[Federal Register Volume 70, Number 22 (Thursday, February 3, 2005)]
[Proposed Rules]
[Pages 5724-5849]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-1901]



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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Part 412



Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals: Proposed Annual Payment Rate Updates, Policy Changes, and 
Clarification; Proposed Rule

  Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / 
Proposed Rules  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1483-P]
RIN 0938-AN28


Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals: Proposed Annual Payment Rate Updates, Policy Changes, and 
Clarification

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would update the annual payment rates for 
the Medicare prospective payment system (PPS) for inpatient hospital 
services provided by long-term care hospitals (LTCHs). The payment 
amounts and factors used to determine the updated Federal rates that 
are described in this proposed rule have been determined based on the 
LTCH PPS rate year July 1, 2005 through June 30, 2006. The annual 
update of the long-term care diagnosis-related group (LTC-DRG) 
classifications and relative weights remains linked to the annual 
adjustments of the acute care hospital inpatient diagnosis-related 
group system, and would continue to be effective each October 1. The 
proposed outlier threshold for July 1, 2005 through June 30, 2006 is 
also derived from the LTCH PPS rate year calculations. We are proposing 
to adopt new labor market area definitions for the purpose of 
geographic classification and the wage index. We are also proposing 
policy changes and clarifications.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on March 29, 2005.

ADDRESSES: In commenting, please refer to file code CMS-1483-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 on specific 
issues in this regulation to http://www.cms.hhs.gov/regulations/ecomments. (Attachments should be in Microsoft Word, WordPerfect, or 
Excel; however, we prefer Microsoft Word.)
    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-1483-P, P.O. Box 8011, Baltimore, MD 
21244-8011.
    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) 786-7197 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 HHH 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 a 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.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by mailing your 
comments to the addresses provided at the end of the ``Collection of 
Information Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Tzvi Hefter, (410) 786-4487 (General 
information); Judy Richter, (410) 786-2590 (General information, 
transition payments, payment adjustments for special cases, and onsite 
discharges and readmissions, interrupted stays, co-located providers, 
and short-stay outliers); Michele Hudson, (410) 786-5490 (Calculation 
of the payment rates, relative weights and case-mix index, market 
basket update, and payment adjustments); Mark Zezza, (410) 786-7937 
(Calculation of the payment rates wage index, wage index, and payment 
adjustments); Ann Fagan, (410) 786-5662 (Patient classification 
system); Miechal Lefkowitz, (410) 786-5316 (High-cost outliers and 
budget neutrality); Linda McKenna, (410) 786-4537 (Payment adjustments, 
interrupted stay, and transition period).

SUPPLEMENTARY INFORMATION:
    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-1483-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. Comments received 
timely will be available for public inspection as they are received, 
generally beginning approximately 3 weeks after publication of a 
document, at the headquarters of the Centers for Medicare & Medicaid 
Services, 7500 Security Boulevard, Baltimore, Maryland 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) 786-7197.
    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.

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Table of Contents

I. Background
    A. Legislative and Regulatory Authority
    B. Criteria for Classification as a LTCH
    1. Classification as a LTCH
    2. Hospitals Excluded from the LTCH PPS
    C. Transition Period for Implementation of the LTCH PPS
    D. Health Insurance Portability and Accountability Act 
Compliance
II. Summary of Major Contents of This Proposed Rule
III. Long-Term Care Diagnosis-Related Group (LTC-DRG) 
Classifications and Relative Weights
    A. Background
    B. Patient Classifications into DRGs
    C. Organization of DRGs
    D. Update of LTC-DRGs
    E. ICD-9-CM Coding System
    1. Uniform Hospital Discharge Data Set (UHDDS) Definitions
    2. Maintenance of the ICD-9-CM Coding System
    3. Coding Rules and Use of ICD-9-CM Codes in LTCHs
    F. Method for Updating the LTC-DRG Relative Weights
IV. Proposed Changes to the LTCH PPS Rates and Proposed Changes in 
Policy for the 2006 LTCH PPS Rate Year
    A. Overview of the Development of the Payment Rates
    B. Proposed Update to the Standard Federal Rate for the 2006 
LTCH PPS Rate Year
    1. Proposed Standard Federal Rate Update a. Description of the 
Proposed Market Basket for the 2006 LTCH PPS Rate Year b. Proposed 
LTCH Market Basket Increase for the 2006 LTCH PPS Rate Year
    2. Proposed Standard Federal Rate for the 2006 LTCH PPS Rate 
Year
    C. Calculation of Proposed LTCH Prospective Payments for the 
2006 LTCH PPS Rate Year
    1. Proposed Adjustment for Area Wage Levels
    a. Background
    b. Proposed Labor-Related Share
    c. Proposed Revision of the LTCH PPS Geographic Classifications
    1. Current LTCH PPS Labor Market Areas Based on MSAs
    2. Core-Based Statistical Areas
    3. Proposed Revision of the Labor Market Areas
    a. New England MSAs
    b. Metropolitan Divisions
    c. Micropolitan Areas
    4. Implementation of the Proposed Revised Labor Market Areas 
Under the LTCH PPS
    d. Proposed Wage Index Data
    2. Proposed Adjustment for Cost-of-Living in Alaska and Hawaii
    3. Proposed Adjustment for High-Cost Outliers
    a. Background
    b. Cost-to-charge ratios (CCRs)
    c. Establishment of the Proposed Fixed-Loss Amount
    d. Reconciliation of Outlier Payments Upon Cost Report 
Settlement
    e. Application of Outlier Policy to Short-Stay Outlier Cases
    4. Proposed Adjustments for Special Cases
    a. General
    b. Adjustment for Short-Stay Outlier Cases
    5. Hospital-within-Hospitals and Satellites of LTCHs 
Notification Requirements
    6. Other Payment Adjustments
    7. Proposed Budget Neutrality Offset to Account for the 
Transition Methodology
    8. Extension of the Interrupted Stay Policy
    9. Onsite Discharges and Readmittances
V. Computing the Proposed Adjusted Federal Prospective Payments for 
the 2005 LTCH PPS Rate Year
VI. Transition Period
VII. Payments to New LTCHs
VIII. Method of Payment
IX. MedPAC Recommendations/Monitoring
X. Collection of Information Requirements
XI. Regulatory Impact Analysis

Acronyms

    Because of the many terms to which we refer by acronym in this 
proposed rule, we are listing the acronyms used and their 
corresponding terms in alphabetical order below:

BBA Balanced Budget Act of 1997, Pub. L. 105-33
BBRA Medicare, Medicaid, and SCHIP (State Children's Health 
Insurance Program) Balanced Budget Refinement Act of 1999, Pub. L. 
106-113
BIPA Medicare, Medicaid, and SCHIP (State Children's Health 
Insurance Program) Benefits Improvement and Protection Act of 2000, 
Pub. L. 106-554
CPSA Core-Based Statistical Area
CMS Centers for Medicare & Medicaid Services
COPS Medicare conditions of participation
DRGs Diagnosis-related groups
FY Federal fiscal year
HCRIS Hospital Cost Report Information System
HHA Home health agency
HIPAA Health Insurance Portability and Accountability Act, Pub. L. 
104-191
IPF Inpatient Psychiatric Facility
IPPS Acute Care Hospital Inpatient Prospective Payment System
IRF Inpatient rehabilitation facility
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare provider analysis and review file
OSCAR Online Survey Certification and Reporting (System)
PPS Prospective Payment System
QIO Quality Improvement Organization (formerly Peer Review 
organization (PRO))
RY Rate Year (July 1 through June 30)
SNF Skilled nursing facility
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-
248

I. Background

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

A. Legislative and Regulatory Authority

    The Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA) (Pub. 
L. 106-113) and the Medicare, Medicaid, and SCHIP Benefits Improvement 
and Protection Act of 2000 (BIPA) (Pub. L. 106-554) provide for payment 
for both the operating and capital-related costs of hospital inpatient 
stays in long-term care hospitals (LTCHs) under Medicare Part A based 
on prospectively set rates. The Medicare prospective payment system 
(PPS) for LTCHs applies to hospitals described in section 
1886(d)(1)(B)(iv) of the Social Security Act (the Act), effective for 
cost reporting periods beginning on or after October 1, 2002.
    Section 1886(d)(1)(B)(iv)(I) of the Act defines a LTCH as ``a 
hospital which has an average inpatient length of stay (as determined 
by the Secretary) of greater than 25 days.'' Section 
1886(d)(1)(B)(iv)(II) of the Act also provides an alternative 
definition of LTCHs: Specifically, a hospital that first received 
payment under section 1886(d) of the Act in 1986 and has an average 
inpatient length of stay (as determined by the Secretary) of greater 
than 20 days and has 80 percent or more of its annual Medicare 
inpatient discharges with a principal diagnosis that reflects a finding 
of neoplastic disease in the 12-month cost reporting period ending in 
FY 1997.
    Section 123 of Pub. L. 106-113 requires the PPS for LTCHs to be a 
per discharge system with a diagnosis-related group (DRG) based patient 
classification system that reflects the differences in patient 
resources and costs in LTCHs while maintaining budget neutrality.
    Section 307(b)(1) of Pub. L. 106-554, among other things, mandates 
that the Secretary shall examine, and may provide for, adjustments to 
payments under the LTCH PPS, including adjustments to DRG weights, area 
wage adjustments, geographic reclassification, outliers, updates, and a 
disproportionate share adjustment.
    In a Federal Register document issued on August 30, 2002 (67 FR 
55954), we implemented the LTCH PPS authorized under Pub. L. 106-113 
and Pub. L. 106-554. This system uses information from LTCH patient 
records to classify patients into distinct long-term care diagnosis-
related groups (LTC-DRGs) based on clinical characteristics and 
expected resource needs. Payments are calculated for each LTC-DRG and 
provisions are made for appropriate payment adjustments.

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Payment rates under the LTCH PPS are updated annually and published in 
the Federal Register.
    The LTCH PPS replaced the reasonable cost-based payment system 
under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), 
Pub. L. 97-248, for payments for inpatient services provided by a LTCH 
with a cost reporting period beginning on or after October 1, 2002. 
(The regulations implementing the TEFRA reasonable cost-based payment 
provisions are located at 42 CFR part 413.) With the implementation of 
the prospective payment system for acute care hospitals authorized by 
the Social Security Amendments of 1983 (Pub. L. 98-21), which added 
section 1886(d) to the Act, certain hospitals, including LTCHs, were 
excluded from the PPS for acute care hospitals and were paid their 
reasonable costs for inpatient services subject to a per discharge 
limitation or target amount under the TEFRA system. For each cost 
reporting period, a hospital-specific ceiling on payments was 
determined by multiplying the hospital's updated target amount by the 
number of total current year Medicare discharges. The August 30, 2002 
final rule further details payment policy under the TEFRA system (67 FR 
55954).
    In the August 30, 2002 final rule, we presented an in-depth 
discussion of the LTCH PPS, including the patient classification 
system, relative weights, payment rates, additional payments, and the 
budget neutrality requirements mandated by section 123 of Pub. L. 106-
113. The same final rule that established regulations for the LTCH PPS 
under 42 CFR part 412, subpart O, also contained LTCH provisions 
related to covered inpatient services, limitation on charges to 
beneficiaries, medical review requirements, furnishing of inpatient 
hospital services directly or under arrangement, and reporting and 
recordkeeping requirements.
    We refer readers to the August 30, 2002 final (67 FR 55954) rule 
for a comprehensive discussion of the research and data that supported 
the establishment of the LTCH PPS.
    On June 6, 2003, we published a final rule in the Federal Register 
(68 FR 34122) that set forth the 2004 annual update of the payment 
rates for the Medicare PPS for inpatient hospital services furnished by 
LTCHs. It also changed the annual period for which the payment rates 
are effective. The annual updated rates are now effective from July 1 
through June 30 instead of from October 1 through September 30. We 
refer to the July through June time period as a ``long-term care 
hospital rate year'' (LTCH PPS rate year). In addition, we changed the 
publication schedule for the annual update to allow for an effective 
date of July 1. The payment amounts and factors used to determine the 
annual update of the LTCH PPS Federal rate is based on a LTCH PPS rate 
year. While the LTCH payment rate update is effective July 1, the 
annual update of the LTC-DRG classifications and relative weights are 
linked to the annual adjustments of the acute care hospital inpatient 
diagnosis-related groups and are effective each October 1.
    On May 7, 2004 we published a final rule in the Federal Register 
(69 FR 25674) that set forth the 2005 LTCH PPS rate year annual update 
of the payment rates for the Medicare PPS for inpatient hospital 
services provided by LTCHs. We also discussed clarification of the 
procedures under which a satellite facility or remote location of a 
LTCH may be designated as a separately certified LTCH. In addition, the 
final rule included a provision to expand the existing interrupted stay 
policy at Sec.  412.531, and a revision to the procedure for computing 
the day count in the average length of stay calculation for Medicare 
patients for hospitals qualifying as LTCHs at Sec.  412.23(e)(3)(ii).

B. Criteria for Classification as a LTCH

1. Classification as a LTCH
    Under the existing regulations at Sec.  412.23(e)(1) and (e)(2)(i), 
which implement section 1886(d)(1)(B)(iv)(I) of the Act, to qualify to 
be paid under the LTCH PPS, a hospital must have a provider agreement 
with Medicare and must have an average Medicare inpatient length of 
stay of greater than 25 days. Alternatively, for cost reporting periods 
beginning on or after August 5, 1997, a hospital that was first 
excluded from the PPS in 1986, and can demonstrate that at least 80 
percent of its annual Medicare inpatient discharges in the 12-month 
cost reporting period ending in FY 1997 have a principal diagnosis that 
reflects a finding of neoplastic disease must have an average inpatient 
length of stay for all patients, including both Medicare and non-
Medicare inpatients, of greater than 20 days (Sec.  412.23(e)(2)(ii)).
    Regulations at Sec.  412.23(e)(3) provide that, subject to the 
provisions of paragraphs (e)(3)(ii) through (e)(3)(iv) of this section, 
the average Medicare inpatient length of stay, specified under Sec.  
412.23(e)(2)(i) is calculated by dividing the total number of covered 
and noncovered days of stay of Medicare inpatients (less leave or pass 
days) by the number of total Medicare discharges for the hospital's 
most recent complete cost reporting period. Section 412.23 also 
provides that subject to the provisions of paragraphs (e)(3)(ii) 
through (e)(3)(iv) of this section, the average inpatient length of 
stay specified under Sec.  412.23(e)(2)(ii) is calculated by dividing 
the total number of days for all patients, including both Medicare and 
non-Medicare inpatients (less leave or pass days) by the number of 
total discharges for the hospital's most recent complete cost reporting 
period.
    In the LTCH PPS final rule published on May 7, 2004, we specified 
the procedure for calculating a hospital's inpatient average length of 
stay for purposes of classification as a LTCH. That is, if a patient's 
stay includes days of care furnished during two or more separate 
consecutive cost reporting periods, the total days of a patient's stay 
would be reported in the cost reporting period during which the patient 
is discharged (69 FR 25705). Therefore, we have revised the regulations 
at Sec.  412.23(e)(3)(ii) to specify that, effective for cost reporting 
periods beginning on or after July 1, 2004, in calculating a hospital's 
average length of stay, if the days of a stay of an inpatient involves 
days of care furnished during two or more separate consecutive cost 
reporting periods, the total number of days of the stay are considered 
to have occurred in the cost reporting period during which the 
inpatient was discharged.
    Effective for cost reporting periods beginning on or after July 1, 
2004, but before July 1, 2005, a one-year exception is provided in the 
event some providers failed to meet the 25-day ALOS criteria due to 
this change in policy. In these cases, the fiscal intermediary will do 
an additional calculation to determine if these providers meet the 
average length of stay methodology found in Sec.  412.23(e)(3)(i).
    Fiscal intermediaries verify that LTCHs meet the average length of 
stay requirements. We note that the inpatient days of a patient who is 
admitted to a LTCH without any remaining Medicare days of coverage, 
regardless of the fact that the patient is a Medicare beneficiary, will 
not be included in the above calculation. Because Medicare would not be 
paying for any of the patient's treatment, data on the patient's stay 
would not be included in the Medicare claims processing systems. In 
order for both covered and noncovered days of a LTCH hospitalization to 
be included, a patient admitted to the LTCH must have at least one 
remaining benefit day as described in Sec.  409.61 (68 FR 34123).
    The fiscal intermediary's determination of whether or not a

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hospital qualified as an LTCH is based on the hospital's discharge data 
from the hospital's most recent complete cost reporting period (Sec.  
412.23(e)(3)) and is effective at the start of the hospital's next cost 
reporting period (Sec.  412.22(d)). However, if the hospital does not 
meet the average length of stay requirement as specified in Sec.  
412.23(e)(2)(i) and (ii), the hospital may provide the intermediary 
with data indicating a change in the average length of stay by the same 
method for the period of at least 5 months of the immediately preceding 
6-month period (69 FR 25676). Our interpretation of the current 
regulations at Sec.  412.23(e)(3) was to allow hospitals to submit data 
using a period of at least 5 months of the most recent data from the 
immediately preceding 6-month period.
    As we stated in the IPPS final rule, published August 1, 2003, 
prior to the implementation of the LTCH PPS, we did rely on data from 
the most recently submitted cost report for purposes of calculating the 
average length of stay. The calculation to determine whether an acute 
care hospital qualifies for LTCH status was based on total days and 
discharges for LTCH inpatients. However, with the implementation of the 
LTCH PPS, with respect to the average length of stay specified under 
Sec.  412.23(e)(2)(i), we revised Sec.  412.23(e)(3)(i) to only count 
total days and discharges for Medicare inpatients (68 FR 45464). In 
addition, the average length of stay specified under Sec.  
412.23(e)(2)(ii) is calculated by dividing the total number of days for 
all patients, including both Medicare and non-Medicare inpatients (less 
leave or pass days) by the number of total discharges for the 
hospital's most recent complete cost reporting period. As we pointed 
out in the IPPS final rule, we are unable to capture the necessary data 
from our present cost reporting forms. We have, therefore, notified 
fiscal intermediaries and LTCHs that until the cost reporting forms are 
revised, for purposes of calculating the average length of stay, we 
will be relying upon census data extracted from MedPAR files that 
reflect each LTCH's cost reporting period (68 FR 45464). Requirements 
for hospitals seeking classification as LTCHs that have undergone a 
change in ownership, as described in Sec.  489.18, are set forth in 
Sec.  412.23(e)(3)(iv).
    In the May 7, 2004 final rule (69 FR 25709), we revised the 
regulations at Sec.  412.23(e) to clarify our longstanding policy by 
stating that a satellite facility or remote location that voluntarily 
separates from its parent LTCH in order to become an independent LTCH 
it must first be considered a State-licensed and Medicare-certified 
hospital before seeking classification as a LTCH. In this regard, a 
satellite facility or remote location that voluntarily wishes to become 
an independent LTCH is required to demonstrate that it meets the 
average length of stay requirements, as specified under 
Sec. 412.23(e)(2)(i) and (ii), based on discharges that occur on or 
after the effective date of its participation under Medicare as a 
separate hospital. Once the satellite facility or remote location is 
Medicare certified, then the hospital may consider using the length of 
stay data accumulated as a hospital to satisfy the classification 
requirements for becoming a ``specialty'' hospital (in this case, a 
LTCH). That is, the hospital must demonstrate that it has a Medicare 
inpatient length of stay of greater than 25 days. The data used to 
calculate the Medicare average length of stay is based on discharges 
that occur after the satellite facility or remote location has 
established itself as a separate participating hospital. However, there 
is an exception to this policy for satellite facilities and remote 
locations of LTCHs that are affected by Sec.  413.65(e)(3) and that 
were in existence prior to the effective date of the provider-based 
location requirements; that is, cost reporting periods beginning on or 
after July 1, 2003. We will assign new Medicare provider numbers to 
former satellite facilities or remote locations that have become 
certified as Medicare participating hospitals. However, if these newly 
certified hospitals should fail the provider-based locations 
requirements under Sec.  413.65(e)(3), they may be classified as LTCHs 
if they meet specific conditions. Under this exception, calculation of 
the ALOS for purposes of qualifying as a LTCH are based on discharge 
data during the 5 months of the immediate 6 months preceding the 
facility's separation from the main hospital. This provision only 
applies to those facilities or locations that became subject to the 
revised provider-based location rules on July 1, 2003, and that seek 
classification as LTCHs for Medicare payment purposes.
2. Hospitals Excluded From the LTCH PPS
    The following hospitals are paid under special payment provisions, 
as described in Sec.  412.22(c) and, therefore, are not subject to the 
LTCH PPS rules:
     Veterans Administration hospitals.
     Hospitals that are reimbursed under State cost control 
systems approved under 42 CFR Part 403.
     Hospitals that are reimbursed in accordance with 
demonstration projects authorized under section 402(a) of Public Law 
90-248 (42 U.S.C. 1395b-1) or section 222(a) of Public Law 92-603 (42 
U.S.C. 1395b-1 (note)) (statewide all-payer systems, subject to the 
rate-of-increase test at section 1814(b) of the Act).
     Nonparticipating hospitals furnishing emergency services 
to Medicare beneficiaries.

C. Transition Period for Implementation of the LTCH PPS

    In the August 30, 2002 final rule, we provided for a 5-year 
transition period from reasonable cost-based reimbursement to fully 
Federal prospective payment for LTCHs (67 FR 56038). However, LTCHs 
have the option to elect to be paid based on 100 percent of the Federal 
prospective payment. During the 5-year period, two payment percentages 
are to be used to determine a LTCH's total payment under the PPS. The 
blend percentages are as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                          Reasonable cost-based
         Cost reporting periods beginning on or after             Prospective payment       reimbursement rate
                                                                Federal rate percentage         percentage
----------------------------------------------------------------------------------------------------------------
October 1, 2002...............................................                       20                       80
October 1, 2003...............................................                       40                       60
October 1, 2004...............................................                       60                       40
October 1, 2005...............................................                       80                       20
October 1, 2006...............................................                      100                        0
----------------------------------------------------------------------------------------------------------------


[[Page 5728]]

D. Health Insurance Portability and Accountability Act Compliance

    We note that as of October 16, 2002, a LTCH that was required to 
comply with the Administrative Simplification Standards under the 
Health Insurance Portability and Accountability Act (HIPAA) (Pub. L. 
104-191) and that had not obtained an extension in compliance with the 
Administrative Compliance Act (Pub. L. 107-105) is obligated to comply 
with the standards for submitting claim forms to the LTCH's Medicare 
fiscal intermediary (45 CFR 162.1002 and 45 CFR 162.1102). Beginning 
October 16, 2003, LTCHs that obtained an extension and that are 
required to comply with the HIPAA Administrative Simplification 
Standards must start submitting electronic claims in compliance with 
the HIPAA regulations cited above, among others.

II. Summary of the Major Contents of This Proposed Rule

    In this proposed rule, we propose to set forth the annual update to 
the payment rates for the Medicare 2006 LTCH PPS rate year. The 
following is a summary of the proposed update changes that we are 
addressing in this final rule:
     In section IV. of this preamble, we discuss the annual 
update of LTC-DRG classifications and relative weights and specify that 
they remain linked to the annual adjustments of the acute care hospital 
inpatient DRG system, which are based on the annual revisions to the 
International Classification of Diseases, Ninth Revision, Clinical 
Modification (ICD-9-CM) codes, effective each October 1.
     As discussed in section IV.C.1. of this preamble, we are 
proposing to adopt new labor market area definitions for LTCHs which 
are based on the new Core-Based Statistical Areas (CBSAs), announced by 
the OMB late in 2000. The CBSAs were adopted for acute care hospitals 
under the IPPS effective October 1, 2004 in the FY 2005 IPPS final 
rule.
     In sections VI. through IX. of this preamble, we are 
including proposed revisions to the wage index, the proposed excluded 
hospital with capital market basket that would be applied to the 
current standard Federal rate to determine the prospective payment 
rates, the applicable adjustments to payment rates, the proposed 
outlier threshold, the transition period, and the proposed budget 
neutrality factor.
     In section IX. of this preamble, we discuss the 
recommendations made in the June 2004 MedPAC Report concerning the 
definition of LTCHs. In this section, we also discuss our continuing 
monitoring efforts to evaluate the LTCH PPS, including a review of the 
QIO's role.
     In section XII. of this preamble, we analyze the impact of 
the proposed changes in this proposed rule on Medicare expenditures and 
on Medicare-participating LTCHs and Medicare beneficiaries.

III. Long-Term Care Diagnosis-Related Group (LTC-DRG) Classifications 
and Relative Weights

[If you choose to comment on issues in this section, please include the 
caption ``LTC-DRG CLASSIFICATIONS AND RELATIVE WEIGHTS'' at the 
beginning of your comments.]

A. Background

    Section 123 of Pub. L. 106-113 specifically requires that the PPS 
for LTCHs be a per discharge system with a DRG-based patient 
classification system reflecting the differences in patient resources 
and costs in LTCHs while maintaining budget neutrality. Section 
307(b)(1) of Pub. L. 106-554 modified the requirements of section 123 
of Pub. L. 106-113 by specifically requiring that the Secretary examine 
``the feasibility and the impact of basing payment under such a system 
[the LTCH PPS] on the use of existing (or refined) hospital DRGs that 
have been modified to account for different resource use of LTCH 
patients as well as the use of the most recently available hospital 
discharge data.''
    In accordance with section 307(b)(1) of Pub. L. 106-554 and Sec.  
412.515 of our existing regulations, the LTCH PPS uses information from 
LTCH patient records to classify patient cases into distinct LTC-DRGs 
based on clinical characteristics and expected resource needs. The LTC-
DRGs used as the patient classification component of the LTCH PPS 
correspond to the hospital inpatient DRGs in the IPPS. We apply weights 
to the existing hospital inpatient DRGs to account for the difference 
in resource use by patients exhibiting the case complexity and multiple 
medical problems characteristic of LTCHs.
    In a departure from the IPPS, we use low volume LTC-DRGs (less than 
25 LTCH cases) in determining the LTC-DRG weights, since LTCHs do not 
typically treat the full range of diagnoses as do acute care hospitals. 
In order to deal with the large number of low volume DRGs (all DRGs 
with fewer than 25 cases), we group low volume DRGs into 5 quintiles 
based on average charge per discharge. (A listing of the composition of 
low volume quintiles appears in the August 30, 2002 LTCH PPS final rule 
at 67 FR 55986.) We also take into account adjustments to payments for 
cases in which the stay at the LTCH is five-sixths of the geometric 
average length of stay and classify these cases as short-stay outlier 
cases. (A detailed discussion of the application of the Lewin Group 
model that was used to develop the LTC-DRGs appears in the August 30, 
2002 LTCH PPS final rule at 67 FR 55978.)

B. Patient Classifications Into DRGs

    Generally, under the LTCH PPS, Medicare payment is made at a 
predetermined specific rate for each discharge; that payment varies by 
the LTC-DRG to which a beneficiary's stay is assigned. Cases are 
classified into LTC-DRGs for payment based on the following six data 
elements:
    (1) Principal diagnosis.
    (2) Up to eight additional diagnoses.
    (3) Up to six procedures performed.
    (4) Age.
    (5) Sex.
    (6) Discharge status of the patient.
    As indicated in the August 30, 2002 LTCH PPS final rule, upon the 
discharge of the patient from a LTCH, the LTCH must assign appropriate 
diagnosis and procedure codes from the most current version of the 
International Classification of Diseases, Ninth Edition, Clinical 
Modification (ICD-9-CM). As of October 16, 2002, a LTCH that was 
required to comply with the HIPAA Administrative Simplification 
Standards and that had not obtained an extension in compliance with the 
Administrative Compliance Act (Pub. L. 107-105) is obligated to comply 
with the standards at 45 CFR 162.1002 and 45 CFR 162.1102. Completed 
claim forms are to be submitted to the LTCH's Medicare fiscal 
intermediary.
    Medicare fiscal intermediaries enter the clinical and demographic 
information into their claims processing systems and subject this 
information to a series of automated screening processes called the 
Medicare Code Editor (MCE). These screens are designed to identify 
cases that require further review before assignment into a DRG can be 
made. During this process, the following types of cases are selected 
for further development:
     Cases that are improperly coded. (For example, diagnoses 
are shown that are inappropriate, given the sex of the patient. Code 
68.6, Radical abdominal hysterectomy, would be an inappropriate code 
for a male.)
     Cases including surgical procedures not covered under 
Medicare. (For

[[Page 5729]]

example, organ transplant in a nonapproved transplant center.)
     Cases requiring more information. (For example, ICD-9-CM 
codes are required to be entered at their highest level of specificity. 
There are valid 3-digit, 4-digit, and 5-digit codes. That is, code 
136.3, Pneumocystosis, contains all appropriate digits, but if it is 
reported with either fewer or more than 4 digits, the claim will be 
rejected by the MCE as invalid.)
     Cases with principal diagnoses that do not usually justify 
admission to the hospital. (For example, code 437.9, Unspecified 
cerebrovascular disease. While this code is valid according to the ICD-
9-CM coding scheme, a more precise code should be used for the 
principal diagnosis.)
    After screening through the MCE, each claim will be classified into 
the appropriate LTC-DRG by the Medicare LTCH GROUPER. As indicated in 
August 30, 2002 LTCH PPS final, the Medicare GROUPER, which is used 
under the LTCH PPS, is specialized computer software, and is the same 
GROUPER software program used under the IPPS. The GROUPER software was 
developed as a means of classifying each case into a DRG on the basis 
of diagnosis and procedure codes and other demographic information 
(age, sex, and discharge status). Following the LTC-DRG assignment, the 
Medicare fiscal intermediary determines the prospective payment by 
using the Medicare PRICER program, which accounts for hospital-specific 
adjustments. As provided for under the IPPS, we provide an opportunity 
for the LTCH to review the LTC-DRG assignments made by the fiscal 
intermediary and to submit additional information within a specified 
timeframe (Sec.  412.513(c)).
    The GROUPER is used both to classify past cases in order to measure 
relative hospital resource consumption to establish the DRG weights and 
to classify current cases for purposes of determining payment. The 
records for all Medicare hospital inpatient discharges are maintained 
in the MedPAR file. The data in this file are used to evaluate possible 
DRG classification changes and to recalibrate the DRG weights during 
our annual update under both the IPPS (Sec.  412.60(e)) and the LTCH 
PPS (Sec.  412.517). As discussed in greater detail below in sections 
III.D. and E. of this preamble, with the implementation of section 
503(a) of Pub. L. 108-173, there is the possibility that one feature of 
the GROUPER software program may be updated twice during a Federal 
fiscal year (October 1 and April 1) as required by the statute for the 
IPPS (69 FR 48954-48957), August 11, 2004). Specifically, ICD-9 
diagnosis and procedure codes for new medical technology may be created 
and added to existing DRGs in the middle of the Federal fiscal year on 
April 1. This policy change will have no effect, however, on the LTC-
DRG relative weights which will continue to be updated only once a year 
(October 1), nor will there be any impact on Medicare payments under 
the LTCH PPS.

C. Organization of DRGs

    The DRGs are organized into 25 Major Diagnostic Categories (MDCs), 
most of which are based on a particular organ system of the body; the 
remainder involve multiple organ systems (such as MDC 22, Burns). 
Accordingly, the principal diagnosis determines MDC assignment. Within 
most MDCs, cases are then divided into surgical DRGs and medical DRGs. 
Surgical DRGs are assigned based on a surgical hierarchy that orders 
operating room (O.R.) procedures or groups of O.R. procedures by 
resource intensity. The GROUPER does not recognize all ICD-9-CM 
procedure codes as procedures that affect DRG assignment, that is, 
procedures which are not surgical (for example, EKG), or minor surgical 
procedures (for example, 86.11, Biopsy of skin and subcutaneous 
tissue).
    The medical DRGs are generally differentiated on the basis of 
diagnosis. Both medical and surgical DRGs may be further differentiated 
based on age, sex, discharge status, and presence or absence of 
complications or comorbidities (CC). We note that CCs are defined by 
certain secondary diagnoses not related to, or not inherently a part 
of, the disease process identified by the principal diagnosis. (For 
example, the GROUPER would not recognize a code from the 800.0x series, 
Skull fracture, as a CC when combined with principal diagnosis 850.4, 
Concussion with prolonged loss of consciousness, without return to 
preexisting conscious level.) In addition, we note that the presence of 
additional diagnoses does not automatically generate a CC, as not all 
DRGs recognize a comorbid or complicating condition in their 
definition. (For example, DRG 466, Aftercare without History of 
Malignancy as Secondary Diagnosis, is based solely on the principal 
diagnosis, without consideration of additional diagnoses for DRG 
determination.)
    In its June 2000 Report to Congress, MedPAC recommended that the 
Secretary `` * * * improve the hospital inpatient prospective payment 
system by adopting, as soon as practicable, diagnosis-related group 
refinements that more fully capture differences in severity of illness 
among patients,'' (Recommendation 3A, p. 63). We have determined it is 
not practical at this time to develop a refinement to inpatient 
hospital DRGs based on severity due to time and resource requirements. 
However, this does not preclude us from development of a severity-
adjusted DRG refinement in the future. That is, a refinement to the 
list of comorbidities and complications could be incorporated into the 
existing DRG structure. It is also possible that a more comprehensive 
severity adjusted structure may be created if a new code set is 
adopted. That is, if ICD-9-CM is replaced by ICD-10-CM (for diagnostic 
coding) and ICD-10-PCS (for procedure coding) or by other code sets, a 
severity concept may be built into the resulting DRG assignments. Of 
course any change to the code set would be adopted through the process 
established in the HIPAA Administrative Simplification Standards 
provisions.

D. Update of LTC-DRGs

    For FY 2005, the LTC-DRG patient classification system was based on 
LTCH data from the FY 2003 MedPAR file, which contained hospital bills 
data from the March 2004 update. The patient classification system 
consisted of 520 DRGs that formed the basis of the FY 2004 LTCH PPS 
GROUPER. The 520 LTC-DRGs included two ``error DRGs.'' As in the IPPS, 
we included two error DRGs in which cases that cannot be assigned to 
valid DRGs will be grouped. These two error DRGs are DRG 469 (Principal 
Diagnosis Invalid as a Discharge Diagnosis) and DRG 470 (Ungroupable). 
(See the FY 2005 IPPS FY 2005 final rule (69 FR 408982-49000).) The 
other 518 LTC-DRGs are the same DRGs used in the IPPS GROUPER for FY 
2005 (Version 22.0).
    In the past, in the health care industry, annual changes to the 
ICD-9-CM codes were effective for discharges occurring on or after 
October 1 each year. Thus, the manual and electronic versions of the 
GROUPER software, which are based on the ICD-9-CM codes, were also 
revised annually and effective for discharges occurring on or after 
October 1 each year. As discussed earlier, the patient classification 
system for the LTCH PPS (LTC-DRGs) is based on the IPPS patient 
classification system (CMS-DRGs), which had historically been updated 
annually and was effective for discharges occurring on or after October 
1 through September 30 each year.

