[Federal Register Volume 69, Number 157 (Monday, August 16, 2004)]
[Proposed Rules]
[Pages 50448-50973]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18427]



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Part II

Book 2 of 2 Pages 50447-50994





Department of Health and Human Services





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Centers for Medicare and Medicaid Services



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42 CFR Parts 410, 411, and 419



Medicare Program; Proposed Changes to the Hospital Outpatient 
Prospective Payment System and Calendar Year 2005 Payment Rates; 
Proposed Rule

  Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / 
Proposed Rules  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 410, 411, and 419

[CMS-1427-P]
RIN 0938-AM75


Medicare Program; Proposed Changes to the Hospital Outpatient 
Prospective Payment System and Calendar Year 2005 Payment Rates

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would revise the Medicare hospital 
outpatient prospective payment system to implement applicable statutory 
requirements and changes arising from our continuing experience with 
this system and to implement certain related provisions of the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003. In 
addition, the proposed rule describes proposed changes to the amounts 
and factors used to determine the payment rates for Medicare hospital 
outpatient services paid under the prospective payment system. These 
changes would be applicable to services furnished on or after January 
1, 2005.

DATES: To be ensured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on October 8, 2004.

ADDRESSES: In commenting, please refer to file code CMS-1427-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of three ways (no duplicates, 
please):
    1. Electronically:
    You may submit electronic comments to http://www.cms.hhs.gov/regulations/ecomments (attachments should be in Microsoft Word, 
WordPerfect, or Excel; however, we prefer Microsoft Word). You can 
assist us by referencing the ``specific identifier'' that precedes the 
section on which you choose to comment.
    2. By Mail:
    You may mail written comments (one original and two copies) to the 
following address ONLY: Centers for Medicare & Medicaid Services, 
Department of Health and Human Services, Attention: CMS-1427-P, P.O. 
Box 8010, Baltimore, MD 21244-8018.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By hand or courier:
    If you prefer, you may deliver (by hand or courier) your written 
comments (one original and two copies) before the close of the comment 
period to one of the following addresses. If you intend to deliver your 
comments to the Baltimore address, please call telephone number (410) 
786-7195 in advance to schedule your arrival with one of our staff 
members.

Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201, or 7500 Security Boulevard, Baltimore, MD 21244-
1850.

(Because access to the interior of the Hubert H. Humphrey Building is 
not readily available to persons without Federal Government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain proof of filing by 
stamping in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this rule to assist us in fully considering issues 
and developing policies. You can assist us by referencing the file code 
CMS-1427-P and the specific ``issue identifier'' that precedes the 
section on which you choose to comment.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. After the close of the 
comment period, CMS posts all electronic comments received before the 
close of the comment period on its public web site. Written comments 
received timely will be available for public inspection as they are 
received, generally beginning approximately 4 weeks after publication 
of a document, at the headquarters of the Centers for Medicare & 
Medicaid Services, 7500 Security Boulevard, Baltimore, MD 21244, Monday 
through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an 
appointment to view public comments, phone (410) 786-7195.
    Submission of comments on paperwork requirements. For comments that 
relate to information collection requirements, mail a copy of comments 
to the following addresses:

Centers for Medicare & Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Security and Standards Group, Office 
of Regulations Development and Issuances, Room C4-24-02, 7500 Security 
Boulevard, Baltimore, MD 21244-1850, Attn: John Burke, CMS-1427-P; and
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 3001, New Executive Office Building, Washington, DC 20503, 
Christopher Martin, CMS Desk Officer.

    Comments submitted to OMB may also be emailed to the following 
address: [email protected], or faxed to OMB at (202) 395-
6974.

FOR FURTHER INFORMATION CONTACT: Dana Burley, (410) 786-0378, 
Outpatient prospective payment issues and Suzanne Asplen, (410) 786-
4558, Partial hospitalization and community mental health center 
issues.

SUPPLEMENTARY INFORMATION: Copies: To order copies of the Federal 
Register containing this document, send your request to: New Orders, 
Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 15250-
7954. Specify the date of the issue requested and enclose a check or 
money order payable to the Superintendent of Documents, or enclose your 
Visa or Master Card number and expiration date. Credit card orders can 
also be placed by calling the order desk at (202) 512-1800 (or toll-
free at 1-888-293-6498) or by faxing to (202) 512-2250. The cost for 
each copy is $10. As an alternative, you can view and photocopy the 
Federal Register document at most libraries designated as Federal 
Depository Libraries and at many other public and academic libraries 
throughout the country that receive the Federal Register.
    This Federal Register document is also available from the Federal 
Register online database through GPO Access, a service of the U.S. 
Government Printing Office. The web site address is: http://www.gpoaccess.gov/fr/index.html.
    To assist readers in referencing sections contained in this 
document, we are providing the following table of contents.

Outline of Contents

I. Background

A. Legislative and Regulatory Authority for the Outpatient 
Prospective Payment System
B. Excluded OPPS Services and Hospitals
C. Prior Rulemaking
D. APC Advisory Panel
    1. Authority for the APC Panel
    2. Establishment of the APC Panel

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    3. APC Panel Meetings and Organizational Structure
E. Provisions of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003
F. Summary of Major Content of This Proposed Rule

II. Proposed Changes Related to Ambulatory Payment Classifications 
(APCs)

A. Proposed APC Changes: General
B. APC Panel Review and Recommendations
    1. APC 0018: Biopsy of Skin/Puncture of Lesion
    2. Level I and II Arthroscopy
    3. Angiography and Venography Except Extremity
C. Limits on Variations Within APCs: Proposed Application of the 2 
Times Rule
    1. Cardiac and Ambulatory Blood Pressure Monitoring
    2. Electrocardiograms
    3. Excision/Biopsy
    4. Posterior Segment Eye Procedures
    5. Laparoscopy
    6. Anal/Rectal Procedures
    7. Nerve Injections
    8. Anterior Segment Eye Procedures
    9. Pathology
    10. Immunizations
    11. Pulmonary Tests
    12. Clinic Visits
D. Proposed Exceptions to the 2 Times Rule
E. Coding for Stereostatic Radiosurgery Services
    1. Background
    2. Proposal for CY 2005
F. Proposed Movement of Procedures From New Technology APCs to 
Clinically Appropriate APCs
    1. Background
    2. APC Panel Review and Recommendation
    3. Proposal for CY 2005
G. Proposed Changes to Inpatient List
H. Proposed Assignment of ``Unlisted'' HCPCS Codes
    1. Background
    2. Proposal for CY 2005
I. Proposed Addition of New Procedure Codes
J. Proposed OPPS Changes: Provisions of MMA (Pub. L. 108-173)
    1. Payment for Initial Preventive Physical Examinations (Section 
611 of Pub. L. 108-173)
    a. Background
    b. Proposed Amendments to Regulations
    c. Proposed Assignment of New HCPCS Code for Payment of Initial 
Preventive Physical Examinations
    d. Handling of Comments Received in Response to This Proposal
    2. Payment for Certain Mammography Services (Section 614 of Pub. 
L. 108-173)

III. Proposed Recalibration of APC Weights for CY 2005

A. Database Construction
    1. Proposed Treatment of Multiple Procedure Claims
    2. Proposed Use of Single Procedure Claims
B. Proposed Calculation of Median Costs for CY 2005
C. Proposed Adjustment of Median Costs for CY 2005
    1. Device-Dependent APCs
    2. Proposed Treatment of Specified APCs
    a. APC 0315, Level II Implantation of Neurostimulator
    b. APC 0651, Complex Interstitial Radiation Application
    c. APC 0659, Hyperbaric Oxygen Therapy
    3. Proposed Required Use of ``C'' Codes for Devices
    4. Submission of External Data
    D. Proposed Calculation of Scaled OPPS Payment Weights

IV. Proposed Payment Changes for Devices

A. Pass-Through Payments for Devices
    1. Expiration of Transitional Pass-Through Payments for Certain 
Devices
    2. Proposal for CY 2005
B. Provisions for Reducing Transitional Pass-Through Payments To 
Offset Costs Packaged Into APC Groups
    1. Background
    2. Proposal for CY 2005

V. Transitional Pass-Through Payment for Additional Costs of Drugs and 
Biologicals

A. New Drugs, Biologicals, and Radiopharmaceuticals With Pass-
Through Status
    1. Background
    2. Expiration in CY 2004 of Pass-Through Status for Drugs and 
Biologicals
    3. Drugs and Biologicals With Pass-Through Status in CY 2005
B. Drugs, Biologicals, and Radiopharmaceuticals Without Pass-Through 
Status
    1. Background
    2. Proposed Criteria for Packaging Payment for Drugs, 
Biologicals, and Radiopharmaceuticals
    3. Proposed Payment for Drugs, Biologicals, and 
Radiopharmaceuticals Without Pass-Through Status That Are Not 
Packaged
    a. Payment for Specified Covered Outpatient Drugs
    b. Proposal to Treat Three Sunsetting Pass-Through Drugs as 
Specified Covered Outpatient Drugs
    c. Proposed CY 2005 Payment for New Drugs and Biologicals With 
HCPCS Codes and Without Pass-Through Application and Reference AWP
    d. Proposed Payment for Separately Payable Nonpass-Through Drugs 
and Biologicals
    e. Proposed CY 2005 Change in Payment Status for HCPCS Code 
J7308
C. Proposed Coding and Billing for Specified Outpatient Drugs
D. Proposed Payment for New Drugs, Biologicals, and 
Radiopharmaceuticals Before HCPCS Codes Are Assigned
    1. Background
    2. Provisions of Pub. L. 108-173
E. Proposed Payment for Vaccines
F. Proposed Changes in Payment for Single Indication Orphan Drugs
G. Proposal To Change Payment Policy for Radiopharmaceuticals
H. Proposed Coding and Payment for Drug Administration
I. Proposed Payment for Blood and Blood Products

VI. Estimated Transitional Pass-Through Spending in CY 2005 for Drugs, 
Biologicals, and Devices

A. Basis for Pro Rata Reduction
B. Proposed Estimate of Pass-Through Spending for CY 2005

VII. Other Policy Decisions and Proposed Policy Changes

A. Statewide Average Default Cost-to-Charge Ratios
B. Transitional Corridor Payments: Technical Change
C. Status Indicators and Comment Indicators Assigned in Outpatient 
Code Editor (OCE)
    1. Payment Status Indicators
    2. Comment Indicators
D. Observation Services
E. Procedures That Will Be Paid Only as Inpatient Procedures
F. Hospital Coding for Evaluation and Management Services
    1. Background
    2. Proposal for Evaluation and Management Guidelines
G. Brachytherapy Payment Issues
H. Payment for APC 0375, Ancillary Outpatient Services When Patient 
Expires

VIII. Proposed Conversion Factor Update for CY 2005

IX. Proposed Wage Index Changes for CY 2005

X. Determination of Proposed Payment Rates and Outlier Payments for CY 
2005

A. Calculation of the Proposed National Unadjusted Medicare Payment
B. Proposed Hospital Outpatient Outlier Payments
C. Proposed Payment for Partial Hospitalization
    1. Background
    2. Proposed PHP APC Update for CY 2005
    3. Separate Threshold for Outlier Payments to CMHCs

XI. Proposed Beneficiary Copayments for CY 2005

A. Background
B. Proposed Copayment for CY 2005

XII. MedPAC Recommendations

XIII. Addenda Files Available to the Public Via Internet

Addendum C--Healthcare Common Procedure Coding System (HCPCS) Codes 
by Ambulatory Payment Classification (APC)

XIV. Collection of Information Requirements

XV. Response to Public Comments

XVI. Regulatory Impact Analysis

A. OPPS: General
B. Impact of Proposed Changes in This Proposed Rule
C. Alternatives Considered
D. Limitations of Our Analysis
E. Estimated Impacts of This Proposed Rule on Hospitals
F. Projected Distribution of Outlier Payment
G. Estimated Impacts of This Proposed Rule on Beneficiaries

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XVII. Regulation Text

Addenda

Addendum A--List of Ambulatory Payment Classification (APCs) With 
Status Indicators, Relative Weights, Payment Rates, and Copayment 
Amounts for CY 2005
Addendum B--Payment Status by HCPCS Code and Related Information--CY 
2005
Addendum C--Healthcare Common Procedure Coding System (HCPCS) Codes 
by Ambulatory Payment Classification (APC) (Available only on CMS 
Website via Internet. See section XIII. of the preamble of this 
proposed rule.)
Addendum D1--Payment Status Indicators for Hospital Outpatient 
Prospective Payment System
Addendum D2--Comment Indicators
Addendum E--CPT Codes That Will Be Paid Only as Inpatient Procedures
Addendum H--Wage Index for Urban Areas
Addendum I--Wage Index for Rural Areas
Addendum J--Wage Index for Hospitals That Are Reclassified
Addendum K--Wage Index Adjustment for Commuting Hospital Employees
Addendum L--Pre-Reclassified Wage Index for Urban Areas
Addendum M--Pre-Reclassified Wage Index for Rural Areas
Addendum N--Hospital Reclassifications and Redesignations by 
Individual Hospital Under Section 508 of Pub.L. 108-173

Alphabetical List of Acronyms Appearing in the Proposed Rule

ACEP American College of Emergency Physicians
AHA American Hospital Association
AHIMA American Health Information Management Association
AMA American Medical Association
APC Ambulatory payment classification
ASP Average sales price
ASC Ambulatory surgical center
AWP Average wholesale price
BBA Balanced Budget Act of 1997, Pub. L. 105-33
BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 
Act of 2000, Pub. L. 106-554
BBRA Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999, Pub. L. 106-113
CAH Critical access hospital
CCR (Cost center specific) cost-to-charge ratio
CMHC Community mental health center
CMS Centers for Medicare & Medicaid Services (formerly known as the 
Health Care Financing Administration)
CORF Comprehensive Outpatient Rehabilitation Facility
CPT [Physicians'] Current Procedural Terminology, Fourth Edition, 2004, 
copyrighted by the American Medical Association
CRNA Certified Registered Nurse Anesthetist
CY Calendar year
DMEPOS Durable medical equipment, prosthetics, orthotics, and supplies
DMERC Durable Medical Equipment Regional Carrier
DRG Diagnosis-related group
DSH Disproportionate share hospital
EACH Essential Access Community Hospital
E/M Evaluation and management
EPO Erythropoietin
ESRD End-stage renal disease
FACA Federal Advisory Committee Act, Pub. L. 92-463
FDA Food and Drug Administration
FI Fiscal intermediary
FSS Federal Supply Schedule
FY Federal fiscal year
HCPCS Healthcare Common Procedure Coding System
HCRIS Hospital Cost Report Information System
HHA Home health agency
HIPAA Health Insurance Portability and Accountability Act of 1996, Pub. 
L. 104-191
ICD-9-CM International Classification of Diseases, Ninth Edition, 
Clinical Modification
IME Indirect medical education
IPPS (Hospital) inpatient prospective payment system
IVIG Intravenous immune globulin
LTC Long-term care
MedPAC Medicare Payment Advisory Commission
MDH Medicare dependent hospital
MMA Medicare Prescription Drug, Improvement, and Modernization Act of 
2003, Pub. L. 108-173
MSA Metropolitan Statistical Area
NCD National Coverage Determination
OCE Outpatient code editor
OMB Office of Management and Budget
OPD (Hospital) outpatient department
OPPS (Hospital) outpatient prospective payment system
PET Positron Emission Tomography
PHP Partial hospitalization program
PM Program memorandum
PPI Producer Price Index
PPS Prospective payment system
PPV Pneumococcal pneumonia (virus)
PRA Paperwork Reduction Act
QIO Quality Improvement Organization
RFA Regulatory Flexibility Act
RRC Rural referral center
SBA Small Business Administration
SCH Sole community hospital
SDP Single drug pricer
SI Status indicator
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248
TOPS Transitional outpatient payments
USPDI United States Pharmacopoeia Drug Information

I. Background

A. Legislative and Regulatory Authority for the Outpatient Prospective 
Payment System

    When the Medicare statute was originally enacted, Medicare payment 
for hospital outpatient services was based on hospital-specific costs. 
In an effort to ensure that Medicare and its beneficiaries pay 
appropriately for services and to encourage more efficient delivery of 
care, the Congress mandated replacement of the cost-based payment 
methodology with a prospective payment system (PPS). The Balanced 
Budget Act of 1997 (BBA) (Pub. L. 105-33), enacted on August 5, 1997, 
added section 1833(t) to the Social Security Act (the Act) authorizing 
implementation of a PPS for hospital outpatient services. The Balanced 
Budget Refinement Act of 1999 (BBRA) (Pub. L. 106-113), enacted on 
November 29, 1999, made major changes that affected the hospital 
outpatient PPS (OPPS). The Medicare, Medicaid, and SCHIP Benefits 
Improvement and Protection Act of 2000 (BIPA) (Pub. L. 106-554), 
enacted on December 21, 2000, made further changes in the OPPS. Section 
1833(t) of the Act was also recently amended by the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. 
108-173, enacted on December 8, 2003 (these amendments are discussed 
later under section I.E. of this proposed rule). The OPPS was first 
implemented for services furnished on or after August 1, 2000. 
Implementing regulations for the OPPS are located at 42 CFR part 419.
    Under the OPPS, we pay for hospital outpatient services on a rate-
per-service basis that varies according to the ambulatory payment 
classification (APC) group to which the service is assigned. We use 
Healthcare Common Procedure Coding System (HCPCS) codes (which include 
certain Current Procedural Terminology (CPT) codes) and descriptors to 
identify and group the services within each APC. The OPPS includes 
payment for most hospital outpatient services, except those identified 
in section I.B. of this proposed rule and certain inpatient services 
covered under Medicare Part B for beneficiaries who are entitled to 
Part B benefits but who have exhausted them or otherwise are not 
entitled to them. In addition, the OPPS applies to partial 
hospitalization services furnished by community mental health centers 
(CMHCs).

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    The OPPS rate is an unadjusted national payment amount that 
includes the Medicare payment and the beneficiary copayment. This rate 
is divided into a labor-related amount and a nonlabor-related amount. 
The labor-related amount is adjusted for area wage differences using 
the inpatient hospital wage index value for the locality in which the 
hospital or CMHC is located.
    All services and items within an APC are comparable clinically and 
with respect to resource use (section 1833(t)(2)(B) of the Act). In 
accordance with section 1833(t)(2) of the Act, subject to certain 
exceptions, services and items within an APC group cannot be considered 
comparable with respect to the use of resources if the highest median 
(or mean cost, if elected by the Secretary) for an item or service in 
the APC is more than 2 times greater than the lowest median cost for an 
item or service with the same APC (referred to as the ``2 times 
rule''). In implementing this provision, we use the median cost of the 
item or service assigned to an APC.
    Special payments under the OPPS may be made for new technology 
items and services in one of two ways. Section 1833(t)(6) of the Act 
provides for temporary additional payments or ``transitional pass-
through payments'' for certain drugs, biological agents, brachytherapy 
devices used for the treatment of cancer, and categories of medical 
devices for at least 2 but not more than 3 years. For new technology 
services that are not eligible for pass-through payments and for which 
we lack sufficient data to appropriately assign them to a clinical APC, 
we have established special APC groups based on costs, which we refer 
to as APC cost bands. These cost bands allow us to price these new 
procedures more appropriately and consistently. Like the pass-through 
payments, these special payments for new technology services are also 
temporary; that is, we retain a service within a new technology APC 
group until we acquire adequate data to assign it to a clinically 
appropriate APC.

B. Excluded OPPS Services and Hospitals

    Section 1833(t)(1)(B)(i) of the Act authorizes the Secretary to 
designate the hospital outpatient services that are paid under the 
OPPS. While most hospital outpatient services are payable under the 
OPPS, section 1833(t)(1)(B)(iv) of the Act excluded payment for 
ambulance, physical and occupational therapy, and speech-language 
pathology services, for which payment is made under a fee schedule. The 
Secretary exercised the broad authority granted under the statute to 
exclude from the OPPS those services that are already paid under fee 
schedules or other payment systems. Such excluded services include, for 
example, the professional services of physicians and nonphysician 
practitioners paid under the Medicare physician fee schedule; 
laboratory services paid under the clinical diagnostic laboratory fee 
schedule; services for beneficiaries with end-stage renal disease 
(ESRD) that are paid under the ESRD composite rate; and services and 
procedures that require an inpatient stay that are paid under the 
hospital inpatient prospective payment system (IPPS). We set forth the 
services that are excluded from payment under the OPPS in Sec.  419.22 
of the regulations.
    Under Sec.  419.20 of the regulations, we specify the types of 
hospitals and entities that are excluded from payment under the OPPS. 
These excluded entities include Maryland hospitals, but only for 
services that are paid under a cost containment waiver in accordance 
with section 1814(b)(3) of the Act; critical access hospitals (CAHs); 
hospitals located outside of the 50 States, the District of Columbia, 
and Puerto Rico; and Indian Health Service hospitals.

C. Prior Rulemaking

    On April 7, 2000, we published in the Federal Register a final rule 
with comment period (65 FR 18434) to implement a prospective payment 
system for hospital outpatient services. The hospital OPPS was first 
implemented for services furnished on or after August 1, 2000. Section 
1833(t)(9) of the Act requires the Secretary to review certain 
components of the OPPS not less often than annually and to revise the 
groups, relative payment weights, and other adjustments to take into 
account changes in medical practice, changes in technology, and the 
addition of new services, new cost data, and other relevant information 
and factors. Since implementing the OPPS, we have published final rules 
in the Federal Register annually to implement statutory requirements 
and changes arising from our experience with this system. For a full 
discussion of the changes to the OPPS, we refer readers to these 
Federal Register final rules.\1\
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    \1\ Interim final rule with comment period, August 3, 2000 (65 
FR 47670); interim final rule with comment period, November 13, 2000 
(65 FR 67798); final rule and interim final rule with comment 
period, November 2, 2001 (66 FR 55850 and 55857); final rule, 
November 30, 2001 (66 FR 59856); final rule, December 31, 2001 (66 
FR 67494); final rule, March 1, 2002 (67 FR 9556); final rule, 
November 1, 2002 (67 FR 66718); interim final rule with comment 
period, November 7, 2003 (68 FR 63398); and interim final rule with 
comment period, January 6, 2004 (69 FR 820).
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    On November 7, 2003, we published a final rule with comment period 
in the Federal Register (68 FR 63398) that revised the OPPS to update 
the payment weights and conversion factor for services payable under 
the calendar year (CY) 2004 OPPS on the basis of claims data from April 
1, 2002 through December 31, 2002. Subsequent to publishing the 
November 7, 2003 final rule with comment period, we published a 
correction of the final rule with comment period on December 31, 2003 
(68 FR 75442). That document corrected technical errors in the November 
7, 2003 rule and included responses to a number of public comments that 
were inadvertently omitted from that rule.
    On January 6, 2004, we published in the Federal Register an interim 
final rule with comment period (69 FR 820) that implemented provisions 
of Pub. L. 108-173 that affected payments made under the OPPS, 
effective January 1, 2004. We will finalize this interim final rule and 
address public comments associated with that rule when we finalize this 
proposed rule.

D. APC Advisory Panel

1. Authority of the APC Panel
    Section 1833(t)(9)(A) of the Act, as amended by section 201(h) of 
the BBRA of 1999, requires that we consult with an outside panel of 
experts to review the clinical integrity of the payment groups and 
weights under the OPPS. The Advisory Panel on APC Groups (the APC 
Panel), discussed under section I.D.2. of this preamble, fulfills this 
requirement. The Act further specifies that the Panel will act in an 
advisory capacity. This expert panel, which is to be composed of 15 
representatives of providers subject to the OPPS (currently employed 
full-time, not consultants, in their respective areas of expertise), 
reviews and advises us about the clinical integrity of the APC groups 
and their weights. The APC Panel is not restricted to using our data 
and may use data collected or developed by organizations outside the 
Department in conducting its review.
2. Establishment of the APC Panel
    On November 21, 2000, the Secretary signed the charter establishing 
the Advisory Panel on APC Groups. The APC Panel is technical in nature 
and is governed by the provisions of the Federal Advisory Committee Act 
(FACA), as amended (Pub. L. 92-463). On November 1, 2002, the Secretary

[[Page 50452]]

renewed the charter. The renewed charter indicates that the APC Panel 
continues to be technical in nature, is governed by the provisions of 
the FACA, may convene up to three meetings per year, and is chaired by 
a Federal official.
    Originally, in establishing the APC Panel, we solicited members in 
a notice published in the Federal Register on December 5, 2000 (65 FR 
75943). We received applications from more than 115 individuals 
nominating either colleagues or themselves. After carefully reviewing 
the applications, we chose 15 highly qualified individuals to serve on 
the APC Panel. Because of the loss of four APC Panel members due to the 
expiration of terms of office on March 31, 2004, we published a Federal 
Register notice on January 23, 2004 (69 FR 3370) that solicited 
nominations for APC Panel membership. From the 24 nominations that we 
received, we chose four new members. The entire APC Panel membership is 
identified on the CMS website at www.cms.hhs.gov/faca/apc/apcmem.asp.
3. APC Panel Meetings and Organizational Structure
    The APC Panel first met on February 27, February 28, and March 1, 
2001. Since that initial meeting, the APC Panel has held four 
subsequent meetings, with the last meeting taking place on February 18, 
19, and 20, 2004. Prior to each of these biennial meetings, we 
published a notice in the Federal Register to announce each meeting 
and, when necessary, to solicit nominations for APC Panel membership. 
For a more detailed discussion about these announcements, refer to the 
following Federal Register notices: December 5, 2000 (65 FR 75943), 
December 14, 2001 (66 FR 64838), December 27, 2002 (67 FR 79107), July 
25, 2003 (68 FR 44089), and December 24, 2003 (68 FR 74621).
    During these meetings, the APC Panel established its operational 
structure which, in part, includes the use of three subcommittees to 
facilitate its required APC review process. Currently, the three 
subcommittees are the Data Subcommittee, the Observation Subcommittee, 
and the Packaging Subcommittee. The Data Subcommittee is responsible 
for studying the data issues confronting the APC Panel and for 
recommending viable options for resolving them. This subcommittee was 
initially established on April 23, 2001, as the Research Subcommittee 
and reestablished as the Data Subcommittee on April 13, 2004. The 
Observation Subcommittee (established on June 24, 2003, and 
reestablished with new members on March 8, 2004) reviews and makes 
recommendations to the APC Panel on all issues pertaining to 
observation services paid under the OPPS, such as coding and 
operational issues. The Packaging Subcommittee, which was established 
on March 8, 2004, studies and makes recommendations on issues 
pertaining to services that are not separately payable under the OPPS 
but are bundled or packaged into the APC payment. Each of these 
subcommittees was established by a majority vote of the APC Panel 
during a scheduled annual or biennial APC Panel meeting. All 
subcommittee recommendations are discussed and voted upon by the full 
APC Panel.
    For a detailed discussion of the APC Panel meetings, refer to the 
hospital OPPS final rules cited in section I.C. of this preamble. A 
full discussion of the APC Panel's February 2004 meeting and the 
resulting recommendations is included in sections II., III., IV., V., 
and VI. of this preamble.

E. 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), Pub. L. 108-173, was enacted. Pub. 
L. 108-173 made changes to the Act relating to the Medicare OPPS. In a 
January 6, 2004 interim final rule with comment period, we implemented 
provisions of Pub. L. 108-173 relating to the OPPS that were effective 
for CY 2004. In this proposed rule, we are proposing to implement the 
following sections of Pub. L. 108-173 that are effective for CY 2005:
     Section 611, which provides for Medicare coverage of an 
initial preventive physical examination under Part B, subject to the 
applicable deductible and coinsurance, as an outpatient department 
(OPD) service payable under the OPPS. The provisions of section 611 
apply to services furnished on or after January 1, 2005, but only for 
individuals whose coverage period under Medicare Part B begins on or 
after that date.
     Section 614, which provides that screening mammography and 
diagnostic mammography services are excluded from payment under the 
OPPS. This amendment applies to screening mammography services 
furnished on or after the date of enactment of Pub. L. 108-173 (that 
is, December 8, 2003), and in the case of diagnostic mammography, to 
services furnished on or after January 1, 2005.
     Section 621(a)(1), which requires special classification 
of certain separately paid radiopharmaceutical agents and drugs or 
biologicals, and specifies the pass-through payment percentages, 
effective for services furnished on or after January 1, 2005, for the 
three categories of ``specified covered OPD drugs'' defined in the 
statute: sole source drug; innovator multiple source drug; and 
noninnovator multiple source drug. In addition, payment for these drugs 
for CYs 2004 and 2005 does not have to be made in a budget neutral 
manner.
     Section 621(a)(2), which specifies the reduced threshold 
for the establishment of separate APCs with respect to drugs or 
biologicals from $150 to $50 per administration for drugs and 
biologicals furnished in CYs 2005 and 2006.
     Section 621(a)(3), which excludes separate drug APCs from 
outlier payments. Specifically, no additional payment will be made in 
the case of APC groups established separately for drugs and 
biologicals.
     Section 621(b), which requires that all devices of 
brachytherapy consisting of a seed or seeds (or radioactive source) 
furnished on or after January 1, 2004, and before January 1, 2007, be 
paid based on the hospital's charges for each device, adjusted to cost. 
This provision also requires that these brachytherapy services be 
excluded from outlier payments.

F. Summary of Major Content of This Proposed Rule

    In this proposed rule, we are setting forth proposed changes to the 
Medicare hospital OPPS. These changes would be effective for services 
furnished on or after January 1, 2005. The following is a summary of 
the major changes that we are proposing to make:
1. Proposed Changes to the APCs Groups
    As required by section 1833(t)(9)(A) of the Act, we are proposing 
the annual update of the APC groups and the relative payment weights. 
This section also requires that we consult with an outside panel of 
experts, the Advisory Panel on APC Groups, to review the clinical 
integrity of the groups and weights under the OPPS. Based on analyses 
of Medicare claims data and recommendations of the APC Panel, we are 
proposing to establish a number of new APCs and to make changes to the 
assignment of HCPCS codes under a number of existing APCs. Our proposed 
APC changes for CY 2005 are set forth in section II. of this preamble.
    We also discuss the application of the 2 times rule and proposed 
exceptions to it; coding for stereotactic radiosurgery services; the 
proposed movement of

[[Page 50453]]

procedures from the new technology APCs; the proposed changes to the 
list of procedures that will be paid as inpatient services; and the 
proposed additions of new procedure codes to the APCs.
2. Recalibrations of APC Relative Payment Weights
    In section III. of this preamble, we discuss the methodology used 
to recalibrate the proposed APC relative payment weights and set forth 
the proposed recalibration of the relative weights for CY 2005.
3. Proposed Payment Changes for Devices
    In section IV. of this preamble, we discuss proposed changes to the 
pass-through payment for devices and the methodology used to reduce 
transitional pass-through payments to offset costs packaged into APC 
groups.
4. Proposed Payment Changes for Drugs, Biologicals, Radiopharmaceutical 
Agents, and Blood and Blood Products
    In section V. of this preamble, we discuss our proposed payment 
changes for drugs, biologicals, radiopharmaceutical agents, and blood 
and blood products.
5. Pro Rata Reduction for Transitional Pass-Through Drugs, Biologicals, 
and Devices
    In section VI. of this preamble, we discuss the proposed 
methodology for measuring whether there should be an estimated pro rata 
reduction for transitional pass-through drugs, biologicals, and devices 
for CY 2005.
6. Other Policy Decisions and Proposed Policy Changes
    In section VII. of this preamble, we present our proposals for CY 
2005 regarding the following:
     Update of statewide default cost-to-charge ratios.
     A conforming change to the regulation relating to the use 
of the first available cost reporting period ending after 1996 and 
before 2001 for determining a provider's payment-to-cost ratio to 
calculate transitional corridor payments for hospitals paid under the 
OPPS that did not have a 1996 cost report.
     Proposed changes in the status indicators and comment 
indicators assigned to APCs for CY 2005.
     Proposed elimination of the diagnostic tests criteria as a 
requirement for hospitals to qualify for separate payment of 
observation services under APC 0339 (Observation) and changes to the 
guidelines to hospitals for counting patients time spent in observation 
care.
     Proposed payment under the OPPS for certain procedures 
currently assigned to the inpatient list.
     Proposed strategy for giving the public notice of new 
implementation guidelines for new evaluation and management codes.
     Proposed addition of three new HCPCS codes and descriptors 
for brachytherapy sources that would be paid separately, pursuant to 
Pub. L. 108-173.
     Proposed modification of the HCPCS code descriptors for 
brachytherapy source descriptors for which units of payment are not 
already delineated.
     Proposed payment for services furnished emergently to an 
outpatient who dies before admission to a hospital as an inpatient.
7. Proposed Conversion Factor Update for CY 2005
    As required by section 1833(5)(3)(C)(ii) of the Act, under section 
VIII. of this preamble, we are proposing to update the conversion 
factor used to determine payment rates under the OPPS for CY 2005.
8. Proposed Wage Index Changes for CY 2005
    In section IX. of this preamble, we discuss the proposed retention 
of our current policy to apply the IPPS wage indices to wage adjust the 
APC median costs in determining the OPPS payment rate and the copayment 
standardized amount. These indices reflect proposed major changes for 
CY 2005 relating to hospital labor market areas as a result of OMB 
revised definitions of geographical statistical areas; hospital 
reclassifications and redesignations, including the one-time 
reclassifications under section 508 of Pub. L. 108-173; and the wage 
index adjustment based on commuting patterns of hospital employees 
under section 505 of Pub. L. 108-173.
9. Determination of Payment Rates and Outlier Payments for CY 2005
    In section X. of this preamble, we discuss how APC payment rates 
are calculated and how the payment rates are adjusted to reflect 
geographic differences in labor-related costs. This section also 
discusses proposed changes in the way we calculate outlier payments for 
CY 2005.
10. MedPAC Recommendations
    Under section 1805(b) of the Act, the Medicare Payment Advisory 
Committee (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. This annual report makes recommendations 
concerning the hospital outpatient prospective payment system. In 
section XII. of this preamble, we discuss the MedPAC recommendations. 
For further information relating specifically to the MedPAC March 1, 
2004 report or to obtain a copy of the report, visit MedPAC's Web site 
at: http://www.medpac.gov.
11. Regulatory Impact Analysis
    In section XV. of this preamble, we set forth our analysis of the 
impact that the proposed changes contained in this proposed rule would 
have on affected hospitals and CMHCs.

II. Proposed Changes Related to Ambulatory Payment Classifications 
(APCs)

    [If you choose to comment on issues in this section, please 
indicate the caption ``APC Groups'' at the beginning of your comment.]
    Section 1833(t)(2)(A) of the Act requires the Secretary to develop 
a classification system for covered hospital outpatient services. 
Section 1833(t)(2)(B) provides that this classification system may be 
composed of groups of services, so that services within each group are 
comparable clinically and with respect to the use of resources. In 
accordance with these provisions, we developed a grouping 
classification system, referred to as the Ambulatory Payment 
Classifications Groups or APCs, as set forth in Sec.  419.31 of the 
regulations. We use Healthcare Common Procedure Coding System (HCPCS) 
codes and descriptors to identify and group the services within each 
APC. The APCs are organized such that each group is homogeneous both 
clinically and in terms of resource use. (However, new technology APCs 
that are temporary groups for certain approved services are structured 
based on cost rather clinically homogeneity.) Using this classification 
system, we have established distinct groups of surgical, diagnostic, 
and partial hospitalization services, and medical visits. Because of 
the transitional pass-through provisions, we also have developed 
separate APC groups for certain medical devices, drugs, biologicals, 
radiopharmaceuticals, and devices of brachytherapy.
    We have packaged into each procedure or service within an APC the 
cost associated with those items or services that are directly related 
and integral to performing a procedure or furnishing a service. 
Therefore, we would not make separate payment for

[[Page 50454]]

packaged items or services. For example, packaged items and services 
include: use of an operating, treatment, or procedure room; use of a 
recovery room; use of an observation bed; anesthesia; medical/surgical 
supplies; pharmaceuticals (other than those for which additional 
payment may be allowed under the transitional pass-through provisions 
discussed in section V. of this preamble); and incidental services such 
as venipuncture. Our packaging methodology is discussed in section 
IV.B.3. of this proposed rule.

A. Proposed APC Changes: General

    Under the OPPS, we pay for hospital outpatient services on a rate-
per-service basis that varies according to the APC group to which the 
service is assigned. Each APC weight represents the median hospital 
cost of the services included in that APC relative to the median 
hospital cost of the services included in APC 601, Mid-Level Clinic 
visits. The APC weights are scaled to APC 601 because a mid-level 
clinic visit is one of the most frequently performed services in the 
outpatient setting.
    Section 1833(t)(9)(A) of the Act requires the Secretary to review 
the components of the OPPS not less than annually and to revise the 
groups and relative payment weights and make other adjustments to take 
into account changes in medical practice, changes in technology, and 
the addition of new services, new cost data, and other relevant 
information and factors. Section 1833(t)(9)(A) of the Act, as amended 
by section 201(h) of the BBRA of 1999, also requires the Secretary, 
beginning in CY 2001, to consult with an outside panel of experts to 
review the APC groups and the relative payment weights.
    Finally, section 1833(t)(2) of the Act provides that, subject to 
certain exceptions, the items and services within an APC group cannot 
be considered comparable with respect to the use of resources if the 
highest median (or mean cost, if elected by the Secretary) for an item 
or service in the group is more than 2 times greater than the lowest 
median cost for an item or service within the same group (referred to 
as the ``2 times rule''). We use the median cost of the item or service 
in implementing this provision. The statute authorizes the Secretary to 
make exceptions to the 2 times rule in unusual cases, such as low 
volume items and services.
    Section 419.31 of the regulations sets forth the requirements for 
the APC system and determination of the payment weights. In this 
section, we discuss the changes that we are proposing to the APC 
groups; the APC Panel's review and recommendations and our proposals in 
response to those recommendations; the application of the 2 times rule 
and proposed exceptions to it; coding for stereotactic radiosurgery 
services; the proposed movement of procedures from the new technology 
APCs; the proposed changes to the inpatient list; and the proposed 
additions of new procedures codes to the APCs.

