add-on payments, since it was clearly a
new technology that provided great potential benefit to Medicare
beneficiaries and met the other criteria as defined by the statute. It
is also reasonable to expect that, once the new ICD-9-CM code went into
effect, with a payment incentive to encourage its rapid adoption and
use, the number of cases including this code rose dramatically. While
the figure of 593 cases using procedure code 99.19 in the relevant
cases in FY 2002 is not very high, we note that in the August 1, 2002
final rule we stated that, based on the sales figures from the company
at that time, there was already ``$35 million in sales reported by
Lilly through February 2002 (since the drug was approved in November
2001). (At $6,800 per patient, $35 million in sales equates to just
over 5,000 cases for the first 4 months since FDA approval.)'' (67 FR
50015). Therefore, we are confident that we have adequate data
reflecting the use of Xigris[reg] over the past 3 years. If we were to
continue add-on payments beyond FY 2004, the technology would be beyond
its 2-3 year maximum as allowed by the statute. We have used these data
to recalibrate the DRGs into which these cases most frequently fall, so
the costs of the technology have already been accounted for in those
DRG weights. Similarly, although we regret that systems changes delayed
the processing of add-on payments for Xigris[reg] in FY 2003, hospitals
received add-on payments for all cases reporting the ICD-9-CM code for
Xigris[reg]. Furthermore, the costs of the new technology are
nonetheless represented in the 2003 MedPAR data, whether hospitals used
the new ICD-9-CM code for Xigris[reg] (00.11) or the earlier procedure
code (99.19). We do not agree with the assertion that Medicare
beneficiaries will no longer have access to this important drug once
the new technology add-on payments associated with it are terminated.
To the contrary, we will continue to pay for the drug through DRG
payment, and as noted above, the costs associated with the drug have
been included in the weights of the relevant DRGs through the DRG
recalibration.
Comment: The manufacturer also noted that section
1886(d)(5)(K)(ii)(IV) of the Act requires, ``that discharges involving
such a service or technology that occur after the close of the period
[of add-on payments] will be classified within a new or existing
diagnosis-related group with a weighting factor * * * that is derived
from the cost data collected with respect to discharges occurring
during such period.'' The commenter argues that there is no room for
interpretation of the statute and that, since the average costs of
cases involving the technology are very high, they should be assigned
either to a new DRG or remapped to higher-weighted DRGs to reflect the
cost of the cases. Another commenter asked that, if CMS refused to
continue add-on payments for the entirety of FY 2005, such payments
should be ``maintained at least until the agency has analyzed the
available data and has classified cases in which Xigris[reg] is
administered into an appropriate DRG.''
Response: We do not agree with the implications the commenter draws
from the statutory language. We have assigned cases involving the use
of Xigris[reg] to clinically coherent DRGs, and the weights of these
DRGs have been recalibrated to reflect the costs of these technology.
We have also analyzed the costs of these cases and determined that,
although the average standardized charge for these cases is higher than
the average charges for the DRGs into which the cases involving
Xigris[reg] fall, there appears to be no justification to warrant
creation of a new DRG or re-assignment of cases involving Xigris[reg]
into higher-weighted DRGs. We do not believe that it is necessary to
assign cases involving Xigris[reg] to a separate unique DRG, as
requested by the manufacturer, in order to satisfy the statutory
requirement. Indeed, we note that the commenter's own comment stated,
``Xigris[reg] is administered to only a small proportion of the severe
sepsis population and is not representative of the comprehensive
incidence of the disease.'' Therefore, by the manufacturer's own
statements, we cannot use cases involving the code for Xigris[reg] as
the standard by which to assign severe sepsis cases. We discuss the DRG
assignment of Xigris[reg] in section II B.16.c. of this final rule.
Comment: One national hospital association agreed with our proposal
to discontinue add-on payments for this technology. The commenter noted
that the termination of the add-on payments falls outside the timeframe
in which a technology is new for add-on payment purposes. The
association strongly encouraged CMS to continue monitoring the use of
Xigris[reg] and associated conditions of severe sepsis to determine if
future revisions to the current DRGs will be necessary. Another
commenter urged us to continue to monitor the use and diffusion of all
new technologies that qualify or have previously qualified for this
provision. Commenters urged CMS to require that all hospitals continue
to code for the use of the new technologies, even after the period of
add-on payment for the technologies has ended, thus ensuring adequate
tracking of diffusion of the new technologies as they continue to be
used.
Response: We appreciate the commenter's support for our decision to
remove this technology from add-on payment status. We note that we
review new technology add-on payment recipients annually to determine
whether they continue to meet the criteria to receive add-on payments.
In the case of Xigris[reg], this review led us to find that it no
longer meets the newness criterion. While we encourage hospitals to
continue to code for the drug, even though there is no longer a payment
incentive to do so, we cannot require hospitals to code for the use of
the drug.
We are finalizing our proposal to remove Xigris[reg] from new
technology status and will no longer pay new technology add-on payments
for this technology, starting October 1, 2004. 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 the preamble to this
final 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-

[[Page 49008]]

CM procedure codes 84.51 (Insertion of 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, in
the May 18, 2004 proposed rule, we proposed 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 also proposed 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 proposed 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 proposed 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. The proposal would reduce
the add-on payment to account for no longer including the costs of the
LT Cage in computing the add-on payment amount. 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 proposed a maximum add-on
amount of $1,955 for cases that qualify for additional payment.
Although we proposed 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 new technology add-on payments 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.
Prior to the publication of the May 18, 2004 proposed rule, we
received public comments in accordance with section 503(b)(2) of Public
Law 108-173 regarding the continuation of add-on payments for this
technology. Commenters expressed support for the continuation of new
technology add-on payments for this technology in FY 2005.
We are finalizing that proposal in this final rule.
We received the following comments in response to the May 18, 2004
proposed rule.
Comment: Several commenters supported our proposal to no longer pay
for the LT Cage as a bundled add-on payment with InFUSE^TM.
They noted that it was not appropriate to pay for the LT Cage as part
of the InFUSE^TM add-on since the technology has been
available for several years.
Response: When we initially reviewed the application, the applicant
indicated to us that the FDA approval was for a pre-packaged product
that included the LT Cage, the InFUSE^TM biotechnology
product, and an absorbable collagen sponge to carry the rhBMP. While
the FDA label required the product to be used with the LT Cage, we were
initially under the impression that these devices were provided to
hospitals in the same package. It later was brought to our attention
that the product was not marketed this way and that in fact the rhBMP
product is supplied to hospitals in several different sized ``kits''
that have differing amounts of InFUSE^TM in them, and that
the LT Cage is purchased separately. As such, it is not only easy to
see why the add-on payment should be unbundled, but also easy to do so.
Comment: Some commenters, including the manufacturer, were opposed
to our proposal to discontinue bundled payment for InFUSE^TM
in combination with the LT Cage. They argue that to remove the payment
for the LT Cage would result in even further restricting the use of
this much needed technology that eliminates a painful second surgery
and extensive blood loss for the patients who must otherwise undergo
spinal fusions via conventional, autogeneous bone-harvesting methods.
Other commenters were very concerned that the lower add-on payment
amount would result in hospitals using cages other than the FDA-
approved LT Cage with this technology. These commenters stated that to
encourage this off-label use by not continuing the higher payments is
contrary to our statement in last year's final rule requiring that a
product qualify for add-on payments based upon usage consistent with
its FDA labeling.
Response: In this clear case where a new technology is being used
in conjunction with an old technology, we do not believe it is
appropriate to continue to pay an add-on payment for the old device, as
this device has already been in use for 9 years and has been accounted
for in DRG payments. We are finalizing our proposal to approve
InFUSE^TM for spinal fusion for an additional year of new
technology add-on payments, through the end of FY 2005. We note that in
order to receive new technology add-on payment for InFUSE^TM,
we are continuing to require both the procedure code for
InFUSE^TM (84.52) and the code for the LT Cage (84.51) due to
the FDA label that requires the LT Cage to be used in conjunction with
the InFUSE^TM product. While the procedure code for the LT
Cage (84.51) does include other brands and types of cages for spinal
fusion, we expect that doctors will maintain the best clinical standard
for their patients and will continue to use the LT Cage with the
InFUSE^TM product. We are therefore finalizing our proposal
to unbundle the new technology add-on payments for this device for FY
2005 by removing payment for the LT Cage from the add-on payment for
cases involving InFUSE^TM. We are also finalizing the maximum
add-on payment amount of $1955 for cases that are eligible to receive
the add-on payment.
Comment: Other commenters were pleased about our proposal to
discontinue bundled payments that include the LT Cage for spinal
fusions because this bundled payment precluded payment for similar
technologies that are used in spinal fusion surgery but that do not
require use of the LT Cage. One commenter noted that another BMP
product was just awarded FDA approval for spinal fusion involving
posterolateral approach. This commenter requested that the other
devices of this nature be included in any approval of rhBMPs for new
technology add-on payments or an unfair economic advantage would be
created.
Response: 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 new product,
called OP-1 Putty, manufactured by Stryker Biotech, utilizes a similar
mechanism to promote natural bone growth by using a closely related
bone morphogenetic protein called rhBMP-7 (InFUSE^TM is
rhBMP-2). Because the OP-1 Putty is now available on the market (it
received FDA approval for spinal fusions in May of this year) for
similar spinal fusion procedures and also eliminates the need

[[Page 49009]]

for the autograft bone surgery, we are extending new technology add-on
payments to this technology as well, for FY 2005. Because the new
product does not require the LT Cage to be used simultaneously, we are
requiring that providers use different codes when the different
products are used.
Cases using InFUSE^TM should be identified by the
combination of procedure codes 84.51 and 84.52, as described above and
as required in the previous year of new technology add-on payments for
this technology. For cases using the OP-1 Putty, the procedure code
84.52 (Insertion of recombinant bone morphogenetic protein) must be
coded in combination with procedure codes identifying posterolateral
spinal fusions, as is consistent with the FDA approval for this device.
Therefore, procedure code 84.52 must be coded with any of the following
procedure codes: 81.08 (Lumbar/lumbosac fusion posterior technique),
81.38 (refusion of lumbar posterior approach), 81.05 (Dorsal and
dorsolumbar fusion, posterior technique), or 81.35 (Refusion of dorsal
and dorsolumbar spine, posterior technique) in order to receive add-on
payments under this provision. Both of these devices have FDA approval
that is consistent with cases that would be assigned to DRGs 497 or
498. Because Stryker Biotech did not submit a new technology add-on
payment application, we were unable to do a complete analysis of the
cost of the device. However, we have been able to determine that the
costs associated with the OP-1 Implant are similar to those associated
with InFUSE^TM. Therefore, we believe that the same payment
amount for new technology add-on payments is appropriate for both
devices. Accordingly, cases containing one of the above combinations of
procedure codes and that fall into DRGs 497 or 498 will be eligible to
receive the add-on payment, with a maximum of $1,955 for FY 2005.
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^TM 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[supreg] 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[supreg] wafer delivers chemotherapy directly to the site where
the tumor is most likely to recur.
The FDA gave initial approval for the GLIADEL[supreg] 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[supreg] 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
stated that the technology was still new because it had not been
possible to specifically identify cases involving use of the
GLIADEL[supreg] 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[supreg] 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[supreg] wafer were also
reflected in the DRG relative weights. Therefore, the GLIADEL[supreg]
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[supreg] wafer on September 23,
1996. Therefore, this technology is beyond the period in which it can
be considered new. Accordingly, in the May 18, 2004, proposed rule, we
proposed to deny this application for new technology add-on payments
for FY 2005.
Prior to the publication of the May 18, 2004, proposed rule, we
received no public comments regarding our reconsideration of this
application for add-on payments. During the 60-day comment period for
the May 18, 2004, proposed rule, we received the following public
comments regarding our reconsideration of the application.
Comment: One commenter stated, ``[a]s a country that prides itself
on being a leader in cancer research, it is disheartening that patients
must battle to gain access to the benefits that this research has
provided.''
Response: We continue to pay for technologies that do not meet the
criteria to receive new technology add-on payments through the regular
payment mechanism established by the DRG payment methodology.
Therefore, patient access to these technologies should not be adversely
affected by a determination that a technology does not qualify to
receive add-on payments.
Comment: One commenter believes that the GLIADEL[supreg]
chemotherapy wafer merits a separate DRG, which the applicant contends
would be similar to our treatment of the establishment of new DRGs for
drug-eluting stents. The commenter acknowledges that DRGs are ``not
normally created to recognize the presence or absence of new
technology.'' Nevertheless, the commenter argues that CMS' recognition
of the ``unique circumstances surrounding the potential breakthrough
nature'' of drug-eluting stents should also be applied to
GLIADEL[supreg] wafer.
Response: Guilford asked us to consider reclassifying this device
into another DRG. We discuss issues relating to the DRG assignment of
the GLIADEL[supreg] wafer in section II.B.16.c. of this final rule. In
that discussion, we announce our decision to create a new DRG 543
(Craniotomy with implantation of chemotherapeutic agent or acute
complex central nervous system principle diagnosis) to which Gliadel
cases will be assigned. The cases assigned to this new DRG have similar
resource utilization and comparable charges to cases involving the
GLIADEL[supreg] wafer. As a result, we

[[Page 49010]]

believe this DRG assignment will result in appropriate payments for
these cases. In this rule we are finalizing our denial of new
technology add-on payments for this technology.
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 (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^TM Lumbar
Tapered Fusion Device. As discussed above, we approved this application
for FY 2004, and will 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. 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 FDA approval for the use of InFUSE^TM for
open tibia fractures was awarded on April 30, 2004. The application for
add-on payments for the use of InFUSE^TM 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 noted that the
patients in their clinical trials as well as patients that would be
likely candidates to receive InFUSE^TM for tibia fractures
would include those cases that had malunion of their fractures
(diagnosis code 733.81) or nonunion of fractures (diagnosis code
733.82). 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^TM in these four DRGs would be $46,468. Therefore, the
applicant maintains that InFUSE^TM for open tibia fractures
meets the cost criterion.
Further discussions with the applicant revealed that the more
appropriate DRGs to which this device should be limited are DRGs 218
and 219 (Lower Extremity and Humerus Procedures Except Hip, Foot and
Femur Age > 17, With and Without CC). The manufacturer projects that
there would be approximately 550 cases (based on the number of open
tibia fractures that would have qualified for InFUSE^TM in
the FY 2002 MedPAR) in FY 2005. Since FDA approval for use of
InFUSE^TM for open tibia fractures, we have performed an
analysis to determine the number of cases that may have already
received InFUSE^TM for treatment of open tibia fractures. We
identified 3,788 cases in DRGs 218 and 219 (Lower Extremity & Humerus
Procedures except hip, foot, femur, age >17, with and without CCs) that
also had procedure code 79.36 (Reduction, fracture, open, internal
fixation, tibia and fibula) and any of the following diagnosis codes:
823.30 (Fracture of tibia alone, shaft, open), 823.32 (Fracture of
fibula with tibia, shaft, open), 733.81 (Malunion of fracture), or
733.82 (Nonunion of fracture). We identified 38 cases in DRGs 218 and
219 that contained a code identifying a BMP product (identified by the
presence of procedure code 84.52) in the FY 2003 MedPAR.
In the May 18, 2004, proposed rule, we noted 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 of 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.
In the May 18, 2004, proposed rule, we did not present 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 the proposed rule. However, we
noted that, although the cited study provides some evidence of clinical
efficacy, we had 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

[[Page 49011]]

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 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 indicated that we would present
our full analysis of the evidence regarding clinical improvement in the
final rule.
Since the publication of the proposed rule, the manufacturer has
provided additional information regarding substantial clinical
improvement. The applicant provided research indicating both the
efficacy of the rhBMP product in the elderly, Medicare population as
well as satisfactorily answering any remaining questions our physicians
had regarding the clinical trials for this use of InFUSE^TM.
In the proposed rule, we indicated that we determined that this
technology still qualifies as new in the context of extending new
technology add-on payments for InFUSE^TM for single-level
spinal fusions (refer to InFUSE^TM for spinal fusion in
section 3(b) above). We noted 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 stated
that we had some reservations about whether this result would be
appropriate. We stated that 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 (in this case, every time the product is
used to treat a new bone injury). We invited 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 also invited comments on whether use of
InFUSE^TM for open tibia fractures should qualify for add-on
payments under the cost and substantial clinical improvement criteria.
Comment: One commenter wrote ``to bring to Medicare's immediate
attention that there is more that one BMP manufacturer with approved
indications for long bone fractures * * *''. The commenter went on to
note that ``Stryker[Biotech]'s * * * OP-1 Implant for recalcitrant long
bone non-unions received FDA clearance in October, 2001.'' The
commenter urged Medicare that ``the decision for add-on payment should
be for the BMP, not the manufacturer.''
Response: We agree with the commenter that determinations
concerning new technology add-on payments should not make distinctions
between different manufacturers of the same technology. As we stated in
the proposed rule on May 18, 2004: ``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.'' (69 FR 28242). In this case, we had received no
information concerning the existence of the OP-1 Implant for long bone
fusion, created by Stryker Biotech, prior to this comment. Since the
OP-1 Implant received FDA clearance in October, 2001, it has been
necessary to reevaluate whether InFUSE^TM for open tibia
fractures can still be considered new in the light of this new
information. This determination turns on two considerations: whether
these products are substantially similar, and whether the indications
for the two products lead to the assignment of cases involving the use
of the two products to the same DRGs. The crucial consideration in
determining whether a technology is new from a payment policy
perspective is whether data reflecting the costs of the technology have
been incorporated into setting the DRG weights. A technology can be
considered new for 2 to 3 years after the point at which charge data
begin to become available.
We have been able to determine that the OP-1 Implant created by
Stryker Biotech in fact was approved by the FDA under Humanitarian
Device Exemption (HDE) on October 17, 2001, for the indication of ``use
as an alternative to autograft in recalcitrant long bone nonunions
where use of autograft is unfeasible and alternative treatments have
failed.'' It came onto the market shortly after approval. The trials
where the OP-1 Implant was used demonstrated the safety and efficacy of
OP-1 Implant for patients with complicated fractures of the tibia.\3\
These cases and the study protocol are similar to those described in
the clinical trials involving InFUSE^TM for open tibia
fractures. In fact, many of the cases that were brought for review
during the application process for Infuse^TM were patients
that had already experienced non-union, were not candidates for
autograft (due to already having autograft surgery and there not being
enough material left in the hip to acquire more, or poor quality of the
bone, etc.), or had fractures in long bones other than the tibia (many
cases were femur fractures). Therefore, we believe the technology
involving use of rhBMP to treat severe long bone fractures, including
open tibial fractures, and recalcitrant long bone fractures has been in
use for more than 3 years. In addition, cases involving use of the OP-1
Implant for long bone nonunions and open tibia fractures are assigned
to the same DRGs (218 and 219, Lower extremity procedures with and
without complication or comorbidity, respectively). Therefore, data
reflecting the costs associated with this technology began to become
available in the relevant DRGs in 2001, and are now reflected in the
DRG weights. We therefore find that the use of rhBMPs for these
indications is not a new technology for the purposes of the new
technology add-on payment. In addition, if we were to approve
InFUSE^TM for open tibia fractures for the new technology
add-on payment there would be no way to distinguish the claims getting
InFUSE^TM BMP and those cases receiving the OP-1 Implant BMP,
because they are indistinguishable by patient characteristics or ICD-9
code.
---------------------------------------------------------------------------

\3\ Friedlaender, GE, at al. ``Osteogenic Protein-1 (Bone
Morphogenetic Protein-7) in the Treatment of Tibial Nonunions: A
Prospective, Randomize Clinical Trial Comparing rhOP-1 with Fresh
Bone Autograft.'' Journal of Bone & Joint Surgery. 2001;83A(S1):
151-158.
---------------------------------------------------------------------------

Accordingly, we are denying the application for add-on payments for
InFUSE^TM for open tibia fractures because this device is not
a substantial clinical improvement over existing technologies, and
therefore is not a new technology for purposes of new technology add-on
payments. We acknowledge, however, that products may evolve that are
very closely related but that have very different clinical efficacies,
and we are committed to continuing to refine and share our methodology
for deciding what should or should not be considered a new and
innovative technology. In this context, we would note that MedPAC has
encouraged us ``to be conservative in [evaluating] * * * technologies
for add-

[[Page 49012]]

on payments, ensuring that technologies are substantially different
from predecessor technologies, costly, and with clinical benefit.''
Comment: Several commenters stated their concerns regarding a
number of issues raised in our discussion in the proposed rule. They do
not think that it would be appropriate to deny add-on payments for
InFUSE^TM for tibia fractures regardless of the existing
status of the device for use in other surgeries. They stated that CMS
should not indiscriminately impose our policy criteria without
considering the clinical opinions of experts involved in these cases
and as a result deny patients access to the latest breakthrough medical
technologies. Several other commenters wrote to encourage CMS to make
add-on payments for the InFUSE^TM bone graft for treatment of
``compound fractures of the tibia.'' The manufacturer commented that it
would go against CMS precedent not to consider the new indication for
InFUSE^TM as qualifying for its own determination of
substantial clinical improvement since we had made a similar analysis
in FY 2004 for GLIADEL[reg] wafer. One commenter also supported the
review and approval of new technology add-on payments where the new
technology is being used for a different medical procedure than the
original use and will group to separate DRGs.
Response: As stated previously, we do not believe that patient
access to breakthrough technologies is being denied. Because another
device using rhBMPs for these indications has been in use for 3 years
and the costs for this technology have been included in the weights for
the DRGs where cases involving InFUSE^TM for open tibia
fractures have been assigned, this technology is not a substantial
clinical improvement over exisitng technologies and can no longer be
considered ``new.'' We further note that because we determined that the
GLIADEL[reg] wafer did not meet the newness criterion, we did not
conduct an analysis on the substantial clinical improvement criterion
in FY 2004.
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.
In the May 18, 2004, proposed rule, we indicated that, 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 proposed that Norian SRS[reg] Cement
does not meet the newness criterion.
Although we proposed to deny add-on payments because the technology
does not meet the newness criterion, we noted 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^[reg] 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 maintained 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.
In the May 18, 2004, proposed rule, we did not present a full
evaluation of the application for add-on payments for Norian
SRS^[reg] Cement under these criteria because the technology
did not meet the newness criterion. Therefore, we proposed to deny add-
on payments for this technology.
In the proposed rule we indicated that prior to publication of the
proposed rule, we had received no public comments on this application
for add-on payments. During the 60-day

[[Page 49013]]

comment period for the proposed rule, we received the following public
comments on this application.
Comment: One commenter, the manufacturer, noted that Norian
SRS^[reg] Cement should still be considered ``new'' since
there is sufficient information on the record, including sales data, to
prove that Norian SRS^[reg] Cement could not have been
included in the DRGs until the middle of 2002. The commenter also noted
that public comments were indeed submitted prior to the proposed rule
supporting a new technology add-on payment for Norian
SRS^[reg] Cement. Another commenter also explained that
Norian SRS^[reg] Cement should be considered new since it was
not generally distributed to the public for use because of technical
difficulties in mixing the product even though the product had been
produced and released for quite some time.
Response: As stated previously and as we discussed in the September
7, 2001 final rule (66 FR 46914), the determination concerning 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. 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. Therefore we do not consider Norian
SRS^[reg] cement to meet the newness criterion. As a result
we are denying add-on payments for this technology in FY 2005.
As a final note, the February 27, 2004, Federal Register notice
specified the method of submitting comments on the town hall meeting.
Our statement in the proposed rule that we did not receive comments
regarding this application referred to not having received any comments
using that method. We are glad to receive the information now. We did,
however, consider this comment as part of our discussion to deny add-on
payments for this technology in FY 2005.
Comment: One commenter noted that the Norian SRS^[reg]
Cement is an outstanding product that allows the stabilization of
fractures that would normally develop postoperative deformity and
problems after surgery. The commenter added that allograft or autogenic
bone graft that uses a bone void filler would often deform and cause
settling of the joint while the Norian SRS^[reg] cement seems
to glue all of the small fracture fragments together and can hold
together very tenuous reductions extremely well. The commenter also
noted that it only began to use the Norian SRS^[reg] Cement
once the new mixer system became available. Another commenter also
noted that the clinical benefits of Norian SRS^[reg] cement
allow for earlier removal of external fixators and pins without risk of
collapse of the fracture site and allow permanent internal fixation to
load share with the Norian SRS^[reg] cement. This results in
earlier range of motion in a safe manner, which ultimately results in
earlier return to a functional and productive lifestyle for patients.
Response: We thank the commenters for providing information on the
clinical benefits of Norian SRS[reg] cement. However, as stated above,
we do not consider Norian SRS[reg] cement to meet the newness criterion
and are denying add-on payments for this technology in FY 2005.
Comment: Some commenters supported the creation of procedure code
84.55 (insertion of bone filler) but requested the title of the code be
revised to injection of bone void filler cement from insertion of bone
filler in order to capture cases of bone void filler cements that
require mixing and are applied via injection. One commenter requested
we review the data upon implementation of this code to see how these
devices affect the DRG weights.
Response: A new code was created for bone void filler which will be
implemented on October 1, 2004. The code is as follows: 84.55 Insertion
of bone void filler. Various options for this new code were discussed
at the April 1-2, 2004, ICD-9-CM Coordination and Maintenance
Committee. A summary of this meeting can be found at: http://www.cms.hhs.gov/paymentsystems/icd9.
Public comments received at the meeting and later submitted in
writing were mixed. The manufacturer and some physicians supported new
codes that differentiated between bone void fillers that were pre-mixed
and required little or no mixing prior to insertion versus those that
required more extensive pre-mixing. The manufacturer suggested a new
code for the injection of bone void filler and another new code for
insertion of bone void filler. Representatives of hospital and coder
organizations were opposed to such a differentiation and recommended
the creation of a single new code to capture this technology: 84.55,
Insertion of bone void filler. The hospital and coding organizations
stated that hospital coders would have difficulty differentiating
between the insertion versus the injection of bone void filler. They
stated that this would be especially true in cases where it would be
necessary to determine the amount of mixing of the product that was
necessary. These organizations did not believe that the medical records
would provide this type of documentation.
The American Hospital Association will be providing education to
hospital coders on the use of this and other new codes. We will review
data on claims submitted using this new code to determine if DRG
modifications are necessary.
We are finalizing our proposal not to approve this technology for
new technology 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-D 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) high risk of ventricular arrhythmias, as
documented by a electrophysiologic testing or clinical history or both,
which would cause sudden cardiac death.
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 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

[[Page 49014]]