[[Page 5730]]

    Recently, the ICD-9-CM coding update process has been revised as 
discussed in greater detail in the FY 2005 IPPS final rule (69 FR 
48954-48957). Specifically, section 503(a) of Pub. L. 108-173 includes 
a requirement for updating ICD-9-CM codes twice a year instead of the 
current process of annual updates on October 1 of each year. This 
requirement is included as part of the amendments to the Act relating 
to recognition of new medical technology under the IPPS. Section 503(a) 
of Pub. L. 108-173 amended section 1886(d)(5)(K) of the Act by adding a 
new clause (vii) which states that ``the Secretary shall provide for 
the addition of new diagnosis and procedure codes by April 1 of each 
year, but the addition of such codes shall not require the Secretary to 
adjust the payment (or diagnosis-related group classification) * * * 
until the fiscal year that begins after such date.'' This requirement 
will improve the recognition of new technologies under the IPPS by 
accounting for the GROUPER software at an earlier date. Despite the 
fact that aspects of the GROUPER software may be updated to recognize 
any new technology codes, there will be no impact on either LTC-DRG 
assignments or payments under the LTCH PPS. That is, no new LTC-DRGs 
will be created or deleted and the relative weights will remain the 
same.
    In the August 30, 2002 final rule (67 FR 55984), when we 
established the LTCH PPS, we determined that the DRG-based patient 
classification system for the LTCH PPS would use the same GROUPER 
software as the IPPS, and therefore would be updated each October 1, as 
set forth in Sec.  412.8(b). In the June 6, 2003 LTCH PPS final rule 
(68 FR 34125-34128), when we revised the annual rate update for the 
LTCH PPS to a July 1 through June 30 schedule, we specified that 
updates of the LTC-DRGs and re-weighting of LTC-DRG weights would 
remain linked to the IPPS GROUPER update which functions on an October 
1 through September 30 schedule. Therefore, under this existing policy, 
during a LTCH PPS rate year, two versions of the GROUPER software are 
utilized for purposes of DRG creation or deletion and relative weight 
assignment during the LTCH PPS rate year that is established each July 
1. The updated LTC-DRG classifications and relative weights in the 
GROUPER that were finalized on October 1, preceding the beginning of a 
LTCH rate year on July 1, would be in effect with the new Federal rate 
from July 1 through September 30. On October 1, the updated version of 
the GROUPER would be used from that October 1 through June 30.
    The updated DRGs and GROUPER software, used by both the IPPS and 
the LTCH PPS, are based on the ICD-9-CM codes updated. (The use of the 
ICD-9-CM codes in this manner is consistent with current usage and the 
HIPAA regulations.) As noted above, historically, these codes have been 
published annually in the IPPS proposed rule and final rule. Consistent 
with historical approaches taken in the IPPS and LTCH PPS, October 1 
will continue to be the effective date of revisions to the CMS DRGs and 
the LTC-DRGs. However, because of the statutory changes under Section 
503(a) of Pub. L. 108-173, new ICD-9-CM codes may become effective on 
both October 1 and April 1. In the past, the new or revised ICD-9-CM 
codes were not used by the industry for either the IPPS or the LTCH PPS 
until the beginning of the Federal fiscal year (effective for 
discharges occurring on or after October 1). Beginning with FY 2005, as 
we explained above, under the authority of Section 503(a) of Pub. L. 
108-173 which amends section 1886(d)(5)(K) of the Act, there is the 
potential for new ICD-9-CM codes to become effective both at the 
beginning of the Federal fiscal year, October 1, and also on April 1. 
As we have already noted, a full discussion along with a description of 
the implementation of this provision, was published in the Federal 
Register in the FY 2005 IPPS final rule (69 FR 48954-48957). We want to 
emphasize, however, that although it was established that the IPPS 
GROUPER, which is also used by the LTCH PPS, could be calibrated with 
respect to ICD-9-CM codes, two times each year, October and April, as 
necessary, to allow the inclusion of new codes reflecting new medical 
technologies and procedures for patients in acute care hospitals and 
that, therefore, the GROUPER could be updated to recognize any new 
codes in April, the inclusion of these new codes would not result in 
the creation or deletion of LTC-DRGs or changes in the relative weights 
and, therefore, would not affect the DRG assigned by the GROUPER for 
LTC-DRGs, nor payments under the LTCH PPS.
    As noted above, updates to the GROUPER for both the IPPS and the 
LTCH PPS (with respect to relative weights and the creation or deletion 
of DRGs) are made in the annual IPPS proposed and final rules and are 
effective each October 1. We explained in the FY 2005 IPPS final rule 
(69 FR 48956), that since we do not publish a mid-year IPPS rule, April 
1 code updates discussed above will not be published in a mid-year IPPS 
rule. Rather, we will assign any new diagnostic or procedure codes to 
the same DRG in which its predecessor code was assigned, so that there 
will be no impact on the DRG assignment. Any proposed coding updates 
will be available through the Web sites indicated in the FY 2005 IPPS 
final rule (69 FR 48956) and provided below in section III.E.2. of this 
preamble and through the Coding Clinic for ICD-9-CM. Publishers and 
software vendors currently obtain code changes through these sources in 
order to update their code books and software systems. If new codes are 
implemented on April 1, revised code books and software systems, 
including the GROUPER software program, will be necessary because we 
must use current ICD-9-CM codes. Therefore, for purposes of the LTCH 
PPS, since each ICD-9-CM code must be included in the GROUPER algorithm 
to classify each case into a LTC-DRG, the GROUPER software program used 
under the LTCH PPS would need to be revised to accommodate any new 
codes.
    As mentioned above, however, an April 1 update of the ICD-9-CM 
codes would only result in a change to the CMS DRG GROUPER software 
program effective April 1, so that it will recognize the new technology 
code and assign it to the appropriate DRG, but will not result in a 
change to the relative weights used under either the IPPS or the LTCH 
PPS, respectively. Consistent with our current practice, any changes to 
the DRGs or relative weights will be made at the beginning of the next 
Federal fiscal year (October 1).
    As specified in the May 7, 2004 LTCH PPS final rule (69 FR 25674) 
and the FY 2005 IPPS final rule (69 FR 48982), and discussed above, we 
annually update to the LTCH PPS payment rates effective from July 1 
through June 30 each year. As a result, the LTCH PPS currently uses two 
GROUPER software programs during a LTCH PPS rate year (July 1 through 
June 30): one GROUPER for 3 months (from July 1 through September 30); 
and an updated GROUPER for 9 months (from October 1 through June 30). 
The need to use two GROUPERs was based upon the October 1 effective 
date of the updated ICD-9-CM coding system. As previously discussed, 
new ICD-9-CM codes may result in changes to the structure of the DRGs 
caused by mapping the new codes to existing DRGs. In order for the 
industry to be on the same schedule (for both the IPPS and the LTCH 
PPS) for the use of the most current ICD-9-CM codes, it had

[[Page 5731]]

been necessary for us to apply two GROUPER programs under the LTCH PPS.
    With the potential addition of new codes effective on April 1, the 
LTCH PPS may now use three GROUPER programs during the LTCH PPS rate 
year (July 1 through June 30), if new diagnosis and procedure codes are 
added on April 1. Specifically, one GROUPER (GROUPER 1) would be used 
for the first 3 months (from July 1 through September 30); a second 
GROUPER (GROUPER 2) would be used for the next 6 months (from October 1 
through March 31); and the third GROUPER (GROUPER 3) would be used for 
the last 3 months (from April 1 through June 30). The need to use three 
GROUPER software programs during a single LTCH PPS rate year in the 
event of an April 1 ICD-9-CM code update is because it is necessary to 
use the updated ICD-9-CM codes (as explained above) in order to 
classify each case into a LTC-DRG for payment purposes. The change from 
GROUPER 1 to GROUPER 2 (on October 1) would coincide with the annual 
update to the LTC-DRGs and relative weights under Sec.  412.517, which 
would be effective for that entire Federal fiscal year, just as it has 
been since we implemented the LTCH PPS. The change from GROUPER 2 to 
GROUPER 3 (on April 1) would only update the CMS DRG structure by 
mapping the new code to an existing DRG, and would not result in the 
addition or deletion of any DRGs nor would it result in a change to the 
LTC-DRG relative weights. If no new diagnoses or procedure codes are 
added on April 1, however, there would be no need to update the GROUPER 
and we would continue to use 2 GROUPERs during the course of a LTCH PPS 
rate year as is currently done. But even with an April 1 update to the 
ICD-9-CM codes (and consequently the GROUPER software), only two sets 
of LTC-DRG relative weights will be used during a LTCH PPS rate year 
(July 1 through June 30), one set from July 1 though September 30 and a 
second set from October 1 through June 30, just as we have done since 
we moved the annual LTCH PPS update to July 1 (effective beginning July 
1, 2003).
    As we discussed in the FY 2005 IPPS final rule (69 FR 48956), in 
implementing section 503(a) of Pub. L. 108-173, there will only be an 
April 1 update if new technology codes are requested and approved. In 
that same IPPS final rule, we specified that there are no new codes for 
April 1, 2005 implementation. However, if new codes had been approved 
for April 1, 2005 implementation, the subsequent changes to the DRG 
structure (that is, the mapping of the new codes to existing DRGs), but 
not to FY 2005 LTC-DRG relative weights and, consequently, LTCH PPS 
payment rates, would have resulted in the use of a third GROUPER during 
the 2005 LTCH PPS rate year. However, as noted above, since there are 
no new codes for April 1, 2005 implementation, and the next update to 
the ICD-9-CM coding system will not occur until October 1, 2005, only 
two GROUPER software programs will be used during the 2005 LTCH PPS 
rate year (July 1, 2004 through June 30, 2005): one GROUPER from July 
1, 2004 through September 30, 2004, and a second GROUPER from October 
1, 2004 through June 30, 2005.
    Discharges beginning on October 1, 2004 and before October 1, 2005 
(Federal FY 2005) are using Version 22.0 of the GROUPER software for 
both the IPPS and the LTCH PPS. Consistent with our current practice, 
any changes to the DRGs or relative weights will be made at the 
beginning of the Federal fiscal year (October 1). We will notify LTCHs 
of any revised LTC-DRG relative weights based on the final DRGs and the 
applicable GROUPER version for the IPPS that will be effective October 
1, 2005. Furthermore, as discussed above, we would notify LTCHs of any 
revisions to the CMS GROUPER that would be implemented April 1, 2006.

E. ICD-9-CM Coding System

1. Uniform Hospital Discharge Data Set (UHDDS) Definitions
    Because the assignment of a case to a particular LTC-DRG will help 
determine the amount that will be paid for the case, it is important 
that the coding is accurate. Classifications and terminology used in 
the LTCH PPS are consistent with the ICD-9-CM and the UHDDS, as 
recommended to the Secretary by the National Committee on Vital and 
Health Statistics (``Uniform Hospital Discharge Data: Minimum Data Set, 
National Center for Health Statistics, April 1980'') and as revised in 
1984 by the Health Information Policy Council (HIPC) of the U.S. 
Department of Health and Human Services.
    We point out that the ICD-9-CM coding terminology and the 
definitions of principal and other diagnoses of the UHDDS are 
consistent with the requirements of the HIPAA Administrative 
Simplification Act of 1996 (45 CFR Part 162). Furthermore, the UHDDS 
has been used as a standard for the development of policies and 
programs related to hospital discharge statistics by both governmental 
and nongovernmental sectors for over 30 years. In addition, the 
following definitions (as described in the 1984 Revision of the UHDDS, 
approved by the Secretary of Health and Human Services for use starting 
January 1986) are requirements of the ICD-9-CM coding system, and have 
been used as a standard for the development of the CMS-DRGs:
     Diagnoses are defined to include all diagnoses that affect 
the current hospital stay.
     Principal diagnosis is defined as the condition 
established after study to be chiefly responsible for occasioning the 
admission of the patient to the hospital for care.
     Other diagnoses (also called secondary diagnoses or 
additional diagnoses) are defined as all conditions that coexist at the 
time of admission, that develop subsequently, or that affect the 
treatment received or the length of stay or both. Diagnoses that relate 
to an earlier episode of care that have no bearing on the current 
hospital stay are excluded.
     All procedures performed will be reported. This includes 
those that are surgical in nature, carry a procedural risk, carry an 
anesthetic risk, or require specialized training.
    We provide LTCHs with a 60-day window after the date of the notice 
of the initial LTC-DRG assignment to request review of that assignment. 
Additional information may be provided by the LTCH to the fiscal 
intermediary as part of that review.
2. Maintenance of the ICD-9-CM Coding System
    The ICD-9-CM Coordination and Maintenance (C&M) Committee is a 
Federal interdepartmental committee, co-chaired by the National Center 
for Health Statistics (NCHS) and CMS, that is, charged with maintaining 
and updating the ICD-9-CM system. The C&M Committee is jointly 
responsible for approving coding changes, and developing errata, 
addenda, and other modifications to the ICD-9-CM to reflect newly 
developed procedures and technologies and newly identified diseases. 
The C&M Committee is also responsible for promoting the use of Federal 
and non-Federal educational programs and other communication techniques 
with a view toward standardizing coding applications and upgrading the 
quality of the classification system.
    The NCHS has lead responsibility for the ICD-9-CM diagnosis codes 
included in the Tabular List and Alphabetic Index for Diseases, while 
CMS has lead responsibility for the ICD-9-CM procedure codes included 
in the

[[Page 5732]]

Tabular List and Alphabetic Index for Procedures.
    The C&M Committee encourages participation by health-related 
organizations in the above process and holds public meetings for 
discussion of educational issues and proposed coding changes twice a 
year at the CMS Central Office located in Baltimore, Maryland. The 
agenda and dates of the meetings can be accessed on our Web site at: 
http://www.cms.gov/paymentsystems/icd9.
    As discussed above, section 503(a) of Pub. L. 108-173 includes a 
requirement for updating ICD-9-CM codes twice a year instead of the 
current process of annual updates on October 1 of each year. This 
requirement will improve the recognition of new technologies under the 
IPPS by accounting for them in the GROUPER software at an earlier date. 
Because this new statutory requirement could have a significant impact 
on health care providers, coding staff, publishers, system maintainers, 
and software systems, among others, we solicited comments on our 
proposed provisions to implement this requirement as part of the FY 
2005 IPPS proposed rule (69 FR 28220-28221). We responded to comments 
and published our new policy regarding the updating of ICD-9-CM codes 
in the FY 2005 IPPS final rule (69 FR 48954-48957).
    While this new requirement states that the Secretary shall not 
adjust the payment of the DRG classification for any codes created for 
use on April 1, DRG software and other systems will have to be updated 
in order to recognize and accept the new codes. Because, as discussed 
above, the LTC-DRGs are the same DRGs used under the IPPS, this means 
that the Medicare GROUPER software program used under both the IPPS and 
the LTCH PPS would need to be revised to reflect ICD-9-CM codes, if any 
coding changes were implemented on April 1. Furthermore, although the 
CMS GROUPER software used under both the IPPS and the LTCH PPS would 
need to be revised to accommodate the new codes effective April 1, 
there would be no additions or deletions of DRGs nor would the relative 
weights used under the IPPS and the LTCH PPS, respectively, be changed 
until the annual update October 1 (to the extent that those changes are 
warranted), just as they have been historically updated. As the LTCH 
PPS is based on the IPPS, we will adopt the same approach used under 
the IPPS for potential April 1 ICD-9-CM coding changes. That is, we 
will assign any new diagnosis codes or procedure codes to the same DRG 
in which its predecessor code was assigned, so there will be no DRG 
impact in terms of potential DRG assignment until the following October 
1. We will maintain the current method of publicizing any new code 
changes, as noted below. Current addendum and code title information is 
published on the CMS Web page at: http://www.cms.hhs.gov/paymentsystem/icd9. Summary tables showing new, revised, and deleted code titles are 
also posted on the following CMS Web page: http://www.cms.hhs.gov/medlearn/icd9code.asp. Information on ICD-9-CM diagnosis codes can be 
found at http://www.cdc.gov/nchs/icd9.htm. Information on new, revised, 
and deleted ICD-9-CM codes is also available in the AHA publication 
Coding Clinic for ICD-9-CM. AHA also distributes information to 
publishers and software vendors. We also send copies of all ICD-9-CM 
coding changes to our contractors for use in updating their systems and 
providing education to providers.
    If the April 1 changes are made to ICD-9-CM diagnosis or procedure 
codes, LTCHs will be required to obtain the new codes, coding books, or 
encoder updates, and make other system changes in order to capture and 
report the new codes. We indicated in the IPPS final rule that we were 
aware of the additional burden this will have on health care providers.
    It should be noted that any new codes created for April 1 
implementation will be limited to those diagnosis and procedure code 
revisions primarily needed to describe new technologies and medical 
services. However, we reiterate that the process for discussing updates 
to the ICD-9-CM has been an open process through the ICD-9-CM C&M 
Committee since 1995. Any requestor who makes a clear and convincing 
case for the need to update ICD-9-CM codes for purposes of the IPPS new 
technology add-on payment process through an April 1 update will be 
given the opportunity to present the merits of their proposed new code.
    To reiterate, at the October 2004 C&M Committee meeting, no new 
codes were proposed for update on April 1, 2005. While no DRG additions 
or deletions or changes to relative weights will occur prior to the 
usual October 1 update, in the event any new codes had been created to 
describe new technologies and medical services through an April 1, 2005 
update, under our proposed policy, LTCH systems would have been 
expected to recognize and report those new codes through the channels 
as described above in this section.
    As discussed above, the ICD-9-CM coding changes that have been 
adopted by the C&M Committee could become effective either at the 
beginning of each Federal fiscal year, October 1, or, in the case of 
codes created to capture new technology, April 1 of each year. Coders 
will be expected to use the most current updated ICD-9-CM codes, as 
updated. Because we do not publish a mid-year IPPS rule, the currently 
accepted avenues of information dissemination will be used to inform 
all ICD-9-CM code users of any changes to the coding system. These 
avenues were described above in section III.D. of this preamble and 
have been discussed at length in the FY 2005 IPPS final rule (69 FR 
48956). Coders in LTCHs using the updated ICD-9-CM coding system will 
be on the same schedule as the rest of the health care industry. In the 
past, the updated ICD-9-CM was not available for use until October 1 of 
each year, which is 5 months after the date that we publish the LTCH 
annual payment rate update final rule.
    Therefore, because the LTCH PPS and the IPPS uses the identical 
GROUPER software, the LTCH PPS will be directly affected by the 
statutory mandates directed at the IPPS, promulgated in section 503(a) 
of Pub. L. 108-173. The practical effect of this provision is that the 
GROUPER software must accept new ICD-9 codes reflecting the 
incorporation of new technologies into inpatient treatment at an acute 
care hospital prior to the scheduled annual update of the GROUPER 
software. Despite the fact that there are no provisions for additional 
payments for new technology under the LTCH PPS as there are under the 
IPPS, statutory compliance requires an alteration of the GROUPER 
software used by both the IPPS and the LTCH PPS. While DRG assignments 
would not change from October 1 through September 30, it is possible 
that there could be additional new ICD-9-CM diagnosis and procedure 
codes during that time, which would be assigned to predecessor DRGs (as 
described above). For both the IPPS and LTCH coders, it is possible 
that there will be ICD-9-CM codes in effect from October 1 through 
March 31, with additional ICD-9-CM codes in effect from April 1 through 
September 30. Presently, as there were no coding changes suggested for 
an April 1, 2005 update, the ICD-9-CM coding set implemented on October 
1, 2004 will continue through September 30, 2005 (FY 2005).
    Of particular note to LTCHs are the invalid diagnosis codes (Table 
6C) and the invalid procedure codes (Table 6D) located in the annual 
proposed and final rules for the IPPS. Claims with invalid codes are 
not processed by the Medicare claims processing system.

[[Page 5733]]

    3. Coding Rules and Use of ICD-9-CM Codes in LTCHs
    We emphasize the need for proper coding by LTCHs. Inappropriate 
coding of cases can adversely affect the uniformity of cases in each 
LTC-DRG and produce inappropriate weighting factors at recalibration. 
We continue to urge LTCHs to focus on improved coding practices. 
Because of concerns raised by LTCHs concerning correct coding, we have 
asked the American Hospital Association (AHA) to provide additional 
clarification or instruction on proper coding in the LTCH setting. The 
AHA will provide this instruction via their established process of 
addressing questions through their publication ``Coding Clinic for ICD-
9-CM.'' Written questions or requests for clarification may be 
addressed to the Central Office on ICD-9-CM, American Hospital 
Association, One North Franklin, Chicago, IL 60606. A form for the 
question(s) is available to be downloaded and mailed on AHA's Web site 
at: www.ahacentraloffice.org. In addition, current coding guidelines 
are available at the National Center for Health Statistics (NCHS) Web 
site: www.cdc.gov/nchs.icd9.htm.
    In conjunction with the cooperating parties (AHA, the American 
Health Information Management Association (AHIMA), and NCHS), we 
reviewed actual medical records and are concerned about the quality of 
the documentation under the LTCH PPS, as was the case at the beginning 
of the IPPS. We fully believe that, with experience, the quality of the 
documentation and coding will improve, just as it did for the IPPS. As 
noted above, the cooperating parties have plans to assist their members 
with improvement in documentation and coding issues for the LTCHs 
through specific questions and coding guidelines. The importance of 
good documentation is emphasized in the revised ICD-9-CM Official 
Guidelines for Coding and Reporting: ``A joint effort between the 
attending physician and coder is essential to achieve complete and 
accurate documentation, code assignment, and reporting of diagnoses and 
procedures. The importance of consistent, complete documentation in the 
medical record cannot be overemphasized. Without such documentation, 
the application of all coding guidelines is a difficult, if not 
impossible, task.'' (Coding Clinic for ICD-9-CM, Fourth Quarter 2002, 
page 115)
    To improve medical record documentation, LTCHs should be aware that 
if the patient is being admitted for continuation of treatment of an 
acute or chronic condition, guidelines at Section I.B.10 of the Coding 
Clinic for ICD-9-CM, Fourth Quarter 2002 (page 129) are applicable 
concerning selection of principal diagnosis. To clarify coding advice 
issued in the August 30, 2002 final rule (67 FR 55979-55981), we would 
like to point out that at Guideline I.B.12, Late Effects, a late effect 
is considered to be the residual effect (condition produced) after the 
acute phase of an illness or injury has terminated (Coding Clinic for 
ICD-9-CM, Fourth Quarter 2002, page 129). Regarding whether a LTCH 
should report the ICD-9-CM code(s) for an unresolved acute condition 
instead of the code(s) for late effect of rehabilitation, we emphasize 
that each case must be evaluated on its unique circumstances and coded 
appropriately. Depending on the documentation in the medical record, 
either a code reflecting the acute condition or rehabilitation could be 
appropriate in a LTCH.
    Since implementation of the LTCH PPS, our Medicare fiscal 
intermediaries have been conducting training and providing assistance 
to LTCHs in correct coding. We have also issued manuals containing 
procedures as well as coding instructions to LTCHs and fiscal 
intermediaries. We will continue to conduct such training and provide 
guidance on an as-needed basis. We also refer readers to the detailed 
discussion on correct coding practices in the August 30, 2002 LTCH PPS 
final rule (67 FR 55979-55981). Additional coding instructions and 
examples will be published in Coding Clinic for ICD-9-CM.

F. Method for Updating the LTC-DRG Relative Weights

    As discussed in the May 7, 2004 LTCH PPS final rule (68 FR 25681), 
under the LTCH PPS, each LTCH will receive a payment that represents an 
appropriate amount for the efficient delivery of care to Medicare 
patients. The system must be able to account adequately for each LTCH's 
case-mix in order to ensure both fair distribution of Medicare payments 
and access to adequate care for those Medicare patients whose care is 
more costly. Therefore, in accordance with Sec.  412.523(c), we adjust 
the standard Federal PPS rate by the LTC-DRG relative weights in 
determining payment to LTCHs for each case.
    Under this payment system, relative weights for each LTC-DRG are a 
primary element used to account for the variations in cost per 
discharge and resource utilization among the payment groups (Sec.  
412.515). To ensure that Medicare patients who are classified to each 
LTC-DRG have access to an appropriate level of services and to 
encourage efficiency, we calculate a relative weight for each LTC-DRG 
that represents the resources needed by an average inpatient LTCH case 
in that LTC-DRG. For example, cases in a LTC-DRG with a relative weight 
of 2 will, on average, cost twice as much as cases in a LTC-DRG with a 
weight of 1.
    As we discussed in the FY 2005 IPPS final rule (69 FR 48982-49000), 
the LTC-DRG relative weights effective under the LTCH PPS for Federal 
FY 2005 were calculated using the March 2004 update of FY 2003 MedPAR 
data and Version 22.0 of the CMS GROUPER software. We use total days 
and total charges in the calculation of the LTC-DRG relative weights.
    By nature, LTCHs often specialize in certain areas, such as 
ventilator-dependent patients and rehabilitation and wound care. Some 
case types (DRGs) may be treated, to a large extent, in hospitals that 
have, from a perspective of charges, relatively high (or low) charges. 
Distribution of cases with relatively high (or low) charges in specific 
LTC-DRGs has the potential to inappropriately distort the measure of 
average charges. To account for the fact that cases may not be randomly 
distributed across LTCHs, we use a hospital-specific relative value 
method to calculate relative weights. We believe this method removes 
this hospital-specific source of bias in measuring average charges. 
Specifically, we reduce the impact of the variation in charges across 
providers on any particular LTC-DRG relative weight by converting each 
LTCH's charge for a case to a relative value based on that LTCH's 
average charge. (See the FY 2005 IPPS final rule (69 FR 48984) for 
further information on the hospital-specific relative value 
methodology.)
    In order to account for LTC-DRGs with low volume (that is, with 
fewer than 25 LTCH cases), we grouped those low volume LTC-DRGs into 
one of five categories (quintiles) based on average charges, for the 
purposes of determining relative weights. For FY 2005 based on the FY 
2003 MedPAR data, we identified 172 LTC-DRGs that contained between 1 
and 24 cases. This list of low volume LTC-DRGs was then divided into 
one of the five low volume quintiles, each containing a minimum of 34 
LTC-DRGs (172/5 = 34 with 2 LTC-DRG as a remainder). Each of the low 
volume LTC-DRGs grouped to a specific quintile received the same 
relative weight and average length of stay using the formula applied to 
the regular LTC-DRGs (25 or more cases), as described below. (See the 
FY 2005 IPPS final rule

[[Page 5734]]

(69 FR 48988-48989) for further explanation of the development and 
composition of each of the five low volume quintiles for FY 2005.)
    After grouping the cases in the appropriate LTC-DRG, we calculated 
the relative weights by first removing statistical outliers and cases 
with a length of stay of 7 days or less. Next, we adjusted the number 
of cases in each LTC-DRG for the effect of short-stay outlier cases 
under Sec.  412.529. The short-stay adjusted discharges and 
corresponding charges were used to calculate ``relative adjusted 
weights'' in each LTC-DRG using the hospital-specific relative value 
method described above. (See the FY 2005 IPPS final rule (69 FR 48989-
48992) for further details on the steps for calculating the LTC-DRG 
relative weights.)
    We also adjusted the LTC-DRG relative weights to account for 
nonmonotonically increasing relative weights. That is, we made an 
adjustment if cases classified to the LTC-DRG ``with comorbidities 
(CCs)'' of a ``with CC''/``without CC'' pair had a lower average charge 
than the corresponding LTC-DRG ``without CCs'' by assigning the same 
weight to both LTC-DRGs in the ``with CC''/''without CC'' pair. (See 
August 11, 2003 IPPS final rule, 69 FR 48991-48992.) In addition, of 
the 520 LTC-DRGs in the LTCH PPS for FY 2005, based on the FY 2003 
MedPAR data, we identified 171 LTC-DRGs for which there were no LTCH 
cases in the database. That is, no patients who would have been 
classified to those DRGs were treated in LTCHs during FY 2003 and, 
therefore, no charge data were reported for those DRGs. Thus, in the 
process of determining the relative weights of LTC-DRGs, we were unable 
to determine weights for these 171 LTC-DRGs using the method described 
above. However, since patients with a number of the diagnoses under 
these LTC-DRGs may be treated at LTCHs beginning in FY 2005, we 
assigned relative weights to each of the 171 ``no volume'' LTC-DRGs 
based on clinical similarity and relative costliness to one of the 
remaining 349 (520-171=349) LTC-DRGs for which we were able to 
determine relative weights, based on the FY 2003 claims data. (A list 
of the no-volume LTC-DRGs and further explanation of their relative 
weight assignment can be found in the FY 2005 IPPS final rule (69 FR 
48992-48999).)
    Furthermore, for FY 2005, we established LTC-DRG relative weights 
of 0.0000 for heart, kidney, liver, lung, pancreas, and simultaneous 
pancreas/kidney transplants (LTC-DRGs 103, 302, 480, 495, 512 and 513, 
respectively) because Medicare will only cover these procedures if they 
are performed at a hospital that has been certified for the specific 
procedures by Medicare and presently no LTCH has been so certified. If 
in the future, however, a LTCH applies for certification as a Medicare-
approved transplant center, we believe that the application and 
approval procedure would allow sufficient time for us to propose 
appropriate weights for the LTC-DRGs affected. At the present time, 
though, we included these six transplant LTC-DRGs in the GROUPER 
program for administrative purposes. As the LTCH PPS uses the same 
GROUPER program for LTCHs as is used under the IPPS, removing these 
DRGs would be administratively burdensome.
    As we stated in the FY 2005 IPPS final rule, we will continue to 
use the same LTC-DRGs and relative weights for FY 2005 until October 1, 
2005. Accordingly, Table 3 in the Addendum to this proposed rule lists 
the LTC-DRGs and their respective relative weights and arithmetic mean 
length of stay that we will continue to use for the period of July 1, 
2005 through September 30, 2005. (This table is the same as Table 11 of 
the Addendum to the FY 2005 IPPS final rule (69 FR 49738-49754), 
including the revisions to Table 11 published in the October 7, 2004 
correction notice (69 FR 60267-60271)). As we noted above, the next 
update to the ICD-9-CM coding system will be presented in the FY 2006 
IPPS proposed rule (since there were no April 1 updates to the ICD-9-CM 
coding system) and the final DRGs and GROUPER for FY 2006 that will be 
used for the IPPS and the LTCH PPS, effective October 1, 2005, will be 
presented in the IPPS FY 2006 proposed and final rule in the Federal 
Register.
    Accordingly, we will notify LTCHs of the revised LTC-DRG relative 
weights for use in determining payments for discharges occurring 
between October 1, 2005 and September 30, 2006 (unless there is an 
April 1, 2006 update to the ICD-9-CM coding system, as discussed 
above), based on the final DRGs and the applicable GROUPER version that 
will be established in FY 2006 IPPS final rule.

IV. Proposed Changes to the LTCH PPS Rates and Proposed Changes in 
Policy for the 2006 LTCH PPS Rate Year

[If you choose to comment on issues in this section, please include the 
caption ``PROPOSED CHANGES TO LTCH PPS RATES AND POLICY FOR THE 2006 
LTCH PPS RATE YEAR'' at the beginning of your comments.]

A. Overview of the Development of the Payment Rates

    The LTCH PPS was effective for a LTCH's first cost reporting period 
beginning on or after October 1, 2002. Effective with that cost 
reporting period, LTCHs are paid, during a 5-year transition period, on 
the basis of an increasing proportion of the LTCH PPS Federal rate and 
a decreasing proportion of a hospital's payment under reasonable cost-
based payment system, unless the hospital makes a one-time election to 
receive payment based on 100 percent of the Federal rate (see Sec.  
412.533). New LTCHs (as defined at Sec.  412.23(e)(4)) are paid based 
on 100 percent of the Federal rate, with no phase-in transition 
payments.
    The basic methodology for determining LTCH PPS Federal prospective 
payment rates is set forth in the regulations at Sec. Sec.  412.515 
through 412.532. Below we discuss the proposed factors that would be 
used to update the LTCH PPS standard Federal rate for the 2006 LTCH PPS 
rate year that would be effective for LTCHs discharges occurring on or 
after July 1, 2005 through June 30, 2006. When we implemented the LTCH 
PPS in the August 30, 2002 LTCH PPS final rule (67 FR 56029-56031), we 
computed the LTCH PPS standard Federal payment rate for FY 2003 by 
updating the best available (FY 1998 or FY 1999) Medicare inpatient 
operating and capital costs per case data, using the excluded hospital 
market basket.
    Section 123(a)(1) of Pub. L. 106-113 requires that the PPS 
developed for LTCHs be budget neutral. Therefore, in calculating the 
standard Federal rate under Sec.  412.523(d)(2), we set total estimated 
LTCH PPS payments equal to estimated payments that would have been made 
under the reasonable cost-based payment methodology had the PPS for 
LTCHs not been implemented. Section 307(a) of Pub. L. 106-554 specified 
that the increases to the hospital-specific target amounts and cap on 
the target amounts for LTCHs for FY 2002 provided for by section 
307(a)(1) of Pub. L. 106-554 shall not be taken into account in the 
development and implementation of the LTCH PPS. Furthermore, as 
specified at Sec.  412.523(d)(1), the standard Federal rate is reduced 
by an adjustment factor to account for the estimated proportion of 
outlier payments under the LTCH PPS to total LTCH PPS payments (8 
percent). For further details on the development of the FY 2003 
standard Federal rate, see the August 30, 2002 LTCH PPS final rule (67 
FR 56027-56037), for the 2004 LTCH PPS rate year rate, see the June 6, 
2003 final rule (68

[[Page 5735]]

FR 34122-34190), and for the 2005 LTCH PPS rate year rate, see the May 
7, 2004 LTCH PPS final rule (69 FR 25674-25748). Under the existing 
regulations at Sec.  412.523(c)(3)(ii), we update the standard Federal 
rate annually to adjust for the most recent estimate of the projected 
increases in prices for LTCH inpatient hospital services. The proposed 
update to the standard Federal rate for the 2006 LTCH PPS rate year is 
discussed below.

