[Federal Register Volume 70, Number 217 (Thursday, November 10, 2005)]
[Rules and Regulations]
[Pages 68516-68980]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-22136]



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Part II

Book 2 of 2 Books

Pages 68515-69040





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 419 and 485



Medicare Program; Changes to the Hospital Outpatient Prospective 
Payment System and Calendar Year 2006 Payment Rates; Final Rule

  Federal Register / Vol. 70, No. 217 / Thursday, November 10, 2005 / 
Rules and Regulations  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 419 and 485

[CMS-1501-FC]
RIN 0938-AN46


Medicare Program; Changes to the Hospital Outpatient Prospective 
Payment System and Calendar Year 2006 Payment Rates

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

ACTION: Final rule with comment period.

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SUMMARY: This final rule with comment period revises the Medicare 
hospital outpatient prospective payment system to implement applicable 
statutory requirements and changes arising from our continuing 
experience with this system and to implement certain related provisions 
of the Medicare Prescription Drug, Improvement, and Modernization Act 
(MMA) of 2003. In addition, the final rule with comment period 
describes changes to the amounts and factors used to determine the 
payment rates for Medicare hospital outpatient services paid under the 
prospective payment system. This final rule with comment period also 
changes the requirement for physician oversight of mid-level 
practitioners in critical access hospitals (CAHs).
    In this final rule with comment period, we also are responding to 
public comments received on the November 15, 2004, final rule with 
comment period pertaining to the ambulatory payment classification 
(APC) group assignment of Healthcare Common Procedure Coding System 
(HCPCS) codes identified in Addendum B of that rule with the new 
interim (NI) comment indicator. These changes are applicable to 
services furnished on or after January 1, 2006.

DATES: Effective Date: This final rule with comment period is effective 
on January 1, 2006.
    Comment Date: We will consider comments on the payment 
classification assigned to HCPCS codes identified in Addendum B with 
the NI comment code and other areas specified through the preamble if 
we receive them at the appropriate address, as provided below, no later 
than 5 p.m. on January 9, 2006.

ADDRESSES: In commenting, please refer to file code CMS-1501-FC. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this final rule with comment period to http://www.cms.hhs.gov/regulations/ecomments. (Attachments should be in 
Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft 
Word).
    2. By regular 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-1501-FC, P.O. Box 8016, Baltimore, MD 21244-8018.
    3. By express or overnight mail. You may send 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-1501-FC, Mail Stop C4-26-05, 7500 
Security Boulevard, Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7195 in advance to schedule your arrival 
with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 
200 Independence Avenue, SW., Washington, DC 20201, or 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without Federal Government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain proof of filing by 
stamping in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    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. CMS posts all electronic 
comments received before the close of the comment period on its public 
Web site as soon as possible after they have been received. Hard copy 
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, MD 
21244-1850, Monday through Friday of each week from 8:30 a.m. to 4 p.m. 
To schedule an appointment to view public comments, phone 1-800-743-
3951.
    Requirements for Issuance of Regulations: Section 902 of the 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 
(MMA), Pub. L. 108-173, amended section 1871(a) of the Act and requires 
the Secretary, in consultation with the Director of the Office of 
Management and Budget, to establish and publish timelines for the 
publication of Medicare final regulations based on the previous 
publication of a Medicare proposed or interim final regulation. Section 
902 of Pub. L. 108-173 also states that the timelines for these 
regulations may vary but shall not exceed 3 years after publication of 
the preceding proposed or interim final regulation except under 
exceptional circumstances.
    This final rule with comment period finalizes provisions set forth 
in the CY 2006 OPPA proposed rule (70 FR 42674, July 25, 2005). In 
addition, this final rule has been published within the 3-year time 
limit imposed by section 902 of Pub. L. 108-173. This final rule also 
finalizes the November 15, 2004 final rule with comment period (69 FR 
65681) to address public comments pertaining to the APC group 
assignment of HCPCS codes identified in Addendum B of that rule with 
the NI comment indicator. Again, we finalized the rule within the 3-
year timeframe imposed under section 902 of Pub. L. 108-173. Therefore, 
we believe that the final rule is in accordance with the Congress' 
intent to ensure timely publication of final regulations.

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

SUPPLEMENTARY INFORMATION:

Electronic Access

    This Federal Register document is 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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Alphabetical List of Acronyms Appearing in the Final Rule With Comment 
Period

ACEP American College of Emergency Physicians
AHA American Hospital Association
AHIMA American Health Information Management Association
AMA American Medical Association
APC Ambulatory payment classification
AMP Average manufacturer price
ASP Average sales price
ASC Ambulatory surgical center
AWP Average wholesale price
BBA Balanced Budget Act of 1997, Pub. L. 105-33
BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000, Pub. L. 106-554
BBRA Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999, Pub. L. 106-113
CAH Critical access hospital
CBSA Core-Based Statistical Areas
CCR (Cost center specific) Cost-to-charge ratio
CMHC Community mental health center
CMS Centers for Medicare & Medicaid Services (formerly known as the 
Health Care Financing Administration)
CNS Clinical nurse specialist
CORF Comprehensive outpatient rehabilitation facility
CPT [Physicians'] Current Procedural Terminology, Fourth Edition, 
2005, copyrighted by the American Medical Association
CRNA Certified registered nurse anesthetist
CY Calendar year
DMEPOS Durable medical equipment, prosthetics, orthotics, and 
supplies
DMERC Durable medical equipment regional carrier
DRGY Diagnosis-related group
DSH Disproportionate share hospital
EACH Essential Access Community Hospital
E/M Evaluation and management
EPO Erythropoietin
ESRD End-stage renal disease
FACA Federal Advisory Committee Act, Pub. L. 92-463
FDA Food and Drug Administration
FI Fiscal intermediary
FSS Federal Supply Schedule
FY Federal fiscal year
GAO Government Accountability Office
HCPCS Healthcare Common Procedure Coding System
HCRIS Hospital Cost Report Information System
HHA Home health agency
HIPAA Health Insurance Portability and Accountability Act of 1996, 
Pub. L. 104-191
ICD-9-CM International Classification of Diseases, Ninth Edition, 
Clinical Modification
IME Indirect medical education
IPPS (Hospital) Inpatient prospective payment system
IVIG Intravenous immune globulin
LTC Long-term care
MedPAC Medicare Payment Advisory Commission
MDH Medicare-dependent hospital
MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, Pub. L. 108-173
MSA Metropolitan Statistical Area
NCCI National Correct Coding Initiative
NCD National Coverage Determination
NP Nurse practitioner
OCE Outpatient Code Editor
OMB Office of Management and Budget
OPD (Hospital) Outpatient department
OPPS (Hospital) Outpatient prospective payment system
PA Physician assistant
PHP Partial hospitalization program
PM Program memorandum
PPI Producer Price Index
PPS Prospective payment system
PPV Pneumococcal pneumonia (virus)
PRA Paperwork Reduction Act
QIO Quality Improvement Organization
RFA Regulatory Flexibility Act
RRC Rural referral center
SBA Small Business Administration
SCH Sole community hospital
SDP Single drug pricer
SI Status indicator
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-
248
TOPS Transitional outpatient payments
USPDI United States Pharmacopoeia Drug Information

    To assist readers in referencing sections contained in this 
document, we are providing the following outline of contents:

Outline of Contents

I. Background
    A. Legislative and Regulatory Authority for the Hospital 
Outpatient Prospective Payment System
    B. Excluded OPPS Services and Hospitals
    C. Prior Rulemaking
    D. APC Advisory Panel
    1. Authority for the APC Panel
    2. Establishment of the APC Panel
    3. APC Panel Meetings and Organizational Structure
    E. Provisions of the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 That Will Be Implemented in CY 2006
    1. Hold Harmless Provisions
    2. Study and Authorization of Adjustment for Rural Hospitals
    3. Payment for ``Specified Covered Outpatient Drugs''
    4. Adjustment in Payment Rates for ``Specified Covered 
Outpatient Drugs'' for Overhead Costs
    5. Budget Neutrality Adjustment
    F. CMS' Commitment to New Technologies
    G. Summary of the Provisions of the CY 2006 OPPS Proposed Rule
    H. Public Comments Received on the CY 2006 OPPS Proposed Rule
    I. Public Comments Received on the November 15, 2004 OPPS Final 
Rule With Comment Period
II. Updates Affecting Payments for CY 2006
    A. Recalibration of APC Relative Weights for CY 2006
    1. Database Construction
    a. Database Source and Methodology
    b. Use of Single and Multiple Procedure Claims
    2. Calculation of Median Costs for CY 2006
    3. Calculation of Scaled OPPS Payment Weights
    4. Changes to Packaged Services
    a. Background
    b. Responses to the APC Panel Recommendations
    B. Payment for Partial Hospitalization
    1. Background
    2. PHP APC Update for CY 2006
    3. Separate Threshold for Outlier Payments to CMHCs
    C. Conversion Factor Update for CY 2006
    D. Wage Index Changes for CY 2006
    E. Statewide Average Default Cost-to-Charge Ratios (CCRs)
    F. Expiring Hold Harmless Provision for Transitional Corridor 
Payments for Certain Rural Hospitals
    G. Adjustment for Rural Hospitals
    1. Factors Contributing to Unit Cost Differences Between Rural 
Hospitals and Urban Hospitals and Associated Explanatory Variables
    2. Results
    H. Hospital Outpatient Outlier Payments
    I. Calculation of the National Unadjusted Medicare Payment
    J. Beneficiary Copayments for CY 2006
    1. Background
    2. Copayment for CY 2006
    3. Calculation of the Unadjusted Copayment Amount for CY 2006
III. Ambulatory Payment Classification (APC) Group Policies
    A. Introduction
    1. Treatment of New HCPCS Codes Discussed in the CY 2006 OPPS 
Proposed Rule
    2. Treatment of New CY 2006 HCPCS Codes
    3. Treatment of New Mid-Year Category III CPT Codes
    B. Variations within APCs
    1. Background
    2. Application of the 2 Times Rule
    a. APC 0146: Level I Sigmoidoscopy
    b. APC 0342: Level I Pathology
    c. Other Comments on the Proposed List of APC Assignments to 
Address 2 Times Violations
    3. Exceptions to the 2 Times Rule
    C. New Technology APCs
    1. Introduction
    2. Refinement of New Technology Cost Bands
    3. Requirements for Assigning Services to New Technology APCs
    4. New Technology Services
    a. Ablation of Bone Tumors
    b. Breast Brachytherapy
    c. Enteryx Procedure
    d. Extracorporeal Shock Wave Treatment
    e. GreenLight Laser
    f. Magnetoencephalography (MEG)
    g. Positron Emission Tomography (PET) Scans
    h. Proton Beam Treatment
    i. Smoking Cessation Counseling
    j. Stereoscopic Kv X-ray
    k. Stereotactic Radiosurgery (SRS)
    D. APC-Specific Policies
    1. Cardiac and Vascular Procedures
    a. Acoustic Heart Sound Recording and Analysis

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    b. Cardiac Electrophysiologic Services (APC 0087)
    c. Cardioverter-Defibrillator Implantation (APCs 0107 and 0108)
    d. Endovenous Ablation (APC 0092)
    e. External Counterpulsation Therapy (APC 0678)
    f. Intracardiac Echocardiography (APC 0670)
    g. Percutaneous Thrombectomy and Thrombolysis (APC 0676)
    h. Coronary Flow Reserve (APCs 0416 and 0670)
    i. Vascular Access Procedures (APCs 0621, 0622, and 0623)
    2. Radiology, Radiation Oncology, and Nuclear Medicine
    a. Angiography and Venography (APCs 0279, 0280, and 0668)
    b. Brachytherapy (APCs 0312, 0313, and0651)
    c. Computed Tomography (APCs 0283 and 0333)
    d. Computed Tomographic Angiography (APC 0333)
    e. Computed Tomographic Guidance (APC 0332)
    f. Computerized Reconstruction (APC 0417)
    g. Diagnostic Computed Tomographic Colonography (APC 0333)
    h. Intensity Modulated Radiation Therapy (IMRT) (APCs 0310 and 
0412)
    i. Kidney Imaging (APC 0267)
    j. Magnetic Resonance Guided Focused Ultrasound Ablation (APC 
0193)
    k. Non-Imaging Nuclear Medicine Studies (APC 0389)
    l. Therapeutic Radiation Treatment (APC 0304)
    m. Urinary Bladder Study (APC 0340)
    3. Gastrointestinal and Genitourinary Procedures
    a. Cystourethroscopy with Lithotripsy (APC 0163)
    b. GI Stenting (APC 0384)
    c. Insertion of Uterine Tandems and/or Vaginal Ovoids for 
Clinical Brachytherapy (APC 0192)
    d. Laparoscopic Ablation Procedures (APC 0131)
    e. Plicator Procedure (APC 0422)
    f. Prostate Cryosurgery (APC 0674)
     g. Stretta Procedure (APC 0422)
    h. Urological Stenting Procedures (APCs 0163 and 0164)
    4. Other Surgical Services
    a. Excision-Malignant Lesions (APCs 0019 and 0020)
    b. External Fixation (APCs 0046 and 0050)
    c. Intradiscal Annuloplasty (APC 0203)
    d. Kyphoplasty (APC 0051)
    e. Neurostimulator Electrode Implantation (APCs 0040 and 0225)
    f. Neurostimulator Generator Implantation (APC 0222)
    g. Thoracentesis/Lavage (APC 0070)
    5. Other Services
    a. Allergy Testing (APC 0370)
    b. Apheresis (APC 0112)
    c. Audiology (APCs 0364, 0365, and 0366)
    d. Bone Marrow Harvesting (APC 0111)
    e. Computer Assisted Navigational Procedures
    f. Hyperbaric Oxygen Therapy (APC 0659)
    g. Ophthalmology Examinations (APC 0601)
    h. Pathology Services
    i. Photodynamic Therapy of the Skin (APC 0013)
    j. Wound Care
IV. Payment Changes for Devices
    A. Device-Dependent APCs
    1. Public Comments and Our Responses on the November 15, 2004 
Final Rule With Comment Period
    2. CY 2006 Proposal, APC Panel Recommendations, and Responses to 
Public Comments Received
    a. APC Panel Recommendations
    b. Public Comments Received and Our Responses
    (1) Adjustment of Median Costs
    (2) Effects of Inconsistent Markup of Charges
    (3) Effects of Multiple Procedure Reduction
    (4) Impact of Proposed Rates on Access to Care
    (5) Addition of Other APCs as Device-Dependent APCs
    (6) Instructions on Reporting Device Charges
    (7) Application of Wage Index to Package Containing Device
    (8) Recalls of High Cost Devices
    (9) Separate Payment for High Cost Devices
    B. Pass-Through Payments for Devices
    1. Expiration of Transitional Pass-Through Payments for Certain 
Devices
    2. Proposed and Final Policy for CY 2006
    C. Other Policy Issues Relating to Pass-Through Device 
Categories
    1. Provisions for Reducing Transitional Pass-Through Payments to 
Offset Costs Packaged into APC Groups
    a. Background
    b. Policy for CY 2006
    2. Criteria for Establishing New Pass-Through Device Categories
    a. Surgical Insertion and Implantation Criterion
    (1) Public Comments Received on November 15, 2004 OPPS Final 
Rule with Comment Period and Our Responses
    (2) Public Comments Received on the CY 2006 OPPS Proposed Rule 
and Our Responses
    b. Existing Device Category Criterion
V. Payment Changes for Drugs, Biologicals, and Radiopharmaceutical 
Agents
    A. Transitional Pass-Through Payment for Additional Costs of 
Drugs and Biologicals
    1. Background
    2. Expiration in CY 2005 of Pass-Through Status for Drugs and 
Biologicals
    3. Drugs and Biologicals With Pass-Through Status in CY 2006
    B. Payment for Drugs, Biologicals, and Radiopharmaceutical 
Agents Without Pass-Through Status
    1. Background
    2. Criteria for Packaging Payment for Drugs, Biologicals, and 
Radiopharmaceutical Agents
    3. Payment for Drugs, Biologicals, and Radiopharmaceutical 
Agents Without Pass-Through Status That Are Not Packaged
    a. Payment for Specified Covered Outpatient Drugs
    (1) Background
    (2) Changes for CY 2006 Related to Pub. L. 108-173
    (3) Data Sources Available for Setting CY 2006 Payment Rates
    (4) CY 2006 Payment Policy for Radiopharmaceutical Agents
    (5) MedPAC Report on APC Payment Rate Adjustment of Specified 
Covered Outpatient Drugs
    b. CY 2006 Payment for Nonpass-Through Drugs, Biologicals, and 
Radiopharmaceutical Agents With HCPCS Codes But Without OPPS 
Hospital Claims Data
    C. Coding and Billing Changes for Specified Covered Outpatient 
Drugs
    1. Background
    2. CY 2006 Payment Policy
    D. Payment for New Drugs, Biologicals, and Radiopharmaceutical 
Agents Before HCPCS Codes Are Assigned
    1. Background
    2. CY 2006 Payment Policy
    E. Payment for Vaccines
    F. Changes in Payments for Single Indication Orphan Drugs
VI. Estimate of Transitional Pass-Through Spending in CY 2006 for 
Drugs, Biologicals, and Devices
    A. Total Allowed Pass-Through Spending
    B. Estimate of Pass-Through Spending for CY 2006
VII. Brachytherapy Payment Changes
    A. Background
    B. Changes Related to Pub. L. 108-173
    C. CY 2006 Payment Policy
VIII. Coding and Payment for Drug Administration
    A. Background
    B. Policy Changes for Drug Administration for CY 2006
    C. Policy Changes for Vaccine Administration for CY 2006
IX. Hospital Coding for Evaluation and Management (E/M) Services
X. Payment for Blood and Blood Products
    A. Background
    B. Policy Changes for CY 2006
XI. Payment for Observation Services
    A. Background
    B. CY 2006 Coding Changes for Observation Services and Direct 
Admission to Observation
    C. Criteria for Separate Payment for Direct Admission to 
Observation
    D. Criteria for Separately Payable Observation Services (APC 
0339)
    1. Diagnosis Requirements
    2. Observation Time
    3. Additional Hospital Services
    4. Physician Evaluation
XII. Procedures That Will Be Paid Only as Inpatient Procedures
    A. Background
    B. Policy Changes to the Inpatient List
    C. Ancillary Outpatient Services When Patient Expires
XIII. Indicator Assignments
    A. Status Indicator Assignments
    B. Comment Indicators for the CY 2006 OPPS Final Rule
XIV. Nonrecurring Policy Changes
    A. Payment for Multiple Diagnostic Imaging Procedures
    B. Interrupted Procedure Payment Policies (Modifiers -52, -73, 
and -74)