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 are being 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 March 2004 update file to the FY 2003 MedPAR file, we
have identified 11,004 cases using CRT-D in the FY 2003 MedPAR
database. Of these, 10,750 cases were reported in DRGs 514 and 515
(then Cardiac Defibrillator Implant With and Without Cardiac Catheter,
respectively). In DRG 515, we found 3,960 cases with procedure code
00.51 (Implantation of cardiac resynchronization defibrillator, total
system (CRT-D)) and 6,790 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 Infraction (AMI) Heart Failure/Shock) and 536 (Cardiac
Defibrillator Implant with Cardiac Catheter Without Acute Myocardial
Infarction (AMI) Heart Failure/Shock). Using the 6,790 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 3,413 cases of CRT-D for DRG 535. The remaining 3,377
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 48,700. 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 indicated in the
proposed rule that we were considering whether the CRT-D technology
still meets the newness criterion. We stated that we would welcome
comments on this issue as we analyzed whether to approve this
technology in the final rule.
Comment: Two commenters, the applicant and another manufacturer of
CRT-D devices, commented that the utilization of CRT-D is still growing
and has not reached full utilization. One of the commenters further
noted that industry estimates forecast that CRT-D will ultimately
account for over 50 percent of the defibrillator market by 2006 (or
double the amount seen in FY 2003). As a result, additional time and
utilization is necessary with CRT-D before the DRGs can be recalculated
to reflect the full costs of CRT-D in the DRG weights. Some commenters,
including the applicant, also explained that the volume of cases in the
FY 2003 MedPAR is indicative of the breakthrough nature of the
technology and the benefit it confers to heart failure patients. The
fact that some hospitals were willing to absorb the costs of the
technology and make CRT-D available to their patients should have no
effect if the technology remains new and eligible for new technology
add-on payments. In light of the above, the applicant believes the
technology should be considered new under the timeframe of newness and
that the existing MedPAR data are insufficient to update the DRG
weights for FY 2005. Another commenter noted that over the last 12
months, the volume of patients receiving the CRT-D in the commenter's
hospital has risen by 28 percent. The commenter added that for the
coming year the volume of patients receiving the CRT-D is expected to
rise an additional 30 percent.
MedPAC questioned if this technology still meets the newness
criterion. MedPAC noted that the technology could diffuse further and
represent an even greater share of cases. However, MedPAC believes it
is clear that costs of the technology are already reflected in the data
used to set the DRG weights. MedPAC recommended that one way to deal
with this issue would be to exclude cases of the technology when it can
be tracked from the calculation of the mean charges from the DRG during
recalibration of the relative weights. This would avoid overpaying for
the technology by including its costs in the base payment while also
providing an add-on payment.
One commenter, the applicant, was concerned that MedPAC's
recommendation might lead to the lowering of payment for implantable
cardioverter defibrillators (ICDs). The commenter recommended that CMS
not take any action that would lower payment for a technology that
already experiences inadequate payment.
Response: Although we have a large amount of cases of CRT-D
reflected within the DRGs, as stated by the commenter, the potential
population that can receive the CRT-D could be much larger as time
elapses. While the regulations state that a technology is no longer new
when data begin to become available reflecting the new technology in
the DRGs, the commenter has argued that the CRT-D is not fully
reflected in the DRGs since it has not reached its full market
utilization. In the proposed rule, we expressed concerns regarding the
extent of the data already reflected in the DRGs, which suggests that
CRT-D should no longer be considered ``new''. However, at this point we
cannot make a definite determination that the CRT-D is fully reflected
within the DRGs; and therefore, we have concluded that CRT-D should be
considered to meet the newness criterion.
We have responded to MedPAC's recommendation on excluding a new
technology from recalibration of the relevant weight above. We will
consider this recommendation as we continue to develop policy in this
area.
Comment: Some commenters believed that the date of issuance of an
ICD-9-CM code should start the 2- to 3-year period of a technology
being new instead of the FDA approval date. The commenters explained
that considering a technology new from the FDA approval date is
inconsistent with the regulations in 42 CFR Sec. 412.87(b)(2). One
commenter further noted that distinct hospital charge data for CRT-D
only became available after the issuance of a ICD-9-CM code and CRT-D
charge data did not become publicly available until May 2004. As a
result the commenter maintains that the CRT-D is still within the 2-3
year period of being considered ``new''. Another commenter

[[Page 49015]]

added that even though CRT-D was approved in May of 2002, it is
uncertain if hospitals adjusted their charges at that time in order to
reflect the higher costs of CRT-D procedures, especially given the lack
of a unique ICD-9-CM code. Furthermore, it was not possible to uniquely
identify CRT-D in the data until a unique ICD-9-CM code was issued.
Therefore, the commenter believes it does not seem appropriate to
consider the CRT-D new from the FDA approval date of May 2002. One
commenter was concerned that continued inadequate payment for the CRT-D
has the potential to limit patient access to this new technology.
Therefore, the commenter encouraged CMS to consider the CRT-D to meet
the newness criterion.
One commenter, the applicant, added that prior to the MMA, CRT-D
did not meet the cost threshold and therefore the applicant did not
apply for new technology add-on payments. The commenter noted that had
Congress acted earlier an application would have been submitted earlier
as well. The applicant believes that finding the CRT-D to meet the
newness criterion and approval of add-on payments for CRT-D is
consistent with Congress' intent to ensure more new technologies
qualify for add-on payments.
Response: As stated previously, we have determined that CRT-D meets
the newness criterion. For a further discussion on the newness
criterion regarding FDA approval dates and the issuance of ICD-9-CM
codes, please see section II.E.2. of the preamble to this 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.\4\ Of
course, the data submitted, which include Medicare data from 30
hospitals, do not represent a random sample of all cases in these DRGs
across all hospitals.
---------------------------------------------------------------------------

\4\ The formula is n = 4[sigma]/B\2\, where [sigma] is 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 who are also at high risk for ventricular arrhythmias. 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 welcomed comments on whether this technology meets the new
technology criterion, 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 indicated that we would determine whether
to approve this technology in the light of any comments that we
received and our continuing analysis.
Prior to the publication of the May 18, 2004, proposed rule, we
received public comments in accordance with section 503(b)(2) of Public
Law 108-173 regarding this application for add-on payments. Commenters
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. One commenter added that CRT-D has helped decrease
hospitalizations and length of stay.
During the 60-day comment period for the May 18, 2004, proposed
rule, we received the following public comments on this application.
Comment: The applicant submitted additional data aside from the
data discussed in the proposed rule showing that CRT-D meets the cost
criterion. The applicant searched the FY 2003 MedPAR for cases with
procedure code 00.51 and found 3,947 cases in DRG 515, 3,396 cases in
DRG 535 and 3,351 cases in DRG 536. The average standardized charge for
these DRGs were $81,950 for DRG 515, $104,092 for DRG 535 and $97,250
for DRG 536. This resulted in a case weighted average standardized
charge of $93,776. The case weighted threshold using the threshold
amounts from table 10 was $81,161. Based on this analysis, the
applicant maintains that CRT-D meets the cost criterion since the case
weighted average standardized charge is greater then the case weighted
threshold. One commenter believes that the average costs of the CRT-D
meet or exceed the cost threshold. The commenter added that CRT-D
procedures are more complex and take longer than conventional ICD
implantations. One commenter added that the DRGs do not provide
adequate reimbursement for cases with a CRT-D.
Response: We also searched the latest update to the FY 2003 MedPAR
and found 3960 cases in DRG 515 with an average standardized charge of
$82,520, 3,413 cases in DRG 535 with an average standardized charge of
$104,755 and 3,377 cases in DRG 536 with an average standardized charge
of $98,329. This resulted in a case weighted average standardized
charge of $94,546. Using the thresholds from table 10, the case
weighted threshold for DRGs 515, 535 and 536 was $81,169. As a result,
the average standardized charge is greater than the case weighted
threshold and therefore the CRT-D meets the cost criterion for new
technology add-on payments.
Comment: The applicant also submitted the following comments on the
substantial clinical improvement criterion. The commenter first noted
that CRT-D meets the definition of substantial clinical improvement
described in 42 CFR 412.87(b)(1) because prior to May 2, 2002 there was
no device available that provided cardiac resynchronization therapy in
combination with an implantable cardiac defibrillator, and that the
introduction of the CRT-D device enabled the treatment of patients with
symptomatic heart failure despite maximal medical therapy in addition
to providing a potentially life saving

[[Page 49016]]

defibrillator in those patients who are at high risk for ventricular
arrhythmias. Another commenter agreed with the applicant that the CRT-D
represents a substantial clinical improvement because it provides
treatment for a new and different patient population (those with heart
failure and high risk for ventricular arrhythmias). Two commenters
further noted multiple studies that demonstrated objective and
subjective clinical improvement in patients with moderate to severe
heart failure when treated with CRT or CRT-D as quantified by such
measures as New York Heart Association Class, 6 minute walk distance,
peak oxygen uptake, left ventricular ejection fraction, and area of
regurgitant mitral jet. It was also noted by the applicant that CRT-D
was shown in the COMPANION study to significantly reduce all cause of
mortality. One of the commenters also noted that CRT-D reduced symptoms
and improved quality of life. Another commenter added that the CRT-D
provides dual therapy for patients with dual indications, and that it
is not simply a combination of two existing devices. One commenter
believed that there is some potential benefit from reduced hospital
readmissions and cost savings to both the hospital and Medicare program
when using the CRT-D.
Response: We agree that CRT-D provides a valuable treatment to
Medicare beneficiaries who have refractory, symptomatic congestive
heart failure despite optimal medical management and who are also at
significant risk for potentially fatal ventricular arrhythmias. We
recognize that prior to the advent of CRT-D patients could not have had
access to the benefits of both cardiac resynchronization therapy and an
implantable defibrillator. For these reasons CMS believes the CRT-D
device represents a substantial clinical improvement for the purposes
of a new technology add-on payment.
Comment: The applicant commented that the FDA's view of CRT-P and
CRT-D devices further supports the distinction between the two
technologies. The commenter explained that the FDA did not allow for
the pooling of data for the Miracle trial (study of a CRT-P) and
MIRACLE ICD trial (study of a CRT-D) as the studies and devices
addressed different patient populations and indications. The FDA
required that the safety and efficacy of the devices be proven
separately as a result of the differences between the devices and
because biventricular pacing was a new technology. The commenter
explained that the FDA believed that the two types of CRT therapy would
affect two different populations (indications for an ICD and CRT-D
versus indications for a CRT-P with no arrhythmia). The commenter
finally noted that the FDA listed the CRT-D as one of ten ``Advances in
Patient Care'' in its Fiscal Year 2002 Office of Device Evaluation
Annual Report. In reference to CRT-D the report stated ``[t]he device,
the first of its kind, can be used to treat symptoms of advanced heart
failure in certain people who already need an ICD.'' The commenter
emphasized the FDA's language describing the device as the ``first of
its kind.''
Response: We again agree that the CRT-D device represents a
substantial clinical improvement because it is capable of treating
patients with the two distinct conditions of congestive heart failure
and ``at high risk for sudden cardiac death,'' who prior to its
availability could not have received the benefits of both cardiac
resynchronization therapy and immediate defibrillation in the event of
sustained ventricular arrhythmia. We have therefore determined that
this device meets the substantial clinical improvement criterion.
Comment: The applicant submitted three different scenarios on the
potential add-on payment amount for the new technology. The device
consists of a defibrillator, right atrial and right ventricular leads,
left ventricular lead, lead delivery system and a balloon catheter. The
first scenario would pay for the device and all the leads associated
with implanting the device. The second approach, which was supported by
the applicant, excluded the costs of the right atrial and right
ventricular leads because these items are used in ICDs whose costs are
already reflected in DRGs 515, 535 and 536. The last scenario excluded
all costs associated with the ICD since the DRGs have already captured
all costs of an ICD in the CRT-D.
Response: After reviewing all the criteria, we have determined that
CRT-D is eligible for add-on payments in FY 2005. Cases involving CRT-D
that are eligible for new technology add-on payments are identified by
either one of the following two ICD-9-CM procedure codes: 00.51
(Implantation of Cardiac Resynchronization Defibrillator, Total System
(CRT-D)) or 00.54 (Implantation or Replacement of Pulse Generator
Device Only (CRT-D)). We agree with the commenter that option number
two is the best approach to determine the costs of the CRT-D for the
purpose of new technology add-on payments. Using this approach, the
total costs for the device are $32,525. Under Sec. 412.88(a)(2), new
technology add-on payments are limited to the lesser of 50 percent of
the costs of the technology or 50 percent of the costs in excess of the
DRG payment for the case. As a result, the maximum add-on payment for a
case involving the CRT-D is $16,262.50.
Comment: One commenter recommended that CRT-D add-on payments
should expire in May of FY 2005. The commenter explained that the
newness criterion should be extended to the full 2-3 year period from
the FDA approval date.
Response: Predictability is an important aspect of the prospective
payment system methodology. Accordingly, we believe that it is
appropriate to apply a consistent payment methodology for new
technologies throughout the fiscal year. Furthermore, we note that the
CRT-D will still be within the 2 to 3 year period in which it can be
considered new for most of FY 2005. As a result, we will make add-on
payments for cases involving CRT-D for the entire FY 2005.
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 25, 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\^-(\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

[[Page 49017]]

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 25, 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 determined that GliaSite^[reg] RTS does
not meet the criterion that a medical service or technology be
considered new. Therefore, in the May 18, 2004 proposed rule, we
proposed to deny approval of GliaSite^[reg] RTS for new
technology add-on payments.
Although we proposed not to approve this application because
GliaSite^[reg] RTS does not meet the newness criterion, we
noted 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] RTS 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, because GliaSite^[reg] RTS
did not meet the newness criterion, we proposed to deny add-on payments
for this technology in FY 2005.
Prior to the publication of the May 18, 2004 proposed rule, we
received no public comments on this application for add-on payments.
During the 60-day comment period for the proposed rule, we received the
following public comments on this application.
Comment: Many commenters objected to the proposed denial of new
technology status for Iotrex (the chemotherapy agent in the
GliaSite^[reg] RTS). They stated that it represents a
substantial improvement over conventional brachytherapy treatment for
brain tumors by reducing the number of radioactive seeds implanted into
the patient's brain (via up to 20 catheters). Commenters also stated
that this therapy reduces the problems associated with conventional
therapy by providing a more ``conformal therapy with no target tissue
underdosing, less target tissue overdosing and no healthy tissue `hot
spots.' '''
Commenters also noted that this therapy is more widely available at
over 140 centers starting in 2003 (whereas brachytherapy treatment is
only offered at 5 centers nationwide). While more widely spread,
commenters nonetheless stated that prior to 2003, when the treatment
was accepted at the 140 centers noted above, ``significantly fewer
hospitals offered this therapy'' due to a combination of licensing and
safety requirements that must be met in order for providers to purchase
and use this radioisotope. Commenters stated that meeting these
requirements of the Nuclear Regulatory Commission or applicable State
authorities governing the distribution and use of Iotrex was time-
consuming, taking on average 6 to 8 months or more per hospital, and
caused a significant delay in the adoption and use of this therapy,
despite the FDA approval date. Commenters also stated that by denying
GliaSite^[reg] RTS new technology status, CMS is not
permitting appropriate payment for the device and is ``likely
restricting access to this therapy.''
Response: The regulations clearly state 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 service or technology (depending on when a new code
is assigned and data on the new service or technology become available
for DRG recalibration). Notably, the regulations continue, ``[a]fter
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 of this section.'' This device received FDA approval in April
of 2001. Information provided by the applicant demonstrates that
despite the delays caused by licensing and safety requirements, the
device was available on the market no later than fall of 2001 and data
began to become available at that time. The applicant's own comments
indicate that since that time, a relatively large number of hospitals
have adopted this therapy, with 69 hospitals having the required
license halfway through FY 2002, and 118 hospitals with the required
license at the end of FY 2003. Therefore, the costs of the device have
already been reflected in three cycles of DRG recalibrations using
costs contained in the second half of FY 2001, and captured in the
entirety of FYs 2002 and 2003 MedPAR data. Since the product has been
on the market since 2001, and since many hospitals that treat this
disease are currently using the device, and have since early in FY
2002, this device is now beyond the 2 to 3 year period in which it can
still be considered new.
Comment: One commenter noted that the DRG for craniotomy (DRGs 1
and 2) does not adequately cover the cost of the catheter and isotope.
The commenter stated that ``some centers are readmitting the patients
for reoperation to place the catheter'' and ``some are treating
patients as outpatient to avoid losing money on the DRG.''
Response: Since Medicare has paid for the device for the hospitals
that have correctly coded the use of the product in the correct DRGs as
well as in other DRGs and in other areas of our system (as disclosed by
this commenter), the costs have nonetheless been accounted for in our
data and the treatment cannot be considered new.
We therefore finalize the decision to deny new technology add-on
status for the GliaSite^[reg] RTS (Iotrex) for FY 2005.
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 enhanced 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).

[[Page 49018]]

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 proposed not to approve this application because
Natrecor[reg] does not meet the newness criterion, in the proposed
rule, we noted 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. 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, in the May 18, 2004 proposed rule, we
proposed to deny add-on payments for this technology in FY 2005.
Prior to the publication of the proposed rule, we received no
public comments on this application for add-on payments. During the 60-
day comment period for the proposed rule, we received the following
public comments on this application.
Comment: Some commenters, including the applicant, disagreed with
CMS' position that Natrecor[reg] is ineligible for an add-on payment
since it is not ``new''. A commenter explained that in the proposed
rule CMS stated that the 2-to-3 year period for collection of cost data
begins when the drug or biological receives FDA approval and not when
an ICD-9-CM code is issued. The commenter felt this contradicts the
statutory language in section 1886 (d)(5)(K)(ii)(II) and the regulatory
text in 42 CFR 412.87(b)(2). The commenter stated that that based on
the statutory and regulatory text, a technology should be considered
new from the date a code is issued. As a result, since Natrecor[reg]
did not receive a unique code until October 1, 2002, it should still
fall within the 2-3 year period to be considered new.
The commenter further noted that heart failure patients who receive
Natrecor[reg] are more costly than patients who do not receive
Natrecor[reg]. Based on data the applicant submitted, the commenter
explained that the average charge for a patient receiving Natrecor[reg]
is 47.5 percent higher than the case weighted average charge threshold
of $32,485. The commenter also added that based on data from the
Premier database, even though 48 percent of all cases of Natrecor[reg]
map to DRG 127, Natrecor[reg] has had a very small impact on DRG 127
since it represents only 1.8 percent of all charges in DRG 127 which is
a result of the fact that only 8.4 percent of all patients assigned to
DRG 127 received Natrecor[reg]. As a result, the commenter disagreed
with CMS' contention that charges for Natrecor[reg] are adequately
reflected in the relevant DRGs. The commenter concluded that limited
Medicare reimbursement coupled with the high cost of a breakthrough
biologic therapy have led to restrictions on the use of Natrecor[reg].
Also, the number of patients that could receive Natrecor[reg] in DRG
127 is much higher then the current figure of 8.4 percent.
Another commenter believed that CMS should provide its full
evaluation of the cost and clinical data submitted by this applicant
(and all other applicants) in order to provide for better insight into
the agency's decision-making process. The commenter was concerned that
during the comment period an application could satisfy the criterion
upon which CMS had proposed to deny the application in the proposed
rule, while in the final rule CMS could deny the application on a
different criterion that had not been discussed in the proposed rule.
As a result, the commenter recommended a full analysis of all the
criteria in the proposed rule.
Response: As stated above, a 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. For a further discussion on the newness criterion regarding
FDA approval dates and the issuance of ICD-9-CM codes, please see the
preamble above.
We conduct sufficient analysis on each application in order to
provide sufficient opportunity to comment. We do not believe that it is
necessary to provide a full analysis of all the criteria in cases
where, for example, we believe

[[Page 49019]]

that sufficient evidence is available to propose denying the
application on the basis of the newness criterion. However, even in
these cases we provide an account of any information submitted by the
applicant in order to provide opportunity for comment.
Comment: One commenter believes that CMS should be more proactive
when it comes to DRG reclassifications of new technologies. The
commenter cited Natrecor[reg] as an example of a new technology with
over 10,000 cases in which the current reimbursement is inadequate. The
commenter noted that after CMS denied the application for add-on
payments, no consideration was given to the reclassification of the new
technology. The commenter encouraged CMS to make strides to ensure that
patient access to important, life threatening therapies is not
threatened by inappropriate PPS payments.
Response: When reviewing new technology applications, we consider
if the applicant has met all the criteria for new technology add-on
payments. The applicant or anyone from the public is free to make a
separate request for consideration of a new DRG assignment as we
discuss in section II. B. of this final rule.
Because Natrecor[reg] does not meet the newness criterion, we are
finalizing our proposal not to approve add-on payments for this
technology in FY 2005.
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, also 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 simpler implantation, follow up, and
programming procedures for physicians.
In December 2003, the device was approved by the FDA. Therefore, it
qualifies under the newness criterion because FDA approval was within
the statutory timeframe of 2-3 years and its costs are therefore not
yet reflected in the DRG weights. Because there are no data available
to evaluate costs associated with 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.
For the proposed rule, 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 and an additional surgery for implantation of
the second generator). Therefore, the Kinetra[reg] device reduces the
number of surgeries from 3 to 2.

[[Page 49020]]

In the May 18, 2004, proposed rule, we indicated that, despite the
improvement Kinetra[reg] represents over its immediate predecessor,
Soletra^TM, we had 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 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 welcomed 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 for the same patient symptoms.
In the proposed rule, we also invited 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], we stated in the
proposed rule that we would expect the costs for patients who receive
the new device to drop. We stated that, for those reasons, 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, in the proposed rule, we invited 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 had 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 also investigated whether a second hospital stay is needed
for implantation of Kinetra[reg].
Despite these issues, we indicated that we would continue to
consider whether it was 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
stated that we would make a final determination in the light of public
comments that we received on the proposed rule and our continuing
analysis.
Prior to publication of the proposed rule, we received no public
comments on this application. During the 60-day comment period for the
proposed rule, we received the following public comments on this
application.
Comment: The applicant responded to our request for comments by
providing further detail on the cost of the device, how it derived the
higher cost for the device and recommendations on how we might proceed
if we were to approve the device for add-on payments. It noted that the
device has substantially higher manufacturing costs than the
predecessor device, Soletra^TM, which has a smaller battery
and much lower production cost. The applicant also stated that the
device meets the substantial clinical improvement criterion due to the
much improved user outcomes for patients that receive Kinetra[reg] as
opposed to those that receive the Soletra^TM. In addition to
the factors listed above, it noted that not only does the device reduce
invasiveness and risk of surgical complications to implant the device,
but the shorter operating time needed to implant one device reduces the
duration of anesthesia in one episode that these patients need for
surgical placement. The time to reach the desired and improved
therapeutic outcome is greatly reduced. The need for follow up care is
substantially reduced and the intervals between battery replacement
operations with the new device are significantly increased (anywhere
from 15 months to 2 years longer, based on various comments received).
The applicant also provided data that satisfactorily answered our
remaining questions with regard to the reasons for staged implantation
of the device in some patients. It noted that many patients simply
cannot physically tolerate the long day of surgery, and particularly
the general anesthesia required to implant the generator if the
procedure is all done in one day or one hospital stay. In addition, due
to the nature of the brain surgery involved to place the leads, care
must be given to ensure that no hemorrhages are present before
proceeding with implanting the rest of the device. Other physicians
noted that patient medications must also be taken into account when
planning the implantation of the device. One commenter, a physician
using the device in his practice, also noted the improved mobility and
function of patients receiving this device and the reduced interference
in daily and leisure activities for patients receiving this device over
the Soletra^TM generators. Other physicians noted that
patients actually spend less time in the hospital under the staged
method for implanting the device and tolerate the procedures much
better. Some nurses noted that there are additional educational
requirements associated with the Kinetra[reg] device due to the unique
patient control, but this training and the additional time to set up
the initial programming of the device result in reduced follow-up
visits and re-programming, and allow the patients to monitor their
symptoms in the stress-free environment of the home instead of the
doctor's office.
Response: We believe that sufficient evidence has been provided by
the applicant to demonstrate that this device satisfies the significant
clinical improvement criterion and should receive new technology add-on
payment for FY 2005. We have found that, based on the new evidence
provided, Kinetra[reg] does represent a substantial clinical
improvement over the previous Soletra^TM device.
Specifically, the increased patient control, reduced surgery, fewer
complications, and elimination of environmental interference
significantly improve patient outcomes. Since we stated in the proposed
rule that the device meets the newness criterion, and that the device
meets the cost threshold in the DRGs to which it is assigned, this
determination of substantial clinical improvement warrants the approval
of Kinetra[reg] for new technology add-on payments for FY 2005.
Comment: The applicant also recommended that, if approved for add-
on payment, CMS should require both the procedure code that identifies
the neurostimulator device for deep brain stimulation (02.93) in
addition to the code that identifies the placement of the

[[Page 49021]]

generator in the chest cavity (86.95). In addition, it commented that
any concern over double-payment if implantation occurs in a staged
manner (that is, in separate inpatient admissions or in different
settings that Medicare pays for) would be ameliorated if we require
that both these two ICD-9-CM codes be required in a case that is mapped
to either DRG 1 or 2 (Craniotomy with and without CC).
Response: We agree that this is the best approach to resolving both
the reimbursement issue as well as concerns over the possibility of
paying for the device twice if performed in different settings (that
is, a staged implantation). We are approving new technology add-on
payments for the Kinetra[reg] device for FY 2005 in this final rule.
Cases receiving Kinetra[reg] for Parkinson's disease or essential
tremor on or after October 1, 2004 will be eligible to receive an add-
on payment of up to $8,285, or half the cost of the device, which is
approximately $16,570. These cases will be identified by the presence
of procedure codes 02.93 (Implantation or replacement of intracranial
neurostimulator leads) and 86.95 (Insertion or replacement of dual
array neurostimulator pulse generator). If a claim has only the
procedure code identifying the implantation of the intracranial leads,
or if the claim identifies only insertion of the generator, no add-on
payment will be made.
Comment: Commenters expressed disappointment that we did not
approve this device in our proposed rule. However, they remarked upon
the complex issues that were raised by our concerns. Specifically,
commenters urged that CMS adopt and maintain a uniform standard between
the inpatient PPS and the outpatient PPS, urging CMS to make consistent
decisions for devices that may be used appropriately in both settings.
The commenters specifically referenced different sets of language
defining substantial improvements from the OPPS rules, urging the IPPS
to follow the guidance of the policies set forth in the OPPS.
Response: The commenters' specific reference to the language in the
November 1, 2002 outpatient prospective payment system final rule (67
FR 66781 through 66783) that refers to determinations of substantial
clinical improvement where factors such as ``increased battery life''
and ``miniaturization, might so improve convenience, durability and
ease of operation'' was taken out of context. The November 1, 2002
final OPPS rule states, ``[n]evertheless, there may be some
improvements in the medical technology itself that are so significant
that we may wish to recognize them for separate payment * * * even
though they do not directly result in substantial clinical
improvements.'' To date, the OPPS has only applied these explicit
substantial clinical improvement criteria to pass-through device
category applications. We have not yet determined whether to apply this
particular standard within IPPS. However, we are approving the
Kinetra[reg] device for new technology add-on payments for FY 2005,
without reference to these considerations. We will continue to consider
whether to employ specific factors such as those identified for the
OPPS in the IPPS.
Comment: Several commenters noted the importance of the
programmability of the device, especially for patients who live at a
distance from their physician and would not be able to visit frequently
to adjust the level of stimulation as would be necessary with the
Soletra^TM device. One commenter (a physician) noted that
``the problem [with the Soletra^TM device] has been so severe
in some patients that [he has] had to loan them a regular physician
programmer so that they could do the adjustments at home.'' He noted
further that the Soletra^TM programmer is not meant for
patient use and encouraged CMS to approve add-on payment for
Kinetra[reg] so he can use it in his practice.
Response: We do not know the protocol for doctor-patient
programming of the Soletra^TM device, however, we are
approving add-on payment for Kinetra[reg] for FY 2005.
Comment: We received one comment that cited that ``the use of
Kinetra[reg] in the VA system is preferred by an almost 3 to 1 ratio
versus the previous technology'' whereas the usage in Medicare was only
approximately 1 to 4.
Response: We do not know where the commenter received the data in
this comment, as we were not given this data by the applicant. However,
we are approving Kinetra^[reg] for add-on payment for FY
2005.
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.
In the May 18, 2004, proposed rule, we indicated that we had
reviewed the application and technology, and we had 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 stated that the ISKD met the substantial
clinical improvement criterion 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. In addition, the manufacturer pointed out that with
the ISKD, the lengthening procedure is

[[Page 49022]]