B. APC Panel Review and Recommendations

    As stated above, the APC Panel met on February 18, 19, and 20, 
2004, to discuss the revised APCs for the CY 2005 OPPS. In preparation 
for that meeting, we published a notice in the Federal Register on 
December 24, 2004 (68 FR 74621), to announce the location, date, and 
time of the meeting; the agenda items; and the fact that the meeting 
was open to the public. In that notice, we solicited public comment 
specifically on the items included on the agenda for that meeting. We 
also provided information about the APC Panel meeting on the CMS 
website: www.cms.hhs.gov/faca/apc/panel.
    Oral presentations and written comments submitted for the February 
2004 APC Panel meeting met, at a minimum, the adopted guidelines for 
presentations set forth in the Federal Register document (68 FR 74621). 
Below is a summary of the APC issues discussed by the APC Panel, its 
recommendations, and our proposals with respect to those 
recommendations. The discussion in this section is limited to proposed 
APC changes regarding APCs other than those that violate the 2 times 
rule and those that represent drugs, biologicals, and transitional 
pass-through devices, or those that are new technology APCs. The 
specific APC Panel review and recommendations applicable to those APCs 
are discussed in sections II.C., IV., III., and II.F., respectively, of 
the preamble to this proposed rule. In conducting its APC review, the 
APC Panel heard testimony and received evidence in support of the 
testimonies from a number of interested parties. The APC Panel also 
used hospital outpatient claims data for the period January 1, 2003, 
through September 30, 2003, that provided, at a minimum, median costs 
for the APC structure in place in CY 2004 and that was based on cost-
to-charge ratios used for setting the CY 2004 payment rates. The data 
set presented to the APC Panel represented 9 months of the CY 2003 data 
that we are proposing to use to recalibrate the APC relative weights 
and to calculate the proposed APC payment rates for CY 2005. For this 
discussion, we are using the APC titles as published in our November 7, 
2003 final rule with comment period, which were the APC titles that 
existed when the APC Panel met in February 2004. Because we are 
proposing to retitle some of the APCs, the titles used in this 
discussion may not be the same as those listed in Addendum A to this 
proposed rule.
1. APC 0018: Biopsy of Skin/Puncture of Lesion
    One presenter requested that the APC Panel recommend moving CPT 
tracking codes 0046T (Catheter lavage, mammary duct(s)) and 0047T (Each 
additional duct) from APC 0018 and placing them in an APC that more 
accurately reflects each of the procedures. The APC Panel recommended 
that we reassign CPT codes 0046T and 0047T to APC 0021, Level III 
Excision/Biopsy.
    We are proposing to accept the APC Panel's recommendation.
2. Level I and II Arthroscopy
APC 0041: Level I Arthroscopy
APC 0042: Level II Arthroscopy

    We testified before the APC Panel regarding a comment that we 
received in 2003 requesting that we reassign CPT code 29827 
(Arthroscopy, shoulder with rotator cuff repair) from APC 0041 to APC 
0042, based on its similarity to CPT 29826 (Arthroscopy, shoulder 
decompression of subacromial space with partial acromioplasty without 
coracoacromial release). Our clinical staff considered the request and 
determined that APCs 0041 and 0042 should be reconfigured to improve 
clinical homogeneity. An APC Panel presenter provided evidence to 
support moving CPT code 29827 to an APC that would more accurately 
recognize the complexity of that procedure. We requested the APC 
Panel's recommendation regarding a total revision of these two APCs.
    The APC Panel recommended that we reevaluate the codes in APCs 0041 
and 0042 and propose restructuring that would improve the clinical 
homogeneity in the two APCs.
    We are proposing to accept the APC Panel's recommendation and to 
revise APCs 0041 and 0042 as shown in Tables 1 and 2 below.
BILLING CODE 4120-01-P

[[Page 50455]]

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[[Page 50456]]


[GRAPHIC] [TIFF OMITTED] TP16AU04.001

3. Angiography and Venography Except Extremity
APC 0279: Level II Angiography and Venography Except Extremity
APC 0280: Level III Angiography and Venography Except Extremity
APC 0668: Level I Angiography and Venography Except Extremity

    As requested by the APC Panel, we presented our proposal for 
reconfiguring APCs 0279, 0280, and 0668 that reflected changes based on 
prior input with outside clinical experts. The APC Panel had previously 
reviewed these APCs during its January 2003 meeting and had recommended 
that we not restructure these three APCs until we received input from 
clinical experts in the field. When we updated the APC groups in CY 
2003, we accepted the APC Panel's recommendation and made no changes to 
APCs 0279, 0280, and 0668.
    A review of these APCs was prompted by a commenter who requested 
that we move CPT code 75978 (Repair venous blockage) from APC 0668 to 
APC 0280 and that we move CPT code 75774 (Artery x-ray, each vessel) 
from APC 0668 to APC 0279. The commenter submitted evidence in support 
of these requests and testified before the APC Panel regarding the 
common use of CPT code 75978 for treating dialysis patients and the 
often required multiple intraoperative attempts to succeed with this 
procedure for such patients.
    After receiving input from the clinical experts, we determined that 
these three APCs should be revised to improve their clinical 
homogeneity. We presented our proposed restructuring of APCs 0279, 
0280, and 0668 to the APC Panel. The APC Panel concurred with our 
proposal.
    In addition, subsequent to the APC Panel meeting, we discovered 
several procedures in these APCs that were more appropriately placed in 
another APC in order to remedy any 2 times rule violations. Tables 3, 
4, and 5 reflect those additional APC reassignments as well as those we 
presented to the APC Panel in February 2004.

[[Page 50457]]

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[[Page 50458]]


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C. Limits on Variations Within APCs: Proposed Application of the 2 
Times Rule

    Section 1833(t)(2) of the Act provides that the items and services 
within an APC group cannot be considered comparable with respect to the 
use of resources if the median of the highest cost item or service 
within an APC group is more than 2 times greater than the median of the 
lowest cost item or service within that same group. However, the 
statute authorizes the Secretary to make exceptions to this limit on 
the variation of costs within each APC group in unusual cases such as 
low volume items and services. No exception may be made in the case of 
a drug or biological that has been designated as an orphan drug under 
section 526 of the Federal Food, Drug, and Cosmetic Act. We implemented 
this statutory provision in Sec.  419.31 of the regulations. Under this 
regulation, we elected to use the highest median cost and lowest median 
cost to determine comparability.
    During the APC Panel's February 2004 meeting, we presented data and 
information concerning a number of APCs that violate the 2 times rule 
and asked the APC Panel for its recommendation. We discuss below the 
APC Panel's recommendations specific to each of these APCs and our 
proposals in response to the APC Panel's recommendations.
1. Cardiac and Ambulatory Blood Pressure Monitoring
APC 0097: Cardiac and Ambulatory Blood Pressure Monitoring

    We expressed concern to the APC Panel that APC 0097 appears to 
violate the 2 times rule. We sought the APC Panel's recommendation on 
revising the APC to address the violation. Based on clinical 
homogeneity considerations, the APC Panel recommended that we not 
restructure APC 0097 for CY 2005.
    We are proposing to accept the APC Panel's recommendation that we 
make no changes to APC 0097 for CY 2005.
2. Electrocardiograms
APC 0099: Electrocardiograms

    We expressed concern to the APC Panel that APC 0099 appears to 
violate the 2 times rule. We asked the APC Panel to recommend options 
for resolving this violation. Based on clinical homogeneity 
considerations, the APC Panel recommended that we not alter the 
structure of APC 0099 for CY 2005.
    We are proposing to accept the APC Panel's recommendation that we 
make no changes to APC 0099 for CY 2005.
3. Excision/Biopsy
APC 0019: Level I Excision/Biopsy
APC 0020: Level II Excision/Biopsy
APC 0021: Level III Excision/Biopsy

    We expressed concern to the APC Panel that APC 0019 appears to 
violate the 2 times rule. We advised the APC Panel that this violation 
was not evident in CY 2004 because the CY 2002 median cost data used in 
calculating the CY 2004 APC updates supported moving CPT codes 11404 
(Removal of skin lesion) and 11623 (Removal of skin lesion) from APC 
0020 and APC 0021. However, based on the CY 2003 data reviewed by the 
APC Panel, APC 0019 would violate the 2 times rule. Therefore, we asked 
the APC Panel to recommend an approach to resolve the violation. We 
asked the APC Panel if we should leave this APC as is; divide APC 0019 
into two separate APCs; or move some codes in APC 0019 to higher level

[[Page 50459]]

excision/biopsy APCs. In making its recommendation, the APC Panel noted 
that the 2 times violation in APC 0019 was minor, and recommended that 
we not modify APC 0019.
    We are proposing to accept the APC Panel's recommendation to not 
make any modifications to APC 0019 for CY 2005.
4. Posterior Segment Eye Procedures
APC 0235: Level I Posterior Segment Eye Procedures

    We expressed concern to the APC Panel that APC 0235 appears to 
violate the 2 times rule. At the August 2003 APC Panel meeting, the APC 
Panel recommended that we monitor the data for APC 0235 for review at 
its February 2004 meeting. In order to address the apparent violation, 
we asked the APC Panel to consider moving a few CPT codes from APC 0235 
into a higher level posterior segment eye procedure APC. The APC Panel 
noted that the 2 times violation in APC 0235 was minor, and recommended 
that we not change APC 0235.
    We are proposing to accept the APC Panel's recommendation that we 
make no changes to the structure of APC 0235 for CY 2005.
5. Laparoscopy
APC 0130: Level I Laparoscopy
APC 0131: Level II Laparoscopy

    We expressed concern to the APC Panel that APC 0130 appears to 
violate the 2 times rule. We suggested moving CPT code 44970 
(Laparoscopy, appendectomy) from APC 0130 to APC 0131. The APC Panel 
recommended that we make this change.
    We are proposing to accept the APC Panel's recommendation to move 
CPT code 44970 from APC 0130 to APC 0131.
6. Anal/Rectal Procedures
APC 0148: Level I Anal/Rectal Procedure
APC 0155: Level II Anal/Rectal Procedure
APC 0149: Level III Anal/Rectal Procedure
APC 0150: Level IV Anal/Rectal Procedure
    We expressed concern to the APC Panel that APC 0148 appears to 
violate the 2 times rule. We suggested moving CPT code 46020 (Placement 
of seton) from APC 0148 to a higher level anal/rectal procedure APC. 
The APC Panel reviewed the four anal/rectal APCs (APC 0148, 0149, 0150, 
and 0155) and recommended moving CPT codes 46020 and 46706 (Repair of 
anal fistula with glue) from APC 0148 to APC 0150. The APC Panel also 
recommended moving CPT codes 45005 (Drainage of rectal abscess) and 
45020 (Drainage of rectal abscess) from APC 0148 to APC 0155.
    We are proposing to accept the APC Panel's recommendations specific 
to APC 0148. Our proposed movement of CPT codes from APC 0148 to APCs 
0150 and 0155 is shown in the Table 6 below.
[GRAPHIC] [TIFF OMITTED] TP16AU04.004

7. Nerve Injections
APC 0204: Level I Nerve Injections
APC 0206: Level II Nerve Injections
APC 0207: Level III Nerve Injections
APC 0203: Level IV Nerve Injections

    We again expressed concern to the APC Panel that APC 0203 and APC 
0207 appear to violate the 2 times rule. We previously discussed this 
issue at the APC Panel's CY 2003 meeting. During the CY 2003 meeting, 
the APC Panel recommended that we gather additional data on procedures 
assigned to APC 0203 and APC 0207 before proposing to reconfigure them 
to attempt to eliminate the 2 times rule violation. The APC Panel 
believed then that the structure of these two APCs as proposed in the 
August 2003 OPPS proposed rule were more clinically cohesive than those 
set forth in the November 2002 OPPS final rule. During the February 
2004 meeting, we presented other information for the APC Panel to 
review in making its recommendation.
    After careful consideration of the new data, the APC Panel 
recommended moving CPTs 64420 (Nerve block injection, intercostal 
nerve), 64630 (Injection treatment of nerve), 64640 (Injection 
treatment of nerve), and 62280 (Treatment of a spinal cord lesion) from 
APC 0207 to APC 0206. The APC Panel also recommended moving CPT code 
62282 (Treatment of a spinal canal lesion) from APC 0207 to APC 0203.
    After reviewing more recent, complete calendar year data, we are 
proposing to accept some of the APC Panel's recommendation 
(specifically, move CPTs 64630 and 64640 from APC 0207 to APC 0206), 
and to make some other changes that we believe are appropriate to 
improve the nerve injection APC's clinical and resource homogeneity. 
Our proposed nerve injection APC assignments are shown in Tables 7, 8, 
and 9 below.

[[Page 50460]]

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[[Page 50461]]


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8. Anterior Segment Eye Procedures
APC 0232: Level I Anterior Segment Eye Procedures
APC 0233: Level II Anterior Segment Eye Procedures

    We expressed concern to the APC Panel that APC 0233 appears to 
violate the 2 times rule. We suggested moving CPT codes 65286 (Repair 
of eye wound), 66030 (Injection treatment of eye), and 66625 (Removal 
of iris) from APC 0233 to APC 0232. The APC Panel agreed and 
recommended that we move CPT codes 65286, 66030, and 66625 from APC 
0233 to APC 0232.
    We are proposing to accept the APC Panel's recommendation and to 
reassign these three codes as shown in Table 10.
[GRAPHIC] [TIFF OMITTED] TP16AU04.007

9. Pathology
APC 0343: Level II Pathology
APC 0344: Level III Pathology

    We expressed concern to the APC Panel that APC 0343 appears to 
violate the 2 times rule. We suggested moving CPT code 88346 
(Immunoflourescent study) from APC 0343 to APC 0344. The APC Panel 
concurred with our proposal.
    We are proposing to accept the APC Panel's recommendation and to 
move CPT code 88346 from APC 0343 to APC 0344.
10. Immunizations
APC 0355: Level III Immunizations (proposed for CY 2005: Level I 
Immunizations)
APC 0356: Level IV Immunizations (proposed for CY 2005: Level II 
Immunizations)

    We expressed concern to the APC Panel that APCs 0355 and 0356 
appear to violate the 2 times rule. In order to eliminate this 
violation, we suggested moving CPT 90636 (Hepatitis A/Hepatitis B 
vaccine, adult dose, intramuscular use) from APC 0355 to APC 0356. We 
also suggested moving CPT codes 90375 (Rabies immune globulin, 
intramuscular or subcutaneous), 90740 (Hepatitis B vaccine, dialysis or 
immunosuppressed patient, intramuscular), 90723 (Diphtheria-pertussis-
tetanus, Hepatitis B, Polio vaccine, intramuscular), and 90693 (Typhoid 
vaccine, AKD, subcutaneous) from APC 0356 to APC 0355.
    The APC Panel recommended moving CPT 90636 from APC 0355 to APC 
0356 and CPT codes 90740, 90723, and 90693 from APC 0356 to APC 0355. 
The APC Panel delayed making a recommendation on CPT 90375 and 
requested that we collect additional cost data on this procedure for 
discussion at the next scheduled APC Panel meeting.
    We are proposing to accept the APC Panel's recommended changes to 
move CPT code 90740 from APC 0356 to 0355, and to move CPT code 90636 
from 0355 to 0356. However, based on our review of more recent claims 
data than were available to the APC Panel, we determined that the 
medians for CPT

[[Page 50462]]

codes 90693 and 90375 are below the $50 drug packaging threshold. 
Therefore, we are also proposing to package both CPT codes 90693 and 
90375. We are proposing to change CPT code 90723 to status indicator 
``e'' because it is not payable by Medicare.
[GRAPHIC] [TIFF OMITTED] TP16AU04.008

11. Pulmonary Tests
APC 0367: Level I Pulmonary Tests
APC 0368: Level II Pulmonary Tests

APC 0369: Level III Pulmonary Tests
    We expressed concern to the APC Panel that APC 0369 appears to 
violate the 2 times rule. We suggested moving CPT code 94015 (Patient 
recorded spirometry) from APC 0369 to APC 0367. The APC Panel concurred 
with our proposal.
    We are proposing to accept the APC Panel's recommendation and to 
move CPT code 94015 from APC 0369 to APC 0367.
    In addition, during our analysis of more recent claims data 
following the APC Panel meeting, we noted that APC 0367 violated the 2 
times rules. Therefore, we are proposing to reassign CPT codes 94375, 
94750, 94450, 94014, 94690, and 93740 to APC 0368.
[GRAPHIC] [TIFF OMITTED] TP16AU04.009

12. Clinic Visits
APC 0600: Low Level Clinic Visits

    We expressed concern to the APC Panel that APC 0600 appears to 
violate the 2 times rule. We suggested moving HCPS code G0264 
(Assessment other than CHF, chest pain, asthma) to a higher level 
clinic visit. The APC Panel recommended that we not make any changes to 
APC 0600.
    We are proposing to accept this recommendation and not make any 
changes to APC 0600 for CY 2005.

D. Proposed Exceptions to the 2 Times Rule

[If you choose to comment on issues in this section please indicate the 
caption ``2 Times Rule'' at the beginning of your comment.]
    As discussed earlier, the Secretary is authorized to make 
exceptions to the 2 times limit on the variation of costs within each 
APC group in unusual cases such as low volume items and services.
    Taking into account the APC changes that we are proposing for CY 
2005 based on the APC Panel recommendations discussed in section II.C. 
of this preamble and the use of CY 2003 claims data to calculate the 
median cost of procedures classified in the APCs, we reviewed all the 
APCs to determine which of them would not meet the 2

[[Page 50463]]

times limit. We used the following criteria when deciding whether to 
propose exceptions to the 2 times rule for affected APCs:

 Resource homogeneity
 Clinical homogeneity
 Hospital concentration
 Frequency of service (volume)
 Opportunity for upcoding and code fragments.

    For a detailed discussion of these criteria, refer to the April 7, 
2000 OPPS final rule with comment period (65 FR 18457).
    Table 13 contains the APCs that we are proposing to exempt from the 
2 times rule based on the criteria cited above. In cases in which a 
recommendation of the APC Panel appeared to result in or allow a 
violation of the 2 times rule, we generally accepted the APC Panel's 
recommendation because these recommendations were based on explicit 
consideration of resource use, clinical homogeneity, hospital 
specialization, and the quality of the data used to determine the APC 
payment rates that we are proposing for CY 2005. The median cost for 
hospital outpatient services for these and all other APCs can be found 
at web site: http//www.cms.hhs.gov.
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[[Page 50464]]


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E. Coding for Stereotactic Radiosurgery Services

[If you choose to comment on issues in this section please indicate the 
caption ``Stereotactic Radiosurgery'' at the beginning of your 
comment.]
1. Background
    In the November 7, 2003 final rule with comment period (68 FR 
63403), we discussed the APC Panel's consideration

[[Page 50465]]

of HCPCS codes G0242 (Cobalt 60-based stereotactic radiosurgery plan) 
and G0243 (Cobalt 60-based stereotactic radiosurgery delivery). At its 
August 22, 2003 meeting, the APC Panel discussed combining the coding 
for these procedures under one code, with the payment for the new code 
derived by adding the payment for HCPCS codes G0242 and G0243 together. 
The APC Panel recommended that we solicit additional input from 
professional societies representing neurosurgeons, radiation 
oncologists, and other experts in the field before recommending changes 
to the coding configuration for Cobalt 60-based stereotactic 
radiosurgery planning and delivery.
    In a correction to the November 7, 2003 final rule with comment 
period, issued on December 31, 2003 (68 FR 75442), we considered a 
commenter's request to combine HCPCS codes G0242 and G0243 into a 
single procedure code in order to accurately capture the costs of this 
treatment in a single procedure claim because the majority of patients 
receive the planning and delivery of this treatment on the same day. We 
responded to the commenter's request by explaining that several other 
commenters stated that HCPCS code G0242 was being misused to code for 
the planning phase of linear accelerator-based stereotactic 
radiosurgery planning. Because the claims data for HCPCS code G0242 
represent costs for linear accelerator-based stereotactic radiosurgery 
planning (due to misuse of the code), in addition to Cobalt 60-based 
stereotactic radiosurgery planning, we were uncertain as to how to 
combine these data with HCPCS code G0243 to determine an accurate 
payment rate for a combined code for planning and delivery of Cobalt 
60-based stereotactic radiosurgery.
    In consideration of the misuse of HCPCS code G0242 and the 
potential for causing greater confusion by combining codes G0242 and 
G0243, we created a planning code for linear accelerator-based 
stereotactic radiosurgery (G0338) to distinguish this procedure from 
Cobalt 60-based stereotactic radiosurgery planning. We maintained both 
HCPCS codes G0242 and G0243 for the planning and delivery of Cobalt 60-
based stereotactic radiosurgery treatment, consistent with the use of 
two G codes for planning (G0338) and delivery (G0173, G0251, G0339, 
G0340, as applicable) of each type of linear accelerator-based 
treatment. We indicated that we intend to maintain these new codes in 
their current new technology APCs until the payment rates could be set 
using medians from this expanded set of codes. We also stated that we 
would solicit input from the APC Panel at its February 2004 meeting.
    During the February 2004 APC Panel meeting, several presenters 
discussed with the APC Panel their rationale for requesting that HCPCS 
codes G0242 and G0243 be combined into a single procedure code. One 
presenter explained that the request to combine the codes was made 
because certain fiscal intermediaries were rejecting claims in which 
HCPCS codes G0242 and G0243 were reported with a surgery revenue code. 
Although we have not issued any national instructions to fiscal 
intermediaries to deny claims for these services if they are billed 
with a surgery revenue code, the presenter stated that we may have 
indirectly led some fiscal intermediaries to believe that Cobalt 60-
based stereotactic radiosurgery should be reported with a radiation 
therapy revenue center because the procedure is separated into a 
planning code and a delivery code, which reflect the coding pattern of 
a radiation therapy procedure rather than a single code for a surgical 
procedure. The presenter stated that because of the way that CMS has 
coded this procedure, some fiscal intermediaries have established local 
edits to deny claims in which HCPCS codes G0242 and G0243 are reported 
on a claim with a surgery revenue code.
    The APC Panel recommended that CMS work with the presenters to 
determine if any fiscal intermediaries have established local edits to 
reject claims in which HCPCS codes G0242 and G0243 are reported on a 
claim, and to determine specific reasons for any such local edits. The 
APC Panel also recommended that CMS take necessary action to ensure 
that any such claims are not being denied payment due to local edits. 
The APC Panel did not agree that the solution to ensuring payment was 
to combine HCPCS codes G0242 and G0243 into a single code, but rather 
recommended that CMS educate fiscal intermediaries as to the 
appropriate procedures for submittal of these claims for Medicare 
payment.
    In response to the concern expressed by several presenters that 
certain fiscal intermediaries were rejecting claims in which HCPCS 
codes G0242 and G0243 were reported with a surgery revenue code, we 
have worked together with these presenters to identify specific fiscal 
intermediaries who may be rejecting these claims. However, to date, we 
have been unable to identify any fiscal intermediaries who have 
established local edits that would reject claims in which HCPCS codes 
G0242 and G0243 are reported with a surgery revenue code. If a provider 
should experience a rejection of such claims in which HCPCS codes G0242 
and G0243 are reported on a claim with a surgery revenue code, they 
should contact their fiscal intermediary to determine the specific 
reason for the claim rejection.
2. Proposal for CY 2005
    For CY 2005, we are proposing to accept the APC Panel's 
recommendation to work with the presenters to ensure that claims in 
which HCPCS codes G0242 and G0243 are reported are not being unjustly 
denied payment due to local edits established by fiscal intermediaries. 
In the meantime, for CY 2005, we are proposing to maintain HCPCS code 
G0242 in new technology APC 1516 at a payment rate of $1,450, and HCPCS 
code G0243 in new technology APC 1528 at a payment rate of $5,250. 
These payment rates are the same as those established for CY 2004.

F. Proposed Movement of Procedures From New Technology APCs to 
Clinically Appropriate APCs

[If you choose to comment on issues in this section, please indicate 
the caption ``New Technology APCs'' at the beginning of your comment.]
1. Background
    In the November 30, 2001 final rule (66 FR 59903), we made final 
our proposal to change the period of time during which a service may be 
paid under a new technology APC. The April 7, 2000 final rule initially 
established the timeframe that new technology APCs would be in effect 
(65 FR 18457). Beginning in CY 2002, we have retained services within 
new technology APC groups until we have acquired adequate data that 
allow us to assign the service to a clinically appropriate APC. This 
policy allows us to move a service from a new technology APC in less 
than 2 years if sufficient data are available, and it also allows us to 
retain a service in a new technology APC for more than 3 years if 
sufficient data upon which to base a decision for reassignment have not 
been collected.
    In the November 7, 2003 final rule with comment period we 
implemented a comprehensive restructuring of the new technology APCs to 
make the payment levels more consistent (68 FR 63416). We established 
payment levels in $50, $100, and $500 intervals and expanded the number 
of new technology payment levels.
2. APC Panel Review and Recommendation
    During the APC Panel's February 2004 meeting, the APC Panel heard 
testimony from several interested parties who

[[Page 50466]]

requested specific modifications to the APCs for radiation oncology 
APC. They asked the APC Panel to make several recommendations: (1) That 
we move CPT code 77418 (Intensity-modulated radiation therapy) from APC 
0412 back into a new technology APC; (2) that we dampen, or limit, any 
possible payment reductions to APC 0301 (Level II Radiation Therapy); 
(3) that we accept more external data to evaluate costs; and (4) that 
we identify more claims that are useful for ratesetting.
    In response to the testimony presented, the APC Panel recommended 
that we reassign CPT code 77418 to the new technology APC 1510 for CY 
2005 and that we explain to providers any steps we take to limit 
payment reductions to APC 0301 so that they can better plan for future 
years during which we may decide not to apply a dampening, or payment 
reduction limitation, to the rates for APC 0301.
    We are not proposing to accept the APC Panel's recommendations 
because we believe that we have ample claims data for use in 
determining an appropriate APC payment rate for CPT code 77418. 
Moreover, we believe that the development of median cost for CPT code 
77418 based on those data would be representative of hospital bills.
    We have over 255,000 claims for this service, and over 95 percent 
were single claims that we could use for ratesetting. Moreover, the APC 
medians have been stable for the last 2 years of data. As indicated by 
our claims data, returning code 77418 to new technology APC 1510 would 
result in a payment for the service that is significantly higher than 
the resources utilized to provide it.
3. Proposal for CY 2005
    There are 24 procedures currently assigned to new technology APCs 
for which we have data adequate to support assignment into clinical 
APCs. We are proposing to reassign these procedures to clinically 
appropriate APCs. We are proposing to assign 24 of the procedures to 
clinically appropriate APCs using CY 2003 claims data to set medians on 
which payments would be based. These APCs and the proposed assignments 
are displayed below in Table 14.
    Based upon our review of the latest claims data available, we are 
proposing to move the procedures listed in Table 14 from their current 
new technology APCs to the APCs listed, as we have adequate data on 
these procedures to enable us to make the necessary APC assignment.

BILLING CODE 4120-01-P

[[Page 50467]]

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[[Page 50468]]


[GRAPHIC] [TIFF OMITTED] TP16AU04.013

    We believe the payment rates in Table 14 for several of the 
procedures that we are proposing to move out of new technology APCs and 
into clinical APCs require further explanation for a fuller 
understanding.
    For CPT code 96567, (Photodynamic therapy of the skin), the impact 
of the estimated payment decrease between CY 2004 and CY 2005 is 
actually low as the CY 2004 payment included the topically applied drug 
required to perform this procedure and the CY 2005 estimated payment 
does not. We now are proposing to pay separately for the drug billed 
under code J7308 in CY 2005. We have adequate claims data on which to 
base payment for that procedure in a clinically appropriate APC. 
Payment based on those data in addition to removal of the drug for 
separate payment resulted in a lower median for the APC.
    In the case of CPT code 33224, (Insertion of a left ventricular 
pacing lead and connection), based on a comparison of payment rates for 
CY 2004 and the estimated rate for CY 2005, it appears that there is a 
large increase in payment that results from reassigning the code from 
its new technology APC to a clinical APC. The difference is due to the 
fact that the estimated CY 2005 APC payment includes the cost of the 
left ventricular lead that was not included in the CY 2004 new 
technology APC payment. That left ventricular lead was paid as a pass-
through device under code C1900 in CY 2004, but is no longer eligible 
for pass-through payments in CY 2005, and, as such, is now included in 
the APC for the procedure.
    Similarly, the CY 2005 estimated payment for CPT code 33225, (Left 
ventricular pacing lead add-on), includes the cost of the ventricular 
lead. However, for 33225, the data are still somewhat unstable. 
Therefore, we are proposing to maintain that procedure in a new 
technology APC, but at a higher payment level, reflecting the 
additional cost of the lead.
    We note that a number of positron emission tomography (PET) scans 
currently are classified into New Technology APC 1516. We recognize 
that PET is an important technology in many instances and want to 
ensure that the technology remains available to Medicare beneficiaries 
when medically necessary. We believe that we have sufficient data to 
assign PET scans to a clinically appropriate APC. We have been told, 
however, that if the effect of doing so is to reduce payment for the 
procedure, it may hinder access to this technology. Therefore, we are 
considering three options as the proposed payment for these procedures 
in CY 2005, based on our review of the 2003 claims data for the PET 
procedures, and we specifically invite comments on each of these 
options.
    Option 1: Continue in CY 2005 the current assignment of the scans 
to New Technology APC 1516 prior to assigning to a clinical APC.
    Option 2: Assign the PET scans to a clinically appropriate APC 
priced according to the median cost of the scans based on CY 2003 
claims data. Under this option, we would assign PET scans to APC 0420, 
PET imaging.
    Option 3: Transition assignment to a clinical APC in CY 2006 by 
setting payment in CY 2005 based on a 50-50 blend of the median cost 
and the CY 2004 New Technology. We would assign the scans to New 
Technology APC 1513 for a blended transition payment. The rates for 
these options are in addendum B.

G. Proposed Changes to the Inpatient List

[If you choose to comment on issues in this section, please indicate 
the caption ``Inpatient List'' at the beginning of your comment.]
    We advised the APC Panel of a request that we had received to move 
four codes for percutaneous abscess drainage 44901(Drain append. 
abscess, percutaneous), 49021 (Drain abdominal abscess), 49041 (Drain 
percutaneous abdominal abscess), 49061(Drain, percutaneous, retroper. 
abscess)) from the inpatient list and to assign them to appropriate 
APCs. The APC Panel also recommended that we evaluate other codes on 
the inpatient list for possible APC assignment and that we consider 
eliminating the inpatient list.
    We are proposing to remove the four above-cited codes and assign 
them to clinically appropriate APCs, as recommended by the APC Panel. 
We are proposing to assign code 44901 to APC 0037, code 49021 to APC 
0037; code 49041 to APC 0037; and code 49061 to APC 0037. We discuss in 
section VII.E. of this preamble our response to the APC Panel's 
recommendation that we either abolish the inpatient list or evaluate it 
for any appropriate changes.

H. Proposed Assignment of ``Unlisted'' HCPCS Codes

[If you choose to comment on issues in this section, please indicate 
the caption

[[Page 50469]]

``Unlisted HCPCS Codes'' at the beginning of your comment.]
1. Background
    Some HCPCS codes are used to report services that do not have 
descriptors that define the exact service furnished. They are commonly 
called ``unlisted'' codes. The code descriptors often contain phrases 
such as: ``unlisted procedure'', ``not otherwise classified,'' or ``not 
otherwise specified.'' The unlisted codes typically fall within a 
clinical or procedural category, but they lack the specificity needed 
to describe the resources used in the service. For example, CPT code 
17999 is defined as, ``Unlisted procedure, skin, mucous membrane and 
subcutaneous tissue.'' The unlisted codes provide a way for providers 
to report services for which there is no HCPCS code that specifically 
describes the service furnished. However, the lack of specificity in 
describing the service prevents us from assigning the code to an APC 
based on clinical homogeneity and median cost.
    In most cases, the unlisted codes are assigned to the lowest level, 
clinically appropriate APC under the Medicare OPPS. This creates an 
incentive for providers to select the appropriate, specific HCPCS code 
to describe the service where one is available. In addition, if there 
is no HCPCS code that accurately describes the service, placing the 
unlisted code in the lowest level APC provides an incentive for 
interested parties to secure a code through the AMA's CPT process that 
will describe the service. Once a code that accurately describes the 
service is created, we can collect data on the service and place it in 
the correct APC based on the clinical nature of the service and its 
median cost.
    We do not use the median cost for the unlisted codes in the 
establishment of the weight for the APC to which the code is assigned 
because, by definition of the code, we do not know what service or 
combination of services is reflected in the claims billed using the 
unlisted code.
    Our review of HCPCS code assignments to APCs has revealed that 
there are a number of unlisted codes that are not assigned to the 
lowest level APC.
2. Proposal for CY 2005
    We are proposing to reassign these unlisted codes for CY 2005 OPPS 
to the lowest level APC in the clinical grouping in which the unlisted 
code is located. The list of those codes, the current APC assignment, 
and the assignment we propose for CY 2005 OPPS are displayed in Table 
15.
    We continue to believe that assigning unlisted codes to the lowest 
level of the APC for the clinical or procedural grouping into which the 
code falls creates an appropriate incentive for providers to pursue 
assignment of new codes where they are needed. Moreover, payment at the 
lowest level of APC for the clinical or procedural grouping allows for 
some payment for the services furnished and also ensures that we do not 
pay inappropriately for services that are unspecified.

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[[Page 50470]]



I. Proposed Addition of New Procedure Codes

    During the first two quarters of CY 2004, we created 85 HCPCS codes 
that were not addressed in the November 7, 2003 final rule that updated 
the CY 2004 OPPS. We have designated the payment status of those codes, 
which are shown in Table 16 below, and added them to the April and July 
updates of the 2004 OPPS (Transmittals 3144, 3154, 3322, and 3324). 
Thirty of the new codes were created to enable providers to bill for 
brand name drugs and to receive payments at a rate that differs from 
that for generic equivalents, as mandated in new section 
1833(t)(14)(A)(i) of the Act as added by Pub. L. 108-173. In this 
proposed rule, we are soliciting comment on the APC assignment of these 
services. Further, consistent with our annual APC updating policy, we 
are proposing to assign the new HCPCS codes for CY 2005 to the 
appropriate APCs and would incorporate them into our final rule for CY 
2005.
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[[Page 50472]]



J. Proposed OPPS Changes: Provisions of MMA (Pub. L. 108-173)

1. Payment for Initial Preventive Physical Examinations (Section 611 of 
Pub. L. 108-173)
[If you choose to comment on issues in this section, please indicate 
the caption ``Physical Examinations'' at the beginning of your 
comment.]
a. Background
    Section 611 of Pub. 108-173 provides for coverage under Medicare 
Part B of an initial preventive physical examination for new 
beneficiaries, effective for services furnished on or after January 1, 
2005. This provision applies to beneficiaries whose coverage period 
under Medicare Part B begins on or after January 1, 2005, and only for 
an initial preventive physical examination performed within 6 months of 
the beneficiary's initial coverage date.
    Current Medicare coverage policy does not allow for payment for 
routine physical examinations (or checkups) that are furnished to 
beneficiaries. Before the enactment of Pub. L. 108-173, all preventive 
physical examinations had been excluded from coverage based on section 
1862(a)(7) of the Act, which states that routine physical checkups are 
excluded services. This exclusion is specified in regulations under 
Sec.  411.15(a). In addition, preventive physical examinations had been 
excluded from coverage based on section 1862(a)(1)(A) of the Act. This 
section of the Act provides that items and services must be reasonable 
and necessary for the diagnosis or treatment of illness or injury or to 
improve the functioning of a malformed body member (as implemented in 
regulations under Sec.  411.15(k)).
    Coverage of initial preventive physical examinations is provided 
only under Medicare Part B. As provided in the statute, this new 
coverage allows payment for one initial preventive physical examination 
within the first 6 months after the beneficiary's first Part B coverage 
begins, although that coverage period may not begin before January 1, 
2005. We also note that Pub. L. 108-173 did not make any provision for 
the waiver of the Medicare coinsurance and Part B deductible for the 
initial preventive physical examination. Payment for this service would 
be applied to the required Medicare Part B deductible, which is $110 
for CY 2005, if the deductible has not been met, and the usual 
coinsurance provisions would apply.
b. Proposed Amendments to Regulations
    We are proposing to amend our regulations to add a new Sec.  410.16 
that would provide for coverage of initial preventive physical 
examinations in various settings, including the hospital outpatient 
department, as specified in the statute, and specify the condition for 
coverage and limitation on coverage. In addition, we are proposing to 
conform our regulations on exclusions from coverage under Sec.  
411.15(a)(1) and Sec.  411.15(k) to the provisions of section 611 of 
Pub. L. 108-173. Specifically, we are proposing to specify an exception 
to the list of examples of routine physical checkups that are excluded 
from coverage under Sec.  411.15(a) and to add a new exclusion under 
Sec.  411.15(k)(11).
    We are proposing to amend Sec.  419.21 of the OPPS regulations to 
add a new paragraph (e) to specify payment for an initial preventive 
physical examination as a Medicare Part B covered service under the 
OPPS if the examination is furnished within the first 6 months of the 
beneficiary's first Medicare Part B coverage.
    We note that the initial preventive physical examination is also 
addressed in detail in our proposed rule to update the Medicare 
Physician's Fee Schedule for CY 2005. However, because we believe the 
same elements of the initial physical examination furnished in a 
physician's office would also apply when the examination is performed 
in a hospital outpatient clinic, we are proposing to revise the 
applicable regulations to reflect this requirement.
    Section of 611(b) of Pub. L. 1089-173 define an ``initial 
preventive physical examination'' to mean physicians'' services 
consisting of--
    (1) A physical examination (including measurement of height, 
weight, blood pressure, and an electrocardiogram, but excluding 
clinical laboratory tests) with the goal of health promotion and 
disease detection; and
    (2) Education, counseling, and referral with respect to screening 
and other preventive coverage benefits separately authorized under 
Medicare Part B, excluding clinical lab tests.
    Specifically, section 611(b) of Pub. L. 108-173 provides that the 
education, counseling, and referral services with respect to the 
screening and other preventive services authorized under Medicare Part 
B include the following:
    (1) Pneumococcal, influenza, and hepatitis B vaccine and their 
administration;
    (2) Screening mammography;
    (3) Screening pap smear and screening pap smear and screening 
pelvic examination;
    (4) Prostate cancer screening tests;
    (5) Colorectal cancer screening tests;
    (6) Diabetes outpatient self-management training services;
    (7) Bone mass measurements;
    (8) Screening for glaucoma;
    (9) Medical nutrition therapy services for individuals with 
diabetes and renal disease;
    (10) Cardiovascular screening blood tests; and
    (11) Diabetes screening tests.
    Section 611(d)(2) of Pub. L 108-173 amended section 
1861(s)(2)(K)(i) and (ii) of the Act to specify the services identified 
as physicians' services and referred to in the definition of initial 
preventive physical examination include services furnished by a 
physician assistant, a nurse practitioner, or a clinical nurse 
specialist. We refer to these professionals as ``qualified nonphysician 
practitioners.''
    Based on the language of the statute, our review of the medical 
literature, current clinical practice guidelines, and United States 
Preventive Services Task Force recommendations, we are proposing (under 
proposed new Sec.  410.16(a), Definitions) to interpret the term 
``initial preventive physical examination'' for purposes of this new 
benefit to include all of the following services furnished by a doctor 
of medicine or osteopathy or a qualified nonphysician practitioner:
    (1) Review of the individual's comprehensive medical and social 
history. We are proposing to define ``medical history'' to include, as 
a minimum, past medical and surgical history, including experience with 
illnesses, hospital stays, operations, allergies, injuries, and 
treatments; current medications and supplements, including calcium and 
vitamins; and family history, including a review of medical events in 
the patient's family, including diseases that may be hereditary or 
place the individual at risk. We are proposing to define ``social 
history'' to include, at a minimum, history of alcohol, tobacco, and 
illicit drug use; work and travel history; diet; social activities; and 
physical activities.
    (2) Review of the individual's potential (risk factors) for 
depression (including past experiences with depression or other mood 
disorders) based on the use of an appropriate screening instrument that 
the physician or other qualified nonphysician practitioner may select 
from various available standardized screening tests for this purpose, 
unless the appropriate screening instrument is defined through the 
national coverage determination (NCD) process.