B. Proposed Update to the Standard Federal Rate for the 2006 LTCH PPS 
Rate Year

    As established in the May 7, 2004 LTCH PPS final rule (69 FR 
25683), based on the most recent estimate of the excluded hospital with 
capital market basket, adjusted to account for the change in the LTCH 
PPS rate year update cycle, the current LTCH PPS standard Federal rate 
which is effective from July 1, 2004 through June 30, 2005 (the 2005 
LTCH PPS rate year), is $36,833.69.
    In the discussion that follows, we explain how we developed the 
proposed standard Federal rate for the 2006 LTCH PPS rate year. The 
proposed standard Federal rate for the 2006 LTCH PPS rate year would be 
calculated based on the update factor of 1.031. Thus, the proposed 
standard Federal rate for the 2006 LTCH PPS rate year would increase 
3.1 percent compared to the 2005 LTCH PPS rate year standard Federal 
rate due to the proposed update to the LTCH PPS Federal rate.
1. Proposed Standard Federal Rate Update
    Under Sec.  412.523, the annual update to the LTCH PPS standard 
Federal rate must be equal to the percentage change in the excluded 
hospital with capital market basket (described in further detail 
below). As we discussed in the August 30, 2002 LTCH PPS final rule (67 
FR 56087), in the future we may propose to develop a framework to 
update payments to LTCHs that would account for other appropriate 
factors that affect the efficient delivery of services and care 
provided to Medicare patients. As we discussed in the May 7, 2004 final 
rule (69 FR 25674), because the LTCH PPS has only been implemented for 
slightly more than 2 years (that is, for cost reporting periods 
beginning on or after October 1, 2002), we have not yet collected 
sufficient data to allow for the analysis and development of an update 
framework under the LTCH PPS. Therefore, we are not addressing an 
update framework for the 2006 LTCH PPS rate year in this proposed rule. 
However, we note that a conceptual basis for the proposal of developing 
an update framework in the future can be found in Appendix B of the 
August 30, 2002 LTCH PPS final rule (67 FR 56086-56090).
    a. Description of the Proposed Market Basket for LTCHs for the 2006 
LTCH PPS Rate Year. A market basket has historically been used in the 
Medicare program to account for price increases of the services 
furnished by providers. The market basket used for the LTCH PPS 
includes both operating and capital-related costs of LTCHs because the 
LTCH PPS uses a single payment rate for both operating and capital-
related costs. The development of the LTCH PPS standard Federal rate is 
discussed in further detail in the August 30, 2002 LTCH PPS final rule 
(67 FR 56027-56037).
    Under the reasonable cost-based payment system, the excluded 
hospital market basket was used to update the hospital-specific limits 
on payment for operating costs of LTCHs. Currently, the excluded 
hospital market basket is based on operating costs from cost report 
data from FY 1997 and includes data from Medicare-participating long-
term care, rehabilitation, psychiatric, cancer, and children's 
hospitals. Since LTCHs' costs are included in the excluded hospital 
market basket, this market basket index, in part, also reflects the 
costs of LTCHs. However, in order to capture the total costs (operating 
and capital-related) of LTCHs, we added a capital component to the 
excluded hospital market basket for use under the LTCH PPS. We refer to 
this index as the excluded hospital with capital market basket.
    As we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 
56016 and 56086), beginning with the implementation of the LTCH PPS in 
FY 2003, the excluded hospital with capital market basket, based on FY 
1992 Medicare cost report data, has been used for updating payments to 
LTCHs. In the May 7, 2004 LTCH PPS final rule (69 FR 25683), we revised 
and rebased the excluded hospital with capital market basket, using 
more recent data, that is, using FY 1997 base year data beginning with 
the 2004 LTCH PPS rate year. (For further details on the development of 
the FY 1997-based LTCH PPS market basket, see the May 7, 2004 LTCH PPS 
final rule (69 FR 25683)).
    In the August 30, 2002 LTCH PPS final rule (67 FR 56016 and 56085-
56086), we discussed why we believe the excluded hospital with capital 
market basket provides a reasonable measure of the price changes facing 
LTCHs. In the May 7, 2004 LTCH PPS final rule (69 FR 25682-25683), we 
discussed our research into the feasibility of developing a market 
basket specific to LTCH services. However, based on this research, we 
did not develop a market basket specific to LTCH services. In that same 
final rule, we explained why we continue to believe that the excluded 
hospital with capital market basket is the appropriate market basket 
for the LTCH PPS.
    For the reasons discussed in those final rules (August 30, 2002 and 
May 7, 2004), we continue to believe that an excluded hospital with 
capital market basket adequately reflects the price changes facing 
LTCHs. Therefore, in this proposed rule, we are proposing to continue 
to use the FY 1997-based excluded hospital with capital market basket 
as the LTCH PPS market basket for determining the proposed update to 
the LTCH PPS standard Federal rate for the 2006 LTCH PPS rate year. We 
continue to solicit comments about issues particular to LTCHs that 
should be considered in relation to the FY 1997-based excluded hospital 
with capital market basket and to encourage suggestions for additional 
data sources that may be available.
    b. Proposed LTCH Market Basket Increase for the 2006 LTCH Rate 
Year. As we discussed in the May 7, 2004 LTCH PPS final rule (69 FR 
25683), for the update to the 2005 LTCH PPS rate year, we calculated 
the estimated increase between the 2004 LTCH PPS rate year (July 1, 
2003 through June 30, 2004) and the 2005 LTCH PPS rate year (July 1, 
2004 through June 30, 2005) based on Global Insight's forecast of the 
revised and rebased FY 1997-based excluded hospital with capital market 
basket using data available through the fourth quarter of 2003. The 
market basket for the 2005 LTCH PPS rate year was 3.1 percent (69 FR 
25683). Consistent with our historical practice of estimating market 
basket increases based on Global Insight's forecast of the FY 1997-
based excluded hospital with capital market basket using more recent 
data through the third quarter of 2004, we are proposing a 3.1 percent 
update to the Federal rate for the 2006 LTCH PPS rate year. In 
accordance with Sec.  412.523, this proposed update would represent the 
most recent estimate of the increase in the excluded hospital with 
capital market basket for the 2006 LTCH PPS rate year.
2. Proposed Standard Federal Rate for the 2006 LTCH PPS Rate Year
    In the May 7, 2004 LTCH PPS final rule (69 FR 25683), we 
established a standard Federal rate of $36,833.69 for the 2005 LTCH PPS 
rate year that was

[[Page 5736]]

based on the best available data and policies established in that final 
rule.
    In this proposed rule, in accordance with Sec.  412.523, we are 
proposing to establish a standard Federal rate of $37,975.53 based on 
the most recent estimate of the LTCH PPS market basket of 3.1 percent. 
Since the proposed standard Federal rate for the 2006 LTCH PPS rate 
year has already been adjusted for differences in case-mix, wages, 
cost-of-living, and high-cost outlier payments, we are not proposing to 
make any additional adjustments in the proposed standard Federal rate 
for these factors.

C. Proposed Calculation of Proposed LTCH Prospective Payments for the 
2006 LTCH PPS Rate Year

    The basic methodology for determining prospective payment rates for 
LTCH inpatient operating and capital-related costs is set forth in 
Sec.  412.515 through Sec.  412.532. In accordance with Sec.  412.515, 
we assign appropriate weighting factors to each LTC-DRG to reflect the 
estimated relative cost of hospital resources used for discharges 
within that group as compared to discharges classified within other 
groups. The amount of the prospective payment is based on the standard 
Federal rate, established under Sec.  412.523, and adjusted for the 
LTC-DRG relative weights, differences in area wage levels, cost-of-
living in Alaska and Hawaii, high-cost outliers, and other special 
payment provisions (short-stay outliers under Sec.  412.529 and 
interrupted stays under Sec.  412.531).
    In accordance with Sec.  412.533, during the 5-year transition 
period, payment is based on the applicable transition blend percentage 
of the adjusted Federal rate and the reasonable cost-based payment rate 
unless the LTCH makes a one-time election to receive payment based on 
100 percent of the Federal rate. A LTCH defined as ``new'' under Sec.  
412.23(e)(4) is paid based on 100 percent of the Federal rate with no 
blended transition payments (Sec.  412.533(d)). As discussed in the 
August 30, 2002 final rule (67 FR 56038), and in accordance with Sec.  
412.533(a), the applicable transition blends are as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                          Reasonable cost-based
         Cost reporting periods  beginning on or after          Federal rate percentage        payment rate
                                                                                                percentage
----------------------------------------------------------------------------------------------------------------
October 1, 2002...............................................                       20                       80
October 1, 2003...............................................                       40                       60
October 1, 2004...............................................                       60                       40
October 1, 2005...............................................                       80                       20
October 1, 2006...............................................                      100                        0
----------------------------------------------------------------------------------------------------------------

    Accordingly, for cost reporting periods beginning during FY 2005 
(that is, on or after October 1, 2004, and before September 30, 2005), 
blended payments under the transition methodology are based on 40 
percent of the LTCH's reasonable cost-based payment rate and 60 percent 
of the adjusted LTCH PPS Federal rate. For cost reporting periods that 
begin during FY 2006 (that is, on or after October 1, 2005 and before 
September 30, 2006), blended payments under the transition methodology 
will be based on 20 percent of the LTCH's reasonable cost-based payment 
rate and 80 percent of the adjusted LTCH PPS Federal rate.
1. Proposed Adjustment for Area Wage Levels
    a. Background. Under the authority of section 307(b) of Pub. L. 
106-554, we established an adjustment to the LTCH PPS Federal rate to 
account for differences in LTCH area wage levels at Sec.  412.525(c). 
The labor-related share of the LTCH PPS Federal rate, estimated by the 
excluded hospital with capital market basket, is adjusted to account 
for geographic differences in area wage levels by applying the 
applicable LTCH PPS wage index. The applicable LTCH PPS wage index is 
computed using wage data from inpatient acute care hospitals without 
regard to reclassification under section 1886(d)(8) or section 
1886(d)(10) of the Act. Furthermore, as we discussed in the August 30, 
2002 LTCH PPS final rule (67 FR 56015-56019), we established a 5-year 
transition to the full wage adjustment. The applicable wage index 
phase-in percentages are based on the start of a LTCH's cost reporting 
period as shown in the following table:

------------------------------------------------------------------------
 Cost reporting periods beginning on or    Phase-in percentage of the
                 after                     full wage index (percent)
-----------------------------------------------------------------------
October 1, 2002........................  1/5th (20)...................
October 1, 2003........................  2/5ths (40)..................
October 1, 2004........................  3/5ths (60)..................
October 1, 2005........................  4/5ths (80)..................
October 1, 2006........................  5/5ths (100).................
------------------------------------------------------------------------

    For example, for cost reporting periods beginning on or after 
October 1, 2004 and before September 30, 2005 (FY 2005), the applicable 
LTCH wage index value is three-fifths of the applicable full LTCH PPS 
wage index value. Similarly, for cost reporting periods beginning on or 
after October 1, 2005 and before September 30, 2006 (FY 2006), the 
applicable LTCH wage index value will be four-fifths of the applicable 
full LTCH PPS wage index value. As we established in the August 30, 
2002 LTCH PPS final rule (67 FR 56018), the applicable full LTCH PPS 
wage index value is calculated from acute-care hospital inpatient wage 
index data without taking into account geographic reclassification 
under sections 1886(d)(8) and (d)(10) of the Act.
    In that same final rule (67 FR 56018), we stated that we would 
continue to reevaluate LTCH data as they become available and would 
propose to adjust the phase-in if subsequent data support a change. As 
we discussed in the May 7, 2004 LTCH PPS final rule (69 FR 25674), 
because the LTCH PPS has only been recently implemented (slightly over 
2 years) and because of the lag time in availability of cost report 
data, sufficient new data have not been generated that would enable us 
to conduct a comprehensive reevaluation of the appropriateness of 
adjusting the phase-in. However, we have reviewed the most recent data 
(FY 2001-FY 2003) available and did not find any evidence to support a 
change in the 5-year phase-in of the wage index. Specifically, our 
statistical analysis still does not show a significant relationship 
between LTCHs' costs and their geographic location. Therefore, in this 
proposed rule, we are not proposing a change in the phase-in of the 
adjustment for area wage levels under Sec.  412.525(c).
    b. Proposed Labor-Related Share. In the August 30, 2002 LTCH PPS 
final rule (67 FR 56016), we established a labor-related share of 
72.885 percent based on the relative importance of the labor-related 
share of operating costs (wages and salaries, employee benefits, 
professional fees, postal services, and all

[[Page 5737]]

other labor-intensive services) and capital costs of the excluded 
hospital with capital market basket based on FY 1992 data. In the March 
7, 2003 proposed rule (68 FR 11249-11250), in conjunction with our 
revision and rebasing of the excluded hospital with capital market 
basket from a FY 1992 to a FY 1997 base year, we discussed revising the 
labor-related share based on the relative importance of the labor-
related share of operating and capital costs of the excluded hospital 
with capital market basket based on FY 1997 data. However, in the June 
6, 2003 final rule (68 FR 34142), while we adopted the revised and 
rebased FY 1997-based LTCH PPS market basket as the LTCH PPS update 
factor for the 2004 LTCH PPS rate year, we decided not to update the 
labor-related share under the LTCH PPS pending further analysis of the 
current labor share methodology.
    In the August 1, 2002 IPPS final rule, we did not update the IPPS 
or excluded hospital labor-related shares for FY 2003 (67 FR 50041-
50042), and we discussed our research into the appropriateness of this 
policy. Specifically, we discussed the methods that we were reviewing 
for establishing the labor-related share and our intention to continue 
to explore all options for alternative data and a methodology for 
determining the labor-related share. We also stated that we would 
propose to update the IPPS and excluded hospital labor-related shares, 
if necessary, once our research is complete.
    As we discussed in greater detail in the May 7, 2004 LTCH PPS final 
rule (69 FR 25685-25686), the LTCH PPS was modeled after the IPPS for 
short-term, acute care hospitals. Specifically, the LTCH PPS uses the 
same patient classification system (CMS-DRGs) as the IPPS, and many of 
the case-level and facility-level adjustments explored or adopted for 
the LTCH PPS are payment adjustments under the IPPS (69 FR 25686). In 
fact, LTCHs are certified as acute care hospitals to participate as a 
hospital in the Medicare program, and in general, qualify for payment 
under the LTCH PPS instead of the IPPS solely because their Medicare 
inpatient average length of stay is greater than 25 days (69 FR 25686). 
In addition, prior to qualifying as a LTCH, hospitals generally are 
paid under the IPPS during the period in which they demonstrate that 
they have an average Medicare inpatient length of stay of greater than 
25 days (69 FR 25686).
    The primary reason that we did not update the LTCH PPS labor-
related share for the 2004 and 2005 LTCH PPS rate years was the same 
reason that we explained for not updating the labor-related share under 
the IPPS for FY 2004 (see August 1, 2003; 68 FR 27226) and FY 2005 (see 
FY 2005 IPPS final rule (69 FR 49069)), which are equally applicable to 
the LTCH PPS. As we noted above, and as we explained in the May 7, 2004 
LTCH PPS final rule (69 FR 5686), we did not revise the labor-related 
share under the IPPS based on the revised and rebased FY 1997 hospital 
market basket and the excluded hospital market basket because of data 
and methodological concerns. We indicated that we would conduct further 
analysis to determine the most appropriate methodology and data for 
determining the labor-related share.
    The IPPS labor-related share of 71.066 percent was established in 
the August 29, 1997 IPPS final rule (62 FR 45995), effective for IPPS 
discharges occurring on or after October 1, 1997 (FY 1998). This 
(71.066 percent) is the most recent estimate of ``the proportion (as 
estimated by CMS from time to time) of Federal rates'' under the IPPS 
adjusted to account for different area wage levels and labor-related 
costs (Sec.  412.62(k)). As also explained in the August 29, 1997 IPPS 
final rule (62 FR 45995), the labor-related portion of the IPPS 
operating standardized amounts is determined by summing the labor-
related items of the revised 1992-based operating prospective payment 
hospital market basket (that is, wages and salaries, employee benefits, 
professional fees, business services, computer and data processing 
services, postage, and all other labor intensive services). This is the 
same methodology used to determine the operating portion of the current 
LTCH PPS labor-related share established in the August 30, 2002 LTCH 
PPS final rule (67 FR 56016), which is effective for LTCH PPS 
discharges occurring in cost reporting periods beginning on or after 
October 1, 2002 (FY 2003). (Note, as discussed in the August 30, 2002 
LTCH PPS final rule (67 FR 56016), because the LTCH PPS standard 
Federal rate includes both operating and capital costs, the LTCH PPS 
labor-related share includes the labor-related share of capital costs 
as well as the labor-related share of operating costs.)
    As noted above, the IPPS labor-related share of 71.066 percent 
became effective for IPPS discharges occurring on after October 1, 
1997. As we also discussed in the May 7, 2004 LTCH PPS final rule (69 
FR 25686), for purposes of payment under the IPPS, section 403 of Pub. 
L. 108-173 amended section 1886(d) of the Act to provide that for 
discharges occurring on or after October 1, 2004, the Secretary must 
employ 62 percent as the labor-related share under the IPPS, unless 
this ``would result in lower payments to a hospital than would 
otherwise be made.'' That is, beginning in FY 2005 under the IPPS, the 
labor-related share remains 71.066 percent for acute-care hospitals 
with a wage index greater than 1.0, while the labor-related share is 
equal to 62 percent for acute-care hospitals under the IPPS with a wage 
index less than or equal to 1.0 (69 FR 49070). This alternative labor-
related share is only applicable to acute care hospitals paid under the 
IPPS and does not apply to LTCHs.
    The current LTCH PPS labor share (72.885 percent) was developed 
using the same methodology used to develop the existing IPPS labor 
share (71.066). The statutory alternative (62 percent) is limited to 
acute care hospitals paid under the IPPS and does not apply to 
hospitals paid under the LTCH PPS. Since we had not yet completed the 
research of the labor-share methodology used to establish the current 
IPPS labor-related share estimated by CMS from time (71.066 percent) 
and the current LTCH PPS labor-related share (72.885 percent), we did 
not change the LTCH PPS labor-share for the 2005 LTCH PPS rate year.
    Since we are continuing our research into updating the hospital 
labor-related share and because we have not implemented a change in the 
methodology for determining both the existing IPPS labor-related share 
estimated by CMS from time to time (as discussed in the FY 2005 IPPS 
final rule (69 FR 49069-49070)) and the current LTCH PPS labor-related 
share, we are not proposing to change the LTCH PPS labor-related share 
at this time. Accordingly, we are proposing that the labor-related 
share for the 2006 LTCH PPS rate year remain at 72.885 percent. As is 
the case under the IPPS, once our research on the labor-related share 
is complete, any future revisions to the LTCH PPS labor-related share 
will be proposed and subject to public comment in a future rule.
    c. Proposed Revision of LTCH PPS Geographic Classifications. As 
discussed in the August 30, 2002 LTCH PPS final rule, which implemented 
the LTCH PPS (67 FR 56015), in establishing an adjustment for area wage 
levels under Sec.  412.525(c), the labor-related portion of a LTCH's 
Federal prospective payment is adjusted by using an appropriate wage 
index. As set forth in Sec.  412.525(c), a LTCH's wage index is 
determined based on the location of the LTCH in an urban or rural area 
as defined in Sec.  412.62(f)(1)(ii) and (f)(1)(iii), respectively. An 
urban area, under the LTCH PPS, is defined at Sec.  412.62(f)(1)(ii)(A) 
and (B). In general,

[[Page 5738]]

an urban area is defined as a Metropolitan Statistical Area (MSA) or 
New England County Metropolitan Area (NECMA) as defined by the Office 
of Management and Budget (OMB). (In addition, a few counties located 
outside of MSAs are considered urban as specified at Sec.  
412.62(f)(1)(ii)(B).) Under Sec.  412.62(f)(1)(iii), a rural area is 
defined as any area outside of an urban area. The geographic 
classifications defined in Sec.  412.62(f)(1)(ii) and (f)(1)(iii), 
respectively, were used under the IPPS from FYs 1984 through 2004 
(Sec. Sec.  412.62(f) and 412.63(b) ), and have been used under the 
LTCH PPS since it was implemented for cost reporting periods beginning 
on or after October 1, 2002 (FY 2003).
    Under the IPPS, the wage index is calculated and assigned to 
hospitals on the basis of the labor market area in which the hospital 
is located or geographically reclassified to in accordance with 
sections 1886(d)(8) and (d)(10) of the Act. Under the LTCH PPS, the 
wage index is calculated using IPPS wage index data (as discussed below 
in section IV.C.1.d of this preamble) on the basis of the labor market 
area in which the hospital is located, but without taking into account 
geographic reclassification under sections 1886(d)(8) and (d)(10) of 
the Act. The applicable LTCH wage index value is assigned to a LTCH on 
the basis of the labor market area in which the LTCH is geographically 
located.
    The current LTCH PPS labor market areas are defined based on the 
definitions of MSAs, Primary MSAs (PMSAs), and NECMAs issued by the OMB 
(commonly referred to collectively as ``MSAs''). These MSA definitions, 
which are discussed in greater detail below, are currently used under 
the LTCH PPS and other non-IPPS prospective payment systems (that is, 
the inpatient rehabilitation facility PPS (IRF PPS), the inpatient 
psychiatric facility PPS (IPF PPS), the home health agency PPS (HHA 
PPS), and the skilled nursing facility PPS (SNF PPS)). In the FY 2005 
IPPS final rule (67 FR 49026-49034), revised labor market area 
definitions were adopted under the IPPS (Sec.  412.64(b)), which were 
effective October 1, 2004. These new standards, called Core-Based 
Statistical Areas (CBSAs), were announced by the OMB late in 2000 and 
are discussed in greater detail below.
    1. Current LTCH PPS Labor Market Areas Based on MSAs. Below, we 
will provide a description of the current labor markets that have been 
used for area wage adjustments under the LTCH PPS since its 
implementation for cost reporting periods beginning on or after October 
1, 2002. Previously, we have not described the labor market areas used 
under the LTCH PPS in detail, although we have published each area's 
wage index in tables, in the LTCH PPS final rules, each year and noted 
the use of the geographic area (MSA) in applying the wage index 
adjustment in LTCH PPS payment examples in the final regulation 
implementing the LTCH PPS (August 30, 2002 67 FR 56037-56038). The LTCH 
industry has also understood that the same labor market areas in use 
under the IPPS (from the time LTCH PPS was implemented, for cost 
reporting periods beginning on or after October 1, 2002) would be used 
under the LTCH PPS. Because OMB has adopted new statistical area 
definitions (as discussed in greater detail below) and we are proposing 
to adopt new labor market area definitions based on these areas under 
the LTCH PPS (as discussed in greater detail below), we believe it is 
helpful to provide a more detailed description of the current LTCH PPS 
labor market areas, in order to better understand the proposed change 
to the LTCH PPS labor market areas presented below in this proposed 
rule.
    As mentioned earlier, since the implementation of the LTCH PPS in 
the August 30, 2002 LTCH PPS final rule, we have used labor market 
areas to further characterize urban and rural areas as determined under 
Sec.  412.62(f)(1)(ii) and (iii). To this end, we have defined labor 
market areas under the LTCH PPS based on the definitions of MSAs, 
PMSAs, and NECMAs issued by the OMB, which is consistent with the IPPS 
approach. The OMB also designates Consolidated MSAs (CMSAs). A CMSA is 
a metropolitan area with a population of one million or more, 
comprising two or more PMSAs (identified by their separate economic and 
social character). For purposes of the wage index, we use the PMSAs 
rather than CMSAs because they allow a more precise breakdown of labor 
costs. If a metropolitan area is not designated as part of a PMSA, we 
use the applicable MSA.
    These different designations use counties as the building blocks 
upon which they are based. Therefore, under the LTCH PPS, hospitals are 
assigned to either an MSA, PMSA, or NECMA based on whether the county 
in which the LTCH is located is part of that area. All of the counties 
in a State outside a designated MSA, PMSA, or NECMA are designated as 
rural. Specifically, for purposes of calculating the wage index, we 
currently combine all of the counties in a State outside a designated 
MSA, PMSA, or NECMA together to calculate the statewide rural wage 
index for each State. The labor market area definitions currently used 
under the LTCH PPS are the same as those used for acute care inpatient 
hospitals under the IPPS prior to FY 2005 (69 FR 49026).
    2. Core-Based Statistical Areas. The OMB reviews its Metropolitan 
Area (MA) definitions preceding each decennial census. As discussed in 
the FY 2005 IPPS final rule (69 FR 49027), in the fall of 1998, the OMB 
chartered the Metropolitan Area Standards Review Committee to examine 
the MA standards and develop recommendations for possible changes to 
those standards. Three notices related to the review of the standards, 
providing an opportunity for public comment on the recommendations of 
the Committee, were published in the Federal Register on the following 
dates: December 21, 1998 (63 FR 70526); October 20, 1999 (64 FR 56628); 
and August 22, 2000 (65 FR 51060).
    In the December 27, 2000 Federal Register (65 FR 82228-82238), the 
OMB announced its new standards. In that notice, the OMB defines a 
Core-Based Statistical Area (CBSA), beginning in 2003, as ``a 
geographic entity associated with at least one core of 10,000 or more 
population, plus adjacent territory that has a high degree of social 
and economic integration with the core as measured by commuting ties. 
The standards designate and define two categories of CBSAs: MSAs and 
Micropolitan Statistical Areas.'' (65 FR 82236)
    According to the OMB, MSAs are based on urbanized areas of 50,000 
or more population, and Micropolitan Statistical Areas (referred to in 
this discussion as Micropolitan Areas) are based on urban clusters of 
at least 10,000 population, but less than 50,000 population. Counties 
that do not fall within CBSAs (either MSAs or Micropolitan Areas) are 
deemed ``Outside CBSAs.'' In the past, the OMB defined MSAs around 
areas with a minimum core population of 50,000, and smaller areas were 
``Outside MSAs.'' On June 6, 2003, the OMB announced the new CBSAs, 
comprised of MSAs and the new Micropolitan Areas based on Census 2000 
data. (A copy of the announcement may be obtained at the following 
Internet address: http://www.whitehouse.gov/omb/bulletins/fy04/b04-03.html.) The new CBSA designations recognize 49 new MSAs and 565 new 
Micropolitan Areas, and extensively revise the composition of many of 
the existing MSAs. There are 1,090 counties in MSAs under the new CBSA 
designations (previously, there were 848

[[Page 5739]]

counties in MSAs). Of these 1,090 counties, 737 are in the same MSA as 
they were prior to the change in designations, 65 are in a different 
MSA, and 288 were not previously designated to any MSA. There are 674 
counties in Micropolitan Areas. Of these, 41 were previously in an MSA, 
while 633 were not previously designated to an MSA. There are five 
counties that previously were designated to an MSA but are no longer 
designated to either an MSA or a new Micropolitan Area: Carter County, 
KY; St. James Parish, LA; Kane County, UT; Culpepper County, VA; and 
King George County, VA. For a more detailed discussion of the 
conceptual basis of the new CBSAs, refer to the FY 2005 IPPS final rule 
(67 FR 49026-49034).
    3. Proposed Revision of the LTCH PPS Labor Market Areas. In its 
June 6, 2003 announcement, the OMB cautioned that these new definitions 
``should not be used to develop and implement Federal, State, and local 
nonstatistical programs and policies without full consideration of the 
effects of using these definitions for such purposes. These areas 
should not serve as a general-purpose geographic framework for 
nonstatistical activities, and they may or may not be suitable for use 
in program funding formulas.''
    As discussed in the FY 2005 IPPS final rule (69 FR 49027), we have 
previously examined alternatives to the use of MSAs for the purpose of 
establishing labor market areas for Medicare wage indices in general. 
For purposes of the proposed changes to the LTCH PPS labor market 
areas, we examined the same alternatives to the use of MSAs as examined 
under the IPPS. In the May 27, 1994, IPPS proposed rule (59 FR 27724), 
we presented our latest research concerning possible future refinements 
to the labor market areas. Specifically, we discussed and solicited 
comment on the proposal by the Prospective Payment Assessment 
Commission (ProPAC), a predecessor organization to the Medicare Payment 
Advisory Commission (MedPAC), for hospital-specific labor market areas 
based on each hospital's nearest neighbors, and our research and 
analysis on alternative labor market areas. Even though we found that 
none of the alternative labor market areas that we studied provided a 
distinct improvement over the use of MSAs, we presented an option using 
the MSA-based wage index, but generally giving a hospital's own wages a 
higher weight than under the current system. We also described for 
comment a State labor market option, under which hospitals would be 
allowed to design labor market areas within their own State boundaries.
    We described the comments we received in the June 2, 1995 IPPS 
proposed rule (60 FR 29219). Specifically, as we discussed in that same 
proposed rule, there was no consensus among the commenters on the 
choice for new labor market areas. Many individual hospitals that 
commented on that proposed rule expressed dissatisfaction with all of 
the proposals. However, several State hospital associations that 
commented on that proposed rule stated that the options merited further 
study. Therefore, at that time we contacted the association 
representatives that participated in our November 1993 meeting on labor 
market issues in which we solicited ideas for additional types of labor 
market research to conduct. None of the individuals we contacted 
suggested any ideas for further research. After considering these same 
options for the LTCH PPS, we conclude that there is no basis for 
believing that either the nearest neighbor option or the State labor 
market option would result in a wage index adjustment that would be 
more appropriate for LTCHs than the MSA-based wage index adjustment. As 
discussed in the June 2, 1995 IPPS proposed rule (60 FR 29219), these 
options could inappropriately reward the highest cost hospitals with 
higher wage indexes and there would likely be less than full consent by 
hospitals to participate in the alternative options, particularly if 
hospitals face lower reimbursement due to the change.
    Consequently, consistent with the approach taken under the IPPS, we 
have used MSAs to define labor market areas for purposes of Medicare 
wage indices in the LTCH PPS since its implementation for cost 
reporting periods beginning on or after October 1, 2002. In fact, MSAs 
are also used to define labor market areas for purposes of the wage 
index for many of the other Medicare payment systems (for example, IRF 
PPS, SNF PPS, HHA PPS, Outpatient PPS, and IPF PPS). While we recognize 
MSAs are not designed specifically to define labor market areas, we 
believe they do represent a useful proxy for this purpose, and our 
analysis and discussion here are focused on issues related to adopting 
the new CBSA-based designations to define labor market areas for 
purposes of the IPPS and for purposes of proposing them for LTCH PPS.
    Historically, Medicare prospective payment systems have utilized MA 
definitions developed by the OMB. The labor market areas currently used 
under the LTCH PPS (described above in section IV.C.1.c.1. of this 
preamble) are based on the MA definitions issued by the OMB. As noted 
above, the OMB reviews its MA definitions preceding each decennial 
census to reflect more recent population changes. As discussed in 
greater detail above in section IV.C.1.c.2., the CBSAs are the OMB's 
latest MA definitions based on the Census 2000 data. Because we believe 
that the OMB's latest MA designations more accurately reflect the local 
economies and wage levels of the areas in which hospitals are currently 
located, we adopted revised labor market area designations based on the 
OMB's CBSA designations under the IPPS effective October 1, 2004.
    When we implemented the wage index adjustment at Sec.  412.525(c) 
under the LTCH PPS in the August 30, 2002 LTCH PPS final rule (67 FR 
56016), we explained that the LTCH PPS wage index adjustment was 
intended to reflect the relative hospital wage levels in the geographic 
area of the hospital as compared to the national average hospital wage 
level. Because we believe that the OMB's CBSA designations based on 
Census 2000 data reflect the most recent available geographic 
classifications (MA definitions), we are proposing to revise the labor 
market area definitions used under the LTCH PPS based on the OMB's CBSA 
designations to ensure that the LTCH PPS wage index adjustment most 
appropriately accounts for and reflects the relative hospital wage 
levels in the geographic area of the hospital as compared to the 
national average hospital wage level. Specifically, we are proposing to 
revise the LTCH PPS labor market definitions based on the OMB's new 
CBSA designations (as discussed in greater detail below) effective for 
LTCH PPS discharges occurring on or after July 1, 2005. Accordingly, we 
are proposing to revise Sec.  412.525(c) to specify that for discharges 
occurring on or after July 1, 2005, the application of the wage index 
under the LTCH PPS would be made on the basis of the location of the 
facility in an urban or rural area as defined in Sec.  
412.64(b)(1)(ii)(A)-(C). (As a conforming change, we are also proposing 
to revise Sec.  412.525(c) to state that the current labor area 
definitions in the existing Sec.  412.525(c) would be effective for 
discharges occurring in cost reporting periods beginning on or after 
October 1, 2002 and before July 1, 2005.)
    We also note that these are the same labor market area definitions 
(based on the OMB's new CBSA designations) implemented for acute care 
inpatient hospitals under the IPPS at Sec.  412.64(b), which were 
effective for those hospitals

[[Page 5740]]

beginning October 1, 2004 as discussed in the FY 2005 IPPS final rule 
(69 FR 49026-49034). As discussed above in section IV.C.1.b. of this 
preamble, the LTCH PPS was modeled after the IPPS for short-term acute 
care inpatient hospitals. The similarity between the IPPS and the LTCH 
PPS includes the adoption in the initial implementation of the LTCH PPS 
of the same labor market area definitions under the LTCH PPS that 
existed under the IPPS at that time, as well as the use of acute care 
inpatient hospitals' wage data in calculating the LTCH PPS wage index. 
Therefore, besides reflecting the most recent available geographic 
classifications and, consequently, more accurately reflecting the 
current labor markets (which is the primary reason for proposing to 
adopt OMB's new CBSA-based designations), we believe that proposing to 
revise the LTCH PPS labor marker area definitions based on OMB's new 
CBSA-based designations is also consistent with our historical practice 
of modeling LTCH PPS policy after IPPS policy.
    Below, we discuss the composition of the proposed LTCH PPS labor 
market areas based on the OMB's new CBSA designations. It should be 
noted that OMB's new CBSA designations are comprised of several county-
based area definitions as explained above, which include Metropolitan 
Areas, Micropolitan Areas, and areas ``outside CBSAs.'' Under the LTCH 
PPS, since the implementation of the LTCH PPS, we have used two types 
of labor market areas, urban and rural. As discussed in greater detail 
below, in this proposed rule, in proposing to adopt revised labor 
market areas under the LTCH PPS based on OMB's new CBSA-based 
designations, we are proposing to continue to have 2 types of labor 
market areas (urban and rural). In the discussion that follows, we 
explain our proposal to recognize Metropolitan Areas, which include New 
England MSAs and Metropolitan Divisions, as urban. We also explain our 
proposal to recognize Micropolitan Areas and areas ``outside CBSAs'' as 
rural. The following discussion will describe the proposed methodology 
for mapping OMB's CBSA-based designations into the LTCH PPS (urban area 
or rural area) format.
    a. New England MSAs. As stated above, under the LTCH PPS, we 
currently use NECMAs to define labor market areas in New England, 
because these are county-based designations rather than the 1990 MSA 
definitions for New England, which used minor civil divisions such as 
cities and towns. Under the current MSA definitions, NECMAs provided 
more consistency in labor market definitions for New England compared 
with the rest of the country, where MSAs are county-based. Under the 
new CBSAs, the OMB has now defined the MSAs and Micropolitan Areas in 
New England on the basis of counties. The OMB also established New 
England City and Town Areas, which are similar to the previous New 
England MSAs.
    In order to create consistency across all LTCH labor market areas, 
under the LTCH PPS, we are proposing to use the county-based areas for 
all MSAs in the nation, including those in New England. The OMB has now 
defined the New England area based on counties, creating a city- and 
town-based system as an alternative. We believe that adopting county-
based labor market areas for the entire country except those in New 
England would lead to inconsistencies in our designations. Adopting 
county-based labor market areas for the entire country provides 
consistency and stability in Medicare program payment because all of 
the labor market areas throughout the country, including New England, 
would be defined using the same system (that is, counties) rather than 
different systems in different areas of the county, and minimizes 
programmatic complexity.
    In addition, we have consistently employed a county-based system 
for New England for precisely that reason: to maintain consistency with 
the labor market definitions used throughout the country. Because we 
have never used cities and towns for defining LTCH labor market areas, 
employing a county-based system in New England maintains that 
consistent practice. We note that this is consistent with the 
implementation of the CBSA-based designations under the IPPS for New 
England (69 FR 49028). Accordingly, under the LTCH PPS we are proposing 
to use the New England MSAs as determined under the proposed new CBSA-
based labor market area definitions in defining the proposed revised 
LTCH PPS labor market areas.
    b. Metropolitan Divisions. Under the OMB's new CBSA designations, a 
Metropolitan Division is a county or group of counties within a CBSA 
that contains a core population of at least 2.5 million, representing 
an employment center, plus adjacent counties associated with the main 
county or counties through commuting ties. A county qualifies as a main 
county if 65 percent or more of its employed residents work within the 
county and the ratio of the number of jobs located in the county to the 
number of employed residents is at least 0.75. A county qualifies as a 
secondary county if 50 percent or more, but less than 65 percent, of 
its employed residents work within the county and the ratio of the 
number of jobs located in the county to the number of employed 
residents is at least .75. After all the main and secondary counties 
are identified and grouped, each additional county that already has 
qualified for inclusion in the MSA falls within the Metropolitan 
Division associated with the main/secondary county or counties with 
which the county at issue has the highest employment interchange 
measure. Counties in a Metropolitan Division must be contiguous. (65 FR 
82236)
    The construct of relatively large MSAs being comprised of 
Metropolitan Divisions is similar to the current construct of CMSAs 
comprised of PMSAs. As noted above, in the past, the OMB designated 
CMSAs as Metropolitan Areas with a population of one million or more 
and comprised of two or more PMSAs. Under the LTCH PPS, we currently 
use the PMSAs rather than CMSAs to define labor market areas because 
they comprise a smaller geographic area with potentially varying labor 
costs due to different local economies. We believe that CMSAs may be 
too large of an area with a relatively large number of hospitals, to 
accurately reflect the local labor costs of all of the individual 
hospitals included in that relatively ``large'' area. A large market 
area designation increases the likelihood of including many hospitals 
located in areas with very different labor market conditions within the 
same market area designation. This variation could increase the 
difficulty in calculating a single wage index that would be relevant 
for all hospitals within the market area designation. Similarly, we 
believe that MSAs with a population of 2.5 million or greater may be 
too large of an area to accurately reflect the local labor costs of all 
of the individual hospitals included in that relatively ``large'' area. 
Furthermore, as indicated above, Metropolitan Divisions represent the 
closest approximation to PMSAs, the building block of the current LTCH 
PPS labor market area definitions, and therefore, would most accurately 
maintain our current structuring of the LTCH PPS labor market areas. 
Therefore, as implemented under the IPPS (69 FR 49029), we are 
proposing to use the Metropolitan Divisions where applicable (as 
described below) under the proposed new CBSA-based labor market area 
definitions.
    In addition to being comparable to the organization of the labor 
market areas under current MSA designations (that is, the use of PMSAs 
rather than