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,
in the May 18, 2004 proposed rule, we proposed to deny the application
for the ISKD device for new technology add-on payments for FY 2005.
Prior to publication of the proposed rule, we received no public
comments on this application. During the 60-day comment period for the
proposed rule, we received the following public comments on this
application.
Comment: The applicant noted that it was very disappointed with
CMS' proposal to deny add-on payments for this device. It stated that,
although the device may be paid for in the DRG system, so few cases
have received the device that the costs related to the device are not
accurately reflected in the data used to recalibrate the DRG weights.
It argues that the low volume of cases that have received the device
has been a direct result of underpayment for the device and that CMS is
denying this treatment to beneficiaries by not paying more for this
device. The applicant also stated that if we had asked for market data
in the application, it would have provided that information to us
sooner, and would have had the opportunity to present its argument that
the device did, in fact, have a delay between FDA approval and coming
to the market. It stated that the ``delay between FDA approval and
commercial availability was due to a halt in production while certain
changes on the ISKD were validated.'' It also noted that the company
``conducted a comprehensive review of its sales database'' and has
determined that the first commercial sales of the device were made in
February 2002, and as such, the costs of the device were not included
in the FY 2001 MedPAR.
Response: This device has been on the market for more than the 2-
to 3-year period for which new technology add-on payments are allowed.
Even though there may have been a delay in commercial availability of
the device, the company stated that sales were made in February of
2002. We note that we are not using strictly the FY 2001 MedPAR as our
basis for determining newness in FY 2005, but are denying add-on
payments to those products that were on the market prior to midway into
FY 2002. Products that were in use prior to April of 2002 have data for
more than half of FY 2002 so that the costs of the new technology were
included in the DRG recalibration in subsequent years. We have been
making payments for the ISKD device since it came on the market and
data reflecting the cost of the device are therefore already reflected
in the DRG weights. Therefore, we cannot find that the device is new
and we are finalizing our proposal to deny this applicant new
technology 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: an 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, in the proposed
rule, we indicated that we had determined that Acticon^TM
Neosphincter does not meet this criterion.
Although we proposed not to approve this application because
Acticon^TM Neosphincter does not meet the newness criterion,
we noted 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: (1) There is no other existing
device in the United States that can be used to treat severe fecal
incontinence; and (2) 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, because Acticon^TM Neosphincter does not meet
the newness criterion, we proposed 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 final rule,
we are finalizing our proposal 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) in MDC 6 (Diseases and
Disorders of the Digestive System) only. All other MDC and DRG
assignments for codes 49.75 and 49.76 remain the same.
Prior to the publication of the May 18, 2004 proposed rule, we
received public comments in accordance with section 50(b)(2) of Pub. L.
108-173 regarding this application for add-on payments.
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. However, because we
concluded that the Acticon^TM Neosphincter is no longer new,
we proposed that it is not eligible for add-on payments.
During the 60-day comment period for the May 18, 2004 proposed
rule, we received the following public comments on this application.
Comment: One commenter, the applicant, commented that the
Acticon^TM Neosphincter should still be considered new under
the newness criterion since the device received FDA approval on
December 18, 2001 and

[[Page 49023]]

ICD-9-CM codes (49.75 and 49.76) became effective October 1, 2002. The
commenter believes that only after the ICD-9-CM codes became available
did data begin to reflect the costs of the technology in the DRGs.
Based on the issuance of the codes, there is only 1\1/2\ years of data
and this is the first year CMS is using data with the new ICD-9-CM
codes that reflect the Acticon^TM Neosphincter within the
DRGs. As a result, the commenter maintains that the
Acticon^TM Neosphincter is still ``new'' under 42 CFR
412.87(b)(2).
The commenter also noted that the standardized charges per case of
$16,758 are actually the standardized costs per case. The correct
average charge per case based on the data submitted is $41,396.
Response: As stated above, 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 and the costs of this
technology are currently reflected in the DRG weights. As a result, the
Acticon^TM Neosphincter does not meet the newness criterion.
For a further discussion regarding the effect of FDA approval dates and
the issuance of ICD-9-CM codes upon our evaluation of the newness
criterion, please see the preamble above.
Also, in reference to the cost data, we appreciate the commenter
pointing out this error and agree that the average case weighted
standardized charge is $41,396. Because the average case weighted
standardized charge is greater then the average case weighted threshold
of $14,426, the commenter maintains that the Acticon^TM
Neosphincter meets the cost criterion. However, because the
Acticon^TM Neosphincter does not meet the newness criterion,
we are denying add-on payments for this technology in FY 2005.
We are finalizing our proposal not to approve this technology for
add-on payments for FY 2005.
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 the 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 the 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. We indicated in the proposed rule that, because we
lack a significant sample of data reflecting the costs of this
technology, we could not accurately determine the average charge per
case for the TandemHeart\TM\ pVAD. Neither could we determine whether
this technology meets our cost criterion. We indicated that if we
received sufficient data to complete our analysis in time for inclusion
in the final rule, we would assess whether this technology meets the
cost criterion.
In response to this request, the manufacturer and applicant
submitted supplementary data on the TandemHeart\TM\ pVAD. We received a
total of 11 actual cases that used the Tandem Heart. Although these
cases are approximately 18 percent of all TandemHeart\TM\ pVAD cases,
we cannot consider this a significant sample of cases to determine if
the Tandem Heart meets the cost criterion. Of the 11 cases submitted,
the variance in charges from the lowest charge per case to highest
charge per case was close to 1 million dollars. Such a large variance
in charges per case will require us to consider many more cases in
excess of the 11 cases submitted and the 60 total cases that have used
the device since its inception before we can determine if the
TandemHeart\TM\ pVAD meets the cost criterion. Also, because this is a
small pool of cases, one unrepresentative case could skew the results
of the data. As a result, because there are insufficient data for us to
determine whether the TandemHeart\TM\ pVAD meets the cost criterion, we
are denying add-on payments for this technology in FY 2005.
Although we are not approving this application because we did not
have sufficient data to determine whether TandemHeart\TM\ pVAD meets
the cost criterion, in the proposed rule we noted 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. In the proposed rule, we indicated that we would present a
full analysis of this technology under the significant improvement

[[Page 49024]]

criterion if we received sufficient data in time for this final rule to
evaluate whether the technology met the cost criterion. For this final
rule, as we have determined above, the TandemHeart\TM\ pVAD does not
meet the cost criterion and therefore we are not presenting our full
analysis of this technology under the substantial improvement
criterion. However, we note, although the TandemHeart\TM\ pVAD appears
to be a promising new technology for providing circulatory support in
profound, refractory left ventricular failure, our review of the
submitted literature did not find that adequate clinical experience or
clinical evidence exists to demonstrate substantial clinical
improvement to the degree we feel is necessary to warrant a new
technology special add-on payment. As a result of this and the fact
that there are insufficient data to determine whether the
TandemHeart\TM\ pVAD meets the cost criterion, we are denying add-on
payments in FY 2005 for this technology.
Nevertheless, we encourage the manufacturers of the TandemHeart\TM\
pVAD device to continue their efforts to compile objective clinical
data that demonstrate its clinical efficacy, particularly with regard
to improved clinical outcomes in patients with this very serious, life
threatening condition. Because the device only became available for use
in May 2003, it could remain eligible for consideration for new
technology add-on payments in FY 2006.
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
final rule.
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) A 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 commercially
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. In the proposed rule, we
indicated that 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, in the proposed rule, we
indicated that 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 invited
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.
Comment: One commenter, the applicant, explained that the System
100 should still be considered new for numerous additional reasons. The
commenter explained that System 100 has received numerous patents
issued from the United States Patent Office for many aspects of the
technology thus demonstrating its uniqueness and newness. The commenter
also added that the technology should be considered new since the FDA
recognized the features of the technology, such as proprietary design
of the filter assembly and its unique low flow capability, as a
different technology because the device can be used in a different
patient population. The commenter further explained that no other
technology operates in this low flow range using automatic pressure
control algorithms and peripheral vascular access while delivering ease
of use and patient safety.
Some commenters recommended that CMS maintain the criteria and
definition established in the September 7, 2001, Federal Register (66
FR 46915) 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 criterion. As a result,
the commenters maintain that according to the September 7, 2001, final
rule the System 100 meets these criteria and should be approved for new
technology add-on payments.
Response: We appreciate the commenter's comments on the newness
criterion. As noted above, we do not employ FDA guidelines to determine

[[Page 49025]]

what drugs, devices or technologies qualify for new technology add-on
payments. We also do not consider patents issued by the United States
Patent Office as an indicator of a new technology. For a more detailed
discussion of the criteria for newness and substantial clinical
improvement please see the September 7, 2001, Federal Register (66 FR
46914).
We will continue to review the policy stated in our September 7,
2001, rule. We invite further public comment on this issue in the
interim.
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, as in the
proposed rule, we 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)(5)(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 for only the circuits and catheter, which represent the
operating expenses of the device. However, in the proposed rule we
stated our belief that the catheters cannot be considered new
technology in any sense. As a result, we considered only the UF 500
disposable blood circuit as 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 (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. In
the May 18, 2004 proposed rule, we welcomed comments from the public on
the charge information submitted by the applicant for the circuits.
Comment: One commenter noted that we stated, ``[c]atheters cannot
be considered new technology in any sense.'' The commenter stated that
this language on catheters is unduly broad and it is possible that the
introduction of a new catheter could represent a substantial clinical
improvement. The commenter also noted that a catheter could be
considered new under CMS policy specified in the September 7, 2001,
Federal Register (66 FR 46915) that discusses if the new use of an
existing technology is for treating patients not expected to be
assigned to the same DRG, it may be considered for approval of new
technology add-on payments.
Response: We thank the commenter for pointing this out and we agree
that in a certain circumstance a catheter could be considered a new
technology under our current policy. We also note that we are
continuing to review our policy regarding whether a new use of an
existing technology may be considered for approval of new technology
add-on payments.
For the proposed rule, 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 payments 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. In the proposed rule we stated our belief that there was
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, in the May 18, 2004 proposed
rule, we also invited comment on whether the data submitted are indeed
adequate to demonstrate significant clinical improvement.
Prior to the publication of the May 18, 2004, proposed rule, we
received public comments in accordance with section 503(b)(2) of Public
Law 108-173 regarding this application for add-on payments. 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.
We considered these comments in our evaluation in the proposed rule
of whether the System 100 meets this substantial clinical improvement
criterion. During the 60-day comment period for the proposed rule, we

[[Page 49026]]

received the following comments on this application.
Comment: One commenter, the applicant, illustrated that there
remains a growing unmet clinical need for effective treatment of the
congestive heart failure population. The need for new technologies to
treat fluid overload is demonstrated through data from the ADHERE
registry which states that the percentage of heart failure patients
discharged but still symptomatic of fluid retention is 39 percent. The
registry had other notable facts and concluded that chronic diuretic
therapy is due to fluid overload seen in patients with and without
renal insufficiency and is an independent predictor of poor clinical
outcomes and higher resource utilization. The commenter concluded that
the emerging knowledge of congestive heart failure patients suffering
from fluid overload demonstrates the need for efficient and effective
fluid removal such as the System 100.
Some commenters also commented that the System 100 meets the
established criteria for new technology since it is clearly and
distinctly new and different from any currently available technology
and provides clinical services to patients who previously were
ineligible for this kind of therapy, and treats a different patient
population--heart failure versus renal failure. Furthermore, these
commenters also noted that patients with fluid overload are treated in
a different DRG than patients who have renal failure.
The applicant also noted that there are some clinical trials that
have demonstrated the clinical safety and effectiveness as well as cost
effectiveness of the System 100 in treating patients with fluid
overload.
Response: We thank the commenters for their comments on this
criterion. After careful review of all available information, we have
determined that although we recognize the potential benefit of this new
technology for Medicare beneficiaries (as stated by the commenter), we
do not believe there is sufficient objective clinical evidence to
determine that the System 100 meets the substantial clinical
improvement criterion (such as a large prospective, randomized clinical
trial), given the prevalence of congestive heart failure in the
Medicare population. For example, a large prospective, randomized
clinical trial that demonstrates improved outcomes, especially in
morbidity and mortality, when compared to standard therapy for this
sub-population of Medicare patients with congestive heart failure was
not submitted. As a result, we are denying add-on payments for this
technology for FY 2005.

III. 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 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 for FY 2005 is discussed in section II.B. of the
Addendum to this final 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 for FY
2005 is discussed in section II.B. of the Addendum to this final 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 applying 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

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);

[[Page 49027]]

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 composition 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 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.
Comment: Many commenters recommended various revisions to the
proposed labor market definitions. Many of these comments focused on
specific situations, especially situations in which previously large
MSAs were divided into smaller MSAs under the new definitions, and the
converse situation in which MSAs expanded under the new definitions.
One commenter, proposed an extensive reoconfiguration of CMS' labor
market areas. Specifically, the commenter recommended that, instead of
expanding certain MSAs, we create a system of overlapping markets,
beginning with a core labor market, consisting of the original MSA and
center city, and creating overlapping subdivisions, or ``tiers,'' out
of the areas outside the core. Furthermore, the commenter cites a U.S.
Government Accountability Office (GAO) report that called for CMS to
refine its MSA-based wage index areas so that they might better
represent actual hospital labor markets, which could potentially entail
reducing the size of some large urban markets because of the large
disparities between the wage levels in central cities, large towns, and
outlying counties.
The proposal begins with all counties associated with the urban
area, either under the old or new MSAs, which are then subdivided based
upon PMSAs or Metropolitan Divisions. These areas would be ranked
according to wage level, assigning the highest wage area as the
``core.'' Then overlapping labor markets would be formed as each
subsequent ranked area is packaged with the center city, creating tiers
of labor markets. A wage index would be developed for each tier,
retaining a high wage value reflective of the center city, and
successively lower wage levels for the surrounding areas. As the labor
markets incorporate one another and build upon the central area, the
system acknowledges the interaction between the given areas but fairly
accounts for the wage level differences encompassed therein.
The commenter asserts that this system will adequately recognize
the higher labor costs in the core area and moderate the funding
differential between the central area and the

[[Page 49028]]

outlying communities, who are undoubtedly linked to the core area. It
would also afford more reclassification opportunities for hospitals
within the greater metropolitan area and prevent the `orphanization' of
hospitals whose provider neighbors are reclassified into higher wage
areas while they retain their geographic wage index.
Other commenters objected to the division of certain MSAs, and
advocated restoring the larger MSAs that existed under the previous
definitions. These commenters contended that the smaller MSAs do not
adequately capture the regional nature of markets for hospital labor.
Other commenters, especially those that would benefit from specific
changes, supported the changes previously cited. Hospitals in a high
wage area supported the proposal to split their area off from the lower
wage areas around the fringe of the large MSA to which they had
belonged under the old definitions. Hospitals that are included in a
higher wage MSA under the new definitions also expressed strong support
for the expansion of this MSA, and specifically requested that we make
no changes in the proposal.
Response: We appreciate the detailed and substantive
recommendations provided by these commenters. These recommendations
merit further study and consideration. However, we do not believe that
it would be prudent to proceed with any of these recommendations at
this time, for several reasons. First, these recommendations are not
entirely consistent, since some emphasize expanding existing MSAs or
preserving large MSAs that existed under the old definitions, and
others emphasize creating smaller units or at least distinguishing
segments within larger MSAs. In addition, the range of comments on
specific situations indicates the importance of taking into
consideration all of the effects that these proposed revisions might
have. Specifically, hospitals that stand to benefit from the new
definitions might experience lesser gains from the proposed revisions.
Finally, we believe that the 1-year transition that we have proposed
will alleviate the concerns of many hospitals, by limiting the
reductions that they might otherwise experience from the introduction
of the new labor market areas. We will continue to study these issues.
Comment: Several commenters have suggested that the implementation
of the new MSAs be delayed at least another year so that alternative
solutions may be reviewed.
Response: The new MSA designations were released June 6, 2003. We
stated in our August 1, 2003 final rule that CMS was unable to
implement the new MSAs immediately but intended to evaluate the impact
of the changes for the FY 2005 proposed rule. In essence, we have
already delayed the implementation of the new Census information.
Comment: One commenter mentioned the need to closely monitor the
population changes in the large Micropolitan areas, as crossing the
threshold to 50,000 would create a new MSA. The commenter cited the
case of Eagle Pass, TX, which, according to July 1, 2003 population
estimates, now exceeds the 50,000 threshold. The commenter states that
failure to recognize such areas will unnecessarily cripple growing
areas.
Response: In the past, CMS has updated its MSA database annually
before the publication of the proposed rule based on OMB's listing of
MSAs. While an area may have an estimated population exceeding the
threshold, we can only update once OMB recognizes this change. At this
time, OMB still recognizes Eagle Pass, TX as a Micropolitan Area.
Comment: Many commenters believe that the large MSA should not be
divided into the Metropolitan Divisions as outlined by the new OMB
definitions.
Response: In previous years we have utilized PMSAs, a division of
the larger CMSA. We believe the usage of Metropolitan Divisions
represent the closest approximation to PMSAs, the building block of our
current Labor Market Definitions. Therefore, we do not believe that we
should abandon the use of these new definitions since they most
accurately retain our current structuring of labor market areas.
However, given the scope and drastic implications of these new
boundaries and to buffer the subsequent negative impact on numerous
hospitals, we have decided to provide, during FY 2005, a blend of wage
indexes to those hospitals that would experience a drop in their wage
indexes because of the adoption of the new labor market areas. Any
hospital experiencing a decrease in their wage index relative to its FY
2005 wage index because of the labor market area changes will receive
50 percent of the wage index using the new labor market definitions and
50 percent of the wage index that the provider would have received
under the old MSA standards. This blend will apply to any provider
experiencing a decrease due to the new definitions, including providers
who are reclassifying under MCGRB requirements, section 1886(d)(8)(B)
of the Act or section 508 of Public Law 108-173. We describe the
determination of this blend in detail below. It is important to note
that this blend will not protect hospitals from the effects of a drop
in wage index due to any reason other than the usage of the new MSAs.
For example, the blend will not apply to changes due to the use of new
wage data in calculating the FY 2005 wage index. In other words, the
two wage indexes (one wage index reflecting the labor market
definitions employed in FY 2004, the other wage index reflecting the
new CBSA definitions) used in determining the blended wage index both
reflect the new FY 2005 wage data. Both these wage indexes also reflect
the 10 percent occupational mix adjustment that we discuss in section
III.G of this final rule.
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, in the May 18, 2004 proposed rule (69 FR 28250), we
proposed to use the New England MSAs under the new CBSA definition.
Comment: Some commenters have expressed concern regarding the
adoption of a county-based system for the New England MSAs. They
believe that abandoning the city- and town-based areas will
inaccurately reflect the labor market areas in New England.
Response: In order to create consistency among all labor market
areas and facilitate the maintenance of these areas, we will use the
county-based areas for all MSAs in the nation. Census has now defined
the New England area around counties, creating a city- and town-based
system as an alternative. We believe that adopting county-based labor
market areas for the entire country provides consistency and stability
in program payment, and minimizes programmatic complexity. In addition,
we have consistently employed a county-based system for

[[Page 49029]]

New England for precisely that reason: to maintain consistency with the
labor market definitions used throughout the country. Because we have
never used cities and towns, employing a county-based system in New
England maintains that consistent practice.
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, in the May 18, 2004 proposed rule, we proposed 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,
DC. 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 PMSAs 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 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.
Comment: Many commenters have expressed their concern regarding the
division of large MSAs of 2.5 million population or greater. They are
concerned that this dividing of previously larger areas will result in
dramatic disparities in wage indexes in what once was a congruous area.
Additionally, many hospitals are concerned they did not have the
opportunity to reclassify given the dramatic effect of this division of
previously consolidated areas.
Response: As indicated above, Metropolitan Divisions represent the
closest approximation to PMSAs, the building block of our current labor
market definitions. Therefore, we do not believe that we should abandon
the use of these new definitions since they most accurately retain our
current structuring of labor market areas. However, given the scope and
drastic implications of these new boundaries and to buffer the
subsequent negative impact on numerous hospitals, we have decided to
provide, during FY 2005, a blend of wage indexes to those hospitals
that would experience a drop in their wage indexes because of the
adoption of the new labor market areas. Any hospital experiencing a
decrease in their wage index relative to its FY 2005 wage index because
of the labor market area changes will receive 50 percent of the wage
index using the new labor market definitions and 50 percent of the wage
index that the provider would have received under the old MSA
standards. This blend will apply to any provider experiencing a
decrease due to the new definitions, including providers who are
reclassifying under MCGRB requirements, section 1886(d)(8)(B) of the
Act or section 508 of Public Law 108-173. We describe the determination
of this blend in detail below. It is important to note that this blend
will not protect hospitals from the effects of a drop in wage index due
to any reason other than the usage of the new MSAs. For example, the
blend will not apply to changes due to the use of new wage data in
calculating the FY 2005 wage index. In other words, the two wage
indexes (one wage index reflecting the labor market definitions
employed in FY 2004, the other wage index reflecting the new CBSA
definitions) used in determining the blended wage index both reflect
the new FY 2005 wage data.
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 proposed 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 final 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, which was included in the proposed rule,
demonstrates the distributions of hospitals by their current and new
designations. Approximately 50 percent of hospitals currently
designated rural are now in

[[Page 49030]]

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.
[GRAPHIC] [TIFF OMITTED] TR11AU04.036

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 on the Census
Bureau's Web site: http://www.census.gov/population/www/estimates/metrodef.html. We then compared the 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 did 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, which was included in the proposed rule, 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, counties were added to the Atlanta, Denver, Little Rock,
Omaha, Portland, Richmond, Toledo, Virginia Beach-Norfolk MSAs but
hospitals were not added).
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.

[[Page 49031]]

[GRAPHIC] [TIFF OMITTED] TR11AU04.037

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 1
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, in the May 18, 2004, proposed rule, we proposed
not to adopt Micropolitan Areas as independent labor market areas.
Although we considered alternative 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 proposed 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, which was included in the proposed rule, displays the
impacts of using this approach on hospital wage indexes. 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
from 36 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.

[[Page 49032]]

[GRAPHIC] [TIFF OMITTED] TR11AU04.038

Comment: Many commenters addressed the usage of Micropolitan Areas.
Some commenters believe that we should adopt a policy recognizing each
of the individual Micropolitan Areas. These commenters pointed out that
some hospitals would benefit from the adoption of Micropolitan Areas as
in the case of higher wage hospitals in currently rural areas that
would receive a wage index more closely reflecting their own wage
level. However, other commenters endorsed our proposal to treat
Micropolitan Areas as part of the statewide rural areas. Many hospitals
and several national hospital associations supported our decision not
to employ Micropolitan Areas for the reasons that we presented. MedPAC
also expressed support for the proposal to include Micropolitan Areas
in the statewide rural areas.
Response: We continue to believe that the reasons we presented in
the proposed rule for including Micropolitan Areas in the statewide
rural areas are compelling. We are therefore finalizing our proposal to
treat the Micropolitan Areas as ``rural.''
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
DSH adjustment payments to a hospital redesignated from urban to rural.
Given the significant payment impacts upon some hospitals because
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 the new definitions. 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, in the May 18, 2004 proposed rule, we proposed 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.
Specifically, we will assign these hospitals, as we did in the proposed
rule, the prereclassified wage index of the urban area to which they
currently belong. (For purposes of wage index computation, the wage
data of these hospitals will remain assigned to the statewide rural
area in which they are located.) We are finalizing this policy in the
final rule. We are using the wage data from these hospitals as part of
setting the rural wage index. The higher wage indexes these hospitals
are receiving is being taken into consideration in determining whether
they qualify for the out-commuting adjustment and the amount of any
adjustment. Beginning in FY 2008, these hospitals would receive their
statewide rural wage index, although they will 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. We noted that,
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. Therefore,
although we notified the public that a blended rate was a viable
option, we did not propose this in the proposed rule. We also noted
that OMB in the past has

[[Page 49033]]

announced MSA changes on an annual basis due to population changes, and
we have not transitioned these changes.
Comment: Many commenters urged CMS to adopt broader protections for
hospitals against changes in the wage index due to the adoption of the
new labor market areas. Many of these commenters advocated extending
hold harmless protection to other categories of providers beyond those
that we provided for in the proposed rule. Commenters offered various
recommendations about how to provide such protection. Most commenters
advocated transition mechanisms such as hold harmless or blending only
for those hospitals that would experience a wage index decrease from
the effects of the labor market area changes. MedPAC recommended
providing a transition to all hospitals that experience large decreases
in their wage indexes due to these changes and phasing in the changes
for these hospitals over three years. MedPAC also recommended that the
threshold for large decreases be set so that the cost of this provision
over the transition period would equal the cost of our proposal to
implement the new market definitions with a hold harmless for urban
hospitals that become rural under the new definitions.
Response: We recognize that many hospitals will experience
decreases in wage index as a result of the labor market area changes.
At the same time, significant numbers of hospitals will benefit from
these changes. In addition, as of September 1, 2004, hospitals will be
able to seek reclassification for FY 2006 using the new labor market
areas, if they believe another area's wage index is more appropriate
and if they meet the requirements for reclassification by the MGCRB.
Therefore, we have decided to provide a 1-year transition blend for
hospitals that, due solely to the changes in the labor market
definitions, experience a decrease in their FY 2005 wage index compared
to the wage index they would have received using the labor market areas
included in calculating their FY 2004 wage index. Each hospital
experiencing a decrease in its wage index due to the labor market
changes will receive 50 percent of its wage index based upon the new
CBSA configurations and 50 percent based upon FY 2004 MSA boundaries
(in both cases using the FY 2001 wage data). This blend will not apply
to any hospital that experiences a drop for any reason other than the
new MSA definitions, nor will it apply to hospitals that benefit from a
higher wage index due to the labor market definition changes.
Specifically, we will determine for each hospital a new wage index
employing the FY 2001 wage index data and the old labor market
definitions, and a wage index employing FY 2001 wage index data and the
new labor market definitions. Any hospital experiencing a decrease in
its wage index under the new labor market definitions will receive a
blended wage index consisting of 50 percent of each of these wage
indexes (that is, 50 percent of the wage index using the FY 2001 wage
index data and the old labor market definitions, and 50 percent of the
wage index using FY 2004 wage index data and the new labor market
definitions). Both the comparison and the blending will employ post
reclassification wage indexes; that is, wage indexes computed after
applying the established rules for assigning the wage data for
reclassifying hospitals to one or more wage areas.
As part of this transition, as we proposed in the proposed rule, we
will also allow currently urban hospitals that become rural under the
new definitions to maintain their assignment to the MSA where they are
currently located for the 3-year period FY 2005, FY 2006, and FY 2007.
Specifically, we will assign these hospitals, as we did in the proposed
rule, the prereclassified wage index of the urban area to which they
currently belong. (For purposes of wage index computation, the wage
data of these hospitals will remain assigned to the statewide rural
area in which they are located.) Beginning in FY 2008, these formerly
urban hospitals will 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. The
hospitals receiving this transition will not be considered urban
hospitals but rather they will maintain their status as rural
hospitals. Thus, the hospital would not be eligible, for example, for a
large urban add-on under capital PPS. Thus, it is the wage index, but
not the urban or rural status, of these hospitals that is being
affected by this transition.
Comment: One commenter asked us to clarify whether the special
provisions of Sec. 412.102 of the regulations apply to these
hospitals, that is, hospitals that were classified as urban under the
previous labor market definitions, but are rural under the new labor
market definitions. The commenter pointed out that this section of the
regulations provides special protections for hospitals against abrupt
reductions in DSH payments resulting from transitions from urban to
rural status.
Response: We agree with the commenter that the provisions of Sec.
412.102 apply in this case. Specifically, as described in Sec.
412.102, in the first year after a hospital loses urban status, the
hospital will receive an additional payment that equals two thirds of
the difference between the urban disproportionate share payments
applicable to the hospital before its redesignation from urban to rural
and the rural disproportionate share payments applicable to the
hospital subsequent to its redesignation from urban to rural. In the
second year after a hospital loses urban status, the hospital will
receive an additional payment that equals one third of the difference
between the urban disproportionate share payments applicable to the
hospital before its redesignation from urban to rural and the rural
disproportionate share payments applicable to the hospital subsequent
to its redesignation from urban to rural.
We decided not to provide for a longer transition, as recommended
by MedPAC and other commenters, because we have already, in effect,
provided one year at a higher wage index level for these hospitals by
retaining the previous labor market definitions for one year after the
new labor market definitions became available. However, we are still
allowing a longer, 3-year hold-harmless transition for the group of
hospitals that were previously urban, and are now rural under the new
definitions. We are continuing to provide for a longer transition for
these hospitals because, as a group they have experienced a steeper and
more abrupt reduction in their wage index due to the labor market
revisions.
We will apply this blended transition in a budget neutral manner.
Specifically, we will make an adjustment to the rates to ensure that
total payments, including the effects of the transition provisions,
will equal what payments would have been if we had fully implemented
the new labor market areas. We believe that doing so is most consistent
with the requirement of section 1886(d)(3)(E) of the Act that any
``adjustments or updates [to the adjustment for different area wage
levels] * * * shall be made in a manner that assures that aggregate
payments * * * are not greater or less than those that would have been
made in the year without such adjustment.'' In addition, as a policy
matter, it would not be feasible for us to allow for a transition only
for hospitals that experience a decrease as a result of the new labor
market definitions, were we not to implement such a transition in a
budget

[[Page 49034]]

neutral manner. Because we have adopted a policy of allowing for a
transition only when it would benefit the hospital, we believe it is
appropriate to ensure that such a transition does not increase Medicare
payments beyond the payments that would be made had we simply adopted
the new labor market definitions without any transition provisions. We
note that, consistent with past practice, we are not adopting the new
labor market definitions themselves in a budget neutral manner. We do
not believe that the revision to the labor market areas in and of
itself constitutes an ``adjustment or update'' to the adjustment for
area wage differences, as provided under section 1886(d)(3)(E) of the
Act.