[[Page 50473]]

    (3) Review of the individual's functional ability and level of 
safety (that is, at a minimum, a review of the following areas: hearing 
impairment, activities of daily living, falls risk, and home safety), 
based on the use of an appropriate screening instrument, which the 
physician or other qualified nonphysician practitioner may select from 
various available standardized screening tests for this purpose, unless 
the appropriate screening instrument is further defined through the NCD 
process.
    (4) An examination to include measurement of the individual's 
height, weight, blood pressure, a visual acuity screen, and other 
factors as deemed appropriate, based on the individual's comprehensive 
medical and social history and current clinical standards.
    (5) Performance of an electrocardiogram and interpretation.
    (6) Education, counseling, and referral, as deemed appropriate, 
based on the results of elements (1) through (5) of the proposed 
definition of the initial preventive physical examination.
    (7) Education, counseling, and referral, including a written plan 
for obtaining the appropriate screening and other preventive services, 
which are also covered as separate Medicare Part B benefits; that is, 
pnuemococcal, influenza, and hepatitis B vaccines and their 
administration, screening mammography, screening pap smear and 
screening pelvic exams, prostate cancer screening tests, diabetes 
outpatient self-management training services, bone mass measurements, 
screening for glaucoma, medical nutrition therapy services, 
cardiovascular screening blood tests, and diabetes screening tests.
    In view of the possibility that it may be appropriate to include 
other (or revised) elements in the definition of the term ``initial 
preventive physical examination,'' we are requesting public comments on 
this issue. For example, we have chosen not to define the term 
``appropriate screening instrument'' for screening individuals for 
depression, alcohol, tobacco and illicit drug use, functional ability, 
and level of safety because we anticipate that the examining physician 
or qualified nonphysician practitioner would want to use the test of 
his or her choice, based on current clinical practice guidelines. We 
believe that any standardized screening test for depression, substance 
abuse, functional ability, and level of safety recognized by the 
American Academy of Family Physicians, the American College of 
Physicians-American Society of Internal Medical, the American College 
of Preventive Medicine, the American Geriatrics Society, the American 
Psychiatric Association, and the United States Preventive Services Task 
Force would be acceptable for purposes of meeting the ``appropriate 
screening instrument'' provision.
    To facilitate our future consideration of defining more 
specifically the type or types of appropriate screening instruments for 
depression, substance abuse, functional ability, or level of safety, we 
are proposing to include provisions in paragraphs (2) and (3) under the 
proposed definition of initial preventive physical examination that 
would allow us to do this through the NCD process. This proposed 
approach would allow us to conduct a more timely assessment of new 
types of screening tests than would be possible under the standard 
rulemaking process. We intend to use the NCD process, if necessary, for 
evaluating appropriate new screening tests for depression; alcohol, 
tobacco and illicit drug use; functional ability; or level of safety. 
This NCD process includes an opportunity for public comment in order to 
evaluate the medical and scientific issues related to the coverage of 
the new tests that may be brought to our attention in the future.
c. Proposed Assignment of New HCPCS Code for Payment of Initial 
Preventive Physical Examinations
    There is no current CPT code that contains the specific elements 
included in the initial preventive physical examination. Therefore, we 
are proposing to establish the following new HCPCS code, GXXXX, Initial 
preventive physical examination, to be used to bill for the new service 
under both the Medicare physician fee schedule and the OPPS. As 
required by the statute, this code includes an electrocardiogram, but 
does not include the other previously mentioned preventive services 
that are currently separately covered and paid under the Medicare Part 
B screening benefits. When these other preventive services are 
performed, they should be identified using the existing appropriate 
codes.
    For payment under the physician fee schedule, relative value units 
are being proposed for new HCPCS code GXXXX based on equivalent 
resources and work intensity to those contained in CPT E/M code 99203 
(new patient, office or other outpatient visit) and CPT 93000 
(electrocardiogram, complete). The ``technical component'' is the 
portion of the physician fee schedule that is most comparable to what 
Medicare pays under the OPPS, the costs other than the physician 
professional services that are billed and paid for separately under the 
fee schedule, not OPPS. The estimated technical component of the 
physician fee schedule is between $50 and $100.
    Given our lack of cost data to guide assignment of the new benefit 
into a clinically appropriate APC, we are proposing to assign GXXXX to 
the new technology APC 1539 that has a payment level of $50 to $100. 
Temporary assignment to a new technology APC allows us to pay for the 
new benefit provided in the OPD while we accrue claims data and 
experience on which to base a clinically relevant APC assignment.
d. Handling of Comments Received in Response to This Proposal
    We will respond to all comments regarding the proposed elements 
required for the initial preventive physical examination, whether the 
examination is performed in a physician's office or clinic or in a 
hospital clinic, in the final rule implementing the Medicare Physician 
Fee Schedule for CY 2005. We will respond to comments regarding payment 
for the examination under the OPPS in the subsequent final rule 
implementing the OPPS payment rates for CY 2005.
2. Payment for Certain Mammography Services (Section 614 of Pub. L. 
108-173)
[If you choose to comment on issues in this section, please indicate 
the caption ``Mammography'' at the beginning of your comment.]
    Section 614 of Pub. L. 108-173 amended section 1833(t)(1)(B)(iv) of 
the Act to provide that screening mammography and diagnostic 
mammography services are excluded from payment under the OPPS. This 
amendment applies to screening mammography services furnished on or 
after December 8, 2003 (the date of the enactment of Pub. L. 108-173), 
and in the case of diagnostic mammography, to services furnished on or 
after January 1, 2005. As a result of this amendment, both screening 
mammography and diagnostic mammography will be paid under the physician 
fee schedule.
    We are proposing to amend Sec.  419.22 of the regulations by adding 
a new paragraph(s) to specify that both screening mammography and 
diagnostic mammography will be excluded from payment under the OPPS, in 
accordance with section 614 of Pub. L. 108-173.

III. Proposed Recalibration of APC Relative Weights for CY 2005

[If you choose to comment on issues in this section, please include the 
caption

[[Page 50474]]

``APC Relative Weights'' at the beginning of your comment.]

A. Database Construction

    Section 1833(t)(9)(A) of the Act requires that the Secretary review 
and revise the relative payment weights for APCs at least annually, 
beginning in CY 2001 for application in CY 2002. In the April 7, 2000 
final rule (65 FR 18482), we explained in detail how we calculated the 
relative payment weights that were implemented on August 1, 2000 for 
each APC group. Except for some reweighting due to APC changes, these 
relative weights continued to be in effect for CY 2001. (See the 
November 13, 2000 interim final rule (65 FR 67824 through 67827).)
    To recalibrate the relative APC weights for services furnished on 
or after January 1, 2005, and before January 1, 2006, we are proposing 
to use the same basic methodology that we described in the April 7, 
2000 final rule. That is, we would recalibrate the weights based on 
claims and cost report data for outpatient services. We are proposing 
to use the most recent available data to construct the database for 
calculating APC group weights. For the purpose of recalibrating APC 
relative weights for CY 2005, the most recent available claims data are 
the approximately 119 million final action claims for hospital OPD 
services furnished on or after January 1, 2003, and before January 1, 
2004.
    Of the 119 million final action claims for OPPS services, 96.7 
million claims were of the type of bill potentially appropriate for use 
in setting rates for OPPS services (but did not necessarily contain 
services payable under OPPS). Of the 96.7 million claims, we were able 
to use 48.5 million whole claims (from which we created 75 million 
single procedure claim records) to set OPPS proposed for CY 2005 
weights.
    The proposed weights and payments in Addenda A and B to this 
proposed rule were calculated using claims from this period that had 
been processed before January 1, 2004. We selected claims for services 
paid under the OPPS and matched these claims to the most recent cost 
report filed by the individual hospitals represented in our claims 
data. We are proposing that the APC relative weights for CY 2005 under 
the OPPS would continue to be based on the median hospital costs for 
services in the APC groups. For the final rule, we are proposing to 
base median costs on claims for services furnished in CY 2003 and 
processed before June 30, 2004.
1. Proposed Treatment of Multiple Procedure Claims
    For CY 2005, we are proposing to continue to use single procedure 
claims to set the medians on which the weights would be based. We have 
received many requests that we ensure that the data from claims that 
contain charges for multiple procedures are included in the data from 
which we calculate the CY 2005 relative payment weights. Requesters 
believe that relying solely on single procedure claims to recalibrate 
APC weights fails to take into account data for many frequently 
performed procedures, particularly those commonly performed in 
combination with other procedures. They believe that, by depending upon 
single procedure claims, we base payment weights on the least costly 
services, thereby introducing downward bias to the medians on which the 
weights are based.
    We agree that, optimally, it is desirable to use the data from as 
many claims as possible to recalibrate the relative payment weights, 
including those with multiple procedures. As discussed in the 
explanation of single procedure claims below, we have used the date of 
service on the claims and a list of codes to be bypassed to create 
``pseudo'' single claims from multiple procedure claims. We refer to 
these newly created single procedure claims as ``pseudo'' singles 
because they were submitted by providers as multiple procedure claims.
2. Proposed Use of Single Procedure Claims
    We use single procedure claims to set the median costs for APCs 
because we are, so far, unable to ensure that packaged costs can be 
correctly allocated across multiple procedures performed on the same 
date of service. However, bypassing specified codes that we believe do 
not have significant packaged costs enables use of more data from 
multiple procedure claims. For CY 2003, we created ``pseudo'' single 
claims by bypassing HCPCS codes 93005 (Electrocardiogram, tracing), 
71010 (Chest x-ray), and 71020 (Chest x-ray) on a submitted claim. 
However, we did not use claims data for the bypassed codes in the 
creation of the median costs for the APCs to which these three codes 
were assigned because the level of packaging that would have remained 
on the claim after we selected the bypass code was not apparent and 
therefore, it was difficult to determine if the medians for these codes 
would be correct.
    For CY 2004, we created ``pseudo'' single claims by bypassing these 
three codes and also by bypassing an additional 269 HCPCS codes in 
APCs. These codes were selected by CMS based on a clinical review of 
the services and because it was presumed that these codes had only very 
limited packaging and could appropriately be bypassed for the purpose 
of creating ``pseudo'' single claims. The APCs to which these codes 
were assigned were varied and included mammography, cardiac 
rehabilitation, and level I plain film x-rays. To derive more 
``pseudo'' single claims, we also broke claims apart where there were 
dates of service for revenue code charges on that claim that could be 
matched to a single procedure code on the claim on the same date.
    As in CY 2003, we did not include the claims data for the bypassed 
codes in the creation of the APCs to which the 269 codes were assigned 
because, again, we had not established that such an approach was 
appropriate and would aid in accurately estimating the median cost for 
that APC. For CY 2004, from about 16.3 million otherwise unusable 
claims, we were able to use about 9.5 million multiple procedure claims 
to create about 27 million ``pseudo'' single claims. For CY 2005, from 
about 21 million otherwise unusable claims, we were able to use about 
18 million multiple procedure claims to create about 45.5 million 
``pseudo'' single claims.
    For CY 2005, we are proposing to continue using date of service 
matching as a tool for creation of ``pseudo'' single claims and also to 
take a more empirical approach to creating the list of codes that we 
would bypass to create ``pseudo'' single claims. The process we are 
proposing for CY 2005 OPPS results in our being able to use some part 
of 93 percent of the total claims eligible for use in OPPS ratesetting 
and modeling. In CY 2004, we were able to use some part of the data 
from 82 percent of eligible claims. This process enabled us to use 75 
million single bills for ratesetting: 45.5 million ``pseudo'' singles 
and 30.5 million ``natural'' single bills.
    We are proposing to bypass the 383 codes identified in Table 17 to 
create new single claims and to use the line-item costs associated with 
the bypass codes on these claims in the creation of the median costs 
for the APCs into which they are assigned. Of the codes on this list, 
only 123 (32 percent) were used for bypass in CY 2004.
    We developed the proposed bypass list using four criteria:

[[Page 50475]]

    a. We developed the following empirical standards by reviewing the 
frequency and magnitude of packaging in the single claims for payable 
codes other than drugs and biologicals. We assumed that the 
representation of packaging on the single claims for any given code is 
comparable to packaging for that code in the multiple claims.
     There were 100 or more single claims for the code. This 
ensured that observed outcomes were sufficiently representative of 
packaging that might occur in the multiple claims.
     Five percent or fewer of the single claims for the code 
had packaged costs on that single claim for the code. This criterion 
results in limiting the amount of packaging being redistributed to the 
payable procedure remaining on the claim after the bypass code is 
removed and ensures that the costs associated with the bypass code 
represent the cost of the bypassed service. For the remaining payable 
codes, the average percentage of single claims with any packaged costs 
was 70 percent, and the chosen threshold of 5 percent fell at roughly 
the 15th percentile.
     The median cost of packaging observed in the single claim 
was equal to or less than $50. This limits the amount of error in 
redistributed costs.
     The code is not a code for an unlisted service.
    b. We examined APCs relying on a low volume of single claims, and 
it became apparent that several radiological supervision and 
interpretation codes were commonly billed with the procedural codes in 
the APCs. We then reviewed all radiological supervision and 
interpretation codes to assess their viability as bypass codes. For the 
codes included on the list in Table 17, we determined that, generally, 
the packaging on claims, including these radiological supervision and 
interpretation codes, should be associated with the procedure 
performed.
    c. We examined radiation planning and related codes provided by a 
professional organization. In the organization's opinion, the codes 
could safely be bypassed and used without packaging to set medians for 
the APCs into which these codes are assigned. Many of the codes the 
organization recommended met our criterion under item a., and the 
remaining codes were close. Therefore, after reviewing such codes, we 
are proposing to adopt as bypass codes all radiation planning and 
related codes as provided by the organization.
    d. We included HCPCS codes 93005 and 71010. These codes have been 
bypassed for the past 3 years and generate a significant amount of new 
single claims because they are very commonly done on the same date of 
surgery. They have low median packaged costs and a low percentage of 
single claims with any packaged costs, 6 percent and 18 percent, 
respectively.
    We invite public comment on the ``pseudo'' single process, 
including the bypass list and the criteria.

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    However, we note several inherent features of multiple bill claims 
that prevented us from the further creation of ``pseudo'' singles. We 
discussed these obstacles in detail in the August 9, 2002 proposed rule 
(67 FR 52092, 52108 through 52111) and the November 1, 2001 final rule 
(66 FR 66718 and 66743 through 66746).
    Notwithstanding the obstacles in creating additional ``pseudo'' 
single claims, we have received a number of suggestions from outside 
sources providing options to this approach. Some of the suggestions 
involved complex methodologies driven by lengthy tables of codes and 
complex logic that focused on creating ``pseudo'' singles by packaging 
specific packaged HCPCS codes with specific payable HCPCS codes. While 
we appreciate the time and attention spent by various parties 
interested in this issue, our review of the suggestions and our 
empirical analysis of the most specific and detailed recommendation 
using the data used to develop the APC relative weights for the APC 
Panel's February 2004 meeting indicated that code-specific packaging 
would add a significant amount of time and complexity to the 
ratesetting process and would require involved annual maintenance to 
accurately update the code sets used in the suggested methodology each 
year. Moreover, we would experience only a modest increase in 
``pseudo'' single claims.
    Further, code-specific packaging does not appear to appreciably 
increase the volume of single bills available for calculating medians 
for those APCs that are currently derived from a small volume of total 
claims. We believe that the observed modest improvements in the 
``pseudo'' single claims volume from code-specific packaging can be 
attributed to the number and variety of services billed on multiple 
procedure claims, which often have complex HCPCS code combinations. 
These complex claims cannot be reduced to single bills by packaging the 
costs for a few procedures. In light of these findings, we are not 
proposing to adopt any code-specific packaging proposals. However, we 
would review and consider any other specific proposals that we received 
as comments.
    Other suggestions included recommendations that the costs in 
packaged revenue codes and packaged HCPCS codes be allocated separately 
to paid HCPCS codes based on the prior year's payment weights or 
payment rates for the single procedures. Still other suggestions 
recommended that we allocate the packaged costs in proportion to the 
charges or to the costs for the major procedures based on the current 
year's claims. We are concerned that using a prior year's median costs, 
relative weights or payment rates as the basis to allocate current 
year's packaged costs to current year costs for payable HCPCS codes may 
not be appropriate. For example, if two procedures are performed and 
one uses an expensive device, this methodology would split the costs of 
the device between the service that uses the device and a service that 
does not use the device, thus resulting in incorrect allocation of the 
packaged costs. Therefore, we are not proposing to incorporate these 
suggestions in our ratesetting methodology but we intend to examine 
them more thoroughly.
    We continue to seek strategies that would enable us to use more 
multiple procedure claims and continue to explore whether there are 
techniques that could result in medians that are more representative of 
the relative cost of the services being furnished. However, at this 
time, we are not proposing a methodology beyond use of dates of service 
and the expanded bypass list. We solicit specific proposals provided in 
comments on how multiple procedure claims can be better used in 
calculating the relative payment weights.

B. Proposed Calculation of Median Costs for CY 2005

    In this section of the preamble, we discuss the use of claims to 
calculate the proposed OPPS payment rates for CY 2005. (See the 
hospital outpatient prospective payment page on the CMS website on 
which this proposed rule is posted for an accounting of claims used in 
the development of the proposed rates: www.cms.hhs.gov/hopps.) The 
accounting of claims used in the development of the proposed rule is 
included under supplemental materials for this proposed rule. That 
accounting provides additional detail regarding the number of claims 
derived at each stage of the process. In addition, we note that below 
we discuss the files of claims that comprise the data sets that are 
available for purchase under a CMS data user contract. See 
www.cms.hhs.gov/providers/hopps for information about purchasing the 
following two OPPS data files: ``OPPS limited data set'' and ``OPPS 
identifiable data set''.
    We are proposing to use the following methodology to establish the 
weights to be used to set payment rates for CY 2005:
    We are proposing to use outpatient claims for full CY 2003 to set 
the weights for CY 2005. To begin the calculation of the weights for 
this proposed rule for CY 2005, we pulled all claims for outpatient 
services furnished in CY 2003 from the national claims history file. 
This is not the population of claims paid under the OPPS, but all 
outpatient claims (for example, ambulatory surgical center (ASC) claims 
reported on bill type 83, critical access hospital (CAH) claims, and 
hospital claims for clinical laboratory services for persons who are 
neither inpatients nor outpatients of the hospital).
    We then excluded claims with condition code 04, 20, 21, 77. These 
are claims that providers submitted to Medicare knowing that no payment 
will be made. For example, providers submit claims with a condition 
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[[Page 50487]]

an official denial notice from Medicare and document that a service is 
not covered. We then excluded claims for services furnished in 
Maryland, Guam, and the U.S. Virgin Islands because hospitals in those 
geographic areas are not paid under the OPPS.
    We divided the remaining claims into three groups shown below. 
Groups 2 and 3 comprise the 96.7 million claims that contain hospital 
bill types paid under the OPPS.
    1. Claims that were not bill types 12X, 13X, 14X (hospital bill 
types) or 76X (CMHC bill types). Other bill types, such as ASCs, bill 
type 83, are not paid under the OPPS and, therefore, these claims were 
not used to set OPPS payment.
    2. Bill types 12X, 13X, or 14X (hospital bill types). These claims 
are hospital outpatient claims.
    3. Bill type 76X (CMHC). (These claims are later combined with any 
claims in item 2 above with a condition code 41 to set the per diem 
partial hospitalization rate determined through a separate process.)
    In previous years, we have begun the CCR calculation process using 
the most recent available cost reports for all hospitals irrespective 
of whether any or all of the hospitals included actually filed hospital 
outpatient claims for the data period. However, for this proposed rule, 
we first limited the population of cost reports to only those for 
hospitals that filed outpatient claims in CY 2003 before determining 
whether the CCRs for such hospitals were valid. This initial limitation 
changed the distribution of CCRs used during the trimming process 
discussed below.
    We then calculated the cost-to-charge ratios (CCRs) at a 
departmental level and overall for each hospital for which we had 
claims data. We did this using hospital specific data from the Hospital 
Cost Report Information System (HCRIS). We used the most recent 
available cost report data, in most cases, cost reports for CY 2001 or 
CY 2002. We used the most recent available cost report, whether 
submitted or settled. If the most recent available cost report was 
submitted but not settled, we looked at the last settled cost report to 
determine the ratio of submitted to settled cost and we then adjusted 
the most recent available submitted but not settled cost report using 
that ratio. We are proposing to use these same CCRs ratios for the 
final rule.
    We then flagged CAHs, which are not paid under the OPPS, and 
hospitals with invalid CCRs. These included claims from hospitals 
without a CCR, for hospitals paid an all-inclusive rate, for hospitals 
with obviously erroneous CCRs (greater than 90 or less than .0001), and 
for hospitals with CCRs that were identified as outliers (3 standard 
deviations from the geometric mean after removing error CCRs). In 
addition, we trimmed the CCRs at the departmental level by removing the 
CCRs for each cost center as outliers if they exceeded 3 
standard deviations of the geometric mean. We are proposing to use 
these trimmed CCRs for the final rule. In prior years, we did not trim 
CCRs at the departmental level. However, for CY 2005, we are proposing 
to trim at the departmental CCR level to eliminate aberrant CCRs that, 
if found in high volume hospitals, could skew the medians. We used a 
four-tiered hierarchy of cost center CCRs to match a cost center to a 
revenue code with the top tier being the most common cost center and 
the last tier being the default CCR. If a hospital's departmental CCR 
was deleted by trimming, we set the departmental CCR for that cost 
center to ``missing,'' so that another departmental CCR in the revenue 
center hierarchy could apply. If no other departmental CCR could apply 
to the revenue code on the claim, we used the hospital's overall CCR 
for the revenue code in question.
    We then converted the charges on the claim by applying the CCR that 
we believed was best suited to the revenue code indicated on the line 
with the charge. See Table 18 for the allowed revenue codes. Revenue 
codes not on this list are those not allowed under the OPPS because 
their services cannot be paid under the OPPS (for example, inpatient 
room and board charges) and, thus, charges with those revenue codes 
were not packaged for creation of the OPPS median costs. If a hospital 
did not have a CCR that was appropriate to the revenue code reported 
for a line item charge (for example, a visit reported under the clinic 
revenue code but the hospital did not have a clinic cost center), we 
applied the hospital-specific overall CCR, except as discussed in 
section V.H. of this proposed rule for calculation of costs for blood.
    Thus, we applied CCRs as described above to claims with bill types 
12X, 13X, or 14X, excluding all claims from CAHs and hospitals in 
Maryland, Guam, or the U.S. Virgin Islands, and flagged hospitals with 
invalid CCRs. We excluded claims from all hospitals for which CCRs were 
flagged as invalid.
    We identified claims with condition code 41 as partial 
hospitalization services of CMHCs and removed them to another file. 
These claims were combined with the 76X claims identified previously to 
calculate the partial hospitalization per diem rate.
    We then excluded claims without a HCPCS code. We also removed 
claims for observation services to another file. We removed to another 
file claims that contain nothing but flu and pneumococcal pneumonia 
(virus) (``PPV'') vaccine. Influenza and PPV vaccines are paid at 
reasonable cost and, therefore, these claims are not used to set OPPS 
rates. We note that the two above mentioned separate files containing 
partial hospitalization claims and the observation services claims are 
included in the files that are available for purchase as discussed 
above.
    We next copied line item costs for drugs, blood, and devices (the 
lines stay on the claim but are copied off onto another file) to a 
separate file. No claims were deleted when we copied these lines onto 
another file. These line-items are used to calculate the per unit 
median for drugs, radiopharmaceuticals, and blood and blood products. 
The line-item costs were also used to calculate the per administration 
cost of drugs, radiopharmaceuticals, and biologicals (other than blood 
and blood products) for purposes of determining whether the cost of the 
item would be packaged or be paid separately. Section 1833(t)(16)(B) of 
the Act, as added by section 621(a)(2) of Pub. L. 108-173, requires the 
Secretary to lower to $50 the threshold for separate payment of drugs 
and biologicals and the per administration cost derived using these 
line-item cost data would be used to make that decision for CY 2005. As 
discussed in our November 7, 2003 final rule with comment period (68 FR 
63398), we had also applied a $50 threshold for the CY 2004 update to 
the OPPS.
    We then divided the remaining claims into five groups.
    1. Single Major Claims: Claims with a single separately payable 
procedure, all of which would be used in median setting.
    2. Multiple Major Claims: Claims with more than one separately 
payable procedure or multiple units for one payable procedure. As 
discussed below, some of these can be used in median setting.
    3. Single Minor Claims: Claims with a single HCPCS code that is not 
separately payable. These claims may have a single packaged procedure 
or a drug code.
    4. Multiple Minor Claims: Claims with multiple HCPCS codes that are 
not separately payable without examining dates of service. (For 
example, pathology codes are packaged unless they appear on a single 
bill by themselves. The multiple minor file has claims with multiple 
occurrences of pathology codes, with packaged costs

[[Page 50488]]

that cannot be appropriately allocated across the multiple pathology 
codes. However, by matching dates of service for the code and the 
reported costs through the ``pseudo'' single creation process discussed 
earlier, a claim with multiple pathology codes may become several 
``pseudo'' single claims with a unique pathology code and its 
associated costs on each day. These ``pseudo'' singles for the 
pathology codes would then be considered a separately payable code and 
would be used like claims in the single major claim file.
    5. Non-OPPS Claims: Claims that contain no services payable under 
the OPPS are excluded from the files used for the OPPS. Non-OPPS claims 
have codes paid under other fee schedules, for example, DME or clinical 
laboratory.
    We note that the claims listed in numbers 1 through 4 above are 
included in the data files that can be purchased as described above.
    We set aside the single minor claims and the non-OPPS claims 
(numbers 3 and 5 above) because we did not use either in calculating 
median cost.
    We then examined the multiple major and multiple minor claims 
(numbers 2 and 4 above) to determine if we could convert any of them to 
single major claims using the process described previously. We first 
grouped items on the claims by date of service. If each major procedure 
on the claim had a different date of service and if the line items for 
packaged HCPCS and packaged revenue codes had dates of service, we 
broke the claim into multiple ``pseudo'' single claims based on the 
date of service.
    After those single claims were created, we used a list of ``bypass 
codes'' to remove separately payable procedures that are thought to 
contain limited costs or no packaged costs from a multiple procedure 
bill. A discussion of the creation of the list of bypass codes used for 
the creation of ``pseudo'' single claims is contained in section 
III.A.2. of this preamble and the list of codes is provided in Table 
17.
    We excluded those claims that we were not able to convert to 
singles even after applying both of the techniques for creation of 
``pseudo'' singles. We then packaged the costs of packaged HCPCS (codes 
with status indicator ``N'' on Addendum B to this proposed rule) and 
packaged revenue codes (listed in Table 18) into the cost of the single 
major procedure remaining on the claim.
    After removing claims for hospitals with error CCRs, claims without 
HCPCS codes, claims for immunizations not covered under the OPPS, and 
claims for services not paid under the OPPS, 52.2 millions claims were 
left. This subset of claims is roughly one-half of the 96.7 million 
claims for bill types paid under the OPPS. Of these 52.2 million 
claims, we were able to use some portion of 48.5 million (93 percent) 
whole claims to create the 75 million single and ``pseudo'' single 
claims for use in our CY 2005 median payment ratesetting.

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    We also excluded claims that either had zero costs after summing 
all costs on the claim or for which CMS lacked an appropriate provider 
wage index. For the remaining claims, we then wage adjusted 60 percent 
of the cost of the claim (which we determined to be the labor-related 
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the OPPS, to adjust for geographic variation in labor-related costs. We 
made this adjustment by determining the wage index that applied to the 
hospital that furnished the service and dividing the cost for the 
separately paid HCPCS code furnished by the hospital by that wage 
index. We used the pre-reclassified wage index proposed for IPPS 
published in the hospital IPPS proposed rule on May 18, 2004 (69 FR 
28196), and corrected in the IPPS correction notice published on June 
25, 2004 (69 FR 35919). These wage indices are reprinted in Addenda L 
and M to this proposed rule. We are proposing to use the pre-
reclassified wage index for standardization because we believe that it 
better reflects the true costs of items and services in the area in 
which the hospital is located than the post-reclassification wage 
index, and would result in the most accurate adjusted median costs.
    We then excluded claims that were outside 3 standard deviations 
from the geometric mean cost for each HCPCS code. We used the remaining 
claims to calculate median costs for each separately payable HCPCS 
code; first, to determine the applicability of the ``2 times'' rule, 
and second, to determine APC medians as based on the claims containing 
the HCPCS codes assigned to each APC. As stated previously, section 
1833(t)(2) of the Act provides that, subject to certain exceptions, the 
items and services within an APC group cannot be considered comparable 
with respect to the use of resources if the highest median (or mean 
cost, if elected by the Secretary) for an item or service in the group 
is more than 2 times greater than the lowest median cost for an item or 
service within the same group (``the 2 times rule''). Finally, we 
reviewed the medians and reassigned HCPCS codes to different APCs as 
deemed appropriate. See section III.B. of this preamble for a 
discussion of the proposed HCPCS code assignment changes that resulted 
from examination of the medians and for other reasons. The APC medians 
were recalculated after we reassigned the affected HCPCS codes.
    For discussion of the medians for blood and blood products see V.I 
of this preamble. For a discussion of the medians for APC 0315 (Level 
II Implantation of Neurostimulator), APC 0422 (Implantation of the BARD 
Endoscopic Suturing System), and APC 0651 (Complex Interstitial 
Radiation Application), see sections III.C.2.a., III.C.2.b., and 
III.C.2.c., respectively, of this preamble.
    For discussion of the medians for APCs that require one or more 
devices when the service is performed, see section III.C. of this 
preamble. For a discussion of the median for observation services, see 
section VII.D. of this preamble and for a discussion of the median for 
partial hospitalization, see section X.C.

C. Proposed Adjustment of Median Costs for CY 2005

1. Device-Dependent APCs
    Table 19 contains a list of APCs consisting of HCPCS codes that 
cannot be provided without one or more devices. For CY 2002, we used 
external data in part to establish the median used for weight setting. 
At that time, many devices were eligible for pass-through payment. For 
that year, we estimated that the total amount of pass-through payments 
would far exceed the limit imposed by statute. To reduce the amount of 
a pro rata adjustment to all pass-through items, we packaged 75 percent 
of the cost of the devices (using external data furnished by commenters 
on the August 24, 2001 proposed rule) into the median cost for the APCs 
associated with these pass-through devices. The remaining 25 percent of 
the cost was considered to be pass-through payment. (See section VI. of 
this preamble for discussion of pro rata adjustment.)
    For CY 2003 OPPS, which was based on CY 2001 claims data, we found 
that the median costs for certain device-dependent APCs when all claims 
were used were substantially less than the median costs used for 2002. 
We were concerned that using the medians calculated from all claims 
would result in payments for some APCs that would not compensate the 
hospital even for the cost of the device. Therefore, we calculated a 
median cost using only claims from hospitals that had separately billed 
the pass-through device in CY 2001 (that is, hospitals whose claims 
contained the ``C'' code for the pass-through device). Furthermore, for 
any APC (whether device dependent or not) where the median cost would 
have decreased by 15 percent or more from CY 2002 to CY 2003, we 
limited decreases in median costs by 15 percent plus half of the amount 
of any reduction beyond 15 percent (see 68 FR 47984). For a few 
particular device-dependent APCs for which we believed that access to 
the service was in jeopardy, we blended external data furnished by 
commenters on the August 9, 2002 proposed rule (see 67 FR 57092) with 
claims data to establish the median cost used to set the payment rate. 
For CY 2003, we also eliminated the HCPCS ``C'' codes for the devices 
and returned to providers those claims on which the deleted device 
codes were used. (See 67 FR 66750, November 1, 2002, and section IV.B. 
of this preamble for a discussion regarding the required use of C codes 
for specific categories of devices.)
    For CY 2004 OPPS, which was based on CY 2002 claims data, we used 
only claims on which hospitals had reported devices to establish the 
median cost for certain APCs. We did this because we found that the 
median costs calculated when we used all claims for these services were 
inadequate to cover the cost of the device if the device was not 
separately coded on the claim. Using only claims containing the code 
for the device (a ``C'' code) provided costs that were closer to those 
used for CY 2002 and CY 2003 for these services. For a few particular 
APCs in which we believed that access to the service was in jeopardy, 
we used external data provided by commenters on the August 12, 2003 
proposed rule in a 50-percent blend with claims data to establish the 
device portion of the median cost used to set the payment rate (68 FR 
63423). We also reinstated, but on a voluntary basis, the reporting of 
``C'' codes for devices.
    Thus, in developing the median costs for device-dependent APCs for 
CYs 2002, 2003, and 2004, we applied certain adjustments to our claims 
data as provided under the authority of section 1833(t)(9)(A) of the 
Act to ensure equitable payments to the hospitals for the provision of 
such services. We have continued to receive comments from interested 
parties as part of the APC Panel process urging us to determine whether 
the claims data that would be used in calculating the median costs for 
device-dependent APCs for payment in CY 2005 would represent valid 
relative costs for these services. Careful analysis of the CY 2003 data 
that we are proposing to use in calculating the median costs for the CY 
2005 OPPS revealed problems similar to those discussed above in 
calculating device-dependent APC median costs based solely on claims 
data. Calculation of the CY 2005 median costs for the device-dependent 
APCs indicated that some of the medians appeared to appropriately 
reflect the costs of the services, including the cost of the device, 
and others did not. Of the 43 device-dependent APCs analyzed , 31 have 
median costs that are lower than the medians on which the OPPS payments 
were based in CY 2004. In contrast, 11 device-dependent APCs have 
median costs that are higher than the medians on which OPPS payments 
were based in CY 2004.

[[Page 50491]]

    The differences between the CY 2004 payment medians and the 
proposed CY 2005 median costs using CY 2003 claims data are 
attributable to several factors. As discussed above, the CY 2004 
payment medians were based on a subset of claims that contained the 
codes for the devices without which the procedures could not be 
performed, and several APCs were adjusted using external data. The 
proposed CY 2005 OPPS median costs were calculated based on all single 
bills, including ``pseudo'' single bills, for the services in the APCs 
and (not a subset of claims containing device codes) and were not 
adjusted using external data. In fact, as stated previously, we 
eliminated device coding requirements for hospitals in CY 2003. 
Consequently, there were no device codes reported for almost all 
devices in the CY 2003 claims data. Thus, it was not possible to use 
only the CY 2003 claims data containing device codes to calculate APC 
device-dependent medians as was done in CY 2004. Similarly, it was not 
possible to calculate a percentage of the APC cost attributed to device 
codes as would be needed to use external data to adjust CY 2003 claims 
data.
    In light of these data issues for CY 2005, we examined several 
alternatives to using CY 2003 claims data to calculate the proposed 
median costs for device-dependent APCs. We considered using CY 2004 
OPPS medians with an inflation factor, as recommended by the Panel and 
by several outside organizations. We rejected this option because it 
would not recognize any changes in relative costs for these APCs and 
would not direct us towards our goal of using all single claims data as 
the basis for payment weights for all OPPS services.
    We also considered using the medians we calculated from all single 
bills with no adjustments. However, the results of using this approach 
without increasing the payments for some important high cost services 
for CY 2005 could result in the closing of hospital programs that 
provide these services thus, jeopardizing access to needed care. 
Therefore, we did not adopt this approach.
    In addition, we considered subsetting claims based on the presence 
of charges in certain revenue codes. Specifically, we reviewed those 
codes where we require that hospitals report charges for the devices 
required for these procedures. These revenue codes include: 272, 
sterile supplies; 275, pacemakers; 278, other implants; 279, other 
supplies/devices; 280, oncology; 289, other oncology; and 624, 
investigational devices. We determined that the medians increased for 
some device-dependent APCs when we used only claims with a charge in at 
least one of these revenue codes, but our analysis provided no reliable 
evidence that the charges that would be found in these revenue codes 
were necessarily for the cost of the device.
    Further, we considered using CY 2002 claims to calculate a ratio 
between the median calculated using all single bills and the median 
calculated using only claims with HCPCS codes for devices on them, and 
applying that ratio to the median calculated using all single bills 
from CY 2003 claims data. We rejected this option because it assumes 
that the relationship between the costs of the claims with and without 
codes for devices is a valid relationship not only for CY 2002 but CY 
2003 as well. It also assumes no changes in billing behavior. We have 
no reason to believe either of these assumptions is true and, 
therefore, we did not choose this option.
    In summary, we considered and rejected all of the above options. We 
have given special treatment to the device-dependent APCs for the past 
3 years, recognizing that, in a new payment system, hospitals need time 
to establish correct coding processes and, considering the need to 
ensure continued access to these important services. After 3 years of 
such consideration, we believe that it is time to begin a transition to 
the use of pure claims data for these services (reflected in these 
APCs) to ensure the appropriate relativity of the median costs for all 
payable OPPS services. Our goal is to establish payment rates that 
provide appropriate relative payment for all services paid under the 
OPPS without creating payment disincentives that may reduce access to 
care.
    We do not believe that any of the above options considered would 
help us realize our goal. We believe that the better payment approach 
for determining median costs for device-dependent APCs in CY 2005 would 
be to base such medians on the greater of (1) median costs calculated 
using CY 2003 claims data, or (2) 90 percent of the APC payment median 
for CY 2004 for such services. We believe that some variation in median 
costs is to be expected from year to year, and we believe that 
recognizing up to a 10-percent variation in our proposed payment 
approach would be a reasonable limit.
    We believe that this proposed adjustment methodology provides an 
appropriate transition to eventual use of all single bill claims data 
without adjustment and that the methodology moves us towards the goal 
of using all single bill data without adjustment by CY 2007. It is a 
simple and easily understood methodology for adjusting median costs. 
Where reductions occur compared to CY 2004 OPPS, we believe that, under 
this methodology, the reductions will be sufficiently modest that 
providers will be able to accommodate them without ceasing to furnish 
services that Medicare beneficiaries need.
    We considered applying the adjustment methodology we used for all 
APCs, including device-dependent APCs, for CY 2003 OPPS, but we saw no 
advantage to doing so. We applied that methodology to the identified 
device-dependent APCs only for 1 year, and we applied it where we had 
already made an adjustment by calculating the median costs based only 
on claims containing ``C'' codes for the devices. Therefore, for 
device-dependent APCs, there was a double adjustment intended to soften 
the effects of the first year of cessation of pass-through payment for 
devices (that is, we adjusted the higher ``C'' code medians, not all 
single bill medians). Devices have been off pass-through for several 
years now and for CY 2005 OPPS, we are unable to calculate medians 
based only on claims containing ``C'' codes. Therefore, we do not view 
the circumstances across the 2 years as comparable.
    In addition, beginning in CY 2005, we are proposing to require 
hospitals to bill device-dependent procedures using the appropriate 
``C'' codes for the devices. This requirement is limited to only those 
APCs to which the proposed use of CY 2004 medians would apply. We 
believe that this proposal would mitigate against the reduction of 
access to care while encouraging hospitals to bill correctly for the 
services they furnish. We intend this requirement to be the first step 
towards use of all available single bill claims data to establish 
medians for device-dependent APCs. Our goal is to use all single bills 
for device APCs by the CY 2007 OPPS, which we expect to base on data 
from claims for services in CY 2005. We further discuss our coding 
proposal in section III.C.3. of this preamble.
    We welcome comments on all aspects of theses issues and 
particularly on steps that can be taken in the future to transition 
from the historic payment medians to claims based median costs for OPPS 
ratesetting for these important services.
    Table 19 is sorted by percentage difference between changes in the 
CY 2004 and CY 2005 APC payment rate CY 2004 to CY 2005. It also 
contains the CY 2004 OPPS payment medians, the CY 2005 OPPS proposed 
medians (using

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single bill claims from January 1, 2003, through December 31, 2003), 
and the medians derived from the proposed adjustment processes 
discussed further below.