[[Page 5741]]

CMSAs), we believe that proposing to use Metropolitan Divisions where 
applicable (as described below) under the LTCH PPS would result in a 
more accurate adjustment for the variation in local labor market areas 
for LTCHs. Specifically, if we would recognize the relatively 
``larger'' CBSA that comprises two or more Metropolitan Divisions as an 
independent labor market area for purposes of the wage index, it would 
be too large and would include the data from too many hospitals to 
compute a wage index that would accurately reflect the various local 
labor costs of all of the individual hospitals included in that 
relatively ``large'' CBSA. As mentioned earlier, a large market area 
designation increases the likelihood of including many hospitals 
located in areas with very different labor market conditions within the 
same market area designation. This variation could increase the 
difficulty in calculating a single wage index that would be relevant 
for all hospitals within the market area designation. Rather, by 
proposing to recognize Metropolitan Divisions where applicable (as 
described below) under the proposed new CBSA-based labor market area 
definitions under the LTCH PPS, we believe that in addition to more 
accurately maintaining the current structuring of the LTCH PPS labor 
market areas, the local labor costs would be more accurately reflected, 
thereby resulting in a wage index adjustment that better reflects the 
variation in the local labor costs of the local economies of the LTCHs 
located in these relatively ``smaller'' areas.
    Below we describe where Metropolitan Divisions would be applicable 
under the proposed new CBSA-based labor market area definitions under 
the LTCH PPS.
    Under OMB's new CBSA-based designations, there are 11 MSAs 
containing Metropolitan Divisions: Boston; Chicago; Dallas; Detroit; 
Los Angeles; Miami; New York; Philadelphia; San Francisco; Seattle; and 
Washington, D.C. Although these MSAs were also CMSAs under the prior 
definitions, in some cases these areas have been significantly altered. 
Under the current LTCH PPS MSA designations, Boston is a single NECMA. 
Under the proposed CBSA-based labor market area designations, it would 
be comprised of 4 Metropolitan Divisions. Los Angeles would go from 4 
PMSAs under the current LTCH PPS MSA designations to 2 Metropolitan 
Divisions under the proposed CBSA-based labor market area designations 
because 2 MSAs became separate MSAs. The New York CMSA would go from 15 
PMSAs under the current LTCH PPS MSA designations down to only 4 
Metropolitan Divisions under the proposed CBSA-based labor market area 
designations. Five PMSAs in Connecticut under the current LTCH PPS MSA 
designations would become separate MSAs under the proposed CBSA-based 
labor market area designations, and the number of PMSAs in New Jersey 
under the current LTCH PPS MSA designations would go from 5 to 2, with 
the consolidation of 2 New Jersey PMSAs (Bergen-Passaic and Jersey 
City) into the New York-Wayne-White Plains, NY-NJ Division, under the 
proposed CBSA-based labor market area designations. In San Francisco, 
under the proposed CBSA-based labor market area designations, only 2 
Divisions would remain where there were once 6 PMSAs some of which are 
now separate MSAs under the current LTCH PPS labor market area 
designations.
    Under the current LTCH PPS labor market area designations, 
Cincinnati, Cleveland, Denver, Houston, Milwaukee, Portland, 
Sacramento, and San Juan are all designated as CMSAs, but would no 
longer be designated as CMSAs under the proposed CBSA-based labor 
market area designations. As noted previously, the population threshold 
to be designated a CMSA under the current LTCH PPS labor market area 
designations is one million. In most of these cases, counties currently 
in a PMSA under the current LTCH PPS labor market area designations 
would become separate, independent MSAs under the proposed CBSA-based 
labor market area designations.
    c. Micropolitan Areas. Under the OMB's new CBSA-based designations, 
Micropolitan Areas are essentially a third area definition made up 
mostly of currently rural areas, but also include some or all of areas 
that are currently designated as an urban MSA. As discussed in greater 
detail in the FY 2005 IPPS final rule (69 FR 49029-49032), how these 
areas are treated would have significant impacts on the calculation and 
application of the wage index. Specifically, whether or not 
Micropolitan Areas are included as part of the respective statewide 
rural wage indices would impact the value of statewide rural wage index 
of any State that contains a Micropolitan Area because a hospital's 
classification as urban or rural affects which hospitals' wage data are 
included in the statewide rural wage index. As discussed above in 
section IV.C.1.c.1., we combine all of the counties in a State outside 
a designated urban area together to calculate the statewide rural wage 
index for each State.
    In general, including Micropolitan Areas as part of the statewide 
rural labor market area would result in an increase to the statewide 
rural wage index because hospitals located in those Micropolitan Areas 
typically have higher labor costs than other rural hospitals in the 
State. Alternatively, as discussed in greater detail below, if 
Micropolitan Areas would be recognized as independent labor market 
areas, because there would be so few hospitals in each labor market 
area, the wage indices for LTCHs in those areas could become relatively 
unstable as they would change considerably from year to year.
    Because we currently use MSAs to define urban labor market areas 
and we group all the hospitals in counties within each State that are 
not assigned to an MSA together into a statewide rural labor market 
area, we have used the terms ``urban'' and ``rural'' wage indexes in 
the past for ease of reference. However, the introduction of 
Micropolitan Areas by the OMB potentially complicates this terminology 
because these areas include many hospitals that are currently included 
in the statewide rural labor market areas.
    We are proposing to treat Micropolitan Areas as rural labor market 
areas under the LTCH PPS for the reasons outlined below. That is, 
counties that are assigned to a Micropolitan area under the CBSA-based 
designations would be treated the same as other ``rural'' counties that 
are not assigned to either an MSA (Metropolitan Statistical Area) or a 
Micropolitan Area. Therefore, in determining a LTCH's applicable wage 
index (based on IPPS hospital wage index data, as discussed in greater 
detail below in section IV.C.d. of this preamble), we propose that a 
LTCH in a Micropolitan Area under the OMB's CBSA-based designations 
would be classified as ``rural'' and would be assigned the statewide 
rural wage index for the State in which it resides.
    In the FY 2005 IPPS final rule (69 FR 49029-49032), we discuss our 
evaluation of the impact of treating Micropolitan Areas as part of the 
statewide rural labor market area instead of treating Micropolitan 
Areas as independent labor market areas for hospitals paid under the 
IPPS. As an alternative to treating Micropolitan Areas as part of the 
statewide rural labor market area for purposes of the LTCH PPS, we 
examined treating Micropolitan Areas as separate (urban) labor market 
areas, just as we did when implementing the revised labor market areas 
under the IPPS. As discussed in that same final rule, one of the 
reasons

[[Page 5742]]

Micropolitan Areas have such a dramatic impact on the wage index is, 
because Micropolitan Areas encompass smaller populations than MSAs, 
they tend to include fewer hospitals per Micropolitan Area. Currently, 
there are only 25 MSAs with one hospital in the MSA. However, under the 
new proposed CBSA-based definitions, there are 373 Micropolitan Areas 
with one hospital, and 49 MSAs with only one hospital.
    This large number of labor market areas with only one hospital and 
the increased potential for dramatic shifts in the wage indexes from 1 
year to the next is a problem for several reasons. First, it creates 
instability in the wage index from year to year for a large number of 
hospitals. Second, it reduces the averaging effect (This averaging 
effect allows for more data points to be used to calculate a 
representative standard of measured labor costs within a market area.) 
lessening some of the incentive for hospitals to operate efficiently. 
This incentive is inherent in a system based on the average hourly 
wages for a large number of hospitals, as hospitals could profit more 
by operating below that average. In labor market areas with a single 
hospital, high wage costs are passed directly into the wage index with 
no counterbalancing averaging with lower wages paid at nearby competing 
hospitals. Third, it creates an arguably inequitable system when so 
many hospitals have wage indexes based solely on their own wages, while 
other hospitals' wage indexes are based on an average hourly wage 
across many hospitals.
    For the reasons noted above, and consistent with the treatment of 
these areas under the IPPS, we are proposing not to adopt Micropolitan 
Areas as independent labor market areas under the LTCH PPS, but 
instead, we propose that Micropolitan Areas, under the CBSA-based labor 
market area definitions, would be considered part of the statewide 
rural labor market area. Accordingly, we are proposing that the LTCH 
PPS statewide rural wage index would be determined using acute-care 
IPPS hospital wage data (the rational for using IPPS hospital wage data 
is discussed in greater detail below in section IV.C.1.d. of this 
preamble) from hospitals located in non-MSA areas (for example, rural 
areas, including Micropolitan Areas) and that statewide rural wage 
index would be assigned to LTCHs located in those non-MSA areas.
4. Implementation of the Proposed Revised Labor Market Areas Under the 
LTCH PPS
    We note that, consistent with our policy under the IPPS, we are not 
proposing to adopt the proposed new labor market area definitions 
themselves in a budget neutral manner. As we discussed in the August 
30, 2002 LTCH PPS final rule, under section 123 of Pub. L. 106-113, and 
section 307 of Pub. L. 106-554, the Secretary generally has broad 
authority in developing the LTCH PPS, including whether and how to make 
adjustments to the LTCH PPS. In that same final rule we state that we 
will consider whether it is appropriate for us to propose a budget 
neutrality adjustment in the annual update of some aspects of the LTCH 
PPS under our broad discretionary authority under the statute to 
provide ``appropriate adjustments'' to the LTCH PPS. Until the 5-year 
transition from cost-based reimbursement to prospective payment is 
complete, including the end of the phase-in of the wage index 
adjustment under Sec.  412.525(c), we believe that it would not be 
appropriate to update any aspects of the LTCH PPS in a budget neutral 
manner. A primary reason for waiting until after the transition is 
complete before evaluating aspects of the LTCH PPS, including the 
budget neutrality issue, is that the data available to analyze such 
issues is very limited, because the LTCH PPS is still relatively new 
and there is a lag time in data availability. Also, the fact that a 
number of LTCHs were and some still are operating under the transition 
period from TEFRA to LTCH PPS may make the available data even less 
appropriate for an analysis, since hospitals may still be modifying 
their behavior based on their transition to prospective payment and our 
data may not yet replace any operational changes LTCHs may have made in 
response to prospective payment. Once the transition is complete, we 
will have a better opportunity to evaluate the impacts of the 
implementation of this new payment system based on a number of years of 
LTCH PPS data.
    To facilitate an understanding of the proposed policies related to 
the proposed change to the LTCH PPS labor market areas discussed above, 
in Table 4 of the Addendum of this proposed rule, we are providing a 
listing of each LTCH's State and county location; existing labor market 
area designation; and its proposed new CBSA-based labor market area 
designation based on the best available cost report data from HCRIS 
(FYs 1999-2003) and county information from our OSCAR database. We 
encourage LTCHs to review the county location and both the current and 
proposed labor market area assignments for accuracy. Any questions or 
corrections (including additions or deletions) to the information 
provided in Table 4 should be emailed to the following CMS Web address: 
[email protected]. A link to this address can be found on the 
following CMS Web page http://www.cms.hhs.gov/providers/longterm/default.asp.
    When the revised labor market areas based on the OMB's new CBSA-
based designations were adopted under the acute care hospital IPPS 
beginning on October 1, 2004, a transition to the new labor market area 
designations was established due to the scope and significant 
implications of these new boundaries and to buffer the subsequent 
significant impacts it may have on payments to numerous hospitals. As 
discussed in the FY 2005 IPPS final rule (69 FR 49032), during FY 2005, 
a blend of wage indexes is calculated for those acute care IPPS 
hospitals experiencing a drop in their wage indexes because of the 
adoption of the new labor market areas. Also, as described in that same 
final rule (69 FR 49032), under the IPPS, hospitals that previously 
were located in an urban MSA, but then became rural under the new CBSA-
based definitions are assigned the wage index value of the urban area 
to which they previously belonged, for 3 years (FYs 2005-2007).
    Because the former MSA-based labor market areas used under the IPPS 
had been used for payment for over 10 years, we believe it was 
necessary to provide additional protection given the scope and 
potentially significant implications of these new labor market areas on 
numerous acute-care hospitals. Therefore, we implemented a transition 
under the IPPS from the former MSA-based labor market area designation 
to the new CBSA-based labor market area designation for acute-care 
hospitals that would receive a lower wage index as a result of the 
change in the labor market area designations.
    We recognize that, just like IPPS hospitals, many LTCHs would 
experience decreases in their wage index as a result of the proposed 
labor market area changes. At the same time, a significant number of 
LTCHs would benefit from these proposed changes. However, because we 
are in the midst of a transition to a full wage-index adjustment under 
the LTCH PPS, we believe that the effects on the LTCH PPS wage index 
from the proposed changes to the LTCH PPS labor market areas 
definitions would be mitigated. Specifically, as noted above, most

[[Page 5743]]

LTCHs are presently still in their FY 2004 cost reporting period (the 
vast majority of LTCHs start their cost reporting periods on July 1 or 
September 1), and are, therefore, in the 2nd year of the 5-year phase-
in of the LTCH PPS wage index adjustment, and the applicable wage index 
value is \2/5\ths (40 percent) of the applicable full LTCH PPS wage 
index adjustment. Since most LTCHs are only in the 2nd year of the 5-
year phase-in of the wage index adjustment, for most LTCHs, the labor-
related portion of the standard Federal rate is only adjusted by 40 
percent of the applicable full wage index (that is, \2/5\ths wage index 
value). As also noted above, the LTCH PPS wage index adjustment is made 
by multiplying the LTCH PPS standard Federal rate by the applicable 
wage index value, and the current LTCH PPS labor related-share is 
72.885 percent. Consequently, for most LTCHs, only 29 percent of the 
standard Federal rate is affected by the wage index adjustment (72.885 
percent x 0.4 = 29.154 percent), and the proposed revision to the labor 
market area definitions based on OMB's new CBSA-based designations 
would only have a minimal impact on LTCH PPS payments. Therefore, we do 
not believe it is necessary to propose a transition policy for the 
proposed revision to the LTCH PPS labor market area definitions because 
the impact of the proposed revision to the labor market area 
definitions would only have a minimal impact on LTCH PPS payments (as 
explained above).
    For the reasons discussed in greater detail below, we are not 
proposing a transition under the LTCH PPS from the current MSA-based 
labor market area designations to the new CBSA-based labor market area 
designations. Rather, we are proposing under the LTCH PPS to adopt the 
new CBSA-based labor market area definitions beginning with the 2006 
LTCH PPS rate year without a transition period. As also discussed in 
greater detail below, we believe that this proposed policy is 
appropriate because despite significant similarities between the LTCH 
PPS and the IPPS, there are clear distinctions between the payment 
systems, particularly regarding wage index issues.
    The most significant distinction upon which we have based this 
proposed policy determination is that where acute care hospitals under 
the IPPS have been paid using full wage index adjusted payments since 
1983 and had used the previous IPPS MSA-based labor market area 
designations for over 10 years, under the LTCH PPS, a wage index 
adjustment is being phased-in over a 5-year period, and as noted above, 
most LTCHs are only in the 2nd year of the 5-year phase-in of the wage 
index adjustment (that is, LTCH cost reporting periods beginning during 
FY 2004 as established in the August 30, 2002 LTCH PPS final rule (67 
FR 56016-56019)). As explained in greater detail above, the impact that 
the wage index can have on LTCH PPS payments is limited at this point, 
since only a small percentage of the LTCH PPS standard Federal rate is 
affected by the wage index (approximately 29 percent in most cases, as 
explained above) because of the 5-year phase-in of the wage index 
adjustment.
    Our initial analysis of the appropriateness of including a wage 
index adjustment in the March 22, 2004 proposed rule for the LTCH PPS 
(67 FR 13465-13466) indicated that a wage adjustment did not lead to an 
increase in the accuracy of LTCH PPS payments because a statistical 
analysis did not show a significant relationship between LTCHs costs 
and their geographic location. However, based upon comments, we 
revisited this proposed determination after additional data analysis 
and a more general policy evaluation, and we stated that we ``believe 
that the conceptual reasons for having an area wage adjustment support 
transitioning into a wage adjustment, notwithstanding the data problems 
and issues with the regression analysis'' (see August 30, 2002 LTCH PPS 
final rule (67 FR 56018)). However, given the lack of strong empirical 
evidence to support a wage index adjustment under the LTCH PPS, we 
provided for a 5-year transition to the full implementation of the wage 
index adjustment. We also noted that we would `` * * * continue to 
reevaluate LTCH data as they become available and would propose to 
adjust the phase-in if subsequent data support a change.'' In each 
subsequent LTCH PPS proposed and final rule since FY 2003, we have 
evaluated the most recent LTCH data available and still have found no 
empirical evidence to support a change in the 5-year phase-in of the 
wage index adjustment under the LTCH PPS.
    Therefore, where a wage index adjustment has been a stable feature 
of the acute care hospital IPPS since its 1983 implementation and had 
utilized the prior MSA-based labor market area designation for over 10 
years, this is not the case for the LTCH PPS which has only been 
implemented since October 1, 2002. Furthermore, as explained above, 
most LTCHs are presently still in their FY 2004 cost reporting period 
(the vast majority of LTCHs start their cost reporting periods on July 
1 or September 1), and are, therefore, in the 2nd year of the 5-year 
phase-in of the LTCH PPS wage index adjustment, and the applicable wage 
index value is \2/5\ths (40 percent) of the full LTCH PPS wage index 
adjustment. As also noted above, the LTCH PPS wage index adjustment is 
made by multiplying the LTCH PPS standard Federal rate by the 
applicable wage index value, and the current LTCH PPS labor related-
share is 72.885 percent. Consequently, for most LTCHs, only 29 percent 
of the standard Federal rate is affected by the wage index adjustment 
(72.885 percent x 0.4 = 29.154 percent). Therefore, the proposed 
revision to the labor market area definitions based on OMB's new CBSA-
based designations would only have a minimal impact on LTCH PPS 
payments.
    Because the impact of the proposed revision to the labor market 
area definitions would only have a minimal impact on LTCH PPS payments 
(as explained above), we do not believe it is necessary to propose a 
transition policy for the proposed revision to the LTCH PPS labor 
market area definitions. In contrast, a transition policy to the 
revised IPPS labor market area definitions under the IPPS was 
appropriate because, as there is no phase-in of a wage index adjustment 
under the IPPS as there currently is under the LTCH PPS, the full 
labor-related share of either 71.066 percent or 62 percent (as 
discussed above in section IV.C.1.b. of this preamble) of the IPPS 
standardized amount (that is, Federal rate) is affected by the IPPS 
wage index adjustment, which resulted in a more significant projected 
impact for acute care hospitals under the IPPS. Furthermore, we do 
believe that it is necessary to further transition any proposed changes 
to the LTCH PPS wage index adjustment, including the proposed revision 
of the labor market area definitions, because, in fact, the LTCH PPS 
wage index adjustment is still being phased-in over 5 years as 
established in the August 30, 2002 final rule (67 FR 56018). 
Accordingly, to the extent the new CBSA-based labor market area 
definitions are implemented, we would not expect them to have as 
significant of an impact on LTCHs, as they do for IPPS hospitals since 
the full wage index adjustment had been a stable factor of IPPS payment 
for over 20 years.
    An additional distinction between the IPPS and the LTCH PPS 
regarding the wage index adjustment is that the IPPS policies that 
provide for blended and hold-harmless payments during the transition 
from MSA-based labor market areas to CBSA-based labor market areas 
described above were implemented in a

[[Page 5744]]

budget neutral manner under the IPPS (69 FR 49034-49035 and 49275). (We 
note the new labor market area definitions themselves, not the 
transition policies that provide for blended and hold-harmless 
payments, under the IPPS were not adopted in a budget neutral manner 
(69 FR 49034). However, as noted above, wage index changes are not 
budget neutral under the LTCH PPS. Under the IPPS, hospitals located in 
areas with a lower wage index being calculated under their new CBSA 
designation in comparison to what they would have been assigned under 
the old MSA designation were given a blend consisting of 50 percent of 
the new CBSA wage index and 50 percent of the old MSA wage index. This 
essentially increases the wage index for those hospitals, which results 
in an increase in their payment since the blended MSA/CBSA wage index 
is higher than the full CBSA wage index. However, because the IPPS wage 
index transition payments were implemented in a budget neutral manner, 
it did not result in increased spending by Medicare, but rather a 
redistribution of dollars across IPPS acute-care hospitals. If we were 
to propose a similar transition under the LTCH PPS to the one 
implemented under the IPPS, it would result in additional LTCH spending 
by the Medicare program if we did so without a budget neutrality 
adjustment.
    Therefore, given the fact that the LTCH PPS has only been 
implemented for hospital cost reporting periods beginning on or after 
October 1, 2002, (which means that payments to many LTCHs have only 
been governed by the LTCH PPS for slightly more than 2 years), and that 
even for LTCHs that are negatively affected by the new CBSA-based 
designations, the LTCH PPS wage index adjustment, at this point, has 
not been fully implemented and we do not believe that it is appropriate 
or necessary to propose a transition to the proposed new CBSA-based 
labor market areas for purposes of the LTCH PPS wage index adjustment 
under Sec.  412.525(c).
    In addition, we are proposing to revise Sec.  412.525(c) to clarify 
the application of the current adjustment for area wage levels under 
the LTCH PPS, which was originally established in the August 30, 2002 
final rule (67 FR 56015-56019). Specifically, we are proposing to 
revise Sec.  412.525(c) to state that the labor portion of a LTCH's 
Federal prospective payment is adjusted to account for geographical 
differences in the area wage levels using an appropriate wage index 
(established by CMS). The wage index reflects the relative level of 
hospital wages and wage-related costs in the geographic area of the 
hospital compared to the national average level of hospital wages and 
wage-related costs. Currently, urban or rural area is determined in 
accordance with the definitions at Sec.  412.62(f)(1)(ii) and (iii). As 
we discussed above, because we are proposing to revise those 
definitions in this proposed rule, urban or rural area would be 
determined in accordance with the proposed revisions to Sec.  
412.525(c)(1) or the proposed revisions to Sec.  412.525(c)(2), 
respectively. In addition, Sec.  412.525(c) would be revised to specify 
that the appropriate wage index (established by CMS) is updated 
annually. We note that this proposed revision to the language in Sec.  
412.525(c), which codifies our existing policy into regulations, is 
similar to the wage index adjustment codified in regulations under the 
IPPS at Sec.  412.64(h). As stated above, this proposed clarification 
to Sec.  412.525(c) clearly outlines in regulations our established 
methodology for the application of the area wage adjustment under the 
LTCH PPS. As noted above, this methodology was established when we 
implemented the LTCH PPS (that is, cost reporting periods beginning on 
or after October 1, 2002) in the August 30, 2002 final rule (67 FR 
56015-56019).
    d. Wage Index Data. In the May 7, 2004 final rule (69 FR 25684-
25686), we established LTCH PPS wage index values for the 2005 LTCH PPS 
rate year calculated from the same data (generated in cost reporting 
periods beginning during FY 2000) used to compute the FY 2004 acute 
care hospital inpatient wage index data without taking into account 
geographic reclassification under sections 1886(d)(8) and (d)(10) of 
the Act. The LTCH wage index values applicable for discharges occurring 
on or after July 1, 2004 through June 30, 2005 are shown in Table 1 
(for urban areas) and Table 2 (for rural areas) in the Addendum to that 
final rule. Acute care hospital inpatient wage index data is also used 
to establish the wage index adjustment used in the IRF PPS, IPF PPS, 
HHA PPS, SNF PPS, and inpatient psychiatric facility PPS (IPF). As we 
discussed in the August 30, 2002 LTCH PPS final rule (67 FR 56019), 
since hospitals that are excluded from the IPPS are not required to 
provide wage-related information on the Medicare cost report and 
because we would need to establish instructions for the collection of 
this LTCH data in order to establish a geographic reclassification 
adjustment under the LTCH PPS, the wage adjustment established under 
the LTCH PPS is based on a LTCH's actual location without regard to the 
urban or rural designation of any related or affiliated provider. Thus, 
because complete LTCH wage-related data are not currently available on 
the cost report, we do not have complete LTCH wage related data to use 
for the purposes of creating a LTCH wage index based on LTCH wage data, 
and since the labor market areas of acute care hospitals under the IPPS 
are similar to those of LTCHs, we believe wage data of acute care IPPS 
hospitals accurately capture the relationship between the wage related 
costs for LTCHs in an area as compared to the national average. 
Therefore, we believe IPPS acute care hospitals' wage data are the best 
available data to use for the wage index under the LTCH PPS.
    In this proposed rule, we are proposing that for the for the 2006 
LTCH PPS rate year, acute care hospital inpatient wage index data 
generated from cost reporting periods beginning during FY 2001 without 
taking into account geographic reclassification under sections 
1886(d)(8) and (d)(10) of the Act would be used to determine the 
applicable wage index values under the LTCH PPS because these data (FY 
2001) are the most recent complete data. These data are the same FY 
2001 acute care hospital inpatient wage data that were used to compute 
the FY 2005 wage indices currently used under the IPPS, SNF PPS, and 
HHA PPS. The proposed full wage index values that would be applicable 
for LTCH PPS discharges occurring on or after July 1, 2005 through June 
30, 2006 are shown in Tables 1 and 2 in the Addendum of this proposed 
rule.
    The proposed LTCH wage index values that would be applicable for 
discharges occurring on or after July 1, 2005 through June 30, 2006, 
are shown in Table 1 (for urban areas) and Table 2 (for rural areas) in 
the Addendum of this proposed rule. (We note a labeling error published 
in prior years wage index tables used in the LTCH PPS. That labeling 
error was the listing of Stanly County, NC as one of the areas under 
MSA 1520 when, in fact, we consider Stanly County, NC to be a rural 
area in North Carolina. Stanly County wage data have always been 
correctly treated as rural in the actual creation of the LTCH wage 
index values, and it has only been the listing of Stanly County under 
MSA 1520 in prior years LTCH PPS index tables that was in error. 
Consequently, Table 1a in the Addendum of this proposed rule correctly 
removes Stanly County from the list of areas that fall under the MSA

[[Page 5745]]

1520 wage index. As this is strictly a labeling correction that does 
not affect the actual computation of the wage index values, any LTCHs 
located in Stanly County, NC, will continue to fall under, and use, the 
wage index for rural North Carolina.)
    As noted above, a listing of each LTCH's State and county location; 
existing MSA-based labor market area designation; and its proposed new 
CBSA-based labor market area designation based on the best available 
cost report data (FYs 1999-2003) from HCRIS and county information from 
our OSCAR database, are shown in Table 4 of the Addendum of this 
proposed rule. As we also noted earlier in this section, we encourage 
LTCHs to review the county location and both the current and proposed 
labor market area assignments for accuracy. Any questions or 
corrections (including additions or deletions) to the information 
provided in Table 4 should be e-mailed to the following CMS web 
address: [email protected]. A link to this address can be found on 
the following CMS Web page http://www.cms.hhs.gov/providers/longterm/default.asp.
    As discussed earlier in this section (IV.C.1.a.), the applicable 
wage index phase-in percentages are based on the start of a LTCH's cost 
reporting period beginning on or after October 1 of each year during 
the 5-year transition period. Thus, for cost reporting periods 
beginning on or after October 1, 2004 and before October 1, 2005 (FY 
2005), the labor portion of the standard Federal rate would be adjusted 
by three-fifths of the applicable LTCH wage index value. For example, 
for a LTCH's discharges occurring during the 2006 LTCH PPS rate year 
(that is, July 1, 2005 through June 30, 2006) and occurring in the 
LTCH's cost reporting period beginning during FY 2005, the applicable 
wage index value would be three-fifths of the full FY 2005 acute care 
hospital inpatient wage index data, without taking into account 
geographic reclassification under sections 1886(d)(8) and (d)(10) of 
the Act (shown in Tables 1 and 2 of the Addendum to this proposed 
rule). Similarly, for a LTCH's discharges occurring during the 2006 
LTCH PPS rate year (that is, July 1, 2005 through June 30, 2006) and 
occurring in the LTCH's cost reporting period beginning during FY 2006, 
the applicable wage index value would be four-fifths of the full FY 
2005 acute care hospital inpatient wage index data, without taking into 
account geographic reclassification under sections 1886(d)(8) and 
(d)(10) of the Act (shown in Tables 1 and 2 in the Addendum to this 
proposed rule).
    Because the phase-in of the wage index does not coincide with the 
LTCH PPS rate year (July 1 through June 30), most LTCHs will experience 
a change in the wage index phase-in percentages during the LTCH PPS 
rate year. For example, during the 2006 LTCH PPS rate year, for a LTCH 
with a January 1 fiscal year, the three-fifths wage index would be 
applicable for the first 6 months of the 2006 LTCH PPS rate year (July 
1, 2005 through December 31, 2005) and the four-fifths wage index would 
be applicable for the second 6 months of the 2006 LTCH PPS rate year 
(January 1, 2006 through June 30, 2006). We also note that some 
providers will still be in the second year of the 5-year phase-in of 
the LTCH wage index (that is, those LTCHs who began the second year of 
the 5-year phase-in during their cost reporting periods that began 
between July 1, 2004 and September 30, 2004). For the remainder of 
those LTCHs' FY 2004 cost reporting periods which will conclude during 
the first 3 months of the 2006 LTCH PPS rate year, the applicable wage 
index value would be two-fifths of the full FY 2005 acute care hospital 
inpatient wage index data, without taking into account geographic 
reclassification under sections 1886(d)(8) and (d)(10) of the Act as 
shown in Tables 1 and 2 in the Addendum to this proposed rule. Since 
there are no longer any LTCHs in their cost reporting period that began 
during FY 2003 (the first year of the 5-year wage index phase-in), we 
are no longer showing the \1/5\th wage index value in Tables 1 and 2 in 
the Addendum to this proposed rule.
2. Proposed Adjustment for Cost-of-Living in Alaska and Hawaii
    In the August 30, 2002 LTCH PPS final rule (67 FR 56022), we 
established, under Sec.  412.525(b), a cost-of-living adjustment (COLA) 
for LTCHs located in Alaska and Hawaii to account for the higher costs 
incurred in those States. (The inadvertent omission of Sec.  412.525(b) 
by the OFR noted in the May 7, 2004 LTCH PPS final rule (69 FR 25686) 
has been corrected in 42 CFR Parts 400 to 429 revised as of October 1, 
2004) In the May 7, 2004 final rule (69 FR 25686), for the 2005 LTCH 
PPS rate year, we established that we make a COLA to payments for LTCHs 
located in Alaska and Hawaii by multiplying the standard Federal 
payment rate by the appropriate factor listed in Table I of that same 
final rule.
    Similarly, in this proposed rule, for the 2006 LTCH PPS rate year 
we are proposing to make a COLA to payments to LTCHs located in Alaska 
and Hawaii by multiplying the proposed standard Federal payment rate by 
the proposed factors listed in Table I below. These proposed factors 
are obtained from the U.S. Office of Personnel Management (OPM) and are 
currently used under the IPPS. In addition, we propose that if the OPM 
releases revised COLA factors before March 1, 2005, we would use them 
for the development of the payments for the 2006 LTCH rate year and 
publish them in the LTCH PPS final rule.