C. Occupational Mix Adjustment to FY 2005 Index

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.
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 had 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
was the same as

[[Page 49035]]

for Worksheet S-3 wage data, under Section H.) Occupational mix survey
data received by us through March 15, 2004, were used in computing the
proposed wage index in the May 18, 2004, proposed rule. Data received
from intermediaries after March 15 through April 16, 2004, are included
in this final rule.
The final response rate for the occupational mix survey was 93.8
percent. We received occupational mix data from 3,768 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. In the
proposed rule, we said that for any hospital that was expected to
provide occupational mix data but did not, we would consider 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 invited public comment to this
proposal. We noted that the wage index in the proposed rule did not
include proxy data for hospitals that did not complete and submit the
occupational mix survey.
Comment: Some commenters supported the intent of the occupational
mix adjustment to the wage index. The commenter believed that an
occupational mix adjusted wage index more accurately reflects
hospitals' labor costs. Other commenters questioned whether there is a
need for the occupational mix adjustment with the implementation of the
provisions of Public Law 108-173 that has also increased payments to
hospitals in rural areas. One commenter, an association representing
hospitals in a large metropolitan area, stated that its members are
concerned that any redistribution of monies from urban teaching
hospitals to rural hospitals will result in further underpayment by
Medicare to hospitals that utilize the most sophisticated and costly
equipment, technology, and staff needed to treat the sickest patients.
Further, the commenter believed that an occupational mix classification
system is inherently flawed due to the diverse manner in which hospital
services are rendered throughout the United States.
Several commenters expressed concern that the occupational mix
adjustment is contrary to CMS' quality initiatives that place emphasis
on improvement in quality outcomes and standards of care, which may
require hospitals to employ more highly skilled caregivers. In
addition, some commenters believed that the occupational mix adjustment
opposes the direction that State governments are undertaking in
mandating registered nurse staffing ratios; the resulting adjustment
may be negative for hospitals in these states. Two commenters opposed
the occupational mix adjustment because the commenters believed that
the adjustment is unnecessary, increases the information burden for
hospitals, and adds to the data that CMS must regularly audit. A few
commenters recommended that we request Congress to rescind the BIPA
provision that requires the occupational mix adjustment because our
proposed adjustment does not have the anticipated impact.
Response: We appreciate these and other comments and concerns we
received regarding the proposed initial implementation of the
occupational mix adjusted wage index. We acknowledge that a wage index
adjusted for occupational mix could have a redistributive effect on
Medicare payments to hospitals, and, combined with the provisions of
Public Law 108-173, some hospitals may be significantly negatively
impacted. However, we also agree with the theory that an occupational
mix adjusted wage index should more accurately reflect relative labor
costs among hospitals by removing the differences that result from
hiring higher skilled or lower skilled workers. For hospitals that
employ a higher skill mix because they treat more complicated cases,
the DRG assignment of cases should reflect the extra cost. Therefore,
we do not agree with the recommendation that we should approach
Congress to rescind the law that requires the occupational mix
adjustment.
While the law requires us to implement the adjustment with the FY
2005 wage index, we also intend to minimize the negative impact that
this initial implementation of the occupational mix adjustment may have
on some hospitals' wage index values. The final FY 2005 wage index
adjustment is only partially adjusted for occupational mix. A complete
discussion of the blended wage index appears in section III.G. of the
preamble to this final rule. We welcome input from MedPAC, hospitals,
and associations in assessing the impact of the occupational mix
adjustment on hospitals' wage index values and monitoring how current
hospital staffing trends affect the expected outcome of the adjustment.
Comment: Several commenters addressed the issue of how we should
handle the occupational mix adjustment for hospitals that did not
complete the survey. The majority of commenters recommended that we use
the unadjusted wage data or the national SOC mix so that other
hospitals in the MSA are not adversely impacted by negative proxy data.
One commenter requested us to adopt the first option, that, for any
hospital that did not respond to the survey, CMS should assume that the
hospital employs all of its workers in the highest level SOC for each
category. The commenter believed that hospitals were provided enough
time to ensure that their data collected for the occupational mix
adjustment were accurate. One commenter suggested that we could achieve
a 100 percent response rate to the survey if we make the survey
mandatory. Another commenter recommended that we set the same
consequences for failure to complete the occupational mix survey as
those for not submitting a cost report and notify hospitals of these
consequences in the survey instructions.
Response: We agree that other hospitals should not be harmed by a
hospital's failure to respond to the occupational mix survey. If we
were to apply the first option, the worst-case scenario, the wage index
values for most of the areas that have hospitals that did not complete
the survey would decrease significantly compared to leaving such
hospitals' wage data unadjusted for occupational mix. Therefore, for
the final FY 2005 wage index, we decided to use the unadjusted wage
data for hospitals that did not submit occupational mix survey data.
For calculation purposes, this equates to applying the national SOC mix
to the wage data for such hospitals, because hospitals having the same
mix as the nation would have an occupational mix adjustment factor
equaling 1.0000. We note that we will revisit this matter with
subsequent collections of the occupational mix data. We will explore
the possibilities of making it mandatory for all IPPS hospitals to
complete the survey, as well as establishing penalties for hospitals
that fail to submit occupational mix data.
Comment: Some commenters opposed our decision to allow hospitals to
provide occupational mix data prospectively for a 4-week period. The
commenters believed that the 4-week reporting period occurred during
hospitals' peak season and is not representative of hospitals' annual
staffing (about 30 percent of hospitals

[[Page 49036]]

used this option). The commenter suggested that the next survey should
be for a full year only.
Response: We believe that in the first year of the occupational mix
adjustment, it was reasonable to use a 4-week period. A 4-week period
represents a sampling of the occupational mix that occurs in a hospital
during the year. We do not have available data to determine if the 4-
week reporting period is a peak season for hospitals, as the commenter
contends, or even whether a hospital's employment mix significantly
changes during peak seasons. However based on the similarity of our
results and the results found by the Bureau of Labor Statistics, we
believe use of the 4-week period did not significantly affect the data
we received for the adjustment. Nevertheless, in order to further
assure the accuracy of the adjustment, in future years, we will require
data collected from a full year.
Comment: Several commenters reported that the short timeframe for
hospitals to complete, review, and correct the survey data and lack of
clarity by hospitals in determining the proper category to place
certain employees (for example, a registered nurse who also conducts
administrative duties) led to errors and inconsistencies in reporting
that may have contributed to the unexpected outcomes. One commenter
noted errors in the date fields of the survey, stating that about 8
percent of hospitals appear to have incorrect dates in the date fields
and large variances in hours reported between Worksheet S-3 and the
occupational mix survey. The commenter recommended that CMS clarify its
definitions and notify hospitals of the next survey's design at least
60 days or, ideally, 6 months prior to the period the data collection
will begin. This would allow hospitals more time to prepare their
payroll and other systems to collect more accurate data. Some
commenters suggested that, due to possible errors and inconsistencies
in the initial data collection, CMS should gather new data next year,
rather than waiting 3 years for the next collection of occupational mix
data.
Response: We did not believe that the survey definitions would be
problematic for hospitals because of hospitals' experience with the BLS
OES survey. In fact, several hospitals and associations strongly
recommended that we use the BLS definitions for the occupational mix
survey. In future years, if hospitals wish to receive further
clarification of the definitions of the occupational categories then we
welcome their assistance. We also plan in future years to provide the
next survey to hospitals prior to the period that the data collection
begins. The suggested 60-day preparation period appears reasonable, and
we will consider such a schedule for future occupational mix data
collections. With regard to administering another survey next year, we
are reluctant to do so because of the additional reporting burden for
hospitals. Further, we would have to issue the survey immediately for
implementation with the FY 2006 index. However, we have not ruled out
the possibility of revising the survey and administering another survey
before 2007. According to section 1886(d)(3)(E) of the Act, the
Secretary has the authority to administer the occupational mix survey
more than once during a 3-year period.
Comment: Two commenters suggested changes to the categories that
are included in the occupational mix survey. One commenter recommended
that CMS exclude the dietary categories and medical assistants. The
commenter noted significant variations among hospitals in these
categories that may have been due to lack of clarity regarding the
category definitions. The commenter further cautioned that, although
only a small portion of hospital workers are in these occupational
categories, misreporting in these categories could significantly
distort the occupational mix data because the categories have low
hourly rates. MedPAC recommended that CMS assess whether including
subcategories of RNs would result in a more accurate occupational mix
adjustment. MedPAC believed that including all RNs in a single category
may obscure significant wage differences among the subcategories of
RNs, for example, the wages of surgical RNs and floor RNs may differ.
To offset additional reporting burden for hospitals, MedPAC suggested
that CMS could eliminate some of the general service categories that
account for fewer hours, since most of the total occupational mix
adjustment is correlated with the nursing general service category.
Response: We believe that it is appropriate to include the dietary
and medical assistant occupations in the FY 2005 adjustment. Although
these occupations represent a small portion of a hospital's total
workforce, hospitals employ these occupations in different mixes, just
as for the other survey categories. In the absence of data showing that
there is minimum variation among hospitals in their employment of these
occupations, we are not convinced, as the commenter suggests, that the
variations reflected in the survey results are due to a lack of clarity
regarding the category definitions. With regards to MedPAC's
recommendation to expand the RN category, we would need to investigate
this matter further to assess its impact on the occupational mix
adjustment, hospital's reporting burden, and intermediary's review
workload. We welcome any data or studies related to both of these
issues.
Comment: Several commenters noted that the occupational mix
adjusted wage index in the proposed rule was based on data from the
March 8, 2004 public use file. However, 263 surveys were added to the
database in the May 13, 2004 public use file. The commenters urged CMS
to recalculate its final analysis of the occupational mix adjustment
using the data for all hospitals that submitted the survey data.
Response: As we stated in the proposed rule (69 FR 28253), and
above, the occupational mix adjustment in the proposed rule was based
on data we received by March 15, 2004. We further stated in the
proposed rule, and above, that data received after March 15 and through
April 16 would be included in the final wage index. The FY 2005 wage
index in this final rule includes the most complete and updated set of
occupational mix survey data that we received timely from hospitals,
that is, by April 16, 2004.
Comment: Two commenters recommended that CMS collect data on
hospitals' service mix to include as part of the occupational mix
adjustment. The commenters believe that hospitals that provide more
services requiring highly skilled workers, such as oncology services,
should not be penalized in the wage index for providing those services.
One of the commenters also suggested that the adjustment should account
for productivity, because hospitals should not be penalized if they
hire highly skilled workers who work effectively with minimum support
staff.
Response: We are concerned that collecting data on service mix and
productivity would substantially increase the reporting burden for
hospitals and the complexity of the occupational mix adjustment. We are
also uncertain as to what impact these additional factors would
actually have on the occupational mix adjustment. If hospitals hire
more highly skilled workers because they treat more complex cases,
Medicare's DRG assignment already reflects the higher costs of
providing these services. We note that the wage index under section
1886(d)(3)(E) is intended to account for geographic differences in
labor costs--not skill mix. We welcome the

[[Page 49037]]

commenters to provide more details of the data and methodology that
would be required to include these factors in the occupational mix
adjustment, as well as any analysis of the impact of these factors on
the occupational mix adjustment.
Comment: Several commenters expressed concern about CMS' use of
unaudited occupational mix data and suggested that a review process is
needed. Some commenters believed that CMS should not implement the
occupational mix adjustment because the survey data were not verified
by the fiscal intermediaries. One commenter added that CMS should
provide the fiscal intermediaries ample time and resources to complete
more thorough reviews of future occupational mix data.
Response: We plan to audit the occupational mix survey data in
future years. However, given the short timeframe for collecting the
occupational mix data and implementing the adjustment with the FY 2005
wage index, there was no time for fiscal intermediaries to conduct such
reviews. Further, as this was the first time we collected data on hours
for the 19 occupational categories, we had no baseline data to develop
edit thresholds to incorporate in an intermediary review program. Thus,
it would have been difficult to develop an audit program for use by
fiscal intermediaries. We notified hospitals that they were responsible
for submitting to us accurate data for Medicare payment purposes.
Because hospitals will be affected by their own submission of data, we
believe that hospitals had ample incentive to ensure that the data they
submitted were correct and, therefore, self-audited their own data.
Finally, we note that our policy of applying the occupational mix
adjustment to only 10 percent of the wage index takes into account that
this is the first year for submitting, analyzing, and applying the
occupational mix data.
Although the occupational mix data were not as extensively reviewed
as may occur in future years, we are required by law to implement an
occupational mix adjustment with the FY 2005 wage index. The next
collection of occupational mix data will include an intermediary review
period and an opportunity for hospitals to respond to any adjustments
made by the intermediaries during the review.
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 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 reflect 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 rather consistent with the findings of
the BLS OES survey, especially for the nursing and physical therapy
categories.
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.
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BILLING CODE 4120-01-C
2. Calculation of the Occupational Mix Adjustment Factor and the
Occupational Mix Adjusted Wage Index
The method used to calculate the 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
percentage of the hospital's total workers attributable to the general
service category (this is corrected from the proposed rule, in which we
applied, instead, the national percentages to all hospitals) 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

[[Page 49043]]

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
national occupational mix adjusted average hourly wage is 26.4114.
Step 9--To compute the occupational mix adjusted wage index, divide
each area's occupational mix adjusted average hourly wage (Step 7) by
the national occupational mix adjusted average hourly wage (Step 8).
Step 10--To compute the Puerto Rico specific occupational mix
adjusted wage index, follow the Steps 1 through 9 above. The Puerto
Rico occupational mix adjusted average hourly wage is 12.2577.
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BILLING CODE 4120-01-C
In implementing an occupational mix adjusted wage index based on
the above calculation, the final wage index values for 16 rural areas
(36.0 percent) and 210 urban areas (4.4 percent) would decrease as a
result of the adjustment. Six (6) rural areas (12.8 percent) and 111
urban areas (28.8 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 2.1 percent and for an urban area, 4.0 percent.
Meanwhile, 31 rural areas (66.0 percent) and 176 urban areas (45.6
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.
Comment: Several commenters raised concerns about the data CMS
utilized to compute the occupational mix adjustment. One commenter
noted that CMS computed the occupational mix adjustment using various
sources of data from various time periods: (1) Average hourly wage data
from the BLS 2001 OES survey; and (2) hours data collected on the
Medicare occupational mix survey from calendar year 2003 or 4 weeks in
2004. The commenter added that CMS applied the adjustment to wage costs
collected on the Medicare cost report during FY 2001. The commenter
believed that the data used in computing the occupational mix adjusted
wage index should derive from the same time period because significant
labor changes can occur in 2 to 3 years in the health care industry.
Some commenters also expressed concern about CMS' reliance on BLS
data for average hourly rate information that led to CMS collecting
hours data for occupations that are excluded from the wage index
(certified registered nurse anesthestists (CRNAs), nurse practitioners
(NPs) and clinical nurse specialists (CNSs)). The commenters recognized
that CMS attempted to simplify the reporting and effort required by
utilizing the BLS information. However, they recommended that future
surveys collect salaries and hours from hospitals and on the same basis
as Worksheet S-

[[Page 49048]]

3 of the cost report. The commenters believed that this would
facilitate the intermediary's and CMS' review of the survey data.
Response: It is our intent to collect both salaries and hours data
directly from hospitals for the computation of the occupational mix
adjustment. We agree that, ideally, both the data used to compute the
occupational mix adjustment and the wage data to which the adjustment
is applied should derive from approximately the same time period and
include the same occupational categories. However, we do not believe it
was unreasonable in this instance, and in this short timeframe to use
data from different time periods. We believe the consistency of our
outcomes with the BLS OES data reflects this. In addition, if hospitals
were concerned about collecting data from different time periods, we
believe this is an issue that should have been commented upon when the
actual occupational mix survey was published in 2003. We also believe
that the BLS OES data are the best available for representing hospital
hourly wage data. For future data collections, we will revise the
occupational mix survey to allow hospitals to provide both salaries and
hours data for each of the employment categories that are included on
the survey. We will also assess whether future occupational mix surveys
should be based on the calendar year or if the data should be collected
on a fiscal year basis as part of the Medicare cost report. One
logistical problem is that cost report data are collected yearly, but
occupational mix survey data are collected only every 3 years.
Comment: Several comments addressed the methodology we used to
calculate the occupational mix adjustment to the wage index. Most
commented that the methodology appears theoretically sound, although
the results appear counterintuitive. The commenters noted that one
third of rural hospitals would experience a decline in their
occupational mix adjusted wage index, while several large academic
medical centers would experience an increase in their wage indexes.
However, the commenters believed that the unexpected results are due
more to errors in the data rather than our methodology for computing
the occupational mix adjustment.
Four commenters cited problems with our computation of the
occupational mix adjustment. The first commenter suggested that CMS
should compute and apply the adjustment to the MSA average hourly wage
rather than to each hospital's average hourly wage to reduce the effect
that an individual hospital's data could have on an area wage index.
The second commenter suggested that CMS should calculate an
occupational mix adjustment for each of the 19 SOCs rather than the 7
general service category groupings. The third commenter noted that CMS
applied the occupational mix adjustment for each general service
category to a percentage of total salaries that was computed based on
hours represented by each general service category. This commenter
believed that, instead, the adjustment should have been applied to a
percentage of total salaries that was based on wage costs represented
by each of the general service categories. The fourth commenter cited
that, in Step 5 of the occupational mix adjustment calculation in the
proposed rule, CMS applied national weights to adjust all hospitals'
total salaries for occupational mix, rather than applying hospital-
specific weights. This commenter suggested that, in applying the
national weights to all hospitals' total wages, some area wage index
values could be negatively impacted.
Response: We appreciate the input that we received from MedPAC, the
Bureau of Labor Statistics, and the hospital community during our
research and development of the occupational mix adjustment. We believe
that our calculation of the occupational mix adjustment in this final
rule is appropriate based on the purpose of the adjustment and the data
we had available to calculate the adjustment.
We disagree with the comment that the occupational mix adjustment
should be applied at the MSA level instead of the hospital level. By
adjusting hospitals' data for occupational mix, we are treating the
occupational mix adjustment consistent with the way we treat the wage
index; that is, in calculating the wage index, we first compute
adjusted salaries and hours for each hospital, then we sum the adjusted
salaries and hours for all hospitals in an area to derive an area
average hourly wage.
We also disagree with the suggestion that CMS should calculate an
occupational mix adjustment for each of the 19 SOCs rather than the
aggregated 7 general service category groupings. The adjustment is
intended to control for hospitals' employment choices within certain
service groupings, where, to an extent, the employees' skills are
interchangeable. Therefore, we believe it is appropriate to apply the
adjustment to the general service category grouping.
With regards to the suggestion that the adjustment should have been
applied to a percentage of total salaries that was based on salary
costs represented by each of the general service categories, the
initial implementation of the occupational mix adjustment did not
provide for the collection of data on salaries. Therefore, we could not
use the salaries for a general service category to derive the
proportion of a hospital's total salaries to be adjusted for
occupational mix. Based on our experience with wage and hours data, we
believe that the proportions we derived from hours data would closely
approximate the proportions that we would have derived if salaries data
were available and used. Further, this use of hours data is consistent
with a methodology we allow hospitals to use for allocating their wage-
related costs on Worksheet S-3. Some hospitals base these allocations
on proportions of total hours rather than salaries.
Finally, we acknowledge the error the commenter cited regarding
Step 5. As shown above, we applied hospital-specific weights to adjust
hospitals' total salaries in computing the occupational mix adjustment
in this final rule.
Comment: Several hospitals stated that they had difficulty
determining the impact of the occupational mix adjustment on their area
wage index values. The commenters acknowledged that CMS provided public
use files in March and May of the survey data and a public use file in
June indicating hospitals' occupational mix adjustment factors. The
commenters requested that CMS provide more detailed information about
the findings of the occupational mix adjustment. One commenter
suggested that CMS provide a table in the Addendum of the rule that
shows what the area wage index values would have been without the
occupational mix adjustment.
Response: In our continuing efforts to meet the information needs
of the public, we will provide two additional public use files for the
final occupational mix adjusted wage index: a file including each
hospital's unadjusted and adjusted average hourly wage and a file
including each area's unadjusted and adjusted average hourly wage and
wage index value. These additional files will be posted on the
Internet, at http://cms.hhs.gov/providers/hipps/ippswage.asp. We will
also post these files with future applications of the occupational mix
adjustment.

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

The FY 2005 wage index values (effective for hospital discharges
occurring on or after October 1, 2004 and before October 1, 2005) in
section

[[Page 49049]]

VI. of the Addendum to this final 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 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 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 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.
Comment: One commenter noted that the data CMS uses to compute the
wage index is 4 years old and urged CMS to use more recent data. The
commenter suggested that, due to the time lapse, the wage index does
not sufficiently capture trends of health care professional shortages
in certain labor markets and the corresponding salary increases
associated with the rise in demand for certain health care
professionals.
Response: We discussed this matter in a previous notice (65 FR
47070). Due to the time period allowed for: (1) Hospitals to complete
and submit their cost reports to their intermediaries, (2) fiscal
intermediaries to perform a separate, detailed review of all wage data
and submit hospitals' reviewed wage data to CMS, and (3) CMS to compile
a complete set of all hospitals' wage data from a common Federal fiscal
year period, we do not have available more recent, complete, and
reliable data to calculate the wage index. Therefore, hospitals' wage
data are always 3 to 4 years old, depending on the end date of the
hospital's cost reporting period, before we can use the data in
calculating the wage index.
Comment: One commenter noted that, in the August 1, 2002, Federal
Register rule (67 FR 50022), CMS stated that it would begin to collect
contract labor wage costs and hours for management services and the
following overhead services: administrative and general, housekeeping,
and dietary. The commenter requested CMS to also add a line 25.01 to
Worksheet S-3, Part II to collect wage costs and hours for contract
laundry services and include the costs in the wage index calculation.
Based on the commenter's analysis of the May public use file, 1,468
hospitals had no data on line 25 (direct costs for laundry services)
and 1,599 hospitals had less than $100,000 in wage costs on this line.
The commenter believed that the data indicates that many hospitals
contract their laundry services, and including the costs for contract
laundry services would provide equity in the wage index.
Response: In the August 1, 2002, rule, we stated that, while we
agree that it may be appropriate to include indirect patient care
contract labor costs in the wage index, in light of concerns about
hospitals' ability to accurately document and report the costs, we
believe that the best approach is to assess and include these costs
incrementally. We will begin collecting data on contract management,
administrative and general, housekeeping, and dietary services with
cost reporting periods beginning on or after October 1, 2003 (that is,
the FY 2004 cost reports). Hospitals will submit their FY 2004 cost
reports to their intermediaries during calendar year 2005 through early
2006. Intermediaries will complete their wage index desk reviews and
submit hospitals' FY 2004 audited wage data to us by early 2007. We
will use data from the FY 2004 cost reports to compute the FY 2008 wage
index. Before including these additional costs in the wage index, we
will analyze the impact of the costs on area wage index values and
provide a detailed analysis for public comment. Our decision on whether
to include these contract costs, and other contract costs in the
future, such as, contract laundry services, will depend on the outcome
of our analyses and public comment.
Comment: One commenter requested CMS to designate provider-based
clinics (PBCs) as an IPPS-excluded area in order to remove the costs
from the wage index. The commenter stated that PBCs are like physician
private offices, which are excluded from the wage index. PBCs bill the
technical component under certain outpatient ambulatory payment
classifications (APCs) and the professional component under the
physician fee schedule. The commenter noted that PBC costs are not paid
under IPPS.
Response: We appreciate the commenter's suggestion. However, as
this matter was not addressed in the FY 2005 proposed rule, or any
previous rulemaking, we are not prepared to provide a decision about
PBC costs in this final rule. We intend to explore a comprehensive
assessment of the costs in a future rule.

E. Verification of Worksheet S-3 Wage Data

The wage data for the 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 wage index includes FY 2001 data as
of June 25, 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. The unresolved data
elements that were included in the calculation of the proposed FY 2005
wage index have been resolved and are reflected in the calculation of
the final FY 2005 index. For the final FY 2005 wage index in this final
rule, we removed the data for 237 hospitals from our database: 147
hospitals became critical access hospitals by the time we published
from the FY 2005 wage index), and 76 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 14 hospitals with incomplete or
inaccurate data resulting in zero or negative, or otherwise

[[Page 49050]]

aberrant, average hourly wages. As a result, the final FY 2005 wage
index is calculated based on FY 2001 wage data from 3,955 hospitals.
In constructing the 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 wage index in this final 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

The method used to compute the FY 2005 wage index without an
occupational mix adjustment follows:
Step 1--As noted above, we based the 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.

[[Page 49051]]

[GRAPHIC] [TIFF OMITTED] TR11AU04.049

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 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 national average hourly wage is $26.3570.
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 average hourly wage of
$12.2568 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

[[Page 49052]]

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 208
hospitals in 57 urban areas. The areas affected by this provision are
identified by a footnote in Table 4A in the Addendum of this final
rule.

G. Computation of the FY 2005 Blended Wage Index

As we proposed in the May 18, 2004, proposed rule, for the final FY
2005 wage index, we are using 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 basing 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 $26.3624 and the Puerto Rico specific average hourly wage is
$12.2569. 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, 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 using 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 14 rural areas (21.3 percent) and 205 urban areas (53.1
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 0.21 percent and for an urban area, 0.40 percent.
Conversely, 31 rural areas (66 percent) and 172 urban areas (44.6
percent) would benefit from this adjustment, with 1 urban area
increasing 2.2 percent and all other areas gaining 0.7 percent or less.
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 final rule for
further analyses of the impact of the 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
final rule include the occupational mix adjustment. We note that,
although we are using a blended wage index for FY 2005, at this time we
are not applying 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.
Comment: Commenters generally agreed with CMS' decision to only
partially implement the occupational mix adjustment with the FY 2005
wage index. A majority of commenters supported the proposed blended
wage index in which the occupational mix adjusted portion is 10
percent. A few commenters suggested other applications of the
adjustment as follows:
Lower the percent adjusted for occupational mix to 5
percent or less. In addition, CMS should not raise the percent until
the occupational mix survey process is improved.
Apply an occupational mix adjustment to only 1 percent of
the wage index.
Apply a higher percentage of the occupational mix
adjustment if the results for the hospital are positive and a lower
percentage if the results are negative.
Fully apply the adjustment to hospitals that are
positively impacted and use a blend of 10 percent for hospitals that
are negatively impacted.
Phase in the adjustment, for example, over a period of 10
years (apply 10 percent per year). After the adjustment is fully
implemented, cap the adjustment at 2 percent. That is, an occupational
mix adjusted wage index value should be no greater or less than 2
percent of what the wage index value would have been in the absence of
the occupational mix adjustment.
Hold hospitals harmless on the use of occupational mix
adjustment for 3 years.
One commenter stated that CMS should impose a temporary moratorium
on the use of the occupational mix data until more accurate and
reliable data can be gathered and studied.
Response: Due to the general support we received for our proposal
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, we are proceeding as
proposed. As we stated above, we will determine and discuss the
application of future adjustments in subsequent IPPS updates.