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    As a result of our data analysis for device-dependent APCs, we are 
proposing to make the following changes in our methodology for setting 
the CY 2005 payment rates for device-dependent APC for the reasons 
specified:
    We propose to remove APC 0226, Implantation of drug infusion 
reservoir, from the list of device-dependent APCs and to use its 
unadjusted single bill median of $2,793.30 as the basis for the payment 
weight. CPT code 62360, Implantation or replacement of device for 
intrathecal or epidural drug infusion, subcutaneous reservoir, is 
assigned to APC 0226. In 2002, when we packaged 75 percent of the cost 
of the device into the payment for the procedure with which the device 
was billed to reduce the pro rata adjustment, we inadvertently packaged 
the cost of an implantable infusion pump (C1336 and C1337) rather than 
that of a drug reservoir. Our data indicate that the reservoir used in 
performing CPT code 62360 cost considerably less than an implantable 
infusion pump, and we believe that the median cost for APC 0226 
appropriately reflects the relative cost of the service and the 
required device.
    In addition, we are proposing to delete APC 0048, Arthroplasty with 
Prosthesis, from the list of device-dependent APCs and adjust the 
median costs for this APC because we believe that the proposed CY 2005 
median cost for this APC as restructured is reasonable and appropriate. 
Based on our careful analysis of the CY 2003 claims data for this APC, 
we believe the difference between the CY 2004 and CY 2005 median cost 
is attributable to the migration of certain high cost CPT codes (23470, 
24361, 24363, 24366, 25441, 25442, 25446) from APC 0048 to new APC 
0425, Level II Arthroplasty with Prosthesis and, as such, this change 
would not adversely limit beneficiary access to this important service. 
Therefore, we are not proposing to apply a device-dependent adjustment 
to the median cost for APC 0048.
    Further, we are proposing to move HCPCS code 52282 (Cystoscopy, 
implant stent), from APC 0385, Level I Prosthetic Urological Procedure, 
and assign it to APC 0163, Level IV Cystourethoscopy and other 
Genitourinary Procedures, for clinical homogeneity. As titled, APC 0385 
was intended for the assignment of certain urological procedures that 
require the use of prosthetics. However, HCPCS code 52282 requires the 
use of a stent rather than a urological prosthetic. Therefore, we are 
proposing to reassign HCPCS code 52282 to APC 0163. Recalculation of 
the median cost for APC 385 after reassigning HCPCS code 52282 yields a 
median cost for that APC that is consistent with its CY 2004 median 
payment. Thus, we are not proposing to apply a device-dependent 
adjustment to the median cost for APC 0385.
    Lastly, we are proposing to remove HCPCS code 49419 (Insert abdom 
cath for chemo tx), from APC 0119, Implantation of Infusion Pump, and 
assign it to APC 0115, Cannula/Access Device Procedures, to achieve 
clinical homogeneity within APC 0115. Unlike all the other codes 
assigned to APC 0115, HCPCS code 49419 does not require the use of an 
infusion pump. Rather, this code is used when inserting an 
intraperitoneal cannula or catheter with a subcutaneous reservoir. 
Thus, we believe it would be more appropriate clinically to reassign 
HCPCS code 49419 to APC 0115 that includes procedures which require the 
use of devices similar to that required for code 49419.
2. Proposed Treatment of Specified APCs
a. APC 0315 Level II Implantation of Neurostimulator
    The code, CPT code 61866, (Implant neurostim arrays) was brought to 
our attention by means of an application for a new device category for 
transitional pass-through payment for the Kinetra[supreg] 
neurostimulator, a dual channel neurostimulator currently approved and 
used for Parkinson's disease. We denied approval for a new device 
category for the Kinetra[supreg] neurostimulator because the device is 
described by a previously existing category, C1767, ``Generator, 
neurostimulator (implantable)''.
    The manufacturer of Kinetra[supreg] stated that the AMA created CPT 
61886 to accommodate implantation of the Kinetra[supreg] 
neurostimulator and that no services other than implantation of the 
Kinetra[supreg] are currently described by that CPT code. Even though, 
the Kinetra[supreg] did not receive full FDA pre-market approval until 
December 2003, hospital outpatient claims were reported in CYs 2002 and 
2003 (289 total claims in 2003) for this device. The manufacturer 
asserted that these claims must have been miscoded because the 
Kinetra[supreg] could not have been used in performing CPT code 61886 
before obtaining FDA approval in December 2003. Therefore, the 
manufacturer did not believe that the device cost could be included in 
the median for CPT code 61886, which has been assigned to APC 222.
    In examining the CY 2003 claims for CPT code 61866, we noted that 
many of the claims also contained codes for procedures related to 
treatment with cranial nerve stimulators, including the placement of 
electrodes for cranial nerve stimulation. The placement of the cranial 
neurostimulator electrodes used with the Kinetra[supreg] are currently 
an inpatient rather than outpatient procedure. Therefore, we would not 
expect patients being prepared for cranial nerve stimulation to also 
have a Kinetra[supreg] neurostimulator for deep brain stimulation for 
Parkinson's disease placed at the same time. Thus, it seems possible 
that the CY 2003 claims for CPT code 61886, generally, are incorrectly 
coded and do not include

[[Page 50495]]

the dual chamber neurostimulator in the reported charges.
    Prior to the availability of the dual channel neurostimulator 
Kinetra[supreg] for bilateral deep brain stimulation, it is our 
understanding that patients diagnosed with Parkinson's disease had two 
single channel neurostimulator generators implanted in the same 
operative session. According to the Kinetra[supreg] manufacturer, this 
device will now replace the insertion of two single channel 
neurostimulators and the cost of the Kinetra[supreg] is equivalent to 
the cost of two single channel neurostimulators. Given this 
information, we examined our CY 2003 claims data and found that 69 
single claims were reported for patients with a diagnosis of 
Parkinson's disease and that 2 single channel neurostimulator pulse 
generators (CPT code 61885) were implanted on the same day. The median 
cost for these claims was $20,631. Other than the device costs, we 
believe the procedural costs for the insertion of two single channel 
devices or with one dual channel device should be roughly comparable. 
Therefore, we are proposing to establish a new APC 0315, Level II 
Implantation of Neurostimulator, for CPT code 61886, and assign it a 
median cost of $20,631. Because of our concern that hospitals correctly 
code OPPS claims for CPT code 61886, we are also proposing to require 
device coding (``C'' code) for APC 0315 to improve the coding on all 
claims for placement of a dual channel cranial neurostimulator pulse 
generator or receiver, as we are proposing for APC 0039, Implantation 
of Neurostimulator, for placement of a single channel cranial 
neurostimulator, discussed in Section III. C3 of this preamble.
b. APC 0651, Complex Interstitial Radiation Application
    For CY 2003 APC 0651, HCPCS code 77778 (Complex interstitial 
radiation source application) was not to be used for prostate 
brachytherapy because we created HCPCS codes G0256 (Prostate 
brachytherapy with palladium sources) and G0261 (Prostate brachytherapy 
with iodine sources) in which we packaged the cost of placement of 
needles or catheters and sources into a single APC payment for each G 
code (see 67 FR 66779). When we calculated the median from all single 
bills for HCPCS code 77778 from CY 2003 data for CY 2005 OPPS, we found 
that 73 percent of the single bills for this APC were for prostate 
brachytherapy and, therefore, were miscoded. The median for APC 0651, 
using all single bills, including those miscoded for prostate 
brachytherapy, was $2,641.67. When we removed the incorrectly coded 
claims for prostate brachytherapy, the median is $1,491.39, which is 
the amount we are proposing for payment for CY 2005 OPPS for APC 0651. 
This median is considerably higher than the median cost of $589.72 for 
CY 2004 OPPS (from CY 2002 claims data).
    We believe that this adjusted median is appropriate for APC 0651 
when used for prostate brachytherapy because the service described by 
HCPCS code 77778 is only one of several components of the payment for 
the service in its entirety. When it is used for prostate 
brachytherapy, hospitals should also bill for the placement of the 
needles and catheters using HCPCS code 55859 and should also bill the 
brachytherapy sources separately. Hospitals will be paid for both APCs 
and for the cost of sources. Under the amounts proposed, the total 
unadjusted payment would be $3,544.59, plus the hospital's cost for the 
brachytherapy sources.
    Section 621(b)(1) of Pub. L. 108-173 specifically provides separate 
payment in CY 2005 ``* * * for a device of brachytherapy, consisting of 
a seed or seeds (or radioactive source)'' * * * at the hospital's 
charge adjusted to cost. We are proposing to package the cost of other 
services such as the needles or catheters into the payment for the 
brachytherapy APCs and not to pay on the same basis as the 
brachytherapy sources because the law does not include needles and 
catheters in its definition of brachytherapy sources to be paid on 
charges adjusted to cost.
    We also recognize that APC 0651 is used for brachytherapy services 
other than prostate brachytherapy and that, in some of those cases, 
there are no other codes for placement of the needles or catheters. In 
those cases, which are represented in the claims we used to calculate 
the median (once the miscoded claims for prostate brachytherapy were 
excluded), we believe that the charges for HCPCS code 77778 may include 
the placement of the needles or catheters and therefore the median may 
be somewhat overstated when used as the basis of payment for prostate 
brachytherapy and the other forms of brachytherapy that have codes for 
placement of needles and catheters. Similarly, the median may be 
understated when used to pay for brachytherapy services for which there 
are no separate HCPCS codes for needle or catheter placement. We 
considered whether to create new G codes for the placement of catheters 
and needles for the brachytherapy services for which such codes do not 
exist, but we were concerned that doing so might create unneeded 
complexity and that the existing data may not support establishing 
medians for the new codes. We are requesting comments on how to address 
those services for which there are currently no HCPCS codes for 
placement of needles and catheters for brachytherapy applications.
c. APC 0659, Hyperbaric Oxygen Therapy
    Over the past year, we have received a number of questions about 
billing and payment for HCPCS code C1300, Hyperbaric oxygen under 
pressure, full body chamber, per 30 minute interval. In light of these 
issues, we have carefully examined the CY 2003 single procedure claims 
data that we are proposing to use to calculate the CY 2005 proposed 
median for APC services. Based on our examination of single procedure 
claims filed for HCPCS code C1300 in CY 2003, we believe that the 
claims for these services were either miscoded or the therapy was 
aborted before its completion. The claims that we examined reflected a 
pattern that is inconsistent with the clinical delivery of this 
service. Hyperbaric oxygen therapy (HBOT) is prescribed for clinical 
conditions such as promoting the healing of chronic wounds. It is 
typically prescribed on average for 90 minutes and therefore, you would 
expect hospitals to bill multiple units of HBOT to achieve full body 
hyperbaric oxygen therapy. In addition to the therapeutic time spent at 
full hyperbaric oxygen pressure, treatment involves additional time for 
achieving full pressure (descent), providing air breaks to prevent 
neurological and other complications from occurring during the course 
of treatment, and returning the patient to atmospheric pressure 
(ascent). Our examination of the claims data revealed that providers 
who billed multiple units of C1300 reported a consistent charge for 
each ``30 Minute'' unit. Conversely, providers who billed only a single 
unit of C1300, suggesting either a miscoded or aborted service, 
reported a charge that was 3 to 4 times greater than the per ``30 
minute'' unit reported by providers billing multiple units of HCPCS 
code C1300. While, it appears that many of the single procedure HBOT 
claims that we examined, represented billing for a full 90 to 120 
minutes of HBOT (including ascent, descent, and air break time), they 
were improperly billed as 1 unit rather than as 3 or 4 units of HBOT. 
Consequently, this type of incorrect coding would result in an 
inappropriately high per 30 minute median cost for HBOT or a median 
cost for HBOT of $177.96 derived using single service claims and 
``pseudo''

[[Page 50496]]

single service claims. This is a significant issue because HBOT is the 
only procedure assigned to APC 0659.
    Our analysis of the HBOT claims data further revealed that about 40 
percent of all HBOT claims included packaged costs. To confirm our 
belief that these packaged costs were not associated with HBOT, we 
examined the other major payable procedures billed in conjunction with 
HBOT. As a result, we identified billed services such as drug 
administration and wound debridement that we would typically expect to 
have associated with packaged services. We also looked at the magnitude 
of packaged costs in our single bills and found the majority of these 
costs were small, less than $30, and concentrated in revenue codes 25X, 
Pharmacy, and 27X, Medical/Surgical Supplies.
    As a result of these coding anomalies, we are proposing to 
calculate our proposed ``30 minute'' median cost for APC 0659, using a 
total of 30,736 claims containing multiple units or multiple 
occurrences of HBOT, about 97 percent of all HBOT claims. Based on our 
finding, we are proposing to exclude claims with only one unit of HBOT. 
Using this proposed methodology, the proposed median cost per unit of 
C1300 is $82.91. Based on hospitals' charges on correctly coded claims, 
we believe this estimate is much more accurate for 30 minutes of HBOT. 
Thus, we are proposing a median cost for APC 0659 of $82.91 for CY 
2005.
d. APC 0422, Implantation of the BARD Endoscopic Suturing System
    For CY 2005, we are proposing to establish APC 0422 for Level II 
Upper GI Procedures. Code C9703 (the Bard Endoscopic Suturing System) 
was placed in that APC based on clinical and resource homogeneity as 
compared with the other services in the APC. Currently, code C9703 is 
assigned to new technology APC 1555, with a payment of $1,650. Median 
cost for code C9703 was based on CY 2002 claims and was somewhat lower 
than the established payment level. However, our examination of CY 2003 
claims data for APC 422 revealed that 137 of the 171 single claims for 
code C9703 were from a single institution with an extremely low and 
consistent cost per claim. We do not believe that these 137 claims 
represent the service described by code C9703, which includes an upper 
gastrointestinal endoscopy along with suturing of the esophagogastric 
junction. Therefore, in establishing the median for APC 0422, we did 
not use these 137 claims, which we believe were incorrectly coded.
3. Proposed Required Use of ``C'' Codes for Devices
    An important ancillary issue in regard to using hospital outpatient 
claims data to calculate median costs for device-dependent APC is 
whether to require that hospitals bill the HCPCS codes for the devices 
that are required to be used to provide the services in these APCs. We 
deleted these HCPCS codes for devices in CY 2003 because hospitals 
objected to the complexity of this coding, and we believed that 
hospitals would charge for the devices in appropriate revenue codes. 
Our review of the claims data does not support this belief. Hospitals 
do not appear to routinely include the charges for the devices they use 
when they bill for the related services in the device-dependent APCs. 
Therefore, we are also considering requiring hospitals to code devices 
for APCs to improve the quality of the claims data in support of our 
transition to the use of all single claims to establish payment rates 
for these APCs. We make this proposal cautiously, as we realize that it 
imposes a burden on hospitals to code the devices.
    Specifically, for CY 2005 OPPS, we are proposing to require coding 
of devices required for APCs for which we propose to adjust the median 
costs for CY 2005 OPPS. The APCs and the devices that are proposed for 
device coding are displayed in Table 20 below. Specifically, if one 
device is shown for one APC, that device would have to be billed on the 
claim for a service in that APC or the claim would be returned to the 
provider for correction. If more than one device is shown for one APC, 
the provider would be required to bill one of the device codes shown on 
the same claim with the service in that APC for the claim to be 
accepted.
    We are also proposing to require coding of C1900 (Left Ventricular 
lead) required to perform the service described in APC 0418, Left 
Ventricular Lead, because the service cannot be done without the lead 
and, because the device has been billed separately for pass-through 
payment in CYs 2003 and 2004. We believe that continued coding of the 
device would not impose a burden on hospitals. Similarly, because of 
our concerns regarding the correct coding of claims for CPT code 61886 
(Implant neurostim arrays), assigned to APC 0315 (discussed in greater 
detail in section III.C.2.a. of the preamble), we are proposing to 
require device coding for APC 0315, Level II Implantation of 
Neurostimulator, to improve the coding on claims for placement of a 
dual channel cranial neurostimulator pulse generator or receiver, just 
as we are proposing to require device coding for APC 0039, Implantation 
of Neurostimulator, for placement of a single channel cranial 
Neurostimulator as noted below.
    Table 20 below displays the APCs for which we are proposing to 
require ``C'' codes and the ``C'' code edits we are proposing to 
require for each APC. We welcome comments on the proposed ``C'' code 
requirements.

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    In addition, we are considering expanding the device coding 
requirements in the future. We believe that, by requiring device coding 
for a small subset of device-dependent APCs each year, we would 
minimize the marginal annual coding burden on hospitals and begin to 
improve data for these APCs, which have consistently proven to be 
problematic. We believe coding of devices is essential if we are to 
improve the accuracy of claims data sufficiently to better calculate 
the correct relative costs of device-dependent APCs in relation to the 
other services paid under the OPPS.
    We request that the public inform us of the device codes that are 
essential to the procedures contained in the device-dependent APCs 
contained in Table 20. The alphanumeric HCPCS codes for devices that 
were reactivated for CY 2004 OPPS can be found on the CMS website at 
www.cms.hhs.gov/providers under coding. They are in the section of 
alphanumeric codes that begin with the initial letter ``C.'' Comments 
regarding the device codes that should be required with the APCs listed 
in Table 20 should contain the APC and identify all device codes that 
may be essential to the performance of the procedures identified in the 
APC. Ideally, the comments will include a narrative that explains how 
the device is inserted.
4. Submission of External Data
    We would consider external data submitted with respect to any APC 
to the extent that such data enable us to verify or adjust claims data 
where we are convinced that such an adjustment to the median cost is 
appropriate. All comments and any data we use would be available for 
public inspection and commenters should not expect that any data 
furnished as part of the comment would be withheld from public 
inspection. Parties who submit external data for devices should also 
submit a strategy that can be used to determine what part of the median 
cost represents the device to which the external data applies. External 
data that are likely to be of optimal use should meet the following 
criteria:
     Represent a diverse group of hospitals both by location 
(for example, rural and urban) and by type (for example, community and 
teaching). We would prefer that commenters identify each hospital, 
including location with city and State, nonprofit vs. for profit 
status, teaching vs. nonteaching status, and the percent of Medicare 
vs. non-Medicare patients receiving the service. A pseudo identifier 
could be used for the hospital identification. Data should be submitted 
both ``per hospital'' and in the aggregate.
     Identify the number of devices billed to Medicare by each 
hospital as well as any rebates or reductions for bulk purchase or 
similar discounts and identify the characteristics of providers to 
which any such price rebates or reductions apply.
     Identify all HCPCS codes with which each item would be 
used.
     Identify the source of the data.
     Include both the charges and costs for each hospital for 
CY 2003.
    Meeting the criteria would enable us to compare our CY 2003 claims 
data to the submitted external data and help us determine whether the 
submitted data

[[Page 50500]]

are representative of hospitals that submit claims under the OPPS.
    We note that information containing beneficiary-specific 
information (for example, medical records, and invoices with 
beneficiary identification on it) must be altered, if necessary, to 
remove any individually identifiable information, such as information 
that identifies an individual, diagnoses, addresses, telephone numbers, 
attending physician, medical record number, and Medicare or other 
insurance number. Moreover, individually identifiable beneficiary 
medical records, including progress notes, medical orders, test 
results, and consultation reports must not be submitted to us. 
Similarly, photocopies of checks from hospitals or other documents that 
contain bank routing numbers must not be submitted to us.

D. Proposed Calculation of Scaled OPPS Payment Weights

    Using the median APC costs discussed previously, we calculated the 
proposed relative payment weights for each APC for CY 2005. As in prior 
years, we scaled all the relative payment weights to APC 0601, Mid-
Level Clinic Visit, because it is one of the most frequently performed 
services in the hospital outpatient setting. We assigned APC 0601 a 
relative payment weight of 1.00 and divided the median cost for each 
APC by the median cost for APC 0601 to derive the relative payment 
weight for each APC. Using CY 2003 data, the proposed median cost for 
APC 0601 is $57.32 for CY 2005.
    Section 1833(t)(9)(B) of the Act requires that APC reclassification 
and recalibration changes and wage index changes be made in a manner 
that assures that aggregate payments under the OPPS for CY 2005 are 
neither greater than nor less than the aggregate payments that would 
have been made without the changes. To comply with this requirement 
concerning the APC changes, we compared aggregate payments using the CY 
2004 relative weights to aggregate payments using the CY 2005 proposed 
weights. Based on this comparison, we are proposing to make an 
adjustment of the weights for purposes of budget neutrality. The 
weights that we are proposing for CY 2005, which incorporate the 
recalibration adjustments explained in this section, are listed in 
Addendum A and Addendum B to this proposed rule.
    Section 1833(t)(14)(H) of the Act, as added by section 621(a)(1) of 
Pub. L. 108-173, states that ``Additional expenditures resulting from 
this paragraph shall not be taken into account in establishing the 
conversion factor, weighting and other adjustment factors for 2004 and 
2005 under paragraph (9) but shall be taken into account for subsequent 
years.'' Section 1833(t)(14) provides the payment rates for certain 
specified covered outpatient drugs. Therefore, the incremental cost of 
those specified covered outpatient drugs (as discussed in section II.J. 
of this proposed rule) is excluded from the budget neutrality 
calculations but the base median cost of the drugs continues to be a 
factor in the calculation of budget neutrality. Accordingly, we 
calculated median costs for the specified covered outpatient drugs to 
which this section applies and used those medians and the frequencies 
in the calculation of the scaler for budget neutrality.
    Under section 1833(t)(16)(C) of the Act, as added by section 
621(b)(1) of Pub. L. 108-173, payment for devices of brachytherapy 
consisting of a seed or seeds (or radioactive source) is to be made at 
charges adjusted to cost for services furnished on or after January 1, 
2004 and before January 1, 2006. As we stated in our January 6, 2004 
interim final rule, charges for the brachytherapy sources will not be 
used in determining outlier payments and payments for these items will 
be excluded from budget neutrality calculations, consistent with our 
practice under the OPPS for items paid at cost. (See section VII.G. of 
this proposed rule.)

IV. Proposed Payment Changes for Devices

[If you choose to comment on this section, please indicate the caption 
``Devices'' at the beginning of your comment.]

A. Pass-Through Payments for Devices

1. Expiration of Transitional Pass-Through Payments for Certain Devices
    Section 1833(t)(6)(B)(iii) of the Act requires that, under the 
OPPS, a category of devices be eligible for transitional pass-through 
payments for at least 2, but not more than 3, years. This period begins 
with the first date on which a transitional pass-through payment is 
made for any medical device that is described by the category. In our 
November 7, 2003 final rule with comment period (68 FR 63437), we 
specified six device categories currently in effect that would cease to 
be eligible for pass-through payment effective January 1, 2005.
    The device category codes became effective April 1, 2001, under the 
provisions of the BIPA. Prior to pass-through device categories, we 
paid for pass-through devices under the OPPS on a brand-specific basis. 
All of the initial category codes that were established as of April 1, 
2001, have expired; 95 categories expired after CY 2002 and 2 
categories expired after CY 2003. All of the categories listed in Table 
21, along with their expected expiration dates, were created since we 
published the criteria and process for creating additional device 
categories for pass-through payment on November 2, 2001 (66 FR 55850 
through 55857). We based the expiration dates for the category codes 
listed in Table 21 on the date on which a category was first eligible 
for pass-through payment.
    There are six categories for devices that would have been eligible 
for pass-through payments for at least 2 years as of December 31, 2004. 
In our November 7, 2003 final rule with comment period, we finalized 
the December 31, 2004 expiration dates for these six categories. (Three 
other categories listed in Table 21, C1814, C1818, and C1819, would 
expire on December 31, 2005.) The six categories that would expire as 
of December 31, 2004, are C1783, C1884, C1888, C1900, C2614, and C2632, 
as indicated in Table 23. Each category includes devices for which 
pass-through payment was first made under the OPPS in CY 2002 or CY 
2003.
    In the November 1, 2002 final rule, we established a policy for 
payment of devices included in pass-through categories that are due to 
expire (67 FR 66763). For CY 2003, we packaged the costs of the devices 
no longer eligible for pass-through payments into the costs of the 
procedures with which the devices were billed in CY 2001. There were 
few exceptions to this established policy (brachytherapy sources for 
other than prostate brachytherapy, which is now also separately paid in 
accordance with section 621(b)(2) of Pub. L. 108-173). For CY 2004, we 
continued to apply this policy for categories that expired on January 
1, 2004.
2. Proposal for CY 2005
    We are proposing to continue to base the expiration date for a 
device category on the earliest effective date of pass-through payment 
status of the devices that populate the category. This basis for 
determining the expiration date of a device category is the same as 
that used in CY 2003 and CY 2004.
    We are also proposing that payment for the devices that populate 
the six categories that would cease to be eligible for pass-through 
payment after December 31, 2004, would be made as part of the payment 
for the APCs with which they are billed. This methodology for packaging 
device cost is consistent with the packaging methodology that we

[[Page 50501]]

describe in section III. of this proposed rule. To accomplish this, we 
are proposing to package the costs of devices that would no longer be 
eligible for pass-through payment in CY 2005 into the HCPCS codes with 
which the devices are billed.
    We note that category C1819 (Tissue localization excision device) 
was added subsequent to our proposed rule for CY 2004. We first 
announced the start date and the proposed expiration date for this 
device category in our November 7, 2003 final rule with comment period. 
Therefore, we are proposing to maintain the category's December 31, 
2005 expiration date. We invite comments on the proposed expiration 
date for category C1819.
[GRAPHIC] [TIFF OMITTED] TP16AU04.036

B. Provisions for Reducing Transitional Pass-Through Payments To Offset 
Costs Packaged Into APC Groups

1. Background
    In the November 30, 2001 final rule, we explained the methodology 
we used to estimate the portion of each APC rate that could reasonably 
be attributed to the cost of the associated devices that are eligible 
for pass-through payments (66 FR 59904). Beginning with the 
implementation of the CY 2002 OPPS update (April 1, 2002), we deducted 
from the pass-through payments for the identified devices an amount 
that reflected the portion of the APC payment amount that we determined 
was associated with the cost of the device, as required by section 
1833(t)(6)(D)(ii) of the Act. In the November 1, 2002 final rule, we 
published the applicable offset amounts for CY 2003 (67 FR 66801).
    For the CY 2002 and CY 2003 OPPS updates, to estimate the portion 
of each APC rate that could reasonably be attributed to the cost of an 
associated pass-through device eligible for pass-through payment, we 
used claims data from the period used for recalibration of the APC 
rates. Using those claims, we calculated a median cost for every APC 
without packaging the costs of associated ``C'' codes for device 
categories that were billed with the APC. We then calculated a median 
cost for every APC with the costs of the associated device category 
``C'' codes that were billed with the APC packaged into the median. 
Comparing the median APC cost without device packaging to the median 
APC cost including device packaging enabled us to determine the 
percentage of the median APC cost that is attributable to the 
associated pass-through devices. By applying those percentages to the 
APC payment rates, we determined the applicable amount to be deducted 
from the pass-through payment, the ``offset'' amount. We created an 
offset list comprised of any APC for which the device cost was at least 
1 percent of the APC's cost.
    As first discussed in our November 1, 2002 final rule (67 FR 66801) 
the offset list that we publish each year is a list of offset amounts 
associated with those APCs with identified offset amounts developed 
using the methodology described above. As a rule, we do not know in 
advance which procedures and APCs may be billed with new categories. An 
offset amount is therefore applied only when a new device category is 
billed with an APC appearing on the offset list. The list of potential 
offsets for CY 2004 is currently published on our website 
www.cms.hhs.gov, as ``Device Related Portions of Ambulatory Payment 
Classification Costs for 2004.''
    For CY 2004, we modified our policy for applying offsets to device 
pass-through payments. Specifically, we indicated that we would apply 
an offset to a new device category only when we could determine that an 
APC contains costs associated with the device. We continued our 
existing methodology for determining the offset amount, described 
above. We were able to use this methodology to establish the device 
offset amounts for CY 2004 because providers reported device codes (C 
codes) on the CY 2002 claims used for CY 2004 OPPS. However, for the CY 
2005 update to the OPPS, we are proposing to use CY 2003 claims that do 
not include device coding. (Section III. of this proposed rule contains 
a fuller discussion of our proposed requirement for use of ``C'' codes 
for CY 2005.)
    In the CY 2004 OPPS update, we reviewed the device categories 
eligible for continuing pass-through payment in CY 2004 to determine 
whether the costs associated with the device categories are packaged 
into the existing APCs. Based on our review of the data for the 
categories existing in CY 2004, we determined that there were no close 
or identifiable costs associated with the devices relating to the 
respective APCs that are normally billed with them. Therefore, for 
those device categories, we set the offset to $0 for CY 2004.
2. Proposal for CY 2005
    For CY 2005, we are proposing to continue to review each new device 
category on a case-by-case basis as we did in CY 2004 to determine 
whether device costs associated with the new category are packaged into 
the existing APC structure. We are also proposing to set the offsets to 
$0 for the currently

[[Page 50502]]

established categories that would continue for pass-through payment 
into CY 2005. If, during CY 2005, we create a new device category and 
determine that our data contain identifiable costs associated with the 
devices in any APC, we would adjust the APC payment if the offset is 
greater than $0. If we determine that device offsets greater than $0 
are appropriate for any new category that we create during CY 2005, we 
are proposing to announce the offset amounts in the program transmittal 
that announces the new category.
    Further, for CY 2005, we are proposing to use the device 
percentages (portion of the APC median cost attributable to the 
packaged device) that we developed for potential offsets in CY 2004 and 
to apply these percentages to the CY 2005 payment amounts to obtain CY 
2005 offset amounts, in cases where we determine that an offset is 
appropriate. We propose to use the device percentage developed for CY 
2004 because, as noted above, for the CY 2005 update to the OPPS, we 
are using CY 2003 claims that do not include device codes. Therefore, 
we are not easily able to determine the device portions of APCs for CY 
2003 claims data. We have posted the list of device-dependent APCs and 
their respective device portions on the CMS website: www.cms.hhs.gov.

V. Proposed Payment Changes for Drugs, Biologicals, Radiopharmaceutical 
Agents, and Blood and Blood Products

A. Transitional Pass-Through Payment for Additional Costs of Drugs and 
Biologicals

[If you choose to comment on issues in this section, include the 
caption ``Pass-Through'' at the beginning of your comment.]
1. Background
    Section 1833(t)(6) of the Act provides for temporary additional 
payments or ``transitional pass-through payments'' for certain drugs 
and biological agents. As originally enacted by the BBRA, this 
provision required the Secretary to make additional payments to 
hospitals for current orphan drugs, as designated under section 526 of 
the Federal Food, Drug, and Cosmetic Act (Pub. L. 107-186); current 
drugs and biological agents and brachytherapy used for the treatment of 
cancer; and current radiopharmaceutical drugs and biological products. 
For those drugs and biological agents referred to as ``current,'' the 
transitional pass-through payment began on the first date the hospital 
OPPS was implemented (before enactment of BIPA (Pub. L. 106-554), on 
December 21, 2000).
    Transitional pass-through payments are also required for certain 
``new'' drugs, devices and biological agents that were not being paid 
for as a hospital OPD service as of December 31, 1996, and whose cost 
is ``not insignificant'' in relation to the OPPS payment for the 
procedures or services associated with the new drug, device, or 
biological. Under the statute, transitional pass-through payments can 
be made for at least 2 years but not more than 3 years. Pass-through 
drugs and biological agents are identified by status indicator ``G.''
    The process to apply for transitional pass-through payment for 
eligible drugs and biological agents can be found on pages of our CMS 
website: www.cms.hhs.gov. If we revise the application instructions in 
any way, we will post the revisions on our website and submit the 
changes to the Office of Management and Budget (OMB) for approval, as 
required under the Paperwork Reduction Act (PRA). Notification of new 
drugs and biological application processes is generally posted on the 
OPPS website at: www.cms.hhs.gov/hopps.
2. Expiration in CY 2004 of Pass-Through Status for Drugs and 
Biologicals
    Section 1833(t)(6)(C)(i) of the Act specifies that the duration of 
transitional pass-through payments for drugs and biologicals must be no 
less than 2 years and any longer than 3 years. The drugs whose pass-
through status will expire on December 31, 2004, meet that criterion. 
Table 22 lists the drugs and biologicals for which we are proposing 
that pass-through status would expire on December 31, 2004.

[[Page 50503]]

[GRAPHIC] [TIFF OMITTED] TP16AU04.037

3. Drugs and Biologicals With Proposed Pass-Through Status in CY 2005
    We are proposing to continue pass-through status for CY 2005 for 
the drugs and biologicals listed in Table 23. The APCs and HCPCS codes 
for drugs and biologicals that we are proposing to continue with pass-
through status in CY 2005 are assigned status indicator ``G'' in 
Addendum A and Addendum B, respectively, to this proposed rule.
    Section 1833(t)(6)(D)(i) of the Act sets the payment rate for pass-
through eligible drugs (assuming that no pro rata reduction in pass-
through payment is necessary) as the amount determined under section 
1842(o) of the Act. Section 303(c) of Pub. L. 108-173 amends Title 
XVIII of the Act by adding new section 1847A. This new section 
establishes the use of the average sales price (ASP) methodology for 
payment for drugs and biologicals described in section 1842(o)(1)(C) of 
the Act furnished on or after January 1, 2005. Therefore, in CY 2005, 
we are proposing to pay under the OPPS for drugs and biologicals with 
pass-through status consistent with the provisions of section 1842(o) 
of the Act as amended by Pub. L. 108-173 at a rate that is equivalent 
to the payment these drugs and biologicals would receive in the 
physician office setting, and established in accordance with the 
methodology described in the CY 2005 Physician Fee Schedule proposed 
rule (69 FR 47488).
    We are further proposing to amend Sec.  419.64 of the regulations 
to conform with these changes. Specifically, we propose to replace 
paragraphs (d)(1) and (d)(2) with paragraph (d) to provide that, 
subject to any reduction determined under Sec.  419.62(b), the pass-
through payment for a drug or biological equals the amount determined 
under section 1842(o) of the Act, minus the portion of the APC that we 
determine is associated with the drug or biological.
    Section 1833(t)(6)(D)(i) of the Act also sets the amount of 
additional payment for pass-through eligible drugs and biologicals (the 
pass-through payment amount). The pass-through payment amount is the 
difference between the amount authorized under section 1842(o) of the 
Act, and the portion of the otherwise applicable fee schedule amount 
(that is, the APC payment rate) that the Secretary determines is 
associated with the drug or biological. As we explain in section V.B. 
of this proposed rule, we are proposing to make separate payment, 
beginning in CY 2005, for new drugs and biologicals with a HCPCS code 
consistent with the provisions of section 1842(o) of the Act as amended 
by Pub. L. 108-173 at a rate that is equivalent to the payment they 
would receive in a physician office setting, whether or not we have 
received a pass-through application for the item. Accordingly, 
beginning in CY 2005, the pass-through payment amount for new drugs and 
biologicals that we determine have pass-through status equals zero. 
That is, when we subtract the amount to be paid for pass-through drugs 
and biologicals under section 1842(o) of the Act, as amended by Pub. L. 
108-173, from the portion of the otherwise

[[Page 50504]]

applicable fee schedule amount, or the APC payment rate associated with 
the drug or biological which would be the amount paid for drugs and 
biologicals under section 1842(o) of the Act as amended by Pub. L. 108-
173, the resulting difference is equal to zero. Table 23 lists the 
drugs and biologicals for which we propose pass-through status 
continuing in CY 2005. Addendum B to this proposed rule lists the 
proposed CY 2005 rates for these pass-through drugs and biologicals 
based on data reported to CMS as of April 30, 2004.
[GRAPHIC] [TIFF OMITTED] TP16AU04.038

B. Drugs, Biologicals, and Radiopharmaceuticals Without Pass-Through 
Status

[If you choose to comment on issues in this section, include ``Drugs, 
Biologicals, and Radiopharmaceuticals NonPass-Throughs'' at the 
beginning of your comment.]
1. Background
    Under the OPPS, we currently pay for drugs, biologicals including 
blood and blood products, and radiopharmaceuticals that do not have 
pass-through status in one of two ways: packaged payment and separate 
payment (individual APCs). We explained in the April 7, 2000 final rule 
(65 FR 18450) that we generally package the cost of drugs and 
radiopharmaceuticals into the APC payment rate for the procedure or 
treatment with which the products are usually furnished. Hospitals do 
not receive separate payment from Medicare for packaged items and 
supplies, and hospitals may not bill beneficiaries separately for any 
packaged items and

[[Page 50505]]

supplies whose costs are recognized and paid for within the national 
OPPS payment rate for the associated procedure or service. (Program 
Memorandum Transmittal A-01-133, issued on November 20, 2001, explains 
in greater detail the rules regarding separate payment for packaged 
services.)
    Packaging costs into a single aggregate payment for a service, 
procedure, or episode of care is a fundamental principle that 
distinguishes a prospective payment system from a fee schedule. In 
general, packaging the costs of items and services into the payment for 
the primary procedure or service with which they are associated 
encourages hospital efficiencies and also enables hospitals to manage 
their resources with maximum flexibility. Notwithstanding our 
commitment to package as many costs as possible, we are aware that 
packaging payments for certain drugs, biologicals, and 
radiopharmaceuticals, especially those that are particularly expensive 
or rarely used, might result in insufficient payments to hospitals, 
which could adversely affect beneficiary access to medically necessary 
services. As discussed in the November 7, 2003 OPPS final rule with 
comment period (68 FR 63445), we packaged payment for drugs, 
biologicals, and radiopharmaceuticals into the APCs with which they 
were billed if the median cost per day for the drug, biological, or 
radiopharmaceutical was less than $50. We established a separate APC 
payment for drugs, biologicals, and radiopharmaceuticals for which the 
median cost per day exceeded $50. Our rationale for establishing a $50 
threshold was also discussed.
2. Proposed Criteria for Packaging Payment for Drugs, Biologicals, and 
Radiopharmaceuticals
    Section 621(a)(2) of Pub. L. 108-173 amended section 1833(t)(16) of 
the Act by adding a new subparagraph (B) to require that the threshold 
for establishing separate APCs for drugs and biologicals be set at $50 
per administration for CYs 2005 and 2006. For CY 2005, we are proposing 
to continue our policy of paying separately for drugs, biologicals, and 
radiopharmaceuticals whose median cost per day exceeds $50 and 
packaging the cost of drugs, biologicals, and radiopharmaceuticals 
whose median cost per day is less than $50 into the procedures with 
which they are billed.
    We calculated the median cost per day using claims data from 
January 1, 2003, to December 31, 2003, for all drugs, biologicals, and 
radiopharmaceuticals that had a HCPCS code during this time period and 
were paid (via packaged or separate payment) under the OPPS. Items such 
as single indication orphans drugs, certain vaccines, and blood and 
blood products were excluded from these calculations and our treatment 
of these is discussed separately in sections V.F., E., and I., 
respectively, of this preamble. In order to calculate the median cost 
per day for drugs, biologicals, and radiopharmaceuticals to determine 
their packaging status in CY 2005, we are proposing to use the 
methodology that was described in detail in the CY 2004 OPPS proposed 
rule (68 FR 47996 through 47997) and finalized in the CY 2004 final 
rule with comment period (68 FR 63444 through 63447). We are requesting 
comments on the methodology we are proposing to continue to use to 
determine the median cost per day of these items.
    We are proposing to apply an exception to our packaging rule to one 
particular class of drugs, the injectible and oral forms of anti-emetic 
treatments. The HCPCS codes to which our exception would apply are 
listed below in Table 24. Our calculation of median cost per day for 
these products showed that, if we were to apply our packaging rule to 
these items, two of the injectible products would be packaged and one 
would be separately payable. In addition, two of the oral products 
would be separately payable and one would be packaged. Chemotherapy is 
very difficult for many patients to tolerate as the side effects are 
often debilitating. In order for beneficiaries to achieve the maximum 
therapeutic benefit from chemotherapy and other therapies with side 
effects of nausea and vomiting, anti-emetic use is often an integral 
part of the treatment regimen. We want to ensure that our payment rules 
do not impede a beneficiary's access to the particular anti-emetic that 
is most effective for him or her as determined by the beneficiary and 
his or her physician. Therefore, we are proposing to pay separately for 
all six injectible and oral forms of anti-emetic products CY 2005.