   Table I.--Proposed Cost-of-Living Adjustment Factors for Alaska and
            Hawaii Hospitals for the 2006 LTCH PPS Rate Year
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Alaska:
  All areas...............................................        1.25
Hawaii:
  Honolulu County.........................................        1.25
  Hawaii County...........................................        1.165
  Kauai County............................................        1.2325
  Maui County.............................................        1.2375
  Kalawao County..........................................        1.2375
------------------------------------------------------------------------

3. Proposed Adjustment for High-Cost Outliers
    a. Background. Under Sec.  412.525(a), we make an adjustment for 
additional payments for outlier cases that have extraordinarily high 
costs relative to the costs of most discharges. Providing additional 
payments for outliers strongly improves the accuracy of the LTCH PPS in 
determining resource costs at the patient and hospital level. These 
additional payments reduce the financial losses that would otherwise be 
caused by treating patients who require more costly care and, 
therefore, reduce the incentives to under serve these patients. We set 
the outlier threshold before the beginning of the applicable rate year 
so that total outlier payments are projected to equal 8 percent of 
total payments under the LTCH PPS.
    Under Sec.  412.525(a), we make outlier payments for any discharges 
if the estimated cost of a case exceeds the adjusted LTCH PPS payment 
for the LTC-DRG plus a fixed-loss amount. The fixed-loss amount is the 
amount used to limit the loss that a hospital will incur under an 
outlier policy. This results in Medicare and the LTCH sharing financial 
risk in the treatment of extraordinarily costly cases. The LTCH's loss 
is limited to the fixed-loss amount and a fixed percentage of costs 
above the marginal cost factor. We calculate the estimated cost of a 
case by multiplying the overall hospital cost-to-charge ratio by the 
Medicare allowable covered charge. In accordance with

[[Page 5746]]

Sec.  412.525(a), we pay outlier cases 80 percent of the difference 
between the estimated cost of the patient case and the outlier 
threshold (the sum of the adjusted Federal prospective payment for the 
LTC-DRG and the fixed-loss amount).
    Under the LTCH PPS, we determine a fixed-loss amount, that is, the 
maximum loss that a LTCH can incur under the LTCH PPS for a case with 
unusually high costs before the LTCH will receive any additional 
payments. We calculate the fixed-loss amount by simulating aggregate 
payments with and without an outlier policy. The fixed-loss amount 
would result in estimated total outlier payments being projected to be 
equal to 8 percent of projected total LTCH PPS payments. Currently, 
MedPAR claims data and cost-to-charge ratios based on data from the 
latest available cost report data from Hospital Cost Report Information 
System (HCRIS) and corresponding MedPAR claims data are used to 
establish a fixed-loss threshold amount under the LTCH PPS.
    b. Cost-to-charge ratios (CCRs). As we noted above, we calculate 
the estimate of the cost of the case used in determining LTCH PPS 
outlier payments by multiplying the Medicare allowable charges for the 
case by the LTCH's overall CCR. As we established in the June 9, 2003 
IPPS high-cost outlier final rule (68 FR 34494-34515), currently (for 
discharges occurring on or after October 1, 2003) fiscal intermediaries 
(FIs) use either the most recent settled cost report or the most recent 
tentative settled cost report, whichever is from the later period, to 
determine a LTCH's CCR. As we specified in Program Memorandum 
Transmittal A-02-093 when we implemented the LTCH PPS and as codified 
in regulation at Sec.  412.525(a)(4)(ii), for discharges occurring on 
or after August 8, 2003, for LTCHs that we are unable to compute a CCR 
(for example, due to faulty or unavailable data), we assign the 
applicable statewide average CCR to the LTCH. (Currently, the 
applicable statewide average CCRs can be found in Tables 8A and 8B of 
the FY 2005 IPPS final rule (69 FR 49687-49688).)
    As set forth in Sec.  412.525(a)(4)(ii), by cross-referencing Sec.  
412.84(i)(3), currently, we apply the applicable statewide average CCR 
when a LTCH's CCR exceeds the maximum CCR threshold (ceiling) set forth 
specifically at Sec.  412.84(i)(3)(ii). As we explained in the June 9, 
2003 high cost outlier final rule (68 FR 34506-34507), CCRs above this 
range are probably due to faulty data reporting or entry. Therefore, 
these CCRs should not be used to identify and make payments for outlier 
cases because the data are clearly errors and should not be relied 
upon. We also made a similar change to the short-stay outlier policy at 
Sec.  412.529. Since CCRs are also used in determining short-stay 
outlier payments, the rationale for that change mirrors that for high-
cost outliers. (The current LTCH PPS CCR ceiling is 1.409, which is 
equal to the combined operating and capital CCR ceilings (as 
established in the FY 2005 IPPS final rule (69 FR 49287)).)
    Currently, (for discharges occurring on or after August 8, 2003, 
only a maximum CCR threshold (ceiling) is applied to a LTCH's CCR 
ratio. For discharges occurring on or after August 8, 2003), a minimum 
CCR threshold (floor) is no longer applicable (See June 8, 2003, 68 FR 
34506-34507). As discussed above, if a LTCH's cost-to-charge ratio is 
above the ceiling, the applicable statewide average CCR is assigned to 
the LTCH. However, a LTCH's CCR is no longer raised to the applicable 
statewide average CCR if it falls below a minimum CCR threshold (floor) 
for discharges occurring on or after August 8, 2003, as we discussed in 
the June 9, 2003 high cost outlier final rule (68 FR 34507), in order 
to prevent hospitals from receiving inappropriately high outlier 
payments. (Refer to the June 9, 2003 high-cost outlier final rule (68 
FR 34507) for further explanation of the establishment of the current 
CCR policy.)
    c. Establishment of the Proposed Fixed-Loss Amount. When we 
implemented the LTCH PPS, as discussed in the August 30, 2002 final 
rule (67 FR 56022-56026), we establish a fixed-loss amount so that 
total estimated outlier payments are projected to equal 8 percent of 
total estimated payments under the LTCH PPS. To determine the fixed-
loss amount, we estimate outlier payments and total LTCH PPS payments 
for each case using claims data from the MedPAR. Specifically, to 
determine the outlier payment for each case, we estimate the cost of 
the case by multiplying the Medicare covered charges from the claim by 
the LTCH's hospital specific CCR. In accordance with Sec.  
412.525(a)(3), if the estimated cost of the case exceeds the outlier 
threshold (the sum of the adjusted Federal prospective payment for the 
LTC-DRG and the fixed-loss amount), we pay an outlier payment equal to 
80 percent of the difference between the estimated cost of the case and 
the outlier threshold (the sum of the adjusted Federal prospective 
payment for the LTC-DRG and the proposed fixed-loss amount).
    In the May 7, 2004 final rule, in calculating the fixed-loss amount 
that would result in outlier payments projected to be equal to 8 
percent of total payments for the 2005 LTCH PPS rate year, we used 
claims data from the December 2003 update of the FY 2003 MedPAR files, 
as that was the best available data at that time. We calculated LTCHs' 
CCRs for determining the fixed-loss amount based on the latest 
available cost report data in HCRIS from FYs 1999 through 2002. Also, 
as we explained in that same final rule (68 FR 25687), we calculated a 
single fixed-loss amount for the 2005 LTCH PPS rate year based on 
Version 21.0 of the GROUPER, which was the version in effect as of the 
beginning of the LTCH PPS rate year (that is, July 1, 2004 for the 2005 
LTCH PPS rate year).
    We also applied the current outlier policy under Sec.  412.525(a) 
in determining the fixed-loss amount for the 2005 LTCH PPS rate year; 
that is, we assigned the applicable statewide average CCR only to LTCHs 
whose CCRs exceeded the ceiling (and not when they fell below the 
floor). Accordingly, we used the FY 2004 IPPS combined operating and 
capital CCR ceiling of 1.366 (as explained in the IPPS final rule, 
published August 1, 2003 (68 FR 45346)). As we explained in that same 
final rule, we believe that using the FY 2004 combined IPPS operating 
and capital CCR ceiling for LTCHs is appropriate for the same reasons 
we stated above regarding the use of the FY 2004 combined operating and 
capital CCR ceiling under the IPPS.
    For the 2005 LTCH PPS rate year, in the May 7, 2004 final rule (69 
FR 25689), we established a fixed-loss amount of $17,864. Thus, in the 
2005 LTCH PPS rate year we pay an outlier case 80 percent of the 
difference between the estimated cost of the case and the outlier 
threshold (the sum of the adjusted Federal LTCH PPS payment for the 
LTC-DRG and the fixed-loss amount of $17,864).
    In this proposed rule, we are not proposing a change in our 
established methodology for determining the fixed-loss amount. However, 
we are proposing to use more recently available data to determine the 
proposed fixed-loss amount for the 2006 LTCH PPS rate year, including 
the most recent available claims data and data from the Provider 
Specific File (PSF). Specifically, for the 2006 LTCH PPS rate year, we 
are proposing to use the September 2004 update of the FY 2003 MedPAR 
claims data to determine a proposed fixed-loss amount that would result 
in projected outlier payments being equal to 8 percent of total 
projected LTCH PPS

[[Page 5747]]

payments, based on the policies described in this proposed rule, 
because these data are the best LTCH data available. As noted above, we 
determined the proposed fixed-loss amount based on the version of the 
GROUPER that would be in effect as of the beginning of the 2006 LTCH 
PPS rate year (July 1, 2005), that is, Version 22.0 of the LTCH PPS 
GROUPER (69 FR 48982).
    As we explained above, in determining the LTCH PPS fixed-loss 
amount, CCRs are used to estimate the cost of each case by multiplying 
the Medicare covered charges from the claim by the LTCH's CCR. Rather 
than using CCRs calculated from the latest available cost report data 
in HCRIS and corresponding claims data from the MedPAR data as we did 
when we determined the 2005 LTCH PPS rate year fixed-loss amount (as 
noted above), in this proposed rule, for purposes of determining the 
proposed fixed-loss amount for the 2006 LTCH PPS rate year, we are 
proposing to use CCRs from the PSF as they are the best available data 
for the LTCH PPS because, as we discuss in greater detail below, they 
are more recent data and were actually used to make LTCH PPS payment.
    The PSF contains CCRs computed by FIs in accordance with Program 
Memorandum Transmittal A-02-093 and Program Memorandum Transmittal A-
03-058, which reflects the changes made in the June 9, 2003 high-cost 
outlier final rule (68 FR 34494), including the use of either the most 
recently settled or tentatively settled cost report, whichever is 
later, to determine a LTCH's CCR. This also includes the assignment of 
the applicable statewide average CCR by the FI in cases where the FI 
was unable to compute a CCR (for example, due to faulty or unavailable 
data), or the CCR computed by the FI exceeded the applicable CCR 
ceiling. While FIs have been determining a CCR for each LTCH and 
entering them on the PSF (as instructed in Program Transmittal A-02-
093) in order to determine the LTCH PPS payment for each discharge 
using the LTCH PPS PRICER software, we have only recently had access to 
the complete PSF data for all LTCHs due to the lag time in data 
availability (the LTCH PPS has only been implemented for slightly over 
2 years, that is cost reporting periods beginning on or after October 
1, 2002). Thus, this is the first opportunity that we have had to use 
CCRs from the PSF in determining the fixed-loss amount.
    We are proposing to use CCRs from the PSF rather than computing 
CCRs from the latest MedPAR claims data and corresponding cost report 
data for purposes of determining the proposed fixed-loss amount under 
the LTCH PPS because we believe that using these CCRs to estimate the 
cost of the case used determining outlier payments would be more 
accurate than they would be using our current source for obtaining CCRs 
to estimate the fixed-loss amount (that is, calculating CCRs from the 
latest cost report data in HCRIS and corresponding claims data in the 
MedPAR files, as explained above). Specifically, as we discuss in 
greater detail below, CCRs in the PSF are based on the most recently 
settled or tentatively settled cost report, whichever is later, where 
as the CCRs computed from HCRIS and corresponding MedPAR data are 
several years old due to the lag time in data availability. Increasing 
the accuracy of estimated outlier payments in determining the fixed-
loss amount by using CCRs from the PSF rather than CCRs computed from 
HCRIS and corresponding MedPAR data would help ensure that outlier 
payments are projected to equal 8 percent of total LTCH PPS payments as 
we established in the August 30, 2002 final rule (67 FR 56026). Using 
CCRs from the PSF should result in a more precise fixed-loss amount 
because these CCRs are based on more recent available data and, as 
explained above, these are the CCRs actually used by FIs to make LTCH 
PPS payments using the LTCH PPS PRICER software.
    Specifically, for purposes of determining the proposed 2006 LTCH 
PPS rate year fixed-loss amount, we are proposing to use CCRs from the 
June 2004 update of the PSF, which are the CCRs that were used by FIs 
to make LTCH PPS payments to LTCHs as of June 30, 2004. As noted above, 
the CCRs in this file also reflect the changes to the CCR and outlier 
policy made in the June 9, 2003 high cost outlier final rule (68 FR 
34494), which includes the use of either the most recently settled or 
tentatively settled cost reports, whichever is later, by FIs to 
determine a LTCHs CCR.
    In addition, because all LTCHs paid under the LTCH PPS have an 
entry in the PSF, for all of the LTCHs with claims in the September 
2004 update of the Fy 2003 MedPAR files (which we used to determine the 
proposed fixed-loss amount), there were no LTCHs with missing CCRs, 
and, therefore, there was no need to assign the applicable statewide 
average CCR to any LTCHs in determining the proposed fixed-loss amount 
(unless this was already done by the FI when entering the CCR in the 
PSF). This results in a more accurate CCR for each LTCH, and therefore 
a more accurate estimate of the cost of each case for LTCHs that, in 
the past, were assigned the applicable statewide average CCR in 
determining the fixed-loss amount because the data needed to compute a 
CCR were unavailable. (We note that consistent with our established 
methodology for determining CCRs for the purposes of determining the 
fixed-loss amount, if, in the future, a LTCH were missing a CCR in the 
PSF, we would assign the applicable statewide average CCR.)
    We believe that CCRs from the PSF are a better approximation of the 
CCRs that would be used to determine LTCHs' LTCH PPS payments during 
the 2006 LTCH PPS rate year because these are the most recent available 
CCRs actually used to make LTCH PPS payments. The CCRs that we have 
previously used to estimate the fixed-loss amount, computed from cost 
report data in HCRIS and corresponding claims data in the MedPAR files, 
were not used by FIs to make LTCH payments. Data from the PSF have only 
recently become available for all LTCHs because the LTCH PPS has only 
been implemented for slightly over 2 years (that is, cost reporting 
periods beginning on or after October 1, 2002). Prior to the 
availability of PSF data, for purposes of determining the fixed-loss 
amount, CCRs were computed based on the best available data (that is, 
from cost report data in HCRIS and corresponding MedPAR claims data). 
However, because there is lag time in the submission of cost report 
data in HCRIS, CCRs may have been computed from cost reports that were 
several years old. In addition, often the applicable statewide average 
CCR was assigned to LTCHs when cost report and corresponding claims 
data to compute a CCR were unavailable. This proposed change in the 
source of obtaining CCRs for computing the fixed-loss amount results in 
more up-to-date and generally lower CCRs. This is the same data source 
used for obtaining CCRs under the IPPS for determining the IPPS fixed-
loss amount annually (FY 2005 IPPS final rule, 69 FR 49276).
    As stated above, in this proposed rule, we are only proposing to 
change the data source for obtaining the CCRs used in determining the 
fixed-loss amount and not our established methodology for determining 
the fixed-loss amount or our established rules for determining CCRs for 
LTCH PPS payment purposes. Accordingly, based on the data and policies 
described above, we are proposing a fixed-loss amount of $11,544 for 
the 2006 LTCH PPS rate year. Thus, we would pay an outlier

[[Page 5748]]

case 80 percent of the difference between the estimated cost of the 
case and the proposed outlier threshold (the sum of the adjusted 
proposed Federal LTCH payment for the LTC-DRG and the proposed fixed-
loss amount of $11,544).
    We note that the proposed fixed-loss amount of $11,544 for the 2006 
LTCH PPS rate year is significantly lower than the current fixed-loss 
amount of $17,864 for the 2005 LTCH PPS rate year. This notable change 
in the proposed fixed-loss amount is primarily due to the proposed 
change in the source of LTCHs' CCRs used to estimate costs when 
estimating LTCH PPS payments (specifically, using CCRs from the PSF 
rather than computing them from HCRIS and corresponding MedPAR data). 
As described above, in the past we have used CCRs calculated using 
costs from the most recent available cost report data in HCRIS and 
corresponding charges from MedPAR claims data. As also noted above, 
often the statewide average CCR was assigned to LTCHs when data to 
compute a CCR was unavailable. However, for the 2006 LTCH PPS rate 
year, in determining the proposed fixed-loss amount, we are proposing 
to use CCRs from the PSF because, as we discussed above, we believe 
that these CCRs would more closely approximate the CCRs that will be 
used to make payments to LTCHs during the 2006 LTCH PPS rate and would 
result in a more accurate estimate of the cost of each case used in 
determining outlier payments.
    As we noted above, CCRs from the PSF are based on more recent data 
and are generally lower than the CCRs computed from cost report data in 
HCRIS and corresponding claims data in the MedPAR files. Specifically, 
in comparing the best available data for 301 LTCHs, we found that 
almost 40 percent of LTCHs would experience a decrease in the CCR we 
used for computing the proposed fixed-loss amount. The decrease in the 
CCRs was in excess of 75 percent for some LTCHs in which the applicable 
statewide average CCR was assigned in determining the 2005 LTCH PPS 
rate year fixed-loss amount where data to compute a CCR was 
unavailable.
    In determining estimated outlier payments (80 percent of costs 
beyond the fixed-loss amount), as discussed above, costs are estimated 
by multiplying the Medicare covered charges for the case by the LTCH's 
CCR. When relatively lower CCRs are used to estimate costs from 
charges, the resulting estimated cost of each case is lower, thereby 
reducing outlier payments since outlier payments are equal to 80 
percent of the difference between the estimated cost of the case and 
the outlier threshold (the sum of the adjusted Federal prospective 
payment for the LTC-DRG and the fixed-loss amount). Lowering the fixed-
loss amount results in more cases qualifying as outlier cases as well 
as increases the amount of the outlier payment for outlier cases 
because the maximum loss that a LTCH must incur before receiving an 
outlier payment (that is, the fixed-loss amount) would be smaller. 
Thus, in order to maintain that outlier payments would be equal to 8 
percent of total LTCH PPS payments, the outlier fixed-loss should be 
lowered.
    As stated above, we have established that under the LTCH PPS, 
outlier payments are estimated to be equal to 8 percent of total LTCH 
PPS payments. An analysis of recent LTCH PPS claims indicates that the 
2004 and 2005 LTCH PPS rate year outlier fixed-loss amounts may have 
resulted in LTCH PPS outlier payments that fell below the estimated 8 
percent. Specifically, based on claims discharged during the 2004 LTCH 
PPS rate year (July 1, 2003 through June 30, 2004), we estimate that 
outlier payments equal about 6 percent of total LTCH PPS payments.
    As an alternative to lowering the fixed-loss amount, we examined 
adjusting the marginal cost factor (that is, the percentage that 
Medicare will pay of the estimated cost of a case that exceeds the sum 
of the adjusted Federal prospective payment for the LTC-DRG and the 
fixed-loss amount for LTCH PPS outlier cases (Sec.  412.525(a)(3)), as 
a means of assuring that estimated outlier payments would be projected 
to equal 8 percent of total LTCH PPS payments. Under the LTCH PPS high-
cost outlier policy at Sec.  412.525(a)(3), the marginal cost factor is 
currently equal to 80 percent, as we established in the August 30, 2002 
final rule (67 FR 56022-56026). As we discuss in that same final rule, 
a marginal cost factor equal to 80 percent means that we pay the LTCH 
for an outlier case, 80 percent of the difference between the estimated 
cost of the case and the outlier threshold (the sum of the adjusted 
Federal rate for the LTC-DRG PPS payment and the fixed-loss amount).
    As we discussed in the August 30, 2002 final rule (67 FR 56023), 
the marginal cost factor is designed to share the financial risk of 
treating extremely costly LTCH cases between LTCHs and the Medicare 
program by providing ``a balance between the need to protect LTCHs 
financially, while encouraging them to treat expensive patients and 
maintain the incentives of a prospective payment system to improve the 
efficient delivery of care.'' Increasing the marginal cost factor from 
the established 80 percent, while maintaining the existing fixed-loss 
amount would increase total outlier payments because we would pay a 
larger percentage of the estimated costs that exceed the outlier 
threshold (the sum of the adjusted Federal rate for the LTC-DRG and the 
fixed-loss amount). For example, if we were to propose to increase the 
marginal cost factor to 90 percent without lowering the fixed-loss 
amount, we would pay outlier cases an additional 10 percent (90 percent 
minus 80 percent) of the estimated costs that exceed the outlier 
threshold (the sum of the adjusted Federal rate for the LTC-DRG and the 
fixed-loss amount).
    While this alternative would also ensure that outlier payments are 
projected to equal 8 percent of total LTCH PPS payments, it would not 
maintain the incentive for LTCHs to treat expensive patients and 
improve the efficient delivery of care. It would significantly reduce 
the LTCHs' share of the financial risk in treating those costly 
patients. As we discussed in the August 30, 2002 final rule (67 FR 
56023-56024), our analysis of payment to cost ratios for outlier cases 
showed that a marginal cost factor of 80 percent appropriately 
addresses outlier cases that are significantly more expensive than non-
outlier cases, while simultaneously maintaining the integrity of the 
LTCH PPS.
    Our proposal to lower the fixed-loss amount from the current fixed-
loss amount of $17,864 to the proposed fixed-loss amount of $11,544 
would reduce the amount of the loss that a LTCH must incur under the 
LTCH PPS for a case with unusually high costs before the LTCH will 
receive any additional Medicare payments. However, as we explain above, 
we believe the 80 percent marginal cost factor would continue to 
adequately maintain the LTCHs' share of the financial risk in treating 
those costly patients and ensure the efficient delivery of services. 
Under our proposed fixed-loss amount, LTCHs would still have to first 
lose $11,544 before receiving any additional payment for treating an 
unusually costly case. We believe the proposed fixed-loss amount of 
$11,544 in conjunction with the requirement that the LTCH is 
responsible for 20 percent of all estimated cost incurred beyond the 
outlier threshold (the sum of the adjusted Federal rate for the LTC-DRG 
PPS payment and the fixed-loss amount) would be significant enough to 
avoid the ``incentive'' to reach the outlier threshold in order to 
receive an

[[Page 5749]]

additional payment. Therefore, we believe the proposed fixed-loss 
amount of $11,544 would sufficiently identify unusually costly LTCH 
cases while maintaining the integrity of the LTCH PPS.
    Accordingly, we are not proposing to adjust the marginal cost 
factor under the LTCH PPS high-cost outlier policy. Rather, as 
discussed in detail above, we believe that employing actual CCR data 
from the PSF for purposes of determining the proposed fixed-loss 
amount, which were actually used to make LTCH PPS payments, would 
result in a more accurate estimate of LTCH PPS outlier payments. 
Therefore, a decrease in the fixed-loss amount is appropriate and 
necessary to maintain that outlier payments would equal 8 percent of 
total LTCH PPS payments, as required under Sec.  412.525(a).
    d. Reconciliation of Outlier Payments Upon Cost Report Settlement. 
In the June 9, 2003 high-cost outlier final rule (68 FR 34508-34512), 
consistent with the change made for acute care hospitals under the IPPS 
at Sec.  412.84(m), we established under Sec.  412.525(a)(4)(ii), by 
cross-referencing Sec.  412.84(m), that effective for LTCH PPS 
discharges occurring on or after August 8, 2003, reconciliation of 
outlier payments may be made upon cost report settlement to account for 
differences between the actual CCR and the estimated CCR ratio for the 
period during which the discharge occurs. As is the case with the 
changes made to the outlier policy for acute care hospitals under the 
IPPS, the instructions for implementing these regulations are discussed 
in further detail in Program Memorandum Transmittal A-03-058. In 
addition, in that same final rule (68 FR 34513), we established a 
similar change to the short-stay outlier policy at Sec.  
412.529(c)(5)(ii).
    We also discussed in the June 9, 2003 IPPS high-cost outlier final 
rule (68 FR 34494-34515), consistent with the policy change for acute 
care hospitals under the IPPS at Sec.  412.84(i)(2), that, for LTCH PPS 
discharges occurring on or after October 1, 2003, FIs will use either 
the most recent settled cost report or the most recent tentative 
settled cost report, whichever is from the later period, to determine a 
LTCH's CCR. In addition, in that same final rule, we established a 
similar change to the short-stay outlier policy at Sec.  
412.529(c)(5)(iii).
    e. Application of Outlier Policy to Short-Stay Outlier Cases. As we 
discussed in the August 30, 2002 LTCH PPS final rule (67 FR 56026), 
under some rare circumstances, a LTCH discharge could qualify as a 
short-stay outlier case (as defined under Sec.  412.529 and discussed 
in section V.B.4. of this preamble) and also as a high-cost outlier 
case. In such a scenario, a patient could be hospitalized for less than 
five-sixths of the geometric average length of stay for the specific 
LTC-DRG, and yet incur extraordinarily high treatment costs. If the 
costs exceeded the outlier threshold (that is, the short-stay outlier 
payment plus the fixed-loss amount), the discharge would be eligible 
for payment as a high-cost outlier. Thus, for a short-stay outlier case 
in the 2006 LTCH PPS rate year, the high-cost outlier payment will be 
80 percent of the difference between the estimated cost of the case and 
the outlier threshold (the sum of the proposed fixed-loss amount of 
$11,544 and the amount paid under the short-stay outlier policy).
4. Proposed Adjustments for Special Cases
    a. General. As discussed in the August 30, 2002 LTCH PPS final rule 
(67 FR 55995), under section 123 of Pub. L. 106-113, the Secretary 
generally has broad authority in developing the PPS for LTCHs, 
including whether (and how) to provide for adjustments to reflect 
variations in the necessary costs of treatment among LTCHs.
    Generally, LTCHs, as described in section 1886(d)(1)(B)(iv) of the 
Act, are distinguished from other inpatient hospital settings by 
maintaining an average inpatient length of stay of greater than 25 
days. However, LTCHs may have cases that have stays of considerably 
less than the average length of stay and that receive significantly 
less than the full course of treatment for a specific LTC-DRG. As we 
explained in the August 30, 2002 LTCH PPS final rule (67 FR 55954), 
these cases would be paid inappropriately if the hospital were to 
receive the full LTC-DRG payment. Below we discuss the payment 
methodology for these special cases.
    b. Adjustment for Short-Stay Outlier Cases. A short-stay outlier 
case may occur when a beneficiary receives less than the full course of 
treatment at the LTCH before being discharged. These patients may be 
discharged to another site of care or they may be discharged and not 
readmitted because they no longer require treatment. Furthermore, 
patients may expire early in their LTCH stay.
    Generally, LTCHs are defined by statute as having an average 
inpatient length of stay of greater than 25 days. We believe that a 
payment adjustment for short-stay outlier cases results in more 
appropriate payments because these cases most likely would not receive 
a full course of treatment in this short period of time and a full LTC-
DRG payment may not always be appropriate. Payment-to-cost ratios 
simulated for LTCHs, for the cases described above, show that if LTCHs 
receive a full LTC-DRG payment for those cases, they would be 
significantly ``overpaid'' for the resources they have actually 
expended.
    Under Sec.  412.529, in general, we adjust the per discharge 
payment to the least of 120 percent of the cost of the case, 120 
percent of the LTC-DRG specific per diem amount multiplied by the 
length of stay of that discharge, or the full LTC-DRG payment, for all 
cases with a length of stay up to and including five-sixths of the 
geometric average length of stay of the LTC-DRG.
    As we noted in section V.C.3. of this preamble, in the June 9, 2003 
high-cost outlier final rule (68 FR 34494-34515), we revised the 
methodology for determining CCRs for acute care hospitals under the 
IPPS because we became aware that payment vulnerabilities existed in 
the previous IPPS outlier policy. Consistent with the policy 
established for acute care hospitals under the IPPS at Sec.  412.84(i) 
and (m) in the June 9, 2003 high-cost outlier final rule (68 FR 34515), 
and similar to the policy change described above for LTCH PPS high-cost 
outlier payments at Sec.  412.525(a)(4)(ii), we established under Sec.  
412.529(c)(5)(ii) that for discharges on or after August 8, 2003, 
short-stay outlier payments are subject to the provisions in the 
regulations at Sec.  412.84(i)(1), (i)(3) and (i)(4), and (m).
    In addition, we also discussed in the June 9, 2003 high-cost 
outlier final rule (68 FR 34508-34513) that short-stay outlier payments 
are subject to the provisions in the regulations at Sec.  412.84(i)(2) 
for discharges on or after October 1, 2003 in accordance with Sec.  
412.529(c)(5)(iii). In addition, in that same final rule, we 
established that the applicable statewide average CCR is applied when a 
LTCH's CCR exceeds the ceiling. Thus, the applicable statewide average 
CCR is no longer applied when a LTCH's CCR falls below the floor. 
Furthermore, we also established that any reconciliation of payments 
for short-stay outliers may be made upon cost report settlement to 
account for differences between the estimated CCR and the actual CCR 
for the period during which the discharge occurs. In the June 6, 2003 
final rule (68 FR 34146-34148), for certain hospitals that qualify as 
LTCHs under section 1886(d)(1)(B)(iv)(II) of the Act (``subclause 
(II)'' LTCHs) as added by section 4417(b) of Pub. L. 105-33, and 
implemented in Sec.  412.23(e)(2)(ii), we

[[Page 5750]]

established a temporary adjustment to the short-stay outlier policy 
during the 5-year transition period. Under Sec.  412.529(c)(4), 
effective for discharges from a ``subclause (II)'' LTCH occurring on or 
after July 1, 2003, the short-stay outlier percentage is 195 percent 
during the first year of the hospital's 5-year transition. For the 
second cost reporting period, the short-stay outlier percentage is 193 
percent; for the third cost reporting period, the percentage is 165 
percent; for the fourth cost reporting period, the percentage is 136 
percent; and for the final cost reporting period of the 5-year 
transition (and future cost reporting periods), the short-stay outlier 
percentage is 120 percent, that is, the same as it is for all other 
LTCHs under the LTCH PPS.
    As we discussed in the June 6, 2003 final rule (68 FR 34147), we 
established this formula with the expectation that an adjustment to 
short-stay outlier payments during the transition will result in 
reducing the difference between payments and costs for a ``subclause 
(II)'' LTCH for the period of July 1, 2003 through the end of the 
transition period, when the LTCH PPS will be fully phased-in.
    As we stated in that same final rule, we also expect that during 
this 5-year period, ``subclause (II)'' LTCHs will make every attempt to 
adopt the type of efficiency enhancing policies that generally result 
from the implementation of prospective payment systems in other health 
care settings. We are not proposing any changes to the short-stay 
outlier policy in this proposed rule.
5. Hospital-within-Hospitals and Satellites of LTCHs Notification 
Requirements
    In the August 30, 2002 LTCH PPS final rule, we established a 
notification requirement for LTCHS that were HwHs as defined in Sec.  
412.22(e) and satellites of LTCHs, defined at Sec.  412.22(h)(5) and 
for LTCHs and satellites of LTCHs that were subject to onsite provider 
payment adjustment under Sec.  412.532. At Sec.  412.22(e)(3) and 
(h)(5) and Sec.  412.532(i), respectively, we require LTCHs to notify 
their FIs and CMS of their co-located status within 60 days of the 
start of the hospital's first cost reporting period under the LTCH PPS. 
We also established an additional notification requirement at Sec.  
412.532(i), for LTCHs subject to the onsite provider payment adjustment 
at Sec.  412.532, to notify their FIs and CMS within 60 days of a 
change in co-located status. We intended that these regulations also 
require the LTCHs to identify the Medicare providers, that is, acute 
care hospitals, as well as other excluded hospitals and units (IRFs and 
IPFs), and SNFs with which they were co-located.
    It appears, however, that this expectation is unclear in our 
present regulations because we have been informed by our Regional 
offices and FIs that LTCHs, for which they are responsible, have in 
many cases neglected to specify the names, addresses, and provider 
identification numbers of their co-located providers. We are proposing 
to clarify our policy that when a LTCH informs its fiscal intermediary 
of its co-located status, it also would be required to include the 
name, address, and the provider numbers of the other co-located 
providers (that is, acute care hospitals, as well as other excluded 
hospitals and units (IRFs and IPFs) and SNFs) with which they were co-
located. Furthermore, since the existing regulation text at Sec.  
412.22(e)(3) and (h)(5) required that the notification take place 
within 60 days of the LTCH's first cost reporting period beginning on 
or after October 1, 2002 and Sec.  412.532(i) required that the 
notification occur within 60 days of the effective date of the original 
regulation (October 1, 2002), and this timeframe for many providers has 
long since passed, we are proposing to eliminate that specific timing 
requirement in favor of the on-going, prospective notification 
requirement described above, which is also clearer and more 
comprehensive. We are also proposing to delete the phrase ``and within 
60 days of a change in co-located status'' from Sec.  412.532(i) 
because we believe that this proposed continuing notification 
requirement in the proposed revised regulation text at Sec.  
412.22(e)(3) and (h)(5), as well as at Sec.  412.532(i) would include 
the obligation to notify CMS and the fiscal intermediary in writing of 
any changes in co-located status and the obligation to provide the 
requisite information detailed above. We are proposing revisions to 
each of the three notification provisions, therefore, to establish 
consistency and to clearly state the on-going requirement that LTCH 
HwHs and satellites of LTCHs inform their fiscal intermediary and CMS 
in writing of the names, addresses, and provider numbers of other 
applicable co-located Medicare providers.
6. Other Payment Adjustments
    As indicated earlier, we have broad authority under section 123 of 
Pub. L. 106-113, including whether (and how) to provide for adjustments 
to reflect variations in the necessary costs of treatment among LTCHs. 
Thus, in the August 30, 2002 LTCH PPS final rule (67 FR 56014-56027), 
we discussed our extensive data analysis and rationale for not 
implementing an adjustment for geographic reclassification, rural 
location, treating a disproportionate share of low-income patients 
(DSH), or indirect medical education (IME) costs. In that same final 
rule, we stated that we would collect data and reevaluate the 
appropriateness of these adjustments in the future once more LTCH data 
become available after the LTCH PPS is implemented.
    Because the LTCH PPS has only been implemented for a few years and 
there is a lag-time in data availability, sufficient new data have 
still not yet been generated that would enable us to conduct a 
comprehensive reevaluation of these payment adjustments. Nonetheless, 
we have reviewed the limited data that are available and have found no 
evidence to support additional proposed policy changes. Therefore, in 
this proposed rule, we are not proposing to make any adjustments for 
geographic reclassification, rural location, DSH, or IME. However, we 
will continue to collect and interpret new data as they become 
available in the future to determine if these data support proposing 
any additional payment adjustments.
7. Proposed Budget Neutrality Offset to Account for the Transition 
Methodology
    Under Sec.  412.533, we implemented a 5-year transition period from 
reasonable cost-based payment to prospective payment, during which a 
LTCH is paid an increasing percentage of the LTCH PPS rate and a 
decreasing percentage of its payments under the reasonable cost-based 
payment methodology for each discharge. Furthermore, we allow a LTCH to 
elect to be paid based on 100 percent of the standard Federal rate in 
lieu of the blended methodology.
    The standard Federal rate was determined as if all LTCHs will be 
paid based on 100 percent of the standard Federal rate. As stated 
earlier, we provide for a 5-year transition period that allows LTCHs to 
receive payments based partially on the reasonable cost-based 
methodology. Section 123(a)(1) of the Pub. L. 106-113 requires that the 
Secretary shall develop a per discharge prospective payment system for 
LTCHs and such system shall ``maintain budget neutrality.'' 
Accordingly, as we established in the August 30, 2002 final rule (67 FR 
56033-56036), during the 5-year transition period, we reduce all LTCH 
Medicare payments (whether a LTCH elects payment based on 100 percent 
of the Federal rate or whether a LTCH is being paid under the 
transition blend methodology).