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XV. OPPS Policy and Payment Recommendations
    A. MedPAC Recommendations
    1. Report to the Congress: Medicare Payment Policy (March 2005)
    2. Report to the Congress: Issues in a Modernized Medicare 
Program--Payment for Pharmacy Handling Costs in Hospitals
    B. APC Panel Recommendations
    C. GAO Recommendations
XVI. Physician Oversight of Nonphysician Practitioners in Critical 
Access Hospitals
    A. Background
    B. Proposed Policy Change in Proposed Rule
    C. Public Comments Received on Proposed Rule and Our Responses
    D. Final Policy
XVII. Files Available to the Public via the Internet
XVIII. Collection of Information Requirements
XIX. Regulatory Impact Analysis
    A. OPPS: General
    1. Executive Order 12866
    2. Regulatory Flexibility Act (RFA)
    3. Small Rural Hospitals
    4. Unfunded Mandates
    5. Federalism
    B. Impact of Changes in this Final Rule with Comment Period
    C. Alternatives Considered
    1. Option Considered for Payment Policy for Separately Payable 
Drugs and Biologicals
    2. Payment Adjustment for Rural SCHs
    3. Change in the Percentage of Total OPPS Payments Dedicated to 
Outlier Payments
    D. Limitations of Our Analysis
    E. Estimated Impacts of this Final Rule with Comment Period on 
Hospitals
    F. Estimated Impact of the Change in Outlier Policy
    G. Accounting Statement
    H. Estimated Impacts of this Final Rule with Comment Period on 
Beneficiaries
XX. Waiver of Proposed Rulemaking

Regulation Text

Addenda

    Addendum A--List of Ambulatory Payment Classification (APCs) 
with Status Indicators, Relative Weights, Payment Rates, and 
Copayment Amounts--CY 2006
    Addendum B--Payment Status by HCPCS Code and Related 
Information--CY 2006
    Addendum D1--Payment Status Indicators for the Hospital 
Outpatient Prospective Payment System
    Addendum D2--Comment Indicators
    Addendum E--CPT Codes That Are Paid Only as Inpatient Procedures
    Addendum L-Out-Migration Wage Adjustment for CY 2006

I. Background

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

    When the Medicare statute was originally enacted, Medicare payment 
for hospital outpatient services was based on hospital-specific costs. 
In an effort to ensure that Medicare and its beneficiaries pay 
appropriately for services and to encourage more efficient delivery of 
care, the Congress mandated replacement of the reasonable cost-based 
payment methodology with a prospective payment system (PPS). The 
Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33), enacted on August 
5, 1997, added section 1833(t) to the Social Security Act (the Act) 
authorizing implementation of a PPS for hospital outpatient services. 
The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999 (BBRA) (Pub. L. 106-113), enacted on November 29, 1999, made major 
changes that affected the hospital outpatient PPS (OPPS). The Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA) (Pub. L. 106-554), enacted on December 21, 2000, made further 
changes in the OPPS. Section 1833(t) of the Act was also amended by the 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 
(MMA), Pub. L. 108-173, enacted on December 8, 2003. (Discussion of 
provisions related specifically to the CY 2006 OPPS is included in 
sections II.C., II.F., II.G., and V.B.3.a.(2) of this final rule with 
comment period.) The OPPS was first implemented for services furnished 
on or after August 1, 2000. Implementing regulations for the OPPS are 
located at 42 CFR Part 419.
    Under the OPPS, we pay for hospital outpatient services on a rate-
per-service basis that varies according to the ambulatory payment 
classification (APC) group to which the service is assigned. We use 
Healthcare Common Procedure Coding System (HCPCS) codes (which include 
certain Current Procedural Terminology (CPT) codes) and descriptors to 
identify and group the services within each APC group. The OPPS 
includes payment for most hospital outpatient services, except those 
identified in section I.B. of this final rule with comment period. 
Section 1833(t)(1)(B)(ii) of the Act provides for Medicare payment 
under the OPPS for certain services designated by the Secretary that 
are furnished to inpatients who have exhausted their Part A benefits or 
who are otherwise not in a covered Part A stay. Section 611 of Pub. L. 
108-173 provided for Medicare coverage of an initial preventive 
physical examination, subject to the applicable deductible and 
coinsurance, as an outpatient department service, payable under the 
OPPS. In addition, the OPPS includes payment for partial 
hospitalization services furnished by community mental health centers 
(CMHCs).
    The OPPS rate is an unadjusted national payment amount that 
includes the Medicare payment and the beneficiary copayment. This rate 
is divided into a labor-related amount and a nonlabor-related amount. 
The labor-related amount is adjusted for area wage differences using 
the inpatient hospital wage index value for the locality in which the 
hospital or CMHC is located.
    All services and items within an APC group are comparable 
clinically and with respect to resource use (section 1833(t)(2)(B) of 
the Act). In accordance with section 1833(t)(2) of the Act, subject to 
certain exceptions, services and items within an APC group cannot be 
considered comparable with respect to the use of resources if the 
highest median (or mean cost, if elected by the Secretary) for an item 
or service in the APC group is more than 2 times greater than the 
lowest median cost for an item or service within the same APC group 
(referred to as the ``2 times rule''). In implementing this provision, 
we use the median cost of the item or service assigned to an APC group.
    Special payments under the OPPS may be made for new technology 
items and services in one of two ways. Section 1833(t)(6) of the Act 
provides for temporary additional payments or ``transitional pass-
through payments'' for certain drugs, biological agents, brachytherapy 
devices used for the treatment of cancer, and categories of medical 
devices for at least 2 but not more than 3 years. For new technology 
services that are not eligible for pass-through payments and for which 
we lack sufficient data to appropriately assign them to a clinical APC 
group, we have established special APC groups based on costs, which we 
refer to as ``APC cost bands.'' These cost bands allow us to price 
these new procedures more appropriately and consistently. Similar to 
pass-through payments, these special payments for new technology 
services are also temporary; that is, we retain a service within a new 
technology APC group until we acquire adequate data to assign it to a 
clinically appropriate APC group.

B. Excluded OPPS Services and Hospitals

    Section 1833(t)(1)(B)(i) of the Act authorizes the Secretary to 
designate the hospital outpatient services that are paid under the 
OPPS. While most hospital outpatient services are payable under the 
OPPS, section 1833(t)(1)(B)(iv) of the Act excluded payment for 
ambulance, physical and occupational therapy, and speech-

[[Page 68520]]

language pathology services, for which payment is made under a fee 
schedule. Section 614 of Pub. L. 108-173 amended section 
1833(t)(1)(B)(iv) of the Act to exclude OPPS payment for screening and 
diagnostic mammography services. The Secretary exercised the broad 
authority granted under the statute to exclude from the OPPS those 
services that are paid under fee schedules or other payment systems. 
Such excluded services include, for example, the professional services 
of physicians and nonphysician practitioners paid under the Medicare 
Physician Fee Schedule (MPFS); laboratory services paid under the 
clinical diagnostic laboratory fee schedule; services for beneficiaries 
with end-stage renal disease (ESRD) that are paid under the ESRD 
composite rate; services and procedures that require an inpatient stay 
that are paid under the hospital inpatient prospective payment system 
(IPPS); and certain services furnished to inpatients of hospitals that 
do not submit claims for outpatient services under Medicare Part B. We 
set forth the services that are excluded from payment under the OPPS in 
Sec.  419.22 of the regulations.
    Under Sec.  419.20 of the regulations, we specify the types of 
hospitals and entities that are excluded from payment under the OPPS. 
These excluded entities include Maryland hospitals, but only for 
services that are paid under a cost containment waiver in accordance 
with section 1814(b)(3) of the Act; critical access hospitals (CAHs); 
hospitals located outside of the 50 States, the District of Columbia, 
and Puerto Rico; and Indian Health Service hospitals.

C. Prior Rulemaking

    On April 7, 2000, we published in the Federal Register a final rule 
with comment period (65 FR 18434) to implement a prospective payment 
system for hospital outpatient services. The hospital OPPS was first 
implemented for services furnished on or after August 1, 2000. Section 
1833(t)(9) of the Act requires the Secretary to review certain 
components of the OPPS not less often than annually and to revise the 
groups, relative payment weights, and other adjustments to take into 
account changes in medical practice, changes in technology, and the 
addition of new services, new cost data, and other relevant information 
and factors. Since implementing the OPPS, we have published final rules 
in the Federal Register annually to implement statutory requirements 
and changes arising from our experience with this system. For a full 
discussion of the changes to the OPPS, we refer readers to these 
Federal Register final rules.\1\
---------------------------------------------------------------------------

    \1\ Interim final rule with comment period, August 3, 2000 (65 
FR 47670); interim final rule with comment period, November 13, 2000 
(65 FR 67798); final rule and interim final rule with comment 
period, November 2, 2001 (66 FR 55850 and 55857); final rule, 
November 30, 2001 (66 FR 59856); final rule, December 31, 2001 (66 
FR 67494); final rule, March 1, 2002 (67 FR 9556); final rule, 
November 1, 2002 (67 FR 66718); final rule with comment period, 
November 7, 2003 (68 FR 63398); correction of the November 7, 2003 
final rule with comment period, December 31, 2003 (68 FR 75442); 
interim final rule with comment period, January 6, 2004 (69 FR 820); 
and final rule with comment period, November 15, 2004 (69 FR 65681).
---------------------------------------------------------------------------

    On November 15, 2004, we published in the Federal Register a final 
rule with comment period (69 FR 65681) that revised the OPPS to update 
the payment weights and conversion factor for services payable under 
the calendar year (CY) 2005 OPPS on the basis of claims data from 
January 1, 2003 through December 31, 2003, and to implement certain 
provisions of Pub. L. 108-173. In addition, we responded to public 
comments received on the January 6, 2004 interim final rule with 
comment period relating to Pub. L. 108-173 provisions that were 
effective January 1, 2004, and finalized those policies. Further, we 
responded to public comments received on the November 7, 2003 final 
rule with comment period pertaining to the APC assignment of HCPCS 
codes identified in Addendum B of that rule with the NI comment 
indicator; and public comments received on the August 16, 2004 OPPS 
proposed rule (69 FR 50448).
    Subsequent to publishing the November 15, 2004 final rule with 
comment period, we published a correction of final rule with comment 
period on December 30, 2004 (69 FR 78315). This document corrected 
technical errors that appeared in the November 15, 2004 final rule with 
comment period. It also provided additional information about the CY 
2005 wage indices for the OPPS that was not published in the November 
15, 2004 final rule with comment period.

D. APC Advisory Panel

1. Authority of the APC Panel
    Section 1833(t)(9)(A) of the Act, as amended by section 201(h) of 
the BBRA of 1999, requires that we consult with an outside panel of 
experts to review the clinical integrity of the payment groups and 
weights under the OPPS. The Advisory Panel on Ambulatory Payment 
Classification (APC) Groups (the APC Panel), discussed under section 
I.D.2. of this preamble, fulfills this requirement. The Act further 
specifies that the APC Panel will act in an advisory capacity. This 
expert panel, which may be composed of up to 15 representatives of 
hospitals and other Medicare providers subject to the OPPS (currently 
employed full-time and in their respective areas of expertise), reviews 
and advises CMS about the clinical integrity of the APC groups and 
their weights. For purposes of this Panel, consultants or independent 
contractors are not considered to be full-time employees. The APC Panel 
is not restricted to using our data and may use data collected or 
developed by organizations outside the Department in conducting its 
review.
2. Establishment of the APC Panel
    On November 21, 2000, the Secretary originally signed the charter 
establishing the APC Panel. The APC Panel is technical in nature and is 
governed by the provisions of the Federal Advisory Committee Act 
(FACA), as amended (Pub. L. 92-463). Since its initial chartering, the 
Secretary has twice renewed the APC Panel's charter: on November 1, 
2002, and on November 1, 2004. The renewed charter indicates that the 
APC Panel continues to be technical in nature; is governed by the 
provisions of FACA with a Designated Federal Official (DFO) to oversee 
the day-to-day administration of the FACA requirements and to provide 
to the Committee Management Officer all committee reports for 
forwarding to the Library of Congress; may convene up to three meetings 
per year; and is chaired by a Federal official who also serves as a CMS 
medical officer.
    Originally, in establishing the APC Panel, we solicited members in 
a notice published in the Federal Register on December 5, 2000 (65 FR 
75943). We received applications from more than 115 individuals who 
nominated either colleagues or themselves. After carefully reviewing 
the applications, we chose 15 highly qualified individuals to serve on 
the APC Panel. Because four APC Panel members' terms of office expired 
on March 31, 2004, we published a Federal Register notice on January 
23, 2004 (69 FR 3370) that solicited nominations for APC Panel 
membership. From the 24 nominations that we received, we chose four new 
members. Six members' terms expired on March 31, 2005; therefore, a 
Federal Register notice was published on February 25, 2005, requesting 
nominations to the APC Panel. We received only 13 nominations before 
the nomination period closed on March 15, 2005. Consequently, we 
extended the deadline for nominations to May 9, 2005, and announced the 
extension in the Federal Register on April 8, 2005 (70 FR 18028). From 
a total of 26 nominees from the two notices, we

[[Page 68521]]

chose 6 new members who were announced in the Federal Register on 
August 26, 2005 (70 FR 50358). The entire APC Panel membership and 
information pertaining to it, including Federal Register notices, 
meeting dates, agenda topics, and meeting reports are identified on the 
CMS Web site: http://www.cms.hhs.gov/faca/apc/apcmem.asp.
3. APC Panel Meetings and Organizational Structure
    The APC Panel first met on February 27, February 28, and March 1, 
2001. Since that initial meeting, the APC Panel has held seven 
subsequent meetings. The most recent meeting took place on August 17 
and 18, 2005, which was announced in the meeting notice published on 
July 8, 2005 (70 FR 39514). Prior to each of these biennial meetings, 
we published a notice in the Federal Register to announce each meeting 
and, when necessary, to solicit and announce nominations for APC Panel 
membership. For a more detailed discussion about these announcements, 
refer to the following Federal Register notices: December 5, 2000 (65 
FR 75943), December 14, 2001 (66 FR 64838), December 27, 2002 (67 FR 
79107), July 25, 2003 (68 FR 44089), December 24, 2003 (68 FR 74621), 
August 5, 2004 (69 FR 47446), December 30, 2004 (69 FR 78464), and July 
8, 2005 (70 FR 39514).
    During these meetings, the APC Panel established its operational 
structure that, in part, includes the use of three subcommittees to 
facilitate its required APC review process. Currently, the three 
subcommittees are the Data Subcommittee, the Observation Subcommittee, 
and the Packaging Subcommittee. The Data Subcommittee is responsible 
for studying the data issues confronting the APC Panel and for 
recommending viable options for resolving them. This subcommittee was 
initially established on April 23, 2001, as the Research Subcommittee 
and reestablished as the Data Subcommittee on April 13, 2004, February 
11, 2005, and August 15, 2005. The Observation Subcommittee, which was 
established on June 24, 2003, and reestablished with new members on 
March 8, 2004, February 11, 2005, and August 15, 2005, reviews and 
makes recommendations to the APC Panel on all issues pertaining to 
observation services paid under the OPPS, such as coding and 
operational issues. The Packaging Subcommittee, which was established 
on March 8, 2004, and reestablished with new members on February 11, 
2005, and August 15, 2005, studies and makes recommendations on issues 
pertaining to services that are not separately payable under the OPPS 
but are bundled or packaged APC payments. Each of these subcommittees 
was established by a majority vote of the APC Panel during a scheduled 
APC Panel meeting. All subcommittee recommendations are discussed and 
voted upon by the full APC Panel.
    For a detailed discussion of the APC Panel meetings, refer to the 
hospital OPPS final rules cited in section I.C. of this preamble. Full 
discussion of the recommendations resulting from the APC Panel's 
February 2005 and August 2005 meetings are included in the sections of 
this preamble that are specific to each recommendation.