BILLING CODE 4120-01-P

[[Page 50506]]

[GRAPHIC] [TIFF OMITTED] TP16AU04.039

3. Proposed Payment for Drugs, Biologicals, and Radiopharmaceuticals 
Without Pass-Through Status That Are Not Packaged
a. Payment for Specified Covered Outpatient Drugs
    Section 621(a)(1) of Pub. L. 108-173 amended section 1833(t) of the 
Act by adding a new subparagraph (14) that requires special 
classification of certain separately paid radiopharmaceutical agents 
and drugs or biologicals and mandates specific payments for these 
items. Under section 1833(t)(14)(B)(i), a ``specified covered 
outpatient drug'' is a covered outpatient drug, as defined in section 
1927(k)(2) of the Act, for which a separate APC exists and that either 
is a radiopharmaceutical agent or is a drug or biological for which 
payment was made on a pass-through basis on or before December 31, 
2002.
    Under section 1833(t)(14)(B)(ii) of the Act, certain drugs and 
biologicals are designated as exceptions and are not included in the 
definition of ``specified covered outpatient drugs.'' These exceptions 
are:
     A drug or biological for which payment is first made on or 
after January 1, 2003, under the transitional pass-through payment 
provision in section 1833(t)(6) of the Act.
     A drug or biological for which a temporary HCPCS code has 
not been assigned.
     During CYs 2004 and 2005, an orphan drug (as designated by 
the Secretary).
    Section 1833(t)(14)(A)(i) of the Act, as added by section 621(a)(1) 
of Pub. L. 108-173, specifies payment limits for three categories of 
specified covered outpatient drugs in CY 2004. Section 1833(t)(14)(F) 
of the Act defines the three categories of specified covered outpatient 
drugs based on section 1861(t)(1) and sections 1927(k)(7)(A)(ii), 
(k)(7)(A)(iii), and (k)(7)(A)(iv) of the Act. The categories of drugs 
are ``sole source drugs,'' ``innovator multiple source drugs,'' and 
``noninnovator multiple source drugs.'' The definitions of these 
specified categories for drugs, biologicals, and radiopharmaceutical 
agents under Pub. L. 108-173 were discussed in the January 6, 2004 OPPS 
interim final rule with comment period (69 FR 822), along with our use 
of the Medicaid average manufacturer price database to determine the 
appropriate classification of these products. Because of the many 
comments received on the January 6, 2004 interim final rule with 
comment period, the classification of many of the drugs, biologicals, 
and radiopharmaceuticals changed from that initially published. These 
changes were announced to the public on February 27, 2004, Transmittal 
112, Change Request 3144. Additional classification changes were 
implemented in Transmittals 3154 and 3322. We will finalize the interim 
final rule and address public comments associated with that rule when 
we finalize this proposed rule.
    Section 1833(t)(14)(A) of the Act, as added by section 621(a)(1) of 
Pub. L. 108-173, also provides that payment for these specified covered 
outpatient drugs is to be based on its ``reference average wholesale 
price,'' that is, the AWP for the drug, biological, or 
radiopharmaceutical as determined under section 1842(o) of the Act as 
of May 1, 2003 (section 1833(t)(14)(G) of the Act). Section 621(a) of 
Pub. L. 108-173 also amended the Act by adding section 
1833(t)(14)(A)(ii), which requires that:
     A sole source drug must, in CY 2005, be paid no less than 
83 percent and no more than 95 percent of the reference AWP.
     An innovator multiple source drug must, in CY 2005, be 
paid no more than 68 percent of the reference AWP.
     A noninnovator multiple source drug must, in CY 2005, be 
paid no more than 46 percent of the reference AWP.
    Section 1833(t)(14)(G) of the Act defines ``reference AWP'' as the 
AWP determined under section 1842(o) as of May 1, 2003. We interpret 
this to mean the AWP set under the CMS single drug pricer (SDP) based 
on prices published in the Red Book on May 1, 2003.
    For CY 2005, we are proposing to determine the payment rates for 
specified covered outpatient drugs under the provisions of Pub. L. 108-
173 by comparing the payment amount

[[Page 50507]]

calculated under the median cost methodology as done for procedural 
APCs (described previously in the preamble) to the AWP percentages 
specified in section 1833(t)(14)(A)(ii) of the Act.
    Specifically, for sole source drugs, biologicals, and 
radiopharmaceuticals, we compared the payments established under the 
median cost methodology to their reference AWP. We are proposing to 
determine payment for sole source items as follows: If the payment 
falls below 83 percent of the reference AWP, we would increase the 
payment to 83 percent of the reference AWP. If the payment exceeds 95 
percent of the reference AWP, we would reduce the payment to 95 percent 
of the reference AWP. If the payment is no lower than 83 percent and no 
higher than 95 percent of the reference AWP, we would make no change.
    There is one sole source item, Co 57 cobaltous chloride (HCPCS code 
C9013), for which we cannot find a reference AWP amount. However, we 
have CY 2003 hospital claims data for C9013, and we are proposing to 
derive its payment rate using its median cost per unit. Therefore, we 
are proposing a CY 2005 payment rate for C9013 of $143.96. We request 
comments on our proposed methodology for determining the payment rate 
for C9013.
    We note that there are three radiopharmaceutical products for which 
we are proposing a different payment policy in CY 2005. These products 
are represented by HCPCS codes A9526 (Ammonia N-13, per dose), C1775 
(FDG, per dose (4-40 mCi/ml), and Q3000 (Rubidium-Rb-82). 
Radiopharmaceuticals are classified as a ``specified covered outpatient 
drug'' according to section 1833(t)(14)(B)(i)(I) of the Act; and their 
payment is dependent on their classification as a single source, 
innovator multiple cource, or noninnovator multiple source product as 
defined by sections 1927(k)(7)(A)(iv), (ii), and (iii) of the Act. Upon 
further analysis of these items, we determined that these three 
products do not meet the statutory definition of a sole source item or 
a multiple source item. Pub. L. 108-173 requires us to pay for 
``specified covered outpatient drugs'' using specific payment 
methodologies based on their classification and does not address how 
payment should be made for items that do not meet the definition of a 
sole source or multiple source item. Therefore, we are proposing to set 
the CY 2005 payment rates for these three products based on median 
costs derived from CY 2003 hospital outpatient claims data, which would 
reflect hospital costs associated with these products. With regard to 
HCPCS code A9526, we have no hospital outpatient cost data for this 
HCPCS code. We received correspondence from an outside source stating 
that Rubidium-Rb-82 (HCPCS code Q3000) is an alternative product used 
for procedures for which Ammonia N-13 is also used and these two 
products are similar in cost. Therefore, we are proposing to establish 
a payment rate for Ammonia N-13 that is equivalent to the payment rate 
for Rubdium Rb-82.
    We request comments on the proposed CY 2005 payment rates for these 
three items and invite commenters to submit external data if they 
believe the proposed CY 2005 payment rates for these items do not 
adequately represent actual hospital costs. Table 25 below lists the CY 
2005 OPPS payment rates that we are proposing for these three 
radiophmaceutical products.
[GRAPHIC] [TIFF OMITTED] TP16AU04.040

    Table 25A lists the proposed payment amounts for sole source drugs, 
biologicals, and radiopharmaceuticals effective January 1, 2005 to 
December 31, 2005.

[[Page 50508]]

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[[Page 50509]]


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[[Page 50510]]


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[[Page 50511]]


[GRAPHIC] [TIFF OMITTED] TP16AU04.044

    In order to determine the payment amounts for innovator multiple 
source and noninnovator multiple source forms of the drug, biological, 
or radiopharmaceutical, we compared the payments established under the 
median cost methodology to their reference AWP. For innovator multiple 
source items, we are proposing to set payment rates at the lower of the 
payment rate calculated under our standard median cost methodology or 
68 percent of the reference AWP. For noninnovator or multiple source 
items, we are proposing to set payment rates at the lower of the 
payment rate calculated under our standard median cost methodology or 
46 percent of the reference AWP. We followed this same methodology to 
set payment amounts for innovator multiple source and noninnovator 
multiple source specified covered to payment drugs that were 
implemented by the January 6, 2004 interim final rule with comment 
period.
    Table 26 lists the proposed payment amounts for innovator and 
noninnovator multiple source drugs, biologicals, and 
radiopharmaceuticals effective January 1, 2005 to December 31, 2005.

[[Page 50512]]

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[[Page 50513]]


[GRAPHIC] [TIFF OMITTED] TP16AU04.046

b. Proposal To Treat Three Sunsetting Pass-Through Drugs as Specified 
Covered Outpatient Drugs
    As discussed in section V.A.2 of the preamble, there are 13 drugs 
and biologicals whose pass-through status will expire on December 31, 
2004. Table 22 lists these drugs and biologicals.
    Pass-through payment was made for 10 of these 13 items as of 
December 31, 2002. Therefore, these 10 items now qualify as specified 
covered outpatient drugs under section 1833(t)(14) of the Act, as added 
by section 621(a) of Pub. L. 108-173, as described above. However, 
pass-through status for three of the pass-through drugs and biologicals 
that will expire on December 31, 2004 (C9121, Injection, argatroban; 
J9395, Fulvestrant; and J3315, Triptorelin pamoate), was first made 
effective on January 1, 2003. These items are specifically excluded 
from the definition of ``specified covered outpatient drugs'' in 
section 1833(t)(14)(B)(ii) of the Act, because they are not drugs or 
biologicals for which pass-through payment was first made on or before 
December 31, 2002. Pub. L. 108-173 does not address how to set payment 
for items whose pass-through status expires in CY 2005, but for which 
pass-through payment was not made as of December 31, 2002.
    Therefore, we are proposing to pay for the three expiring pass-
through items for which payment was first made on January 1, 2003 
rather than on or before December 31, 2002 using the methodology 
described under section 1833(t)(14) of the Act for specified covered 
outpatient drugs. We believe that this methodology would allow us to 
determine appropriate payment amounts for these products in a manner 
that is consistent with how we pay for drugs and biologicals whose 
pass-through status was effective as of December 31, 2002, and that 
does not penalize those products for receiving pass-through status on 
or after January 1, 2003. Table 27 below lists the CY 2005 OPPS payment 
rates that we are proposing for these three drugs and biologicals.
    Of the 13 products for which we are proposing that pass-through 
status expire on December 31, 2004, we are proposing to package two of 
them (C9113, Inj. Pantoprazole sodium and J1335, Ertapenum sodium) 
because their median cost per day falls below the $50 packaging 
threshold. The remaining 11 drugs and biologicals were determined to be 
sole source items and would be paid separately according to the payment 
methodology for sole source products described above.
    We wish to note that darbepoetin alfa (Q0137) will be considered a 
specified covered outpatient drug in CY 2005. Payment for these drugs 
is governed under section 1833(t)(14) of the Act. Specifically, 
darbepoetin alfa will be paid as a sole-source drug at a rate between 
83 and 95 percent of its reference AWP. Given the status required under 
1833(t)(14) of the Act, as added by section 621(a)(1) of Pub. L. 108-
173, we specifically solicit comment on whether we should again apply 
an equitable adjustment, made pursuant to 1833(t)(2)(E) of the Act, to 
the price of this drug.

[[Page 50514]]

[GRAPHIC] [TIFF OMITTED] TP16AU04.047

c. Proposed CY 2005 Payment for New Drugs and Biologicals With HCPCS 
Codes and Without Pass-Through Application and Reference AWP
    Pub. L. 108-173 does not address OPPS payment in CY 2005 for new 
drugs and biologicals that have assigned HCPCS codes, but that do not 
have a reference AWP or approval for payment as pass-through drugs or 
biologicals. Because there is no statutory provision that dictates 
payment for such drugs and biologicals in CY 2005, and because we have 
no hospital claims data to use in establishing a payment rate for them, 
we investigated other possible options to pay for these items in CY 
2005. Clearly, one option is to continue packaging payment for these 
new drugs and biologicals that have their own HCPCS codes until we 
accumulate sufficient claims data to calculate median costs for these 
items. Another option is to pay for them separately using a data source 
other than our claims data. The first option is consistent with the 
approach we have taken in prior years when claims data for new services 
and items are not available to calculate median costs. However, because 
these new drugs and biologicals may be expensive, we are concerned that 
packaging these new drugs and biologicals may jeopardize beneficiary 
access to them. In addition, we do not want to delay separate payment 
for a new drug or biological solely because a pass-through application 
was not submitted.
    Therefore, in CY 2005, we are proposing to pay for these new drugs 
and biologicals which do not have pass-through status at a rate that is 
equivalent to the payment they would receive in the physician office 
setting, which will be established in accordance with the methodology 
described in the CY 2005 Physician Fee Schedule proposed rule (69 FR 
47488, 47520 through 47524). We note that this payment methodology is 
the same as the methodology that would be used to calculate the OPPS 
payment amount that pass-through drugs and biologicals would be paid in 
CY 2005 in accordance with section 1842(o) of the Act, as amended by 
section 303(b) of Pub. L. 108-173, and section 1847A of the Act. Thus, 
we would be treating new drugs and biologicals with established HCPCS 
codes the same, irrespective of whether pass-through status has been 
determined. We are also proposing to assign status indicator ``K'' to 
HCPCS codes for new drugs and biologicals for which we have not 
received a pass-through application.
    In light of this proposal, we understand that manufacturers might 
be hesitant to apply for pass-through status. However, we do not 
believe there would be many instances in CY 2005 when we would not 
receive a pass-through application for a new drug or biological that 
has a HCPCS code. To avoid delays in setting an appropriate payment 
amount for new drugs and biologicals and to expedite the processing of 
claims, we strongly encourage manufacturers to continue submitting 
pass-through applications for new drugs and biologicals when FDA 
approval for a new drug or biological is imminent to give us advance 
notice to begin working to create a HCPCS code and APC. The preliminary 
application would have to be augmented by FDA approval documents and 
final package inserts once such materials become available. However, 
initiating the pass-through application process as early as possible 
would enable us to expedite coding and pricing for the new drugs and 
biologicals and accelerate the process for including them in the next 
available OPPS quarterly release.
    We discuss in section V.D. of this preamble how we are proposing to 
pay in CY 2005 for new drugs and biologicals between their FDA approval 
date and assignment of a HCPCS code and APC. We share the desire of 
providers and manufacturers to incorporate payment for new drugs and 
biological into the OPPS as expeditiously as possible to eliminate 
potential barriers to beneficiary access and to minimize the number of 
claims that must be processed manually under the OPPS interim process 
for claims without established HCPCS codes and APCs, and we solicit 
public comments on our proposal.
d. Proposed Payment for Separately Payable NonPass-Through Drugs and 
Biologicals
    As discussed in section V.B.2. of this preamble, for CY 2005, we 
used CY 2003 claims data to calculate the proposed median cost per day 
for drugs, biologicals, and radiopharmaceuticals that have an assigned 
HCPCS code and are paid either as a packaged or separately payable item 
under the OPPS. Section 1833(t)(14) of the Act, as added by section 
621(a) of Pub. L. 108-173, specified payment methodologies for most of 
these drugs, biologicals, and radiopharmaceuticals. However, this 
provision did not specify how payment was to be made for separately 
payable drugs and biologicals that never received pass-through status 
and that are not otherwise addressed in section 1833(t)(14) of the Act. 
Some of the items for which such payment is not specified are (1) those 
that have been paid separately since implementation of the OPPS on 
August 1, 2000, but are not eligible for pass-through status, and (2) 
those that have historically been packaged with the procedure with 
which they are billed but, based on the CY 2003 claims data, their 
median cost per day is above the legislated $50 packaging threshold. 
Because Pub. L. 108-173 does not address how we are to pay for such 
drugs and biologicals (any drug or biological that falls into one or 
the other category and that has a per day cost greater than $50), we 
are proposing to set payment based on median costs derived from the CY 
2003 claims data. Because these products are generally older or low-
cost items, or

[[Page 50515]]

both, we believe that the proposed payments would allow us to provide 
adequate payment to hospitals for furnishing these items. Table 28. 
below lists the drugs and biologicals to which this proposed payment 
policy would apply.
[GRAPHIC] [TIFF OMITTED] TP16AU04.048


[[Page 50516]]


e. Proposed CY 2005 Change in Payment Status for HCPCS Code J7308
    Since implementation of the OPPS on August 1, 2000, HCPCS code 
J7308 (Aminolevulinic acid HCI for topical administration, 20 percent 
single unit dosage form) has been treated as a packaged item and 
denoted as such using status indicator ``N''. Thus, historically we 
have not allowed separate payment for this drug under the OPPS. In CY 
2005, this drug would receive a separate payment under the Medicare 
physician fee schedule when furnished in a physician's office. 
Therefore, as we generally intend to establish, wherever possible, 
consistent payment policies for drugs whether they are furnished in a 
hospital outpatient setting or in a physician's office or clinic, we 
are proposing to also pay separately for J7308 when furnished in a 
hospital outpatient department. Thus, for CY 2005, we are proposing to 
pay for this drug at 106 percent of ASP, which is equivalent to the 
payment rate that it would receive under the physician fee schedule. 
The proposed CY 2005 ASP and payment under the OPPS for J7308 is 
$88.86. We are soliciting comments on our proposed payment methodology 
for HCPCS code J7308 for CY 2005.

C. Proposed Coding and Billing for Specified Outpatient Drugs

[If you choose to comment on issues in this section, include the 
caption ``Drug Coding and Billing'' at the beginning of your comment.]
    As discussed in the January 6, 2004 interim final rule with comment 
period (69 FR 826), hospitals were instructed to bill for sole source 
drugs using the existing HCPCS code, which were priced in accordance 
with the provisions of newly added section 1833(t)(14)(A)(i) of the 
Act, as added by Pub. L. 108-173. However, at that time, the existing 
HCPCS codes did not allow us to differentiate payment amounts for 
innovator multiple source and noninnovator multiple source forms of the 
drug. Therefore, effective April 1, 2004, we implemented new HCPCS 
codes via Program Transmittal 112 (Change Request 3144, February 27, 
2004) and Program Transmittal 132 (Change Request 3154, March 30, 2004) 
that providers were instructed to use to bill for innovator multiple 
source drugs in order to receive appropriate payment in accordance with 
section 1833(t)(14)(A)(i)(II) of the Act. Providers were also 
instructed to continue to use the current HCPCS codes to bill for 
noninnovator multiple source drugs to receive payment in accordance 
with section 1833(t)(14)(A)(i)(III). In this manner, drugs, 
biologicals, and radiopharmaceuticals will be appropriately coded to 
reflect their classification and be paid accordingly. We are proposing 
to continue this coding practice in CY 2005 with payment made in 
accordance with section 1833(t)(14)(A)(ii) of the Act.

D. Proposed Payment for New Drugs, Biologicals and Radiopharmaceuticals 
Before HCPCS Codes Are Assigned

[If you choose to comment on issues in this section, include the 
caption ``HCPCS Codes'' at the beginning of your comment.]
1. Background
    Historically, hospitals have used a code for an unlisted or 
unclassified drug, biological, or radiopharmaceutical or used an 
appropriate revenue code to bill for drugs, biologicals, and 
radiopharmaceuticals furnished in the outpatient department that do not 
have an assigned HCPCS code. The codes for not otherwise classified 
drugs, biologicals, and radiopharmaceuticals are assigned packaged 
status under the OPPS. That is, separate payment is not made for the 
code, but charges for the code would be eligible for an outlier payment 
and, in future updates, the charges for the code are packaged with the 
separately payable service with which the code is reported for the same 
date of service.
    Drugs and biologicals that are newly approved by the FDA and for 
which a HCPCS code has not yet been assigned by the National HCPCS 
Alpha-Numeric Workgroup could qualify for pass-through payment under 
the OPPS. An application must be submitted to CMS in order for a drug 
or biological to be assigned pass-through status, along with a 
temporary C-code for billing purposes, and an APC payment amount. Pass-
through applications are reviewed on a flow basis, and payment for 
drugs and biologicals approved for pass-through status is implemented 
throughout the year as part of the quarterly updates of the OPPS.
    In the November 7, 2003 final rule with comment period (68 FR 
63440), we explained how CMS generally pays under the OPPS for new 
drugs and biologicals that are assigned HCPCS codes, but that are not 
approved for pass-through payment, and for which CMS had no data upon 
which to base a payment rate. These codes do not receive separate 
payment, but are assigned packaged status. Hospitals were urged to 
report charges for the new codes even though separate payment is not 
provided. Charges reported for the new codes are used to determine 
hospital costs and payment rates in future updates. For CY 2004, we 
again noted that drugs that were assigned a HCPCS code effective 
January 1, 2004, and that were assigned packaged status, remain 
packaged unless pass-through status is approved for the drug. If pass-
through status is approved for these drugs, pass-through payments are 
implemented prospectively in the next available quarterly release.
2. Provisions of Pub. L. 108-173
    Section 621(a)(1) of Pub. L. 108-173 amended section 1833(t) of the 
Act by adding paragraph (15) to provide for payment for new drugs and 
biologicals until HCPCS codes are assigned under the OPPS. Under this 
provision, we are required to make payment for an outpatient drug or 
biological that is furnished as part of covered OPD services for which 
a HCPCS code has not been assigned in an amount equal to 95 percent of 
AWP. This provision applies only to payments under the OPPS, effective 
January 1, 2004. However, we did not implement this provision in the 
January 6, 2004 interim final rule with comment period because we had 
not determined at that time how hospitals would be able to bill 
Medicare and receive payment for a drug or biological that did not have 
an identifying HCPCS code.
    As stated earlier, at its February 2004 meeting, the APC Panel 
heard presentations suggesting how to make payment for a drug or 
biological that did not have a code. The APC Panel recommended that we 
work swiftly to implement a methodology to enable hospitals to file 
claims and receive payment for drugs that are newly approved by the 
FDA. The APC Panel further recommended that we consider using temporary 
or placeholder codes that could be quickly assigned following FDA 
approval of a drug or biological to facilitate timely payment for new 
drugs and biologicals.
    We have explored a number of options to make operational the 
provisions of section 1833(t)(15) of the Act, as added by section 
621(a)(1) of Pub. L. 108-173, as soon as possible. One of the 
approaches that we considered was to establish a set of placeholder 
codes in the Outpatient Code Editor (OCE) and the PPS pricing software 
for the hospital OPPS (PRICER) that we would instruct hospitals to use 
when a new drug was approved. Hospitals would be able to submit claims 
using the new code but would receive no payment until the next 
quarterly update. By that time, we would have installed an actual 
payment amount and descriptor for the code into

[[Page 50517]]

the PRICER, and would mass-adjust claims submitted between the date of 
FDA approval and the date of installation of the quarterly release. A 
second option that we considered was to implement an APC, a C-code, and 
a payment amount as part of the first quarterly update following notice 
of FDA approval of a drug or biological. Hospitals would hold claims 
for the new drug or biological until the quarterly release was 
implemented and then submit all claims for the drug or biological for 
payment using the new C-code to receive payment on a retroactive basis. 
We also considered instructing hospitals to bill for a new drug or 
biological using a ``not otherwise classified'' code for which they 
would receive an interim payment based on charges converted to cost. 
Final payment would then be reconciled at cost report settlement. While 
each of these approaches might enable hospitals to begin billing for a 
newly approved drug or biological as soon as it received FDA approval, 
each approach had significant operational disadvantages, such as 
increased burden on hospitals or payment delays, or the risk of 
significant overpayments or underpayments that could not be resolved 
until cost report settlement.
    We adopted an interim approach that we believe balances the need 
for hospitals to receive timely and accurate payment as soon as a drug 
or biological is approved by the FDA with minimal disruption of the 
OPPS claims processing modules that support the payment of claims. On 
May 28, 2004 (Transmittal 188, Change Request 3287), we instructed 
hospitals to bill for a drug or biological that is newly approved by 
the FDA by reporting the National Drug Code (NDC) for the product along 
with a new HCPCS code C9399, Unclassified drug or biological. When 
C9399 appears on a claim, the OCE suspends the claim for manual pricing 
by the fiscal intermediary. The fiscal intermediary prices the claim at 
95 percent of its AWP using Red Book or an equivalent recognized 
compendium, and processes the claim for payment. This approach enables 
hospitals to bill and receive payment for a new drug or biological 
concurrent with its approval by the FDA. The hospital does not have to 
wait for the next quarterly release or for approval of a product-
specific HCPCS to receive payment for a newly approved drug or 
biological or to resubmit claims for adjustment. Hospitals would 
discontinue billing C9399 and the NDC upon implementation of a HCPCS 
code, status indicator, and appropriate payment amount with the next 
quarterly update. In this proposed rule, we are proposing to formalize 
this methodology for CY 2005 and to expand it to include payment for 
new radiopharmaceuticals to which a HCPCS code is not assigned (see 
section V.G. of this preamble). We are soliciting comments on the 
methodology and are particularly interested in the reaction of 
hospitals to using this approach to bill and receive timely payment 
under the OPPS for drugs, biologicals, and radiopharmaceuticals that 
are newly approved by the FDA, prior to assignment of a product-
specific HCPCS code.

E. Proposed Payment for Vaccines

[If you choose to comment on issues in this section, include the 
caption ``Vaccines'' at the beginning of your comment.]
    Outpatient hospital departments administer large amounts of the 
vaccines for influenza (flu) and pneumococcal pneumonia (PPV), 
typically by participating in immunization programs. In recent years, 
the availability and cost of some vaccines (particularly the flu 
vaccine) have fluctuated considerably. As discussed in the November 1, 
2002 final rule (67 FR 66718), we were advised by providers that OPPS 
payment was insufficient to cover the costs of the flu vaccine and that 
access of Medicare beneficiaries to flu vaccines might be limited. They 
cited the timing of updates to OPPS rates as a major concern. They 
indicated that our update methodology, which uses 2-year-old claims 
data to recalibrate payment rates, would never be able to take into 
account yearly fluctuations in the cost of the flu vaccine. We agreed 
with this concern and decided to pay hospitals for influenza and 
pneumococcal pneumonia vaccines based on a reasonable cost methodology. 
As a result of this change, hospitals, home health agencies (HHAs), and 
hospices, which were paid for these vaccines under the OPPS in CY 2002, 
have been receiving payment at reasonable cost for these vaccines since 
CY 2003. We are aware that access concerns continue to exist for these 
vaccines. However, we continue to believe that payment other than on a 
reasonable cost basis would exacerbate existing access problems. 
Therefore, we are proposing to continue paying for influenza and 
pneumococcal pneumonia vaccines under the reasonable cost methodology 
in CY 2005.

F. Proposed Changes in Payment for Single Indication Orphan Drugs

[If you choose to comment on issues in this section, include the 
caption ``Orphan Drugs'' at the beginning of your comment.]
    Section 1833(t)(1)((B)(i) of the Act gives the Secretary the 
authority to designate the hospital outpatient services to be covered. 
The Secretary has specified coverage for certain drugs as orphan drugs 
(section 1833(t)(14)(B)(ii)(III) of the Act as added by section 
621(a)(1) of Pub. L. 108-173). Section 1833(t)(14)(C) of the Act as 
added by section 621(a)(1) of Pub. L. 108-173, gives the Secretary the 
authority in CYs 2004 and 2005 to specify the amount of payment for an 
orphan drug that has been designated as such by the Secretary.
    We recognize that orphan drugs that are used solely for an orphan 
condition or conditions are generally expensive and, by definition, are 
rarely used. We believe that if the cost of these drugs were packaged 
into the payment for an associated procedure or visit, the payment for 
the procedure might be insufficient to compensate a hospital for the 
typically high cost of this special type of drug. Therefore, we are 
proposing to continue making separate payments for orphan drugs based 
on their currently assigned APCs.
    In the November 1, 2002 final rule (67 FR 66772), we identified 11 
single indication orphan drugs that are used solely for orphan 
conditions by applying the following criteria:
     The drug is designated as an orphan drug by the FDA and 
approved by the FDA for treatment of only one or more orphan 
conditions(s).
     The current United States Pharmacopoeia Drug Information 
(USPDI) shows that the drug has neither an approved use nor an off-
label use for other than the orphan condition(s).
    Eleven single indication orphan drugs were identified as having met 
these criteria and payments for these drugs were made outside of the 
OPPS on a reasonable cost basis.
    In the November 7, 2003 final rule with comment period (68 FR 
63452), we discontinued payment for orphan drugs on a reasonable cost 
basis and made separate payments for single indication orphan drugs. 
Payments for the orphan drugs were made at 88 percent of the AWP listed 
for these drugs in the April 1, 2003 single drug pricer, unless we were 
presented with verifiable information that shows that our payment rate 
does not reflect the price that is widely available to the hospital 
market. For CY 2004, Ceredase

[[Page 50518]]

(alglucerase) and Cerezyme (imiglucerase) were paid at 94 percent of 
AWP because external data submitted by commenters on the August 12, 
2003 proposed rule caused us to believe that payment at 88 percent of 
AWP would be insufficient to ensure beneficiaries' access to these 
drugs.
    In the December 31, 2003 correction of the November 7, 2003 final 
rule with comment period (68 FR 75442), we added HCPCS code J9017, 
arsenic trioxide (per unit) to our list of single indication orphan 
drugs. To date, the following are the 12 orphan drugs that we have 
identified as meeting our criteria: J0205 Injection, alglucerase, per 
10 units; J0256 Injection, alpha 1-proteinase inhibitor, 10 mg; J9300 
Gemtuzumab ozogamicin, 5 mg; J1785 Injection, imiglucerase, per unit; 
J2355 Injection, oprelvekin, 5 mg; J3240 Injection, thyrotropin alpha, 
0.9 mg; J7513 Daclizumab parenteral, 25 mg; J9015 Aldesleukin, per 
vial; J9017 Arsenic trioxide, per unit; J9160 Denileukin diftitox, 300 
mcg; J9216 Interferon, gamma 1-b, 3 million units and Q2019 Injection, 
basiliximab, 20 mg. We are not proposing any changes to this list of 
orphan drugs for CY 2005.
    If we had not classified these drugs as single indication orphan 
drugs for payment under the OPPS, they would have met the definition 
and been paid as single source specified covered outpatient drugs, 
resulting in lower payments which could impede beneficiary access to 
these unique drugs dedicated to the treatment of rate diseases. 
Instead, for CY 2005, under our authority at section 1833(t)(14)(C) of 
the Act, we are proposing to pay for all 12 single indication orphan 
drugs, including Ceredase and Cerezyme, at the rate of 88 percent of 
AWP or 106 percent of the ASP, whichever is higher. However, for drugs 
where 106 percent of ASP would exceed 95 percent of AWP, payment would 
be capped at 95 percent of AWP, which is the upper limit allowed for 
sole source specific covered outpatient drugs. For example, Ceredase 
and Cerezyme would each be paid at 95 percent of the AWP because 
payment at 106 percent of the ASP for these two drugs not only exceeds 
88 percent of the AWP but also exceeds 95 percent of the AWP. We are 
proposing to pay the higher of 88 percent of AWP or 106 percent of ASP 
capped at 95 percent of AWP to ensure that beneficiaries will continue 
to have access to such important drugs.

G. Proposal To Change Payment Policy for Radiopharmaceuticals

[If you choose to comment on issues in this section, include the 
caption ``Radiopharmaceuticals'' at the beginning of your comment.]
    In the November 1, 2002 OPPS final rule (67 FR 66757), we 
determined that we would classify any product containing a therapeutic 
radioisotope to be in the category of benefits described under section 
1861(s)(4) of the Act. We also determined that the appropriate benefit 
category for diagnostic radiopharmaceuticals is section 1861(s)(3) of 
the Act. We stated in the November 1, 2002 final rule that we will 
consider neither diagnostic nor therapeutic radiopharmaceuticals to be 
drugs as defined in 1861(t) of the Act (67 FR 66757). Therefore, 
beginning with the CY 2003 OPPS update, and continuing with the CY 2004 
OPPS update, we have not qualified diagnostic or therapeutic 
radiopharmaceuticals as drugs or biologicals.
    When we analyzed the many changes mandated by Pub. L. 108-173 that 
affect how we would pay for drugs, biologicals, and 
radiopharmaceuticals under the OPPS in CY 2005, we revisited the 
decision that we implemented in CY 2003 not to classify diagnostic and 
therapeutic radiopharmaceuticals as drugs or biologicals. In our 
analysis, we noted that although we did not consider 
radiopharmaceuticals for pass-through payment in CYs 2003 and 2004, we 
did apply to radiopharmaceuticals the same packaging threshold policy 
that we applied to other drugs and biologicals, and which we are 
proposing to continue in CY 2005. In addition, for the CY 2004 OPPS 
update, we applied the same adjustments to median costs for 
radiopharmaceuticals that we applied to separately payable drugs and 
biologicals that did not have pass-through status (68 FR 63441).
    In our review of this policy, we noted that section 
1833(t)(14)(B)(i) of the Act, as amended by section 621(a) of Pub. L. 
108-173, does include ``radiopharmaceutical'' within the meaning of the 
term ``specified covered outpatient drugs,'' although neither section 
621(a)(2) nor section 621(a)(3) of Pub. L. 108-173 includes a reference 
to radiopharmaceuticals.
    In an effort to provide a consistent reading and application of the 
statute, we are proposing to apply to radiopharmaceuticals certain 
provisions in section 621 of Pub. L. 108-173 which affect payment for 
drugs and biologicals billed by hospitals for payment under the OPPS. 
We believe it is reasonable to include radiopharmaceuticals in the 
general category of drugs in light of their inclusion as specified 
covered outpatient drugs in section 1833(t)(14)(B) of the Act, as added 
by section 621(a)(1) of Pub. L. 108-173.
    Section 621(a)(1) of Pub. L. 108-173, which amends section 1833(t) 
of the Act by adding a new subparagraph (14) affecting payment for 
radiopharmaceuticals under the OPPS, is unambiguous. This provision 
clearly requires that separately paid radiopharmaceuticals be 
classified as ``specified covered outpatient drugs.'' Therefore, in CY 
2005, we propose to continue to set payment for radiopharmaceuticals in 
accordance with these requirements, which are discussed in detail in 
section V.B.3. of this preamble.
    Section 1833(t)(16)(B) of the Act, as added by section 621(a)(2) of 
Pub. L. 108-173, requires us to reduce the threshold for the 
establishment of separate APCs with respect to drugs and biologicals to 
$50 per administration for drugs and biologicals furnished in 2005 and 
2006. We are proposing to apply the $50 packaging threshold methodology 
discussed in section V.B.2. of this preamble to radiopharmaceuticals as 
well as to drugs and biologicals.
    Section 1833(t)(15) of the Act, added by section 621(a)(1) of Pub. 
L. 108-173, requires us to make payment equal to 95 percent of the AWP 
for an outpatient drug or biological that is covered and furnished as 
part of covered OPD services for which a HCPCS code has not been 
assigned. We propose, beginning in CY 2005, to extend to 
radiopharmaceuticals the same payment methodology proposed in section 
V.D. of this preamble for new drugs and biologicals before HCPCS codes 
are assigned. That is, we are proposing to pay for newly approved 
radiopharmaceuticals, as well as newly approved drugs and biologicals, 
at 95 percent of AWP prior to assignment of a HCPCS code.
    Section 1833(t)(5)(E) of the Act, as added by section 621(a)(3) of 
Pub. L. 108-173, excludes separate drug and biological APCs from 
outlier payments. Beginning in CY 2005, we are proposing to apply 
section 621(a)(3) of Pub. L. 108-173 to APCs for radiopharmaceuticals. 
That is, beginning in CY 2005, radiopharmaceuticals would be excluded 
from receiving outlier payments.
    Consistent with our proposal to apply to radiopharmaceutical agents 
payment policies that apply to drugs and biologicals, we further 
propose, beginning in CY 2005, to accept applications for pass-through 
status for certain radiopharmaceuticals. That is, we propose on a 
prospective basis to consider for pass-through status those

[[Page 50519]]

radiopharmaceuticals to which a HCPCS code is first assigned on or 
after January 1, 2005. As we explain in section V.A.3. above, section 
1833(t)(6)(D)(i) of the Act sets the payment rate for pass-through 
eligible drugs and biologicals as the amount determined under section 
1842(o) of the Act. We propose in section V.A.3. to pay for drugs and 
biologicals with pass-through status in CY 2005 consistent with the 
provisions of section 1842(o) of the Act as amended by Pub. L. 108-173, 
at a rate that is equivalent to the payment these drugs and biologicals 
would receive in the physician office setting and set in accordance 
with the methodology described in the Medicare Physician Fee Schedule 
Proposed Rule for CY 2005 (69 FR 47488, 47520 through 47524).
    We issued an interim final rule with comment period entitled 
``Medicare Program: Manufacturer Submission of Manufacturer's Average 
Sales Price (ASP) Data for Medicare Part B Drugs and Biologicals'' in 
the April 6, 2004 Federal Register, related to the calculation and 
submission of manufacturer's ASP data (69 FR 17935). We need these data 
in order to determine payment for drugs and biologicals furnished in a 
physician office setting in accordance with the methodology described 
in the Medicare Physician Fee Schedule Proposed Rule (69 FR 47488, 
47520 through 47524). However, the April 6, 2004 interim final rule 
with comment period excludes radiopharmaceuticals from the data 
reporting requirements that apply to Medicare Part B covered drugs and 
biologicals paid under sections 1842(o)(1)(D), 1847A, or 
1881(b)(13)(A)(ii) of the Act (69 FR 17935). As a consequence, we would 
not have the same type of data available to determine payment for a new 
radiopharmaceutical approved for pass-through status after January 1, 
2005 that would be available to determine payment for a new drug or 
biological with pass-through status in CY 2005.
    Therefore, in order to set payment for a new radiopharmaceutical 
approved for pass-through status in accordance with 1842(o) and in a 
manner that is consistent with how we propose to set payment for a 
pass-through drug or biological, we are proposing a methodology that 
would apply solely to new radiopharmaceuticals for which payment would 
be made under the OPPS and for which an application for pass-through 
status is submitted after January 1, 2005. That is, in order to receive 
pass-through payment for a new radiopharmaceutical under the OPPS, a 
manufacturer would be required to submit data and certification for the 
radiopharmaceutical in accordance with the requirements that apply to 
drugs and biologicals under section 303 of Pub. L. 108-173 as set forth 
in the interim final rule with comment period issued in the April 6, 
2004 Federal Register (66 FR 17935) and described on the CMS website at 
cms.hhs.gov. Payment would be determined in accordance with the 
methodology applicable to drugs and biologicals that is discussed in 
the CY 2005 Medicare Physician Fee Schedule proposed rule (69 FR 47488, 
47520-47524). In the event the manufacturer seeking pass-through status 
for a radiopharmaceutical does not submit data in accordance with the 
requirements specified for new drugs and biologicals, we propose to set 
payment for the new radiopharmaceutical as a specified covered 
outpatient drug, under section 1833(t)(14)(A) as added by section 
621(a)(1) of Pub. L. 108-173.

H. Proposed Coding and Payment for Drug Administration

[If you choose to comment on issues in this section, include the 
caption ``Drug Administration'' at the beginning of your comment.]
    Since implementation of the OPPS, Medicare OPPS payment for 
administration of cancer chemotherapy drugs and infusion of other drugs 
has been made using the following HCPCS codes:
     Q0081, Infusion therapy other than chemotherapy, per visit
     Q0083, Administration of chemotherapy by any route other 
than infusion, per visit
     Q0084, Administration of chemotherapy by infusion only, 
per visit
     Q0085, Administration of chemotherapy by both infusion and 
another route, per visit
    In the CY 2004 proposed rule, we proposed to change coding and 
payment for these services to enable us to pay more accurately for the 
wide range of services and the drugs that we package into these per 
visit codes. (See August 12, 2003 proposed rule (68 FR 47998) for 
background discussion on these codes.) Commenters on the CY 2004 
proposed rule recommended that we use the CPT codes for drug 
administration. One commenter provided a crosswalk from the CPT codes 
for drug administration to the Q codes that we could use in a 
transition. We did not implement this in the final rule for CY 2004 
OPPS but indicated that we would consider it for CY 2005 and would 
discuss it with the APC Panel at its February 2004 meeting.
    Commenters and the APC Panel recommended that we discontinue use of 
code Q0085 for CY 2004 because codes Q0083 and Q0084 could be used 
together to report the services described by code Q0085. We did 
implement this change for CY 2004 and made code Q0085 nonpayable for CY 
2004 OPPS.
    At the APC Panel meeting, we presented a proposal from an outside 
organization that matched CPT codes for chemotherapy and 
nonchemotherapy infusions to the Q codes currently used to pay for 
these services under the OPPS. We asked the APC Panel for their 
perspective on the potential benefit of using the proposed coding 
approach as the basis for billing and determining OPPS payment for 
administering these drugs. The APC Panel recommended that CMS continue 
to review the organization's proposed coding crosswalk with the goal of 
using it to transition from the use of Q codes to that of CPT codes to 
bill for administration of these drugs.
    For CY 2005, we are proposing to use the CPT codes for drug 
administration but to crosswalk the CPT codes into APCs that reflect 
how the services would have been paid under the Q codes. Although 
hospitals would bill the CPT codes and include the charges for each CPT 
code on the claim, payment would be made on a per visit basis, using 
the cost data from the per visit Q codes (Q0081, Q0083 and Q0084) to 
set the payment rate for CY 2005. See Table 29. for the crosswalk of 
CPT codes into APCs based on the Q codes. The only change from the 
crosswalk that was submitted by the outside organization is that we are 
proposing a Q code and APC crosswalk for CPT code 96549 (Unlisted 
chemotherapy procedure), rather than bundling that service. We believe 
that Q0083 is the code that would have previously been reported by 
hospitals to describe the unlisted service. In addition, this would 
place the unlisted service in our lowest resource utilization APC for 
chemotherapy, consistent with our policy for other unlisted services.
    We are proposing to establish the Q code and APC crosswalk for CPT 
code 96549 because there is no CPT specific charge or frequency data on 
which to set payments. The CY 2005 OPPS is based on CY 2003 claims data 
which used the Q codes. Therefore, the only cost data available to us 
for establishment of median costs is the data based on the Q codes for 
drug administration. Moreover, the only frequency data that are 
available for use in calculating the scaler for budget neutrality of 
payment weights are the frequency data for the Q

[[Page 50520]]

codes. Therefore, the payments set for the CPT codes must use the cost 
data for the Q codes and must result in the same payments that would 
have been made had the Q codes been continued.
    Under this proposed methodology, hospitals would report the 
services they furnish with the CPT codes and would show the charges 
that they assign to the CPT codes on the claim. The Medicare OCE would 
assign the code to an APC whose payment is based on the per visit Q 
code that would have been used absent coding under CPT. In most cases, 
the OCE would collapse multiple codes or multiple units of the same CPT 
code into a single unit to be paid a single APC amount. This approach 
is needed because the data for the Q codes is reported on a per visit 
basis and more than one unit of a CPT code can be provided in a visit.
    For example, CPT code 96410 (Chemotherapy administration infusion 
technique, up to 1 hour) is for infusion of chemotherapy drugs for the 
first hour, and CPT code 96412 is for chemotherapy infusion up to 8 
hours, each additional hour. The claims data used to set the APC 
payment rate for these codes is for a per visit amount (taken from CY 
2003 data for Q0084 a per visit code). The frequency data on the claim 
are also on a per visit basis. For CY 2005, we are proposing that CPT 
code 96410 would be paid one unit of APC 0117 (to which CPT code 96410 
would be crosswalked) and no separate payment would be made for CPT 
code 96412, regardless of whether one unit or more than one unit is 
billed. CPT code 96412 would be a packaged code for CY 2005. Under the 
Q code data on which the payment weight for APC 0117 is based, the per 
visit amount would represent a payment that is appropriate for all drug 
administration services in a visit (that is, one unit of CPT code 96410 
and as many units of CPT code 96412 as were furnished in the same 
visit).
    Similarly, when a hospital bills 3 units of 96400 (Chemotherapy 
administration, subcutaneous or intramuscular, with or without local 
anesthesia), the OCE would assign one unit of APC 0116 for that code. 
(APC 0116 is the APC to which CPT code 96400 would be crosswalked.) The 
payment would be based on Q0083, a per visit code, because, absent the 
ability to be paid based on CPT codes, the hospital would have billed 
one unit of Q0083 (for the 3 injections) had we not discontinued the Q 
codes for CY 2005. The OCE would assume that there was one and only one 
visit in which there were 3 injections and would pay accordingly (that 
is, one unit of APC 0116).
    If we adopt the CPT codes for drug administration to ensure 
accurate payment in the future, it would be critical for hospitals to 
bill the charges for the packaged CPT codes for drug administration for 
CY 2005 (that is, the CPT codes with SI=N), even though there would be 
no separate payment for them in CY 2005. For CY 2007 OPPS, CY 2005 
claims data would be used as the basis for setting median costs for 
each CPT code, based on the reported charges reduced to cost, and would 
determine what APC configuration ensures most appropriate payment for 
the CPT drug administration codes. If hospitals do not bill charges in 
CY 2005 for the packaged drug administration CPT codes such as CPT 
codes 96412, 96423, 96545, or 90781, they would jeopardize our ability 
to make accurate payments for services billed and paid under these 
codes in CY 2007 when we use the CY 2005 data to set the payment 
weights.