H. Revisions to the Wage Index Based on Hospital Redesignation

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.
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,

[[Page 49053]]

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,\5\ the wage index values were determined by
considering the following:
---------------------------------------------------------------------------

\5\ 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
Pub. L. 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 1886(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 adoption of 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
CBSA 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 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 final 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 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

[[Page 49054]]

standardized amount for hospitals in large urban areas. However,
section 401 of Public Law 108-173 established that all hospitals will
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, in the proposed rule, we explained our proposed method for
eliminating standardized amount reclassifications. 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).
No commenters objected to our proposal to eliminate standardized
amount reclassifications.
b. Implementation of New MSAs
As discussed above, we are implementing 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 implementation. Hospitals that were reclassified for FY 2005
were asked to verify that the reclassified wage index for the labor
market area into which they had been reclassified (in Table 4C in the
Addendum to the May 18, 2004 proposed rule) exceeded the wage index of
the labor market area where they are located (in Table 4A or 4B in the
Addendum of the May 18, 2004 proposed rule) after our proposed
implementation of the new MSAs. Hospitals could have withdrawn their FY
2005 reclassifications within 45 days of the publication of the
proposed rule.
In some cases, the new CBSA definitions result in previously
existing MSAs being divided into two or more separate MSAs. Given that
the areas to which the hospitals reclassified no longer exist in FY
2005, we needed to propose rules we could use to determine such
hospitals' reclassification areas. We proposed assigning the hospital
to the nearest county in the current MSA, and the hospital's FY 2005
reclassification is 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 an MSA based on whether it is closer to Washtenaw or
Livingston, which are still in MSAs. We would not consider Lenawee
because it is now considered part of the statewide rural area.)
Reclassified hospitals that have been assigned to a new MSA are
identified in Table 9A in the Addendum of this final rule by the
identification of the county used to designate them. We determined that
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
final rule. Hospitals that disagreed with our determination of the
closest proximate county on which to assign them to a new MSA were
given the opportunity to submit a comment indicating the basis for
their disagreement.
Comment: Many hospitals approved for reclassification under the
traditional reclassification process objected to our proposal to assign
hospitals to the nearest county in the MSA to which it was
reclassified. Several hospitals recommended allowing hospitals to amend
their FY 2005 reclassification applications or implementing the policy
adopted in 1994. Others recommended that CMS consider retracting the
proposal, in its entirety and, in doing so, allow hospitals to be
reclassified to the area approved by the MGCRB for the full 3 years. In
the September 1, 1993 final rule (58 FR 46292), the adopted methodology
for effectuating FY 1994 MGCRB decisions resulted in the assignment of
hospitals to the revised labor market area that included ``most or all
of the counties that comprised the labor market area to which the
hospital was reclassified by the MGCRB based on the current labor
market area definitions.'' Others recommended that CMS consider
retracting the proposal in its entirety and in doing so allow hospitals
to be reclassified to the area approved by the MGCRB for the full 3
years.
Finally, two sets of hospitals commented on special circumstances
that would arise under the rule as proposed. One group of hospitals
from Rhode Island commented that the nearest county proposal does not
take into consideration instances where a hospital or group of
hospitals reclassified to an area defined under the old MSA definitions
is assigned to the nearest county which, under the new definitions, is
in its own home MSA. In another situation, a group of hospitals in the
Midwest described a situation where, under the new definitions, the MSA
the hospitals reclassified to splits and the hospitals are assigned to
the MSA that contains the nearest county from the old MSA. In some
cases, a hospital may also satisfy the normal distance requirement for
reclassification into one or more of the new MSAs that were once part
of the old MSA. In these cases, the commenter believed that a hospital
should be permitted to reclassify to any MSA that was once part of the
old MSA for which it meets the normal proximity requirement.
Response: We acknowledge that the new MSA designations have
considerable effect on hospital geographic reclassifications under both
section 1886(d)(8)(B) and 1886(d)(10) of the Act. Because the MGCRB
reclassifications approved for FY 2005 and prior years are based on the
old MSA designations, it was necessary to reconcile (as we did with the
FY 1994 reclassification decisions) the processes of implementing the
new MSA designations with the MGCRB decisions for FY 2003, FY 2004, and
FY 2005. As was the case with the implementation of new MSA definitions
in FY 1994, we have sought to implement the MGCRB decisions in the
manner that is most consistent with implementing the new labor market
areas. As we stated in the May 25, 1993 proposed rule (58 FR 30234),
``* * * we believe that in reconciling the two processes, we must
balance our obligation to implement the reclassifications prescribed by
the MGCRB's decisions with our duty to implement the new labor market
areas in as uniform a manner as possible. Thus, we believe that when a
hospital

[[Page 49055]]

has been reclassified based on the old MSA definitions, payment to the
hospital should be based on the new MSA definition most compatible with
the reclassification decision.'' On the basis of our evaluations, we
decided not to employ the FY 1994 reclassification assignment rule.
This is because doing so would have led in many cases to anomalous
results in the context of the current MSA changes. For example, we
needed to take in account instances where MSAs split, creating smaller
MSAs on the boundaries of what was the old MSA. If we were to apply the
FY 1994 rule to the new MSA designations, many hospitals would have
been reclassified into MSAs farther away than a new bordering MSA. We
believe this would have been inconsistent with the proximity rules that
govern reclassifications.
However, the commenters on the two situations described above
persuade us that two refinements to the basic rule are appropriate.
We will assign the hospital or group of hospitals
previously reclassified in accordance with sections 1886(d)(8)(B) and
1886(d)(10) of the Act to an MSA that is splitting, to the MSA outside
the hospital's own MSA that contains the nearest county from the old
MSA. For example, under the new MSA designations, the Boston-Worcester-
Lancaster-Lowell-Brockton, MA-NH NECMA was split into several new MSAs.
The reclassification of Rhode Island hospitals to the old Boston NECMA
resulted, under our proposal, in an assignment to the Providence-New
Bedford-River Falls, RI-MA MSA, their home MSA. This is because the
nearest proximate county of the old Boston NECMA, Bristol County, is
now part of the Providence-New Bedford-River Falls, RI-MA MSA. Under
this revision, the Rhode Island hospitals approved for reclassification
for FY 2005 will be assigned to the Boston-Cambridge-Quincy, MA-NH MSA,
the nearest outside MSA that contains a county from the old Boston-
Worcester-Lancaster-Lowell-Brockton, MA-NH NECMA.
In cases where a hospital (or group of hospitals) was
reclassified under section 1886(d)(8)(B) or section 1886(d)(10) of the
Act to an MSA that has been split, the hospital may be reclassified to
any MSA containing counties from the old MSA reclassification provided
that the hospital demonstrates that it meets the applicable proximity
requirements in 42 CFR 412.230(b) and (c) (for individual hospitals),
Sec. 412.232(a)(1) (for a rural group), and Sec. 412.234(a)(2) and
(a)(3) (for an urban group) or in relation to the MSA.
We have changed the reclassification assignments for hospitals that
brought this situation to our attention. Hospitals in this situation
that wish to be reassigned to the nearest alternate county, for which
they meet the applicable proximity criteria, may notify us in writing
within 30 days of the date of publication of this final rule. 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.
The area (name and MSA number) identified in the FY 2005
reclassification application and the name and MSA number of the
``assigned'' area.
Documentation certifying that they meet the requisite
proximity requirement for assignment to the nearest alternate county.
We also note that the 1-year transition blend that we have adopted
for FY 2005 will have the effect of giving hospitals that would
experience a decrease in wage index due to the new MSA designations, 50
percent of the wage index determined using the old area definitions for
MSAs to which the hospital reclassified, and 50 percent of the wage
index determined using the new area definition for the MSA to which the
hospital is assigned in this final rule. This provision will mitigate
any negative effects of the new labor market areas on reclassifying
hospitals and all other hospitals.
Comment: One commenter suggested that CMS provide that a hospital
will not lose SCH status, or other special designations that are
dependent upon being located in a rural area, by being redesignated
into an MSA. The commenter further elaborated that the loss of SCH
status can have profound implications for a hospital, including loss of
special payment under the hospital inpatient and outpatient payment
systems and loss of favorable treatment for purposes of geographic
reclassification. The commenter recommended that CMS provide that
hospitals with SCH status that are redesignated into an urban area will
maintain SCH status. The commenter also recommended that, likewise, CMS
provide that these hospitals will continue to be eligible for hold-
harmless payments under the outpatient PPS, even though these hospitals
will no longer be physically located in an urban area.
Response: The regulations at Sec. 412.103(a)(3) provide for a
hospital located in an urban area to be reclassified as a rural
hospital if it would qualify as an SCH if it were located in a rural
area, or if it meets any of the other conditions specified. Because any
reclassification under this provision is effective as of the filing
date of the application, existing SCHs that have been redesignated to
urban areas and otherwise meet all of the requirements for SCH status
could retain their SCH designation by filing an application for
reclassification as rural with their CMS Regional Office before October
1, 2004.
In order to retain its SCH status when the area in which it is
located is redesignated from rural to urban, a hospital must apply for
reclassification as rural under the regulations at Sec. 412.103(a).
Section 412.103(a) specifies that a prospective payment hospital that
is located in an urban area may be reclassified as a rural hospital if
it submits a complete application and meets any of the specified
conditions, including Sec. 412.103(a)(3), which states, ``The hospital
would qualify as a rural referral center as set forth in Sec. 412.96,
or as a sole community hospital as set forth in Sec. 412.92, if the
hospital were located in a rural area.'' A hospital seeking
reclassification under this section must submit a complete application
in writing to its CMS Regional Office. Because any reclassification
under this provision is effective as of the filing date of the
application, existing SCHs that have been redesignated to urban areas
effective October 1, 2004, and otherwise meet all of the requirements
for SCH status, could retain their SCH designation, without a break in
status, by filing an application for reclassification as rural with
their CMS Regional Office before October 1, 2004.
We note that a hospital located in an urban area and more than 35
miles from other like hospitals would qualify as an SCH under Sec.
412.92(a). In order to retain its SCH status by qualifying as an urban
SCH under this provision, a hospital must submit an application to its
fiscal intermediary, in accordance with the classification procedure at
Sec. 412.92(b). According to that procedure, the fiscal intermediary
would review the request and send the request, with its recommendation,
to the CMS Regional Office responsible for the hospital. The CMS
Regional Office would review the request and the fiscal intermediary's
recommendation and notify the fiscal intermediary of its approval or
disapproval. SCH status is effective 30 days after the date of CMS'
written notification to the fiscal intermediary. Therefore, written
notification dated by

[[Page 49056]]

September 1, 2004, would be effective by October 1, 2004.
We note that comments regarding the hospital outpatient PPS will
need to be addressed as part of the outpatient prospective payment
system rule that is under development.
Comment: One commenter requested CMS to clarify that rural RRCs
will not lose that status when they become urban.
Response: Section 4202(b) of Public Law 105-33 states, in part,
``Any hospital classified as a rural referral center by the Secretary *
* * for fiscal year 1991 shall be classified as such a rural referral
center for fiscal year 1998 and each subsequent year.'' In the August
29, 1997 final rule with comment period, we reinstated RRC status for
all hospitals that lost the status due to triennial review or MGCRB
reclassification, but not to hospitals that lost RRC status because
they were now urban for all purposes because of the OMB designation of
their geographic area as urban (62 FR 45999).
However, subsequently, in the August 1, 2000 final rule, we
indicated we were revisiting that decision (65 FR 47089). Specifically,
we stated we would permit hospitals that previously qualified as an RRC
and that lost their status due to OMB redesignation of the county in
which they are located from rural to urban to be reinstated as an RRC.
This policy extends to RRCs located in counties that become urban as a
result of the new MSAs implemented in this final rule.
Comment: One commenter suggested that CMS utilize its broad
discretion under the Act to designate urban hospitals as RRCs for
purposes of geographic reclassification if such hospitals reflect the
same characteristics of those facilities currently designated urban
RRCs. The commenter stated that, otherwise, CMS will fail in its desire
to treat all RRCs equally and will continue to significantly
disadvantage other urban hospitals that play the same critical role in
treating Medicare rural beneficiary populations. The commenter
suggested designating any hospital meeting the criterion of Sec.
412.103(a)(3) as it relates to RRCs as an urban RRC for geographic
reclassification purposes.
Response: While CMS has broad discretion regarding establishing
criteria for geographic reclassification purposes under section
1886(d)(10) of the Act, we are limited in designating a hospital as an
RRC. Section 1886(d)(5)(C)(I) of the Act limits the Secretary to giving
RRC status to a hospital that is classified as a rural hospital (with
certain exceptions for previously designated RRCs, as noted above). In
other words, CMS is, in fact, limited from granting first-time RRC
status to a hospital that is not classified as a rural hospital.
Comment: Another commenter stated that some hospitals, due to
geography and market size, are located in an urban area but serve a
high number of rural patients. The commenter further stated that CMS
noted RRCs play a significant role in treating Medicare beneficiaries
from rural areas, whether or not a particular hospital is physically
located in a rural or urban area. The commenter asked that CMS review
the RRC criteria and revise it so that urban hospitals can qualify for
RRC status and be on the same level as their urban RRC counterparts.
Response: There is already a regulatory provision for these urban
hospitals that are like RRCs to obtain that status by first being
reclassified as rural. Section 412.103(a)(3) provides for hospitals
that would otherwise qualify as an RRC if they were rural to be
reclassified as rural.
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.
For FY 2005, we are using 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 98. As we proposed, we are
providing 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.
BILLING CODE 4120-01-P

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BILLING CODE 4120-01-C
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 were requested to compare the
reclassified wage index for the labor market area in Table 4C in the
Addendum of the 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 were given the
opportunity to withdraw from an MGCRB reclassification within 45 days
of the publication of the proposed rule.
When we apply the OMB 2000 CBSA standards, 16 rural counties no
longer meet the qualifying criteria to be redesignated, 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;
Greene, NC; Preble, OH.
Counties that failed to meet the 25-percent threshold are:
Marshall, AL; Putnam, FL; Wilson, NC; Van Wert, OH; and Lawrence, PA.
Comment: Several commenters expressed concern with our proposed
adoption of the OMB area designations and the impact on county
designations governed by section 1886(d)(8)(B). Specifically, these
commenters objected to the proposed adoption because use of the 2000
Census data to develop the revised designations resulted in five
counties no longer meeting the qualifying criteria for section
1886(d)(8)(B) county designation. The commenters argue that because
they were not given adequate notice that these counties were in danger
of losing their section 1886(d)(8)(B) county designation, the abrupt
decrease will have a significant impact on operations. The commenters
are requesting that CMS extend the three-year hold harmless transition
to hospitals located in those counties losing their section
1886(d)(8)(B) county designation.
Response: In the proposed rule, to help alleviate dramatic negative
impacts in payment for hospitals designated as urban under the old MSA
standards, but slated to be classified as rural, we proposed to
implement a 3-year hold harmless transition period that would allow
these hospitals to maintain their assignment to the MSA where they are
currently located for FY 2005, FY 2006, and FY 2007. Specifically, we
will assign these hospitals, as we did in the proposed rule, the
prereclassified wage index of the urban area to which they currently
belong. (For purposes of wage index computation, the wage data of these
hospitals will remain assigned to the statewide rural area in which
they are located.) We are finalizing this policy in the final rule. We
did not propose that the transition period apply to hospitals located
in those counties losing their designation under section 1886(d)(8)(B).
Consistent with our longstanding policy that counties redesignated
under section 1886(d)(8)(B) of the Act, are considered urban for
purposes of the standardized amount, we are extending the 3-year
transition to the hospitals located in counties formerly designated as
urban under 1886(d)(8)(B), because the hospitals are, in fact, losing
their designated urban status. We are using the wage data from these
hospitals as part of setting the rural wage index. The higher wage
indexes these hospitals are receiving are being taken into
consideration in determining whether they qualify for the out-commuting
adjustment and the amount of any adjustment. During this 3-year
transition period, these hospitals are eligible to apply for
reclassification by the MGCRB. In FY 2008, these hospitals will receive
their statewide rural wage index. Thus, the hospital would not be
eligible, for example, for a large urban add-on under capital PPS.
Thus, it is the wage index, but not the urban or rural status of the
hospitals, that is being affected by this transition.
Comment: Commenters indicated that CMS utilized an older 2000
Census Crosswalk that has since been updated in December of 2003.
Commenters wanted to know whether or not CMS intends to use this
updated crosswalk for the final regulation.
Response: Our initial investigation and analysis of the impact of
the new metropolitan areas began in the early fall of 2003. In the
process of this analysis, the update of the crosswalk was overlooked
and was not incorporated into the proposed rule. We have updated the
crosswalk for this final regulation and, therefore, the updates are
incorporated in the calculations and the subsequent output in the
tables.
Comment: Commenters noted that CMS improperly classified Merrimack,
NH and Litchfield, CT. These counties are ``deemed urban'' and,
therefore, must be included in an urban area.

[[Page 49060]]

Response: We recognize this oversight. Based on the strongest
commuting ties, we have incorporated Merrimack, NH into the Manchester-
Nashua, MA MSA (31700), and Litchfield, CT has been placed into the
Hartford-West Hartford-East Hartford, CT MSA (25540).
Comment: Commenters expressed opposition to and support of the
decision to not adopt micropolitan areas. They indicated that the
financial and reimbursement impact of using these areas is unknown at
this time, and it appears that further consideration of the effects of
these changes by CMS is necessary. Some commenters argued that those
micropolitan areas that were previously included in a metropolitan are
now unjustly dubbed ``rural.''
Response: We have provided hospitals in urban counties now
designated as micropolitan and therefore rural as ``hold harmless,''
assigning them the urban wage index for the MSA from which they came.
We will continue to review the role of micropolitan areas in the
development of labor market areas for the purposes of the wage index.
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 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 were not otherwise reclassified by
the MGCRB for FY 2005. For the hospitals exempted from the ``not
otherwise classified'' requirement and that received a section 508
reclassification under the one-time appeal process, the section 508
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 final rule.
Comment: One hospital commented that the proposed adoption of the
new MSA designations will result in the hospital being located in a
county that has been incorporated, under the new designations, into the
MSA to which they were approved for reclassification. Because they will
now be located in the area to which they were granted reclassification,
the hospital argued that its FY 2005 reclassification is, in effect,
moot.
Response: We acknowledge that there are situations where hospitals
that have been reclassified by the MGCRB are located in counties that
have been incorporated, under the new designations, into the area to
which the hospitals were approved for reclassification. As a result,
hospitals in this situation are already located in the area to which
they requested to be reclassified. In this case, under the new
designations, these hospitals will be paid by virtue of this change
based on the payment rates applicable to the requested area and their
wage data will be reflected in the wage index for that area. Although
we have acknowledged above that hospitals reclassified to MSAs that
split need not be reclassified back into their home area, that rule
would not apply in the situation raised by the commenter. In the
commenter's case, the area to which it reclassified has now been
expanded to absorb the hospital's home county. Thus, we need not
identify an area that can serve as a substitute for the
reclassification area. Rather, there is no need for the hospital to
reclassify when it now is originally classified into its desired area.
Comment: Several hospitals approved for reclassification under
section 508 objected to our proposal regarding the treatment of
hospitals that were reclassified under section 508 to areas that have
since divided because of implementation of the new labor market
definitions. As we discuss in further detail in section III.H.3.b.
above, in some cases, the new CBSA definitions result in previously
existing MSAs being divided into two or more separate MSAs. Given that
the areas to which the hospitals reclassified no longer exist in FY
2005, we proposed assigning the hospital to the nearest county in the
current MSA, and the hospital's FY 2005 reclassification is to the new
MSA (under the CBSA definitions) that includes that county to which it
has been assigned. The hospitals argue that consistent with section
508, when a previous labor market area has split into several different
areas, they should be permitted to select the area to which to
reclassify.
Response: We appreciate the commenters' suggestions and their
interest in this matter. Based on those comments, and on a careful
review of the provisions of section 508, we have decided to change our
proposed policy in the limited case of hospitals that reclassified in
accordance with section 508 to areas that, because of the new labor
market definitions, have now been divided into several areas. Because
section 508(a)(1) of Public Law 108-173 allows a hospital to appeal its
wage area classification to the Board and ``select another area within
the state (or, at the discretion of the Secretary, to a contiguous
State) to which to be reclassified,'' we believe, in these limited
circumstances, a hospital should be permitted to select the area into
which it should be reclassified. Specifically, a hospital reclassified
under the section 508 process to an MSA that, under the new labor
market definitions, divided into several areas, will be given the
opportunity to select which of those areas it wishes to reclassify to.
We believe this is in keeping with the statutory intent of section 508.
To effect the selection, we will automatically assign these hospitals
to the divisor MSA with the highest wage index. Hospitals reclassified
under the one-time appeals process that have been assigned to a new MSA
are identified in Table 9B, column 7, in the Addendum of this final
rule. If these hospitals disagree with our selection, they must submit
to us, in writing, a request to select a different divisor area.
Requests must be received by us within 30 days of publication of this
final rule. Requests should be sent to the following address: Centers
for Medicare and Medicaid Services, Center for Medicare Management,
Hospital and Ambulatory

[[Page 49061]]

Policy Group, Division of Acute Care, Mailstop C4-08-06, 7500 Security
Boulevard, Baltimore, Maryland 21244-1850. Attn: Section 508 Appeals.
In the proposed rule, we also stated that 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 were asked to 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 were
redesignated under section 1886(d)(8)(B) of the Act, if those areas are
different. Again, affected hospitals were allowed to withdraw their
one-time appeal process reclassifications within 45 days of the
publication of the proposed rule.
Comment: A hospital association expressed concern that, due to our
proposal to implement the new CBSAs, hospitals granted a
reclassification under section 508 of Public Law 108-173 or the
traditional MCGRB reclassification process may realize little or no
benefit from the reclassification. The association stated that the
requirement that a hospital base its decision to withdraw an existing
reclassification is ``unnecessary'' and ``unfair'' because it requires
the hospital to ``give up'' the reclassification when there exists the
possibility that changes effected in the final rule could result in the
reclassification being beneficial. The association believed that, for
hospitals reclassified under section 508 or the traditional MGCRB
process, we should automatically apply the higher wage index for each
hospital, with no action required by the hospital. Many other
commenters recommended that CMS allow reclassifying hospitals 30 days
after publication of the final rule to withdraw their reclassification
requests.
Response: In the August 1, 2001 final rule, we included a detailed
discussion of the withdrawal, termination, and cancellation procedures
for reclassified hospitals (66 FR 39887). In that rule, we stated that
a hospital may cancel a previous withdrawal or termination of a 3-year
wage index reclassification by submitting written notice of intent to
the MGCRB no later than the deadline for submitting reclassification
applications effective at the start of the following fiscal year. This
provision allows the hospital to reinstate the original
reclassification for the wage index. As we stated in the August 1, 2001
final rule, we provided this option so that `` a hospital that later
discovers that the withdrawal of its approved wage index
reclassification was disadvantageous would have the ability to
reinstate its MGCRB approval for the wage index for the remaining years
in the 3-year term.'' Even in light of the existing provision, we are
persuaded by the comments received in response to the proposed rule, in
this limited circumstance, to allow hospitals a 30-day period where
they can make final, informed determinations regarding whether to
maintain or withdraw their existing reclassification on the basis of
the information published in the final rule. This 30-day period is also
applicable to those hospitals that adhered to the established process
and notified the MGCRB of their decision to withdraw or terminate their
section 1886(d)(10) or section 508 reclassification. Hospitals will
have 30 days after the publication date of this rule to submit, in
writing, to the MGCRB a request to withdraw their reclassification
request or to rescind their previous withdrawal or termination request.
e. Wage Index Adjustment Based on Commuting Patterns of Hospital
Employees (Section 505 of Pub. L. 108-173)
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 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 inpatient
PPS 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. We have employed the prereclassified wage indexes in making
these calculations. We also are not taking into account any of the
transition payments that are being used to account for the change in
labor market definitions announced by CMS. We believe it is reasonable
to interpret the term ``wage index'' in section 1886(d)(13)(D) to mean
the prereclassified, preadjusted wage index. In response to comment, we
discuss below our reasons for using the prereclassified wage indexes in
both identifying higher wage index areas and in calculating the out-
migration adjustment. We believe that it is also reasonable to
interpret ``wage index'' under section 1886(d)(13) as applying solely
to the wage index that exists using the most recent CMS definitions for
labor market areas. Section 505 is a new provision, first being
implemented for FY 2005, and we do not believe it is necessary to
incorporate transitional wage index payments, when there is no
transition necessary. Hospitals were fully able to assess the
implications of the new labor market areas on implementation of section
505 through review of the proposed rule. Thus, the higher wage index
areas will be identified, and the out-migration adjustment will be
calculated without taking into account the effect on wage index caused
by either of our transitional rules. We include a detailed discussion
of these transitional rules in section III.B.3. of this preamble. 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

[[Page 49062]]

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 data set 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 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 indexes 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, in the May 18, 2004 proposed rule, we
solicited 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
soliciting comments on the merits of relying on the Census data, we
welcomed 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.
Comment: One commenter questioned whether it would be possible in
future years to update commuting data using data from U.S. Census
Bureau's American Community Survey (ACS) rather than using data from
the 2000 census.
Response: The ACS is part of the U.S. Census Bureau's effort to
streamline and improve the census, and is intended to replace the long
form and provide some demographic information every year instead of
once every 10 years. Starting in July 2004, 1 in every 480 households
throughout America will receive and be asked to participate in the
survey each month. Since this is a new initiative, we are unable to
determine whether the data that will be collected is appropriate for
use in calculating the out-migration adjustment. However, as the U.S.
Census Bureau moves forward with this initiative, we will continue to
monitor the initiative's progress and evaluate the feasibility of using
data from the ACS to calculate the out-migration adjustment.
Comment: Several comments stated that the commuting data does not
reflect the ``new potential for increased commuting,'' in a specific
instance where a county used to be part of an MSA, but no longer is due
to the new MSA definitions. The commenters stated that the reduced
reimbursement resulting from the new MSA definitions will create the
potential for increased commuting in future years, even though the
county qualified for an out-migration adjustment. The commenters
recommended we ``adjust the commuting index to a more appropriate value
based on opportunity and not based solely on historical data.''
Response: The commenters did not provide suggestions on how we
would consistently measure the ``opportunity'' for increased commuting.
Therefore, we are unable to address the commenters' concerns at this
time. As we stated in the proposed rule, we will use the decennial
census in order to determine commuting rates. We note that as part of
its new definitions of statistical areas, OMB takes into account the
level of commuting. Thus, the new areas should reflect any increased
commuting that