E. Provisions of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 That Will Be Implemented in CY 2006

    On December 8, 2003, the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 (MMA), Pub. L. 108-173, was enacted. Pub. 
L. 108-173 made changes to the Act relating to the Medicare OPPS. In 
the January 6, 2004 interim final rule with comment period and the 
November 15, 2004 final rule with comment period, we implemented 
provisions of Pub. L. 108-173 relating to the OPPS that were effective 
for CY 2004 and CY 2005, respectively. Provisions of Pub. L. 108-173 
that were implemented in CY 2004 or CY 2005, and that are continuing in 
CY 2006, are discussed throughout this final rule with comment period. 
Moreover, in this final rule with comment period, we finalize our 
proposal to implement the following provisions of Pub. L. 108-173 that 
affect the OPPS beginning in CY 2006:
1. Hold Harmless Provisions
    Section 411 of Pub. L. 108-173 amended section 1833(t)(7)(D)(i) of 
the Act and extended the hold harmless provision for small rural 
hospitals having 100 or fewer beds through December 31, 2005. Section 
411 of Pub. L. 108-173 further amended section 1833(t)(7) of the Act to 
provide that hold harmless transitional corridor payments shall apply 
through December 31, 2005 to sole community hospitals (SCHs) (as 
defined in section 1886(d)(5)(D)(iii) of the Act) located in a rural 
area. In accordance with these provisions, effective January 1, 2006, 
we proposed to discontinue transitional corridor payments for small 
rural hospitals having 100 or fewer beds and for SCHs located in a 
rural area.
2. Study and Authorization of Adjustment for Rural Hospitals
    Section 411(b) of Pub. L. 108-173 added a new paragraph (13) to 
section 1833(t) of the Act to authorize an ``Adjustment for Rural 
Hospitals.'' This provision requires us to conduct a study to determine 
if costs incurred by hospitals located in rural areas by APCs exceed 
those costs incurred by hospitals located in urban areas. This 
provision further requires us to provide for an appropriate adjustment 
by January 1, 2006, if we find that the costs incurred by hospitals 
located in rural areas exceed those costs incurred by hospitals located 
in urban areas. In accordance with these provisions, effective January 
1, 2006, as we proposed, we are implementing an adjustment for rural 
sole community hospitals (SCHs), as discussed below.
3. Payment for ``Specified Covered Outpatient Drugs''
    Section 621(a)(1) of Pub. L. 108-173 added section 1833(t)(14) to 
the Act that specifies payments for certain ``specified covered 
outpatient drugs'' beginning in 2006. Specifically, section 
1833(t)(14)(A)(iii)(I) of the Act states that such payment shall be 
equal to what we determine to be the average acquisition cost for the 
drug, taking into account hospital acquisition cost survey data 
furnished by the Government Accountability Office (GAO). Section 
1833(t)(14)(A)(iii)(II) of the Act further notes that if hospital 
acquisition cost data are not available, payment for specified covered 
outpatient drugs shall equal the average price for the drug established 
under section 1842(o), section 1847(A), or section 1847(B) of the Act 
as calculated and adjusted by the Secretary as necessary. Both payment 
approaches are subject to adjustments under section 1833(t)(14)(E) of 
the Act as discussed below.
4. Adjustment in Payment Rates for ``Specified Covered Outpatient 
Drugs'' for Overhead Costs
    Section 621(a)(1) of Pub. L. 108-173 added section 1833(t)(14)(E) 
to the Act. Section 1833(t)(14)(E)(ii) of the Act authorizes us to make 
an adjustment to payments for ``specified covered outpatient drugs'' to 
take into account overhead and related expenses such as pharmacy 
services and handling costs, based on recommendations contained in a 
report prepared by the Medicare Payment Advisory Commission (MedPAC).
5. Budget Neutrality Adjustment
    Section 621(a)(1) of Pub. L. 108-173 amended the Act by adding 
section

[[Page 68522]]

1833(t)(14)(H), which requires that additional expenditures resulting 
from adjustments in APC payment rates for specified covered outpatient 
drugs be taken into account beginning in CY 2006 and continuing in 
subsequent years, in establishing the OPPS conversion, weighting, and 
other adjustment factors.

F. CMS' Commitment to New Technologies

    As we indicated in the CY 2006 proposed rule, CMS is committed to 
ensuring that Medicare beneficiaries will have timely access to new 
medical treatments and technologies that are well-evaluated and 
demonstrated to be effective. We launched the Council on Technology and 
Innovation (CTI) to provide the Agency with improved methods for 
developing practical information about the clinical benefits of new 
medical technologies to result in faster and more efficient coverage 
and payment of these medical technologies. The CTI supports CMS efforts 
to develop better evidence on the safety, effectiveness, and cost of 
new and approved technologies to help promote their more effective use.
    We want to provide doctors and patients with better information 
about the benefits of new medical treatments or technologies, or both, 
especially compared to other treatment options. We also want 
beneficiaries to have access to valuable new medical innovations as 
quickly and efficiently as possible. We note there are a number of 
payment mechanisms in the OPPS and the IPPS designed to achieve 
appropriate payment of promising new technologies. In the OPPS, 
qualifying new medical devices may be paid on a cost basis by means of 
transitional pass-through payments, in addition to the APC payments for 
the procedures which utilize the devices. In addition, qualifying new 
services may be assigned for payment to New Technology APCs or, if 
appropriate, to regular clinical APCs. In the IPPS, qualifying new 
technologies may receive add-on payments to the standard diagnosis-
related group (DRG) payments. We also note that collaborative efforts 
are underway to facilitate coordination between the Food and Drug 
Administration (FDA) and CMS with regard to streamlining the CMS 
coverage process by which new technologies come to the marketplace.
    To promote timely access to new medical treatments and 
technologies, in the CY 2006 OPPS proposed rule, we proposed 
enhancements to both the OPPS pass-through payment criteria for devices 
as discussed in section IV.D.2. of that rule and the qualifying process 
for assignment of new services to New Technology APCs or regular 
clinical APCs discussed in section III.C.3. of that rule. In the CY 
2006 OPPS proposed rule, we proposed to make device pass-through 
eligibility available to a broader range of qualifying devices. We also 
proposed to change the application and review process for assignment of 
new services to New Technology APCs to promote thoughtful review of the 
coding, clinical use and efficacy of new services by the wider medical 
community, encouraging appropriate dissemination of new technologies.
    We received a large number of public comments generally supporting 
our commitment to new technologies. Many of these comments in support 
of this commitment were stated in the context of our proposals to 
enhance the OPPS pass-through payment criteria for devices or the 
application requirements for assignment of a service to a New 
Technology APC. Specific comments are addressed in those respective 
sections.

G. Summary of the Provisions of the CY 2006 OPPS Proposed Rule

    On July 25, 2005, we published a proposed rule in the Federal 
Register (70 FR 42674) that set forth proposed changes to the Medicare 
hospital OPPS for CY 2006 to implement statutory requirements and 
changes arising from our continuing experience with the system, to 
implement provisions of Pub. L. 108-173 specified in sections II.C., 
II.F., II.G., and V.B.3.a.(2) of this preamble, and to change the 
requirement for physician oversight of nonphysician practitioners in 
CAHs that will be effective for services furnished on or after January 
1, 2006. Subsequent to publishing the proposed rule, we published a 
correction of the proposed rule on August 26, 2005 (70 FR 50679) that 
corrected technical errors that appeared in the proposed rule. The 
following is a summary of the major changes included in the CY 2006 
OPPS proposed rule that we proposed to make:
1. Updates to Payments for CY 2006
    In the proposed rule, we set forth--
     The methodology used to recalibrate the proposed APC 
relative payment weights and the proposed recalibration of the relative 
payment weights for CY 2006.
     The proposed payment for partial hospitalization, 
including the proposed separate threshold for outlier payments for 
CMHCs.
     The proposed update to the conversion factor used to 
determine payment rates under the OPPS for CY 2006.
     The proposed retention of our current policy to apply the 
IPPS wage indices to wage adjust the APC median costs in determining 
the OPPS payment rate and the copayment standardized amount for CY 
2006.
     The proposed update of statewide average default cost-to-
charge ratios.
     Proposed changes relating to the expiring hold harmless 
payment provision.
     Proposed changes to payment for rural SCHs for CY 2006.
     Proposed changes in the way we calculate hospital 
outpatient outlier payments for CY 2006.
     Calculation of the proposed national unadjusted Medicare 
OPPS payment.
     The proposed beneficiary copayment for OPPS services for 
CY 2006.
2. Ambulatory Payment Classification (APC) Group Policies
    In the proposed rule, we discussed establishing a number of new 
APCs and making changes to the assignment of HCPCS codes under a number 
of existing APCs based on our analyses of Medicare claims data and 
recommendations of the APC Panel. We also discussed the application of 
the 2 times rule and proposed exceptions to it; proposed changes for 
specific APCs; the proposed refinement of the New Technology cost 
bands; the proposed movement of procedures from the New Technology 
APCs; and the proposed additions of new procedure codes to the APC 
groups.
3. Payment Changes for Devices
    In the proposed rule, we discussed proposed changes to the device-
dependent APCs, to related regulations under Sec. Sec.  419.66(b)(3) 
and 419.66(c)(1), and to the pass-through payment for three categories 
of devices.
4. Payment Changes for Drugs, Biologicals, and Radiopharmaceutical 
Agents
    In the proposed rule, we discussed proposed payment changes for 
drugs, biologicals, radiopharmaceutical agents, and vaccines.
5. Estimate of Transitional Pass-Through Spending in CY 2006 for Drugs, 
Biologicals, and Devices
    In the proposed rule, we discussed the proposed methodology for 
estimating total pass-through spending and whether there should be a 
pro rata reduction for transitional pass-through drugs, biologicals, 
radiopharmacials, and categories of devices for CY 2006.

[[Page 68523]]

6. Brachytherapy Payment Changes
    In the proposed rule, we included a discussion of our proposal 
concerning coding and payment for the sources of brachytherapy.
7. Coding and Payment for Drug Administration
    In the proposed rule, we discussed our proposed coding and payment 
changes for drug administration services.
8. Hospital Coding for Evaluation and Management (E/M) Services
    In the proposed rule, we discussed our proposal for developing 
coding guidelines for evaluation and management services.
9. Payment for Blood and Blood Products
    In the proposed rule, we discussed our proposed payment changes for 
blood and blood products.
10. Payment for Observation Services
    In the proposed rule, we discussed our proposed criteria and coding 
changes for observation services.
11. Procedures That Will Be Paid Only as Inpatient Services
    In the proposed rule, we discussed the procedures that we proposed 
to remove from the inpatient list and assign to APCs.
12. Indicator Assignments
    In the proposed rule, we discussed proposed changes to the list of 
status indicators assigned to APCs and presented our comment indicators 
that we proposed to use in this final rule with comment period.
13. Nonrecurring Policy Changes
    In the proposed rule, we discussed proposed changes in payments for 
multiple diagnostic imaging procedures and proposed changes in payment 
policy for interrupted procedures.
14. OPPS Policy and Payment Recommendations
    In the proposed rule, we addressed recommendations made by MedPAC, 
the APC Panel, and the GAO regarding the OPPS for CY 2006.
15. Physician Oversight in Critical Access Hospitals
    In the proposed rule, we discussed physician oversight for services 
provided by nonphysician practitioners such as physician assistants, 
nurse practitioners, and clinical nurse specialists in CAHs.

H. Public Comments Received on the CY 2006 OPPS Proposed Rule

    We received over 1,000 timely pieces of correspondence containing 
multiple comments on the CY 2006 OPPS proposed rule. Summaries of the 
public comments and our responses to those comments are set forth in 
the various sections under the appropriate headings.
    Comment: One commenter objected to the short time between the end 
of the comment period and the effective date of the final rule. The 
commenter stated that the brief time period gives inadequate time for 
systems and software changes. The commenter asked that the proposed 
rule be published July 1 and that the final rule be published no later 
than October 1 of each year. The commenter indicated that hospitals 
need the extra month to implement the OPPS because it is much more 
complex for hospitals to implement than the IPPS.
    Response: We understand the commenter's concern about the 
difficulty of implementing the annual OPPS update in 60 days. We do our 
best to issue the proposed rule and the final rule as promptly as 
possible and to make all of the supporting documentation available on 
the CMS Web site as soon as we can. However, factors such as the use of 
the most recent claims data and cost report data on which we base the 
proposed and final rates delay the issuance of the proposed rule and 
the final rule. Hospital delays in submission of hospital bills are an 
important factor in timing of the OPPS updates as well, because we want 
to use as many claims as possible in setting the OPPS rates. Moreover, 
we cannot issue the final rule until the HCPCS code files for the 
forthcoming year are final because we assign a stataus indicator to 
each HCPCS code in the OPPS OCE. The HCPCS files are not final until 
they are published in October.
    Comment: Commenters asked that CMS include an indirect medical 
education adjustment in the OPPS because it is the only major Medicare 
payment system that does not include a teaching adjustment. One 
commenter asked that CMS conduct a study to determine the special roles 
and costs related to medical education and the appropriateness of 
including a teaching hospital adjustment.
    Response: We have not developed an indirect medical education add-
on payment made under the OPPS because the statute does not provide for 
this adjustment, and we are not convinced that it would be appropriate 
in a budget-neutral payment system where such changes would result in 
reduced payments to all other hospitals. Moreover, in the final rule, 
we have developed payment weights that we believe resolve many of the 
public concerns regarding appropriate payments for new technology 
services and device-dependent procedures, which we believe are 
furnished largely by teaching hospitals. In addition, the application 
of the wage index adjustment to 60 percent of the APC payment package 
(especially for APCs into which expensive devices are packaged) tends 
to benefit teaching hospitals, which are predominantly located in hgh-
cost areas. These and other payment changes should help ensure 
equitable payment for all hospitals within the constraints of the 
statute.

I. Public Comments Received on the November 15, 2004 Final Rule With 
Comment Period

    We received approximately 55 timely pieces of correspondence on the 
November 5, 2004 final rule with comment period, some of which 
contained multiple comments on the APC assignment of HCPCS codes 
identified with the NI comment indicator in Addendum B of that final 
rule with comment period and on the surgical insertion and implantation 
device criterion. Summaries of those public comments and our responses 
to those comments are set forth in the various sections under the 
appropriate headings.