BILLING CODE 4120-01-P

[[Page 50521]]

[GRAPHIC] [TIFF OMITTED] TP16AU04.049

I. Proposed Payment for Blood and Blood Products

[If you choose to comment on issues in this section, include the 
caption ``Blood and Blood Products'' at the beginning of your 
comments.]
    Since the OPPS was first implemented in August 2000, separate 
payment has been made for blood and blood products in APCs rather than 
packaging them into payment for the procedures with which they were 
administered. We recognize that blood is a valuable health care 
resource used regularly in a broad range of hospital procedures and the 
availability of safe blood is essential to the delivery of high quality 
health care services to Medicare beneficiaries.
    In CY 2000, payment for blood was established based on external 
data provided by commenters due to limited Medicare claims data. From 
CY 2000 to CY 2002, payment rates were updated for inflation. For CY 
2003, as described in the November 1, 2002 final rule (67 FR 66773), we 
applied a special dampening methodology to blood and blood products 
that had significant reductions in payment rates from CY 2002 to CY 
2003. Using the dampening methodology, we limited the decrease in

[[Page 50522]]

payment rates for blood and blood products to approximately 15 percent. 
For CY 2004, as recommended by the APC Panel, we froze payment rates 
for blood and blood products at CY 2003 levels. This allowed us to 
undertake further study of the issues raised by past commenters and 
presenters at the August 2003 and February APC 2004 Panel meetings.
    For CY 2005, we are proposing to continue to pay separately for 
blood and blood products. We also are proposing to establish new APCs 
that would allow each blood product to be in its own separate APC. In 
addition, after review, we determined that several of the blood product 
APCs contained multiple blood products with no clinical homogeneity or 
whose product-specific median costs may not have been similar. Thus, we 
are also proposing to reassign some of these HCPCS already contained in 
certain APCs to new APCs. Table 30 below lists, by HCPCS code, our 
proposed CY 2005 APC reassignments for such blood and blood products.

[[Page 50523]]

[GRAPHIC] [TIFF OMITTED] TP16AU04.050


[[Page 50524]]


[GRAPHIC] [TIFF OMITTED] TP16AU04.051

    Administrative costs for the processing and storage specific to the 
transfused blood product are included in the APC payment, which is 
based on hospitals' charges. Payment for the collection, processing, 
and storage of autologous blood, as described by CPT 86890 and used in 
transfusion is made through APC 347 (Level III Transfusion Laboratory 
Procedures).
    Other than for autologous blood products, the costs for collection, 
processing, storage, wastage, and other administrative costs for blood 
products that are not transfused are reported in the appropriate cost 
centers on hospitals' cost reports. These reported costs are 
attributable to overhead and distributed across all hospital services 
linked to those cost centers through the standard process of converting 
charges to costs using hospitals' CCRs for each cost center on the cost 
report.
    The DHHS Advisory Committee on Blood Safety and Availability has 
recommended that CMS establish payment rates for blood and blood 
products based on current year acquisition costs and actual total costs 
of providing such blood products. At the February 2004 APC Panel 
meeting, the APC Panel recommended that CMS use external data to derive 
costs of blood and blood products in order to establish payment rates.
    As with all services, we prefer to rely on our claims data whenever 
possible. We conducted a thorough analysis of billing for blood in CY 
2003 claims data. Comments received for previous rules suggest that 
current hospital blood costs are not captured because hospitals 
underreport blood on their claims. Commenters explained that hospitals 
sometimes found it too costly to bill for blood. However, we found that 
81 percent of all hospitals included in our ratesetting and modeling 
billed at least one blood and blood product in CY 2003. Of these 
hospitals, only 47 percent reported separate costs and charges in the 
two cost centers specific to blood on their most recent annual cost 
report. It may be that those hospitals billing for blood but not 
reporting costs and charges on their cost report for either of the two 
blood-specific cost centers report their blood costs and charges under 
other cost centers, such as operating room.
    We have also received comments that the CCRs that we use to adjust 
claim charges to costs for blood are too low, which results in an 
underestimation of the true cost of blood and blood products. Our 
current methodology for matching cost center CCRs to revenue codes 
includes a default to the overall CCR when any given provider has 
chosen not to report costs and charges for a specific cost center. 
After matching the two blood-specific cost centers to the 38X and 39X 
revenue codes, we observed a significant difference in CCRs for those 
hospitals with and without blood-specific cost centers. The median CCR 
for those hospitals with a blood-specific cost center was 0.66 for 
revenue code 38X and 0.64 for revenue code 39X, and for those 
defaulting to the overall CCR, the result was a CCR of 0.34 for revenue 
code 38X and 0.33 for revenue code 39X. The median overall CCR for all 
hospitals in the 2005 analysis was 0.33.
    As noted above, about half of the hospitals (47 percent) reported 
at least one of the blood-specific cost centers on their most recent 
cost report. We then looked at the CY 2003 claims being used to set CY 
2005 median costs and discovered that about one-quarter relied on a CCR 
that was based on a blood-specific cost center to adjust charges to 
costs, and about three-quarters did not. This pattern existed even 
though almost all hospitals were billing blood in the 38X and 39X 
revenue codes. The result was the default CCR was used to adjust almost 
75 percent of the line-items used to set the median costs for blood and 
blood products.
    In light of this information, we simulated a blood-specific CCR for 
those hospitals now defaulting to the overall CCR. We assumed that 
those hospitals not reporting costs and charges in a blood-specific 
cost center on their annual cost report, in general, face similar costs 
and engage in comparable charging practices for blood as those 
reporting a blood-specific cost center. For each hospital reporting 
costs and charges for the blood cost centers on their cost report, we 
calculated the ratio of the CCR in the blood-specific cost center to 
the overall CCR. We then calculated the geometric mean of this ratio. 
This was 2.2 for revenue code 38X

[[Page 50525]]

and 2.1 for revenue code 39X. For each hospital not reporting costs and 
charges for the blood cost centers on their cost report, we applied 
this mean ratio to their overall CCR. We believe that this approach 
better responds to a missing blood-specific CCR than simply using the 
average blood-specific CCR for each revenue code because it takes into 
account the unique charging structure of each provider. We then 
adjusted charges to costs for all hospitals and calculated a median 
cost for all blood products. Overall, this methodology increased the 
estimated median costs by 25 percent for CY 2005 relative to the 
medians used to set CY 2004 rates. For example, the estimated median 
for P9016 (Red blood cells, leukocytes reduced), the most frequently 
billed blood product, increased by 32 percent relative to the CY 2004 
median.
    In reviewing the simulated medians created above relative to those 
medians used to set CY 2004 payment rates, we noticed that procedures 
relying on a low volume of blood units (<1,000) demonstrated large 
decreases. Overall, the simulated median costs for low-volume blood 
products declined by 14 percent for CY 2005. Because a small sample 
size can lead to great variability in point estimates, we sought to 
increase the number of units of blood by combining CY 2002 and CY 2003 
claims data for the low-volume products. We used the simulated CCRs to 
calculate costs from charges. We recognize that not all of the low-
volume blood products had claims in CY 2002. Listed in Table 31 are the 
low volume products for which we combined CY 2002 and 2003 claims. To 
ensure that we combined comparable costs, we updated the simulated 
costs on the claims in CY 2002 to the base year of 2003 using the 
Producer Price Index (PPI) for blood and derivatives for human use 
(Commodity Code 063711), which is the PPI used to update blood 
and blood product prices in the market basket (67 FR 50039, August 1, 
2002). We estimated the annual PPI from December 2002 to December 2003 
to be -12.2 percent. Although a decline in PPI is unusual, we 
understand that the price of plasma products have recently declined. 
Further, the majority of the low-volume items are plasma products. 
After combining the 2 years of claims, we were able to raise the volume 
of blood units billed for 5 of these products above 1,000. Ultimately, 
overall estimated median costs continue to increase by 25 percent for 
all products, but decline by 16 percent for the low-volume products.
[GRAPHIC] [TIFF OMITTED] TP16AU04.052

    After discussions with industry representatives and hospitals and 
careful consideration of our claims analyses, for CY 2005 we are 
proposing to set payment rates for all blood and blood products listed 
in Table 29 based on our CY 2003 claims data, utilizing an actual or 
simulated hospital blood-specific CCR to convert charges to costs for 
blood and blood products. For those low-volume products listed in Table 
30, we would combine claims data for CYs 2002 and 2003. We are 
confident that we have claims data from the vast majority of the OPPS 
hospitals for blood products, and the tight distribution of costs for 
individual products, including low-volume products, provides no 
evidence of significant coding problems. In general, as a blood product 
undergoes increasing levels of processing or selection, our CY 2005 
proposed payment for the product would increase commensurate with the 
additional resources utilized. We believe that the proposed payment 
methodology described above will enable us to use our historical 
hospital claims data to assure the adequate payment for blood and blood 
products essential to continued Medicare beneficiary access to blood 
and blood products. In addition, we recognize the need to clarify 
billing regarding a variety of blood-related services under the OPPS in 
response to numerous questions and comments we have received. We intend 
to provide further billing guidelines to clarify our original Program 
Transmittal A-01-50 issued on April 12, 2001 (CR Request 1585) 
regarding correct billing for blood-related services in the near 
future.

VI. Estimated Transitional Pass-Through Spending in CY 2005 for Drugs, 
Biologicals, and Devices

[If you choose to comment on issues in this section, please include the 
caption ``Estimated Transitional Pass-Through Spending'' at the 
beginning of your comment.]

A. Basis for Pro Rata Reduction

    Section 1833(t)(6)(E) of the Act limits the total projected amount 
of transitional pass-through payments for a

[[Page 50526]]

given year to an ``applicable percentage'' of projected total Medicare 
and beneficiary payments under the hospital OPPS. For a year before CY 
2004, the applicable percentage is 2.5 percent; for CY 2004 and 
subsequent years, we specify the applicable percentage up to 2.0 
percent.
    If we estimate before the beginning of the calendar year that the 
total amount of pass-through payments in that year would exceed the 
applicable percentage, section 1833(t)(6)(E)(iii) of the Act requires a 
prospective uniform reduction in the amount of each of the transitional 
pass-through payments made in that year to ensure that the limit is not 
exceeded. We make an estimate of pass-through spending to determine not 
only whether payments exceed the applicable percentage but also to 
determine the appropriate reduction to the conversion factor.
    For devices, making an estimate of pass-through spending in CY 2005 
entails estimating spending for two groups of items. The first group 
consists of those items for which we have claims data for procedures 
that we believe used devices which were eligible for pass-through 
status in CY 2003 and CY 2004 and that would continue to be eligible 
for pass-through payment in CY 2005. The second group consists of those 
items for which we have no direct claims data, that is, items that 
became, or would become, eligible in CY 2004 and would retain pass-
through status in CY 2005, as well as items that would be newly 
eligible for pass-through payment beginning in CY 2005.

B. Proposed Estimate of Pass-Through Spending for CY 2005

    We are proposing to set the applicable percentage cap at 2.0 
percent of the total OPPS projected payments for CY 2005. To estimate 
CY 2005 pass-through spending for device categories in the first group 
described above, we are proposing to use volume information from CY 
2003 claims data for procedures associated with a pass-through device 
and manufacturer's price information from applications for pass-through 
status. This information would be projected forward to CY 2005 levels, 
using inflation and utilization factors based on total growth in 
Medicare Part B as projected by the CMS Office of the Actuary (OACT).
    To estimate CY 2005 pass-through spending for device categories 
included in the second group, that is, items for which we have no 
direct claims data, we are proposing to use the following approach: For 
categories with no claims data in CY 2003 that would be active in CY 
2005, we would follow the methodology described in the November 2, 2001 
final rule (66 FR 55857). That is, we are proposing to use price 
information from manufacturers and volume estimates based on claims for 
procedures that would most likely use the devices in question. This 
information would be projected forward to CY 2005 using the inflation 
and utilization factors supplied by the CMS OACT to estimate CY 2005 
pass-through spending for this group of device categories. For 
categories that become eligible in CY 2005, we would use the same 
methodology. We anticipate that any new categories for January 1, 2005, 
would be announced after the publication of this proposed rule but 
before the publication of the final rule. Therefore, the estimate of 
pass-through spending would incorporate pass-through spending for 
categories made effective January 1, 2005.
    With respect to CY 2005 pass-through spending for drugs and 
biologicals, as we explain in section V.A.3. of this proposed rule, the 
pass-through payment amount for new drugs and biologicals that we 
determine have pass-through status would equal zero. Therefore, our 
estimate of total pass-through spending for drugs and biologicals with 
pass-through status in CY 2005 would equal zero.
[GRAPHIC] [TIFF OMITTED] TP16AU04.053

    In accordance with the methodology described above, we estimate 
that total pass-through spending in CY 2005 would equal approximately 
$30.8 million, which represents 0.13 percent of total OPPS projected 
payments for CY 2005. This figure includes estimates for the current 
device categories continuing into CY 2005, in addition to projections 
for categories that first become eligible in CY 2005. This estimate is 
significantly lower than previous year's estimates because of the 
method we are proposing in section V.A.3 of this preamble for 
determining the amount of pass-through payment for drugs and 
biologicals with pass-through status in CY 2005.
    In section V.G., we are proposing to accept pass-through 
applications for new radiopharmaceuticals that are

[[Page 50527]]

assigned a HCPCS code on or after January 1, 2005. The pass-through 
amount for new radiopharmaceuticals approved for pass-through status in 
CY 2005 would be the difference between the OPD payment for the 
radiopharmaceutical, that is, the payment amount determined for the 
radiopharmaceutical as a sole source specified covered drug, and the 
payment amount for the radiopharmaceutical under section 1842(o) of the 
Act. However, we have no information identifying new 
radiopharmaceuticals to which a HCPCS code might be assigned after 
January 1, 2005 for which pass-through status would be sought. We also 
have no data regarding payment for new radiopharmaceuticals with pass-
through status under the methodology that we propose in section V.G. 
However, we do not believe that pass-through spending for new 
radiopharmaceuticals in CY 2005 would be significant enough to 
materially affect our estimate of total pass-through spending in CY 
2005. Therefore, we are not including radiopharmaceuticals in our 
estimate of pass-through spending in CY 2005.
    Because we estimate pass-through spending in CY 2005 would amount 
to 0.13 percent of total projected OPPS CY 2005 spending, we are 
proposing to return 1.87 percent of the pass-through pool to adjust the 
conversion factor, as we discuss in section VIII of this preamble.

VII. Other Policy Decisions and Proposed Policy Changes

A. Statewide Average Default Cost-to-Charge Ratios

[If you choose to comment on issues in this section, include the 
caption ``Cost-to-Charge Ratios'' at the beginning of your comment.]
    CMS uses cost-to-charge ratios (CCRs) to determine outlier 
payments, payments for pass-through devices, and monthly interim 
transitional corridor payments under the OPPS. Some hospitals do not 
have a valid CCR. These hospitals include, but are not limited to, 
hospitals that are new and have not yet submitted a cost report, 
hospitals that have a CCR that falls outside predetermined floor and 
ceiling thresholds for a valid CCR, or hospitals that have recently 
given up their all-inclusive rate status. When OPPS was first 
implemented in CY 2000, we used CY 1996 and CY 1997 cost reports to 
calculate default urban and rural CCRs for each State to use in 
determining the reasonable cost-based payments for those hospitals 
without a valid CCR (Program Memorandum A-00-63, CR 1310, issued on 
September 8, 2000). We are proposing to update the default ratios for 
CY 2005. Table 33 lists the proposed CY 2005 default urban and rural 
CCRs by State.
    We calculated the proposed statewide default CCRs in Table 33 using 
the same CCRs that we use to adjust charges to costs on claims data. 
These CCRs are the ratio of total costs to total charges from each 
provider's most recently submitted cost report, for those cost centers 
relevant to outpatient services. We also adjust these ratios to reflect 
final settled status by applying the differential between settled to 
submitted costs and charges from the most recent pair of settled to 
submitted cost reports. The majority of submitted cost reports, 87 
percent, were for CY 2002. We only used valid CCRs to calculate these 
default ratios. That is, we removed the CCRs for all-inclusive 
hospitals, CAHs, and hospitals in Guam and the U.S. Virgin Islands 
because these entities are not paid under the OPPS, or in the case of 
all-inclusive hospitals, because their CCRs are suspect. We further 
identified and removed any obvious error CCRs and trimmed any outliers. 
We limited the hospitals used in the calculation of the default CCRs to 
those hospitals that billed for services under the OPPS during CY 2003.
    Finally, we calculated an overall average CCR, weighted by a 
measure of volume, for each State except Maryland. This measure of 
volume is the total lines on claims and is the same one that we use in 
our impact tables. Calculating a rate for Maryland presented a unique 
challenge. There are only a few providers in Maryland that are eligible 
to receive payment under the OPPS. However, we had no usable in-house 
cost report data for these Maryland hospitals. Therefore, we obtained 
data from the fiscal intermediary for Maryland which we attempted to 
use in calculating the CCRs for Maryland but which we ultimately 
determined could not be used to calculate representative CCRs. The cost 
data for 3 Maryland hospitals with very low volumes of services and 
cost data were so irregular that we lacked confidence that it would 
result in a valid statewide CCR. Thus, for Maryland, we used an overall 
weighted average CCR for all hospitals in the nation to calculate the 
weighted average CCRs appearing in Table 33. The overall decrease in 
default statewide CCRs can be attributed to the general decline in the 
ratio between costs and charges widely observed in the cost report 
data.

[[Page 50528]]

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[[Page 50529]]


[GRAPHIC] [TIFF OMITTED] TP16AU04.055


[[Page 50530]]


[GRAPHIC] [TIFF OMITTED] TP16AU04.056

B. Transitional Corridor Payments: Technical Change

[If you choose to comment on issues in this section, include the 
caption ``Transitional Corridor Payments'' at the beginning of your 
comment.]
    When the OPPS was implemented, every provider was eligible to 
receive an additional payment adjustment (or transitional corridor 
payment) if the payments it received under the OPPS were less than the 
payment it would have received for the same services under the prior 
reasonable cost-based system (section 1833(t)(7) of the Act). 
Transitional corridor payments were intended to be temporary payments 
for most providers but permanent payments for cancer and children's 
hospitals to ease their transition from the prior reasonable cost-based 
payment system to the prospective payment system. Section 411 of Pub. 
L. 108-173 amended section 1833(t)(7)(D)(i) to the Act to extend such 
payments through December 31, 2005, for rural hospitals with 100 or 
fewer beds and extended such payments for services furnished during the 
period that begins with the provider's first cost reporting period 
beginning on or after January 1, 2004 and ends on December 31, 2005, 
for sole community hospitals located in rural areas. Accordingly, 
transitional corridor payments are only available to children's 
hospitals, cancer hospitals, rural hospitals having 100 or fewer beds, 
and sole community hospitals located in rural areas.
    At the time the OPPS was implemented, section 1833(t)(7)(F)(ii) of 
the Act defined the payment-to-cost ratio (PCR) used to calculate the 
``pre-BBA amount'' \2\ for purposes of calculating the transitional 
corridor payments to be determined using the payments and reasonable 
costs of services furnished during the provider's cost reporting period 
ending in calendar year 1996. The BIPA, Pub. L. 106-554, enacted on 
December 21, 2000, revised that requirement. Section 403 of BIPA 
amended section 1833(t)(7)(F)(ii)(I) of the Act to allow transitional 
corridor payments to hospitals subject to the OPPS that did not have a 
1996 cost report by authorizing use of the first available cost 
reporting period ending after 1996 and before 2001 in calculating a 
provider's PCR.
---------------------------------------------------------------------------

    \2\ Section 1833(t)(7) of the Act defined the ``pre-BBA'' amount 
for a period as the amount equal to the product of (1) the payment-
to-cost ratio for the hospital based on its cost reporting period 
ending in 1996, and (2) the reasonable cost of the services for the 
period. (Emphasis added.) In this context, BBA refers to the 
Balanced Budget Act of 1997, Pub. L. 105-33, enacted on August 5, 
1997.
---------------------------------------------------------------------------

    Although we discussed the BIPA amendment in the CY 2002 OPPS

[[Page 50531]]

proposed rule published on August 24, 2001 (66 FR 44674), and 
implemented the amendment through Program Memorandum No. A-01-51, 
issued on April 13, 2001, we failed to revise the regulations at Sec.  
419.70(f)(2) to reflect the change. In this proposed rule, we are 
proposing a technical correction to Sec.  419.70(f)(2) to conform it to 
the provision of section 1833(t)(7)(F)(ii)(I) of the Act.

C. Status Indicators and Comment Indicators Assigned in the Outpatient 
Code Editor (OCE)

[If you choose to comment on issues in this section, include the 
caption ``Status Indicators and Comment Indicators'' at the beginning 
of your comment.]
1. Payment Status Indicators
    The payment status indicators (SIs) that we assign to HCPCS codes 
and APCs under the OPPS play an important role in determining payment 
for services under the OPPS because they indicate whether a service 
represented by a HCPCS code is payable under the OPPS or another 
payment system and also whether particular OPPS policies apply to the 
code. For CY 2005, we are providing our proposed status indicator (SI) 
assignments for APCs in Addendum A, for the HCPCS codes in Addendum B, 
and the definitions of the status indicators in Addendum D1 to this 
proposed rule.
    Payment under the OPPS is based on HCPCS codes for medical and 
other health services. These codes are used for a wide variety of 
payment systems under Medicare, including, but not limited to, the 
Medicare fee schedule for physician services, the Medicare fee schedule 
for durable medical equipment and prosthetic devices, and the Medicare 
clinical laboratory fee schedule. For purposes of making payment under 
the OPPS, we must be able to signal the claims processing system 
through the Outpatient Code Editor (OCE) software, as to HCPCS codes 
that are paid under the OPPS and those codes to which particular OPPS 
payment policies apply. We accomplish this identification in the OPPS 
through the establishment of a system of status indicators with 
specific meanings. Addendum D1 contains the proposed definitions of 
each status indicator for purposes of the OPPS for CY 2005.
    We assign one and only one status indicator to each APC and to each 
HCPCS code. Each HCPCS code that is assigned to an APC has the same 
status indicator as the APC to which it is assigned.
    Specifically, for CY 2005, we are proposing to use the following 
status indicators in the specified manner:
     ``A'' to indicate services that are paid under some 
payment method other than OPPS, such as under the durable medical 
equipment, prosthetics, orthotics, and supplies (DMEPOS) fee schedule 
or the physician fee schedule. Some, but not all, of these other 
payment systems are identified in Addendum D1 to this proposed rule.
     ``B'' to indicate the services that are not payable under 
the OPPS when submitted on an outpatient hospital Part B bill type, but 
that may be payable by fiscal intermediaries to other provider types 
when submitted on an appropriate bill type.
     ``C'' to indicate inpatient services that are not payable 
under the OPPS.
     ``D'' to indicate a code that is discontinued, effective 
January 1, 2005.
     ``E'' to indicate items or services that are not covered 
by Medicare or codes that not recognized by Medicare.
     ``F'' to indicate acquisition of corneal tissue, which is 
paid on a reasonable cost basis and certain CRNA services that are paid 
on a reasonable cost basis.
     ``G'' to indicate drugs, biologicals, and 
radiopharmaceutical agents that are paid under the OPPS transitional 
pass-through rules.
     ``H'' to indicate devices that are paid under the OPPS 
transitional pass-through rules and brachtheraphy sources that are paid 
on a cost basis.
     ``K'' to indicate drugs, biologicals (including blood and 
blood products), and radiopharmaceutical agents that are paid in 
separate APCs under the OPPS, but that are not paid under the OPPS 
transitional pass-through rules.
     ``L'' to indicate flu and pneumococcal immunizations that 
are paid at reasonable cost but to which no coinsurance or copayment 
apply.
     ``N'' to indicate services that are paid under the OPPS, 
but for which payment is packaged into another service or APC group.
     ``P'' to indicate services that are paid under the OPPS, 
but only in partial hospitalization programs.
     ``S'' to indicate significant procedures that are paid 
under the OPPS, but to which the multiple procedure reduction does not 
apply.
     ``T'' to indicate significant services that are paid under 
the OPPS and to which the multiple procedure payment discount under the 
OPPS applies.
     ``V'' to indicate medical visits (including emergency 
department or clinic visits) that are paid under the OPPS.
     ``X'' to indicate ancillary services that are paid under 
the OPPS.
     ``Y'' to indicate nonimplantable durable medical equipment 
that must be billed directly to the durable medical equipment regional 
carrier rather than to the fiscal intermediary.
    We are proposing the payment status indicators identified above for 
each HCPCS code and each APC in Addenda A and B and are requesting 
comments on the appropriateness of the indicators we have assigned.
2. Comment Indicators
    In the November 1, 2002 and the November 7, 2003 final rules with 
comment period, which implemented changes in the OPPS for CYs 2003 and 
2004, respectively, we provided code condition indicators in Addendum 
B. The code condition indicators and their meaning are as follows:
     ``DG''--Deleted code with a grace period; Payment will be 
made under the deleted code during the 90-day grace period.
     ``DNG''--Deleted code with no grace period; Payment will 
not be made under the deleted code.
     ``NF''--New code final APC assignment; Comments were 
accepted on a proposed APC assignment in the Proposed Rule; APC 
assignment is no longer open to comment.
     ``NI''--New code interim APC assignment; Comments will be 
accepted on the interim APC assignment for the new code.
    Medicare has permitted a 90-day grace period after implementation 
of an updated medical code set, such as the HCPCS, to give providers 
time to incorporate new codes in their coding and billing systems and 
to remove the discontinued codes. HCPCS codes are updated annually 
every January 1, so the grace period for billing discontinued HCPCS was 
implemented every January 1 through March 31.
    The Health Insurance Portability and Accountability Act (HIPAA) 
transaction and code set rules require usage of the medical code set 
that is valid at the time that the service is provided. Therefore, 
effective January 1, 2005, CMS is eliminating the 90-day grace period 
for billing discontinued HCPCS codes. Details about elimination of the 
90-day grace period for billing discontinued HCPCS codes were issued to 
our contractors on February 6, 2004, in Transmittal 89, Change Request 
3093.
    In order to be consistent with the HIPPA rule that results in the 
elimination of the 90-day grace period for billing discontinued HCPCS 
codes, we are proposing, effective January 1, 2005, to delete code 
condition indicators ``DNG'' and ``DG''. We are proposing to designate 
codes that are

[[Page 50532]]

discontinued effective January 1, 2005 with status indicator ``D,'' as 
described in section VII.C.1. of this preamble.
    Further, we are proposing to rename ``code condition'' indicators 
as ``comment indicators.'' In Addendum D2 to this proposed rule, we 
list the following two comment indicators that we are proposing to use 
to identify HCPCS codes assigned to APCs that are or are not subject to 
comment:
     ``NF''--New code, final APC assignment; Comments were 
accepted on a proposed APC assignment in the Proposed Rule; APC 
assignment is no longer open to comment.
     ``NI''--New code, interim APC assignment; Comments will be 
accepted on the interim APC assignment for the new code.

D. Observation Services

[If you choose to comment on issues in this section, include the 
caption ``Observation Services'' at the beginning of your comment.]
    Frequently, beneficiaries are placed in ``observation status'' in 
order to receive treatment or to be monitored before making a decision 
concerning their next placement (that is, admit to the hospital or 
discharge). This status assignment occurs most frequently after surgery 
or a visit to the emergency department. For a detailed discussion of 
the clinical and payment history of observation services, see the 
November 1, 2002 final rule with comment period (67 FR 66794).
    Before the implementation of the OPPS in CY 2000, payment for 
observation care was made on a reasonable cost basis, which gave 
hospitals a financial incentive to keep beneficiaries in ``observation 
status'' even though clinically they were being treated as inpatients. 
With the initiation of the OPPS, observation services were no longer 
paid separately; that is, they were not assigned to a separate APC. 
Instead, costs for observation services were packaged into payments for 
the services with which the observation care was associated.
    Beginning in early 2001, the APC Panel began discussing the topic 
of separate payment for observation services. In its deliberations, the 
APC Panel asserted that observation services following clinical and 
emergency room visits should be paid separately, and that observation 
following surgery should be packaged into the payment for the surgical 
procedure. For CY 2002, we implemented separate payment for observation 
services (APC 0339) under the OPPS for three medical conditions: chest 
pain, congestive heart failure, and asthma. A number of accompanying 
requirements were established, including the billing of an evaluation 
and management visit in conjunction with the presence of certain 
specified diagnosis codes on the claim, hourly billing of observation 
care for a minimum of 8 hours up to a maximum of 48 hours, timing of 
observation beginning with the clock time on the nurse's admission note 
and ending at the clock time on the physician's discharge orders, a 
medical record documenting that the beneficiary was under the care of a 
physician who specifically assessed patient risk to determine that the 
beneficiary would benefit from observation care, and provision of 
specific diagnostic tests to beneficiaries based on their diagnoses. In 
developing this policy for separately payable observation services, we 
balanced issues of access, medical necessity, potential for abuse, and 
the need to ensure appropriate payment. We selected the three medical 
conditions, noted previously, and the accompanying diagnosis codes and 
diagnostic tests to avoid significant morbidity and mortality from 
inappropriate discharge while, at the same time, avoiding unnecessary 
inpatient admissions.
    Over the past 2 years, we have continued to review observation care 
claims data for information on utilization and costs, along with 
additional information provided to us by physicians and hospitals 
concerning our current policies regarding separately payable 
observation services. Our primary goal is to ensure that Medicare 
beneficiaries have access to medically necessary observation care. We 
also want to ensure that separate payment is made only for 
beneficiaries actually receiving clinically appropriate observation 
care.
    In January 2003, the APC Panel established an Observation 
Subcommittee. Over the last year, this subcommittee has held 
discussions concerning observation care and reviewed data extracted 
from claims that reported observation services. The subcommittee 
presented the results of its deliberations to the full APC Panel at the 
February 2004 meeting. The APC Panel recommendations regarding 
observation care provided under the OPPS were broad in scope and 
included elimination of the diagnosis requirement for separate payment 
for observation services, elimination of the requirement for the 
concomitant diagnostic tests for patients receiving observation care, 
unpackaging of observation services beyond the typical expected 
recovery time from surgical and interventional procedures, and 
modification of the method for measuring beneficiaries' time in 
observation to make it more compatible with routine hospital practices 
and their associated electronic systems.
    In response to the APC Panel recommendations, we undertook a number 
of studies regarding observation services, while acknowledging data 
limitations from the brief 2-year experience the OPPS has had with 
separately payable observation services.
    To assess the appropriateness of our proposal not to pay separately 
for observation services following surgical or interventional 
procedures, we analyzed the claims for these procedures to determine 
the extent to which the claims reported packaged observation services 
codes. This analysis revealed that while observation services are being 
reported on some claims for surgical and interventional procedures, the 
great majority of claims for these procedures reported no observation 
services. The packaged status of these observation services codes may 
result in underreporting their frequency, but the proportion of 
surgical and interventional procedures reported with the packaged 
observation services codes was so small that any increase would not 
change our substantive conclusion. This confirms our belief that, 
although an occasional surgical case may require a longer recovery 
period than expected for the procedure, as a rule, surgical outpatients 
do not require observation care. Given the rapidly changing nature of 
outpatient surgical and interventional services, it would be difficult 
to determine an expected typical recovery time for each procedure. We 
have concerns about overutilization of observation services in the 
post-procedural setting as partial replacement for recovery room time. 
However, we note that, to the extent observation care or extended 
recovery services are provided to surgical or interventional patients, 
the cost of that care is packaged into the payment for the procedural 
APC which may result in higher median costs for those procedures.
    We also analyzed the possibility of expanding the list of medical 
conditions for separately payable visit-related observation services, 
altering the requirements for diagnostic tests while in observation, 
and modifying the rules for counting time in observation care.
    We looked at CY 2003 OPPS claims data for all packaged visit-
related observation care for all medical conditions in order to 
determine whether or not there were other diagnoses that would be 
candidates for separately payable observation services. Our analysis 
confirmed that the three

[[Page 50533]]

diagnoses that are currently eligible for separate payment for 
observation services are appropriate, as those diagnoses are frequently 
reported in our visit-related claims with packaged observation 
services. In fact, diagnoses related to chest pain were, by far, the 
diagnosis most frequently reported for observation care, either 
separately payable or packaged. Other diagnoses that appeared in the 
claims data with packaged observation services included syncope and 
collapse, transient cerebral ischemia, and hypovolemia.
    The packaged status of those observation stays means that the data 
are often incomplete and the frequency of services may be 
underreported. Generally, information about packaged services is not as 
reliably reported as is that for separately paid services. However, we 
are not convinced that, for those other conditions (such as 
hypovolemia, syncope and collapse, among others), there is a well-
defined set of hospital services that are distinct from the services 
provided during a clinic or emergency room visit. Separately payable 
observation care must include specific, clinically appropriate 
services, and we are still accumulating data and experience for the 
three medical conditions for which we are currently making separate 
payment. Therefore, we believe it is premature to expand the conditions 
for which we would separately pay for visit-related observation 
services.
    Hospitals have indicated that, even in the cases where the 
diagnostic tests have been performed, to assure that billing 
requirements for separately payable observation services under APC 0339 
are met, they must manually review the medical records to prepare the 
claims. If they do not conduct this manual review, they may not be 
coding appropriately for separately payable observation services.
    We have also received comments from the community and the APC Panel 
asserting that the requirements for diagnostic testing are overly 
prescriptive and administratively burdensome, and that hospitals may 
perform tests to comply with the CMS requirements, rather than based on 
clinical need. For example, a patient admitted directly to observation 
care with a diagnosis of chest pain may have had an electrocardiogram 
in a physician's office just prior to admission to observation and may 
only need one additional electrocardiogram while receiving observation 
care. Thus, two more electrocardiograms performed in the hospital as 
required under the current OPPS observation policy might not be 
medically necessary.
    We continue to believe that the diagnostic testing criteria we 
established for the three medical conditions are the minimally 
appropriate tests for patients receiving a well-defined set of hospital 
observation services for those conditions. The previous example, 
notwithstanding, we also continue to believe that the majority of these 
tests would be performed in the hospital outpatient setting. We define 
observation care as an active treatment to determine if a patient's 
condition is going to require that he or she be admitted as an 
inpatient or if the condition resolves itself and the patient is 
discharged. The currently required diagnostic tests reflect that an 
active assessment of the patient was being undertaken, and we believe 
they are generally medically necessary to determine whether a 
beneficiary will benefit from being admitted to observation care and 
aid in determining the appropriate disposition of the patient following 
observation care.
    After careful consideration, we agree that specifying which 
diagnostic tests must be performed as a prerequisite for payment of APC 
0339 may be imposing an unreasonable reporting burden on hospitals and 
may, in some cases, result in unnecessary tests being performed. 
Therefore, beginning in CY 2005, we are proposing to remove the current 
requirements for specific diagnostic testing, and rely on clinical 
judgment in combination with internal and external quality review 
processes to ensure that appropriate diagnostic testing (which we 
expect would include some of the currently required diagnostic tests) 
is provided for patients receiving high quality, medically necessary 
observation care.
    Accordingly, we are proposing that, beginning in CY 2005, the 
following tests would no longer be required to receive payment for APC 
0339 (Observation):
     For congestive heart failure, a chest x-ray (71010, 71020, 
71030), and electrocardiogram (93005) and pulse oximetry (94760, 94761, 
94762)
     For asthma, a breathing capacity test (94010) or pulse 
oximetry (94760, 94761, 94762)
     For chest pain, two sets of cardiac enzyme tests; either 
two CPK (82550, 82552, 82553) or two troponins (84484, 84512) and two 
sequential electrocardiograms (93005)
    We believe that this proposed policy change would benefit hospitals 
because it would reduce administrative burden, allow more flexibility 
in management of beneficiaries in observation care, provide payment for 
clinically appropriate care, and remove a requirement that may have 
resulted in duplicative diagnostic testing.
    Hospitals and the APC Panel further suggested that we modify the 
method for accounting for the beneficiary's time in observation care. 
Currently, hospitals report the time in observation beginning with the 
admission of the beneficiary to observation and ending with the 
physician's order to discharge the patient from observation. There are 
two problems related to using the time of the physician discharge order 
to determine the ending time of observation care. First, providers 
assert that it is not possible to electronically capture the time of 
the physician's orders for discharge. As a result, manual medical 
record review is required in order to bill accurately. Second, the 
hospital may continue to provide specific discharge-related observation 
care for a short time after the discharge orders are written and, 
therefore, may not be allowed to account for the full length of the 
observation care episode. In an effort to reduce hospitals' 
administrative burden related to accurate billing, we are proposing to 
modify our instructions for counting time in observation care to end at 
the time the outpatient is actually discharged from the hospital or 
admitted as an inpatient. Our expectation is that specific, medically 
necessary observation services are being provided to the patient up 
until the time of discharge. However, we do not expect reported 
observation time to include the time patients remain in the observation 
area after treatment is finished for reasons that include waiting for 
transportation home.
    Although beneficiaries may be in observation care up to 48 hours or 
longer, we believe that, in general, 24 hours is adequate for the 
clinical staff to determine what further care the patient needs. In CY 
2005, we would continue to make separate payment for observation care 
based on claims meeting the requirement for payment of HCPCS code G0244 
(Observation care provided by a facility to a patient with CHF, chest 
pain, or asthma, minimum 8 hours, maximum 48 hours). However, we are 
proposing not to include claims reporting more than 48 hours of 
observation care in calculating the final payment rate for APC 0339.
    In CY 2005, we expect OPPS payments for observation care to 
increase over CY 2004 levels for two reasons. First, our proposal to 
eliminate the requirement that specific diagnostic tests be performed 
in order to receive separate payment for observation care will result 
in more observation stays being paid for under APC 0339. We identified 
a number of CY 2003 claims

[[Page 50534]]

with packaged observation services reported for congestive heart 
failure (CHF), asthma, and chest pains that would have qualified for 
separate payment absent the requirement that certain diagnostic tests 
be reported on the same claim. In the CY 2003 claims data we used for 
our analyses, we identified about 55,000 claims coded with G0244 for 
separate payment in APC 0339. We also identified approximately 13,500 
claims coded for observation care provided to beneficiaries with one of 
the three eligible medical conditions that did not report HCPCS code 
G0244 for separate payment. Our analysis revealed that those claims 
satisfy all of the criteria for separate payment of observation 
services if we remove the requirements for diagnostic tests. As 
mentioned above, hospitals report that billing for separately payable 
observation services requires manual medical record review and the 
separate payment may not offset the cost of the additional work even if 
patients' observation stays meet our criteria for separately payable 
observation services. Therefore, if we adopt our proposed changes, we 
expect the volume of claims for payment under APC 0339 to increase in 
CY 2005.
    This volume increase, combined with the slightly higher median cost 
calculated for APC 0339 based on CY 2003 claims, would likely result in 
higher aggregate Medicare payments to hospitals for observation care in 
CY 2005 than in previous years. We attribute the increase in payment 
rate for APC 0339 to an increase in the relative level of charges 
reported by hospitals for observation services in CY 2003, compared to 
the relative level of charges reported by hospitals for all other 
outpatient services furnished during the same period. Our budget 
neutrality simulations, which we discuss in section XVI. of this 
preamble take into account both the increased payment for APC 0339 
proposed for CY 2005, as well as the increase in the volume of 
separately payable observation services that we project could result 
from the changes in criteria that we are proposing for CY 2005.
    Moreover, the increase in payments for observation care may be 
offset by a modest decrease in the number of previously required 
diagnostic tests performed by hospitals for patients in observation and 
in the reduction of billing for HCPCS code G0264, which pays for the 
initial nursing assessment of a patient directly admitted to 
observation for congestive heart failure, asthma, or chest pain when 
the stay does not meet all of the criteria for G0244.
    In summary, to receive separate payment for medically necessary 
observation services, G0244 in APC 0339, involving specific goals and a 
plan of care that are distinct from the goals and plan of care for an 
emergency department, physician office, or clinic visit, we are 
proposing the following requirements beginning in CY 2005:
     The beneficiary must have one of three medical conditions: 
congestive heart failure, chest pain, or asthma. The hospital bill must 
report as the admitting or principal diagnosis an appropriate ICD-9-CM 
code to reflect the condition. The eligible ICD-9-CM diagnosis codes 
for CY 2005 are shown in Table 34 below.
     The hospital must provide and report on the bill an 
emergency department visit (APC 0610, 0611, or 0612), clinic visit (APC 
0600, 0601, or 0602), or critical care (APC 0620) on the same day or 
the day before the separately payable observation care (G0244) is 
provided. For direct admissions to observation, in lieu of an emergency 
department visit, clinic visit, or critical care, G0263 (Adm with CHF, 
CP, asthma) must be billed on the same day as G0244.
     HCPCS code G0244 must be billed for a minimum of 8 hours.
     No procedures with a T status indicator, except the code 
for infusion therapy of other than a chemotherapy drug (currently HCPCS 
code Q0081 or as proposed in this proposed rule, CPT code 90780), can 
be reported on the same day or day before observation care is provided.
     Observation time must be documented in the medical record 
and begins with the beneficiary's admission to an observation bed and 
ends when he or she is discharged from the hospital.
     The beneficiary must be in the care of a physician during 
the period of observation, as documented in the medical record by 
admission, discharge, and other appropriate progress notes that are 
timed, written, and signed by the physician.
     The medical record must include documentation that the 
physician explicitly assessed patient risk to determine that the 
beneficiary would benefit from observation care.