[[Page 49063]]

has already occurred from one county to another.
Comment: One commenter stated that it is unclear as to how we will
measure commuting patterns and determine the applicability of the wage
index adjustment. The commenter requested that we describe the proposed
data resources and methodology that will be used for applying the wage
index adjustment.
Response: We note that in the May 18, 2004 proposed rule and in
this final rule, we discussed the data set used for measuring out-
migration patterns and the process for determining the out-migration
adjustments. (See sections III.H.3.e.(1) and 3.e.(3) of this preamble,
respectively.)
Comment: A commenter asked if the data used by CMS to compute the
out-migration adjustment will be made available via a public use file.
Response: We plan to make the data used for determining the
qualifying counties and the out-migration adjustment available after
the publication of this final rule on the CMS Web site at http://www.cms.gov.
Comment: One commenter requested that CMS allow hospitals to submit
their own commuting data to apply for the out-migration adjustment.
Response: Because the adjustment is based on the number of hospital
workers in a county who commute to other higher wage index areas, we
believe it would be extremely problematic for individual hospitals to
track and submit the data necessary for the out-migration adjustment.
The hospital could not simply survey their own employees to obtain this
necessary data, but would have to survey all hospital workers who live
in the county where the hospital is located and commute to hospitals in
other higher wage index areas.
In addition, we did not receive any specific comments on the
availability of an alternative data source or on the feasibility of
surveying hospitals on the residence and commuting patterns of their
employees for purposes of developing future year adjustments. We also
received comments supportive of our general implementation process and
its administrative simplicity. The commenters noted the merits of using
this data set and not placing an additional burden on hospitals through
a survey of employees. Therefore, we will use our proposed data set for
purposes of computing the qualifying counties and the out-migration
adjustment. However, we will continue to explore the possibility that
hospitals could submit their own data in future refinements of our
policy.
(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 an average 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
Sec. 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.
Comment: One commenter recommended that the wage index amounts
utilized in the calculation for the higher wage county be based on the
wage index utilized for Medicare payment including those increases in
wage index due to a group reclassification appeal. The commenter stated
that not utilizing this higher wage index amount would put the
hospitals addressed by the commuting adjustment provision at a serious
disadvantage.
Response: We considered using the post-reclassified wage index as
the basis for computing the higher wage index counties. In situations
like the group reclassification where all hospitals in a given county
are receiving the same wage index, it could be possible to use the
post-reclassified wage index for determining higher wage index counties
and for calculating the out-migration adjustment. However, it is not as
straightforward for counties where not all hospitals are receiving the
same wage index due to individual hospital reclassifications. For
example, in one county there may be two hospitals that receive
different wage indexes because one hospital has been reclassified.
Given the differing wage indexes in this situation, it is unclear which
wage index would be most appropriate to use as the basis for comparison
for this county or if some form of a blended wage index should be
calculated. This issue is further complicated by the use of a blended
wage index this year to mitigate the effects of the new MSA
definitions. Due to these complicating factors, and the fact that the
prereclassified wage index most accurately reflects the wages being
paid to hospital employees in a given geographic area, we believe that
the most equitable method is to use the prereclassified wage index when
calculating the qualifying counties and the out-migration adjustment.
However, we will continue to examine the possibility of employing post-
reclassification wage indexes as we refine our policy for future
adjustments.
Comment: One commenter asked how the out-migration adjustment will
be made in subsequent years, specifically if CMS increases the wage
index of qualifying counties by the out-migration adjustment when
calculating higher wage index counties in subsequent years. The
commenter identified a potential ripple effect if the data we use in
year two incorporates the new higher wage index value (resulting from
the additional out-migration adjustment) when identifying the county-
to-county flows where hospital employees were commuting to a higher
wage index area.
Response: We appreciate the opportunity to clarify this important
point. We recognize that if we used the new wage index (wage index plus
commuting adjustment) when computing the higher wage index counties,
the effect of the out-migration adjustment could ripple out each year
to

[[Page 49064]]

more counties. Consequently, in future years, we plan to identify the
higher wage index counties and compute the adjustment using the
prereclassified wage index without the additional out-migration
adjustment. We believe that this will more appropriately reflect the
intent of the statute without creating unanticipated effects.
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, County A's out-migration
percentage is equal to 70 percent.
To implement section 1886(d)(13)(B)(ii) of the Act, in the May 18,
2004 proposed rule (69 FR 28267), we proposed 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 welcomed public comment on this
proposed threshold.
Comment: Many commenters supported our decision to set the out-
migration threshold at the statutory minimum of 10 percent.
Response: We note that we did not receive any comments recommending
that we increase the threshold and we do not plan to change the
threshold in this final rule. Therefore, we are finalizing the out-
migration threshold at the statutory minimum of 10 percent.
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 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, in the May 18, 2004
proposed rule (69 FR 28268), we proposed 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 proposed 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 indexes 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.
Comment: Many commenters supported our decision not to set a
minimum difference between the wage index that applies to the county
and the higher wage index areas.
Response: We do not plan to change the minimum difference
requirement in this final rule; and therefore, establish the minimum
difference in the wage indexes between the resident county and the work
county to be any percentage greater than zero.
Our analysis for the proposed rule indicated that 224 counties
qualify under the proposed criteria. There were 411 hospitals located
in these qualifying counties. For the final rule, we have identified
230 counties that qualify under the proposed criteria. There were 415
hospitals located in these qualifying counties. Hospitals located in
qualifying counties are identified in Table 4J in the Addendum to this
final rule. Of the 415 hospitals, 181 are reclassified under section
1886(d)(8) of the Act, redesignated under section 1886(d)(10) of the
Act or received a section 508 reclassification and are signified in
Table 4J in the Addendum to this final rule with asterisks. Given the
statutory limitation on hospitals receiving the out-migration
adjustment and reclassification under section 1886(d)(8) of the Act,
redesignation under section 1886(d)(10) of the Act, or reclassification
under section 508, we assume that hospitals represented by asterisks
that have already been reclassified or redesignated, wish to retain
their reclassification or redesignation and not receive the out-
migration adjustment. Only one of the redesignated hospitals informed
us that they would like to waive the application of their redesignation
for the purposes of receiving the out-migration adjustment. As
described in section III.H.3.e.(4) of this preamble, hospitals have an
additional 30 days from the date of publication of this final rule to
notify CMS if they would like to waive their reclassification or
redesignation in order to receive the out-migration adjustment.
(3) The Adjustment
Hospitals located in the qualifying counties identified in Table 4J
in the Addendum to this final rule that have not already reclassified
through section 1886(d)(10) of the Act, redesignated through section
1886(d)(8) of the Act, received a section 508 reclassification, or
requested to waive the application of the out-migration adjustment will
receive the wage index adjustment listed in the table. This adjustment
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)

[[Page 49065]]

= 0.05998

So, hospitals in County A could receive a new wage index of
1.05998, instead of 1.000 for the following 3 years.
The adjustments calculated for qualifying hospitals are listed in
Table 4J in the Addendum to this final rule. These 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.
Comment: Several commenters questioned the temporary nature of the
out-migration adjustment. They suggested that CMS modify the rule to
extend the out-migration adjustment beyond the 3-year period in order
to reflect ongoing wage competition.
Response: Section 1886(d)(13)(F) of the Act specifies that the wage
index increase shall be applied for a period of 3 fiscal years.
Therefore, we do not have the discretion to extend the time period.
However, we will evaluate and designate qualifying counties each year.
Therefore, it is possible that after a qualifying county's 3-year
period ends, the county again will become a qualifying county and
receive a new out-migration adjustment for another 3-year time period.
Comment: Several commenters noted that the commuting adjustment is
based the commuting flows of hospital employees alone, while clinicians
can work in many nonhospital environments. Thus, the commenter stated
that the data used for the commuting adjustment does not address the
economic reality facing certain areas because it does not incorporate
data from clinicians working in nonhospital environments.
Response: Section 1886(d)(13) of the Act specifies that the
adjustment be based on the out-migration patterns of hospital
employees. Thus, we do not have flexibility to incorporate data based
on the commuting patterns of clinicians working in nonhospital
environments in the out-migration adjustment.
Comment: One commenter requested that the out-migration adjustment
be given to all counties within an MSA, to avoid competitive
disadvantages within an MSA.
Response: Section 1886(d)(13) of the Act specifies that the
adjustment is applied to qualifying counties, not to MSAs. In keeping
with this provision, we are adopting the provision that was in the
proposed rule that we will apply the out-migration adjustment at a
county level and not to all counties within an MSA.
Comment: Several commenters stated that the out-migration
adjustment only captures the success of other hospitals recruiting
labor from areas, but fails to recognize the cost of recruiting and
retaining hospital employees. One commenter noted that the formula does
not take into account the in-migration of hospital employees who live
in other MSAs and recommends that CMS address this issue to include a
more comprehensive measure of the interchange between adjacent MSAs.
Response: Section 1886(d)(13) of the Act specifies that the
adjustment be made based on the out-migration of hospital employees.
Therefore, we do not have the discretion to make additional adjustments
based on the in-migration of hospital employees.
Comment: One commenter stated that the out-migration adjustment
demonstrates that ``CMS is aware that many hospital's wage index would
be significantly affected by the OMB's revised definitions of
geographic statistical areas.'' The commenter also stated that the
provision does not go far enough to stabilize the severe impact of
changes in the MSAs.
Response: Section 505 of Public Law 108-173 established a provision
to recognize the out-migration of hospital employees. This statutory
provision is separate and distinct from OMB's release of updated MSA
definitions. We believe the commenter is incorrect in linking the two
provisions, because the out-migration adjustment was not explicitly
established to mitigate the effects of the new MSA definitions. We also
note that the blended wage index described in section III.G. of the
preamble of this final rule is specifically intended to help mitigate
the impacts of the adoption of the new MSA definitions.
(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
final rule are the counties and corresponding hospitals that qualify
for an increase in wage index through our implementation of the
section. This list includes the universe of hospitals that could
receive the adjustment, including those who are redesignated under
section 1886(d)(8) of the Act or reclassified under section 1886(d)(10)
of the Act. Hospitals located in qualifying counties that have not
already been reclassified or redesignated to another geographic area
for purposes of the wage index amount (including reclassifications
under section 508 of Pub. L. 108-173) will automatically receive the
increase in wage index. 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
indexes 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.
In the May 18, 2004 proposed rule, we invited public comment 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
noted 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 was to employ an automatic adjustment process
this year, and to replace the automatic process with an application
process for future years. We invited comments on whether to establish
the automatic process permanently, or to devise an application process
for future years. We also invited public comment on whether any
application process should be the responsibility of the MGCRB or some
other entity.
Comment: One commenter expressed support for the automatic nature
of the out-migration adjustment.
Response: We appreciate the commenter's support. In addition, we
did not receive specific comments on whether we should devise an
application process for the out-migration adjustment in future years.
However, we believe that numerous comments in support of our general
implementation process and its administrative simplicity suggest that
hospitals also appreciate the merits of an automatic application of the
out-migration adjustment. Thus, we are adopting our proposal of
applying the adjustment on an automatic basis to all hospitals in
qualifying counties except those that have already been reclassified
under section 1886(d)(10) of the Act, or

[[Page 49066]]

under section 508 of Public Law 108-173 redesignated under section
1886(d)(8)of the Act, or requested waiver of the application of the
out-migration adjustment.
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, including
reclassifications under section 508 of Public Law 108-173. 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 wished to waive the application of this wage
index adjustment were asked to notify CMS within 45 days of the
publication of the proposed rule. However, consistent with Sec.
412.273, hospitals that have been reclassified by the MGCRB were
permitted to withdraw their applications within 45 days of the
publication of the proposed rule in the Federal Register. Hospitals
that have been reclassified by the MGCRB (including reclassifications
under section 508 of Public Law 108-173) were permitted to terminate an
existing 3-year reclassification within 45 days of the publication of
the proposed rule in order to receive the wage index adjustment under
this provision. Hospitals that are eligible for this adjustment and
that have not been reclassified through section 1886(d)(10) of the Act
or under section 508 of Public Law 108-173, redesignated through
section 1886(d)(8) of the Act, or requested waiver of the application
of the out-migration adjustment will automatically receive the wage
index adjustment listed in Table 4J in the Addendum to this final rule.
In our proposed rule, we stated that the request for withdrawal of an
application for reclassification or termination of an existing 3-year
reclassification had to be received by the MGCRB within 45 days of
publication of the proposed rule. We asked hospitals to carefully
review the wage index adjustment that they would receive under this
provision (as listed in Table 2 in the Addendum to the proposed rule)
in comparison with the wage index that they would receive under MGCRB
reclassification (Table 9 in the Addendum to the proposed rule).
Comment: Many commenters questioned the timing of hospitals
reclassification decisions for FY 2005 because of the changes to the
wage index reclassification in this year's proposed rule (including the
new MSA definitions, section 1886(d)(8)(B) redesignations, and the out-
migration adjustment). The commenters noted that since the 45-day
timeframe for hospitals to waive their reclassification request ends
before publication of the final rule, hospitals are unable to
appropriately evaluate the impacts of their reclassification decisions
before to the deadline for withdrawing an approved reclassification.
Commenters suggested that CMS allow hospitals 30 days after publication
of the final rule to withdraw a reclassification request in order to
receive the out-migration adjustment instead. Commenters also requested
that CMS clarify that hospitals eligible for the out-migration
adjustment, but were already reclassified for FY 2005, were not
required to submit a formal waiver request to retain their existing
reclassification.
In addition, several commenters questioned how the out-migration
adjustment affects counties that are redesignated under section
1886(d)(8)(B) of the Act (Lugar counties). Specifically, one commenter
requested clarification on how hospitals that are eligible for
redesignation under section 1886(d)(8)(B) of the Act and the out-
migration adjustment are to notify CMS as to which provision they wish
to take advantage of because hospitals are automatically redesignated
under section 1886(d)(8)(B) of the Act, and do not have a
reclassification request to withdraw. The commenter also requested that
hospitals be given the opportunity to determine whether they want to
accept the section 1886(d)(8(B) of the Act redesignation or the out-
migration adjustment when the final rule is published.
Response: Section 1886(d)(13)(G) of the Act specifies that the out-
migration adjustment is not eligible for a hospital that has received
redesignation under section 1886(d)(8) of the Act or reclassification
under section 1886(d)(10) of the Act during that period (unless they
waive their reclassification/redesignation). In the vast majority of
cases, we believe that it is most advantageous for hospitals that have
been granted redesignation under section 1886(d)(8) of the Act,
reclassification under section 1886(d)(10) of the Act or section 508 of
Public Law 108-173 to retain the redesignation or reclassification
instead of the out-migration adjustment. However, there may be a
circumstance in which it is in the hospital's best interest to
terminate its redesignation or reclassification because the out-
migration adjustment results in a higher wage index. Given the number
of changes in the proposed rule and the apparent confusion regarding
the automatic application of the out-migration adjustment, we are
allowing hospitals a 30-day period from the date of this final rule
during which they can decide if they would rather take advantage of
their redesignation or reclassification or the out-migration
adjustment. Therefore, hospitals will have 30 days from the date of
publication of this final rule to submit to CMS a request to withdraw
their reclassification requests under section 1886(d)(10) of the Act,
section 508 of Public Law 108-173, or their redesignated status under
section 1886(d)(8) of the Act and receive the out-migration adjustment
instead. Hospitals must submit their request 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.
As previously noted, we will assume that hospitals that have been
redesignated under section 1886(d)(8) of the Act, reclassified under
section 1886(d)(10) of the Act or under section 508 of Public Law 108-
173 would prefer to keep their redesignation/reclassification unless
they explicitly notify CMS that they would like to receive the out-
migration adjustment instead. Additionally, we are clarifying that
hospitals that wish to retain their redesignation/reclassification
(instead of getting the out-migration adjustment) for FY 2005 did not
and do not have to submit a formal request to CMS, and will
automatically retain their reclassification/redesignation status for FY
2005.
The hospitals listed in Table 4J include all the hospitals that
could possibly take advantage of the out-migration adjustment.
Hospitals marked with an asterisk represent those hospitals that could
have received the out-migration adjustment, but are assumed to be
taking advantage of their reclassification or redesignation status (and
consequently not the out-migration adjustment) for FY 2005. These
hospitals do not have to do anything if they would like to remain
reclassified/redesignated and not receive the out-migration adjustment.
Comment: Several commenters requested that we clarify if hospitals
will have the same option to withdraw their reclassification or
redesignation if they would rather receive the out-migration adjustment
in subsequent years.
Response: In subsequent fiscal years, we will use the same process
we proposed for FY 2005 to allow hospitals to withdraw their
reclassification or redesignation requests and receive the

[[Page 49067]]

out-migration adjustment as long as their county remains a qualifying
county. That is, hospitals will be able to terminate their
reclassification or redesignation and take advantage of the out-
migration adjustment if they notify CMS within 45 days of the notice of
proposed rulemaking. We note that in upcoming years, we do not expect
to allow any withdrawals after that date, as we have done in this final
rule (allowing 30 days after publication of the final rule to withdraw
a reclassification or redesignation). We note that by the time the
proposed rule is published in 2005, hospitals will be familiar with the
new labor market areas and the policies for adopting such areas will
have been finalized.
Comment: Several commenters requested clarification on the ability
of hospitals to apply for reclassification in future year if they
receive the out-migration adjustment in FY 2005. Specifically, the
commenter asked whether a hospital that qualifies for the out-migration
adjustment effective for October 1, 2004, through September 30, 2005,
will be able to request geographic reclassification effective for
October 1, 2005, under the normal reclassification process. Similarly,
another commenter asked if a hospital would be able to receive the out-
migration adjustment at the time their MGCRB reclassification expires.
Response: It is our intent that hospitals should be able to
evaluate the merits of reclassification and the out-migration
adjustment on an annual basis. Given the statutory prohibition on
hospitals being redesignated or reclassified (under section 1886(d)(8)
or section 1886(d)(10) of the Act) and receiving the commuting
adjustment, hospitals cannot receive both the out-migration adjustment
and reclassification in the same year. We agree with the commenter that
a hospital should not have to forgo the out-migration adjustment in FY
2005 in order to be able to apply for reclassification in FY 2006.
Hospitals that qualify for the out-migration adjustment in a given year
can take advantage of that adjustment in that year, and can still apply
to be reclassified in the subsequent year. Hospitals that apply for
reclassification for FY 2005 will be viewed as implicitly waiving the
out-migration adjustment for that fiscal year, assuming they receive
the reclassification requested. Conversely, if a hospital's
reclassification request is not approved in a given year and the
hospital remains eligible for the out-migration adjustment, the
hospital will automatically receive the out-migration adjustment.
4. FY 2005 Reclassifications
The 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 final
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 final 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 final
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 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.
We are including in the Addendum of this final 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 hospitals) or FY 2004 (102 hospitals) 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 a 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 the 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).
Changes to the wage index that result from withdrawals of requests
for reclassification, wage index corrections, appeals, and the
Administrator's review process have been incorporated into the wage
index values published in this final rule. These changes may affect not
only the wage index value for specific geographic areas, but also the
wage index value redesignated hospitals receive; that is, whether they
receive the wage index that includes the data for both the hospitals
already in the area and the redesignated hospitals. Further, the wage
index value for the area from which the hospitals are redesignated may
be affected.
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.

[[Page 49068]]

I. Requests for Wage Index Data Corrections

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.
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 transmitted any 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
disagreed with the fiscal intermediary's policy interpretations was
April 23, 2004.
Hospitals were also instructed to examine Table 2 in the Addendum
to the proposed rule. Table 2 of the proposed rule contained 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 FY 2005 wage index. We noted that the hospital average
hourly wages shown in Table 2 of the proposed rule only reflected
changes made to a hospital's data and transmitted to CMS by March 15,
2004.
The final wage data public use file was released in May 2004 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 was 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 believed that its wage data were incorrect due
to a fiscal intermediary or CMS error in the entry or tabulation of the
final wage data, it was provided the opportunity to send a letter to
both its fiscal intermediary and CMS that outlined why the hospital
believed an error exists and provide all supporting information,
including relevant dates (for example, when it first became aware of
the error). These requests had to be received by CMS and the fiscal
intermediaries no later than June 11, 2004. The intermediary reviewed
requests upon receipt and contacted CMS immediately to discuss its
findings.
After the release of the May 2004 wage index file, changes to the
hospital wage data were only 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 accepted 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) have been incorporated into the final wage index in this
final rule, and are effective October 1, 2004.
We created the processes described above to resolve all substantive
wage index data index 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 had access to the final wage index data by early May
2004, they had the opportunity to detect any data entry or tabulation
errors made by the fiscal intermediary or CMS before the development
and publication of the final FY 2005 wage index in this final rule, and
the implementation of the FY 2005 wage index on October 1, 2004. If
hospitals availed themselves of this opportunity, the wage index
implemented on October 1 should be

[[Page 49069]]

accurate. Nevertheless, in the event that errors are identified after
publication of the final rule, 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, since a
hospital had to 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 had the opportunity to verify its data, and the fiscal
intermediary notified the hospital of any changes, we do not expect
that midyear corrections will be necessary. However, if the correction
of a data error changes the wage index value for an area, the revised
wage index value will be effective prospectively from the date the
correction is approved.
Comment: One national hospital association commended CMS for the
revised wage index development process and timeframe that CMS
implemented with the FY 2005 wage index. The commenter believed that
releasing the wage data file before intermediaries begin their desk
reviews of the wage data makes the process more efficient than in prior
years and recommended that CMS follow a similar process for 2006. The
commenter suggested that notifying hospitals of the schedule as soon as
possible and extending the hospital review timeframe would enhance the
process.
Another commented that nearly 13 percent of hospitals made changes
to their wage data after the release of the February public use file.
The commenter believed that this percentage of changes is too high and
creates budgeting challenges for hospitals, as well as, contributes to
difficulties in determining reclassification decisions.
Response: We will continue to explore ways to improve the process
for developing the wage index. With the new process in place, the rate
of revisions between the proposed (February) and final (May) public use
files has decreased dramatically, from approximately 30 percent in
prior years to less than 15 percent for the FY 2005 wage index.
However, we agree with the commenter that the volume of changes after
the proposed rule is still too high. We encourage hospitals to work
with their intermediaries as early as possible to ensure that their
wage data are correct early in the process. For the FY 2006 wage index,
we will apply the same process that we used for the FY 2005 wage index.
Comment: One commenter requested that CMS provide more specific
guidance to fiscal intermediaries for handling the June appeals, that
is, hospitals' requests to correct errors in the May public use files,
just as CMS provides for the earlier stages of the correction process.
Response: We plan to provide more specific instructions regarding
the intermediaries' handling of the June appeals in forthcoming
instructions for the wage index development process, beginning with the
FY 2006 wage index.
Comment: One commenter suggested that CMS should put a process in
place that allows other hospitals negatively impacted by another
hospitals' incorrect data to make a request to obtain a correction. The
commenter is concerned that sometimes the hospital with the incorrect
data has no incentive to request a correction, for example, the
hospital has closed or changed enrollment status to a CAH other non-
IPPS hospital.
Response: The opportunity that the commenter requested is already
available. If a hospital believes that another hospital's wage data may
be erroneous in the public use files, the hospital may notify CMS that
there is a potential problem with the other hospital's data. CMS and
the other hospital's intermediary will review the data and attempt to
contact the other hospital to determine the appropriate action. Any
correction to a hospital's wage data can only be based on data that
derives directly from the hospital.

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

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 Public Law 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

[[Page 49070]]

payments than would otherwise be made.'' However, this provision of
Public Law 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 Public Law 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 results in higher payments.
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 incorporation of
the requirements of section 403 of Public Law 108-173 in a new Sec.
412.64(h) of the regulations.
As discussed above, the Secretary had determined, prior to the
enactment of Public Law 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.
We did not receive any specific comments on the proposed
implementation of section 403 of Public Law 108-173. Therefore, we are
adopting as final the proposed policy change without modification.

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

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

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 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.
This policy 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.
Comment: One commenter requested that we clarify our policy
regarding LAMAs. The commenter noted that in the FY 2004 proposed rule,
we ``considered and appropriately rejected * * * a knowledge standard''
when we amended the transfer policy to include LAMAs. Under the
standard that was rejected, a hospital would have been required to code
LAMAs as transfers based on knowledge of a same-day admission to
another hospital. However, the commenter notes that in the May 18, 2004
proposed rule, we stated that 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.'' The commenter notes that this could be interpreted as reflecting
a change in policy, returning to the knowledge standard that we
rejected in the August 1, 2003 final rule.
Response: We did not intend to change our policy in the preamble of
the

[[Page 49071]]

May 18, 2004 proposed rule. A discharging hospital is not required to
identify cases in which a patient is admitted to another hospital on
the same day. Our claims processing software has been revised to
identify cases in which a patient is admitted to a hospital after being
discharged from another hospital on the same day.
Comment: Some commenters noted that the edits to the CWF will cause
claims to be rejected and that providers will have to recode the claims
and resubmit them. Others expressed concerns that hospitals
appropriately discharge their patients to home ``only to have other
providers outside of the hospital admit patients to other entities and
healthcare settings,'' imposing on hospitals an unfair burden that is
caused by patient choice and is not of their own doing. As a result,
claims are frequently denied for these providers as a result of the
lack of a method to ensure consistent inpatient processing of claims.
The commenter cites ``unplanned situations (for example, LAMA,
readmissions post-discharge to home, patients seeking additional care
at other facilities)'' that result in ``unnecessary payment delays and
rework of claims'' by the facilities that originally treated the
patients. The commenter further argues, ``these unnecessary process
issues result in additional overhead costs that will never be recovered
by the already reduced transfer per diem payments that the original
treating facility ultimately receives.''
Response: As we discussed above, we adopted this policy in the
August 1, 2003 final rule (68 FR 45404 through 45406) in response to an
OIG report indicating that transfers were frequently miscoded as LAMAs.
Since we have implemented the systems edits to identify these cases,
the number of cases identified by these edits has provided further
evidence that this policy is appropriate.
2. Changes to DRGs Subject to the Postacute Care Transfer Policy (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 expanded 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.
In the FY 2004 IPPS final rule, we indicated that we would review
and update this list periodically to assess whether additional DRGs
should be added or existing DRGs should be removed (68 FR 45413). 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 the May 18, 2004 IPPS proposed rule (69 FR 28212)
and in section II.B.9. of this final rule, we proposed to eliminate DRG
483. Under our proposal, the cases that would have been placed into DRG
483 would be split into two proposed new DRGs, 541 (Tracheostomy With
Mechanical 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 tracheostomy 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

[[Page 49072]]