II. Updates Affecting Payments for CY 2006

A. Recalibration of APC Relative Weights for CY 2006

1. Database Construction
    a. Database Source and Methodology. Section 1833(t)(9)(A) of the 
Act requires that the Secretary review and revise the relative payment 
weights for APCs at least annually. In the April 7, 2000 OPPS final 
rule (65 FR 18482), we explained in detail how we calculated the 
relative payment weights that were implemented on August 1, 2000, for 
each APC group. Except for some reweighting due to a small number of 
APC changes, these relative payment weights continued to be in effect 
for CY 2001. This policy is discussed in the November 13, 2000 interim 
final rule (65 FR 67824 through 67827).
    In the CY 2005 OPPS proposed rule (70 FR 42680), we proposed to use 
the same basic methodology that we described in the April 7, 2000 final 
rule to recalibrate the APC relative payment

[[Page 68524]]

weights for services furnished on or after January 1, 2006, and before 
January 1, 2007. That is, we would recalibrate the relative payment 
weights for each APC based on claims and cost report data for 
outpatient services. We proposed to use the most recent available data 
to construct the database for calculating APC group weights. For the 
purpose of recalibrating APC relative payment weights for CY 2006, we 
used approximately 137 million final action claims for hospital OPD 
services furnished on or after January 1, 2004, and before January 1, 
2005. Of the 137 million final action claims for services provided in 
hospital outpatient settings, 109 million claims were of the type of 
bill potentially appropriate for use in setting rates for OPPS services 
(but did not necessarily contain services payable under the OPPS). Of 
the 109 million claims, we were able to use 52.7 million whole claims 
to set the proposed OPPS APC relative weights for CY 2006 OPPS. From 
the 52.7 million whole claims, we created 87.9 million single records, 
of which 54.9 million were ``pseudo'' single claims (created from 
multiple procedure claims using the process we discuss in this 
section).
    As we proposed, the final APC relative weights and payments for CY 
2006 in Addenda A and B to this final rule with comment period were 
calculated using claims from this period that had been processed before 
June 30, 2005, and continue to be based on the median hospital costs 
for services in the APC groups. We selected claims for services paid 
under the OPPS and matched these claims to the most recent cost report 
filed by the individual hospitals represented in our claims data.
    We received numerous public comments concerning our proposed data 
source and methodology for recalibrating the APC relative weights for 
CY 2006. A summary of the comments and our responses are discussed 
below.
    Comment: Commenters stated that many APC rates fluctuate 
dramatically, and the instability in the system makes it very hard for 
hospitals to budget and plan services from year to year. Among the 
services identified as issues of specific concern were clinic visits, 
application of brachytherapy sources, drugs and biologicals, and 
device-intensive APCs. Some commenters recommended that CMS limit 
increases and decreases for all APCs to no more than a 5-percent shift 
(increase or decrease) from one year to another. Commenters emphasized 
that fluctuations in payment rates for device-dependent procedures from 
year to year impact manufacturers' abilities to contract effectively 
with hospitals to provide a stable purchasing environment and, thereby, 
impede innovation and adversely impact beneficiaries.
    Response: We understand the commenters' concerns about the need for 
sufficient stability in the OPPS so that hospitals can plan and budget. 
We have given this issue much consideration. We recognize that reliance 
on single procedure claims may result in fewer claims for some services 
than for others. For example, median costs for services such as office 
visits, for which the volume of single bills is very high, would 
generally be more stable than the median costs for services for which 
we have very few single procedure claims. We will continue to explore 
changes we could effectuate to enable us to use even more claims on the 
premise that using more claims data will enhance stability.
    However, we note that the statutory design of the OPPS and the 
rapid evolution in the delivery of outpatient hospital services include 
many elements that may be responsible for some of the fluctuation in 
rates from year to year. For example, the ``2 times rule'' imposed by 
the law requires the movement of some procedures from one APC to 
another each year. Moreover, the OPPS is based on procedure coding for 
which there are hundreds of changes each year. In addition, the entry 
of new technology into a budget neutral payment system results in a 
shift of funds away from previously existing services to provide 
payments for new services. These systemic factors are valid reflections 
of the changes in services in the outpatient department, and shifts in 
payment legitimately mirror those changes.
    Comment: Commenters stated that the entire OPPS is underfunded 
because it pays only 87 percent of the costs of services to Medicare 
beneficiaries. One commenter indicated that the underfunding of 
services to Medicare patients is particularly severe for 
disproportionate share hospitals and hospitals with level I trauma 
centers and, therefore, will inhibit access to care for Medicare 
beneficiaries and other individuals.
    Response: Our early analyses indicated that the OPPS was, in its 
inception, based on payment that was less than cost due to statutory 
reductions in payment for hospital outpatient costs prior to the 
enactment of the BBA, which authorized the current OPPS. Certain 
fundamental statutory features of the OPPS dictate such a finding. For 
example, the base amounts upon which the OPPS was established, the 
rules concerning budget neutrality, and subsequent out-year adjustments 
such as annual reductions in coinsurance and adjustments to outlier and 
pass-through payment allocations are established in statute and, as 
such, would require legislation to amend.
    Comment: Commenters supported use of the most recent claims data 
for recalibrating the APC relative weights but in many cases wanted CMS 
to adjust the claims data for particular services of interest to them 
in ways that will result in higher payment for those specified 
services. Other commenters supported use of proprietary, confidential 
external data in lieu of claims data to set the median costs on which 
the rates are based for selected services because they believe that the 
use of claims data results in median costs that are less than the costs 
of the services being furnished. Some commenters asked CMS to establish 
a representative sample of hospitals from which data would be collected 
for use in place of claims data or to validate the data derived from 
claims.
    Response: We believe that, in a budget neutral relative payment 
system such as the OPPS, it is important that the relative weights be 
based on a uniform source of data processed in a standardized way. We 
believe that Medicare claims data are the most uniform data source 
available to us. Moreover, the weights derived from such a system are 
the vehicles for distributing Medicare payments for outpatient hospital 
services fairly among all hospitals that furnish outpatient hospital 
services to Medicare beneficiaries. We are committed to using claims 
data in a uniform manner, to the maximum extent possible, to develop 
the relative weights from which payment rates are calculated. We do not 
see a compelling need to use external data to set or adjust median 
costs for device-dependent APCs for the CY 2006 OPPS. Therefore, for 
the CY 2006 OPPS, we have not substituted external data for Medicare 
claims data for the purpose of setting the median costs on which the 
relative weights are based.
    After carefully considering all comments received, we are 
finalizing our data source and methodology for the recalibration of CY 
2006 APC relative weights as proposed without modification.
    b. Use of Single and Multiple Procedure Claims. For CY 2006, we 
proposed to continue to use single procedure claims to set the medians 
on which the APC relative payment weights would be based. As noted in 
the November 15, 2004 final rule with

[[Page 68525]]

comment period, we have received many requests asking that we ensure 
that the data from claims that contain charges for multiple procedures 
are included in the data from which we calculate the relative payment 
weights (69 FR 65730 through 65731). Requesters believe that relying 
solely on single procedure claims to recalibrate APC relative payment 
weights fails to take into account data for many frequently performed 
procedures, particularly those commonly performed in combination with 
other procedures. They believe that, by depending upon single procedure 
claims, we base relative payment weights on the least costly services, 
thereby introducing downward bias to the medians on which the weights 
are based.
    We agree that, optimally, it is desirable to use the data from as 
many claims as possible to recalibrate the APC relative payment 
weights, including those with multiple procedures. We generally use 
single procedure claims to set the median costs for APCs because we 
are, so far, unable to ensure that packaged costs can be appropriately 
allocated across multiple procedures performed on the same date of 
service. However, by bypassing specified codes that we believe do not 
have significant packaged costs, we are able to use more data from 
multiple procedure claims. In many cases, this enables us to create 
multiple ``pseudo'' single claims from claims that, as submitted, 
contained multiple separately paid procedures on the same claim. We 
have used the date of service on the claims and a list of codes to be 
bypassed to create ``pseudo'' single claims from multiple procedure 
claims the same as we did in recalibrating the CY 2005 APC relative 
payment weights. We refer to these newly created single procedure 
claims as ``pseudo'' singles because they were submitted by providers 
as multiple procedure claims.
    For CY 2003, we created ``pseudo'' single claims by bypassing HCPCS 
codes 93005 (Electrocardiogram, tracing), 71010 (Chest x-ray), and 
71020 (Chest x-ray) on a submitted claim. However, we did not use 
claims data for the bypassed codes in the creation of the median costs 
for the APCs to which these three codes were assigned because the level 
of packaging that would have remained on the claim after we selected 
the bypass code was not apparent and, therefore, it was difficult to 
determine if the medians for these codes would be correct.
    For CY 2004, we created ``pseudo'' single claims by bypassing these 
three codes and also by bypassing an additional 269 HCPCS codes in 
APCs. We selected these codes based on a clinical review of the 
services and because it was presumed that these codes had only very 
limited packaging and could appropriately be bypassed for the purpose 
of creating ``pseudo'' single claims. The APCs to which these codes 
were assigned were varied and included mammography, cardiac 
rehabilitation, and Level I plain film x-rays. To derive more 
``pseudo'' single claims, we also split the claims where there were 
dates of service for revenue code charges on that claim that could be 
matched to a single procedure code on the claim on the same date.
    As in CY 2003, we did not include the claims data for the bypassed 
codes in the creation of the APCs to which the 269 codes were assigned 
because, again, we had not established that such an approach was 
appropriate and would aid in accurately estimating the median costs for 
those APCs. For CY 2004, from about 16.3 million otherwise unusable 
claims, we used about 9.5 million multiple procedure claims to create 
about 27 million ``pseudo'' single claims. For CY 2005, we identified 
383 bypass codes and from approximately 24 million otherwise unusable 
claims, we used about 18 million multiple procedure claims to create 
about 52 million ``pseudo'' single claims.
    For CY 2006, we proposed to continue using date of service matching 
as a tool for creation of ``pseudo'' single claims and to continue the 
use of a bypass list to create ``pseudo'' single claims. The process we 
proposed for CY 2006 OPPS resulted in our being able to use some part 
of 90 percent of the total claims that are eligible for use in OPPS 
rate-setting and modeling in developing this final rule with comment 
period. This process enabled us to use, for CY 2006, 88 million single 
bills for rate-setting: 55 million ``pseudo'' singles and 34 million 
``natural'' single bills (bills that were submitted containing only one 
separately payable major HCPCS code). (These numbers do not sum to 88 
million because more than 800,000 single bills were removed when we 
trimmed at the HCPCS level at +/-3 standard deviations from the 
geometric mean.)
    We proposed to bypass the 404 codes identified in Table 1 of the 
proposed rule (70 FR 42682) to create new single claims and to use the 
line-item costs associated with the bypass codes on these claims in the 
creation of the median costs for the APCs into which they are assigned. 
Of the codes on that list, 385 were used for bypass in CY 2005. For CY 
2006, we proposed to continue the use of the codes on the CY 2005 OPPS 
bypass list and expand it by adding those codes that, using data 
presented to the APC Panel at its February 2005 meeting, met the same 
empirical criteria as those used in CY 2005 to create the bypass list. 
Our examination of the data against the criteria for inclusion on the 
bypass list, as discussed below for the addition of new codes, shows 
that the empirically selected codes used for bypass for the CY 2005 
OPPS generally continue to meet the criteria or come very close to 
meeting the criteria, and we have received no comments against 
bypassing them.
    As we proposed, in this final rule with comment period, we used the 
following empirical criteria that were developed by reviewing the 
frequency and magnitude of packaging in the single claims for payable 
codes other than drugs and biologicals. We assumed that the 
representation of packaging on the single claims for any given code is 
comparable to packaging for that code in the multiple claims:
     There were 100 or more single claims for the code. This 
number of single claims ensured that observed outcomes were 
sufficiently representative of packaging that might occur in the 
multiple claims.
     Five percent or fewer of the single claims for the code 
had packaged costs on that single claim for the code. This criterion 
results in limiting the amount of packaging being redistributed to the 
payable procedure remaining on the claim after the bypass code is 
removed and ensures that the costs associated with the bypass code 
represent the cost of the bypassed service.
     The median cost of packaging observed in the single claim 
was equal to or less than $50. This limits the amount of error in 
redistributed costs.
     The code is not a code for an unlisted service.
    As stated in the proposed rule (70 FR 42681), we also added to the 
bypass list three codes (CPT codes 51701, 51702, and 51703 for bladder 
catheterization) which do not meet these criteria. These codes have 
been packaged and have never been paid separately. For that reason, 
when these were the only services provided to the beneficiary, no 
payment was made to the hospital. The APC Panel's Packaging 
Subcommittee recommended that we make separate payment when they are 
the only service on the claim. See section II.A.4. of this preamble for 
further discussion of our policy to pay these services separately. We 
added these codes to the bypass list because changing them from 
packaged to separately paid would result in a reduction of the number 
of single bills on which we could base median costs

[[Page 68526]]

for other major separately paid procedures that are billed on the same 
claim with these procedure codes. Single bills which contain other 
procedures would become multiple procedure claims when these bladder 
catheterization codes were converted from packaged to separately paid 
status.
    As explained in the CY 2006 proposed rule (70 FR 42682), we 
examined the packaging on the single procedure claims in the CY 2004 
data for these codes. We found that none of these three codes met the 
empirical standards for the bypass list. However, we believe that when 
these services are performed on the same date as another separately 
paid procedure, any packaging that appears on the claim would 
appropriately be associated with the other procedures and not with 
these codes. Therefore, we believe that bypassing them does not 
adversely affect the medians for other procedures. Moreover, future 
separate payment for these codes does not harm the hospitals that 
furnish these services, in view of the historical absence of separate 
payment for them under the OPPS in the past. Hence, we proposed to pay 
separately for these codes and to add them to the bypass list for the 
CY 2006 OPPS.
    In the CY 2006 proposed rule, we specifically invited public 
comments on the proposed ``pseudo'' single process, including the 
bypass list and the criteria. A summary of the many comments we 
received and our responses follow:
    Comment: Some commenters supported use of multiple procedure claims 
through application of the bypass list and date of service 
stratification. Other commenters stated that these processes may result 
in more claims but not necessarily better data for rate-setting. Many 
commenters objected to the use of single procedure claims as the basis 
for setting the relative weights because they believed that using 
single procedure claims limits the claims data to the simplest and 
least costly cases. They proposed CPT code or APC specific strategies 
for using multiple procedure claims in ways that would apply only to 
the services of interest to them that could not be generalized across 
multiple procedure claims for all services. The commenters indicated 
that the use of single procedure claims greatly limits the number of 
claims that are used for setting median costs and weights, and that the 
OPPS relative weights would be greatly improved if we could use all of 
the claims data. They indicated that the use of single procedure claims 
causes medians to be set based on incorrectly coded claims for the many 
add-on codes that can only be billed properly when they are billed with 
the base code to which they are attached. In addition, they indicated 
that many services are so routinely furnished in combination with other 
services that use of single procedure claims will never result in 
appropriate median costs for these procedures.
    Response: We share the commenters' desire to use as much claims 
data as possible to set the relative weights for the OPPS services. We 
continue to explore ways to use more data from multiple procedure 
claims. Specifically, we are looking at the extent to which the many 
add-on codes (codes that are reported for services furnished only as an 
adjunct to another service) can be packaged to create more single 
claims. We are also exploring strategies for using data from correctly 
coded multiple procedure claims containing both base and add-on codes 
to ascertain the incremental costs of the add-on services. We also 
expect to explore other generally applicable strategies, such as 
apportioning packaging based on submitted charges that would enable us 
to use multiple procedure claims.
    We are disinclined to focus on service-specific strategies for 
using multiple procedure claims because those that have been suggested 
to us are not generally applicable to multiple procedure claims across 
all services, but rather are focused on increasing the median costs of 
particular services to the exclusion of all other services. As we 
indicated above, we believe that it is important in a relative weight 
system that, to the maximum extent possible, the same claims and the 
same processing rules apply to all services so that the resulting 
relative weights are uniformly created and serve all hospitals fairly.
    Comment: One commenter asked why only some of the office visit and 
consultation services are included in the bypass list (for example, CPT 
codes 99213 and 99214 are on the list) but CPT codes 99211, 99212 and 
99215 are not. The commenter believed that the cited unlisted codes 
should also be on the list. Other commenters did not believe that CPT 
codes 99213 and 99214 met the criteria for inclusion as bypass codes 
and believed that they should be removed from the list.
    Response: We have included below data calculated from the APC Panel 
data for use in setting the bypass list for the CY 2006 proposed rule 
and this final rule with comment period. These data show that CPT codes 
99213 and 99214 meet the criteria for inclusion as bypass codes, and 
that CPT codes 99211, 99212 and 99215 exceed the 5-percent limit for 
single bills containing packaging:

------------------------------------------------------------------------
                                                            Percent of
                                           Median amount   single bills
         HCPCS          Short descriptor   of packaging    for the code
                                             on single      containing
                                               bills         packaging
------------------------------------------------------------------------
99211.................  Office/                   $11.98            6.15
                         outpatient
                         visit, est.
99212.................  Office/                    10.88            5.43
                         outpatient
                         visit, est.
99213.................  Office/                    11.72            3.87
                         outpatient
                         visit, est.
99214.................  Office/                    12.76            3.63
                         outpatient
                         visit, est.
00215.................  Office/                    12.76            8.62
                         outpatient
                         visit, est.
------------------------------------------------------------------------

    Comment: Commenters supported the use of the bypass list but were 
concerned that the inclusion of services on the bypass list may 
systematically result in lower costs for the procedures that are 
included on the list than if they had not been included on the list.
    Response: We established the bypass list criteria for the purpose 
of limiting any potential adverse impact on the medians for the 
services on the bypass list. We believe that the requirement that a 
code cannot be placed on the bypass list if more than 5 percent of the 
single bills for that code contain packaging or if the median packaging 
for the code exceeds $50, is a strong deterrent to systematic reduction 
of medians for services on the bypass list. We have received no 
comments on the appropriateness or inappropriateness of the bypass 
criteria, and thus, we have not changed them for the CY 2006 OPPS.
    Comment: Commenters asked CMS to carefully consider the impact of 
add-on codes on the creation of multiple