BILLING CODE 4120-01-P

[[Page 50535]]

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[[Page 50536]]


[GRAPHIC] [TIFF OMITTED] TP16AU04.058

E. Procedures That Will Be Paid Only as Inpatient Procedures

[If you choose to comment on issues in this section, include the 
caption ``Inpatient Procedures'' at the beginning of your comment.]
    Before implementation of the OPPS, Medicare paid reasonable costs 
for services provided in the outpatient department. The claims 
submitted were subject to medical review by the fiscal intermediaries 
to determine the appropriateness of providing certain services in the 
outpatient setting. We

[[Page 50537]]

did not specify in regulations those services that were appropriate to 
provide only in the inpatient setting and that, therefore, should be 
payable only when provided in that setting.
    Section 1833(t)(1)(B)(i) of the Act gives the Secretary broad 
authority to determine the services to be covered and paid for under 
the OPPS. In the April 7, 2000 final rule with comment period, we 
identified procedures that are typically provided only in an inpatient 
setting and, therefore, would not be paid by Medicare under the OPPS 
(65 FR 18455). These procedures comprise what is referred to as the 
``inpatient list.'' The inpatient list specifies those services that 
are only paid when provided in an inpatient setting. These are services 
that require inpatient care because of the nature of the procedure, the 
need for at least 24 hours of postoperative recovery time or monitoring 
before the patient can be safely discharged, or the underlying physical 
condition of the patient. As we discussed in the April 7, 2000 final 
rule with comment period (65 FR 18455) and the November 30, 2001 final 
rule (66 FR 59856), we use the following criteria when reviewing 
procedures to determine whether or not they should be moved from the 
inpatient list and assigned to an APC group for payment under the OPPS:
     Most outpatient departments are equipped to provide the 
services to the Medicare population.
     The simplest procedure described by the code may be 
performed in most outpatient departments.
     The procedure is related to codes that we have already 
removed from the inpatient list.
    In the November 1, 2002 final rule (67 FR 66792), we added the 
following criteria for use in reviewing procedures to determine whether 
they should be removed from the inpatient list and assigned to an APC 
group for payment under the OPPS:
     We have determined that the procedure is being performed 
in multiple hospitals on an outpatient basis; or
     We have determined that the procedure can be appropriately 
and safely performed in an ASC and is on the list of approved ASC 
procedures or proposed by us for addition to the ASC list.
    At the February 2004 meeting, the APC Panel made the recommendation 
to remove the following four abscess drainage CPT codes from the 
inpatient list: 44901, 49021, 49041, and 49061. As discussed in section 
II.G. of this preamble, we agree with the APC Panel's recommendation 
and we are proposing to remove these four abscess codes from the 
inpatient list and to assign them to APC 0037 for OPPS payment in CY 
2005.
    The APC Panel also made a recommendation to either eliminate the 
inpatient list from the OPPS or to evaluate the current list of 
procedures for any other appropriate changes. To determine the codes to 
be removed from the inpatient list, we have evaluated those codes that 
are performed in all sites of service other than the hospital inpatient 
setting approximately 60 percent or more of the time. We have chosen 60 
percent as a threshold because, in general, we believe that a procedure 
should be considered for removal from the inpatient list if there is 
evidence that it is being performed less than one half of the time in 
the hospital inpatient setting. For procedures where data have shown 
that they can be done in a safe and appropriate manner on an outpatient 
basis in a variety of different hospitals, we believe that it would be 
reasonable to consider the removal of the procedure from the inpatient 
list. After careful evaluation of the list of inpatient codes against 
our criteria, we are proposing to remove the procedures listed in Table 
35 from the inpatient list and to place them in APCs for payment under 
the OPPS. All of these codes would be assigned a status indicator 
``T'', except for CPT codes 00174 and 00928, which would be assigned a 
status indicator ``N'' because, under the OPPS, anesthesia codes are 
packaged into the procedures with which they are billed.

[[Page 50538]]

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BILLING CODE 4120-01-C
    For the reasons stated above, we are not proposing to accept the 
APC Panel's recommendation to completely eliminate the inpatient list 
for CY 2005. However, we are soliciting comments, especially from 
professional societies and hospitals, on whether these procedures are 
appropriate for removal from the inpatient list and on whether any 
other such procedures should be paid under the OPPS. We are also asking 
commenters who recommend that a procedure that is currently on the 
inpatient list be reclassified to an APC to include evidence 
(preferably from peer-reviewed medical literature) that the procedure 
is being performed on an outpatient basis in a safe and effective 
manner. We request that commenters suggest an appropriate APC 
assignment for the procedure, and furnish supporting data, in the event 
that we determine in the final rule, based on comments, that the 
procedure would be payable under the OPPS in CY 2005.

F. Hospital Coding for Evaluation and Management Services

[If you choose to comment on issues in this section, include the 
caption ``E/M Services Guidelines'' at the beginning of your comment.]
1. Background
    Currently, for claims processing purposes, we direct hospitals to 
use the CPT codes used by physicians to report clinic and emergency 
department visits on claims paid under the OPPS. However, we have 
received comments suggesting that the CPT codes are insufficient to 
describe the range and mix of services provided to patients in the 
clinic and emergency department setting because they are defined to 
reflect only the activities of physicians (for example, ongoing nursing 
care, and patient preparation for diagnostic tests). For both clinic 
and emergency department visits, there are currently five levels of 
care. To facilitate proper coding, we require each hospital to create 
an internal set of guidelines to determine what level of visit to 
report for each patient (April 7, 2000, final rule with comment period 
(65 FR 18434)).
    We have continued our efforts to address the situation of proper 
coding of clinic and emergency department visits to ensure proper 
Medicare payments to hospitals. Commenters who responded to the August 
24, 2001 OPPS proposed rule (66 FR 44672) recommended that we retain 
the existing evaluation and management coding system until facility-
specific evaluation and management codes for emergency department and 
clinic visits, along with national coding guidelines, were established. 
Commenters also recommended that we convene a panel of experts to 
develop codes and guidelines that are simple to understand and to 
implement, and that are compliant with the HIPAA requirements. We 
agreed with these commenters, and in our November 1, 2002 OPPS final 
rule (67 FR 66792), we

[[Page 50539]]

stated that we believed the most appropriate forum for development of 
new code definitions and guidelines would be an independent expert 
panel that could provide information and data to us. We believed that, 
in light of the expertise of organizations such as the AHA and the 
AHIMA, these organizations were particularly well equipped to do so and 
to provide ongoing education to providers.
    The AHA and the AHIMA, on their own initiative, convened an 
independent expert panel comprised of members of the AHA and AHIMA, as 
well as representatives of the American College of Emergency 
Physicians, the Emergency Nurses Association, and the American 
Organization of Nurse Executives, to develop code descriptions and 
guidelines for hospital emergency department and clinic visits and to 
provide us with the information and data. In June 2003, we received the 
panel's input concerning a set of national coding guidelines for 
emergency and clinic visits.
    We are currently considering the panel's set of coding guidelines 
and the public comments we have received in response to them. In the 
November 7, 2003 OPPS final rule with comment period (68 FR 63463), we 
also indicated that we would implement new evaluation and management 
codes only when we are also ready to implement guidelines for their 
use. We further indicated that we would allow ample opportunity for 
public comment, systems changes, and provider education before 
implementing such new coding requirements.
2. Proposal for Evaluation and Management Guidelines
    In the November 7, 2003 OPPS final rule with comment period (68 FR 
63463), we discussed our primary concerns and direction for developing 
the proposed coding guidelines for emergency department and clinic 
visits and indicated our plans to make available for public comment the 
proposed coding guidelines that we are considering through the CMS OPPS 
website as soon as we have completed them. We will notify the public 
through our ``listserve'' when the proposed guidelines will become 
available. To subscribe to this listserve, individuals should access 
the following website: http://www.cms.hhs.gov/medlearn/listserv.asp and 
follow the directions to the OPPS listserve. When we post the proposed 
guidelines on the website, we will provide ample opportunity for the 
public to comment.
    In addition, we will provide ample time to train clinicians and 
coders on the use of new codes and guidelines and for hospitals to 
modify their systems. We anticipate providing at least 6 to 12 months 
notice prior to implementation of the new evaluation and management 
codes and guidelines. We will continue working to develop and test the 
new codes even though we have not yet made plans for their 
implementation.

G. Brachytherapy Payment Issues

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

Payment for Brachytherapy Sources (Section 621(b) of Pub. L. 108-173, 
MMA)

    Sections 621(b)(1) and (b)(2) of Pub. L. 108-173 amended the Act by 
adding section 1833(t)(16)(C) and section 1833(t)(2)(H), respectively, 
to establish separate payment for devices of brachytherapy consisting 
of a seed or seeds (or radioactive source) based on a hospital's 
charges for the service, adjusted to cost. Charges for the 
brachytherapy devices may not be used in determining any outlier 
payments under the OPPS. In addition, consistent with our practice 
under the OPPS to exclude items paid at cost from budget neutrality 
consideration, these items must be excluded from budget neutrality as 
well. The period of payment under this provision is for brachytherapy 
sources furnished from January 1, 2004 through December 31, 2006.
    In the OPPS interim final rule with comment period published on 
January 6, 2004 (69 FR 827), we implemented sections 621(b)(1) and 
621(b)(2)(C) of Pub. L. 108-173. We stated that we will pay for the 
brachytherapy sources listed in Table 4 of the interim final rule with 
comment period (69 FR 828) on a cost basis, as required by the statute. 
The status indicator for brachytherapy sources was changed to ``H.'' 
The definition of status indicator ``H'' was for pass-through payment 
only for devices, but the brachytherapy sources affected by new 
sections 1833(t)(16)(C) and 1833(t)(2)(H) of the Act are not pass-
through device categories. Therefore, we also changed, for CY 2004, the 
definition of payment status indicator ``H'' to include nonpass-through 
brachytherapy sources paid on a cost basis. This use of status 
indicator ``H'' is a pragmatic decision that allows us to pay for 
brachytherapy sources in accordance with new section 1833(t)(16)(C) of 
the Act, effective January 1, 2004, without having to modify our claims 
processing systems. We stated in the January 6, 2004 interim final rule 
with comment period that we would revisit the use and definition of 
status indicator ``H'' for this purpose in the OPPS update for CY 2005. 
Therefore, in this proposed rule, we are soliciting further comments on 
this policy.
    As we indicated in the January 6, 2004 interim final rule with 
comment period, we began payment for the brachytherapy source in HCPCS 
code C1717 (Brachytx source, HCR lr-192) based on the hospital's charge 
adjusted to cost beginning January 1, 2004. Prior to enactment of Pub. 
L. 108-173, these sources were paid as packaged services in APC 0313. 
As a result of the requirement under Pub. L. 108-173 to pay for C1717 
separately, we adjusted the payment rate for APC 0313, Brachtherapy, to 
reflect the unpackaging of the brachytherapy source.
    Section 1833(t)(2)(H) of the Act, as added by section 621(b)(2)(C) 
of Pub. L. 108-173, mandated the creation of separate groups of covered 
OPD services that classify brachytherapy devices separately from other 
services or groups of services. The additional groups must be created 
in a manner that reflects the number, isotope, and radioactive 
intensity of the devices of brachytherapy furnished, including separate 
groups for Palladium-103 and Iodine-125 devices.
    We invited the public to submit recommendations for new codes to 
describe brachytherapy sources in a manner that reflects the number, 
radioisotope, and radioactive intensity of the sources. We requested 
commenting parties to provide a detailed rationale to support 
recommended new codes. We stated that we would propose appropriate 
changes in codes for brachytherapy sources in the CY 2005 OPPS update.
    At its meetings of February 18 through 20, 2004, the APC Panel 
heard from parties that recommended the addition of two new 
brachytherapy codes and HCPCS codes for high activity Iodine-125 and 
high activity Palladium-103. The APC Panel, in turn, recommended that 
CMS establish new HCPCS codes and new APCs, on a per source basis, for 
these two brachytherapy sources.
    We have considered this recommendation and agree with the APC 
Panel. Therefore, we are proposing to establish the following two new 
brachytherapy source codes for CY 2005:
     Cxxx1 Brachytherapy source, high activity, Iodine-125, per 
source
     Cxxx2 Brachytherapy source, high activity, Palladium-103, 
per source

[[Page 50540]]

    In addition, we believe the APC Panel's recommendation to establish 
new HCPCS codes that would distinguish high activity Iodine-125 from 
high activity Palladium-103 on a per source basis is an approach that 
should be implemented for other brachytherapy code descriptors, as 
well. Specifically, that recommendation would require that we include 
in the HCPCS code descriptor for such brachytherapy sources that the 
new high activity sources are paid ``per source.'' Therefore, we are 
proposing to include ``per source'' in the HCPCS code descriptors for 
all those brachytherapy source descriptors for which units of payment 
are not already delineated.
    Further, a new linear source Palladium-103 came to our attention in 
CY 2003 by means of an application for a new device category for pass-
through payment. While we declined to create a new category for pass-
through payment, we believe that this source falls under the provisions 
of Pub. L. 108-173 for separate cost-based payment as a brachytherapy 
source. Accordingly, we are proposing to add, for separate payment, the 
following code of linear source Palladium-103: Cxxx3 Brachytherapy 
linear source, Palladium-103, per 1 mm.
    Table 36 provides a complete listing of the HCPCS codes, long 
descriptors, APC assignments and status indicators that we are 
proposing for brachytherapy sources paid under the OPPS in CY 2005.

BILLING CODE 4120-01-P
[GRAPHIC] [TIFF OMITTED] TP16AU04.060

BILLING CODE 4120-01-C

H. Payment for APC 0375, Ancillary Outpatient Services When Patient 
Expires

    In CY 2003, we implemented a new modifier -CA, Procedure payable 
only in the inpatient setting when performed emergently on an 
outpatient who dies before admission. The purpose of this modifier is 
to allow payment, under certain conditions, for outpatient services on 
a claim that have the same date of service as a HCPCS code with status 
indicator ``C'' that is billed with modifier -CA. When a procedure with 
status indicator ``C'' (inpatient services not payable under the OPPS) 
was billed with modifier -CA, we made payment of a fixed amount, under 
New Technology APC 0977.
    In the November 7, 2003 final rule with comment period, we 
implemented APC 0375 to pay for services furnished in CY 2004 on the 
same date billed for a procedure code with modifier -CA, (68 FR 63467). 
We were concerned that

[[Page 50541]]

continuing to pay a fixed amount under a new technology APC for 
otherwise payable outpatient services furnished on the same date of 
service that a procedure with status indicator ``C'' is performed 
emergently on an outpatient would not result in appropriate payment for 
these services. That is, continuing to make payment under a new 
technology APC would not allow us to establish a relative payment 
weight for the services, subject to recalibration based on actual 
hospital costs.
    We implemented a payment rate of $1,150 for APC 0375, which is the 
payment amount for the restructured New Technology--Level XIII, APC 
1513, that replaced APC 0977, in CY 2004. We also stated that for the 
CY 2005 update of the OPPS, we would calculate a median cost and 
relative payment weight for APC 0375 using charge data from CY 2003 
claims for line items with a HCPC code and status indicator ``V,'' 
``S,'' ``T,'' ``X,'' ``N,'' ``K,'' ``G,'' and ``H,'' in addition to 
charges for revenue codes without a HCPCS code, that have the same date 
of service reported for a procedure billed with modifier -CA. We would 
then determine whether to set payment for APC 0375 based on our claims 
data or continue a fixed payment rate for these special services.
    In accordance with this methodology, for CY 2005 we reviewed the 
services on the 18 claims that reported modifier -CA in CY 2003. We 
calculated a median cost for the aggregated payable services on the 18 
claims reporting modifier -CA in the amount of $2,804.18. The mix of 
outpatient services that were reported appeared reasonable for a 
patient with an emergent condition requiring immediate medical 
intervention, and revealed a wide range of costs, which would also be 
expected. Therefore, we are proposing to set the payment rate for APC 
0375 in accordance with the same methodology we have followed to set 
payment rates for the other procedural APCS in CY 2005, based on the 
relative payment weight calculated for APC 0375.

VIII. Proposed Conversion Factor Update for CY 2005

[If you choose to comment on issues in this section, please indicate 
the caption ``Conversion Factor'' at the beginning of your comment.]
    Section 1833(t)(3)(C)(ii) of the Act requires us to update the 
conversion factor used to determine payment rates under the OPPS on an 
annual basis. Section 1833(t)(3)(C)(iv) of the Act provides that, for 
CY 2005, the update is equal to the hospital inpatient market basket 
percentage increase applicable to hospital discharges under section 
1886(b)(3)(B)(iii) of the Act.
    The forecast of the hospital market basket increase for FY 2005 
published in the IPPS proposed rule on May 18, 2004, is 3.3 percent (69 
FR 28374). To set the proposed OPPS conversion factor for CY 2005, we 
increased the CY 2004 conversion factor of $54.561, as specified in the 
November 7, 2003 final rule (68 FR 63459), by 3.3 percent.
    In accordance with section 1833(t)(9)(B) of the Act, we further 
adjusted the proposed conversion factor for CY 2004 to ensure that the 
revisions we are proposing to update by means of the wage index are 
made on a budget-neutral basis. We calculated a proposed budget 
neutrality factor of 1.001 for wage index changes by comparing total 
payments from our simulation model using the proposed FY 2005 IPPS wage 
index values to those payments using the current (FY 2004) IPPS wage 
index values. In addition, for CY 2005, allowed pass-through payments 
have decreased to 0.13 percent of total OPPS payments, down from 1.3 
percent in CY 2004. The proposed conversion factor is also adjusted by 
the difference in estimated pass-through payments of 1.17 percent.
    The proposed market basket increase update factor of 3.3 percent 
for CY 2005, the required wage index budget neutrality adjustment of 
approximately 1.001, and the 1.17 percent adjustment to the pass-
through estimate result in a proposed conversion factor for CY 2005 of 
$57.098.

IX. Proposed Wage Index Changes for CY 2005

[If you choose to comment on issues in this section, please include the 
caption ``Wage Index'' at the beginning of your comment.]
    Section 1833(t)(2)(D) of the Act requires the Secretary to 
determine a wage adjustment factor to adjust, for geographic wage 
differences, the portion of the OPPS payment rate and the copayment 
standardized amount attributable to labor and labor-related cost. This 
adjustment must be made in a budget neutral manner.
    As discussed in section III.B., of this preamble, we are proposing 
to standardize 60 percent of estimated costs (labor-related costs) for 
geographic area wage variation using the IPPS wage indices that are 
calculated prior to adjustments for reclassification to remove the 
effects of differences in area wage levels in determining the OPPS 
payment rate and the copayment standardized amount. The proposed IPPS 
pre-reclassified urban and rural wage indices for FY 2005 are reprinted 
in Addenda L and M of this proposed rule.
    In accordance with section 1886(d)(3)(E) of the Act, the IPPS wage 
index is updated annually. In this proposed rule, we are proposing to 
use the proposed corrected FY 2005 hospital IPPS wage index for urban 
areas published in the Federal Register on June 25, 2004 (69 FR 35919) 
and the proposed FY 2005 hospital IPPS wage index for rural areas 
published in the Federal Register on May 18, 2004 (69 FR 28580) to 
determine the wage adjustments for the OPPS payment rate and the 
copayment standardized amount for CY 2005. We note that the proposed FY 
2005 IPPS wage indices reflect a number of proposed changes as a result 
of the new OMB standards for defining geographic statistical areas, the 
proposed implementation of a occupational mix adjustment as part of the 
wage index, and new wage adjustments provided for under Pub. L. 108-
173. The following is a brief summary of the proposed changes in the FY 
2005 IPPS wage indices and any adjustments that we are proposing to 
apply to the OPPS for CY 2005. (We refer the reader to the May 18, 2004 
IPPS proposed rule (69 FR 28248) for a fuller discussion of the 
proposed changes to the wage indices.)
    A. The proposed use of the new Core Based Statistical Areas (CBSAs) 
issued by the Office of Management and Budget (OMB) as revised 
standards for designating geographical statistical areas based on the 
2000 Census data, to define labor market areas for hospitals for 
purposes of the IPPS wage index. The OMB revised standards were 
published in the Federal Register on December 27, 2000 (65 FR 82235), 
and OMB announced the new CBSAs on June 6, 2003, through an OMB 
bulletin. In the FY 2005 hospital IPPS proposed rule, for wage index 
purposes, we proposed to treat hospitals designated as rural under the 
new CBSA classification system that were previously located in an MSA 
as if they were located in their old MSA, and further proposed to 
maintain that MSA designation for determining a wage index for the next 
3 years. To be consistent, we are proposing to apply the same criterion 
to TEFRA hospitals paid under the OPPS but not under the IPPS and to 
maintain that MSA designation for determining a wage index for the next 
3 years. This proposed policy would impact six TEFRA providers for 
purposes of OPPS payment.
    B. The proposed incorporation of a blend of an occupational mix 
adjusted wage index into the unadjusted wage

[[Page 50542]]

index to reflect the effect of hospitals' employment choices of 
occupational categories to provide specific patient care.
    C. The reclassifications of hospitals to geographic areas for 
purposes of the wage index that were approved under the one-time appeal 
process for hospitals authorized under section 508 of Pub. L. 108-173 
(May 18, 2004 IPPS proposed rule (69 FR 28265 through 28266)).
    D. The proposed implementation of an adjustment to the wage index 
to reflect the ``out-migration'' of hospital employees who reside in 
one county but commute to work in a different county with a higher wage 
index, in accordance with section 505 of Pub. L. 108-173 (May 18, 2004 
IPPS proposed rule (69 FR 28266 through 28269). Hospitals paid under 
the IPPS located in the qualifying section 505 ``out-migration'' 
counties received a wage index increase. We are proposing to apply the 
same criterion to TEFRA hospitals paid under the OPPS but not paid 
under the IPPS. Therefore, TEFRA hospitals located in a qualifying 
section 505 county would also receive an increase to their wage index 
under OPPS. These additional hospitals are listed in Addendum K to this 
proposed rule with all IPPS hospitals receiving a wage index increase 
because they are located in a qualifying 505 county.
    The following proposed FY 2005 IPPS wage indices that were 
published in the May 18, 2004 Federal Register (69 FR 28195) or 
corrected in the June 25, 2004 Federal Register (69 FR 35919) are 
reprinted as Addenda in this OPPS proposed rule: Addendum H--Wage Index 
for Urban Areas; Addendum I--Wage Index for Rural Areas; Addendum J--
Wage Index for Hospitals That Are Reclassified; Addendum K--Wage Index 
Adjustment for Commuting Hospital Employees (Out-Migration) in 
Qualifying Counties; Addendum L--Pre-Reclassified Wage Index for Urban 
Areas; Addendum M--Pre-Reclassified Wage Index for Rural Areas; 
Addendum N--Hospital Reclassifications and Redesignations by Individual 
Hospital under Section 508 of Pub. L. 108-173. We are proposing to use 
these IPPS indices, as they are finalized by July 30, 2004, to adjust 
the payment rates and coinsurance amounts that we will publish in the 
OPPS final rule for CY 2005. Because the reclassification that results 
from implementation of section 508 of Pub. L. 108-173 is not subject to 
budget neutrality, we have not taken it into account in developing the 
OPPS budget neutrality estimates for CY 2005. However, the wage index 
increases that result from implementation of section 505 of Pub. L. 
108-173 are subject to budget neutrality. Therefore, we have included 
the wage index changes associated with section 505 of Pub. L. 108-173 
in calculating the OPPS budget neutrality estimates for CY 2005.

X. Determination of Proposed Payment Rates and Outlier Payments for CY 
2005

A. Calculation of the Proposed National Unadjusted Medicare Payment

[If you choose to comment on issues in this section, please indicate 
the caption ``Payment Rate for APCs'' at the beginning of your 
comment.]
    The basic methodology for determining prospective payment rates for 
OPD services under the OPPS is set forth in existing regulations at 
Sec. Sec.  419.31 and 419.32. The payment rate for services and 
procedures for which payment is made under the OPPS is the product of 
the conversion factor calculated in accordance with section VIII. of 
this proposed rule, and the relative weight determined under section 
III. of this proposed rule. Therefore, the national unadjusted payment 
rate for APCs contained in Addendum A to this proposed rule and for 
payable HCPCS codes in Addendum B to this proposed rule (Addendum B is 
provided as a convenience for readers) was calculated by multiplying 
the proposed CY 2005 scaled weight for the APC by the proposed CY 2005 
conversion factor.
    However, to determine the payment that would be made under the OPPS 
to a specific hospital for an APC for a service other than a drug, in a 
circumstance in which the multiple procedure discount does not apply, 
we take the following steps:
    Step 1. Calculate 60 percent (the labor-related portion) of the 
national unadjusted payment rate. Since initial implementation of the 
OPPS, we have used 60 percent to represent our estimate of that portion 
of costs attributable, on average, to labor. (See the April 7, 2000 
final rule with comment period (65 FR 18496 through 18497), for a 
detailed discussion of how we derived this percentage.)
    Step 2. Determine the wage index area in which the hospital is 
located and identify the wage index level that applies to the specific 
hospital. Addenda H, I, J, and L to this proposed rule, which reflect 
the new proposed geographic statistical areas as a result of revised 
OMB standards (urban and rural) to which hospitals would be assigned 
for FY 2005 under the IPPS and the reclassifications of hospitals under 
the one-time appeals process under section 508 of Pub. L. 108-173, 
contain the wage index values assigned to each area. The wage index 
values include the proposed occupational mix adjustment described in 
section IX. of this proposed rule that was developed for the IPPS.
    Step 3. Adjust the wage index of hospitals located in certain 
qualifying counties that have a relatively high percentage of hospital 
employees who reside in the county but who work in a different county 
with a higher wage index, in accordance with section 505 of Pub. L. 
108-173. Addendum K contains the qualifying counties and the proposed 
wage index increase developed for the IPPS.
    Step 4. Multiply the applicable wage index determined under Steps 2 
and 3 by the amount determined under Step 1 that represents the labor-
related portion of the national unadjusted payment rate.
    Step 5. Calculate 40 percent (the nonlabor-related portion) of the 
national unadjusted payment rate and add that amount to the resulting 
product of Step 4. The result is the wage index adjusted payment rate 
for the relevant wage index area.

B. Proposed Hospital Outpatient Outlier Payments

[If you choose to comment on issues in this section, please indicate 
the caption ``Outlier Payments'' at the beginning of your comment.]
    For OPPS services furnished between August 1, 2000, and April 1, 
2002, we calculated outlier payments in the aggregate for all OPPS 
services that appear on a bill in accordance with section 1833(t)(5)(D) 
of the Act. In the November 30, 2001 final rule (66 FR 59856 through 
59888), we specified that, beginning with CY 2002, we calculate outlier 
payments based on each individual OPPS service. We revised the 
aggregate method that we had used to calculate outlier payments and 
began to determine outlier payments on a service-by-service basis.
    As explained in the April 7, 2000 final rule with comment period 
(65 FR 18498), we set a target for outlier payments at 2.0 percent of 
total payments. For purposes of simulating payments to calculate 
outlier thresholds, we set the target for outlier payments at 2.0 
percent for CYs 2001, 2002, 2003, and 2004. For reasons discussed in 
the November 7, 2003 final rule with comment period (68 FR 63469), for 
CY 2004, we established a separate outlier threshold for CMHCs. For CY 
2004, the outlier threshold is met when costs of furnishing a service 
or procedure by a hospital exceed 2.6 times the APC payment amount or 
when

[[Page 50543]]

the cost of furnishing services by a CMHC exceeds 3.65 times the APC 
payment amount. The current outlier payment percentage is 50 percent of 
the amount of costs in excess of the threshold.
    For CY 2005, we are proposing to continue to set the target for 
outlier payments at 2.0 percent of total OPPS payments (a portion of 
that 2.0 percent, 0.6 percent, would be allocated to CMHCs for partial 
hospitalization program (PHP) services).
    Outlier payments are intended to ensure beneficiary access to 
services by having the Medicare program share in the financial loss 
incurred by a provider associated with individual, extraordinarily 
expensive cases. They are not intended to pay hospitals additional 
amounts for specific services on a routine basis. In its March 2004 
Report, MedPAC found that 50 percent of OPPS outlier payments in CY 
2004 were for 21 fairly common services that had relatively low APC 
payment rates, such as plain film x-rays and pathology services. We are 
concerned by the MedPAC findings which indicate that a significant 
portion of outlier payments are being made for high volume, lower cost 
services rather than for unusually high cost services, contrary to the 
intent of an outlier policy. (A full discussion of the 2004 MedPAC 
recommendations related to the OPPS and the CMS response to those 
recommendations can be found in section XII. of this preamble.)
     In light of the MedPAC findings, we are proposing to change the 
standard we have used to qualify a service for outlier payments since 
the OPPS was originally implemented. That is, in addition to the 
outlier threshold we have applied since the beginning of the OPPS, 
which requires that a hospital's cost for a service exceed the APC 
payment rate for that service by a specified multiple of the APC 
payment rate, we are proposing to add a fixed dollar threshold that 
would have to be met in order for a service to qualify for an outlier 
payment. Section 1833(t)(5)(A) of the Act gives the Secretary the 
authority to impose a fixed dollar threshold in addition to an APC 
multiplier threshold. By imposing a dollar threshold, we expect to 
redirect outlier payments from lower cost, relatively simple procedures 
to more complex, expensive procedures for which the costs associated 
with individual cases could be exceptionally high and for which 
hospitals have a financial risk would be at greater risk financially.
    In this proposed rule, we are proposing to require that, in order 
to qualify for an outlier payment, the cost of a service must exceed 
1.5 times the APC payment rate and the cost must also exceed the sum of 
the APC rate plus a $625 fixed dollar threshold. Based upon our review 
of the data, a threshold of $625 better meets our 2.0 percent targets. 
When the cost of a hospital outpatient service exceeds these 
thresholds, we would pay 50 percent of the amount by which the cost of 
furnishing the service exceeds 1.5 times the APC payment rate (the APC 
multiple) as an outlier payment.
    We are proposing to set the dollar threshold at a level that would, 
for all intents and purposes, exclude outliers for a number of lower 
cost services. For example, under the CY 2004 methodology a service 
mapped to an APC with a payment rate of $20 would only have to exceed 
$52 (2.6 x APC payment amount) in order to qualify for an outlier 
payment. Our proposed policy for CY 2005 with the additional fixed 
dollar threshold would require that the service in this example exceed 
$645 in order to qualify for an outlier payment. That is, the cost of 
the service would have to exceed both 1.5 times the APC payment rate, 
or $30, and $645 ($20 + $625).
    The proposed dollar threshold would also enable us to lower the APC 
multiplier portion of the total outlier threshold from 2.6 to 1.5. We 
have chosen a multiple of 1.5 because this continues to recognize some 
variability relative to APC payment implicit in the current statute, 
but limits its impact in determining outlier payments. Under the 
proposed changes to the outlier methodology, it would also be easier 
for the higher cost cases of a complex, expensive procedure or service 
to qualify for outlier payments because the $625 threshold is a small 
portion of the total payment rate for high cost services. For example, 
under the CY 2004 methodology, a service mapped to an APC with a 
payment rate of $20,000 would have to exceed $52,000 in order to 
qualify for an outlier payment but, as proposed for CY 2005, would have 
to exceed only $30,000. That is, the cost of the service would have to 
exceed both 1.5 times the APC payment rate, or $30,000, and $20,625 
($20,000 + $625). Further, outlier payments for unusually expensive 
cases would be higher because the APC multiplier for outlier payment 
would decrease from 2.6 to 1.5 times the APC payment rate.
    As discussed in the following section pertaining to Proposed 
Payment for Partial Hospitalization services, we are proposing to set 
the APC multiplier outlier threshold for CMHCs for CY 2005 at 3.35 
times the APC payment amount and the CY 2005 outlier payment percentage 
applicable to costs in excess of the threshold at 50 percent.

C. Proposed Payment for Partial Hospitalization

 [If you choose to comment on issues in this section, please indicate 
the caption ``Partial Hospitalization'' at the beginning of your 
comment.]
 1. Background
    Partial hospitalization is an intensive outpatient program of 
psychiatric services provided to patients as an alternative to 
inpatient psychiatric care for beneficiaries who have an acute mental 
illness. A partial hospitalization program (PHP) may be provided by a 
hospital to its outpatients or by a Medicare-certified CMHC. Section 
1833(t)(1)(B)(i) of the Act provides the Secretary with the authority 
to designate the hospital outpatient services to be covered under the 
OPPS. Section 419.21(c) of the Medicare regulations that implement this 
provision specifies that payments under the OPPS will be made for 
partial hospitalization services furnished by CMHCs. Section 
1883(t)(2)(C) of the Act requires that we establish relative payment 
weights based on median (or mean, at the election of the Secretary) 
hospital costs determined by 1996 claims data and data from the most 
recent available cost reports. Payment to providers under the OPPS for 
PHPs represents the provider's overhead costs associated with the 
program. Because a day of care is the unit that defines the structure 
and scheduling of partial hospitalization services, we established a 
per diem payment methodology for the PHP APC, effective for services 
furnished on or after August 1, 2000. For a detailed discussion, see 
the April 7, 2000 OPPS final rule (65 FR 18452).
2. Proposed PHP APC Update for CY 2005
    For calculation of the proposed CY 2005 per diem payment, we used 
the same methodology that was used to compute the CY 2004 per diem 
payment. For CY 2004, the per diem amount was based on three quarters 
of hospital and CMHC PHP claims data (for services furnished from April 
1, 2002, through December 31, 2002). We used data from all hospital 
bills reporting condition code 41, which identifies the claim as 
partial hospitalization, and all bills from CMHCs because CMHCs are 
Medicare providers only for the purpose of providing partial 
hospitalization services. We used cost-to-charge ratios from the most 
recently available hospital and CMHC cost reports to

[[Page 50544]]

convert each provider's line item charges as reported on bills, to 
estimate the provider's cost for a day of PHP services. Per diem costs 
are then computed by summing the line item costs on each bill and 
dividing by the number of days on the bill.
    Unlike hospitals, CMHCs do not file cost reports electronically and 
the cost report information is not included in the Healthcare Cost 
Report Information System (HCRIS). The CMHC cost reports are held by 
the Medicare fiscal intermediaries. In a Program Memorandum issued on 
January 17, 2003 (Transmittal A-03-004), we directed fiscal 
intermediaries to recalculate hospital and CMHC cost-to-charge ratios 
using the most recently settled cost reports by April 30, 2003. 
Following the initial update of cost-to-charge ratios, fiscal 
intermediaries were further instructed to continue to update a 
provider's cost-to-charge ratio and enter revised cost-to-charge ratios 
into the outpatient provider specific file. Therefore, for CMHCs, we 
use cost-to-charge ratios from the outpatient provider specific file. 
For CY 2005, we analyzed 12 months of data for hospital and CMHC PHP 
claims for services furnished between January 1, 2003, and December 31, 
2003. Updated cost-to-charge ratios reduced the median cost per day for 
CMHCs. The revised medians are $313 for CMHCs and $213 for hospitals. 
Combining these files results in a median per diem PHP cost of $297. As 
with all APCs in the OPPS, the median cost for each APC is scaled to be 
relative to a mid-level office visit and the conversion factor is 
applied. We are proposing the resulting APC amount for PHP of $292.19 
for CY 2005, of which $58.44 is the beneficiary's coinsurance.
3. Separate Threshold for Outlier Payments to CMHCs
    In the November 7, 2003 final rule with comment period (68 FR 
63469), we indicated that, given the difference in PHP charges between 
hospitals and CMHCs, we did not believe it was appropriate to make 
outlier payments to CMHCs using the outlier percentage target amount 
and threshold established for hospitals. There was a significant 
difference in the amount of outlier payments made to hospitals and 
CMHCs for PHP. Further analysis indicated the use of outlier payments 
was contrary to the intent of the outlier policy as discussed 
previously in section X.B. above. Therefore, for CY 2004, we 
established a separate outlier threshold for CMHCs. We designated a 
portion of the estimated 2.0 percent outlier target amount specifically 
for CMHCs, consistent with the percentage of projected payments to 
CMHCs under the OPPS in CY 2004, excluding outlier payments.
    As stated in the November 7, 2003 final rule with comment period, 
CMHCs were projected to receive 0.5 percent of the estimated total OPPS 
payments in CY 2004. The CY 2004 outlier threshold is met when the cost 
of furnishing services by a CMHC exceeds 3.65 times the APC payment 
amount. The current outlier payment percentage is 50 percent of the 
amount of costs in excess of the threshold.
    CMS and the Office of the Inspector General are continuing to 
monitor the excessive outlier payments to CMHCs. However, we do not yet 
have CY 2004 claims data that will show the effect of the separate 
outlier threshold for CMHCs that was effective January 1, 2004. 
Therefore, for CY 2005, as discussed in section X.B. of this preamble, 
we are proposing to continue to set the target for hospital outpatient 
outlier payments at 2.0 percent of total OPPS payments. We are 
proposing that a portion of that 2.0 percent, 0.6 percent, would be 
allocated to CMHCs for PHP services. We propose 0.6 percent for CMHCs 
because the percentage of CMHC's payment to total OPPS payment rose 
slightly in the CY 2003 claims data. In the absence of CY 2004 claims 
data, we developed simulations for CY 2005. As discussed in section 
X.B. of this preamble, we are proposing a dollar threshold in addition 
to an APC multiplier threshold for hospital OPPS outlier payments. 
However, because PHP is the only APC for which CMHCs may receive 
payment under the OPPS, we would not expect to redirect outlier 
payments by imposing a dollar threshold. Therefore, we are not 
proposing a dollar threshold for CMHC outliers. We are proposing to set 
the outlier threshold for CMHCs for CY 2005 at 3.35 percent times the 
APC payment amount and the CY 2005 outlier payment percentage 
applicable to costs in excess of the threshold at 50 percent.

XI. Proposed Beneficiary Copayments for CY 2005

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

A. Background

    Section 1833(t)(3)(B) of the Act requires the Secretary to set 
rules for determining copayment amounts to be paid by beneficiaries for 
covered OPD services. Section 1833(t)(8)(C)(ii) of the Act specifies 
that the Secretary must reduce the national unadjusted copayment amount 
for a covered OPD service (or group of such services) furnished in a 
year in a manner so that the effective copayment rate (determined on a 
national unadjusted basis) for that service in the year does not exceed 
specified percentages. For all services paid under the OPPS in CY 2005, 
the specified percentage is 45 percent of the APC payment rate. Section 
1833(t)(3)(B)(ii) of the Act provides that, for a covered OPD service 
(or group of such services) furnished in a year, the national 
unadjusted coinsurance amount cannot be less than 20 percent of the OPD 
fee schedule amount.