[[Page 5751]]

    Specifically, we reduce all LTCH Medicare payments during the 5-
year transition by a factor that is equal to 1 minus the ratio of the 
estimated TEFRA reasonable cost-based payments that would have been 
made if the LTCH PPS had not been implemented, to the projected total 
Medicare program PPS payments (that is, payments made under the 
transition methodology and the option to elect payment based on 100 
percent of the Federal rate).
    In the May 7, 2004 final rule (69 FR 25702), based on the best 
available data at that time, we projected that approximately 93 percent 
of LTCHs will be paid based on 100 percent of the standard Federal rate 
rather than receive payment under the transition blend methodology for 
the 2005 LTCH PPS rate year. Using the same methodology described in 
the August 30, 2002 LTCH PPS final rule (67 FR 56034), this projection, 
which used updated data and inflation factors, was based on our 
estimate that either: (1) A LTCH has already elected payment based on 
100 percent of the Federal rate prior to the start of the 2005 LTCH PPS 
rate year (July 1, 2004); or (2) a LTCH would receive higher payments 
based on 100 percent of the 2005 LTCH PPS rate year standard Federal 
rate compared to the payments it would receive under the transition 
blend methodology. Similarly, we projected that the remaining 7 percent 
of LTCHs will choose to be paid based on the applicable transition 
blend methodology (as set forth under Sec.  412.533(a)) because they 
would receive higher payments than if they were paid based on 100 
percent of the 2005 LTCH PPS rate year standard Federal rate.
    In that same final rule, based on the best available data at that 
time and policy revisions described in that same rule, we projected 
that the full effect of the remaining 4 years of the transition period 
(including the election option) would result in a cost to the Medicare 
program of $29 million. Specifically, for the 2005 LTCH PPS rate year, 
we estimated that the cost of the transition would be $15 million. In 
order to maintain budget neutrality, using the methodology established 
in the August 30, 2002 LTCH PPS final rule (67 FR 56034) based on 
updated data and the policies and rates discussed in the May 7, 2004 
LTCH PPS final rule, we established a 0.5 percent reduction (0.995) to 
all LTCH payments in the 2005 LTCH PPS rate year to account for the $15 
million estimate cost of the transition period methodology (including 
the option to elect payment based on 100 percent of the Federal rate) 
for the 2005 LTCH PPS rate year. Furthermore, we indicated that we 
would propose a budget neutrality offset for each of the remaining 
years of the transition period to account for the estimated costs for 
the respective LTCH PPS rate years
    In this proposed rule, based on the most recent available data, 
using the same methodology established in the August 30, 2002 LTCH PPS 
final rule (67 FR 56034), we are projecting that approximately 94 
percent of LTCHs would be paid based on 100 percent of the proposed 
standard Federal rate rather than receive payment under the transition 
blend methodology during the 2006 LTCH PPS rate year. This projection, 
which used updated data is based on our estimate that either: (1) A 
LTCH has already elected payment based on 100 percent of the Federal 
rate prior to the beginning of the 2006 LTCH PPS rate year (July 1, 
2005); or (2) a LTCH would receive higher payments based on 100 percent 
of the proposed standard Federal rate compared to the payments they 
would receive under the transition blend methodology. Similarly, we 
project that the remaining 6 percent of LTCHs would choose to be paid 
based on the transition blend methodology at Sec.  412.533 because 
those payments are estimated to be higher than if they were paid based 
on 100 percent of the proposed standard Federal rate. The applicable 
transition blend percentage is applicable for a LTCH's entire cost 
reporting period beginning on or after October 1 (unless the LTCH 
elects payment based on 100 percent of the Federal rate).
    Based on the best available data and the proposed policies 
described in this proposed rule, we are projecting that in the absence 
of a transition period budget neutrality offset, the full effect of the 
remaining 3 years of the transition period (including the election 
option) as compared to payments as if all LTCHs would be paid based on 
100 percent of the Federal rate would result in a cost to the Medicare 
program of $10 million as follows:

------------------------------------------------------------------------
                                                         Estimated cost
                  LTCH PPS rate year                      (in millions)
------------------------------------------------------------------------
2006..................................................                 7
2007..................................................                 3
2008..................................................                 0
------------------------------------------------------------------------

    We are no longer projecting a small cost for the 2008 LTCH PPS rate 
year (July 1, 2007 through June 30, 2008) even though some LTCH's will 
have a cost reporting period for the 5th year of the transition period 
which will be concluding in the first 3 months of the 2008 LTCH PPS 
rate year because as we discussed above, based on the most recent 
available data, we are projecting that the vast majority of LTCHs will 
have made the election to be paid based on 100 percent of the Federal 
rate rather than the transition blend.
    Accordingly, using the methodology established in the August 30, 
2002 LTCH PPS final rule (67 FR 56034) based on updated data and the 
policies and rates discussed in this proposed rule, we are proposing to 
implement a 0.2 percent reduction (0.998) to all LTCHs' payments for 
discharges occurring on or after July 1, 2005 and through June 30, 
2006, to account for the estimated cost of the transition period 
methodology (including the option to elect payment based on 100 percent 
of the Federal rate) of the $7 million for the 2006 LTCH PPS rate year.
    As noted above, in order to maintain budget neutrality, we 
indicated that we would propose a budget neutrality offset for each of 
the remaining years of the transition period to account for the 
estimated costs for the respective LTCH PPS rate years. In this 
proposed rule, based on the best available data, we estimate the 
following proposed budget neutrality offsets to LTCH PPS payments 
during the remaining years of the transition period: 0.1 percent 
(0.999) for the 2007 LTCH PPS rate year, and 0 percent (no adjustment) 
for the 2008 LTCH PPS rate year. As noted above, we believe there is no 
longer a need for a small offset in the 2008 LTCH PPS rate year because 
we project that the vast majority of those LTCHs whose 5th year of the 
transition period will be concluding in the first 3 months of the 2008 
LTCH PPS rate year will be paid based on 100 percent of the Federal 
rate rather than the transition blend.
    As we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 
56036), consistent with the statutory requirement for budget neutrality 
in section 123(a)(1) of Public Law 106-113, we intended that estimated 
aggregate payments under the LTCH PPS for FY 2003 equal the estimated 
aggregate payments that would be made if the LTCH PPS were not 
implemented. Our methodology for estimating payments for purposes of 
the budget neutrality calculations uses the best available data at the 
time and necessarily reflect assumptions. As the LTCH PPS progresses, 
we are monitoring payment data and will evaluate the ultimate accuracy 
of the assumptions used in the budget neutrality calculations (for 
example, inflation factors, intensity of services provided, or 
behavioral response to the implementation of the LTCH PPS) described in 
the August 30,

[[Page 5752]]

2002 LTCH PPS final rule (67 FR 56027-56037). To the extent these 
assumptions significantly differ from actual experience, the aggregate 
amount of actual payments may turn out to be significantly higher or 
lower than the estimates on which the budget neutrality calculations 
were based.
    Section 123 of Pub. L. 106-113 and section 307 of Pub. L. 106-554 
provide broad authority to the Secretary in developing the LTCH PPS, 
including the authority for appropriate adjustments. Under this broad 
authority, as implemented in the regulations at Sec.  412.523(d)(3), we 
have provided for the possibility of making a one-time prospective 
adjustment to the LTCH PPS rates by October 1, 2006, so that the effect 
of any significant difference between actual payments and estimated 
payments for the first year of the LTCH PPS would not be perpetuated in 
the LTCH PPS rates for future years.
    In the May 7, 2004 LTCH PPS final (69 FR 25703-25704), based on the 
best available data at that time, we estimated that total Medicare 
program payments for LTCH services over the next 5 LTCH PPS rate years 
would be $2.96 billion for the 2005 LTCH PPS rate year; $2.98 billion 
for the 2006 LTCH PPS rate year; $2.95 billion for the 2007 LTCH PPS 
rate year; $3.01 billion for the 2008 LTCH PPS rate year; and $3.12 
billion for the 2009 LTCH PPS rate year.
    In this proposed rule, consistent with the methodology established 
in the August 30, 2002 LTCH PPS final rule (67 FR 56036), based on the 
most recent available data, we estimate that total Medicare program 
payments for LTCH services for the next 5 LTCH PPS rate years would be 
as follows:

------------------------------------------------------------------------
                                                      Estimated payments
                 LTCH PPS rate year                     ($ in billions)
------------------------------------------------------------------------
2006................................................                2.94
2007................................................                2.90
2008................................................                2.96
2009................................................                3.08
2010................................................                3.24
------------------------------------------------------------------------

    In accordance with the methodology established in the August 30, 
2002 LTCH PPS final rule (67 FR 56037), these estimates are based on 
the projection that 94 percent of LTCHs would elect to be paid based on 
100 percent of the 2006 LTCH PPS rate year proposed standard Federal 
rate rather than the applicable transition blend, and our estimate of 
2006 LTCH PPS rate year payments to LTCHs using our Office of the 
Actuary's most recent estimate of the excluded hospital with capital 
market basket of 3.1 percent for the 2006 LTCH PPS rate year, 2.9 
percent for the 2007 LTCH PPS rate year, 2.7 for the 2008 LTCH PPS rate 
year, and 2.9 percent for the 2009 and 2010 LTCH PPS rate years. We 
also took into account our Office of the Actuary's projection that 
there would be a change in Medicare beneficiary enrollment of -4.9 
percent in the 2006 LTCH PPS rate year, -6.5 percent in the 2007 LTCH 
PPS rate year, -1.1 percent in the 2008 LTCH PPS rate year, 0.2 percent 
in the 2009 LTCH PPS rate year, and 0.8 percent in the 2010 LTCH PPS 
rate year. (We note that, based on the most recent available data, our 
Office of the Actuary is projecting a decrease in Medicare fee-for-
service Part A enrollment, in part, because they are projecting an 
increase in Medicare managed care enrollment as a result of the 
implementation of several provisions of the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003.)
    As we discussed in the May 7, 2004 LTCH PPS final rule (69 FR 
25704), because the LTCH PPS has only been recently implemented, 
sufficient new data have not been generated that would enable us to 
conduct a comprehensive reevaluation of our budget neutrality 
calculations. Accordingly, we did not make a one-time adjustment under 
Sec.  412.523(d)(3). At this time, we still do not have sufficient new 
data to enable us to conduct a comprehensive reevaluation of our budget 
neutrality calculations. Therefore, in this proposed rule, we are not 
proposing to make a one-time adjustment under Sec.  412.523(d)(3) so 
that the effect of any significant difference between actual payments 
and estimated payments for the first year of the LTCH PPS is not 
perpetuated in the PPS rates for future years. However, we will 
continue to collect and interpret new data as the data become available 
in the future to determine if such an adjustment should be proposed.
8. Extension of the Interrupted Stay Policy
    In the May 7, 2004 LTCH PPS final rule, we revised the definition 
of an ``interruption of a stay'' at Sec.  412.531 by establishing two 
distinct categories, ``[a] 3-day or less interruption of stay'' at 
(a)(1) and ``[a] greater than 3-day interruption of stay'' at (a)(2). 
The ``greater than 3-day interruption of stay'' which was directly 
based on the original ``interruption of stay'' policy that had been 
implemented at the start of the LTCH prospective payment system (August 
30, 2002 LTCH PPS final rule, 67 FR 56002) is defined as a stay at a 
LTCH during which a Medicare inpatient is discharged from the LTCH to 
an acute care hospital, an IRF, or a SNF (or swing bed) for a period of 
greater than 3 days, but is readmitted to the LTCH within the 
applicable fixed day period, that is, between 4 and 9 consecutive days 
for an acute care hospital, between 4 and 27 consecutive days for an 
IRF, and between 4 and 45 consecutive days for a SNF. In each of these 
cases, the day count begins on the day of discharge from the LTCH, 
(which is also the day of admission to the other site of care), even 
though the payment features of the greater than 3-day policy itself 
govern the stay only after day 4 once the 3-day policy, described 
below, no longer applies.
    As defined in the previous paragraph, for purposes of Medicare 
payment to the LTCH, a greater than 3-day interruption of stay is 
treated as only one discharge from the LTCH and generates only one LTC-
DRG payment. However, under this policy, Medicare makes a separate 
payment to the intervening provider (that is, acute care hospital, IRF, 
or SNF) for the treatment or care given to the beneficiary during the 
interruption.
    In implementing this policy, we provided that, in the event a 
Medicare inpatient is discharged from a LTCH and is readmitted and the 
stay qualifies as an interrupted stay, the provider must cancel the 
claim generated by the original stay in the LTCH and submit one claim 
for the entire stay. (For further details, see Medicare Program 
Memorandum Transmittal A-02-093, September 2002.)
    On the other hand, if the patient stay exceeds the total fixed-day 
threshold outside of the LTCH at the other facility before being 
readmitted, two separate LTCH PPS payments would be made. One would be 
based on the principal diagnosis and length of stay for the first 
discharge from the LTCH and the other based on the principal diagnosis 
and length of stay for the second discharge from the LTCH. Depending 
upon their lengths of stay, both stays could result in payments as a 
short-stay outlier (Sec.  412.529), a full LTC-DRG, or even a high-cost 
outlier. Further, if the principal diagnosis is the same for both 
admissions, the hospital could receive two similar payments. It is also 
important to note that under the existing greater than 3-day 
interrupted stay policy, a separate Medicare payment is made to the 
intervening provider under that provider's payment system.
    The 3-day or less interruption of stay policy is defined at Sec.  
412.531(a)(1) as ``a stay at a long-term care hospital during which a 
Medicare inpatient is discharged from the long-term care hospital to an 
acute care hospital, IRF, SNF, or the patient's home and readmitted to 
the same long-term care hospital within 3-days of the discharge

[[Page 5753]]

from the long-term care hospital. The 3-day or less period begins with 
the date of discharge from the long-term care hospital and ends not 
later than midnight of the third day.'' As discussed in detail in the 
May 7, 2004 LTCH PPS final rule (69 FR 25691-25700), there are several 
components to this policy. First, only one LTC-DRG payment will be made 
to the LTCH for the patient who is discharged from the LTCH to an acute 
care hospital, IRF, SNF, or patient's home and readmitted to the same 
LTCH within 3 days. Secondly, any off-site tests or medical treatment, 
either inpatient or outpatient, delivered at an acute care hospital or 
an IRF, or care at a SNF, will be covered by the LTCH ``under 
arrangements'' if the patient is readmitted to the LTCH within 3 days. 
(We established a specific exception to the ``under arrangements'' 
requirement during the 2005 LTCH PPS rate year, which we will review 
below, at Sec.  412.531(b)(1)(ii)(A)(1), in the event that the 
treatment was grouped to a surgical DRG under the IPPS at an acute care 
hospital.)
    Existing regulations at Sec.  412.509(c) require a LTCH to furnish 
all necessary covered services for a Medicare beneficiary who is an 
inpatient of the hospital either directly or ``under arrangements'' (as 
defined in Sec.  409.3). The ``under arrangements'' policy set forth in 
Sec.  412.509 derives from the regulations at Sec.  411.15(m), which 
implement section 1862(a)(14) of the Act. Section 1862(a) of the Act 
specifies the services for which no payment may be made under Medicare 
Part A and Part B and also specifies the exception for certain services 
to be furnished ``under arrangements'' by providers. Under section 
1862(a)(14) of the Act, notwithstanding any other provision of this 
title, ``no payment may be made under part A or part B for any expenses 
incurred for items or services which are other than physicians' 
services (as defined in regulations promulgated specifically for 
purposes of this paragraph), services described by section 
1861(s)(2)(K) of the Act (certified nurse-midwife services, qualified 
psychologist services, and services of a certified registered nurse 
anesthetist, and which are furnished to an individual who is a patient 
of a hospital or critical access hospital by an entity other than the 
hospital or critical access hospital, unless the services are furnished 
under arrangements (as defined in section 1861(w)(1) of the Act)) with 
the entity made by the hospital or critical access hospital.'' Section 
1861(w)(1) of the Act states that ``[t]he term `arrangements' is 
limited to arrangements under which receipt of payment by the hospital, 
critical access hospital, skilled nursing facility, home health agency, 
or hospice program (whether in its own right or as agent), with respect 
to services for which an individual is entitled to have payment made 
under this title, discharges the liability of such individual or any 
other person to pay for the services.'' We believed the objective of 
these statutory provisions, which were implemented for inpatient acute 
care hospitals in regulations at Sec.  411.15(m) and subsequently at 
Sec.  412.509 for LTCHs, was to discharge financial liability for 
inpatients who may have received additional care off-premises and to 
assign payment responsibility for the care to the hospital that is 
being paid for that beneficiary's total care for that spell of illness.
    Over the years, we have often referred to this as the ``prohibition 
against unbundling'' for purposes of emphasizing that if a Medicare 
provider ``unbundles'' specific components of a beneficiary's total 
inpatient care (provided either ``directly'' or ``under arrangements'') 
and sends separate claims to Medicare for those tests or treatments, 
the provider would be acting in violation of the statute and applicable 
regulations. Since LTCHs treat patients with multicomorbidities who are 
often in need of a wide range of diagnostic and treatment modalities 
and lengthy hospitalizations, we believe that in this particular 
setting, this statutory requirement was particularly vulnerable to 
gaming. For that reason, in formulating the ``3-days or less 
interruption of stay policy'' at Sec.  412.531(a), we clarified the 
existing general unbundling prohibition and the unbundling prohibition 
as it applied to the interrupted stay policy under the LTCH PPS.
    As noted above, we were concerned that LTCH patients, under active 
treatment, were being inappropriately discharged to other treatment 
sites, receiving tests or procedures related to one of the diagnoses 
for which the patient was being hospitalized and which otherwise should 
have been provided at the LTCH either directly or ``under 
arrangements'' (Sec.  412.509) prior to being readmitted to the LTCH. 
Such behavior resulted in another claim being submitted to Medicare by 
the other treatment site for those tests or procedures. Since it is a 
fundamental principle of all prospective payment systems that payments 
associated with specific diagnostic group include all costs associated 
with rendering care to the type of patients treated, the behavior 
described above on the part of the LTCH, would result in an additional 
and inappropriate Medicare payments for services delivered by an 
intervening provider.
    If a LTCH obtains, from another facility ``under arrangements,'' a 
specific test or procedure that is not available on the LTCH's premises 
for one of its inpatients, as contemplated by Sec.  412.509, a 
discharge and a subsequent readmission would therefore be unnecessary 
and inappropriate. This is true even if it is necessary to transport 
the patient to another facility to receive the arranged-for service. In 
this situation, generally, the LTCH would include the medically 
necessary test or procedure on its patient claim to Medicare which 
could have an effect on the assignment of the LTC-DRG and, thus, the 
Medicare payment to the LTCH, and the LTCH would be responsible for 
paying the provider directly for the test or procedure. Under the 3-day 
or less interruption of stay policy, if a LTCH patient is discharged to 
an acute care hospital, IRF, SNF, or patient's home and returns to the 
LTCH for further hospital-level care within 3 days, any Medicare-
covered services delivered during that interruption will be deemed to 
have been delivered ``under arrangements and included in the one 
episode of care for which Medicare will pay the LTCH. Furthermore, 
under Sec.  409.3, when services are furnished ``under arrangements,'' 
Medicare payments made to the provider that arranged for the services 
discharges the liability of the beneficiary or any other person to pay 
for those services. Our policy was premised on the belief that 3 days, 
in most instances, represented an appropriate interval for establishing 
whether or not the reason for the patient's readmission was directly 
connected to the original episode of care at the LTCH. Therefore, no 
additional claim can be submitted to Medicare by the other provider 
that actually furnished the test or procedure if the patient is 
readmitted to the LTCH within 3 days since the initial LTCH admission 
triggered a Medicare payment under the LTCH prospective payment system 
that has been calibrated to cover payment for all necessary Medicare 
covered services delivered to a beneficiary during that episode of 
care.
    Moreover, under this finalized policy, where the LTCH is required 
to pay for outpatient or inpatient medical treatment or care provided 
at an acute care hospital, an IRF or SNF during any days of the 3-day 
or less interruption, all days of the 3-day or less interruption that 
the patient is away from the LTCH

[[Page 5754]]

will be included in that patient's day count at the LTCH. If the LTCH 
patient goes home during the interruption and receives no additional 
medical care prior to being readmitted to the LTCH, the intervening 
days will not be included in the day count because the LTCH did not 
deliver any services to the patient during those days either directly 
or ``under arrangement''.
    In the final policy, as established in the May 7, 2004 LTCH PPS 
final rule, for LTCH rate year 2005, we did provide a limited exception 
to the prohibition against additional Medicare payments to an 
intervening provider under the less than 3-day interruption of stay 
policy at Sec.  412.531(b)(1)(ii)(A)(1). Under this exception, if a 
patient was discharged from a LTCH, admitted as an inpatient to an 
acute care hospital and readmitted to the same LTCH within 3 days, and 
if the treatment that was delivered at the acute care hospital was 
grouped to a surgical DRG Medicare will pay the acute care hospital 
separately for that surgical treatment. We established this exception 
in response to comments on the original policy that we proposed in the 
January 30, 2004 proposed rule (69 FR 4768-4772) requesting that we 
take into consideration the following scenario: The occurrence of an 
emergency ``totally unrelated'' to a LTCH patient's admitting diagnoses 
that occurred and requiring surgery at an acute inpatient hospital, 
followed by the readmission of the patient within 3 days to the LTCH 
for a continuation of treatment of the patient's initial medical 
problems.
    In our response to these concerns, we noted that the 3-day or less 
interruption of stay policy at 412.531 resulted from our concern that 
if a LTCH patient was discharged to an acute care hospital for only 1, 
2, or 3 days, followed by a readmission to the LTCH, there could be 
reason to believe that the treatment delivered, even if it was grouped 
to a surgical DRG, was not a major procedure because of the relatively 
short length of stay, and, therefore, should have been provided ``under 
arrangements.''
    In the May 7, 2004 LTCH PPS final rule, we stated that over the 
course of the first year of implementation of the revised 3-day or less 
interrupted stay policy, we would study relevant claims data in order 
to evaluate whether further proposed refinements to this policy would 
be warranted in this year's rule. Specifically, we stated that we would 
analyze new data to determine whether problems associated with LTCH 
interrupted stays equally affected all settings to which LTCH patients 
may have been discharged and subsequently readmitted; and we would 
closely monitor patterns of discharges and readmissions under the first 
year of this policy. In order to pursue these analyses, we stated that 
we would be using relevant claims data as soon as they were available 
to determine whether our policy was producing its desired effect of 
reducing unnecessary and inappropriate Medicare payments while not 
compromising beneficiary access to medically necessary services. The 3-
day interruption of stay policy was first implemented on July 1, 2004, 
and, therefore, we do not yet have sufficient data to accomplish the 
above evaluations. Therefore, we are proposing to extend the surgical 
DRG exception through the 2006 LTCH rate year, from July 1, 2005 
through June 30, 2006. At that point, the policy will have been in 
effect for 12 months and we believe that we will be able to better 
evaluate whether this exception should be extended further as well as 
whether the overall policy requires modification in order to serve the 
overall goals of the Medicare program.
9. Onsite Discharges and Readmittances
    Under Sec.  412.532, generally, if more than 5 percent of all 
Medicare discharges during a cost reporting period are patients who are 
discharged to an onsite SNF, IRF, or psychiatric facility, or to an 
onsite acute care hospital and who are then directly readmitted to the 
LTCH (including a satellite facility), only one LTC-DRG payment will be 
made to the LTCH for these type of discharges and readmittances during 
the LTCH's cost reporting period. Therefore, payment for the entire 
stay will be paid either as one full LTC-DRG payment or a short-stay 
outlier, depending on the duration of the entire LTCH stay.
    In applying the 5-percent threshold, we apply one threshold for 
discharges and readmittances with the co-located acute care hospital. 
There is also a separate 5-percent threshold for the aggregate of all 
discharges and readmittances to the LTCH from its co-located SNFs, 
IRFs, and psychiatric facilities. In the case of a LTCH that is co-
located with an acute care hospital, an IRF, or a SNF, the interrupted 
stay policy at Sec.  412.531 applies until the 5-percent threshold is 
reached. Once the applicable 5-percent threshold is reached, all LTCH 
discharges and readmittances from the co-located acute care hospital 
for that cost reporting period are paid as one discharge pursuant to 
Sec.  412.532. This means that once the 5-percent threshold has been 
reached, even if a discharged LTCH Medicare patient was readmitted to 
the LTCH following a stay in an acute care hospital of greater than 9 
days, if the facilities share a common location, the subsequent 
discharge from the LTCH will not represent a separate hospitalization 
for payment purposes. Under this policy, the total stay for a patient 
will include LTCH days prior to the interruption and, also, the days 
after the readmission to the LTCH that followed the interruption and 
Medicare will make one LTC-DRG payment when the patient is discharged 
during a cost reporting period. One LTC-DRG will be assigned based upon 
all patient diagnoses and care delivered to the patient during the 
entire LTCH stay and included on the discharge claim regardless of the 
length of stay at the acute care hospital during the interruption.
    Similarly, if the LTCH has exceeded its 5-percent threshold for all 
discharges to an onsite IRF, SNF, or psychiatric hospital or unit, 
which were readmitted to the LTCH from those providers, the subsequent 
LTCH discharge for those patients will not be treated as a separate 
discharge for Medicare payment purposes. (Unless the up to 3-day 
interrupted stay policy is applicable, payment to an acute care 
hospital under the IPPS, to the IRF under the IRF PPS, or to a SNF 
under the SNF PPS, will not be affected. Payments to the psychiatric 
facility also will not be affected.)
    In the August 30, 2002 LTCH PPS final rule, we established a 
notification requirement for LTCHs that were HwHs as defined in Sec.  
412.22(e) and satellites of LTCHs, defined at Sec.  412.22(h)(5) and 
for LTCHs and for satellites of LTCHs that were subject to the onsite 
provider payment adjustment under Sec.  412.532(i) because they were 
co-located with other Medicare providers, as specified in Sec.  
412.532(a). At Sec.  412.22(e)(3) and (h)(5), as well as at Sec.  
412.532(i), respectively, we require LTCHs to notify us and their FIs 
of their co-located status within 60 days of the start of the 
hospital's first cost reporting period under the LTCH PPS. At Sec.  
412.532(i), we also established an additional notification requirement 
for LTCHs subject to the onsite provider payment adjustment at Sec.  
412.532, to notify their FIs and CMS within 60 days of a change in co-
located status. We intended that these regulations also require the 
LTCHs to identify the Medicare providers, that is, acute care 
hospitals, as well as other excluded hospitals and units (IRFs and 
IPFs), and SNFs with which they were co-located and their addresses and 
Medicare provider numbers for purposes of implementing the payment 
adjustment for co-located providers described above.

[[Page 5755]]

    It appears, however, that this expectation is unclear in our 
existing regulations because we have been informed by our Regional 
offices and FIs that LTCHs, for which they are responsible, have in 
many cases neglected to specify the names, addresses, and provider 
identification numbers of their co-located providers. We are proposing 
to clarify our policy that when a LTCH informs its fiscal intermediary 
of its co-located status, it also would be required to include the 
name, address, and the provider numbers of the other co-located 
providers (that is, acute care hospitals, as well as other excluded 
hospitals and units (IRFs and IPFs) and SNFs) with which they were co-
located. Furthermore, since the existing regulation text at Sec.  
412.22(e)(3) and (h)(5) required that the notification take place 
within 60 days of the LTCH's first cost reporting period beginning on 
or after October 1, 2002 and Sec.  412.532(i) required that the 
notification occur within 60 days of the effective date of the original 
regulation (October 1, 2002), and this timeframe for many LTCHs has 
long since passed, we are eliminating that specific timing requirement 
in favor of the on-going prospective notification requirement described 
above, which is also clearer and more comprehensive. We are proposing 
to delete the phrase ``and within 60 days of a change in co-located 
status'' from Sec.  412.532(i) because we believe that this continuing 
notification requirement in the proposed revised regulation text at 
Sec.  412.532(i) as well as at Sec.  412.22(e)(3) and (h)(5) would 
include the obligation to notify CMS and the fiscal intermediary in 
writing of any change in co-located status and the obligation to 
provide the requisite information detailed above. We are proposing 
revisions to each of the notification provisions at Sec.  412.531(i), 
and at Sec.  412.22(e)(3) and (h)(5) to establish consistency and to 
clearly state the on-going requirement that LTCH HwHs and satellites of 
LTCHs inform their fiscal intermediaries and CMS of the names, 
addresses, and provider numbers of other co-located Medicare providers. 
Although Sec.  412.532(i) previously mentioned LTCHs and satellites of 
LTCHs that occupy space in a building used by another hospital, or in 
one or more entire buildings located on the same campus as buildings 
used by another hospital and that meet the criteria of Sec.  
412.22(h)(1) through (h)(4), the scope of Sec.  412.532 is clearly 
broader than this. Specifically, Sec.  412.532(a) also includes SNFs 
among the providers subject to this policy. We are, therefore, 
proposing to revise the regulation text at Sec.  412.532(i) to include 
all providers at Sec.  412.532(a).

V. Computing the Proposed Adjusted Federal Prospective Payments for the 
2006 LTCH PPS Rate Year

[If you choose to comment on issues in this section, please include the 
caption ``PROPOSED ADJUSTED FEDERAL PROSPECTIVE PAYMENTS'' at the 
beginning of your comments.]
    In accordance with Sec.  412.525 and as discussed in section IV.C. 
of this proposed rule, the standard Federal rate is adjusted to account 
for differences in area wages by multiplying the labor-related share of 
the standard Federal rate by the appropriate LTCH PPS wage index (as 
shown in Tables 1 and 2 of the Addendum to this proposed rule). The 
standard Federal rate is also adjusted to account for the higher costs 
of hospitals in Alaska and Hawaii by multiplying the nonlabor-related 
share of the standard Federal rate by the appropriate cost-of-living 
factor (shown in Table I in section IV.C.2. of this preamble). In the 
May 7, 2004 final rule (69 FR 25674), we established a standard Federal 
rate of $36,833.69 for the 2005 LTCH PPS rate year. In this proposed 
rule, based on the best available data, previously established 
policies, and the proposed policies described in this rule, we are 
proposing to establish a standard Federal rate of $37,975.53 for the 
2006 LTCH PPS rate year as discussed in section IV.B. of this preamble. 
We illustrate the methodology used to adjust the proposed Federal 
prospective payments for the 2006 LTCH PPS rate year in the following 
example: During the 2006 LTCH PPS rate year, a Medicare patient is in a 
LTCH located in Chicago-Naperville-Joliet, Illinois (CBSA 16974). This 
LTCH is in the third year of the wage index phase-in, thus, the 
proposed three-fifths wage index values are applicable. The proposed 
three-fifths wage index value for CBSA 16974 is 1.0521 (see Table 1 in 
the Addendum to this proposed rule). The Medicare patient is classified 
into LTC-DRG 9 (Spinal Disorders and Injuries), which has a relative 
weight of 1.0950 (see Table 3 of the Addendum to this proposed rule). 
To calculate the LTCH's total proposed adjusted Federal prospective 
payment for this Medicare patient, we compute the proposed wage-
adjusted Federal prospective payment amount by multiplying the proposed 
unadjusted standard Federal rate ($37,975.53) by the proposed labor-
related share (72.885 percent) and the proposed wage index value 
(1.0521). This proposed wage-adjusted amount is then added to the 
nonlabor-related portion of the proposed unadjusted standard Federal 
rate (27.115 percent; adjusted for cost of living, if applicable) to 
determine the adjusted Federal rate, which is then multiplied by the 
LTC-DRG relative weight (1.0950) to calculate the total proposed 
adjusted Federal prospective payment for the 2006 LTCH PPS rate year 
($43,162.25). Finally, as discussed in section IV.C.6. of this 
preamble, for the 2006 LTCH PPS rate year, the total proposed adjusted 
Federal prospective payment is reduced by the proposed 0.2 percent 
budget neutrality offset to account for the costs of the transition 
methodology.
    The following illustrates the components of the calculations in 
this example:

 
 
 
Unadjusted Standard Federal Prospective................       $37,975.53
Payment Rate:
    Labor-Related Share................................          0.72885
                                                        ----------------
        Labor-Related Portion of the Federal Rate......     = $27,678.47
    3/5ths Wage Index (CBSA 16974).....................           1.0521
                                                        ----------------
        Wage-Adjusted Labor Share of Federal Rate......     = $29,120.52
    Nonlabor-Related Portion of the Federal Rate           + $ 10,297.06
     ($37,975.53 x 0.27115)............................
                                                        ----------------
        Adjusted Federal Rate Amount...................     = $39,417.58
    LTC-DRG 9 Relative Weight..........................         x 1.0950
                                                        ----------------
        Total Adjusted Federal Prospective Payment          = $43,162.25
         (Before the Budget Neutrality Offset).........
    Budget Neutrality Offset...........................          x 0.998
                                                        ----------------
        Total Federal Prospective Payment (Including        = $42,816.95
         the Budget Neutrality Offset).................
 


[[Page 5756]]

VI. Transition Period

    To provide a stable fiscal base for LTCHs, under Sec.  412.533, we 
implemented a 5-year transition period from reasonable cost-based 
reimbursement under the TEFRA system to a prospective payment based on 
industry-wide average operating and capital-related costs. Under the 
average pricing system, payment is not based on the experience of an 
individual hospital. As discussed in the August 30, 2002 final rule (67 
FR 56038), we believe that a 5-year phase-in provides LTCHs time to 
adjust their operations and capital financing to the LTCH PPS, which is 
based on prospectively determined Federal payment rates. Furthermore, 
we believe that the 5-year phase-in of the LTCH PPS also allows LTCH 
personnel to develop proficiency with the LTC-DRG coding system, which 
will result in improvement in the quality of the data used for 
generating our annual determination of relative weights and payment 
rates.
    In accordance with Sec.  412.533, the transition period for all 
hospitals subject to the LTCH PPS begins with the hospital's first cost 
reporting period beginning on or after October 1, 2002 and extends 
through the hospital's last cost reporting period beginning before 
October 1, 2006. During the 5-year transition period, a LTCH's total 
payment under the LTCH PPS is based on two payment percentages--one 
based on reasonable cost-based (TEFRA) payments and the other based on 
the standard Federal prospective payment rate. The percentage of 
payment based on the LTCH PPS Federal rate increases by 20 percentage 
points each year, while the reasonable cost-based payment rate 
percentage decreases by 20 percentage points each year, for the next 2 
fiscal years. For cost reporting periods beginning on or after October 
1, 2006, Medicare payment to LTCHs will be determined entirely under 
the Federal rate. The blend percentages as set forth in Sec.  
412.533(a) are as follows:

------------------------------------------------------------------------
                                                              Reasonable
                                                                 cost
                                                  Federal     principles
 Cost reporting periods beginning on or after       rate    ------------
                                                 percentage      Rate
                                                              percentage
------------------------------------------------------------------------
October 1, 2002...............................           20           80
October 1, 2003...............................           40           60
October 1, 2004...............................           60           40
October 1, 2005...............................           80           20
October 1, 2006...............................          100            0
------------------------------------------------------------------------

    For cost reporting periods that begin on or after October 1, 2004, 
and before October 1, 2005 (FY 2005), the total payment for a LTCH is 
40 percent of the amount calculated under reasonable cost principles 
for that specific LTCH and 60 percent of the Federal prospective 
payment amount. For cost reporting periods that begin on or after 
October 1, 2005 and before October 1, 2006 (FY 2006), the total payment 
for a LTCH will be 20 percent of the amount calculated under reasonable 
cost principles for that specific LTCH and 80 percent of the Federal 
prospective payment amount. As we noted in the May 7, 2004 final rule 
(69 FR 25674), the change in the effective date of the annual LTCH PPS 
rate update from October 1 to July 1 has no effect on the LTCH PPS 
transition period as set forth in Sec.  412.533(a). That is, LTCHs paid 
under the transition blend under Sec.  412.533(a) will receive those 
blend percentages for the entire 5-year transition period (unless they 
elect payments based on 100 percent of the Federal rate). Furthermore, 
LTCHs paid under the transition blend will receive the appropriate 
blend percentages of the Federal and reasonable cost-based rate for 
their entire cost reporting period as prescribed in Sec.  412.533(a)(1) 
through (a)(5).
    The reasonable cost-based rate percentage is a LTCH specific amount 
that is based on the amount that the LTCH would have been paid (under 
TEFRA) if the PPS were not implemented. Medicare fiscal intermediaries 
will continue to compute the LTCH reasonable cost-based payment amount 
according to Sec.  412.22(b) of the regulations and sections 1886(d) 
and (g) of the Act.
    In implementing the PPS for LTCHs, one of our goals is to 
transition hospitals to full prospective payments as soon as 
appropriate. Therefore, under Sec.  412.533(c), we allow a LTCH, which 
is subject to a blended rate, to elect payment based on 100 percent of 
the Federal rate at the start of any of its cost reporting periods 
during the 5-year transition period rather than incrementally shifting 
from reasonable cost-based payments to prospective payments. Once a 
LTCH elects to be paid based on 100 percent of the Federal rate, it 
will not be able to revert to the transition blend. For cost reporting 
periods that began on or after December 1, 2002, and for the remainder 
of the 5-year transition period, a LTCH must notify its fiscal 
intermediary in writing of its election on or before the 30th day prior 
to the start of the LTCH's next cost reporting period. For example, a 
LTCH with a cost reporting period that begins on May 1, 2005, must 
notify its fiscal intermediary in writing of an election before April 
1, 2005.
    Under Sec.  412.533(c)(2)(i), the notification by the LTCH to make 
the election must be made in writing to the Medicare fiscal 
intermediary. Under Sec. Sec.  412.533(c)(2)(ii) and (c)(2)(iii), the 
intermediary must receive the request on or before the specified date 
(that is, on or before the 30th day before the applicable cost 
reporting period begins for cost reporting periods beginning on or 
after December 1, 2002 through September 30, 2006), regardless of any 
postmarks or anticipated delivery dates.
    Notifications received, postmarked, or delivered by other means 
after the specified date will not be accepted. If the specified date 
falls on a day that the postal service or other delivery sources are 
not open for business, the LTCH will be responsible for allowing 
sufficient time for the delivery of the request before the deadline. If 
a LTCH's notification is not received timely, payment will be based on 
the transition period blend percentages.