Diagnosis), except for tracheostomy codes 31.21 and 31.29), the case
would be assigned to the proposed new DRG 541. We indicated that if the
patient does not have an additional major O.R. procedure (that is,
there is only a tracheostomy code assigned to the case), the case would
be assigned to proposed new DRG 542. In section II.B.9. of this
preamble, we are finalizing our proposal to eliminate DRG 483 and
create new DRGs 541 and 542.
As discussed in the May 18, 2004 proposed rule, neither of the 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 will now split
between new DRG 541 (20,812 total cases) and new DRG 542 (23,387 total
cases). As a result, neither of these new DRGs would meet the existing
threshold of 14,000 transfer cases (6,779 projected transfer cases for
new DRG 541, and 8,570 projected transfer cases for new DRG 542).
Nevertheless, we indicated that we believe the cases that will now be
incorporated into these two new DRGs remain appropriate candidates for
application of the postacute care transfer policy. The new DRGs 541 and
542 will 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 new DRGs 541 and 542 will
continue to require postacute care.
For the proposed rule, when we analyzed the cases that we projected
would fall into the two new DRGs in the FY 2005 GROUPER Version 22.0,
we found that a high proportion of cases in both the new DRGs were
projected to be transfer cases: 33 percent of all cases in DRG 541, and
37 percent in DRG 542. In addition, based on the data from cases in DRG
483 in the FY 2003 MedPAR file, a high proportion of the transfer cases
in these proposed new DRGs were projected to fall into the short-stay
transfer category: 41 percent of transfer cases in new DRG 541 and 42
percent of transfer cases in new DRG 542 were projected to occur before
the geometric mean length of stay for these new DRGs. By contrast,
among all DRGs, approximately 15 percent of transfer cases are short-
stay transfer cases. The percentage of transfer cases that were short-
stay cases that would be in both 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 proposed that the
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 did not believe that it was appropriate for these cases to fall
outside the scope of this policy solely because of a revision to the
DRG structure that was driven by policy reasons unrelated to the
postacute care transfer provision. We proposed that the high proportion
of transfer cases among all cases that would be assigned to these new
DRGs, along with the unusually high proportion of short-stay cases
among those transfer cases, provided 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, in the May 18, 2004 proposed rule, we proposed alternate
criteria to be applied in cases where DRGs do not satisfy the existing
criteria, for discharges occurring on or after October 1, 2004 (69 FR
28273-28374). The proposed new criteria were designed to address
situations such as those posed by the 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 proposed 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. Under
our proposal, DRGs that did not satisfy the first set of criteria would
still be included if they satisfied 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 were 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 were
short-stay transfer cases was at least 2 standard deviations above the
geometric mean length of stay across all DRGs (which is 37 percent for
FY 2005). We indicated that 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 proposed to require that, if a DRG was
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 contained only cases that would have been
included in a DRG to which the policy applied in the prior year.
Under the proposed alternate criteria, DRGs 430, 541, and 542 would
have qualified for inclusion in the postacute care transfer policy. DRG
430 met 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
in the proposed rule, the cases to be included in new DRGs 541 and 542
contain a sufficient number of transfers to meet the first alternate
criterion, and among the cases to be included in these DRGs, the
percentages of transfer cases occurring before the geometric mean
length of stay new DRGs exceed 2 standard deviations above the
geometric mean length of stay for all DRGs. The average lengths of stay
for the cases to be included in new DRGs 541 and 542 are 37.7 days and
28.9 days, respectively.
We proposed to revise the regulations governing the postacute
transfer policy to include the alternative criteria described above
(Sec. 412.4(d)). We also proposed that DRG 430 and new DRGs 541 and
542 would be included in the postacute care transfer policy.
In the May 18, 2004 proposed rule, we also called 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 for FY 2004 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 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 criteria that were included in last
year's rule. DRG 263 would have qualified under the volume threshold
and percent of short-stay transfer cases under the proposed new
alternate criteria contained in the proposed rule. However, it still
did not

[[Page 49073]]

meet the proposed required decline in length of stay to qualify to be
added to the policy in FY 2005.
Comment: Several commenters objected to the proposed alternate
criteria for DRGs to be included in the postacute care transfer policy.
Some commenters believed that the proposed criteria were inappropriate
because they appeared contrived to ensure that cases in the former DRG
483, which had a very high DRG weight and resulted in significant
Medicare payments, would not be paid at the higher rate associated with
those cases. One commenter stated that if CMS' creation of the two new
DRGs for tracheostomies with and without surgical procedures does not
create less variation in length of stay and cost per case, there is no
need to split DRG 483 and no need to expand the transfer policy
criteria. The commenters argued that if the split of DRG 483 into more
specific DRGs will better account for variations in the original DRG,
then the historical logic behind the transfer policy in these cases is
no longer valid. Some commenters also believed that the alternate
criteria did not meet the objective of the provision, which is to
ensure that the postacute care transfer policy only subjects high
volume DRGs to this payment method.
Response: We disagree with some of the points raised by these
commenters. In the proposed rule (69 FR 28273) we clearly indicated
that the alternate criteria to be included in the postacute care
transfer policy still required relatively high volumes of postacute
care transfer cases, as well as very high proportions of short stay
transfer cases. We specifically chose a very high threshold for the
percent of these postacute care transfer cases that are short-stay
cases in order to avoid including inappropriate DRGs within the
postacute care transfer policy. In many areas of Medicare program
policy we employ a threshold of one standard deviation or less in order
to qualify for inclusion to or exclusion from certain provisions. In
this instance, we deliberately chose a much higher threshold in order
to ensure that only those DRGs with the highest rate of short-stay
postacute care transfers would be included in the policy.
However, in the light of these and other comments, we are not
adopting the proposed alternate criteria in this final rule. We note
that the postacute care transfer policy was not considered at the time
the decision was made to split DRG 483. We do not intend to change our
rationale for reorganizing DRGs into more coherent groups or to
compromise the clinical cohesiveness of the DRG system in order ensure
cases are included in or excluded from the postacute care transfer
policy or other CMS policies. We have discussed the reasons for
splitting DRG 483 in section II.B.9. of the proposed rule and in this
final rule. However, we do note that, while these cases will continue
to be included in the postacute care transfer policy and subject to per
diem payments, we anticipate that fewer cases will actually receive
these reduced payments as the new DRGs better reflect the resources
required to treat these patients. As a result, hospitals will have less
incentive to discharge these patients to postacute care.
Comment: Some commenters suggested that in place of the proposed
alternate criteria, we should adopt a policy of keeping cases within
the scope of the postacute care transfer policy permanently once they
initially qualify for inclusion in the policy. These commenters noted
that removing DRGs from the postacute care transfer policy makes the
payment system less stable and results in inconsistent incentives over
time. They also argued that ``a drop in the number of transfers to
postacute settings is to be expected after the transfer policy is
applied to a DRG, but the frequency of transfers may well rise again if
the DRG is removed from the policy.'' Other commenters expressed
concern about our changing of the policy criteria in 2 consecutive
years. These commenters argued that such frequent changes in policy
give the appearance that the policy has been contrived to achieve
certain desired results and make the regulatory process unpredictable
and unfair. They further imply that these ``band-aid fixes'' to the 20-
year old Medicare system do not bode well for the confidence of outside
organizations in regards to the program.
Response: We did consider grandfathering cases already included in
the policy because this approach is, on the surface, the simplest
method of ensuring these cases continue to be paid appropriately.
However, we determined that in order to adopt this approach, we would
also need to determine an appropriate timeframe for the grandfathering
period. We did not believe that we could adequately predict or project
what timeframe would be appropriate, not only in the case of the
splitting of DRG 483 into DRGs 541 and 542, but also for future
situations where this kind of split may occur. Therefore, we tried to
develop appropriate, alternative criteria based on actual case data
that could be monitored and applied from year to year.
However, due to the large number of comments received and the
strong arguments they have raised in favor of a more straightforward
approach, we have decided not to adopt the alternate criteria proposed
in the May 18, 2004 proposed rule. Instead, in this final rule we are
adopting the policy of simply grandfathering, for a period of 2 years,
any cases that were previously included within a DRG that has split,
when the split DRG qualified for inclusion in the postacute care
transfer policy for both of the previous 2 years. Under this policy,
the cases that were previously assigned to DRG 483, and that will now
fall into DRGs 541 and 542, will continue to be subject to the
postacute care transfer policy for the next 2 years. We will monitor
the frequency with which these cases are transferred to postacute
settings and the percentage of these cases that are short-stay transfer
cases. Because we are not adopting the proposed alternate criteria for
DRG inclusion the postacute care transfer policy at this time, DRG 430
(Psychoses) does not meet the criteria for inclusion and will not be
subject to the postacute care transfer policy for FY 2005.
We appreciate the recommendation to address situations such as the
splitting of DRGs by simply including all cases within the postacute
care transfer policy permanently once they have initially qualified.
While we are not adopting this policy at this time, we will actively
consider it for adoption at a later date. Meanwhile, we believe that
grandfathering the cases formerly included in DRG 483 for 2 years is an
appropriate interim measure that ensures a consistent payment approach
to these cases while affording us sufficient time to undertake a
thorough review of this issue. In the meantime, we welcome comments on
how to treat the cases formerly included in a split DRG after the
grandfathering period. We note that, if we were to adopt the policy
recommended by the commenter, cases in DRGs 263 and 264 would again
become subject to the policy. As noted above, these DRGs are already
very close to meeting the criteria required to be re-included in the
policy. However, we will monitor cases until next year or until such
time that another change to this policy is warranted.
The table below displays the 30 DRGs that we are including in the
postacute care transfer policy, effective for discharges occurring on
or after October 1, 2004. This table includes the effects of dropping
DRG 483, which we are deleting from the DRG list, and adding the two
new DRGs 541 and 542 that will now incorporate the cases formerly
assigned to DRG 483. As discussed above, these cases are being
grandfathered into the policy for 2

[[Page 49074]]

years. The other DRGs meet the criteria specified above during both of
the 2 most recent years for which data were available prior to the
publication of this final 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.
BILLING CODE 4120-01-P
[GRAPHIC] [TIFF OMITTED] TR11AU04.053

BILLING CODE 4120-01-C
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

[[Page 49075]]

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 proposed to continue the
special payment methodology for DRGs 209, 210, and 211 for FY 2005 (69
FR 28274).
We received no comments on this proposal. Therefore, we will
continue the special payment methodology for these DRGs in FY 2005.
Comment: One commenter requested that we require physicians and
postacute care facilities to notify the original treating hospital that
a patient has been treated within 3 days at another facility. The
commenter indicated that this step would reduce the burden on hospitals
in relation to the postacute transfer policy.
Response: While we appreciate the commenter's concern to reduce the
burdens on hospitals, we are reluctant to impose this burden on other
entities, especially since these other entities are not affected by the
payment decisions that are involved.

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)

Situations may occur in hospital inpatient care settings where a
Medicare provider changes its Medicare payment classification status
during a patient's stay, for example, an acute care hospital is
reclassified as a LTCH. (We refer to the patients in these situations
as ``crossover patients.'') 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 to an acute care hospital for inpatient services are made
under the IPPS on a per discharge basis, using a DRG classification
system. Payments to LTCHs that are classified under section
1886(d)(1)(B)(iv)(I) 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) of the Act defines a LTCH as ``a hospital which as
an average inpatient length of stay (as determined by the Secretary) of
greater than 25 days.''
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 a patient's
stay when the first part of that stay is in the acute care hospital
(before the hospital was reclassified as a LTCH and the second part of
that stay is in the same hospital after it is reclassified as a LTCH.
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. The fact is that all new LTCHs that seek LTCH
classification under section 1886(d)1)(B)(iv)(I) of the Act begin as
other provider types, generally as acute care hospitals, and then these
providers under the regulations at Sec. 412.23(e)(3) are required to
meet the average length of stay criterion by showing that for the
period of at least 5 months of a preceding 6-month period, the
hospital's average Medicare inpatient length of stay is greater than 25
days. Once the entity meets the criteria under Sec. 412.23(e)(3), they
are reclassified as LTCHs and are then paid under the LTCH PPS. It is
for those patients who were admitted to the acute care hospital before
the acute care hospital was reclassified as a LTCH and are discharged
after the hospital is classified as a LTCH that we proposed to codify a
revised crossover policy in the May 18, 2004 IPPS proposed rule.
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 were reimbursed under the reasonable
cost-based (TEFRA) payment system, not other prospective payment
systems. Thus, under the manual instructions, if a patient was in an
acute care hospital and the hospital reclassified 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 generated a full DRG payment under the IPPS; and
the services provided from the time the facility was reclassified as a
LTCH were paid under the TEFRA payment system. The patients were
treated as if they were ``admitted'' to the ``new'' facility until the
patient was actually discharged. We had proposed 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. That is,
LTCHs are now being paid under a 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 patient
stay, and when the acute care hospital is reclassified as a 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 result described above is contrary to a
basic premise of a PPS, which is that a single 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 reclassification of a LTCH is
really one bundle of services associated with 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 classification status of the hospital treating the
patient. In the instant case, the beneficiary by mere coincidence, was
an inpatient of the acute care hospital when it reclassified-the acute
care hospital did not materially change the medical care it provided to
the beneficiary during his/her single hospitalization because its
classification

[[Page 49076]]

as an acute care hospital ended on one day and changed to LTCH
classification on the next day. Under the existing manual instructions,
the hospital is receiving not one payment, but two PPS payments, for a
bundle of services that should have been adequately and properly
reimbursed by a single PPS payment.
As explained in the May 18, 2004 proposed rule (69 FR 28275),
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) of the
regulations, 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 has been reclassified as
a LTCH) 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 the crossover patient situation described
above. Under the postacute care transfer policy, the affect on payment
is limited to a specific scenario; 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. When 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. Therefore, although the transfer policy addresses
discharges from an acute care hospital that occur prior to the
geometric mean length of stay for each DRG, it does not address
crossover patients where the hospital is reclassified after the patient
has a length of stay of at least the geometric mean length of stay.
As we have stated previously in this discussion, we believe that it
is inappropriate to continue to allow the current payment policy for
crossover patients. An acute care hospital before reclassification as a
LTCH may admit and treat patients with multicomorbidities that result
in longer hospital stays than are characteristic of the patient census
at a LTCH. 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 is reclassified as a
LTCH and are ultimately discharged from the LTCH. An acute care
hospital's change in classification status to a LTCH should have no
impact on the course of treatment that is already underway for the
patient in what would now be a LTCH. Thus, since we believe the
proposed patient is receiving one consistent course of treatment
throughout this stay, in the May 18, 2004 proposed rule, we proposed to
revise the present policy and allow for only one Medicare payment for
the patient's entire stay. In proposing this change in policy, we
proposed to provide for one Medicare payment where previously there
would have been two payments made for one stay; instead payment would
be based on the PPS of the facility that is actually discharging the
patient.
Under the proposed approach, we would include those days of care
and costs incurred by the hospital for the crossover patient before the
facility met the LTCH classification criteria, in determining payments
to the LTCH for that patient under the LTCH PPS. Under this policy, for
example, if an acute care hospital admits a patient on December 28 and
the hospital reclassifies to a LTCH on January 1 when its cost
reporting period begins, and the patient is physically discharged from
the LTCH on February 5, one payment would be made for this entire stay
(December 28-February 5), and payment would be based on the LTCH-DRGs
under the LTCH PPS. We are counting the patient's entire
hospitalization (that is, all days and costs of the patient stay in the
facility that occurred prior to and after reclassification) in
determining the applicable payment under the LTCH PPS. This provision
would also count all the days of the patient stay, that is prior to and
after reclassification, as LTCH days for purposes of determining
whether the facility continues to meet the average length of stay
requirement for LTCHs. We believe this is consistent with the
discretionary authority granted to the Secretary at section
1886(d)(1)(B)(iv)(I) of the Act for determining 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 reclassification 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 care days. Section 1871 authorizes the Secretary to
promulgate regulations that are necessary to carry on the
administration of the Medicare program. In addition, as stated in the
proposed rule, we believe counting all days for the patient's stay and
applying them in determining the PPS at the hospital that actually
discharges the patients even though part of the stay was in a prior
cost reporting period is consistent with the policy as recently revised
at Sec. 412.23(e)(3) of the regulations, 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 this example of the
crossover patient, including the days in December may result in a full
LTC-DRG payment rather than a lower payment possible under the short-
stay outlier policy (Sec. 412.529) based solely on the length of the
stay of the patient at the LTCH once it was reclassified. (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.)
While this final rule specifically addresses the situation of a
crossover patient that is in an acute hospital that reclassifies as a
LTCH during the course of the patient's stay, 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 a
rehabilitation hospital (under 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. However, at this time, we are not making a change
to the existing payment policy in situations other than the LTCH
crossover patient. We have only addressed the LTCH crossover patient
since, based on the statutory and regulatory qualifying criteria, every
LTCH must first be certified as a hospital before it can meet the LTCH
criteria. Therefore, it is inevitable that there will be crossover
patients in the newly classified LTCH. However, the same is not true
for other hospital

[[Page 49077]]

certifications. For example, a 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 patient policy as it affects other crossover
situations in the future and would welcome receiving the industry's
views on how Medicare payment policy should address those situations.
Accordingly, we are finalizing our proposed revisions to Sec.
412.2(b) of the regulations to add a new paragraph (3) which would be
applicable to acute care hospitals, and to add a new paragraph (e) to
Sec. 412.521 which would be applicable to LTCHs. The additions will
specify that Medicare would make only one 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. In
order to implement the final policy, we will create systems adjustments
that will enable the single claim generated by the discharging provider
to include patient days under the initial provider number. We note that
our final provisions to define and pay for crossover patient stays as
one episode of care based on the PPS of the discharging provider are
consistent with existing regulations. (Existing regulations have
established that payment under the per discharge PPS constitutes
``payment-in-full'' for acute care hospitals and for LTCHs.
Comment: The commenters agreed that hospitals should not be
receiving two payments for crossover patients, and stated that our
proposed change in policy to pay for only one stay appears reasonable.
Moreover, they suggested that we consider applying this policy to all
conversions, including acute care to rehabilitation, rehabilitation to
LTCH, and LTCH to rehabilitation so that payment rules could be
consistent with those presented in this final rule.
Response: We appreciate the commenters' support of our policy
change to allow only one payment in crossover situations. As we stated
above, we believe this policy could be equally applicable in other
crossover situations, and will be revisiting the crossover policy as it
affects other similar situations in the future.
Therefore, we are proposing to finalize our proposal without
modification.

C. Geographic Reclassifications--Definitions of Urban and Rural Areas
(Sec. 412.63(b), Sec. 412.64(b), and 412.102)

1. Revised MSAs
As we discussed in section III.B. and III.G. of the May 18, 2004
proposed rule and of this final rule, we proposed 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, in the May 18, 2004 proposed rule (69 FR
28277), we proposed to revise Sec. 412.63(b) and add a new Sec.
412.64(b) to reflect the existing geographic classification
definitions.
We note that commenters did not express objections to this specific
proposal. However, commenters expressed concern regarding various
aspects of our proposal to adopt the new definition of CBSAs. We
address these comments throughout this final rule.
2. Transition Period for DSH Payments to Redesignated Hospitals
Section 412.102 of the regulations provides for a 3-year transition
to the standardized amount and DSH adjustment payments to a hospital
redesignation from urban to rural.
Comment: One commenter asked CMS to clarify whether the transition
period that allows urban hospitals reclassified as rural to maintain
their assignment to the MSA where they are currently located for 3
years applies to both the wage index and the DSH payment adjustment.
Response: As described in Sec. 412.102, in the first year after a
hospital loses urban status, the hospital will receive an additional
payment that equals two-thirds of the difference between the urban DSH
payments applicable to the hospital before its designation from urban
to rural and the rural DSH payments applicable to the hospital
subsequent to its redesignation from urban to rural. In the second year
after a hospital loses urban status, the hospital will receive an
additional payment that equals one-third of the difference between the
urban DSH payment applicable to the hospital before its redesignation
from urban to rural and the rural DSH payments applicable to the
hospital subsequent to its redesignation from urban to rural.

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

[[Page 49078]]

years. Similarly, we are revising 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 making conforming changes to various
other sections of the regulations to reflect the single standardized
amount for the States and for Puerto Rico.
The comments received in response to this specific proposal
concurred with the proposal on the basis that it is consistent with the
implementation of recent legislative changes.

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

1. Background
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 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 points 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.
In the May 18, 2004 proposed rule (69 FR 28277), we proposed 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
(JCAHO), 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?
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://www.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

[[Page 49079]]

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, in the May 18, 2004 proposed rule, we proposed
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 submitted the
required 10 measures for the fourth calendar quarter of 2003 by the
CMS-established deadline of May 15, 2004, and that met 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 proposed that
we would estimate the minimum number of discharges anticipated to be
submitted by a hospital using Medicare administrative data. We proposed
to 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 would be applied to new hospitals when determining the
expected number of discharges for the calendar quarters covered for
each fiscal year.
In the May 18, 2004 proposed rule, we stated that the annual
payment updates would 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 would not receive the full
market basket update. Instead, they would receive a 0.4 percentage
points 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.
Comment: All of the commenters who addressed our proposed plans to
implement section 501(b) of Public Law 108-173 supported hospitals
providing quality performance data. Most of the commenters also
mentioned that it was important for CMS and the Joint Commission on
Accreditation of Healthcare Organizations (JCAHO) to align their
respective quality measures and procedures to make collection and
submission of this data as easy as possible.
Response: We are working with the JCAHO to accomplish this
alignment on the current quality measures. We are also setting up a
process to align any and all future measures that may be required by
either organization. In addition, we have taken the necessary steps to
ensure that this alignment is reflected in our chart audit validation
process. We are committed to making the submission of the quality
measures as seamless as possible for submitting either the core
measures defined by JCAHO or the quality measures contained in the CMS
Abstraction and Reporting Tool (CART).
Comment: Many of the comments expressed concerns about the proposed
chart audit validation procedures.
Response: We believe that all of the data to be collected by CMS in
its Clinical Warehouse must be timely, complete, and accurate. To
accomplish this, we proposed reabstraction of data submitted to the
Warehouse using the Clinical Data Abstraction Contractors (CDAC). The
CDAC will request paper charts from each hospital that has submitted
data to the warehouse and reabstract the quality measures using the CMS
CART. Based upon the percent agreement rate at the element level (that
is, the variables abstracted from the chart and used to construct each
measure), hospitals achieving an 80-percent agreement with the CDAC
abstraction will be considered as providing valid data. We will
randomly sample charts for each hospital each quarter and aggregate
across all charts to calculate the percent agreement. Several comments
were concerned about our process for requesting copies of the charts.
Under the proposed rules, hospitals are allowed 30 days to provide the
charts. A followup request is sent, if necessary, 15 days following the
initial request. Charts not received by the 31st day are considered
missing and a zero-percent agreement is assigned to that missing chart.
Comment: One commenter asked that we notify the hospital through
our QNet Exhange Web site to alert the hospitals that a request for
charts has been sent.
Response: We agree that this alert would be helpful and have
included this in future enhancements to our processes.
Comment: Several commenters asked that we allow hospitals to submit
additional information should the initial results be unfavorable.
Response: At this time, we believe allowing hospitals to submit
additional information would create an untenable workload for our
contractors. We have approximately 4,000 hospitals submitting data in
response to section 501(b) of Public Law 108-173. In addition, we are
collecting data from other hospitals that are participating in the
NVHRI. We estimate that we will be receiving data from as many as 4,500
hospitals. We also believe it is important to keep the turnaround time
for processing the validation records as short as possible. It is
important both for our reporting requirements and for the hospitals to
receive the validation results as soon as possible. To allow extensions
for providing data on a piecemeal basis would extend the process beyond
reasonable time limits. The CDAC process for requesting charts has been
in place for over 6 years. We have been collecting both quality data
and administrative data from all hospitals in the country during that
time. We believe our process is functioning well, and we take steps to
ensure that the chart requests are properly addressed and sent in a
timely manner. We believe that hospitals understand the importance of
these requests and will provide the charts in a timely manner.
Comment: Many of the commenters expressed concern about reconciling
differences between the hospital abstracted and CDAC abstracted data.
Several commenters asked that we allow hospitals to supplement the
submitted medical charts during an appeal process.
Response: We have devised an appeal process that allows a hospital
to review the validation results with their local QIO. If, after this
review, the QIO agrees with the hospital's interpretation, the appeal
is forwarded to the CDAC for review and correction, if necessary. We

[[Page 49080]]

do not believe we can allow hospitals to supplement the submitted
medical charts during this appeal process. The original request asks
for the complete chart, and we expect to receive all the information
and documentation necessary to support the abstraction of the quality
measures. Additional documentation puts the CDAC abstractors at a
disadvantage and extends the time to complete the validation process.
We understand that human error is possible and this is why we have set
the required percent agreement at less than 100 percent.
Comment: Other commenters recommended that the adjudication of any
differences noted between the hospital abstraction and the CDAC
abstraction should be subject to third party review and verification.
Response: We believe that adopting this recommendation would create
a lengthy and complicated process. We also believe that abstraction of
the clinical data to calculate the quality measures is a straight-
forward process. The information requested by each question in the
abstraction tool is either there, as stated, or it is not. These data
are not qualitative in their derivation and not subject to human
opinion. Also, our stated policy for ensuring that the data in the
warehouse meet our requirements for consistency and accuracy is that
the CDAC abstraction using the CART tool constitutes the correct data,
or gold standard. We have devoted a great deal of resources to ensuring
that the CDAC abstraction process is consistent and accurate through
our training and internal quality assurance. We consistently achieve
inter rater reliability rates approaching 100 percent in the CDAC.
Comment: All of the commenters who addressed the sampling process
asked that we reduce the percent agreement from our current 80 percent
to at least 60 percent initially and gradually raise the rate to 80
percent.
Response: We do not believe that this is necessary or desirable for
two reasons. First, we believe that the 80 percent level is a minimum
level of agreement that we can accept at any time. This means that four
out of five comparisons are the same. A 60 percent agreement would mean
that only three out of five comparisons are the same. We do not believe
this level of agreement is acceptable to meet our goal of ensuring
submission of timely, complete, and accurate data.
Second, for the FY 2005 annual payment update, we do not have a
chart audit validation requirement. We realize that hospitals need time
to understand the chart audit validation process and learn how to
provide accurate and reliable data. We also need time to implement and
test our procedures to ensure that we meet our goals of timely and
accurate submission of data and provide a fair opportunity to hospitals
to become familiar with the process. In support of the NVHRI program,
we have started the validation process on data submitted to the
warehouse beginning with calendar year 2003. We are providing feedback
to the participating NVHRI hospitals that have deposited data in the
warehouse and have instructed the QIOs to assist hospitals in
correcting any issues or problems that are identified. The first data
submission requirement for section 501(b) is the first calendar quarter
of 2004. We will conduct chart audit validation on these data and
provide feedback to all of the hospitals. The results of this first
quarter will not affect annual payment update determinations for FY
2005 or subsequent fiscal years. We believe that this test period will
provide hospitals the necessary lead time to improve their data
abstraction processes and provide them with the opportunity to achieve
the necessary 80 percent level of agreement prior to institution of the
validation requirement for the annual payment update for FY 2006. By
allowing the hospitals a penalty free period to meet the 80 percent
level we maintain consistent expectations regarding the submission of
accurate data and reduce any confusion that a constantly changing goal
might introduce.
Comment: One commenter suggested we modify our assessment of
percent agreement to differentiate between transcription errors and
errors of omission. This commenter contended that the goal of the
validation process is to determine if the standard of care has been
met.
Response: We disagree. The goal of the chart audit validation
process is to ensure that the hospital is submitting accurate data. In
order to calculate quality measures, which are used to determine the
standard of care, we need to have complete and accurate data. Errors of
omission and transcription errors both contribute to errors in
calculation of quality measures. Therefore, we believe it is important
to include both errors in calculating the percent agreement. We agree
that it is important to differentiate between these errors in order to
provide feedback to the hospitals. The process we have in place to
provide this feedback gives each hospital the detail abstraction
results from the CDAC so that staff may determine the types of errors
and take appropriate action.
In support of our goal of obtaining complete, timely and accurate
data, the chart audit validation process will be applied to all data
submitted to the clinical data warehouse. Several commenters argued
that the validation in support of section 501(b) should only apply to
the 10 quality measures required to be submitted. While such a
restriction would not be in support of our policy on the integrity of
the data in the clinical warehouse, we understand that receiving the
full annual payment update is only subject to submission of the 10
required measures. To varying degrees, all of the data contained in the
clinical warehouse are used to inform different parties on the quality
of care delivered to patients. Therefore, we plan to apply the
validation results in a two-step process. For purposes of the annual
payment update, the validation will be restricted to the 10 measures.
For purposes related to publishing data, we will apply the validation
results to all of the measures submitted. This second validation will
not affect the annual payment update.
Comment: Several commenters made suggestions on the quarterly
sample size used to assess the percent agreement. One commenter
recommended that we allow hospitals to submit additional records if the
hospitals fail the initial validation. A second commenter suggested
that we request a larger number of records and allow the hospital to
select a subset to forward to the CDAC.
Response: In order to maintain the integrity of the chart audit
validation process, the selection of records must be random and
independent of the hospital's control to ensure that the records being
reviewed are representative of the data submitted by the hospital. We
do not believe we can compromise the validity of the audit procedure by
giving up control of the cases selected.
Comment: Several commenters suggested that we consider optional
standards for small volume hospitals. They contended that small
differences in data validation can produce large percent differences
that may adversely affect validation rates.
Response: Our plans call for calculating the percent agreement
based upon the individual variables abstracted from each chart
aggregated across all of the charts abstracted. That is, we will pool
the variables to create a denominator and then calculate the percent
agreement. This approach creates a percent agreement that is
independent of the number of cases a hospital may treat. The problem
for small volume hospitals is that they may