B. Proposed Copayment for CY 2005

    For CY 2005, we determined copayment amounts for new and revised 
APCs using the same methodology that we implemented for CY 2004 (see 
the November 7, 2003 final rule 68 FR 63458). The unadjusted copayment 
amounts for services payable under the OPPS effective January 1, 2005 
are shown in Addendum A and Addendum B.

XII. MedPAC Recommendations

    The Medicare Payment Advisory Commission (MedPAC) in its March 2004 
Report to the Congress: ``Medicare Payment Policy,'' made two 
recommendations relating to the OPPS. This section provides responses 
to those recommendations.
    Recommendation 3A-2: The Congress should increase payment rates for 
the OPPS by the projected rate of increase in the hospital market 
basket index for CY 2005.
    Response: Section 1833(t)(3)(C)(ii) of the Act requires the 
Secretary to update the conversion factor used to determine payment 
rates under the OPPS on an annual basis. Section 1833(t)(3)(C)(iv) of 
the Act provides that, for CY 2005, the update is equal to the hospital 
inpatient market basket percentage applicable under section 1886(b)(3) 
of the Act to hospital discharges. The forecast of the hospital market 
basket increase for FY 2005 published in the IPPS proposed rule on May 
18, 2004, is 3.3 percent (69 FR 63459). Therefore, in accordance with 
this statutory requirement, we are proposing to update the OPPS 
conversation factor for CY 2005 by 3.3 percent as discussed in section 
VIII. of this preamble.
    Recommendation 3A-3: The Congress should eliminate the outlier 
policy under the outpatient PPS.
    Response: We have carefully reviewed the MedPAC report regarding 
this recommendation and are concerned by

[[Page 50545]]

its findings which indicate that a significant portion of outlier 
payments are being made for high volume, lower cost services rather 
than for unusually high cost services, contrary to the intent of an 
outlier policy. While it is evident that the OPPS outlier payments 
cannot be discontinued by us without a legislative change by Congress, 
we believe that the MedPAC findings warrant a change in our standard 
for qualifying a hospital outpatient service for an outlier payment. 
Therefore, in light of the MedPAC findings we are proposing to change 
the standard we have used to qualify a service for an outlier payment 
since initial implementation of the OPPS. As discussed in section X.B. 
of this preamble, we are proposing to add a fixed dollar threshold 
requirement to the current threshold, which requires that a hospital's 
cost for a service exceed the APC payment rate for that service by a 
specified multiple in order to qualify for an outlier payment. That is, 
we are proposing to require, that in order to qualify for an outlier 
payment, the cost of a service must exceed 1.5 times the APC payment 
rate and the cost must also exceed the sum of the APC rate plus a $625 
fixed dollar threshold. By imposing a dollar threshold in addition to 
an APC multiplier threshold, we expect to redirect outlier payments 
from lower cost and relatively simple procedures to more complex, 
expensive procedures for which the costs associated with individual 
cases could be exceptionally high.
    We are not proposing to apply the fixed dollar threshold to CMHCs 
because partial hospitalization services are the only APC service for 
which CMHCs can receive payment under the OPPS, and we would not expect 
to redirect outlier payment by imposing a dollar threshold.

XIII. Addenda Files Available to the Public Via Internet

    The data referenced for Addenda C and G to this proposed rule are 
available on the following CMS Web site via Internet only: http://www.cms.hhs.gov/providers/hopps/. We are not republishing the data 
represented in these two Addenda to this proposed rule because of their 
volume. For additional assistance, contact Chris Smith-Ritter at (410) 
786-0378. Addendum C--Healthcare Common Procedure Coding System (HCPCS) 
Codes by Ambulatory Payment Classification (APC.)
    This file contains the HCPCS codes sorted by the APCs into which 
they are assigned for payment under the OPPS. The file also includes 
the APC status indicators, relative weights, and OPPS payment amounts.

XIV. Collection of Information Requirements

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

Section 410.16 Initial preventive physical examination.
    Proposed new section 410.16 would require, for the furnishing of 
education, counseling and referral services as part of an initial 
preventive physical examination, a written plan for obtaining the 
appropriate screening and other preventive services which are also 
covered as separate Medicare B Part services.
    The burden associated with this requirement is the time required of 
the physician or practitioner to provide beneficiaries with education, 
counseling, and referral services and to develop and provide a written 
plan for obtaining screening and other preventive services.
    While these requirements are subject to the PRA, the burden 
associated with these requirements is currently captured and discussed 
in the ``Revisions to Payment Policies Under the Physician Fee Schedule 
for CY 2005'' (CMS-1429-P). This section mirrors that proposed rule for 
convenience purposes.
    We have submitted a copy of this proposed rule to OMB for its 
review of the information collection requirements described above. 
These requirements are not effective until they have been approved by 
OMB.
    If you comment on any of these information collection and record 
keeping requirements, please mail copies directly to the following:

Centers for Medicare & Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Regulations Development and 
Issuances Group, Attn: John Burke, CMS-1427-P, Room C5-14-03, 7500 
Security Boulevard, Baltimore, MD 21244-1850; and
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: Christopher Martin, CMS Desk Officer

    Comments submitted to OMB may also be e-mailed to the following 
address: e-mail: [email protected], or faxed to OMB at 
(202) 395-6974.

XV. Response to Public Comments

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

XVI. Regulatory Impact Analysis

A. OPPS: General

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132.
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely reassigns responsibility of duties) directs agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year).
    We estimate the effects of the provisions that would be implemented 
by this proposed rule would result in expenditures exceeding $100 
million in any 1 year. We estimate the total increase (from changes in 
the proposed rule as well as enrollment, utilization,

[[Page 50546]]

and case mix changes) in expenditures under the OPPS for CY 2005 
compared to CY 2004 to be approximately $1.5 billion. Therefore, this 
proposed rule is an economically significant rule under Executive Order 
12866, and a major rule under 5 U.S.C. 804(2).
    The RFA requires agencies to determine whether a rule would have a 
significant economic impact on a substantial number of small entities. 
For purposes of the RFA, small entities include small businesses, 
nonprofit organizations, and government agencies. Most hospitals and 
most other providers and suppliers are small entities, either by 
nonprofit status or by having revenues of $6 million to $29 million in 
any 1 year (see 65 FR 69432).
    For purposes of the RFA, we have determined that approximately 37 
percent of hospitals would be considered small entities according to 
the Small Business Administration (SBA) size standards. We do not have 
data available to calculate the percentages of entities in the 
pharmaceutical preparation manufacturing, biological products, or 
medical instrument industries that would be considered to be small 
entities according to the SBA size standards. For the pharmaceutical 
preparation manufacturing industry (NAICS 325412), the size standard is 
750 or fewer employees and $67.6 billion in annual sales (1997 business 
census). For biological products (except diagnostic) (NAICS 325414), 
with $5.7 billion in annual sales, and medical instruments (NAICS 
339112), with $18.5 billion in annual sales, the standard is 50 or 
fewer employees (see the standards website at http://www.sba.gov/regulations/siccodes/). Individuals and States are not included in the 
definition of a small entity.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 603 of the RFA. With 
the exception of hospitals located in certain New England counties, for 
purposes of section 1102(b) of the Act, we previously defined a small 
rural hospital as a hospital with fewer than 100 beds that is located 
outside of a Metropolitan Statistical Area (MSA) (or New England County 
Metropolitan Area (NECMA)). However, under the new labor market 
definitions that we are proposing to adopt, we no longer employ NECMAs 
to define urban areas in New England. Therefore, we now define a small 
rural hospital as a hospital with fewer than 100 beds that is located 
outside of an MSA. Section 601(g) of the Social Security Amendments of 
1983 (Pub. L. 98-21) designated hospitals in certain New England 
counties as belonging to the adjacent NECMA. Thus, for purposes of the 
OPPS, we classify these hospitals as urban hospitals. We believe that 
the changes in this proposed rule would affect both a substantial 
number of rural hospitals as well as other classes of hospitals and 
that the effects on some may be significant. Therefore, we conclude 
that this proposed rule would have a significant impact on a 
substantial number of small entities.
Unfunded Mandates
    Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4) also requires that agencies assess anticipated costs and 
benefits before issuing any rule that may result in an expenditure in 
any 1 year by State, local, or tribal governments, in the aggregate, or 
by the private sector, of $110 million. This proposed rule would not 
mandate any requirements for State, local, or tribal governments. This 
proposed rule would not impose unfunded mandates on the private sector 
of more than $110 million dollars.
Federalism
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it publishes a proposed rule (and subsequent 
final rule) that imposes substantial direct costs on State and local 
governments, preempts State law, or otherwise has Federalism 
implications.
    We have examined this proposed rule in accordance with Executive 
Order 13132, Federalism, and have determined that it would not have an 
impact on the rights, roles, and responsibilities of State, local or 
tribal governments. The impact analysis (see Table 37) shows that 
payments to governmental hospitals (including State, local, and tribal 
governmental hospitals) would increase by 4.3 percent under the 
proposed rule.

B. Impact of Proposed Changes in This Proposed Rule

    We are proposing several changes to the OPPS that are required by 
the statute. We are required under section 1833(t)(3)(C)(ii) of the Act 
to update annually the conversion factor used to determine the APC 
payment rates. We are also required under section 1833(t)(9)(A) of the 
Act to revise, not less often than annually, the wage index and other 
adjustments. In addition, we must review the clinical integrity of 
payment groups and weights at least annually. Accordingly, in this 
proposed rule, we are proposing to update the conversion factor and the 
wage index adjustment for hospital outpatient services furnished 
beginning January 1, 2005 as we discuss in sections VIII. and IX., 
respectively, of this proposed rule. We are also proposing to revise 
the relative APC payment weights using claims data from January 1, 2003 
through December 31, 2003. Finally, we are proposing to remove 6 
devices and 12 drugs and biological agents from pass-through payment 
status. In particular, see section V.A.2 with regard to the expiration 
of pass-through status for devices and see section IV.A.2 with regard 
to the expiration of pass-through status for drugs and biological 
agents.
    Under this proposed rule, the update change to the conversion 
factor as provided by statute as well as the additional money for the 
OPPS payments in CY 2005 as authorized by Pub. L. 108-173, including 
money for drugs and increases in the wage index adjustment, would 
increase total OPPS payments by 4.6 percent in CY 2005. The changes to 
the wage index and to the APC weights (which incorporate the cessation 
of pass-through payments for several drugs and devices) would not 
increase OPPS payments because the OPPS is budget neutral. However, the 
wage index and APC weight changes would change the distribution of 
payments within the budget neutral system as shown in Table 37 and 
described in more detail in this section.

C. Alternatives Considered

    Alternatives to the changes we are making and the reasons that we 
have chosen the options we have are discussed throughout this proposed 
rule. Some of the major issues discussed in this proposed rule and 
options that affect our policies are discussed below.

Payment for Device-Dependent APCs

    We package payment for an implantable device into the APC payment 
for the procedure performed to insert the device. Because almost all 
devices lost pass-through status at the end of CY 2002, we discontinued 
use of separate codes to report devices in CY 2003. We have found that 
claims that we use to set payment rates for device-dependent APCs 
frequently have packaged costs that are much lower than the cost of the 
device. This is attributed, in part, to variations in hospital billing 
practices. In response, we reestablished device codes for reporting on 
a voluntary basis in CY 2004.
    The APC Panel recommended that we use CY 2004 device-dependent APC

[[Page 50547]]

rates updated for inflation as the CY 2005 payments. We considered this 
option but did not adopt it because it would not recognize changes in 
relative cost for these APCs and would not advance us towards our goal 
of using unadjusted claims data as the basis for payment weights for 
all OPPS services.
    In addition to consideration of the APC Panel's recommendation, we 
considered using CY 2002 claims to calculate a ratio between the median 
calculated using all single bills and the median calculated using only 
claims with HCPCS codes for devices on them, and applying that ratio to 
the median calculated using CY 2003 claims data. We rejected this 
option because it assumes that the relationship between the costs of 
the claims with and without codes for devices is a valid relationship 
not only for CY 2002 but CY 2003 as well. It also assumes no changes in 
billing behavior. We have no reason to believe either of these 
assumptions is true and, therefore, we did not choose this option.
    We do not believe that any of the above options would help us 
progress toward reliance on our data. Rather than adoption of any of 
those approaches, we developed an option to adjust the payment for only 
those device-dependent APCs that have the most dramatic decreases for 
CY 2005. We believe that the better payment approach for determining 
median costs for device-dependent APCs in CY 2005 would be to base 
these medians on the greater of (1) median costs calculated using CY 
2003 claims data, or (2) 90 percent of the APC payment median used in 
CY 2004 for these services. We believe that this proposed adjustment 
methodology provides an appropriate transition to eventual use of all 
single bill claims data without adjustment.
    We are also proposing to use ``C'' codes to bill for the device-
dependent procedures for which we adjusted the medians for CY 2005 as 
well as for a few APCs that require devices that are coming off pass-
through payment in CY 2005 (a continuation of current billing 
practice). We believe that adoption of our proposal will mitigate 
barriers to beneficiary access to care while encouraging hospitals to 
bill correctly for the services they furnish. For a more detailed 
discussion of this issue, see section III. of the preamble.

Proposed Hospital Outpatient Outlier Payments

    In its March 2004 Report, MedPAC made a recommendation to the 
Congress to eliminate the outlier provision under the OPPS. MedPAC made 
its recommendation after studying outlier payments on claims for 
services furnished during CY 2002 and concluding that in 2002, 50 
percent of outlier payments were paid for 21 fairly common services 
that had relatively low APC payment rates, while high cost services 
accounted for only a small share of outlier payments. However, outlier 
payments are required under the statute; therefore, we cannot 
discontinue outlier payments absent a legislative change by the 
Congress.
    In light of the MedPAC findings, we are proposing a change to the 
threshold we use for qualifying a service for outlier payments to add a 
fixed dollar threshold in addition to the threshold based on a multiple 
of the APC amount that we have applied since the beginning of the OPPS. 
For a more detailed discussion of this issue, see section X. of the 
preamble.

D. Limitations of Our Analysis

    The distributional impacts represent the projected effects of the 
policy changes, as well as the statutory changes that would be 
effective for CY 2005 on various hospital groups. We estimate the 
effects of individual policy changes by estimating payments per service 
while holding all other payment policies constant. We use the best data 
available but do not attempt to predict behavioral responses to our 
policy changes. In addition, we are not proposing to make adjustments 
for future changes in variables such as service volume, service mix, or 
number of encounters. As we have done in previous proposed rules, we 
are soliciting comments and information about the anticipated effects 
of these proposed changes on hospitals and our methodology for 
estimating them.

E. Estimated Impacts of This Proposed Rule on Hospitals

    The OPPS is a budget neutral payment system under which the 
increase to the total payments made under OPPS is limited by the 
increase to the conversion factor set under the methodology in the 
statute. The enactment of Pub. L. 108-173 on December 8, 2003, provided 
for the payment of additional dollars in 2005 to providers of OPPS 
services outside of the budget neutrality requirements for both 
specified covered outpatient drugs (see section V.A.3.a. of the 
preamble to this rule) and the wage indexes for specific hospitals 
through reclassification reform in section 508 of Pub. L. 108-173 (see 
section IX. of the preamble to this rule). Table 38 shows the estimated 
redistribution of hospital payments among providers as a result of a 
new APC structure and wage index, which are budget neutral; the 
estimated distribution of increased payments in CY 2005 resulting from 
the combined impact of APC recalibration and wage effects, and market 
basket update to the conversion factor; and estimated payments 
considering all proposed changes for CY 2005. In some cases, specific 
hospitals may receive more total payment in CY 2005 than in CY 2004 
while in other cases they may receive less total payment than they 
received in CY 2004. However, our impact analysis suggests that no 
class of hospitals would receive less total payments in CY 2005 than in 
CY 2004. Because updates to the conversion factor, including the market 
basket and any reintroduction of pass-through dollars, are applied 
uniformly, the extent to which this proposed rule redistributes money 
would largely depend on the mix of services furnished by a hospital 
(for example, how the APCs for the hospital's most frequently furnished 
services would change) and the impact of the wage index changes on the 
hospital.
    Overall, the proposed OPPS rates for CY 2005 would have a positive 
effect for every category of hospital. Proposed changes will result in 
a 4.6 percent increase in Medicare payments, to all hospitals, 
exclusive of outlier and transitional pass-through payments. As 
described in the preamble, budget neutrality adjustments are made to 
the conversion factor and the relative weights to ensure that the 
revisions in the wage index, APC groups, and relative weights do not 
affect aggregate payments. The impact of the wage and APC recalibration 
changes are moderate across hospital groups.
    To illustrate the impact of the proposed CY 2005 changes, our 
analysis begins with a baseline simulation model that uses the final CY 
2004 weights, the FY 2004 final post-reclassification wage index 
without increases resulting from section 508 reclassifications, and the 
final CY 2004 conversion factor. Columns 2 and 3 in Table 38 reflect 
the independent effects of the changes in the APC reclassification and 
recalibration changes and the wage index, respectively. These effects 
are budget neutral, which is apparent in the overall zero impact in 
payment for all hospitals. Column 2 shows the independent effect of 
changes resulting from the reclassification of HCPCS codes among APC 
groups and the recalibration of APC weights based on a complete year of 
2003 hospital OPPS claims data. We modeled the independent effect of 
APC recalibration by varying only the weights, final CY 2004 weights 
versus proposed CY 2005

[[Page 50548]]

weights, in our baseline model, and calculating the percent difference 
in payments. Column 3 shows the impact of updating the wage index used 
to calculate payment by applying the FY 2005 hospital inpatient wage 
index. In addition to new wage data, the new inpatient hospital wage 
index uses the Core Based Statistical Area (CBSA) system as the basis 
for geographic adjustment for wages, rather than the Metropolitan 
Statistical Areas (MSA) designations used previously. The CY 2005 
proposed OPPS wage index also includes the new adjustment for 
occupational mix, the reclassifications of hospitals to geographic 
areas by the Medicare Geographic Classification Review Board, and the 
increased payment authorized by section 505 of Pub. L. 108-173 for out-
migration. However, the proposed OPPS wage index does not include wage 
increases due to reclassification of hospitals through section 508 of 
Pub. L. 108-173. We modeled the independent effect of introducing a new 
wage index by varying only the wage index between years, using CY 2004 
weights, and a CY 2004 conversion factor that included a budget 
neutrality adjustment.
    Column 4 demonstrates the combined ``budget neutral'' impact of APC 
recalibration and wage index updates on various classes of hospitals, 
as well as the impact of updating the conversion factor with the market 
basket. We modeled the independent effect of budget neutrality 
adjustments and the market basket update by using the weights and wage 
index for each year, and using a CY 2004 conversion factor that 
included a budget neutrality adjustment for differences in wages and 
the market basket increase. Finally, the remaining column depicts the 
full impact of proposed CY 2005 policy on each hospital group by 
including the effect of all the changes for CY 2005. Column 5 shows not 
only the combined budget neutral effects of APC and wage updates, and 
the market basket update, but it also shows the effects of additional 
monies added to the OPPS as a result of Pub. L. 108-173 and pass-
through money returned to the conversion factor from CY 2004. We 
modeled the independent effect of all changes using the final weights 
for CY 2004 and CY 2005 with additional money for drugs authorized by 
section 621 of Pub. L. 108-173, final wage indexes including wage index 
increases for hospitals eligible for reclassification under section 508 
of Pub. L.108-173 and the CY 2005 proposed conversion factor of 
$57.098.
Column 1: Total Number of Hospitals
    Column 1 in Table 38 shows the total number of hospital providers, 
4,821, for which we were able to use CY 2003 hospital outpatient claims 
to model CY 2004 and CY 2005 payments by category. We excluded all 
hospitals for which we could not accurately estimate CY 2004 or CY 2005 
payment and entities that are not paid under the OPPS. The latter 
include critical access hospitals, all-inclusive hospitals, and 
hospitals located in Guam, the U.S. Virgin Islands, and the State of 
Maryland. This process is discussed in greater detail in section III.B 
of the preamble. In prior years, we displayed non-TEFRA hospitals paid 
under PPS separately from TEFRA hospitals in our impact and outlier 
tables. The distinction between TEFRA and non-TEFRA holds little value 
for OPPS as all hospitals are treated equally under the OPPS payment 
system. Therefore, for this proposed rule we did not include TEFRA 
hospitals as a distinct hospital category in Table 38. Finally, of the 
hospitals displayed in Table 38 and Table 39, it is important to note 
that section 1833(t)(7)(D) of the Act holds harmless cancer hospitals, 
children's hospitals, small rural hospitals with less than 100 beds, 
and sole community hospitals. These hospitals cannot receive less 
payment in CY 2005 than they did in the CY 2004.
Column 2: APC Recalibration
    The APC reclassification and recalibration changes tend to favor 
rural hospitals especially those characterized as small, although the 
overall redistribution impact is modest. Rural hospitals show a 0.9 
percent increase. Specifically, rural hospitals with 0 to 49 beds 
experience an increase of 1 percent, rural hospitals with 50 to 100 
beds show a 1.4 percent increase and rural hospitals with 101 to 149 
beds show a 0.9 percent increase attributable to the APC recalibration. 
Rural hospitals also show overall increases by region, with the East 
North Central and East South Central regions benefiting by 1.3 percent 
and the Mountain region gaining 2.3 percent. Further, sole community 
hospitals experience an increase of 0.9 percent.
    Urban hospitals show, on an average, a 0.2 percent decrease. This 
decrease is concentrated in ``other'' urban hospitals, which experience 
a decline of 0.4 percent. Urban hospitals with greater than 300 beds 
show decreases, and the largest urban hospitals with bed size greater 
than 500 report a decrease of 2.0 percent. The smallest urban hospitals 
report a positive 1.1 percent increase, and urban hospitals with 200 to 
299 beds show an increase of 0.1 percent. Urban hospitals also 
demonstrate overall decreases by region, with South Atlantic hospitals 
losing 1.2 percent and West South Central hospitals losing 0.5 percent 
attributable to APC recalibration.
    The largest observed impacts among other hospital classes resulting 
from APC recalibration include declines of 2 percent for major teaching 
hospitals and 2.2 percent for hospitals without a valid low-income 
indicator, most of which are TEFRA hospitals. Hospitals treating more 
low-income patients also demonstrate declines as high as 1.3 percent. 
In these tables, cancer and children's hospitals also demonstrate 
declines of 2.3 and 2.4 percent, respectively. However, these hospitals 
are ``held harmless'' by section 1833(t)(7)(D)(ii) of the Act.
    In general, APC changes effect the distribution of hospital 
payments by increasing payments to small rural hospitals while 
decreasing those made to large urban hospitals, including major 
teaching hospitals and those serving low-income patients.
Column 3: Wage Effect
    Changes introduced by the new wage index had a very modest impact, 
with the majority of these marginal declines located in rural 
hospitals. Overall, urban hospitals experience no change and rural 
hospitals experience a decrease of 0.2 percent. This pattern is evident 
in all of the urban and rural comparisons. Low-volume urban hospitals 
with fewer than 5000 services and urban hospitals in the West South 
Central region show the largest percentage increases, 0.7 and 0.8 
respectively, attributable to wage index changes.
    Specifically, rural hospitals show modest decreases for most bed 
sizes but show the largest losses for categories with greater than 149 
beds where the wage index change results in a 0.4 percent decrease for 
the largest rural hospitals. Hospitals located in the New England and 
Middle Atlantic regions show a negative impact due to wage index 
changes regardless of urban or rural designation. Rural hospitals in 
the South Atlantic region decrease by 0.6 percent. As noted previously, 
rural hospitals with 100 or fewer beds and sole community hospitals are 
``held harmless'' and earn, at least, the same amount as they earned in 
CY 2004.
    Rural hospitals providing a low volume of services, 10,999 or fewer 
services, are also estimated to experience modest declines, and rural 
hospitals providing a high volume of services, greater than 42,999 
services,

[[Page 50549]]

also face a decline of 0.6 percent. This same pattern continues for 
rural hospitals in half of the regions with the New England region 
experiencing the largest decline of 1.3 percent.
    Looking across other categories of hospitals, major teaching 
hospitals are estimated to lose 0.3 percent. Hospitals not serving low-
income patients lose 0.8 percent, and, among hospitals serving low-
income patients, those serving a high percentage of low-income patients 
also experience a decline. Hospitals for which DSH is not available, 
mostly TEFRA hospitals, lose 0.3 percent.
Column 4: Budget Neutrality and Market Basket Update
    In general, the market basket update lessens the overall impact of 
the budget neutrality adjustments made in columns 2 and 3. As column 4 
demonstrates, with the addition of the market basket update, we do not 
expect any class of hospital providers to experience an overall 
negative impact as a result of the proposed changes to OPPS for CY 
2005. Further, the redistributions created by APC recalibration tend to 
offset those observed with the introduction of the new wage index. For 
example, rural hospitals may gain 0.9 percent from the APC changes but 
lose 0.2 percent as a result of changes to the wage index. Overall, the 
budget neutrality adjustments and the introduction of the market basket 
may result in a projected increase of 4.1 percent for rural hospitals. 
Urban hospitals show a decrease of 0.2 percent resulting from APC 
recalibration and no change as a result of the new wage index, leading 
to an update in column 4 of 3.1 percent.
    However, for several classes of hospitals, positive or neutral wage 
effects do not offset the impact of APC recalibration resulting in 
lower update amounts. Specifically, major teaching hospitals may only 
gain 0.9 with the update factor. Urban hospitals with more than 500 
beds show a gain of 1.2 percent because the impact of APC recalibration 
was a 2 percent decline. Hospitals serving a medium level of low-income 
patients, between 0.16 and 0.23 percent, may experience an update of 
only 1.9 percent.
    A handful of hospital providers may experience much lower and 
higher update amounts because the combined impact of the budget 
neutrality adjustments for the APC recalibration and the new wage index 
are reinforcing. Specifically, low volume rural hospitals show an 
update of 2.4 percent. Cancer hospitals show an update of only 0.2 
percent and children's hospitals, of only 1.3 percent. But as noted 
earlier, statutory provisions ensure that each of these hospitals is 
``held harmless'' relative to last year's payments. A handful of 
hospitals may also gain from the combined positive effect of the APC 
recalibration and the wage effect. Overall low volume to mid-volume 
urban hospitals and urban hospitals with a small number of beds, mid-
volume rural hospitals, and rural hospitals in the East South Central, 
Pacific, and Mountain regions have projected updates ranging from 5.0 
to 5.2 percent.
Column 5: All Proposed Changes for CY 2005
    Column 5 compares all proposed changes for CY 2005 to final 
simulated payment for CY 2004 and includes all additional dollars 
resulting from provisions in Pub. L. 108-173 and the difference in 
pass-through estimates.
    In both urban and rural areas, hospitals that provide a lower 
volume of outpatient services are projected to receive a larger 
increase in payments than higher volume hospitals. In rural areas, 
hospitals with service volumes between 5,000 and 42,999 are projected 
to experience increases larger than 5.5 percent. Urban hospitals that 
provide low-volume services show similar rates of increases (5.4 to 5.8 
percent). Conversely, urban and rural hospitals providing more than 
42,999 services are projected to experience a rate of increase in the 
4.1 to 4.3 percent range. The overall projected increase in payments 
for urban hospitals is slightly lower (4.5 percent) than the average 
increase for all hospitals (4.6 percent) while the increase for rural 
hospitals is slightly greater (5.3 percent) than the average increase.
    Major teaching hospitals are projected to experience a smaller 
increase in payments (2.9 percent) than the aggregate for all hospitals 
(4.6 percent) due to negative impacts from both the APC recalibration 
(-2.0 percent) and wage index (-0.3 percent). Hospitals with less 
intensive teaching programs are projected to experience an overall 
increase (4.7 percent). There is some difference in impact among 
hospitals that serve low-income patients where increases in payments 
range from 3.9 to 5.0 percent higher than in CY 2004.

F. Projected Distribution of Outlier Payments

    As stated in section X.B. of this preamble, we have allocated 2 
percent of the estimated CY 2005 expenditures to outlier payments. For 
2005, we are proposing to add a fixed dollar threshold to our outlier 
policy. As discussed in section X.B. of the preamble, we are proposing 
to change our current policy, which sets the outlier threshold using 
only a multiple of the APC payment rate, to a policy that includes both 
a multiple of the APC payment rate and a new fixed dollar threshold. We 
hope that this policy would better target outlier payments to higher 
cost cases.
    For CY 2005, we are specifically proposing to require that, in 
order to qualify for an outlier payment, the cost of a service must 
exceed 1.5 times the APC payment rate and the cost must also exceed the 
sum of the APC rate plus a $625 fixed dollar threshold. The outlier 
payment under this proposed policy remains at 50 percent of the cost 
minus the multiple of the APC payment rate.
    Table 38 below compares the percentage of outlier payments relative 
to total projected payments for the simulated CY 2004 and proposed CY 
2005 outlier policies. In order to model 2 percent of total estimated 
payments in outlier payments for the simulated CY 2004 policy option, 
we had to lower the multiple for this policy from its current level of 
2.6 percent to 2.25 percent.
    Overall, Table 38 demonstrates that the proposed outlier policy 
accomplishes the goal of redistributing outlier payments to hospitals 
performing more expensive procedures and incurring greater financial 
risk. First, based on the mix of services for the hospitals that would 
be paid under the OPPS in CY 2005, fewer hospitals would receive 
outlier payments. This is appropriate as more outlier money is targeted 
to specific services. We estimate that approximately 88 percent of all 
hospitals would receive outlier payments under the proposed policy, 
where 95 percent of all hospitals were estimated to get these types of 
payments in CY 2004.
    We estimate that the redistribution of outlier payments under the 
proposed policy tends to benefit urban hospitals, especially major 
teaching hospitals, children's hospitals, and those that serve a 
smaller percentage of low income patients. The distribution observed 
here may offset the less than average increases in payment observed for 
these same classes of hospitals in the overall impact Table 37. Rural 
hospitals, specifically those that show a small number of beds and 
report low volume, are eligible for fewer outlier payments when 
compared to other types of hospital categories. Rural hospitals in the 
Mid Atlantic, West South Central, Mountain, and Pacific regions, show a 
smaller percent of outlier payments for CY 2005 when compared to the 
average. Sole community hospitals; hospitals without a DSH percent, 
mostly TEFRA

[[Page 50550]]

hospitals; and urban hospitals located in the New England area show a 
small percentage share of their total payments attributable to outlier 
payments when compared to other types of hospital categories.

G. Estimated Impacts of This Proposed Rule on Beneficiaries

    For services for which the beneficiary pays a coinsurance of 20 
percent of the payment rate, the beneficiary share of payment will 
increase for services for which OPPS payments will rise and will 
decrease for services for which OPPS payments will fall. For example, 
for a mid-level office visit (APC 0601), the minimum unadjusted co-
payment in 2004 was $10.71; under this proposed rule, the minimum 
unadjusted co-payment for APC 601 would be $11.27 because the OPPS 
payment for the service will increase under this rule.
    However, in all cases, the statute limits beneficiary liability for 
co-payment for a service to the inpatient hospital deductible for the 
applicable year. This amount is $912 for CY 2005.
    We estimate that the overall impact on the CY 2005 Part B monthly 
premium rate due to the projected increase in OPPS spending is $0.70. 
This is the impact due only to the projected increase in spending from 
2004 to 2005 and does not reflect any increase in the premium rate in 
order to put the trust fund asset level within an acceptable range.

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BILLING CODE 4120-01-C
Conclusion
    Notwithstanding the statutory ``hold harmless'' provisions that 
prevent negative impacts on small rural, sole community, cancer, and 
children's hospitals, the changes in this proposed rule would affect 
all classes of hospitals, and the effects on some may be significant. 
Table 38 demonstrates the estimated distributional impact of the OPPS 
budget neutrality requirements and an additional 4.6 percent increase 
in payments proposed for CY 2005, exclusive of outlier and transitional 
pass-through payments, across various classes of hospitals. These two 
tables and the accompanying discussion below, in combination with the 
rest of this proposed rule, constitute a regulatory impact analysis.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

XVII. Regulation Text

List of Subjects

42 CFR Part 410

    Health Facilities, Health professions, Kidney diseases, 
Laboratories, Medicare, Rural areas, X-rays.

42 CFR Part 411

    Kidney diseases, Medicare, Reporting and recordkeeping 
requirements.

42 CFR Part 419

    Hospitals, Medicare, Reporting and recordkeeping requirements.

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services proposes to amend 42 CFR Chapter IV, as set forth 
below:
    A. Part 410 is amended as follows:

PART 410--SUPPLEMENTARY MEDICAL INSURANCE (SMI) BENEFITS

    1. The authority citation of part 410 continues to read as follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).
    2. A new Sec.  410.16 is added to read as follows:


Sec.  410.16  Initial preventive physical examinations: conditions for 
and limitations on coverage.

    (a) Definitions. As used in this section, the following definitions 
apply:
    Eligible beneficiary means individuals who receive their initial 
preventive physical examinations within 6 months after the effective 
date of their first Medicare Part B coverage period, but only if their 
first Part B coverage period begins on or after January 1, 2005.
    Initial preventive physical examination means all of the following 
services furnished to an individual by a physician or a qualified 
nonphysician practitioner with the goal of health promotion and disease 
detection:
    (1) Review of the beneficiary's comprehensive medical and social 
history.
    (2) Review of the beneficiary's potential (risk factors) for 
depression, including past experiences with depression or other mood 
disorders, based on the use of an appropriate screening instrument that 
the physician or qualified nonphysician practitioner may select, unless 
the appropriate screening instrument is further defined through a 
national coverage determination.
    (3) Review of the beneficiary's functional ability and level of 
safety, based on the use of an appropriate screening instrument, which 
the physician or qualified nonphysician practitioner may select, unless 
the appropriate screening instrument is further defined through a 
national coverage determination.
    (4) An examination to include measurement of the individual's 
height, weight, blood pressure, a visual acuity screen, and other 
factors as deemed appropriate, based on the individual's medical and 
social history and current clinical standards.
    (5) Performance of an electrocardiogram and interpretation of an 
electrocardiogram.
    (6) Education, counseling, and referral, as deemed appropriate by 
the physician or qualified nonphysician practitioner, based on the 
results of the elements of the review and evaluation services described 
in this section.
    (7) Education, counseling, and referral, including a written plan 
provided to the individual for obtaining the appropriate screening and 
other preventive services for the individual that are covered as 
separate Medicare Part B benefits as described in section 1861(s)(10), 
section 1861(jj), section 1861(nn), section 1861(oo), section 1861(pp), 
section 1861(qq)(1), section 1861(rr), section 1861(uu), section 
1861(vv), section 1861(xx)(1), and section 1861(yy) of the Social 
Security Act (the Act).
    Medical history is defined to include, at a minimum, the following:
    (1) Past medical and surgical history, including experience with 
illnesses, hospital stays, operations, allergies, injuries, and 
treatments.
    (2) Current medications and supplements, including calcium and 
vitamins.
    (3) Family history, including a review of medical events in the 
patient's family, including diseases that may be hereditary or place 
the individual at risk.
    Physician for purposes of this provision means a doctor of medicine 
or osteopathy (as defined in section 1861(r)(1) of the Act).
    Qualified nonphysician practitioner for purposes of this provision 
means a physician assistant, nurse practitioner, or clinical nurse 
specialist (as authorized under section 1861(s)(2)(K)(i) and section 
1861(s)(2)(K)(ii) of the Act and defined in section 1861(aa)(5) of the 
Act, or in regulations at Sec.  410.74, Sec.  410.75, and Sec.  
410.76).
    Review of the individual's functional ability and level of safety. 
Review of the individual's functional ability and level of safety must 
include, at a minimum, a review of the following areas:

(1) Hearing impairment.
(2) Activities of daily living.
(3) Falls risk.
(4) Home safety.

    Social history is defined to include, at a minimum, the following:
(1) History of alcohol, tobacco, and illicit drug use.
(2) Work and travel history.
(3) Diet.
(4) Social activities.
(5) Physical activities.

    (b) Condition for coverage of an initial preventive physical 
examination. Medicare Part B pays for an initial preventive physical 
examination provided to an eligible beneficiary, as described in 
paragraph (a) of this section, if it is furnished by a physician or 
other qualified nonphysician practitioner, as defined in paragraph (a) 
of this section.
    (c) Limitations on coverage of initial preventive physical 
examinations. Payment may not be made for an initial preventive 
physical examination that is performed for an individual who is not an 
eligible beneficiary as described in paragraph (a) of this section.
    B. Part 411 is amended as follows:

PART 411--EXCLUSIONS FROM MEDICARE AND LIMITATIONS ON MEDICARE 
PAYMENT

    1. The authority citation for part 411 continues to read as 
follows:

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

    2. Section 411.15 is amended by--

[[Page 50560]]

    A. Republishing the introductory text of the section and the 
introductory text of paragraphs (a) and (k).
    B. Revising paragraph (a)(1).
    C. Adding a new paragraph (k)(11).
    The additions and revisions read as follows:


Sec.  411.15  Particular services excluded from coverage.

    The following services are excluded from coverage:
    (a) Routine physical checkups such as:
    (1) Examinations performed for a purpose other than treatment or 
diagnosis of a specific illness, symptom, complaint, or injury, except 
for screening and diagnostic mammography, colorectal cancer screening 
tests, screening pelvic examinations, prostate cancer screening tests, 
glaucoma screening exams, or initial preventive physical examinations 
that meet the criteria specified in paragraph (k)(11) of this section.
* * * * *
    (k) Any services that are not reasonable and necessary for one of 
the following purposes: * * *
    (11) In the case of initial preventive physical examinations, with 
the goal of health promotion and disease prevention, subject to the 
conditions and limitations specified in Sec.  410.16 of this chapter.
    C. Part 419 is amended as follows:

PART 419--PROSPECTIVE PAYMENT SYSTEM FOR HOSPITAL OUTPATIENT 
DEPARTMENT SERVICES

    1. The authority citation for Part 419 continues to read as 
follows:

    Authority: Secs. 1102, 1833(t), and 1871 of the Social Security 
Act (42 U.S.C. 1302, 1395l(t), and 1395hh).

    2. Section 419.21 is amended by adding a new paragraph (e) to read 
as follows:


Sec.  419.21  Hospital outpatient services subject to the outpatient 
prospective payment system.

* * * * *
    (e) Effective January 1, 2005, an initial preventive physical 
examination, as defined in Sec.  410.16, if the examination is 
performed no later than 6 months after the individual's initial Part B 
coverage date that begins on or after January 1, 2005.
    3. Section 419.22 is amended by adding a new paragraph (s) to read 
as follows:


Sec.  419.22  Hospital outpatient services excluded from payment under 
the hospital outpatient prospective payment system.

* * * * *
    (s) Effective December 8, 2003, screening mammography and effective 
January 1, 2005, diagnostic mammography services.
    4. Section 419.64 is amended by revising paragraphs (d)(1) and 
(d)(2) to read as follows:


Sec.  419.64  Transitional pass-through payments: Drugs and 
biologicals.

* * * * *
    (d) Amount of pass-through payment subject to any reduction 
determined under section 419.62(b), the pass-through payment for a drug 
or biological equals the amount determined under section 1842(o) of the 
Social Security Act, minus the portion of the APC that CMS determines 
is associated with the drug or biological.
    5. Section 419.70 is amended by revising the section heading and 
paragraphs (f)(2)(i) and (f)(2)(ii) to read as follows:


Sec.  419.70  Transitional adjustment to limit decline in payments.

* * * * *
    (f) Pre-BBA amount defined.
* * * * *
    (2) Base payment-to-cost ratio defined. * * *
    (i) The provider's payment under this part for covered outpatient 
services furnished during one of the following periods, including any 
payment for these services through cost-sharing described in paragraph 
(e) of this section.
    (A) The cost reporting period ending in 1996; or
    (B) If the provider does not have a cost reporting period ending in 
1996, the first cost reporting period ending on or after January 1, 
1997, and before January 1, 2001; and
    (ii) The reasonable costs of these services for the same cost 
reporting period.
* * * * *

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


    Dated: July 27, 2004.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: August 6, 2004.
Tommy G. Thompson,
Secretary.
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[FR Doc. 04-18427 Filed 8-9-04; 4:00 pm]
BILLING CODE 4120-01-C