[[Page 68527]]

procedure claims and urged CMS to not disqualify a claim because of the 
presence of an add-on code that is packaged. In the case of add-on 
codes that are separately paid, one commenter urged CMS to apportion 
the packaged charges between the base code and the add-on code so that 
the data from the multiple procedure claim can be used. Some commenters 
asked CMS to place all add-on codes, both packaged and separately paid, 
on the bypass list to create more single procedure claims.
    Response: The presence of an add-on code with a status indicator of 
``N'' because it is a packaged service does not currently disqualify 
the claim as a multiple procedure claim. The claim is considered to be 
a single procedure claim and the cost of the packaged add-on code is 
treated like any other packaged drug, device, or supply or other 
packaged cost. However, the presence of an add-on code that is 
separately paid but not on the bypass list does currently cause the 
claim to be a multiple procedure claim that is not used because of the 
difficulties in determining how to apportion the packaging on the claim 
between the two separately paid procedure codes.
    We disagree that all add-on codes could safely be added to the 
bypass list. Many add-on codes use significant resources that are 
reported as packaged charges in support of the add-on code. For 
example, CPT code 33225 (Left ventricular lead add-on) requires more 
than an hour of additional operating room time and also requires a 
device with significant cost when the service is furnished in 
conjunction with a base service. If we were to include CPT code 33225 
on the bypass list, only the line-item charge for the CPT code would be 
attributed to the procedure code. Neither the device cost (which is 
packaged), nor the share of other costs attributable to the service 
(for example, drugs, supplies, and extended operating room time) would 
be attributed to CPT code 33225. They would both be packaged into the 
base code. The single procedure claims for CPT code 33225 would not 
reflect the costs of the device or extended operating room time. In 
addition, the single procedure claims for the base code would reflect 
packaging that is not properly associated with that procedure.
    However, we recognize that the add-on codes present a significant 
data problem because they can never be correctly billed unless they are 
also billed on the same claim with a base code to which they add 
services. We are undertaking a study of add-on codes to determine 
whether there are add-on codes that are now separately paid that should 
become packaged, and thus would provide more single procedure claims. 
With respect to the add-on codes for which packaging is not 
appropriate, we will be exploring methods that would enable us to 
systematically calculate valid median costs for the add-on codes from 
multiple procedure claims and thus create a more robust set of valid 
claims for rate-setting. We anticipate working with the APC Panel 
members on this issue.
    Comment: Commenters asked CMS to assign a flag to claims that 
became pseudo singles in the claims included in the public use files so 
that it would be easier for commenters to model future proposed 
policies.
    Response: The public use files (the limited data set and the 
beneficiary encrypted data set) contain claims as submitted to CMS. 
Therefore, to flag the pseudo single claims in the public use file is 
not possible because the pseudo single claims may be part, but not all, 
of the submitted claim. Even if we did flag the claim, the user would 
still have to replicate the process to create pseudo single claims. We 
note that we have greatly increased the information we issued regarding 
how we process the claims to acquire the median costs, and we 
understand that outside replication of our medians has improved.
    Comment: Commenters asked whether CMS disregards line item charges 
for drugs, biologicals, and radiopharmaceutical agents and items with 
status indicators ``K'' and ``G'' for purposes of creating pseudo 
singles claims.
    Response: The presence on a claim of a code and charge for a drug, 
biological, or radiopharmaceutical agent, whether separately paid or 
packaged, has no impact on determining whether the claim is a single 
procedure claim.
    After carefully considering all public comments received, we are 
adopting as final the proposed ``pseudo'' single process and the bypass 
codes listed in Table 1 without modification.
BILLING CODE 4120-01-P

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BILLING CODE 4120-01-C
2. Calculation of Median Costs for CY 2006
    In this section of the preamble, we discuss the use of claims to 
calculate the OPPS payment rates for CY 2006. The hospital outpatient 
prospective payment page on the CMS Web site on which this final rule 
with comment period is posted provides an accounting of claims used in 
the development of the final rates: http://www.cms.hhs.gov/providers/hopps. The accounting of claims used in the development of this final 
rule with comment period is included on the Web site under supplemental 
materials for the CY 2006 final rule with comment period. That 
accounting provides additional detail regarding the number of claims 
derived at each stage of the process. In addition, below we discuss the 
files of claims that comprise the data sets that are available for 
purchase under a CMS data user contract. Our CMS Web site, http://www.cms.hhs.gov/providers/hopps, includes information about purchasing 
the following two OPPS data files: ``OPPS Limited Data Set'' and ``OPPS 
Identifiable Data Set.''
    As we proposed, we used the following methodology to establish the 
relative weights to be used in calculating the OPPS payment rates for 
CY 2006 shown in Addendum A and in Addendum B to this final rule with 
comment period. This methodology is as follows:
    We used outpatient claims for the full CY 2004 to set the relative 
weights for CY 2006. To begin the calculation of the relative weights 
for CY 2006, we pulled all claims for outpatient services furnished in 
CY 2004 from the national claims history file. This is not the 
population of claims paid under the OPPS, but all outpatient claims 
(including, for example, CAH claims, and hospital claims for clinical 
laboratory services for persons who are neither inpatients nor 
outpatients of the hospital).
    We then excluded claims with condition codes 04, 20, 21, and 77. 
These are claims that providers submitted to Medicare knowing that no 
payment will be made. For example, providers submit claims with a 
condition code 21 to elicit an official denial notice from Medicare and 
document that a service is not covered. We then excluded claims for 
services furnished in Maryland, Guam, and the U.S. Virgin Islands 
because hospitals in those geographic areas are not paid under the 
OPPS.
    We divided the remaining claims into the three groups shown below. 
Groups 2 and 3 comprise the 109 million claims that contain hospital 
bill types paid under the OPPS.
    1. Claims that were not bill types 12X, 13X, 14X (hospital bill 
types), or 76X (CMHC bill types). Other bill types are not paid under 
the OPPS and, therefore, these claims were not used to set OPPS 
payment.
    2. Claims that were bill types 12X, 13X, or 14X (hospital bill 
types). These claims are hospital outpatient claims.
    3. Claims that were bill type 76X (CMHC). (These claims are later 
combined with any claims in item 2 above with a condition code 41 to 
set the per diem partial hospitalization rate determined through a 
separate process.)
    For the cost-to-charge ratio (CCR) calculation process, we used the 
same approach as we used in developing the final APC rates for CY 2005 
(69 FR 65744). That is, we first limited the population of cost reports 
to only those for hospitals that filed outpatient claims in CY 2004 
before determining whether the CCRs for such hospitals were valid. This 
initial limitation changed the distribution of CCRs used during the 
trimming process discussed below.
    We then calculated the CCRs at a departmental level and overall for 
each hospital for which we had claims data. We did this using hospital-
specific data from the Healthcare Cost Report Information System 
(HCRIS). We used the most recent available cost report data, in most 
cases, cost reports for CY 2002 or CY 2003. For this final rule with 
comment period, we used the most recent cost report available, whether 
submitted or settled. If the most recent available cost report was 
submitted but not settled, we looked at the last settled cost report to 
determine the ratio of submitted to settled cost, and we then adjusted 
the most recent available submitted but not settled cost report using 
that ratio.
    The overall hospital-specific CCR is the total of costs and charges 
in those cost centers where we believe that a significant portion of 
the costs and charges are for services paid under the OPPS. We have 
included the list of the cost centers that we use in our overall CCR 
calculation on our Web site along with our cost center to revenue code 
crosswalk, which we discuss below. We do not include the costs and 
charges generated by nursing schools or paramedical education programs 
in our cost and charge totals.
    We then flagged CAH claims, which are not paid under the OPPS, and 
claims from hospitals with invalid CCRs. The latter included claims 
from hospitals without a CCR; those from hospitals paid an all-
inclusive rate; those from hospitals with obviously erroneous CCRs 
(greater than 90 or less than .0001); and those from hospitals with 
CCRs that were identified as outliers (3 standard deviations from the 
geometric mean after removing error CCRs). In addition, we trimmed the 
CCRs at the departmental level by removing the CCRs for each cost 
center as outliers if they exceeded +/-3 standard deviations of the 
geometric mean. This is the same methodology that we used in developing 
the final CY 2005 CCRs. For CY 2006, as proposed, we trimmed at the 
departmental CCR level to eliminate aberrant CCRs that, if found in 
high volume hospitals, could skew the medians. We used a four-tiered 
hierarchy of cost center CCRs to match a cost center to a revenue code, 
with the top tier being the most common cost center and the last tier 
being the default CCR. If a hospital's departmental CCR was deleted by 
trimming, we set the departmental CCR for that cost center to 
``missing,'' so that another departmental CCR in the revenue center 
hierarchy could apply. If no other departmental CCR could apply to the 
revenue code on the claim, we used the hospital's overall CCR for the 
revenue code in question. The hierarchy of CCRs is available for 
inspection and comment at the CMS Web site: http://www.cms.hhs.gov/providers/hopps/default.asp.
    We then converted the charges on the claim by applying the CCR that 
we believed was best suited to the revenue code indicated on the line 
with the charge. Table 2 of the proposed rule (70 FR 42690) contained a 
list of the allowed revenue codes. Revenue codes not included in Table 
2 are those not allowed under the OPPS because their services cannot be 
paid under the OPPS (for example, inpatient room and board charges) 
and, thus charges with those revenue codes were not packaged for 
creation of the OPPS median costs. If a hospital did not have a CCR 
that was appropriate to the revenue code reported for a line-item 
charge (for example, a visit reported under the clinic revenue code, 
but the hospital did not have a clinic cost center), we applied the 
hospital-specific overall CCR, except as discussed in section X. of 
this preamble for calculation of costs for blood.
    Thus, we applied CCRs as described above to claims with bill types 
12X, 13X, or 14X, excluding all claims from CAHs and hospitals in 
Maryland, Guam, and the U.S. Virgin Islands, and claims from all 
hospitals for which CCRs were flagged as invalid.
    We identified claims with condition code 41 as partial 
hospitalization services of CMHCs and moved them to

[[Page 68538]]

another file. These claims were combined with the 76X claims identified 
previously to calculate the partial hospitalization per diem rate.
    We then excluded claims without a HCPCS code. We also moved claims 
for observation services to another file. We moved to another file 
claims that contained nothing but flu and pneumococcal pneumonia 
(``PPV'') vaccine. Influenza and PPV vaccines are paid at reasonable 
cost and, therefore, these claims are not used to set OPPS rates. We 
note that the two above mentioned separate files containing partial 
hospitalization claims and the observation services claims are included 
in the files that are available for purchase as discussed above.
    We next copied line-item costs for drugs, blood, and devices (the 
lines stay on the claim, but are copied off onto another file) to a 
separate file. No claims were deleted when we copied these lines onto 
another file. These line-items are used to calculate the per unit 
median for drugs, radiopharmaceutical agents, and blood and blood 
products. The line-item costs were also used to calculate the per 
administration cost of drugs, biologicals (other than blood and blood 
products), and radiopharmaceutical agents.
    We then divided the remaining claims into five groups.
    1. Single Major Claims: Claims with a single separately payable 
procedure, all of which would be used in median setting.
    2. Multiple Major Claims: Claims with more than one separately 
payable procedure or multiple units for one payable procedure. As 
discussed below, some of these can be used in median setting.
    3. Single Minor Claims: Claims with a single HCPCS code that is not 
separately payable. These claims may have a single packaged procedure 
or a drug code.
    4. Multiple Minor Claims: Claims with multiple HCPCS codes that are 
not separately payable without examining dates of service. For example, 
pathology codes are not used unless the pathology service is the single 
code on the bill or unless the pathology code is on a separate date of 
service from the other procedure on the claim. The multiple minor file 
has claims with multiple occurrences of pathology codes, with packaged 
costs that cannot be appropriately allocated across the multiple 
pathology codes. However, by matching dates of service for the code and 
the reported costs through the ``pseudo'' single creation process 
discussed earlier, a claim with multiple pathology codes may become 
several ``pseudo'' single claims with a unique pathology code and its 
associated costs on each day. These ``pseudo'' singles for the 
pathology codes would then be considered a separately payable code and 
would be used the same as claims in the single major claim file.
    5. Non-OPPS Claims: Claims that contain no services payable under 
the OPPS. These claims are excluded from the files used for the OPPS. 
Non-OPPS claims have codes paid under other fee schedules, for example, 
durable medical equipment or clinical laboratory.
    We note that the claims listed in numbers 1, 2, 3, and 4 above are 
included in the data files that can be purchased as described above.
    We set aside the single minor claims and the non-OPPS claims 
(numbers 3 and 5 above) because we did not use either in calculating 
median cost. We then examined the multiple major and multiple minor 
claims (numbers 2 and 4 above) to determine if we could convert any of 
them to single major claims using the process described previously. We 
first grouped items on the claims by date of service. If each major 
procedure on the claim had a different date of service and if the line-
items for packaged HCPCS and packaged revenue codes had dates of 
service, we split the claim into multiple ``pseudo'' single claims 
based on the date of service.
    After those single claims were created, we used the list of 
``bypass codes'' listed in Table 1 of the proposed rule and this final 
rule with comment period to remove separately payable procedures that 
we determined contain limited costs or no packaged costs from a 
multiple procedure bill. A discussion of the creation of the list of 
bypass codes used for the creation of ``pseudo'' single claims is 
contained in section II.A.1.b. of this preamble.
    When one of the two separately payable procedures on a multiple 
procedure claim was on the bypass code list, we split the claim into 
two single procedure claims records. The single procedure claim record 
that contained the bypass code did not retain packaged services. The 
single procedure claim record that contained the other separately 
payable procedure (but no bypass code) retained the packaged revenue 
code charges and the packaged HCPCS charges. This enables us to use a 
claim that would otherwise be a multiple procedure claim and could not 
be used.
    We excluded those claims that we were not able to convert to 
singles even after applying both of the techniques for creation of 
``pseudo'' singles. We then packaged the costs of packaged HCPCS codes 
(codes with status indicator ``N'' listed in Addendum B to this final 
rule with comment period) and packaged revenue codes into the cost of 
the single major procedure remaining on the claim. The list of packaged 
revenue codes is shown below in Table 2. These are the same as those 
published in Table 2 of the proposed rule (70 FR 42690).
    After removing claims for hospitals with error CCRs, claims without 
HCPCS codes, claims for immunizations not covered under the OPPS, and 
claims for services not paid under the OPPS, 58.4 million claims were 
left. Of these million claims, we were able to use some portion of 52.7 
million whole claims (90.24 percent of the potentially usable claims) 
to create the 88 million single and ``pseudo'' single claims for use in 
the CY 2006 median payment rate-setting.
    We also excluded (1) claims that had zero costs after summing all 
costs on the claim and (2) claims containing token charges (charges of 
less than $1.01) or for which intermediary systems had allocated 
charges as if the charges were submitted on the claim. We deleted 
claims containing token charges because we do not believe that a charge 
of less than $1.01 would yield a cost that would be valid to set 
weights for a significant separately paid service. Moreover, effective 
for services furnished on or after July 1, 2004, the OCE assigns 
payment flag number 3 to claims on which hospitals submitted token 
charges for a service with status indicator ``S'' or ``T'' (a major 
separately paid service under OPPS) for which the intermediary is 
required to allocate the sum of charges for services with a status 
indicator equaling ``S'' or ``T'' based on the weight for the APC to 
which each code is assigned. We do not believe that these charges, 
which were token charges as submitted by the hospital, are valid 
reflections of hospital resources. Therefore, we deleted these claims.
    For the remaining claims, we then wage adjusted 60 percent of the 
cost of the claim (which we have previously determined to be the labor-
related portion), as has been our policy since the initial 
implementation of the OPPS, to adjust for geographic variation in 
labor-related costs. We made this adjustment by determining the wage 
index that applied to the hospital that furnished the service and 
dividing the cost for the separately paid HCPCS code furnished by the 
hospital by that wage index. As has been our policy since the inception 
of the OPPS, we use the pre-reclassified wage indices for 
standardization because we believe that they better reflect the true 
costs of items and services in the area in which the hospital is 
located than the post-