[[Page 49081]]

not generate enough cases to meet our minimum sample sizes. Our chart
audit validation rules would have us then request all of the charts
generated by these small volume hospitals and we would, in essence, be
evaluating the ``universe'' of data for these hospitals. In such a
case, we would be calculating the actual percent agreement for that
hospital, rather than estimating this percent as in a hospital where we
have sampled the cases. It is our intent to monitor the demands our
processes will have on small volume hospitals and to consider
modifications so as to not over burden these hospitals. However, we do
believe that Medicare beneficiaries are entitled to the same high level
of quality care in all hospitals providing services and that all
hospitals should be subject to a similar level of assurance by CMS.
Comment: Several commenters requested that we engage in a series of
training programs and briefings to educate the hospitals about the
validation process and, in particular, provide information on the
variables used in calculating the percent agreement.
Response: We agree that this is an important aspect of this process
and we have instructed the QIOs to assist hospitals to understand the
results of the chart audit validation as well as begin to educate the
hospitals on the process itself. We have published on our QNet Exchange
Web site all of the documentation that supports the chart audit
validation process, including the list of variables included in our
calculations. However, we will continue to explore better ways to
educate hospitals, through our QIOs, on all of our processes.
Comment: Several commenters urged us to allow reasonable variation
in abstracted data, especially for the variables containing continuous
data such as the timing data. One commenter stated that our allowed
variances seemed to be arbitrary.
Response: We note that we have published the variation allowed for
each of these continuous data variables. Our decisions on how much
variation to allow in calculating these timing measures are the result
of input from our clinical experts. Each variable was carefully
considered in this context. For example, the variation allowed for the
pneumonia and surgical infection timing is based on the fact that the
measures derived from those values are measured in hours. In contrast,
the acute myocardial infarction indicators are measured in minutes so
the timing variables need to be more accurate. We will conduct research
on this issue as we collect data to test and refine our theoretical
expectations against the empirical data.
Comment: One commenter urged us to streamline and automate our
registration and attestation processes so that potential administrative
problems do not prevent eligible hospitals from receiving their annual
payment update.
Response: We agree that this is an important issue. It is our
policy to guard against just such a situation. We will be upgrading our
systems, with input from the hospital community, to minimize this
potential problem.
Comment: One commenter raised concerns about the accessibility of
the clinical warehouse data through our QNet Exchange server. The
commenter suggested that other users, such as corporate quality
assurance staff employed by a hospital system and not necessarily the
specific hospital, as well as staff from JCAHO accredited ORYX vendors
should be able to see a hospital's data to assist that hospital in its
data collection and reporting and quality assurance activities.
Response: Under current policy, only staff from a specific hospital
are allowed to access that hospital's data through a system of user
registration and password protections. This is a result of the laws and
regulations that govern the data our QIOs maintain in the Clinical
Warehouse. Specifically, regulations prohibit QIOs from releasing data
that identifies individual hospitals without first notifying the
hospitals and allowing a 30-day response period. In principle, we agree
with the suggestion that other users, such as corporate quality
assurance staff employed by a hospital system and not necessarily the
specific hospital, as well as staff from JCAHO accredited ORYX vendors
should be able to see a hospital's data (not patient-identified data)
to assist that hospital in its data collection and reporting and
quality assurance activities. We believe we can resolve the legal
issues satisfactorily and we anticipate implementation of mechanisms to
allow this type of access in the Fall of 2004.
Comment: Several commenters expressed a concern that the
designation of the 10 quality indicators in section 501(b) fixes, by
law, measures that in fact are subject to change depending upon medical
science and the evolving field of quality measurement. While realizing
that CMS cannot change the required data by regulation, the commenters
nonetheless believed that some accommodation should be considered for
allowing these measures to be modified or changed as the knowledge in
the field of quality measurement changes.
Response: We agree that the field of quality measurement is a
changing landscape and that, sometimes, accommodations need to be made.
However, we would point out that section 501(b) contains a sunset
clause for these 10 measures. Submission of the data on the 10 quality
measures is only required for FYs 2005, 2006, and 2007 in order for a
hospital to receive the full annual payment update. Otherwise, we are
required to enforce the law as written.
Comment: Several commenters made note of our attempts to estimate
the minimum number of cases that CMS expects from each hospital. They
were particularly concerned that this number will not be an accurate
representation of the number of cases a hospital may treat.
Response: The estimate of the minimum number of cases that we are
providing is based upon the average number of Medicare discharges per
quarter found in the administrative data for each hospital over the
last 2 years. In contrast, section 501(b) requires that the submitted
data include all payers and not just the Medicare beneficiaries. We
recognize that this distinction is a shortcoming in our calculation of
the minimum number of cases. However, we do not have any data from
which to estimate how many non-Medicare patients a hospital treats. Our
intent is to monitor the submissions from the hospitals and to update
our estimates as we gain experience, taking into account sampling where
appropriate.
Comment: One commenter believed it was important that its
organization participate in the formulation of quality measures, given
the importance attached to these measures.
Response: All of the measures CMS currently collects, as well as
those measures collected by the JCAHO, are endorsed by the National
Quality Forum (NQF). This organization uses a consensus process to
develop quality measures for all health care settings. Its
deliberations include all aspects of a quality measure, including
current standards of practice, documentation requirements, and the
scientific research supporting the measure. Membership is open to all
interested parties. These organizations can contact the NQF and
participate through this mechanism. The 10 measures are required by
statute and have been endorsed by the NQF.
Comment: One commenter was concerned about new hospitals that are
not able to meet the registration and reporting requirements simply
because they were not in existence during the first quarter of calendar
year 2004, but will be operating throughout FY 2005.

[[Page 49082]]

Response: We agree that new hospitals should not be disadvantaged
by their inability to report data prior to opening. Therefore, we will
hold these hospitals harmless with respect to the update. The
instructions we have given the QIOs are to have these new hospitals
register with QNet Exchange as soon as possible; complete the pledge to
participate in the annual payment update; complete the form that tells
CMS the hospital has zero discharges for the first quarter of calendar
year 2004, and begin submitting the required data as it becomes
available in the future.
Comment: Several commenters were concerned about our intent to
publish the quality measure data that we receive through section
501(b). These commenters focused on the validation of the published
data and on the use of composite hospital level scores, as opposed to
individual measures.
Response: We have stated that we intend to use validation results
as part of the criteria for publishing the hospital data. This is still
our intent. However, we recognize that situations may change and we may
have to modify this decision. It is our practice, in this situation, to
notify the community should this decision change. As to the use of a
composite score at the hospital level, we have not made our final
decisions about the format for publishing these data, but we are
considering the use of composite scores.
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 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. Comments regarding the
requirements for the submission of quality data for FY 2006 and FY 2007
are presented above in conjunction with the comments regarding the
general requirements for hospital reporting of quality data.
4. Regulation Change
In the May 18, 2004 proposed rule (69 FR 28279), we proposed 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
points 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.
Comment: MedPAC reiterated its support of the concept of tying
payment to quality performance. MedPAC did question the need to
financially reward or penalize hospitals just for submitting data. It
also noted that the statute requires hospitals to report on the quality
measures that were a part of the NVHRI as of November 2003. MedPAC
recommended that the Secretary should have the authority to update the
measures on a regular basis, adding or retiring measures as clinical
guidelines change or when providers reach high levels of performance in
certain areas.
Response: While payment for performance may be an ultimate goal,
the current law is specific in tying the annual payment update data to
reporting only. We point out that hospitals, as a condition of
participation and payment, are required to submit charts of Medicare
patients for review upon the request of the program. The failure to do
so may result in a denial of payment for that discharge. We appreciate
MedPAC's recommendation that the Secretary should have the authority to
update the measures that are reported. As MedPAC's comment implies,
adoption of this recommendation would require a statutory change.
Comment: One commenter asked whether the Medicare intermediaries
would receive specific instructions about how to implement this
differential update for hospitals that do and do not submit quality
data.
Response: As we indicated in the proposed rule, 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. The software will automatically provide payment
based on the fully updated rate to hospitals that have submitted data
on the requisite quality measures.
In this final rule, we are adopting, as final, the new Sec.
412.64(d)(2) as proposed. This new section of the regulations provides
that, for FYs 2005, 2006, and 2007, the applicable percentage change is
reduced by 0.4 percentage points 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 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 final rule.

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

As discussed in section III. of the preamble of this final 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

[[Page 49083]]

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 Public Law 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 Public Law 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 Public Law 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 final rule (and in the May 18, 2004
proposed rule), we discuss our implementation of section 1886(d)(3)(E)
of the Act, as amended by section 403, as it applies to the development
of the FY 2005 wage index. In this section IV.F. of the preamble, we
are incorporating the provisions of section 403 of Public Law 108-173
under a new Sec. 412.64(h). Specifically, we are specifying 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 by the regulations) of the hospital compared to the
national average level of hospital wages and wage-related costs. The
wage index will continue to be updated annually. In addition, we are
specifying 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 will 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.
We did not receive any public comments on our proposed
implementation of section 403 of Public Law 108-173. Therefore, we are
adopting as final, the proposed addition of the section 403 provisions
in Sec. 412.64(h) of the regulations.

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

As discussed in section III.H.3.e. of this final rule (and in the
May 18, 2004 proposed rule), section 505 of Public Law 108-173
established new section 1886(d)(13) of the Act. We refer readers to
section III.H.3.e for a discussion of this adjustment.
We are incorporating the provisions of section 505 of Public Law
108-173 in the regulations by adding a new Sec. 412.64(i).
To identify ``qualifying counties,'' we use commuting data compiled
by the U.S. Census Bureau based on a special tabulation of Census 2000
journey-to-work data. This 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. We limited the data set to those employees working in the
category designated ``hospitals.'' (BEA code 622000).
In order to be considered a qualifying county, the hospitals in
such county must meet the criteria listed Sec. 412.64(i). First, the
difference between the county's wage index and the weighted wage index
of the surrounding higher wage index areas to which hospital workers
commute must be greater than zero. Thus, any increase in the wage index
resulting from this provision that is greater than zero percent would
be recognized for meeting this criterion. Second, the county must meet
the minimum out-migration threshold of 10 percent (the minimum out-
migration percentage permitted by statute). Third, the average hourly
wage of the hospitals located in the county must equal or exceed the
wage index of the labor market area in which the county is located.
As stated in section III.H.3.e. of this preamble, for this third
criterion, we will use the average of hospitals' 3-year average hourly
wage for all hospitals in a given county. We compared this county
average hourly wage to the 3-year average hourly wage for the labor
market area where the county is located. We are using 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.
In addition, as stated in section III.H.3.e of this preamble that
we will apply the out-migration adjustment in an automatic manner. 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, including reclassifications
under section 508 of Public Law 108-173. If a hospital has been
redesignated under section 1886(d)(8)(B) of the Act, reclassified under
section 1886(d)(10) of the Act, or reclassified under section 508 of
Public Law108-173, we assume that the hospital wishes to remain
reclassified/redesignated and does not want to receive the out-
migration adjustment. This wage index increase will 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)(B) or section 1886(d)(10) of the Act, or under
section 508 of Public Law 108-173. Therefore, in the proposed rule,
consistent with Sec. 412.273, we stated that hospitals that were
reclassified by the MGCRB were permitted to terminate their
reclassifications or redesignations within 45 days of the publication
of the proposed rule in the Federal Register (that is, by July 2,
2004).
In this final rule, we have allowed for a one time rule for FY 2005
that would allow hospitals a 30-day period after publication of this
final rule when they can decide if they would rather take advantage of
their redesignation/reclassification or the out-migration adjustment.
Hospitals will have 30 days after the publication of this rule in the
Federal Register to either-- (1) submit to us a request to terminate
their reclassifications under section 1886(d)(10) of the Act (or under
section 508 of Public Law 108-173) or redesignated status under section
1886(d)(8)(B) of the Act and receive the out-migration adjustment
instead; or (2) reactivate a hospital's reclassification/redesignation
if a hospital withdrew its reclassification/redesignation within 45

[[Page 49084]]

days of publication of the May 18, 2004 proposed rule. (Only one
hospital requested waiver of its redesignation.) If we do not receive a
request for termination or reactivation within this 30-day period, we
will assume that hospitals that have been redesignated under section
1886(d)(8)(B) of the Act or reclassified under section 1886(d)(10) of
the Act or under section 508 of Public Law 108-173 would prefer to keep
their redesignation/reclassification. In addition, if within 30 days of
publication of this final rule, we do not receive a request from the
one hospital that withdrew its redesignation to reactivate such
redesignation, we will assume that the hospital wishes to receive the
out-migration adjustment. Finally, we wish to clarify that (except for
the one hospital that has already withdrawn its redesignation)
hospitals that wish to retain their redesignation/reclassification
(instead of receiving the out-migration adjustment) for FY 2005 did not
and do not have to submit a formal request to CMS, and will
automatically retain their reclassification/redesignation status for FY
2005.

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

As discussed in section II.D. of the preamble of this final rule
(and in the preamble of the May 18, 2004 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 Public Law 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), as we proposed in the May 18, 2004 proposed rule, we are
revising our regulations at Sec. 412.87(b)(3) to incorporate the
revised threshold amount.
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.
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 Public Law 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 Public
Law 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, as we proposed in the May 18, 2004
proposed rule, we are deleting Sec. 412.88(c) of the regulations. All
the comments that we received on add-on payments for new technologies
are addressed in section II.E. of the preamble to this final rule.

[[Page 49085]]

I. Rural Referral Centers (Sec. 412.96)

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 Public Law 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.
Section 4202(b) of Public Law 105-33 states, in part, ``[a]ny
hospital classified as a rural referral center by the Secretary * * *
for fiscal year 1991 shall be classified as such a rural referral
center for fiscal year 1998 and each subsequent year.'' In the August
29, 1997 final rule with comment period (62 FR 45999), we also
reinstated rural referral center status for all hospitals that lost the
status due to triennial review or MGCRB reclassification, but not to
hospitals that lost rural referral center status because they were now
urban for all purposes because of the OMB designation of their
geographic area as urban. However, subsequently, in the August 1, 2000
final rule (65 FR 47089), we indicated that we were revisiting that
decision. Specifically, we stated that we would permit hospitals that
previously qualified as a rural referral center and lost their status
due to OMB redesignation of the county in which they are located from
rural to urban to be reinstated as a rural referral center. 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 March 2004.
In the May 18, 2004 proposed rule (69 FR 28281), we proposed 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. (See the table set
forth in the May 18, 2004 proposed rule at 69 FR 28282.)
Based on the latest data available (FY 2003 bills received through
March 2004), in addition to meeting other criteria, hospitals with
fewer than 275 beds, if they are to qualify for initial rural referral
center status for cost reporting periods beginning on or after October
1, 2004, must have a case-mix index value for FY 2004 that is at
least--
1.2496; 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 final median case-mix index values by region are set forth in
the following table:

[[Page 49086]]

[GRAPHIC] [TIFF OMITTED] TR11AU04.054

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. In the May
18, 2004 proposed rule, we proposed 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 had at that
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 for FY 2004 were based
upon data regarding discharges occurring during FY 2000.
Therefore, in the May 18, 2004 proposed rule (69 FR 28282), we
proposed 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. (See the table set
forth in the May 18, 2004 proposed rule at 69 FR 28282.)
Based on the latest discharge data available at this time, that is,
for cost reporting periods that began during FY 2002, the final median
number of discharges for urban hospitals by census region area are as
follows:
[GRAPHIC] [TIFF OMITTED] TR11AU04.055

[[Page 49087]]

We note that the median number of discharges for hospitals in each
census region is greater than the national standard of 5,000
discharges. Therefore, 5,000 discharges is the minimum criterion for
all hospitals.
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
2002.
We note that in section IV.N.3 of this preamble, we discuss public
comments that we received on the effects on RRCs of the new
geographical area designations for wage index purposes.

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

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 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, in the May 18, 2004 proposed rule (69 FR 28282), we proposed
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.
We indicated that this proposed change would be applied prospectively,
effective for cost reporting periods beginning on or after October 1,
2004.
Comment: One commenter requested clarification as to whether the
proposed change to Sec. 412.104, which provides for an additional
payment to hospitals with a high percentage of ESRD discharges, applies
to LTCHs.
Response: The additional payment to hospitals with a high
percentage of ESRD discharges provided at Sec. 412.104 is applicable
only to short-term, acute care hospitals paid under the IPPS. It does
not apply to LTCHs paid under the LTCH PPS.
Comment: Some commenters opposed the proposed revisions to the
regulation because they believe this regulation was intended to
compensate hospitals for higher costs of treating all ESRD patients,
not just those receiving inpatient dialysis treatment.
Response: Section 412.104 specifically provides for an additional
payment to a hospital for inpatient dialysis provided to ESRD
beneficiaries. This payment is based on the estimated weekly cost of
dialysis and the average length of stay of ESRD beneficiaries for the
hospital. Therefore, we believe it is entirely consistent with the
regulations to provide this additional payment only when dialysis is
actually provided during the inpatient stay.
Comment: Several commenters expressed concern that a revision of
the regulation would place an undue financial burden on hospitals that
treat a significant number of ESRD beneficiaries, and that hospitals
may discontinue these services in the future.
Response: Our data indicate that approximately 41 hospitals are
currently receiving approximately $15 million dollars through this add-
on payment. While we cannot precisely quantify the impact of this
revision, we believe that the impact will be modes because ESRD
patients admitted to the hospital will typically require dialysis
during their hospital stay.
Comment: Some commenters believed that, because hospitals and
fiscal intermediaries are currently counting all ESRD beneficiaries,
the proposed change would lead to confusion. The commenter also
indicated that, in the cost report, there is no way to indicate only
discharges of ESRD beneficiary who are receiving dialysis.
Response: We do not believe that this policy will create confusion.
The cost report instructions will be amended to reflect the policy in
the final rule. As we stated earlier, we believe this revision to the
regultaion will have little effect on additional hospitals with respect
to the add-on payment.
Comment: Several commenters expressed concern that the proposed
revision would distort the existing formula to compute the add-on
payment and would under compensate those hospitals that now treat a
large number of African-American patients who seem to be those affected
largely by ESRD.
Response: The formula is now based on several factors; the most
significant is the cost of inpatient dialysis. We are not revising the
formula. Therefore, we do not agree that the revision would distort the
formula. Further, we do not believe this revision would adversely
affect any specific group of beneficiaries.
Comment: Several commenters expressed concern that CMS did not
comply with the Regulatory Flexibility Act (RFA), in proposing this
revision.
Response: As we indicated in the proposed rule (69 FR 28807), our
impact analysis identified those hospitals currently receiving
compensation through the add-on payment, as well as the amount paid to
each hospital. Currently, there are approximately 41 hospitals
receiving approximately $15 million. As we stated in the proposed rule,
we are unable to quantify the impact more precisely.
Comment: One commenter objected to the exclusion of DRGs 316 and
317 from the add-on payment. The commenter believed the exclusion
places an unfair burden on hospitals.
Response: We do not believe that the exclusion of these DRGs is
inappropriate, because their weights already include a payment amount
for inpatient dialysis.
Comment: One commenter recommended that the add-on payment for
inpatients receiving dialysis be updated. Specifically, the commenter
recommended that the average weekly cost of dialysis be increased from
the current $335.

[[Page 49088]]

Response: Under Sec. 412.104(b)(3), the average cost of dialysis
includes only those costs that are determined to be directly related to
the dialysis services. These costs include salary, employee health and
welfare, drugs, supplies, and laboratory services. We will review these
costs and consider the commenter's recommendation to update the average
weekly cost of dialysis as part of our next annual IPPS rulemaking.
Comment: One comment referenced correspondence that CMS had written
with instructions to include all ESRD beneficiaries when considering
the add-on payment.
Response: The correspondence cited reflected our policy at the time
the correspondence was issued. However, we have further evaluated that
policy and, as we stated in the proposed rule, believe that a revision
is necessary to ensure that the add-on payment is made in accordance
with the intent of the law.

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

1. IME Adjustment Factor Formula Multipliers (Section 502(a) of Public
Law 108-173 and Sec. 412.105(d)(3)(vii) and 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 Public Law 108-173 modified the formula
multiplier c to be used in the calculation of the IME adjustment. Prior
to enactment of Public Law 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.
In the May 18, 2004 proposed rule (69 FR 28283), we proposed 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.
Comment: One commenter opposed decreases in the IME adjustment
factor. The commenter asserted that hospitals are already being taxed
beyond their ability to shoulder the costs of graduate medical
education and that further decreases in payment for such costs will
threaten important educational programs.
Response: The proposed regulatory changes to the IME adjustment
factor are mandated by section 502(a) of Public Law 108-173. We do not
have the discretion to change the IME adjustment factor that is
mandated by statute. However, the changes to the IME factor provided by
section 502(a) of Public Law 108-173 generally constitute increases,
not decreases as indicated by the commenter. As stated above, prior to
enactment of Public Law 108-173, the formula multiplier was fixed at
1.35 for discharges occurring during FY 2003 and thereafter. Section
502(a) modified the formula multiplier beginning midway through FY 2004
and provided for a new schedule of formula multipliers for FYs 2005 and
thereafter, as previously noted.
We are adopting, as final without modification, the proposed
revision of Sec. 412.105(d)(3)(vii) and the proposed addition of Sec.
412.105(d)(3)(viii) through (d)(3)(xii) to incorporate changes in the
formula multipliers.
2. IME Adjustment Formula Multiplier for Redistributed FTE Resident
Slots (Section 422(b)(1)(C) of Public Law 108-173)
Under new section 1886(h)(7)(B) of the Act, added by section 422(a)
of Public Law 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 final rule.) Section 422(b)(1)(C) of
Public Law 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,
in the May 18, 2004 proposed rule (69 FR 28283), we proposed 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 Public Law 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 is 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 Public Law 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, in the May 18, 2004 proposed rule, we proposed
to require that if a

[[Page 49089]]

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. We explained further 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 we proposed to calculate the IME
payment 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 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 Public Law 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 noted 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).
In the May 18, 2004 proposed rule, we proposed to revise Sec.
412.105 to incorporate these changes under proposed new paragraph
(d)(4), proposed new paragraph (e)(2),

[[Page 49090]]

proposed new paragraph (f)(1)(iv)(B), and proposed added new last
sentence of paragraph (f)(1)(v).
Comment: One commenter stated that the calculation of the IME
payment relating to additional residents counted as a result of an
increase in the hospital's FTE cap received under section 1886(h)(7)(B)
of the Act is extremely cumbersome and will require difficult and
extensive changes to the Medicare cost report, particularly if the
additional residents are to be subject to the rolling average and the
resident-to-bed ratio. The commenter suggested that instead of revising
Worksheet E, Part A to include this calculation, CMS should consider
including this calculation on a separate worksheet, with the results
added to Worksheet E, Part A.
Response: First, we note that we are required by section
1886(d)(5)(B)(ix) to apply a different IME formula multiplier to
calculate the IME payment relating to these residents. Therefore, some
level of additional complexity is not avoidable. Additionally, we have
stated in previous responses concerning the IME calculation relating to
residents counted under section 1886(h)(7)(B) of the Act, under our
final policy, we are not requiring that these residents be subject to
the rolling average and resident-to-bed ratio calculations. Thus, we
believe our final policy substantially reduces the complexity of the
proposed calculations that concerned the commenter. Even so, we do
realize that the presence of an additional calculation on Worksheet E,
Part A for IME (and also on Worksheet E-3, Part IV for direct GME)
further complicates an already difficult calculation. We will attempt
to revise the worksheets in the simplest and least disruptive manner.
Comment: Several commenters noted that there is a mathematical
error on page 28284 of the May 18, 2004 Federal Register. The second
column on page 28284, in ``Step 1'', shows an IME computation of: 1.37
x [{ 1-. 10{time} ^.405 -1] = 0.0559. The result of this
computation should be .053917, not the .0559 as indicated.
Response: We agree with the commenters that the computed result for
``Step 1'' of the example is 0.053917, not 0.0559.
Comment: One commenter noted that there appears to be an error on
page 28284 of the May 18, 2004 Federal Register. On page 28284, third
column, in ``Step 3'', shows an IME adjustment factor computation of:
0.0539 + 0.0053 = .0592. The commenter believes the adjustment factor
should be calculated as 0.0559 + 0.0053 = .0612 since 0.0559 is the
factor calculated in ``Step 1'' for residents not counted as a result
of cap redistribution.
Response: As noted previously, ``Step 1'' of the IME adjustment
factor calculation (shown in the second column of page 28284) contains
an error. The result of ``Step 1'' should read 0.0539, not the 0.0559
as indicated. With this change, ``Step 3'' shows the correct IME
adjustment factor calculation (0.0539 + 0.0053 = .0592).
3. Counting Beds and Patient Days for Purposes of Calculating the IME
Adjustment (Sec. 412.105(b)) and DSH Adjustment ((Sec.
412.106(a)(1)(i))
As stated in section IV.K.1 of the preamble, Sec. 412.105 of our
existing regulations specifies that the calculation of the IME
adjustment is based on the IME adjustment factor, which is calculated
using hospitals' ratios of residents to beds. The determination of the
number of beds is based on available bed days. This determination of
the number of available beds is also applicable for other purposes,
including the level of the disproportionate share hospital (DSH)
adjustment payments under Sec. 412.106(a)(1)(i).
In the FY 2004 IPPS proposed rule (68 FR 27201 through 27208, May
19, 2003), we proposed changes to our policy on determining the number
of beds and patient days as it pertains to both the IME and DSH
adjustments. In the FY 2004 IPPS final rule (68 FR 45415 through
45422), we indicated that, due to the nature and number of public
comments we received on the proposed policies regarding unoccupied
beds, observation beds for patients ultimately admitted as inpatients,
dual-eligible patient days, and Medicare+Choice (M+C) days, we would
address the comments in a separate document. In the May 18, 2004
proposed rule, we stated that we planned to respond to comments in this
final rule. Under section IV.L.3. of this preamble, we are responding
to public comments received on the proposals in the May 19, 2003 and
the May 18, 2004 proposed rules as they relate to both the IME and DSH
payment adjustments and finalizing our policies in these four areas.
4. 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, in the May
18, 2004 proposed rule (69 FR 28284), we proposed 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. In the May 18, 2004 proposed rule (69 FR
28284), we proposed to correct the cross-reference to read ``Sec.
415.152.''
We did not receive any comments on these two proposals for
technical changes and, therefore, are adopting them as final.
In section IV.O. of the preamble of this final rule (and
in the May 18, 2004 proposed rule), we discuss our redesignation of
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
proposed to make changes to the cross-reference in Sec. 412.105 to
conform them to these redesignated separate sections.
We did not receive any comments on this proposal; and therefore,
are adopting this proposal as final.

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

1. Background
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
fractions: the ``Medicare fraction and the Medicaid fraction.'' The
Medicare fraction is computed by dividing the number of patient days
that are furnished to patients who were entitled to both Medicare Part
A and Supplemental Security Income (SSI) benefits by the total number
of patient days furnished to patients entitled to benefits under
Medicare Part A. The Medicaid fraction is computed by dividing the
number of patient days furnished to patients who, for those

[[Page 49091]]

days, were eligible for Medicaid but were not entitled to benefits
under Medicare Part A by the number of total hospital patient days in
the same period.

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2. Enhanced DSH Adjustment for Rural Hospitals and Urban Hospitals With
Fewer Than 100 Beds
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.

>=15% <20.2% 2.5% + [.65 x (DSH pct. - 15%)]

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.