VII. Payments to New LTCHs

    Under Sec.  412.23(e)(4), for purposes of Medicare payment under 
the LTCH PPS, we define a new LTCH as a provider of inpatient hospital 
services that otherwise meets the qualifying criteria for LTCHs, set 
forth in Sec.  412.23(e)(1) and (e)(2), under present or previous 
ownership (or both), and its first cost reporting period as a LTCH 
begins on or after October 1, 2002. We also specify in Sec.  412.500 
that the LTCH PPS is applicable to hospitals with a cost

[[Page 5757]]

reporting period that began on or after October 1, 2002.
    As we discussed in the August 30, 2002 final rule (67 FR 56040), 
this definition of new LTCHs should not be confused with those LTCHs 
first paid under the TEFRA payment system for discharges occurring on 
or after October 1, 1997, described in section 1886(b)(7)(A) of the 
Act, as added by section 4416 of Public Law 105-33. As stated in Sec.  
413.40(f)(2)(ii), for cost reporting periods beginning on or after 
October 1, 1997, the payment amount for a ``new'' (post-FY 1998) LTCH 
is the lower of the hospital's net inpatient operating cost per case or 
110 percent of the national median target amount payment limit for 
hospitals in the same class for cost reporting periods ending during FY 
1996, updated to the applicable cost reporting period (see 62 FR 46019, 
August 29, 1997). Under the LTCH PPS, those ``new'' LTCHs that meet the 
definition of ``new'' under Sec.  413.40(f)(2)(ii) and that have their 
first cost reporting period as a LTCH beginning prior to October 1, 
2002, will be paid under the transition methodology described in Sec.  
412.533.
    As noted above and in accordance with Sec.  412.533(d), new LTCHs 
will not participate in the 5-year transition from reasonable cost-
based reimbursement to prospective payment. As we discussed in the 
August 30, 2002 final rule (67 FR 56040), the transition period is 
intended to provide existing LTCHs time to adjust to payment under the 
new system. Since these new LTCHs with their first cost reporting 
periods as LTCHs beginning on or after October 1, 2002, would not have 
received payment under reasonable cost-based reimbursement for the 
delivery of LTCH services prior to the effective date of the LTCH PPS, 
we do not believe that those new LTCHs require a transition period in 
order to make adjustments to their operations and capital financing, as 
will LTCHs that have been paid under the reasonable cost-based 
methodology.

VIII. Method of Payment

    Under Sec.  412.513, a Medicare LTCH patient is classified into a 
LTC-DRG based on the principal diagnosis, up to eight additional 
(secondary) diagnoses, and up to six procedures performed during the 
stay, as well as age, sex, and discharge status of the patient. The 
LTC-DRG is used to determine the Federal prospective payment that the 
LTCH will receive for the Medicare-covered Part A services the LTCH 
furnished during the Medicare patient's stay. Under Sec.  412.541(a), 
the payment is based on the submission of the discharge bill. The 
discharge bill also provides data to allow for reclassifying the stay 
from payment at the full LTC-DRG rate to payment for a case as a short-
stay outlier (under Sec.  412.529) or as an interrupted stay (under 
Sec.  412.531), or to determine if the case will qualify for a high-
cost outlier payment (under Sec.  412.525(a)).
    Accordingly, the ICD-9-CM codes and other information used to 
determine if an adjustment to the full LTC-DRG payment is necessary 
(for example, length of stay or interrupted stay status) are recorded 
by the LTCH on the Medicare patient's discharge bill and submitted to 
the Medicare fiscal intermediary for processing. The payment represents 
payment in full, under Sec.  412.521(b), for inpatient operating and 
capital-related costs, but not for the costs of an approved medical 
education program, bad debts, blood clotting factors, anesthesia 
services by hospital-employed nonphysician anesthetists or obtained 
under arrangement, or the costs of photocopying and mailing medical 
records requested by a Quality Improvement Organization (QIO), which 
are costs paid outside the LTCH PPS.
    As under the previous reasonable cost-based payment system, under 
Sec.  412.541(b), a LTCH may elect to be paid using the periodic 
interim payment (PIP) method described in Sec.  413.64(h) and may be 
eligible to receive accelerated payments as described in Sec.  
413.64(g).
    For those LTCHs that are paid during the 5-year transition based on 
the blended transition methodology in Sec.  412.533(a) for cost 
reporting periods that began on or after October 1, 2002, and before 
October 1, 2006, the PIP amount is based on the transition blend. For 
those LTCHs that are paid based on 100 percent of the standard Federal 
rate, the PIP amount is based on the estimated prospective payment for 
the year rather than on the estimated reasonable cost-based 
reimbursement. We exclude high-cost outlier payments that are paid upon 
submission of a discharge bill from the PIP amounts. In addition, Part 
A costs that are not paid for under the LTCH PPS, including Medicare 
costs of an approved medical education program, bad debts, blood 
clotting factors, anesthesia services by hospital-employed nonphysician 
anesthetists or obtained under arrangement, and the costs of 
photocopying and mailing medical records requested by a QIO, are 
subject to the interim payment provisions (Sec.  412.541(c)).
    Under Sec.  412.541(d), LTCHs with unusually long lengths of stay 
that are not receiving payment under the PIP method may bill on an 
interim basis (60 days after an admission and at intervals of at least 
60 days after the date of the first interim bill) and should include 
any high-cost outlier payment determined as of the last day for which 
the services have been billed.

IX. MedPAC Recommendations/Monitoring

    The Medicare Payment Advisory Commission's (MedPAC's) June 2004 
Report to the Congress: Variation and Innovation in Medicare, contained 
a chapter on ``Defining Long-Term Care Hospitals.'' In this chapter, 
the Commission focused on a broad range of issues central to 
understanding LTCHs which, although rapidly increasing in number, is 
still the smallest of all provider categories, but the most costly to 
the Medicare program per beneficiary episode of care.
    The Commission identified particular problems such as growth of the 
LTCH industry, and high payment rates that appear to result from 
current payment incentives. Specifically the report states, ``[F]irst, 
the financial incentive of the acute and long-term care hospital PPSs 
are likely to encourage facilities to selectively retain and admit 
certain types of patients to minimize their costs. Acute hospitals have 
a financial incentive to transfer patients as quickly as possible if 
they are likely to become high-cost outliers (to avoid losses on those 
patients). LTCHs have an incentive to admit patients with a given 
diagnosis who are likely to require fewer resources. Second, as the 
number of LTCHs grows, facilities may find it increasingly difficult to 
find patients who truly require LTCH-level care; this would lead to an 
increase in lower severity patients being cared for in LTCHs and higher 
Medicare spending. Finally, LTCH care is costly. The per case base rate 
in $37,000 and payments can be as high as $115,000 per case for the 
most complex patients.'' (pp. 127-8)
    The Commission also examined LTCHs in the June 2003 Report to the 
Congress, entitled, ``Monitoring post-acute care.'' Citing that Report, 
the Commission compared beneficiaries treated in LTCHs and other 
settings and determined that based on ``the 11 most common diagnoses in 
LTCHs, using descriptive analysis and controlling for diagnosis related 
group (DRG) and severity of illness * * * that patients in market areas 
with LTCHs had similar acute hospital lengths of stay [preceding the 
LTCH stay] whether they used these facilities or not.'' Further, 
``[p]atients who used LTCHs were three to five times less likely to use 
skilled nursing facility (SNF) care, suggesting that SNFs

[[Page 5758]]

and long-term care hospitals may be substitutes.'' The June 2004 Report 
had also noted that ``* * * Medicare pays more for patients treated in 
LTCHs, compared with patients not treated in them'', but also concluded 
that this study, as well as the rapid and continuing growth in the 
number of LTCHs, the corresponding increases in Medicare spending, 
combined with the markedly uneven distribution of LTCHs throughout the 
country, raised additional issues for further research. (p. 122)
    In its June 2004 Report to the Congress, the Commission reported 
the results of this subsequent research, both qualitative and 
quantitative, which focused on the following questions: What role do 
long-term care hospitals play in providing care?; Where are clinically 
similar patients treated in areas without long-term care hospitals?; 
and How do Medicare payments and outcomes compare for LTCH patients 
versus those in other settings? (p. 122). The Commission's research 
utilized structured interviews with health care providers and hospital 
administrators; site visits and clinical presentations; and 
quantitative analyses of markets with and without LTCHs and patient-
level analyses to examine outcomes and per-episode impact on Medicare 
costs. Responses to these questions included the following assertions:
     LTCHs provide post-acute care to a small number of 
medically complex patients who are more stable than patients in an 
intensive care unit (ICU) but may still have unresolved underlying 
complex medical conditions.
     The use of LTCHs is associated with certain diagnoses, 
severity levels and the proximity of the facility.
     In areas without LTCHs, acute hospitals and SNFs are the 
principal substitutes of LTCHs.
     When LTCH care is not targeted to patients most likely to 
need this level of care, care for patients at a LTCH is more costly to 
Medicare than for similar patients in alternative settings. Conversely, 
when LTCH care is targeted to patients most likely to need this level 
of care, costs for those patients appear to be comparable to costs for 
those who use other settings (and costs for LTCH patients with 
tracheostomies save Medicare money) in large part because of fewer 
acute hospital readmissions for those patients. (pp 121-134)
    The Commission's interpretations of its qualitative and 
quantitative research findings led to two specific recommendations:
    ``5A--The Congress and the Secretary should define long-term care 
hospitals by facility and patient criteria that ensure that patients 
admitted to these facilities are medically complex and have a good 
chance at improvement.
     Facility-level criteria should characterize this level of 
care by features such as staffing, patient evaluation and review 
processes, and mix of patients.
     Patient-level criteria should identify specific clinical 
characteristics and treatment modalities.
    5B--The Secretary should require the Quality Improvement 
Organizations to review long-term care hospital admissions for medical 
necessity and monitor that these facilities are in compliance with 
defining criteria.'' (p. 120).
    Since the publication of MedPAC's recommendations, we have 
discussed the implications of the Report with several trade 
associations that represent different facets of the LTCH industry (for 
example, older non-profit LTCHs; a for-profit chain that specializes in 
a particular case-mix; another for-profit chain which functions mainly 
in the HwH model).
    In response to the recommendation in MedPAC's June 2004 Report that 
the Secretary examine defining LTCHs by facility and patient criteria, 
we have awarded a contract to Research Triangle Institute (RTI), 
International for a thorough examination of the Commission's 
recommendations based on the performance of a wide variety of analytic 
tasks using CMS data files, and also utilizing information collected 
from physicians, providers, and LTCH trade associations. This contract, 
``Long Term Care Hospital (LTCH) Payment System Refinement/
Evaluation,'' will assist (CMS) in researching MedPAC's recommendations 
regarding the appropriate and cost-effective use of LTCHs in the 
Medicare program. With the recommendations of MedPAC's June 2004 Report 
to Congress as a point of departure, RTI, International will evaluate 
patient or facility level characteristics for LTCHs in order to 
identify and distinguish the role of these hospitals as a Medicare 
provider. This effort will be multi-faceted. Claims analysis of 
patients treated by LTCHs, as well as outlier patients treated at acute 
care hospitals will provide information to help direct this work, and 
several additional types of data sources will be used to evaluate these 
two issues, including administrative data such as Medicare claims as 
well as primary data collected through interviews, and a secondary 
analysis of existing regulatory requirements. As they gather 
information for the purposes of determining the feasibility of 
establishing LTCH patient and facility-level criteria, our contractor 
has been directed to include information from representatives, along 
with other stake-holders in the LTCH industry. Additionally, the 
contractor will examine the present role of QIOs in the Medicare 
program, focusing on their responsibilities regarding the LTCH PPS, as 
well as the potential for an expanded QIO role as suggested by MedPAC's 
recommendations. The goals of this research will be to document current 
practices related to the MedPAC recommendations, both in terms of 
provider certification, quality reviews, and hospital practice 
patterns.
    Specifically, the project itself will be completed in two phases. 
Phase I, which is presently being undertaken by the contractor, focuses 
on an analysis of LTCHs within the current Medicare system, their 
history as participating providers, their case-mix, the criteria used 
by QIOs to determine the appropriateness of treatment in LTCHs, and 
where similar patients are treated in areas that lack LTCHs. Prior 
analyses of these issues by other contractors will be utilized as well 
as preliminary discussions with MedPAC, other researchers, and the 
QIOs. Building on the work of Phase I, Phase II will continue to 
address the feasibility of MedPAC's proposed criteria by first 
investigating the appropriateness of patient level criteria to 
determine whether there are distinctions between patients treated in 
LTCHs and other types of potential substitute providers (with 
particular attention to varying outcomes). Medicare claims data will be 
utilized for comparisons of LTCH patients and long-stay patients who 
are treated in acute care hospitals that have attained high cost 
outlier status. A separate analysis will be made for a subset of LTCH 
patients with diagnoses that are typically treated in IRFs. The 
contractor is then planning interviews with QIOs for the purpose of 
gathering information on assessment measures for each setting. 
Comparisons of these instruments will be made across regions for their 
usefulness as standardized patient screening or assessment tools. The 
contractors then plan to evaluate the outcomes of their research in the 
context of MedPAC's recommendation for the development of facility-
level criteria, using claims, interviews, and document reviews. To the 
extent the analyses suggest that changes should be made that may affect 
LTCH payments, LTCH discharges, or the definition of LTCH, such 
proposed changes could necessitate some statutory or regulatory 
changes.
    In the August 30, 2002 final rule (67 FR 56014), we described an 
on-going monitoring component of the new LTCH

[[Page 5759]]

PPS that would enable us to evaluate the impact of the new payment 
policies. Specifically, we discussed on-going analysis of the various 
policies that we believe would provide equitable payment for stays that 
reflect less than the full course of treatment and reduce the 
incentives for inappropriate admissions, transfers, or premature 
discharges of patients that are present in a discharge-based PPS. To 
this end, we have designed system features utilizing MedPAR data that 
will enable us and the fiscal intermediary to track beneficiary 
movement to and from a LTCH and track LTCH patients to and from another 
Medicare provider. We also stated our intent to collect and interpret 
data on changes in average lengths of stay under the LTCH PPS for 
specific LTC-DRGs and the impact of these changes on the Medicare 
program. As part of our data analysis, we have revisited a number of 
our original and even pre-LTCH PPS policies in order to address what we 
believed were behaviors by certain LTCHs that have led to inappropriate 
Medicare payments. In recent Federal Register publications, for 
example, we have proposed and subsequently finalized revisions to the 
interruption of stay policy (69 FR 25692, May, 2004), and we 
established a payment adjustment for LTCH HwHs and satellites (69 FR 
49191, August 11, 2004).
    Also, in the June 6, 2003 final rule (68 FR 34157), we explained 
that, given that the only requirement that distinguishes a LTCH from 
other acute care hospitals is an average inpatient length of stay of 
greater than 25 days, we continue to be concerned about the extent to 
which LTCH services and patients differ from those services and 
patients treated in other Medicare covered settings (for example, SNFs 
and IRFs) and how the LTCH PPS will affect the access, quality, and 
costs across the health care continuum. Thus, we will be monitoring 
trends in the supply and utilization of LTCHs and Medicare's costs in 
LTCHs relative to other Medicare providers. For example, we intend to 
conduct medical record reviews of Medicare patients to monitor changes 
in service use (ventilator use, for example) over a LTCH episode of 
care and to assess patterns in the average length of stay at the 
facility level.
    We also are collecting data on patients staying for periods of 6 
months or longer in LTCHs and believe that QIOs will be evaluating 
whether or not such extensive stays may be indicative of LTCH patients 
who could be more appropriately served at a SNF.
    As we discussed in the June 6, 2003 final rule (68 FR 34157), the 
MedPAC endorsed this monitoring activity as a primary aspect of the 
design and on-going functioning of the LTCH PPS. Furthermore, as 
discussed earlier, the Commission, in its June, 2004 Report to the 
Congress, recommended that we develop facility and patient criteria for 
LTCH admission and treatment and require a review by QIOs to evaluate 
whether LTCH admissions meet criteria for medical necessity once the 
recommended facility and patient criteria are established.
    The involvement of QIOs in the LTCH PPS was established at the 
outset of the system at Sec.  412.508, and was described in the August 
30, 2002 final rule (67 FR 55975). Specific activities for QIOs 
regarding LTCHs are included in contracts awarded by our Office of 
Clinical Standards and Quality (OCSQ) detailing their scope(s) of work 
among which are reviewing random samples of LTCH records for medical 
necessity and coding for generating national payment error estimates; 
proposing projects to reduce improper payments utilizing the national 
payment error cause analysis or their own data collection. One 
direction that is being explored by OCSQ for this type of project is 
the identification of LTCHs that have specific diagnoses codes related 
to medically unnecessary admissions, or perhaps high levels of short-
stay outliers.
    In January 2004, QIOs began reviewing medical records for LTCH 
claims for the specific purpose of estimating a national payment error 
rate. Presently, QIOs review 116 LTCH cases each month for admission 
necessity, for acute care admission, and coding. A cause analysis will 
be done after the first year's sampling to discern patterns of improper 
payments for admission necessity and coding. The payment error 
estimates and some of these analyses will be included in the annual 
fee-for-service error report.
    We continue to be concerned that our policies must assure that 
LTCHs only treat patients for whom the LTCH level of care is 
appropriate in order to ensure that Medicare is a prudent purchaser of 
these very costly services. In addressing one aspect of the issue of 
whether patients in LTCHs truly need hospital-level of care, beginning 
in October 2004 and slated to end in July 2005 OCSQ has undertaken a 
study of LTCH short-stay outliers. Under the short-stay outlier policy 
at Sec.  412.529, when a LTCH patient stay is considered a short-stay 
outlier for Medicare payment purposes, the LTCH receives an adjusted 
(generally lower) payment when the covered days of care do not exceed 
\5/6\ of the (geometric) average length of stay for the particular LTC-
DRG assigned to the case. The study evaluates the extent of short-stay 
outliers and the possibility of retention of patients by the LTCH when 
the LTCH patient no longer requires hospital-level of care and could be 
effectively served in a SNF. Due to possible reductions in payment 
combined with a need to maintain an average length of stay of greater 
than 25 days to remain an LTCH, we believe that LTCHs may be retaining 
these patients beyond the short-stay outlier threshold in order to 
increase Medicare payments. The three QIOs located in States which 
house the majority of LTCHs are conducting reviews on six months of 
records from the monthly random sample for this study in order to 
assess this situation and to determine whether and to what extent 
patients are being retained at the LTCH beyond their need for hospital-
level care and whether retention can be linked to the increased payment 
for patients exceeding the short-stay outlier threshold. If it is 
determined that retaining LTCH patients unnecessarily beyond the short-
stay outlier threshold is a significant payment issue, OCSQ plans to 
add this review type to the standard QIO LTCH review.
    In addition to existing tasks and the above research study on 
short-stay outliers, in accordance with the goals of our on-going 
monitoring program as well as MedPAC's June 2003 recommendations, we 
believe the QIO's findings will be invaluable in both identifying the 
most appropriate type of patients for treatment at a LTCH as well as to 
begin to explore measures of cost-effectiveness for LTCH services.
    Currently, we do not require LTCHs to submit any clinical or other 
quality data, thus, any measurement activity must be based solely on 
claims. General concerns that we have raised since the establishment of 
the LTCH PPS, however, and the analysis and very specific 
recommendations in the MedPAC's June 2004 Report have led us to 
question what level of additional data beyond current claims would be 
required for the creation of clinical quality measures for LTCHs. 
Furthermore, we are presently evaluating whether CMS's Quality 
Measurement and Health Assessment Group (QMHAG) will need to build a 
quality measurement program for the LTCH setting. (A quality 
measurement program would generally establish processes or a group of 
tasks or processes which, if completed satisfactorily, would indicate a 
level of compliance with program goals. Clinical quality measures for 
acute care hospitals based on voluntary data submission and for nursing 
homes and home health

[[Page 5760]]

agencies based on a mandatory standardized data submission are 
currently being generated.)
    As in the acute care hospital, in order to establish a robust set 
of clinical quality measures for LTCHs, the domains would have to reach 
a broad population, be based on medical evidence, be scientifically 
valid, and be actionable. We are also considering measures that cut 
across other care delivery sites and are broadly focused around areas 
such as medication management or patient safety. We anticipate a mix of 
process and outcomes measures that would reflect expected care for each 
setting, but we also believe that the measures should not ultimately be 
limited to clinical measures, but should include measures of 
institutional procedures related to delivery of care systems and 
patients' actual experience of care. Moreover, if these measures are to 
be used to relate payment to outcome or performance, it is essential 
that the measures be adequately risk adjusted.
    Therefore, in addition to pursuing our on-going monitoring program 
under the direction of our Office of Research, Development, and 
Information (ORDI), existing QIO monitoring and studies, and our 
considerations of expanding the QIO role in the LTCH PPS, as noted 
above, we have awarded a contract to RTI International for a thorough 
examination of the feasibility of implementing MedPAC's recommendations 
that are contained in the June 2004 Report to the Congress. The 
research contract was funded for FY 2005 and we anticipate that we will 
be able to include some preliminary findings in the FY 2006 final rule.

X. Collection of Information Requirements

    The collection requirements associated with this proposed rule are 
exempt from the PRA as stipulated under P.L. 100-203, Section 4201.

XI. Regulatory Impact Analysis

    [If you choose to comment on issues in this section, please include 
the caption ``PROPOSED ADJUSTED FEDERAL PROSPECTIVE PAYMENTS'' at the 
beginning of your comments.]

A. Introduction

    We have examined the impact of this proposed rule as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review), 
the Regulatory Flexibility Act (RFA) (September 16, 1980, Pub. L. 96-
354), section 1102(b) of the Social Security Act (the Act), the 
Unfunded Mandates Reform Act of 1995 (UMRA) (Pub. L. 104-4), and 
Executive Order 13132.
1. Executive Order 12866
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely assigns 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 one 
year). In this proposed rule, we are using the most recent estimate of 
the LTCH PPS market basket, updated claims data, and updated wage index 
values to estimate proposed payments for the 2006 LTCH PPS rate year. 
Based on the best available data for 261 LTCHs, we estimate that the 
proposed 3.1 percent increase to the standard Federal rate for the 2006 
LTCH PPS rate year, in conjunction with the proposed decrease in fixed-
loss amount (discussed in section IV.C.3. of this proposed rule) and 
the proposed slight decrease in the transition period budget neutrality 
offset (discussed in section IV.C.7. of this proposed rule), would 
result in an increase in payments from the 2005 LTCH PPS rate year of 
$159 million for the 261 LTCHs. (Section IV.C.7. of this proposed rule 
includes an estimate of Medicare program payments for LTCH services.) 
Because the combined distributional effects and costs to the Medicare 
program are estimated to be greater than $100 million, this proposed 
rule is considered a major economic rule, as defined above.
2. Regulatory Flexibility Act (RFA)
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and government agencies. 
Most hospitals and most other providers and suppliers are small 
entities, either by nonprofit status or by having revenues of $26 
million or less in any 1 year. For purposes of the RFA, all hospitals 
are considered small entities according to the Small Business 
Administration's latest size standards with total revenues of $26 
million or less in any 1 year (for further information, see the Small 
Business Administration's regulation at 65 FR 69432, November 17, 
2000). Because we lack data on individual hospital receipts, we cannot 
determine the number of small proprietary LTCHs. Therefore, we assume 
that all LTCHs are considered small entities for the purpose of the 
analysis that follows. Medicare fiscal intermediaries are not 
considered to be small entities. Individuals and States are not 
included in the definition of a small entity.
    Currently, our database of 261 LTCHs includes the data for 62 non-
profit (voluntary ownership control) LTCHs and 191 proprietary LTCHs. 
The remaining 8 LTCHs are Government owned and operated. (See Table 
II.) The impact of the proposed changes for the 2006 LTCH PPS rate year 
are discussed below in section XII.B.4.c of this proposed rule. The 
provisions of this proposed rule represent a 5.5 percent increase in 
estimated proposed payments in the 2006 LTCH PPS rate year for all 
LTCHs (as shown in Table II below). We do not expect the proposed 
incremental increase of 5.5 percent to the LTCH PPS Medicare payment 
rates, including the 0.1 percent incremental increase due to the 
proposed wage index changes (discussed in section IV.C.1. of this 
proposed rule), to have a significant adverse effect on the overall 
revenues of most LTCHs. In addition, LTCHs also provide services to 
(and generate revenue from) patients other than Medicare beneficiaries. 
Accordingly, we certify that this proposed rule would not have a 
significant impact on a substantial number of small entities, in 
accordance with RFA.
3. Impact on Rural Hospitals
    Section 1102(b) of the Social Security Act requires us to prepare a 
regulatory impact analysis if a proposed or final 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 604 of the RFA. For purposes of section 1102(b) of the Act, we 
define a small rural hospital as a hospital that is located outside of 
a Metropolitan Statistical Area and has fewer than 100 beds. As 
discussed in detail below, the rates and policies set forth in this 
proposed rule would not have a adverse impact on rural hospitals based 
on the data of the 16 rural hospitals in our database of the 261 LTCHs 
for which data were available.
4. Unfunded Mandates
    Section 202 of the UMRA requires that agencies assess anticipated 
costs and benefits before issuing any rule that may result in 
expenditure in any one year by State, local, or tribal governments, in 
the aggregate, or by the private sector, of $110 million or more.

[[Page 5761]]

This proposed rule would not mandate any requirements for State, local, 
or tribal governments, nor would it result in expenditures by the 
private sector of $110 million or more in any one year.
5. Federalism
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications.
    We have examined this proposed rule under the criteria set forth in 
Executive Order 13132 and have determined that this proposed rule would 
not have any significant impact on the rights, roles, and 
responsibilities of State, local, or tribal governments or preempt 
State law, based on the 8 State and local LTCHs in our database of 261 
LTCHs for which data were available.

B. Anticipated Effects of Proposed Payment Rate Changes

    We discuss the impact of the proposed payment rate changes in this 
proposed rule below in terms of their fiscal impact on the Medicare 
budget and on LTCHs.
1. Budgetary Impact
    Section 123(a)(1) of Medicare, Medicaid and State Child Health 
Insurance Program (SCHIP) Balanced Budget Refinement Act of 1999 (BBRA) 
(Pub. L. 106-113) requires that the PPS developed for LTCHs ``maintain 
budget neutrality.'' Therefore, in calculating the standard Federal 
rate under Sec.  412.523(d)(2), we set total payments for FY 2003 under 
the LTCH PPS so that aggregate payments under the LTCH PPS are 
estimated to equal to the amount that would have been paid if this PPS 
had not been implemented. However, as discussed in greater detail in 
the August 30, 2002 final rule (67 FR 56033-56036), the FY 2003 LTCH 
PPS standard Federal rate ($34,956.15) was calculated as though all 
LTCHs would be paid based on 100 percent of the standard Federal rate 
in FY 2003. As discussed in section IV.C.7. of this proposed rule, we 
apply a proposed budget neutrality offset to payments to account for 
the monetary effect of the 5-year transition to full prospective 
payment under the LTCH PPS and the policy to permit LTCHs to elect, 
during the transition, to be paid based on 100 percent of the proposed 
standard Federal rate rather than a blend of proposed Federal 
prospective payments and reasonable cost-based payments. The amount of 
the proposed offset is equal to 1 minus the ratio of the estimated 
payments based on 100 percent of the LTCH PPS Federal rate to the 
projected total Medicare program payments that would be made under the 
transition methodology and the option to elect payment based on 100 
percent of the Federal prospective payment rate.
2. Impact on Providers
    The basic methodology for determining a LTCH PPS payment is set 
forth in the regulations at Sec.  412.515 through Sec.  412.525. In 
addition to the basic LTC-DRG payment (standard Federal rate x LTC-DRG 
relative weight), we make adjustments for differences in area wage 
levels, cost-of-living adjustment for Alaska and Hawaii, and short-stay 
outliers. Furthermore, LTCHs may also receive high-cost outlier 
payments for those cases that qualify based on the threshold 
established each rate year. Section 412.533 provides for a 5-year 
transition to fully prospective payments from payment based on 
reasonable cost-based methodology. During the 5-year transition period, 
payments to LTCHs are based on an increasing percentage of the LTCH PPS 
Federal rate and a decreasing percentage of payment based on reasonable 
cost-based methodology. Section 412.533(c) provides for a one-time 
opportunity for LTCHs to elect payments based on 100 percent of the 
LTCH PPS Federal rate.
    In order to understand the impact of the proposed changes to the 
LTCH PPS discussed in this proposed rule on different categories of 
LTCHs for the 2006 LTCH PPS rate year, it is necessary to estimate 
payments per discharge under the LTCH PPS rates and factors for the 
2005 LTCH PPS rate year (see the May 7, 2005 final rule; 68 FR 25674) 
and to estimate payments per discharge that would be made under the 
proposed LTCH PPS rates and factors for the 2006 LTCH PPS rate year, as 
discussed in the preamble of this proposed rule. To this end, we 
determined the percent change in payments per discharge of estimated 
2005 LTCH PPS rate year payments to estimated 2006 LTCH PPS rate year 
payments for each category of LTCHs. In addition, for each category of 
LTCHs, we have included the estimated percent change in payments per 
discharge resulting from the proposed LTCH PPS wage index changes 
(described in section IV.C.1. of this proposed rule). The proposed wage 
index changes for the 2006 LTCH PPS rate year include the proposed 
changes to the LTCH PPS wage index for the 2006 LTCH PPS rate year 
include the proposed change in the labor market area definitions, the 
proposed update in the wage index data, and the established phase-in of 
the LTCH PPS wage index adjustment, from 2005 LTCH PPS rate year 
(LTCHs' FYs 2004 and 2005 cost reporting periods) to the 2006 LTCH PPS 
rate year (LTCHs' FYs 2005 and 2006 LTCH cost reporting periods).
    Hospital groups were based on characteristics provided in the 
Online Survey Certification and Reporting (System) (OSCAR) data, FYs 
2000 through 2003 cost report data, and Provider Specific File data. 
Hospitals with incomplete characteristics were grouped into the 
``unknown'' category. Hospital groups include:

--Location: Large Urban/Other Urban/Rural
--Participation Date
--Ownership Control
--Census Region
--Bed Size

    To estimate the impacts among the various categories of providers 
during the LTCH PPS transition period, it is imperative that reasonable 
cost-based methodology payments and prospective payments contain 
similar inputs. More specifically, in the impact analysis showing the 
impact reflecting the applicable transition blend percentages of 
prospective payments and reasonable cost-based methodology payments and 
the option to elect payment based on 100 percent of the proposed 
Federal rate (Table III below), we estimated payments only for those 
providers for whom we are able to calculate payments based on 
reasonable cost-based methodology. For example, if we did not have at 
least 2 years of historical cost data for a LTCH, we were unable to 
determine an update to the LTCH's target amount to estimate payment 
under reasonable cost-based methodology.
    Using LTCH cases from the FY 2003 MedPAR file and cost data from 
FYs 1999 through 2002 to estimate payments under the current reasonable 
cost-based principles, we have obtained both case-mix and cost data for 
261 LTCHs. Thus, for the impact analyses reflecting the applicable 
transition blend percentages and the option to elect payment based on 
100 percent of the Federal rate (see Table II below), we used data from 
261 LTCHs. While currently there are more than 300 LTCHs, the most 
recent growth is predominantly in for-profit LTCHs that provide 
respiratory and ventilator-dependent patient care. We believe that the 
discharges from the FY 2003 MedPAR data for the 261 LTCHs in our 
database provide sufficient representation in the LTC-DRGs containing 
discharges for patients who received respiratory and ventilator-