[[Page 68539]]

reclassification wage indices, and would result in the most accurate 
adjusted median costs.
    We then excluded claims that were outside 3 standard deviations 
from the geometric mean cost for each HCPCS code. We used the remaining 
claims to calculate median costs for each separately payable HCPCS 
code; first, to determine the applicability of the ``2 times'' rule, 
and second, to determine APC medians based on the claims containing the 
HCPCS codes assigned to each APC. As stated previously, section 
1833(t)(2) of the Act provides that, subject to certain exceptions, the 
items and services within an APC group cannot be considered comparable 
with respect to the use of resources if the highest median (or mean 
cost, if elected by the Secretary) for an item or service in the group 
is more than 2 times greater than the lowest median cost for an item or 
service within the same group (``the 2 times rule''). Finally, we 
reviewed the medians and reassigned HCPCS codes to different APCs as 
deemed appropriate. Section III.B. of this preamble includes a 
discussion of the HCPCS code assignment changes that resulted from 
examination of the medians and for other reasons. The APC medians were 
recalculated after we reassigned the affected HCPCS codes.
    A detailed discussion of the medians for blood and blood products 
is included in section X. of this preamble. A discussion of the medians 
for APCs that require one or more devices when the service is performed 
is included in section IV.A. of this preamble. A discussion of the 
median for observation services is included in section XI. of this 
preamble and a discussion of the median for partial hospitalization is 
included below in section II.B. of this preamble.
    We received a number of public comments concerning our proposed 
data processes for calculating the CY 2006 OPPS relative weights and 
median costs. A summary of the comments and our responses follow:
    Comment: Commenters stated that the proposed rule did not provide 
adequate information for hospitals to evaluate the impact of each of 
the proposed policy changes independently or in combination. They 
requested that CMS provide a public use file that shows the impact of 
each individual proposed change in methodology so that providers can 
determine how the changes would affect their own operations and provide 
a basis for comments.
    Response: We currently provide provider-specific tables that we 
understand are very accurate in estimating the payments individual 
hospitals will receive. While we wish to make available to the public 
as much hospital-specific information as possible, there are limits to 
the resources available to us to provide hospital-specific information. 
Generally, we provide a broad range of information to the public. We 
make available our claims data in the form of both a limited data set 
and a beneficiary encrypted data set for use by the public, including 
hospitals. In addition, in both the OPPS proposed and final rules each 
year, we give a detailed description of how we process the paid claims 
to derive the median costs and how we create relative weights from the 
median costs. Many different organizations with a broad range of 
divergent interests currently use this information provided to the 
public to generate extraordinarily detailed reports and data of 
interest to them. As this is public information, we would expect that 
hospital associations and hospitals could do the same, either directly 
or using alternative sources to determine the impact of various policy 
options.
    Comment: One commenter strongly opposed the requirement that all 
OPPS encounters furnished on the same day must be billed on a single 
claim. Some commenters believed that this increases the number of 
claims that cannot be used for ratesetting by creating multiple 
procedure claims and creates a needless burden on hospitals to ensure 
that all encounters on the same date of service are billed on the same 
claim.
    Response: We agree and we have revised our policy governing how 
services on the same date of service must be billed. See Change Request 
4047, Transmittal 711, dated October 14, 2005 for a complete discussion 
of our current policy. Under this change in policy, there are instances 
where nonrepetitive OPPS services that are furnished on the same date 
of service may be billed on different claims as long as all charges 
that pertain to each service are also reported on the same claim as the 
HCPCS code that describes that service. We emphasize that it is vitally 
important to us that all of the charges that pertain to a separately 
paid service be included on the same claim with the service being 
billed so that the claim will accurately reflect the full cost of the 
service. If, for example, charges for a packaged drug, recovery room 
time, and sterile supplies that were used in providing a surgical 
service are not included on the claim with the HCPCS code and line-item 
charge for the use of the operating room for the surgical procedure, 
those charges for drugs, recovery room, and supplies will not be 
packaged with the charge for the OR time for the surgical procedure and 
that claim will incorrectly and inadvertently lower the median cost for 
that surgical procedure. This is especially the case if the service is 
a low volume service. Also, this revised billing policy cannot apply to 
services for which we use claim-specific OCE logic to determine 
payments, such as drug administration and observation services, because 
the OCE claim-by-claim logic cannot function properly if all services 
provided by a hospital that are related to the services subject to the 
OCE logic are not reported on the same claim.
    Comment: One commenter supported deletion of claims with token or 
nominal charges (for example, a very small charge such as $1) but was 
concerned about exclusion of claims containing multiple surgical or 
cardiac catheterization services because such exclusions may 
significantly reduce the number of claims used for rate-setting. The 
commenter noted that CMS has long permitted hospitals to show a token 
charge on the line-item with separately paid procedures when they were 
performed at the same session as a surgical procedure for which a 
charge is shown as operating room time. Another commenter wanted claims 
that contain a single payable APC line to be included even if there are 
token charges on other nonpayable lines on the claim.
    Response: The submission of claims for multiple separately paid 
procedures with the same date of service on which there is a charge for 
operating room time for one of the HCPCS codes and token charges on the 
lines for the other separately paid HCPCS codes reflects a difficulty 
with using multiple procedure claims. (For example, a claim contains 
three separately paid surgical services, with a charge of $2,000 for 
one and charges of $1 for each of the others, plus a single charge each 
for drugs, sterile supplies, and recovery room time.) We note if we 
were to use such claims and allocate packaging to each separately paid 
procedure (on some basis yet to be determined) and then divide the 
claim into multiple claims, we would be using claims records that would 
contain nothing but packaged costs and a token charge for some of those 
services. Similarly, if we were to focus solely on the procedure with 
the line charge of $2,000 and attribute all the packaging to it, we 
would be overstating the packaging for that service because some of it 
rightfully belongs with the other two separately paid procedures for 
which there was a token charge. We acknowledge the commenters' concern 
and we will continue to pursue an

[[Page 68540]]

appropriate way to allocate the costs on these types of claims.
    After carefully reviewing all public comments received, we are 
finalizing the process for calculating median costs and the list of 
packaged services shown in Table 2 for OPPS services furnished on or 
after January 1, 2006, as proposed without modification. Table 2 
contains the list of packaged services by revenue code that we used in 
developing the APC relative weights listed in Addenda A and B of this 
final rule with comment period.
    We note that comments and responses regarding aspects of median 
cost and relative weight calculations specific to particular services 
or particular categories of services are also found in specifically 
identified sections of this preamble.
BILLING CODE 4120-01-C

[[Page 68541]]

[GRAPHIC] [TIFF OMITTED] TR10NO05.009


[[Page 68542]]


BILLING CODE 4120-01-P
3. Calculation of Scaled OPPS Payment Weights
    Using the median APC costs discussed previously, we calculated the 
final relative payment weights for each APC for CY 2006 shown in 
Addenda A and B to this final rule with comment period. As in prior 
years, we scaled all the relative payment weights to APC 0601 (Mid 
Level Clinic Visit) because it is one of the most frequently performed 
services in the hospital outpatient setting. We assigned APC 0601 a 
relative payment weight of 1.00 and divided the median cost for each 
APC by the median cost for APC 0601 to derive the relative payment 
weight for each APC. Using CY 2004 data, the median cost for APC 0601 
is $60.19 for CY 2006.
    Section 1833(t)(9)(B) of the Act requires that APC reclassification 
and recalibration changes, wage index changes, and other adjustments be 
made in a manner that assures that aggregate payments under the OPPS 
for CY 2006 are neither greater than nor less than the aggregate 
payments that would have been made without the changes. To comply with 
this requirement concerning the APC changes, we compared aggregate 
payments using the CY 2005 relative weights to aggregate payments using 
the CY 2006 final relative weights. Based on this comparison, we 
adjusted the relative weights for purposes of budget neutrality. The 
unscaled relative payment weights were adjusted by 1.012508103 for 
budget neutrality. The final relative payment weights are listed in 
Addenda A and B to this final rule with comment period. The final 
relative payment weights incorporate the recalibration adjustments 
discussed in sections II.A.1. and 2. of this preamble.
    Section 1833(t)(14)(H) of the Act, as added by section 621(a)(1) of 
Pub. L. 108-173, states that ``Additional expenditures resulting from 
this paragraph shall not be taken into account in establishing the 
conversion factor, weighting and other adjustment factors for 2004 and 
2005 under paragraph (9) but shall be taken into account for subsequent 
years.'' Section 1833(t)(14) of the Act provides the payment rates for 
certain ``specified covered outpatient drugs.'' Therefore, the cost of 
those specified covered outpatient drugs (as discussed in section V. of 
this preamble) is included in the budget neutrality calculations for CY 
2006 OPPS.
    Under section 1833(t)(16)(C) of the Act, as added by section 
621(b)(1) of Pub. L. 108-173, payment for devices of brachytherapy 
consisting of a seed or seeds (or radioactive source) is to be made at 
charges adjusted to cost for services furnished on or after January 1, 
2004, and before January 1, 2006. As we stated in our January 6, 2004 
interim final rule, charges for the brachytherapy sources will not be 
used in determining outlier payments and payments for these items will 
be excluded from budget neutrality calculations for the CY 2006 OPPS. 
(We provide a discussion of brachytherapy payment issues at section 
VII. of this final rule with comment period.)
    Comment: One commenter indicated that CMS should convene a panel to 
look at additional data submission requirements that the panel believes 
would greatly enhance both the reliability of the data and its 
subsequent use for ratesetting. Specifically, the commenter urged CMS 
to consider whether to require hospitals to identify the APCs that 
apply to multiple procedure claims or develop a system that groups 
multiple procedure claims in a fashion that is analogous to the 
inpatient prospective payment system.
    Response: We fail to understand how hospital reporting of the APCs 
that apply to services on claims would resolve the issue of how to 
distribute packaged costs, such as drugs and recovery room time, among 
multiple procedures billed on the same claim. Therefore, we do not 
support imposing this reporting burden on hospitals. With respect to 
grouping procedures into combination APCs for purposes of dealing 
effectively with services that commonly appear in specific combinations 
together on claims, we proposed creation of combination APCs for the CY 
2004 OPPS to deal with very frequent combinations of services. While we 
chose not to implement this approach for the CY 2004 OPPS, largely in 
response to public comments, we have not ruled out such an approach in 
the future as a way to effectively calculate median costs and set 
payment rates for services for which the norm is provision in 
combinations with other services.
4. Changes to Packaged Services
    a. Background. Payments for packaged services under the OPPS are 
bundled into the payments providers receive for separately payable 
services provided on the same day. Packaged services are identified by 
the status indicator ``N.'' Hospitals include charges for packaged 
services on their claims, and the costs associated with these packaged 
services are then bundled into the costs for separately payable 
procedures on the claims for purposes of median cost calculations. 
Hospitals may use CPT codes to report any packaged services that were 
performed, consistent with CPT coding guidelines.
    As a result of requests from the public, a Packaging Subcommittee 
to the APC Panel was established to review all the procedural CPT codes 
with a status indicator of ``N.'' Providers have often suggested that 
many packaged services could be provided alone, without any other 
separately payable services on the claim, and requested that these 
codes not be assigned status indicator ``N.'' As stated in the proposed 
rule, the Packaging Subcommittee reviewed every code that was packaged 
in the CY 2004 OPPS (70 FR 42691). Based on comments we have received 
and their own expert judgment, the subcommittee identified a set of 
packaged codes that are often provided separately and subsequently 
reviewed utilization and median cost data for these codes. One of the 
main criteria utilized by the Packaging Subcommittee to determine 
whether a code should become unpackaged was how likely it was for the 
code to be billed without any other separately payable services on the 
claim. Another criterion used to determine whether a code should become 
unpackaged was how likely it was for the costs of the packaged code to 
be appropriately mapped to the separately payable codes with which it 
was performed. The Packaging Subcommittee also examined median costs 
from hospital claims for packaged services.
    The Packaging Subcommittee identified areas for change for some 
packaged CPT codes that they believed could frequently be provided to 
patients as the sole service on a given date and that required 
significant hospital resources as determined from hospital claims data. 
During the February 2005 meeting, the APC Panel accepted the report of 
the Packaging Subcommittee and recommended:
    (1) That packaged codes be reviewed by the Panel individually.
    (2) That the Packaging Subcommittee continue to meet throughout the 
year to discuss problematic packaged codes.
    (3) That CMS assign a modifier to CPT codes 36540 (Collect blood, 
venous device); 36600 (Withdrawal of arterial blood); and 51701 
(Insertion of non-indwelling bladder catheter), for use when there are 
no other separately payable codes on the claim. The modifier would flag 
the OCE to assign payment to the claim.
    (4) That CMS maintain the current packaged status indicator for CPT 
code 76937 (Ultrasound guidance for vascular access).

[[Page 68543]]

    (5) That CMS change the status indicators for CPT immunization 
administration codes 90471 and 90472 to allow separate payment and 
ensure consistency with other injection codes.
    (6) That CMS gather more data on CPT code 94762 (Overnight pulse 
oximetry) to determine how often this code is billed without any other 
separately payable codes and whether it is performed more frequently 
alone in rural settings than other settings.
    (7) No changes to the packaged status of CPT codes 77790 (Radiation 
source handling) and 94760 and 94761 (both codes are for procedures to 
measure blood oxygen levels).
    (8) That CMS provide education and consistent guidelines to 
providers and fiscal intermediaries on correct billing for packaged 
codes in general, and in particular for CPT codes 36540, 36600, 51701, 
and the recommended modifier, if approved.
    (9) That the Packaging Subcommittee review CPT codes 42550 
(Injection for salivary x-ray) and 38792 (Sentinel node imaging).
    (10) That CPT code 97602 (Nonselective wound care) be referred to 
the Physician Payment Group within CMS for evaluation of its bundled 
status as it relates to services provided under the OPPS and that the 
Physician Payment Group report its conclusions back to the Panel.
    In addition, during its August 2005 meeting, the APC Panel accepted 
the report of the Packaging Subcommittee and made the following 
recommendations:
    (1) No change to the CY 2005 status indicator of 76937 (N-
packaged), ultrasound guidance for vascular access, but requested that 
CMS collect available hospital claims data on that code for further 
consideration by the Packaging Subcommittee at the next available 
meeting.
    (2) No change to the CY 2005 status indicator of CPT code 38792 (N-
packaged), sentinel node identification, but requested that CMS collect 
available hospital claims data on that code for further consideration 
by the Packaging Subcommittee by the next scheduled meeting.
    (3) No change to the CY 2005 status indicator of CPT code 42550 (N-
packaged), injection for salivary x-ray.
    (4) That CMS collect additional data on CPT code 36500, venous 
catheterization for selective blood organ sampling, and the 
corresponding radiological supervision and interpretation code, 75893, 
including a list of other codes with which these codes are most 
frequently billed, for consideration by the Packaging Subcommittee.
    (5) No change to the CY 2005 status indicator of CPT code 0069T (N-
packaged), acoustic heart sound services.
    (6) That CMS collect additional data on CPT 94762, overnight pulse 
oximetry, including a list of other codes with which this code is most 
frequently billed, for consideration by the Packaging Subcommittee.
b. Responses to the APC Panel Recommendations
    For CY 2006, we proposed to maintain CPT codes 36540 (Collect blood 
venous device) and 36600 (Withdrawal of arterial blood) as packaged 
services and not adopt the APC Panel's recommendation to assign a 
modifier to the codes. We noted in our proposed rule that CPT code 
36540 was also bundled under the Medicare Physician Fee Schedule 
(MPFS), and our data demonstrated that the service was generally billed 
with other separately payable services (70 FR 42691). We also had 
relatively few single claims for CPT code 36600, compared to the 
procedure's overall frequency. Both of these codes had relatively low 
hospital resource utilization. As these procedures were almost always 
provided with other separately payable services, hospitals' payments 
for those other services included the costs of CPT codes 36540 and 
36600. With respect to the APC Panel's recommendation that the OPPS 
make payment for one of these services if the code had a modifier 
appended signifying that it was the only service provided on a day, 
there is currently no appropriate CPT modifier that could be appended 
to signal this circumstance. A new HCPCS modifier would not be 
appropriate because the packaged codes recommended by the APC Panel for 
separate payment when billed alone are CPT codes.
    We received a few public comments concerning this proposal.
    Comment: Commenters stated that CPT 36540 should not be assigned 
status indicator ``N'' because drawing blood for laboratory work from a 
venous access device requires that a registered nurse assess the 
patient and then use a sterile kit to perform the blood draw. They 
objected to having to report an E/M visit code in order to receive 
payment for the service when it is the only service provided. The 
commenters requested that CMS assign the proposed status indicator 
``Q'' for CPT code 36540 so that the OPPS could make payment when it is 
the only service provided. Similarly, at least one commenter asked that 
CMS assign the ``Q'' status indicator to CPT code 36600.
    Response: We continue to believe that the services described by CPT 
codes 36540 and 36600 are almost always provided in conjunction with 
other separately payable services in the hospital outpatient department 
setting. Our data do not support making these services separately 
payable. We proposed the new ``Q'' status indicator for services that 
may be separately payable or packaged depending on special 
circumstances for CY 2006 only for observation services. Codes assigned 
this status indicator will require the application of OCE logic to 
determine the codes' payment status and identify separate payment if 
appropriate, and then application of the same logic in our data 
processing to develop median costs for those services for future OPPS 
updates. We seek to gain some experience with such logic in the OCE and 
our data processing for observation services prior to considering any 
expansion of the use of status indicator ``Q.'' Use of the ``Q'' 
modifier for procedures that are sometimes packaged would require 
ongoing maintenance of a list of codes for which this status indicator 
may be used and their APC assignments if separately paid, as well as 
additional claims and data processing activities.
    After carefully reviewing all comments received, for CY 2006 we are 
adopting as final without modification our proposal to retain CPT codes 
36540 and 36600 as packaged services and not adopt the APC Panel's 
recommendation to assign a modifier for use when the services are 
provided with no other separately payable services on the same day.
    For CY 2006, we proposed to pay separately for CPT code 51701 
(Insertion of non-indwelling bladder catheter), and to map it to APC 
0340 (Minor Ancillary Procedures), with status indicator ``X'', and a 
median cost of $39.00. The APC Panel recommended that we pay separately 
for this code only when there are no other separately payable services 
on the claim. However, we proposed to pay separately for this code 
every time it is billed. We believed that it was more appropriate to 
make payment for each procedure, rather than increase hospitals' 
administrative burden by requiring specific coding changes to indicate 
that there were no other separately payable procedures on the claim. 
Based on our review of the data, the cost for this procedure was not 
insignificant, and the volume of single and multiple claims was modest. 
When we reviewed related codes, including CPT code 51702 (Insertion of 
temporary

[[Page 68544]]

indwelling bladder catheter, simple) and CPT code 51703 (Insertion of 
temporary indwelling bladder catheter, complicated), we noted that 
these codes also had substantial median costs and a moderate volume of 
single claims. Therefore, for CY 2006, we proposed to pay separately 
for CPT codes 51702 and 51703, mapping them to APC 0340 with a median 
cost of $39.00 and APC 0164 (Level I Urinary and Anal Procedures) with 
a median cost of $72.00, respectively. We proposed that CPT codes 
51701, 51702, and 51703 be placed on the bypass list, as discussed in 
section II.A.1.b. of this final rule with comment period.
    The comments we received supported our proposal. Accordingly, we 
are finalizing our proposal to pay separately for CPT codes 51701 and 
51702, and to assign them to APC 0340 with status indicator ``X,'' and 
a median cost of $36.00 for CY 2006. We are also finalizing our 
proposal to pay separately for CPT code 51703, and to assign it to APC 
0164 with status indicator ``T,'' and a median cost of $69.00 for CY 
2006.
    For CY 2006, we proposed to accept the APC Panel recommendation 
that CPT code 76937 (Ultrasound guidance for vascular access) remain 
packaged. We were concerned that there might be unnecessary overuse of 
this procedure if it were separately payable. In addition, we believed 
that the service would always be provided with another separately 
payable procedure, so its costs would be appropriately bundled with the 
definitive vascular access service. As stated in the CY 2005 final rule 
with comment period (69 FR 65697), CMS and the Packaging Subcommittee 
reviewed CY 2004 claims data for CPT code 76937 and determined that 
this code should remain packaged.
    We received several public comments in response to our proposal.
    Comment: A few commenters requested that some radiologic guidance 
codes, such as CPT code 76937 for ultrasound guidance for vascular 
access and CPT code 75998 for fluoroscopic guidance for central venous 
access device placement, become separately payable instead of packaged. 
The commenters stated that each guidance code could be reported with 
several separately payable procedure codes, thereby skewing the median 
costs for the procedures and not providing appropriate payment for the 
procedures when radiologic guidance was used. In addition, one 
commenter expressed concern that the codes have been packaged due to 
concern over unnecessary utilization. The commenter stated that an 
audit is a more appropriate way to prevent unnecessary utilization. In 
addition, the commenters cited a finding published in a June 2001 
report by the Agency for Healthcare Research and Quality, that use of 
ultrasound guidance reduces relative risk for complications during a 
central venous catheter insertion by 78 percent, as a reason that 
separate payment should be made for CPT code 76937. The commenters also 
stated that assignment of packaged status to these codes conflicts with 
CMS' policy as stated in its CY 2003 OPPS final rule, to pay separately 
for all radiology guidance codes.
    Response: OPPS hospital claims data reveal that out of the total 
instances of CPT code 76937 appearing on claims used for setting 
payment rates for CY 2006, CPT code 76937 was billed with four 
separately payable codes for insertion of central venous access devices 
84 percent of the time. This indicates, as might be expected, that the 
costs for CPT code 76937 are typically packaged into four CPT codes, 
36556, 36558, 36561, and 36569, the most commonly billed codes under 
the OPPS for vascular access device insertion. The data for CPT code 
75998 reveal similar patterns of utilization and packaging. Of the 
total instances of CPT code 75998 appearing on claims used for setting 
payment rates for CY 2006, code 75998 was billed with the same four 
separately payable codes for insertion of central venous access devices 
70 percent of the time. This indicates that the costs for fluoroscopic 
guidance for central venous access device placement are typically 
packaged into the same CPT codes as the costs for ultrasound guidance 
for vascular access. Of single claims used for setting payment rates 
for CY 2006 for those four CPT codes describing the insertion of 
vascular access devices, ultrasound guidance was reported from 16 to 34 
percent of the time, and fluoroscopic guidance was billed from 29 to 52 
percent of the time. For the same four CPT codes, one or more forms of 
guidance (fluoroscopic and/or ultrasound) were reported on 41 to 64 
percent of the single claims utilized for rate-setting. Thus, overall 
for these vascular access device insertion services, guidance was used 
in at least 41 percent of the single claim cases, a very significant 
proportion of the time. If anything, this percentage may underestimate 
the utilization of guidance for the insertion of vascular access 
devices, as we have been told that hospitals may not always code 
separately for packaged services for which no separate payment is made.
    Hospital claims data from CY 2004 yield a median cost of $61.00 for 
ultrasound guidance and $73.00 for fluoroscopic guidance for vascular 
access. The costs for these guidance procedures are relatively low 
compared with the CY 2006 payment rates for the separately payable 
services they most frequently accompany, which range from almost $500 
to about $1,600. We note that, in general, our payment rates for 
vascular access device services for CY 2006 are significantly greater 
than our CY 2005 payment rates for the same services because more 
specific CY 2004 data available for CPT codes that were new in CY 2004 
permitted us to reconfigure the APCs containing vascular access device 
procedures to improve clinical and resource coherence. In addition, our 
hospital claims data demonstrate that in CY 2004 guidance services were 
used frequently for the insertion of vascular access devices, and we 
have no evidence that patients lacked appropriate access to guidance 
services necessary for the safe insertion of vascular access devices in 
the hospital outpatient setting. We believe the increased CY 2006 
payment rates for insertion of vascular access devices should result in 
preservation of appropriate access to medically reasonable and 
necessary ultrasound and fluoroscopic guidance procedures used to 
facilitate the insertion of the devices.
    If we were to unpackage CPT codes 76937 and 75998, single bills 
available to develop median costs for vascular access device insertion 
services would be significantly reduced. In addition, separate payment 
for an ancillary guidance service always performed in conjunction with 
other separately payable services could lead to overutilization of the 
ancillary service, for which payment is more appropriately bundled into 
the prospectively established payment for the procedure to insert the 
vascular access device. Our statement regarding paying separately for 
radiology guidance services in the CY 2003 final rule with comment 
period was made in the context of our explanation regarding our 
decision to unpackage certain radiology guidance procedures that had 
first been packaged for CY 2002, and does not necessarily apply to all 
radiology guidance services. As for all HCPCS codes, we will continue 
to evaluate each service, including radiology guidance services, for 
its most appropriate OPPS payment status, including packaged versus 
separately payable designation, on a case-by-case basis according to 
the clinical and resource characteristics of the procedure and the 
other services with which it would likely be billed.

[[Page 68545]]

    We will share the CY 2004 and early CY 2005 hospital claims data 
concerning these vascular access guidance services with the APC Panel 
Packaging Subcommittee, as recommended by the APC Panel, for their 
review prior to the next biannual APC Panel meeting.
    After carefully considering the public comments received, we are 
adopting as final without modification our proposal to accept the APC 
Panel's recommendation that CPT code 76937 remains a packaged service 
for CY 2006. In addition, we are finalizing our proposal to continue to 
package CPT code 75998 for CY 2006.
    We refer the reader to section VIII. of this preamble on drug 
administration regarding the APC Panel's recommendation concerning CPT 
codes 90471 and 90472.
    For CY 2006, we proposed to accept the APC Panel recommendation to 
gather data and review CPT code 94762 to determine how often this code 
was billed without any other separately payable codes on the same date 
of service and whether it was performed more frequently alone in rural 
settings than other settings. During the August 2005 APC Panel meeting, 
we presented data to the APC Panel regarding CPT code 94762. CY 2004 
OPPS hospital claims data indicated at that time that CPT code 94762 
was billed only 1,145 times without any separately payable codes on the 
claim, which was only 1.5 percent of all units of code 94762 billed. 
Fifty-two percent of the 1,145 single occurrences of CPT code 94762 
were provided by rural hospitals. Fifty-two percent was particularly 
high considering that, when reviewing both single and multiple 
procedure claims, the data indicated that CPT code 94762 was provided 
by rural hospitals only 12 percent of the time. The data revealed that 
rural hospitals were more likely than urban hospitals to bill CPT code 
94762 without any separately payable codes on the claim. For purposes 
of this analysis, a rural hospital was defined as any hospital that is 
considered rural for payment purposes. In general, this included 
geographically rural providers as well as providers that were 
reclassified to rural areas for wage index classification.
    We recognize that the data used in the analysis are somewhat 
limited. Because CPT 94762 is a packaged code and does not receive 
separate payment, it is possible that an unknown number of hospitals 
chose not to submit claims to CMS when CPT code 94762 was provided 
without other separately payable services on their claims.
    Comment: Several comments requested that CMS change the status 
indicator for CPT code 94762 from ``N'' to ``X'' and that the service 
be assigned to APC 0369, (Level III Pulmonary Tests). They stated that 
because noninvasive ear or pulse oximetry for oxygen saturation, by 
continuous overnight monitoring, is a prerequisite for proving the 
medical necessity for home oxygen therapy, this is often the only 
service provided to beneficiaries during their hospital outpatient 
visits. The commenters stated that no E/M service is necessary and that 
it should be possible to receive payment for CPT code 94762 when it is 
the only service provided.
    Response: We continue to believe that the packaged status of CPT 
code 94762 is appropriate. As discussed during the August 2005 APC 
Panel meeting, our data do not support separate payment for this 
service because 98.5 percent of the time, it is provided with 
separately payable services, and is rarely the only service provided in 
hospital settings on a single date of service to a Medicare 
beneficiary.
    After carefully considering the public comments received, for CY 
2006 we are accepting the APC Panel's recommendations to retain as a 
packaged service CPT code 94762. We will share the CY 2004 and early CY 
2005 hospital claims data concerning CPT code 94762 with the APC Panel 
Packaging Subcommittee as recommended by the APC Panel, for its review 
during the next biannual APC Panel meeting.
    For CY 2006, we proposed to accept the APC Panel recommendations 
that CPT codes 77790 (Radiation handling), 94760 (Pulse oximetry for 
oxygen saturation, single determination), and 94761 (Pulse oximetry for 
oxygen saturation, multiple determinations) remain packaged. We state 
our belief that CPT code 77790 was integral to the provision of 
brachytherapy and should always be billed on the same day with 
brachytherapy sources and their loading, ensuring that the provider 
would receive appropriate payment for the radiation source handling 
bundled with the payment for the brachytherapy service. The small 
number of single claims for this code in our data verified that this 
code was rarely billed alone without other payable services on the 
claim, and those few single claims might be miscoded claims. Our data 
review of CPT codes 94760 and 94761 revealed that these codes had low 
resource utilization, and were most frequently provided with other 
services. Similar to CPT code 77790, there were many fewer single 
claims for CPT codes 94760 and 94761 than multiple procedure claims 
that included CPT codes 94760 and 94761. CPT codes 94760 and 94761 
describe services that were very commonly performed in the hospital 
outpatient setting, and unpackaging these codes would likely 
significantly decrease the number of single claims available for use in 
calculating median costs for other services.
    We did not receive any public comments concerning our proposal. 
Therefore, for CY 2006 we are finalizing, without modification, our 
proposal to accept the APC Panel's recommendations to retain as 
packaged services CPT codes 77790, 94760, and 94761.
    For CY 2006, we proposed to accept the APC Panel recommendation to 
gather data and review CPT codes 42550 (injection for salivary x-ray), 
and 38792 (sentinel node identification) with the Packaging 
Subcommittee. In the proposed rule, we stated that this would include 
analyzing single and multiple procedure claims volume and resource 
utilization data, and reviewing those studies with the Packaging 
Subcommittee. During the August 2005 APC Panel meeting, the Panel 
recommended that we continue to package CPT codes 42550 and 38792 for 
CY 2006. We believed that CPT code 42550 was appropriately packaged, as 
were other injection codes that were integral to the provision of some 
separately payable procedures. In addition, we agreed with the APC 
Panel that CPT code 38792 was appropriately packaged because we 
believed that it would almost always be provided with other separately 
payable procedures on the same date of service, such as nuclear 
medicine services or surgical procedures.
    We received a few public comments regarding our proposal to retain 
as packaged CPT code 38792.
    Comment: The commenters stated that CPT 38792 is sometimes the only 
service provided in the hospital outpatient department, and that 
separate payment under the OPPS should be allowed. They stated that 
there are instances in which the injection for the X-ray is provided in 
the hospital outpatient department, and then the beneficiary goes to a 
different setting outside the hospital for the surgery. The commenters 
requested that CMS assign the proposed ``Q'' status indicator to this 
procedure code to make separate payment possible under the OPPS.
    Response: We believe that the most appropriate course of action 
with regard to CPT code 38792 is to retain its packaged status and to 
collect

[[Page 68546]]

additional data and, as recommended by the APC Panel, to then present 
those data to the Packaging Subcommittee during our next meeting with 
them. Based on our CY 2004 claims data, we had only four single claims 
for CPT code 38792. We continue to believe that payment for the 
injection service is most appropriately packaged with other separately 
payable services provided on the same date of service, most likely 
imaging or surgical procedures.
    After carefully reviewing and considering the public comments 
received for CY 2006, we are accepting the APC Panel's recommendations 
to retain as packaged services CPT codes 38792 and 42550. Payment for 
those injection services is most appropriately bundled with the 
payments for other separately payable services provided on the same 
day.
    We will share the CY 2004 and early CY 2005 hospital claims data 
concerning CPT 38792 with the APC Panel Packaging Subcommittee as 
recommended by the APC Panel, for its review during the next biannual 
APC Panel meeting.
    As we proposed, we referred CPT code 97602 (Nonselective wound 
care) for MPFS evaluation of its bundled status as CPT code 97602 
relates to services provided under the OPPS.
    We received several public comments concerning our proposed 
treatment of CPT code 97602 for CY 2006, with assignment of status 
indicator ``A.''. Those comments and others related to wound care 
services are addressed in section III.D.5.j. of this preamble.
    During the August 2005 APC Panel meeting, the Panel recommended 
that CMS collect additional data on CPT code 36500 (Venous 
catheterization for selective blood organ sampling) and the 
corresponding radiological supervision and interpretation code, 75893. 
We received several clinical scenarios from a provider, indicating that 
CPT codes 36500 and 75893, both packaged services, were frequently 
provided on a claim without any separately payable codes. In those 
cases, the provider did not receive any payment. We believed it was 
unlikely that these two procedures would be reported without any other 
separately payable codes on the claim. Our early review of several 
clinical scenarios revealed that other separately payable codes would 
likely be provided on the same claim.
    We received one comment in response to our proposal to retain 
packaged status for CPT codes 36500 and 75893.
    Comment: One commenter requested that CMS allow separate payment 
for CPT codes 36500 and 75893 when these services are the only services 
on the claim. The commenter stated that there are many times that these 
are the only procedures performed during a hospital outpatient 
encounter.
    Response: Our data do not support separate payment for these 
procedures at this time. After considering the comment and the APC 
Panel's recommendation, we will collect and review additional data to 
determine which codes are most frequently billed on claims with CPT 
codes 36500 and 75893. We will share the CY 2004 and early CY 2005 
hospital claims data for these venous catheterization and radiological 
supervision services as recommended by the APC Panel, for its review 
prior to the next biannual APC Panel meeting.
    During the August 2005 APC Panel meeting, the Panel recommended 
that CMS maintain the packaged status of CPT 0069T (Acoustic heart 
sound recording and computer analysis only). This code is indicated as 
an add-on code to an electrocardiography service, according to the 
American Medical Association's CY 2005 CPT book. Therefore, we believed 
this code was appropriately packaged because it was integrally related 
to the provision of electrocardiography, and should never be performed 
alone.
    We received several comments regarding CPT 0069T in response to the 
code's new interim designation in the CY 2005 final rule with comment 
period and to our proposal for CY 2006.
    Comment: Several commenters requested that CMS change the status 
indicator for CPT code 0069T (Acoustic heart sound recording and 
computer analysis only). The commenters requested that CMS assign the 
procedure to APC 0099 with an ``S'' status indicator rather than ``N,'' 
as was the CY 2005 and proposed CY 2006 status indicator for code 
0069T. The commenters indicated that the test's status as a packaged 
procedure results in inequitable payment to hospitals. They stated that 
the cost of an EKG with the acoustic heart sound recording is $55, 
whereas the cost of an EKG without such recording is only $31. They 
added that because CMS has packaged the procedure, the hospital is 
underpaid by $24 for each test it performs.
    Response: It is our understanding that the acoustic heart sound 
recording and analysis is intended for a specific, targeted group of 
patients to enhance the provider's ability to diagnose heart failure. 
The technology always is performed in conjunction with an EKG and as 
such is ideal for packaging. It is up to hospitals to increase their 
charges to reflect the additional costs for those EKGs that include the 
acoustic heart sound recording. If the hospital uses the test according 
to the manufacturer's guidelines, the costs will be distributed over 
the large number of EKGs that are performed in the hospital outpatient 
department and, over time, the additional costs will be recognized in 
the OPPS rates as increased payments for other services provided on the 
same day, likely EKGs. We are accepting the Panel's recommendation that 
we maintain the packaged status of CPT code 0069T for CY 2006. We will 
review claims data as they become available for the CY 2007 OPPS 
update.
    We also received several comments that requested status indicator 
changes for other CPT codes, not previously brought before the 
Packaging Subcommittee.
    Comment: Commenters suggested that the following packaged 
procedures should be made separately payable: CPT code 96523 
(Irrigation of implanted venous access device for drug delivery systems 
(new code for CY 2006)); CPT code 76001 (Fluoroscopy, physician time 
more than one hour); CPT code 76003 (Fluoroscopic guidance for needle 
placement); CPT code 76005 (Fluoroscopic guidance and location of 
needle or catheter tip); CPT code 74328 (Endoscopic catheterization of 
the biliary ductal system, radiological supervision and 
interpretation); CPT code 74329 (Endoscopic catheterization of the 
pancreatic ductal system, radiological supervision and interpretation); 
CPT code 74330 (Combined endoscopic catheterization of the biliary and 
pancreatic ductal systems, radiological supervision and 
interpretation); HCPCS code P9612 (Catheterization for collection of 
specimen); and HCPCS code G0269 (Placement of occlusive device into 
either a venous or arterial access site, post surgical or 
interventional procedure).
    Response: We believe that the commenters' suggestions bear closer 
examination. We will not make any changes to the packaged status of 
these services at this time. Rather, we will collect data related to 
the costs and utilization of these services for presentation to the 
Packaging Subcommittee of the APC Panel. We note that the status 
indicator of CPT code 96523, a new CPT code for CY 2006, is subject to 
comment in this final rule with comment period. We will discuss with 
the Packaging Subcommittee, on an ongoing basis, packaged procedures 
for which status indicator changes have been suggested by the public. 
The ongoing process allows members some additional time to

[[Page 68547]]

consider the issues we bring to them prior to the twice yearly meetings 
where the subcommittee makes its recommendations to the full APC Panel.
    Additional issues and new data concerning the packaging status of 
codes will be shared with the APC Panel Packaging Subcommittee for its 
consideration as information becomes available. We continue to 
encourage submission of common clinical scenarios involving currently 
packaged HCPCS codes to the Packaging Subcommittee for its ongoing 
review. Additional detailed suggestions for the Packaging Subcommittee 
should be submitted to [email protected], with ``Packaging 
Subcommittee'' in the subject line.