[[Page 5762]]

dependent care based on the relatively large number of LTCH cases in 
LTC-DRGs for these diagnoses. However, using cases from the FY 2003 
MedPAR file we had case-mix data for 301 LTCHs. Cost data to determine 
current payments under reasonable cost-based methodology payments are 
not needed to simulate payments based on 100 percent of the proposed 
Federal rate. Therefore, for the impact analyses reflecting fully 
phased-in prospective payments (see Table III below), we used data from 
301 LTCHs.
    These impacts reflect the estimated ``losses'' or ``gains'' among 
the various classifications of LTCHs for the 2005 LTCH PPS rate year 
(July 1, 2004 through June 30, 2005) compared to the 2006 LTCH PPS rate 
year (July 1, 2005 through June 30, 2006). Prospective payments for the 
2005 LTCH rate year were based on the standard Federal rate of 
$36,833.69 and the hospitals' estimated case-mix based on FY 2003 
claims data. Estimated prospective payments for the 2006 LTCH PPS rate 
year are based on the proposed standard Federal rate of $37,975.53 and 
the same FY 2003 claims data.
3. Calculation of Prospective Payments
    To estimate payments under the LTCH PPS, we simulated payments on a 
case-by-case basis by applying the payment policy for short-stay 
outliers (as described in section IV.C.4.b. of this proposed rule) and 
the proposed adjustments for area wage differences (as described in 
section IV.C.1. of this proposed rule) and for the cost-of-living for 
Alaska and Hawaii (as described in section IV.C.2. of this proposed 
rule). Additional payments would also be made for high-cost outlier 
cases (as described in section IV.C.3. of this proposed rule). As noted 
in section IV.C.6. of this proposed rule, we are not proposing to make 
adjustments for rural location, geographic reclassification, indirect 
medical education costs, or a disproportionate share of low-income 
patients because sufficient new data have not been generated that would 
enable us to conduct a comprehensive reevaluation of these payment 
adjustments.
    For estimated 2006 LTCH PPS rate year payments, we used the 
applicable proposed LTCH wage index values effective for discharges 
occurring on or after July 1, 2005 through June 30, 2006 (as shown in 
Tables 1 and 2 of the Addendum to this proposed rule) based on the 
proposed CBSA-based labor market area designations (described in 
section IV.C.1.c.1. of this proposed rule).
    For estimated 2005 LTCH PPS rate year payments, we used the 
applicable LTCH wage index values effective for discharges occurring on 
or after July 1, 2004 through June 30, 2005 based on the existing MSA-
based labor market area designations (see May 7, 2004 (69 FR 25685)). 
We adjusted for area wage differences for estimated 2005 LTCH PPS rate 
year payments by computing a weighted average of a LTCH's applicable 
wage index during the period from July 1, 2004, through June 30, 2005, 
because some providers may experience a change in the wage index phase-
in percentage during that period. For cost reporting periods beginning 
on or after October 1, 2003 and before September 30, 2004 (FY 2004), 
the labor portion of the Federal rate was adjusted by two-fifths of the 
applicable ``LTCH PPS wage index'' (that is, the FY 2004 IPPS wage 
index data without taking into account geographic reclassification, 
under sections 1886(d)(8) and (d)(10)) of the Act). For cost reporting 
periods beginning on or after October 1, 2004 and before September 30, 
2005 (FY 2005), the labor portion of the Federal rate was adjusted by 
three-fifths of the applicable LTCH PPS wage index. Therefore, during 
the 2005 LTCH PPS rate year (July 1, 2004 through June 30, 2005), a 
provider with a cost reporting period that began October 1, 2003, had 3 
months of payments under the two-fifths wage index value and 9 months 
of payment under the three-fifths wage index value. For this provider, 
for the purposes of estimating payments for the impact analyses, we 
computed a blended wage index of 25 percent (3 months/12 months) of the 
two-fifths wage index value and 75 percent (9 months/12 months) of the 
three-fifths wage index value. The applicable LTCH PPS wage index 
values for the 2005 LTCH PPS rate year are shown in Tables 1 and 2 of 
the Addendum to the May 7, 2004 final rule (69 FR 25722-25741).
    For estimated 2006 LTCH PPS rate year payments, we used the 
applicable proposed LTCH wage index values effective for discharges 
occurring on or after July 1, 2005 through June 30, 2006 (as shown in 
Tables 1 and 2 of the Addendum to this proposed rule) based on the 
proposed CBSA-based labor market area designations (described in 
section IV.C.1.c.1. of this proposed rule). Because some providers may 
experience a change in the wage index phase-in percentage during that 
period, we adjusted for area wage differences for estimated 2006 LTCH 
PPS rate year payments by computing a weighted average of a LTCH's 
applicable wage index during the period from July 1, 2005, through June 
30, 2006. For cost reporting periods that began on or after October 1, 
2004 and before September 30, 2005, the labor portion of the Federal 
rate is adjusted by three-fifths of the applicable LTCH PPS wage index 
(that is, as discussed in section IV.C.1. of this proposed rule, the FY 
2005 IPPS acute care hospital wage index data without taking into 
account geographic reclassification under sections 1886(d)(8) and 
(d)(10) of the Act). For cost reporting periods beginning on or after 
October 1, 2005 and before September 30, 2006, the labor portion of the 
Federal rate will be adjusted by four-fifths of the applicable LTCH PPS 
wage index. The proposed applicable LTCH PPS wage index values for the 
2006 LTCH PPS rate year are shown in Tables 1 and 2 of the Addendum to 
this proposed rule.
    For estimated 2005 LTCH PPS rate year payments, for those LTCHs 
projected to receive payment under the transition blend methodology, we 
also calculated payments using the applicable transition blend 
percentages. During the 2005 LTCH PPS rate year, based on the 
transition blend percentages set forth in Sec.  412.533(a), some 
providers may experience a change in the transition blend percentage 
during the period from July 1, 2004 through June 30, 2005. For example, 
during the period from July 1, 2004 through June 30, 2005, a provider 
with a cost reporting period beginning on October 1, 2003 (which is 
paid under the 60/40 transition blend (60 percent of payments based on 
reasonable cost-based methodology and 40 percent of payments under the 
LTCH PPS) beginning October 1, 2003) has 3 months (July 1, 2004 through 
September 30, 2004) under the 60/40 blend and 9 months (October 1, 2004 
through June 30, 2005) of payment under the 40/60-transition blend (40 
percent of payments based on reasonable cost-based methodology and 60 
percent of payments under the LTCH PPS for cost reporting periods 
beginning during FY 2005). (The 40 percent/60 percent blend will 
continue until the provider's cost reporting period beginning on 
October 1, 2005 (FY 2006).)
    Similarly, during the 2006 LTCH PPS rate year, based on the 
transition blend percentages set forth in Sec.  412.533(a), some of the 
providers paid under the transition blend methodology may experience a 
change in the transition blend percentage during the period from July 
1, 2005 through June 30, 2006. For example, during the period from July 
1, 2005 through June 30, 2006, a provider with a cost reporting period 
beginning on October 1, 2004 (which is paid under

[[Page 5763]]

the 40/60 transition blend would have 3 months (July 1, 2005 through 
September 30, 2005) under the 40/60 blend and 9 months (October 1, 2005 
through June 30, 2006) of payment under the 20/80-transition blend (20 
percent of payments based on reasonable cost-based methodology and 80 
percent of payments under the LTCH PPS for cost reporting periods 
beginning during FY 2006). (The 20 percent/80 percent blend will 
continue until the provider's cost reporting period beginning on 
October 1, 2006 (FY 2007).)
    In estimating blended transition payments, we estimated payments 
based on the reasonable cost-based methodology, in accordance with the 
requirements at section 1886(b) of the Act. For those providers who 
have not already made the election (as determined from PSF data) to be 
paid based on 100 percent of the Federal rate, we compared the 
estimated blended transition payment to the LTCH's estimated payment if 
it would elect payment based on 100 percent of the Federal rate. If we 
estimated that the LTCH would be paid more based on 100 percent of the 
Federal rate, we assumed that it would elect to bypass the transition 
methodology and to receive payments based on 100 percent of prospective 
payment.
    Then we applied the budget neutrality offset to payments to account 
for the effect of the 5-year transition methodology and election of 
payment based on 100 percent of the Federal rate on Medicare program 
payments (established in the August 30, 2002 final rule (67 FR 56034)). 
In estimating 2005 LTCH PPS rate year payments, we applied the 0.5 
percent budget neutrality offset to payments to account for the effect 
of the 5-year transition methodology and election of payment based on 
100 percent of the Federal rate on Medicare program payments (See the 
May 7, 2004 final rule (68 FR 25674)) to each LTCH's estimated payments 
under the LTCH PPS for the 2005 LTCH PPS rate year. Similarly, in 
estimating 2006 LTCH PPS rate year payments, we applied the proposed 
0.2 percent budget neutrality offset to payments to account for the 
effect of the 5-year transition methodology and election of payment 
based on 100 percent of the Federal rate on Medicare program payments 
(see section IV.C.7 of this proposed rule) to each LTCH's estimated 
payments under the LTCH PPS for the 2006 LTCH PPS rate year. The impact 
shown below in Table II is based on our projection of using the best 
available data that approximately 6 percent of LTCHs would be paid 
based on the transition blend methodology or would elect payment based 
on 100 percent of the Federal rate.
    In Table III below, we also show the impact if the LTCH PPS were 
fully implemented; that is, as if there were an immediate transition to 
fully Federal prospective payments under the LTCH PPS for the 2005 LTCH 
PPS rate year and the 2006 LTCH PPS rate year. Accordingly, in the 
impact analysis shown in Table III., the respective budget neutrality 
adjustments to account for the 5-year transition methodology on LTCHs' 
Medicare program payments for the 2005 and 2006 LTCH PPS rate years 
(0.5 percent and the proposed 0.2 percent, respectively) were not 
applied to LTCHs' estimated payments under the LTCH PPS.
    Tables II and III below illustrate the aggregate impact of the 
payment system among various classifications of LTCHs.
     The first column, LTCH Classification, identifies the type 
of LTCH.
     The second column lists the number of LTCHs of each 
classification type.
     The third column identifies the number of long-term care 
cases.
     The fourth column shows the estimated payment per 
discharge for the 2005 LTCH PPS rate year.
     The fifth column shows the estimated payment per discharge 
for the proposed 2006 LTCH PPS rate year.
     The sixth column shows the percent change in estimated 
LTCH PPS payments based on the proposed wage index changes from the 
2005 LTCH PPS rate year to the proposed 2006 LTCH PPS rate year (as 
discussed in section IV.C.1. of this proposed rule).
     The seventh column shows the percent change of 2005 LTCH 
PPS rate year estimated payments compared to the proposed 2006 LTCH PPS 
rate year estimated payments for all proposed changes (as discussed in 
the preamble of this proposed rule).

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BILLING CODE 4120-01-C
4. Results
    Based on the most recent available data (as described above for 261 
LTCHs), we have prepared the following summary of the impact (as shown 
in Table II) of the LTCH PPS set forth in this proposed rule.
    a. Location. We evaluated each LTCH's location (urban or rural) 
based on the proposed CBSA-based labor market area definitions 
described in section IV.C.1.c.1. of this proposed rule. Based on the 
most recent available data, the vast majority of LTCHs are in urban 
areas. Approximately 6 percent of the LTCHs are identified as being 
located in a rural area, and approximately 4.5 percent of all LTCH 
cases are treated in these rural hospitals. Impact analysis in Table II 
shows that for rural LTCHs the percent change in estimated payments per 
discharge for the 2006 LTCH PPS rate year would increase 2.6 percent in 
comparison to the 2005 LTCH PPS rate year from all of the proposed 
changes, which reflects the estimated 2.5 percent decrease in payments 
per discharge from the proposed wage index changes. The primary reason 
for the projected increase in payments per discharge for all proposed 
changes for rural LTCHs is a combination of the proposed 3.1 percent 
increase in the standard Federal rate and a projected increase in 
outlier payments as a result of the proposed decrease in outlier fixed-
loss amount (discussed in section IV.C.3. of this proposed rule), which 
results in more cases qualifying as outlier cases and receiving 
additional outlier payments. This projected increase in estimated 
payments per discharge for rural LTCHs is partially offset by a 
projected decrease in payments per discharge as a result of the 
proposed changes in the wage index.
    Rural LTCHs are projected to experience a relatively large decrease 
in payments due to the proposed wage index changes primarily because of 
the progression of the 5-year phase-in of the wage index adjustment. 
That is, because the wage index of most rural areas is less than 1.0, 
as rural LTCHs progress through the 5-year phase-in of the wage index 
adjustment (for example, the two-fifths wage index for cost reporting 
periods beginning during FY 2004 to the three-fifths wage index for 
cost reporting periods beginning during FY 2005), their wage index 
decreases, which results in a decrease in their payments. This would 
occur even if we had not proposed to revise the labor market area 
definitions based on OMB's CBSA designations. For example (as shown in 
Table 2 of the Addendum to this proposed rule), the proposed three-
fifths wage index for rural Arizona of 0.9362 is less than the proposed 
two-fifths wage index for rural Arizona of 0.9574. In addition, we 
identified three LTCHs that are currently urban under the existing MSA-
based labor market area designations that would become rural under the 
proposed new CBSA-based labor market designations, and as a result, are 
projected to experience a relatively larger decrease in payments per 
discharge due to the proposed changes in the wage index. (See Table 
II.)
    For urban LTCHs, the percent change in estimated payments per 
discharge for the 2006 LTCH PPS rate year are projected to increase 5.6 
percent in comparison to the 2005 LTCH PPS rate year from all proposed 
changes, which reflects a 0.2 percent increase from the proposed wage 
index changes. Payments per discharge for the 2006 LTCH PPS rate year 
are projected to increase 4.6 percent for large urban LTCHs in 
comparison to the 2005 LTCH PPS rate year from all of the proposed 
changes, including a projected 0.6 percent decrease from the proposed 
wage index changes. We project that 2006 LTCH PPS rate year payments 
per discharge would increase 6.1 percent in comparison to the 2005 LTCH 
PPS rate year for urban LTCHs, including a projected 0.6 percent 
increase for the proposed wage index changes.
    As noted above and discussed in greater detail below, the projected 
increase in payments per discharge for all proposed changes for both 
large and other urban LTCHs is largely due to the proposed 3.1 percent 
increase to the standard Federal rate and a projected increase in 
outlier payments as a result of the proposed decrease in the outlier 
fixed amount. These projected increases in payments per discharge 
reflecting all proposed changes for LTCHs that are located in large 
urban areas are partially offset by a projected decrease in

[[Page 5768]]

payments per discharge for the proposed wage index changes. The 
projected decrease in payments per discharge based solely on the 
proposed wage index changes are largely due to the progression of the 
5-year phase-in of the wage index adjustment, as explained above, since 
the majority of LTCHs are in large urban areas with wage index values 
that are slightly less than 1.0. Large urban LTCHs are projected to 
experience a decrease in payments per discharge for the proposed wage 
index changes because, in addition to the effect of the progression of 
the 5-year phase-in of the wage index adjustment, as explained above, 
the proposed wage index for a few large urban areas, such as Houston, 
Texas, would be slightly lower under the proposed CBSA-based labor 
market area designations than they would be under the existing MSA-
based labor market area designations. (See Table II.)
    As noted above, in addition to the proposed update to the standard 
Federal rate, the estimated percent increase in payments per discharge 
for all proposed changes from the 2005 LTCH PPS rate year to the 2006 
LTCH PPS rate year is largely attributable to the decrease in the 
outlier fixed-loss amount (discussed in section IV.C.3. of this 
proposed rule). For the 2005 LTCH PPS rate year, the outlier fixed loss 
amount is $17,864 (as established in the May 7, 2004 final rule). 
Therefore, currently a case qualifies for an additional LTCH PPS 
outlier payment if the estimated cost of the case exceeds the outlier 
threshold (the sum of the adjusted Federal LTCH payment for the LTC-DRG 
and the fixed-loss amount of $17,864). For the 2006 LTCH PPS rate year, 
we are proposing an outlier fixed loss amount of $11,544. Therefore, a 
case would qualify for an additional LTCH PPS outlier payment if the 
estimated cost of the case exceeds the proposed outlier threshold (the 
sum of the adjusted proposed Federal LTCH payment for the LTC-DRG and 
the proposed fixed-loss amount of $11,544). Therefore, we estimate that 
more cases would qualify as outlier cases (the estimated cost of the 
case exceeds the proposed outlier threshold) and would receive outlier 
payments, thereby increasing total estimated payments per discharge. In 
the aggregate, LTCHs are not expected to experience a significant 
impact as a result of the proposed changes to the wage index. As 
discussed throughout this impact section, certain groups of hospitals 
are projected to benefit from the proposed changes to the wage index 
while other groups of LTCHs are projected to be negatively impacted by 
the proposed changes to the wage index. However, as a result of the 
aggregate effect of the proposed update to the standard Federal rate 
combined with the proposed decrease in the outlier fixed-loss amount, 
we estimate that all LTCH categories would experience an increase in 
payments.
    b. Participation Date. LTCHs are grouped by participation date into 
three categories: (1) Before October 1983; (2) between October 1983 and 
September 1993; and (3) between October 1993 and September 2002. At 
this time, we do not have sufficient cost report data for any of the 
LTCHs that began participating in the Medicare program after October 
2002 (the implementation of the LTCH PPS), and, therefore, they are not 
included in the impact analysis shown below in Table II.
    Based on the most recent available data, the majority, 
approximately 77 percent, of the LTCH discharges are in LTCHs hospitals 
that began participating between October 1993 and September 2002, and 
we estimated that 2006 LTCH PPS rate year payments per discharge would 
increase 5.3 percent in comparison to the 2005 LTCH PPS rate year due 
to all proposed changes, which includes the estimated 0.1 percent 
decrease in payments per discharge due to the proposed wage index 
changes.
    Approximately 22 percent of the discharges are in LTCHs that began 
participating in Medicare between October 1983 and September 1993, and 
2006 LTCH PPS rate year payments per discharge are projected to 
increase 5.7 percent in comparison to the 2005 LTCH PPS rate year from 
all proposed changes, which includes the estimated 0.5 percent increase 
in payments per discharge from the proposed wage index changes. 
Payments per discharge for the 2006 LTCH PPS rate year are estimated to 
increase 6.7 percent in comparison to the 2005 LTCH PPS rate year for 
LTCHs that began participating before October 1983 from all proposed 
changes, including the estimated 1.3 percent increase in payments per 
discharge from the proposed wage index changes. This increase in 
projected payments per discharge from the proposed changes in the wage 
index for LTCHs that began participating before October 1983 is largely 
due to a combination of the proposed change to the CBSA-based labor 
market area definitions and the increase in the percentage of the wage 
index adjustment as required by the 5-year phase-in of the wage index 
adjustment (for example, two-fifths of the wage index adjustment for 
cost reporting periods beginning during FY 2004 increasing to three-
fifths of the wage index adjustment for cost reporting periods 
beginning during FY 2005). (See Table II.)
    In addition, as discussed above, these increases in payments for 
the 2006 LTCH PPS rate year are also due to the proposed decrease in 
the outlier fixed-loss amount (as discussed in section IV.C.3. of this 
proposed rule). As a result, more cases would qualify as outlier cases 
(the estimated cost of the case exceeds the proposed outlier threshold) 
and, therefore, would receive outlier payments, thereby increasing 
total estimated payments per discharge. As also noted above, in the 
aggregate LTCHs are not expected to experience a significant impact as 
a result of the proposed changes to the wage index. While certain 
groups of LTCHs are projected to benefit from the proposed changes to 
the wage index, other groups of LTCHs are projected to be negatively 
impacted by the proposed changes to the wage index.
    c. Ownership Control. LTCHs are grouped into three categories based 
on ownership control type--(1) voluntary; (2) proprietary; and (3) 
government.
    Based on the most recent available data, approximately 3 percent of 
LTCHs are government owned and operated. We project that for these 
government owned and operated LTCHs, 2006 LTCH PPS rate year payments 
per discharge would increase 2.8 percent in comparison to the 2005 LTCH 
PPS rate year from all proposed changes, including the estimated 1.5 
percent decrease in payments per discharge from the proposed wage index 
changes. This estimated decrease in estimated payments per discharge 
for the proposed wage index changes is largely due to the current 
applicable percentage of the 5-year phase-in of the wage index 
adjustment, as explained above, since the majority of government run 
LTCHs are located in areas with wage index values that are less than 
1.0. Because government owned and operated LTCHs are expected to 
experience a slight decrease in payments per discharge from the 
proposed changes to the wage index, we project that they would 
experience a slightly smaller increase in payments per discharge from 
all proposed changes as compared to other LTCHs.
    We project that 2006 LTCH PPS rate year payments per discharge for 
voluntary and proprietary LTCHs would increase 5.7 percent and 5.5 
percent, respectively, in comparison to the 2005 LTCH PPS rate year for 
all proposed changes, including the estimated 0.3 percent and 0.1 
percent increase, respectively, in payments per discharge from the 
proposed wage index changes. As noted above, in addition to the

[[Page 5769]]

proposed update to the standard Federal rate, the estimated percent 
increase in payments per discharge for all proposed changes from the 
2005 LTCH PPS rate year to the 2006 LTCH PPS rate year is largely 
attributable to the proposed decrease in outlier fixed loss amount 
(discussed in section IV.C.3. of this proposed rule), which would 
result in more cases qualifying as outlier cases (the estimated cost of 
the case exceeds the proposed outlier threshold) and, therefore, would 
receive additional outlier payments, thereby increasing total estimated 
payments per discharge. (See Table II.)
    d. Census Region. Payments per discharge for the 2006 LTCH PPS rate 
year are estimated to increase for LTCHs located in all regions in 
comparison to the 2005 LTCH PPS rate year from all proposed changes. Of 
the nine census regions, we project that the increase in 2006 LTCH PPS 
rate year payments per discharge in comparison to the 2005 LTCH PPS 
rate year would be the largest for LTCHs in the Pacific and New England 
regions. Specifically, 2006 LTCH rate year payments per discharge for 
LTCHs in the Pacific and New England regions are projected to increase 
7.5 percent and 7.2 percent, respectively, in comparison to the 2005 
LTCH PPS rate year, which includes the estimated 1.7 percent increase 
from the proposed wage index changes for both areas. As explained 
above, these relatively large increases in payments from all proposed 
changes for the 2006 LTCH PPS rate year for LTCHs in the New England 
and Pacific regions are mostly attributable to the proposed decrease in 
the outlier fixed-loss amount (discussed in section IV.C.3. of this 
proposed rule), which results in more cases qualifying as outlier cases 
(the estimated cost of the case exceeds the proposed outlier threshold) 
and, therefore, would receive additional outlier payments, thereby 
increasing total estimated payments per discharge. Furthermore, in 
addition to the proposed update to the standard Federal rate, we 
believe that many LTCHs in the New England and Pacific regions would 
experience an increase in payments because of an the annual percentage 
increase of the phase-in of the wage index adjustment, (two-fifths of 
the applicable LTCH PPS wage index for cost reporting periods beginning 
on or after October 1, 2003; three-fifths of the applicable wage index 
for cost reporting periods beginning on or after October 1, 2004; and 
four-fifths of the applicable wage index for cost reporting periods 
beginning on or after October 1, 2005) since most of the LTCHs in these 
regions are located in areas that have a wage index value of greater 
than 1.0. (See Table II.).
    We project that 2006 LTCH PPS rate year payments per discharge 
would increase the least for LTCHs in the MidAtlantic and South 
Atlantic regions in comparison to the 2005 LTCH PPS rate year for all 
changes (4.4 percent and 4.5 percent, respectively). We project that 
for LTCHs located in the Middle Atlantic and South Atlantic regions, 
2006 LTCH PPS payments per discharge would decrease slightly in 
comparison to the 2005 LTCH PPS rate year from the proposed wage index 
changes (0.5 percent and 0.3 percent, respectively). We are projecting 
a slight decrease in payments per discharge from the proposed wage 
index changes, which results in a slightly lower percent increase in 
payments per discharge from all proposed changes, for LTCHs located in 
these regions because of the progression of the 5-year phase-in of the 
wage index adjustment. Specifically, many LTCHs located in these areas 
would have a wage index value of less than 1.0. (See Table II.)
    e. Bed Size. LTCHs were grouped into six categories based on bed 
size--0-24 beds, 25-49 beds, 50-74 beds, 75-124 beds, 125-199 beds, and 
200+ beds.
    For all bed size categories, we are projecting an increase in 2006 
LTCH PPS rate year payments per discharge in comparison to the 2005 
LTCH PPS rate year from all proposed changes. Most LTCHs are in bed 
size categories where 2006 LTCH PPS rate year payments per discharge 
are projected to increase approximately 5 percent in comparison to the 
2005 LTCH PPS rate year from all proposed changes.
    We project that LTCHs with greater than 200 beds would have the 
largest increase in estimated 2006 LTCH PPS rate year payments per 
discharge in comparison to the 2005 LTCH PPS rate year from all 
proposed changes (7.2 percent), including the estimated increase from 
the proposed wage index changes of 1.2 percent. This increase in 
projected payments per discharge for all proposed changes for LTCHs 
with greater than 200 beds is largely due to a combination of the 
proposed 3.1 percent increase in the standard Federal rate, a projected 
increase in outlier payments resulting from the proposed decrease in 
outlier fixed amount, as explained above, and the increase in projected 
payment per discharge from the proposed wage index changes. This 
increase in projected payments per discharge from the proposed changes 
in the wage index for LTCHs with greater than 200 beds is largely due 
to a combination of the proposed change to the CBSA-based labor market 
area definitions and the increase in the percentage of the wage index 
adjustment as required by the 5-year phase-in of the wage index 
adjustment because most LTCHs with greater than 200 beds are located in 
an area with a wage index value of greater than 1.0. (See Table II.)
    Payments per discharge for the 2006 LTCH PPS rate year for LTCHs 
with 0-24 beds and 25-49 beds are projected to increase in comparison 
to the 2005 LTCH PPS rate year from all proposed changes (5.3 percent 
and 5.0 percent, respectively), which includes the estimated decrease 
in payments per discharge from the proposed wage indexes changes (-0.5 
percent and -0.3 percent, respectively). This slight decrease in 
estimated payments per discharge from the proposed wage index changes 
is largely due to the progression of the 5-year phase-in of the wage 
index adjustment (as explained above) since the majority of LTCHs with 
fewer than 50 beds are located in areas with a wage index value of less 
than 1.0. (See Table II.)
5. Effect on the Medicare Program
    Based on actuarial projections, we estimate that Medicare spending 
(total Medicare program payments) for LTCH services over the next 5 
years would be as follows:

------------------------------------------------------------------------
                                                           Estimated
                  LTCH PPS rate year                    payments  ($ in
                                                           billions)
------------------------------------------------------------------------
2006.................................................              $2.94
2007.................................................               2.90
2008.................................................               2.96
2009.................................................               3.08
2010.................................................               3.24
------------------------------------------------------------------------

    These estimates are based on the current estimate of the increase 
in the excluded hospital with capital market basket of 3.1 percent for 
the 2006 LTCH PPS rate year, 2.9 percent for the 2007, 2.7 for the 2008 
LTCH PPS rate year, 2.9 percent for the 2009 LTCH PPS rate year and 
2010 LTCH PPS rate years. We estimate that there would be a change in 
Medicare beneficiary enrollment of -4.9 percent in the 2006 LTCH PPS 
rate year, -6.5 percent in the 2007 LTCH PPS rate year, -1.1 percent in 
2008 LTCH PPS rate year, 0.2 percent in the 2009 LTCH PPS rate year, 
0.8 percent in the 2010 LTCH PPS rate year, and an estimated increase 
in the total number of LTCHs. (We note that, based on the most recent 
available data, our Office of the Actuary is projecting a decrease in 
Medicare fee-for-service Part A enrollment, in part, because of a 
projected increase in Medicare managed

[[Page 5770]]

care enrollment as a result of the implementation of several provisions 
of the Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003.)
    Consistent with the statutory requirement for budget neutrality, as 
we discussed in the August 30, 2002 final rule that implemented the 
LTCH PPS, in developing the LTCH PPS, we intended for estimated 
aggregate payments under the LTCH PPS in FY 2003 would equal the 
estimated aggregate payments that would have been made if the LTCH PPS 
were not implemented. Our methodology for estimating payments for 
purposes of the budget neutrality calculations used the best available 
data and necessarily reflected assumptions. As we collect data from 
LTCHs, we continue to monitor payments and evaluate the ultimate 
accuracy of the assumptions used to calculate the budget neutrality 
calculations (that is, inflation factors, intensity of services 
provided, or behavioral response to the implementation of the LTCH 
PPS). As discussed above in section IV.C.7. of the preamble of this 
proposed rule, because the LTCH PPS has only been implemented for about 
2.5 years, due to the lag time in the availability of data, at this 
time, we still do not have sufficient new cost report and claims data 
generated under the LTCH PPS to enable us to conduct a comprehensive 
reevaluation of our FY 2003 budget neutrality calculations.
    Section 123 of BBRA and section 307 of BIPA provide the Secretary 
with extremely broad authority in developing the LTCH PPS, including 
the authority for appropriate adjustments. In accordance with this 
broad authority, we may discuss in a future proposed rule a possible 
one-time prospective adjustment to the LTCH PPS rates to maintain 
budget neutrality so that the effect of the difference between actual 
payments and estimated payments for the first year of LTCH PPS is not 
perpetuated in the PPS rates for future years. As discussed above in 
section IV.C.7. of this proposed rule, because the LTCH PPS was only 
recently implemented, we do not yet have sufficient complete data to 
determine whether such an adjustment is warranted.
6. Effect on Medicare Beneficiaries
    Under the LTCH PPS, hospitals receive payment based on the average 
resources consumed by patients for each diagnosis. We do not expect any 
changes in the quality of care or access to services for Medicare 
beneficiaries under the LTCH PPS, but we expect that paying 
prospectively for LTCH services will enhance the efficiency of the 
Medicare program.

C. Accounting Statement

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table IV below, we 
have prepared an accounting statement showing the classification of the 
expenditures associated with the provisions of this proposed rule. This 
table provides our best estimate of the increase in Medicare payments 
under the LTCH PPS as a result of the proposals presented in this 
proposed rule based on the data for 261 LTCHs in our database. All 
expenditures are classified as transfers to Medicare providers (that 
is, LTCHs).

      Table IV.--Accounting Statement: Classification of Estimated
Expenditures, From the 2005 LTCH PPS Rate Year to the 2006 LTCH PPS Rate
                                  Year
                              [In millions]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Category..................................  TRANSFERS.
Annualized Monetized Transfers............  $158.
From Whom To Whom?                          Federal Government To LTCH
                                             Medicare Providers.
------------------------------------------------------------------------

    In accordance with the provisions of Executive Order 12866, this 
final rule was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 412

    Administrative practice and procedure, Health facilities, Medicare, 
Puerto Rico, Reporting and recordkeeping requirements.

    In accordance with the discussion in this preamble, the Centers for 
Medicare & Medicaid Services amends 42 CFR Chapter IV, part 412 as set 
forth below:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

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

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

    2. Section 412.22 is amended by revising paragraphs (e)(3) and 
(h)(5) to read as follows:


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

* * * * *
    (e) * * *
* * * * *
    (3) Notification of co-located status. A long-term care hospital 
that occupies space in a building used by another hospital, or in one 
or more entire buildings located on the same campus as buildings used 
by another hospital and that meets the criteria of paragraphs (e)(1) or 
(e)(2) of this section must notify its fiscal intermediary and CMS in 
writing of its co-location and identify by name, address, and Medicare 
provider number those hospital(s) with which it is co-located.
* * * * *
    (h) * * *
* * * * *
    (5) Notification of co-located status. A satellite of a long-term 
care hospital that occupies space in a building used by another 
hospital, or in one or more entire buildings located on the same campus 
as buildings used by another hospital and that meets the criteria of 
paragraphs (h)(1) through (h)(4) of this section must notify its fiscal 
intermediary and CMS in writing of its co-location and identify by 
name, address, and Medicare provider number, those hospital(s) with 
which it is co-located.
    3. Section 412.525 is amended by revising paragraph (c) to read as 
follows:


Sec.  412.525  Adjustments to the Federal prospective Payments

* * * * *
    (c) Adjustments for area levels. The labor portion of a long-term 
care hospital's Federal prospective payment is adjusted to account for 
geographical differences in the area wage levels using an appropriate 
wage index (established by CMS), which reflects the relative level of 
hospital wages and wage-related costs in the geographic area (that is, 
urban or rural area as determined in accordance with paragraph (c)(1) 
or (c)(2) of this section) of the hospital compared to the national 
average level of hospital wages and wage-related costs. The appropriate 
wage index (established by CMS) is updated annually.
    (1) For discharges occurring in cost reporting periods beginning on 
or after October 1, 2002 and occurring before July 1, 2005, the 
application of the wage index under the long-term care hospital 
prospective payment system is made on the basis of the location of the 
facility in an urban or rural area as defined in Sec.  412.62(f)(1)(ii) 
and (f)(1)(iii), respectively.
    (2) For discharges occurring on or after July 1, 2005, the 
application of the wage index under the long-term care hospital 
prospective payment system made on the basis of the location of the 
facility in an urban or rural area as

[[Page 5771]]

defined in Sec.  412.64(b)(1)(ii)(A) through (C).
* * * * *
    4. Section 412.531 is amended by revising paragraphs (b)(1)(i)(C) 
and (b)(1)(ii)(A)(1) to read as follows:


Sec.  412.531  Special payment provisions when an interruption of a 
stay occurs in a long-term care hospital.

* * * * *
    (b) * * *
    (1) * * *
    (i) * * *
    (C) The number of days that a beneficiary spends away from a long-
term care hospital during a 3-day or less interruption of stay under 
paragraph (a)(1) of this section during which the beneficiary receives 
a procedure that is grouped to a surgical DRG under the inpatient 
prospective payment system in an acute care hospital during the 2005 
and 2006 long-term care hospital prospective payment system rate year 
is not included in determining the length of stay of the patient at the 
long-term care hospital.
* * * * *
    (ii) * * *
    (A) * * *
    (1) For a 3-day or less interruption of stay under paragraph (a)(1) 
of this section in which a long-term care hospital discharges a patient 
to an acute care hospital and the patient's treatment during the 
interruption is grouped into a surgical DRG under the acute care 
inpatient hospital prospective payment system, for the LTCH 2005 and 
2006 rate years, CMS also makes a separate payment to the acute care 
hospital for the surgical DRG discharge in accordance with paragraph 
(b)(1)(i)(C) of this section.
* * * * *
    5. Section 412.532 is amended by revising paragraph (i) to read as 
follows:


Sec.  412.532  Special payment provisions for patients who are 
transferred to onsite providers and readmitted to a long-term care 
hospital.

* * * * *
    (i) A long-term care hospital or a satellite of a long-term care 
hospital that occupies space in a building used by another hospital, or 
SNF, or in one or more entire buildings located on the same campus as 
buildings used by another hospital or SNF and that meets the criteria 
of Sec.  412.22(e)(1) or (e)(2) or 412.22(h)(1) through (h)(4) must 
notify its fiscal intermediary and CMS in writing of its co-location 
and identify by name, address, and Medicare provider number, those 
providers specified at paragraph (a) of this section with which it is 
co-located.

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance)

    Dated: January 14, 2005.
Mark McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: January 28, 2005.
Michael O. Leavitt,
Secretary.
    The following addendum will not appear in the Code of Federal 
Regulations.

Addendum

    This addendum contains the tables referred to throughout the 
preamble to this proposed rule. The tables presented below are as 
follows:

Table 1.--Proposed Long-Term Care Hospital Proposed Wage Index for 
Urban Areas (based on Proposed CBSA-based Labor Market Area 
Designations) for Discharges Occurring from July 1, 2005 through June 
30, 2006
Table 2.--Proposed Long-Term Care Hospital Proposed Wage Index for 
Rural Areas (based on Proposed CBSA-based Labor Market Area 
Designations) for Discharges Occurring from July 1, 2005 through June 
30, 2006
Table 3.--FY 2005 LTC-DRG Relative Weights, Geometric Mean Length of 
Stay, and Short-Stay Five-Sixths Average Length of Stay for Discharges 
Occurring from July 1, 2005 through September 30, 2006. (Note: This is 
the same information provided in Table 11 of the August 11, 2004 IPPS 
final rule (69 FR 49738-49754, as revised in the October 7, 2004 IPPS 
correction notice, 69 FR 60266-60271), which has been reprinted here 
for convenience.)
Table 4.--A Listing of Long-Term Care Hospitals' State and County 
Location; Current Labor Market Area Designation; and Proposed New CBSA-
based Labor Market Area Designation

BILLING CODE 4120-01-P

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[FR Doc. 05-1901 Filed 1-28-05; 12:43 pm]
BILLING CODE 4120-01-C