B. Payment for Partial Hospitalization

1. Background
    Partial hospitalization is an intensive outpatient program of 
psychiatric services provided to patients as an alternative to 
inpatient psychiatric care for beneficiaries who have an acute mental 
illness. A partial hospitalization program (PHP) may be provided by a 
hospital to its outpatients or by a Medicare-certified CMHC. Section 
1833(t)(1)(B)(i) of the Act provides the Secretary with the authority 
to designate the hospital outpatient services to be covered under the 
OPPS. Section 419.21(c) of the Medicare regulations that implement this 
provision specifies that payments under the OPPS will be made for 
partial hospitalization services furnished by CMHCs. Section 
1883(t)(2)(C) of the Act requires that we establish relative payment 
weights based on median (or mean, at the election of the Secretary) 
hospital costs determined by 1996 claims data and data from the most 
recent available cost reports. Payment to providers under the OPPS for 
PHPs represents the provider's overhead costs associated with the 
program. Because a day of care is the unit that defines the structure 
and scheduling of partial hospitalization services, we established a 
per diem payment methodology for the PHP APC, effective for services 
furnished on or after August 1, 2000. For a detailed discussion, refer 
to the April 7, 2000 OPPS final rule (65 FR 18452).
2. PHP APC Update for CY 2006
    To calculate the final CY 2006 PHP per diem payment, we initially 
used the same methodology that was used to compute the CY 2005 PHP per 
diem payment. For CY 2005, the per diem amount was based on 12 months 
of hospital and CMHC PHP claims data (for services furnished from 
January 1, 2003 through December 31, 2003). We used data from all 
hospital bills reporting condition code 41, which identifies the claim 
as partial hospitalization, and all bills from CMHCs because CMHCs are 
Medicare providers only for the purpose of providing partial 
hospitalization services. We used CCRs from the most recently available 
hospital and CMHC cost reports to convert each provider's line-item 
charges as reported on bills, to estimate the provider's cost for a day 
of PHP services. Per diem costs were then computed by summing the line-
item costs on each bill and dividing by the number of days on the bill.
    In a Program Memorandum issued on January 17, 2003 (Transmittal A-
03-004), we directed fiscal intermediaries to recalculate hospital and 
CMHC CCRs using the most recently settled cost reports by April 30, 
2003. Following the initial update of CCRs, fiscal intermediaries were 
further instructed to continue to update a provider's CCR and enter 
revised CCRs into the outpatient provider specific file. Therefore, for 
CMHCs, we used CCRs from the outpatient provider specific file.
    Historically, the median per diem cost for CMHCs has greatly 
exceeded the median per diem cost for hospital-based PHPs and has 
fluctuated significantly from year to year while the median per diem 
cost for hospital-based PHPs has remained relatively constant ($200-
$225). We believe that CMHCs may have increased and decreased their 
charges in response to Medicare payment policies. As discussed in more 
detail in the next section and in the final rule establishing the CY 
2004 OPPS (68 FR 63470), we believe that some CMHCs manipulated their 
charges in order to inappropriately receive outlier payments.
    In the CY 2003 update, the difference in median per diem cost for 
CMHCs and hospital-based PHPs was so great, $685 for CMHCs and $225 for 
hospital-based PHPs, that we applied an adjustment factor of .583 to 
CMHC costs to account for the difference between ``as submitted'' and 
``final settled'' cost reports. By doing so, the CMHC median per diem 
cost was reduced to $384, resulting in a combined hospital-based and 
CMHC PHP median per diem cost of $273. As with all APCs in the OPPS, 
the median cost for each APC was scaled to be relative to the cost of a 
mid-level office visit and the conversion factor was applied. The 
resulting per diem rate for PHP for CY 2003 was $240.03.
    In the CY 2004 OPPS update, the median per diem cost for CMHCs grew 
to $1038, while the median per diem cost for hospital-based PHPs was 
again $225. After applying the .583 adjustment factor to the median 
CMHC per diem cost, the median CMHC per diem cost was $605. Since the 
CMHC median per diem cost exceeded the average per diem cost of 
inpatient psychiatric care, we proposed a per diem rate for CY 2004 
based solely on hospital-based PHP data. The proposed PHP per diem for 
CY 2004, after scaling, was $208.95. However, by the time we published 
the OPPS final rule with comment period for CY 2004, we had received 
updated CCRs for CMHCs. Using the updated CCRs significantly lowered 
the CMHC median per diem cost to $440. As a result, we determined that 
the higher per diem cost for CMHCs was not due to the difference 
between ``as submitted'' and ``final settled'' cost reports, but were 
the result of excessive increases in charges which may have been done 
in order to receive higher outlier payments. Therefore, in calculating 
the PHP median per diem cost for CY 2004, we did not apply the .583 
adjustment factor to CMHC costs to compute the PHP APC. Using the 
updated CCRs for CMHCs, the combined hospital-based and CMHC median per 
diem cost for PHP was $303. After scaling, we established the CY 2004 
PHP APC of $286.82.
    Then, in the CY 2005 OPPS update, the CMHC median per diem cost was 
$310 and the hospital-based PHP median per diem cost was $215. No 
adjustments were determined to be necessary and, after scaling, the 
combined median per diem cost of $289 was reduced to $281.33. We 
believed that the reduction in the CMHC median per diem cost indicated 
that the use of updated CCRs had accounted for the previous increase in 
CMHC charges, and represented a more accurate estimate of CMHC per diem 
costs for PHP.
    As discussed in the proposed rule (70 FR 42693), for CY 2006, we 
analyzed 12 months of data for hospital and CMHC PHP claims for 
services furnished between January 1, 2004, and December 31, 2004. The 
data indicated that the median per diem cost for CMHCs had dropped to 
$143, while the median per diem cost for hospital-based PHPs was $209. 
It appears that CMHCs significantly reduced their charges in CY 2004 
compared to CY 2003. The average charge per day for CMHCs in CY 2003 
was $1,184 and in CY 2004, the CMHC average charge per day dropped to 
$765. We have determined that a combination of lower charges and 
slightly lower CCRs for CMHCs resulted in a significant decline in the 
CMHC median per diem cost.

[[Page 68548]]

    Following the methodology used for the CY 2005 OPPS update, the 
combined hospital-based and CMHC median per diem cost would be $149, a 
decrease of 48 percent compared to the CY 2005 combined median per diem 
amount. We believed that after scaling this amount to the cost of a 
mid-level office visit, the resulting APC rate would be too low to 
cover the per diem cost for all PHPs.
    As stated in the proposed rule (70 FR 42693), we considered three 
alternatives to our update methodology for the PHP APC for CY 2006 that 
would mitigate this drastic reduction in payment for PHP. One 
alternative was to base the PHP APC on hospital-based PHP data alone. 
The median per diem cost of hospital-based PHPs has remained in the 
$200-225 range over the last 5 years, while the median per diem cost 
for CMHC PHPs has fluctuated significantly from a high of $1,037 to a 
low of $143. Under this alternative, we would have used $209, the 
median per diem cost for hospital-based PHPs during CY 2004 to 
establish the PHP APC for CY 2006. However, we believed using this 
amount would also result in an unacceptable drop in Medicare payments 
for all PHPs in CY 2006 compared to payments in CY 2005.
    The second alternative we considered was to apply a different 
trimming methodology to CMHC costs in an effort to eliminate the effect 
of data for those CMHCs that appeared to have excessively increased 
their charges in order to receive outlier payments. We compared CMHC 
per diem costs in CY 2003 to CMHC per diem costs in CY 2004 and 
determined the percentage change. Initially, we trimmed CMHCs claims 
where the CMHC's per diem costs changed by 50 percent or more from CY 
2003 to CY 2004. After combining the remaining CMHC claims with the 
hospital-based PHP claims, we calculated a median per diem cost of 
$160.75. We then analyzed the resulting median per diem cost if we 
trimmed CMHC claims where the difference in CMHC per diem costs from 
2003 to 2004 was 25 percent. This trimming approach resulted in a 
combined CMHC and hospital-based PHP median per diem cost of $176. We 
also trimmed the CMHC claims from the CY 2003 data to see how trimming 
aberrant data would have affected the combined hospital/CMHC median per 
diem cost. We found that trimming the claims from the CMHCs with a 25 
percent difference in per diem cost from CY 2003 to CY 2004 reduced the 
$289 median per diem cost to $218.
    We believe it is important to eliminate aberrant data and we 
believe trimming certain CMHC data will provide an incentive for CMHCs 
to stabilize their charges so that we can use their data in future 
updates of the PHP APC. However, we believe that the trimming methods 
described above will also result in an unacceptably large decrease in 
payment. In addition, the trimming method we used was based on 
percentage change in cost per day, and may not have identified all the 
CMHCs that may have manipulated their charges in order to receive more 
outlier payments, for example, CMHCs with high charges and no reduction 
in charges compared to CY 2003.
    Although we prefer to use both CMHC and hospital data to establish 
the PHP APC, as stated in the proposed rule (70 FR 42693) we continue 
to be concerned about the volatility of the CMHC data. The analyses we 
conducted for the proposed rule seem to indicate that eliminating 
aberrant CMHC data results in a median per diem cost more in line with 
hospital data. We stated in the proposed rule that we would continue to 
analyze the CMHC data in developing payment rates, and cautioned that 
we may use only hospital data in the future if the data continue to be 
unstable.
    In the proposed rule, we stated that we considered a third 
alternative that would lessen the PHP payment reduction for CY 2006, 
yet provide an adequate payment amount to promote access to the partial 
hospitalization benefit for Medicare beneficiaries (70 FR 42694). Using 
this approach, for CY 2006, we proposed to apply a 15-percent reduction 
in the combined hospital-based and CMHC median per diem cost that was 
used to establish the CY 2005 PHP APC. We scaled that amount relative 
to the cost of a mid-level office visit to establish the PHP APC for CY 
2006. We believed a reduction in the CY 2005 median per diem cost would 
strike an appropriate balance between using the best available data and 
providing adequate payment for a program that often spans 5-6 hours a 
day. We believed 15 percent was an appropriate reduction because it 
recognizes decreases in median per diem costs in both the hospital data 
and the CMHC data, and also reduces the risk of any adverse impact on 
access to these services that might result from a large single-year 
rate reduction. However, we proposed that the reduction in payments for 
PHP be a transitional measure, and proposed to continue to monitor CMHC 
costs and charges for these services and work with CMHCs to improve 
their reporting so that payments can be calculated based on better 
empirical data, consistent with the approach we have used to calculate 
payments in other areas of the OPPS.
    We received 58 public comments in response to this proposal. A 
summary of the comments is provided below along with our responses.
    Comment: In general, the commenters expressed concern that a 
reduction in the PHP rate of 15 percent would lead to the closure of 
many PHPs and that limited access to this crucial service would result 
in more costly inpatient hospital care as the only alternative. CMHCs 
commented that their costs are higher than hospitals', with most in the 
$300 to $400 range. Another commenter indicated that a per diem rate of 
$300 to $350 was more appropriate than our proposed amount.
    A few commenters also suggested alternatives such as including 
prior years' CMHC data trended forward based on medical inflation, 
using a rolling-average or maintaining the CY 2005 payment rate for PHP 
services furnished in CY 2006.
    Response: For the final rule, we analyzed 12 months of more current 
data for hospital and CMHC PHP claims for services furnished between 
January 1, 2004 and December 31, 2004. This claims data is more current 
in that it includes claims paid through June 30, 2005. We also used the 
most currently available cost-to-charge ratios to estimate costs. Using 
this updated data, we recreated the analysis performed for this year's 
proposed rule to determine if the significant factors we used in 
determining the proposed PHP rate had changed. The median per diem cost 
for CMHCs increased slightly to $154, while the median per diem cost 
for hospital-based PHPs decreased slightly to $201. The CY 2004 average 
charge per day for CMHCs was $760 similar to the figure noted in the 
proposed rule ($765) but still significantly lower than what is noted 
for CY 2003 ($1,184). We continue to believe that a combination of 
reduced charges and slightly lower CCRs for CMHCs resulted in a 
significant decline in the CMHC median per diem cost between CY 2003 
and CY 2004.
    Following the methodology used for the CY 2005 OPPS update, the 
combined hospital-based and CMHC median per diem cost would be $161, a 
decrease of 44 percent compared to the CY 2005 combined median per diem 
amount. While this figure is somewhat higher than the $149 combined 
median in the proposed rule, we believe that this amount is still too 
low to cover the cost for all PHPs.
    As we did in the proposed rule, we again considered three 
alternatives to our update methodology for the PHP

[[Page 68549]]

APC for CY 2006 that would mitigate the payment differences for PHP 
services. The first alternative was to base the PHP APC on hospital-
based PHP data alone. Using the most recent years available data, the 
median per diem cost of hospital-based PHPs for CY 2004 is $201, 
somewhat less than the $209 median per diem cost of hospital-based PHP 
using the proposed rule CY 2004 data. We continue to believe that using 
$201 would be too low for all PHPs in CY 2006. However, we do believe 
the decrease from $209 to $201 from the proposed rule to this final 
rule with comment continues the trend in lower per diem costs for 
hospital-based PHPs.
    The second alternative we considered was to apply the same trimming 
methodology noted in the proposed rule to CMHC costs in an effort to 
eliminate the effect of data for those CMHCs that appeared to have 
excessively increased their charges in order to receive outlier 
payments. Again, using the most recent available data, we compared CMHC 
per diem costs in CY 2003 to CMHC per diem cost in CY 2004 and 
determined the percentage change. Initially, we trimmed CMHC claims 
where the CMHC's per diem costs changed by 50 percent or more from CY 
2003 to CY 2004. After combining the remaining CMHC claims with the 
hospital-based PHP claims, we calculated a median per diem cost of 
$165, slightly more than noted in the proposed rule. Again, this 
approach still produced a per diem cost we believe is too low. We then 
trimmed CMHC claims where the difference in CMHC per diem costs from 
2003 to 2004 were 25 percent or more. This trimming variant produced a 
CMHC median per diem cost of $172 for CY 2004.
    We continue to believe that trimming certain aberrant CMHC data 
will provide an incentive for CMHCs to stabilize their charges so that 
we can use their data in future updates of the PHP APC. However, the 
two trimming methods described above produce median per diem costs that 
we believe are too low for the CY 2006 PHP APC rate.
    The CY 2004 claims data coincides with the effective date of the 
separate CMHC outlier threshold policy which became effective January 
1, 2004. We believe that this policy may have, in part, contributed to 
the rapid decreases in CMHC's per diem charges in CY 2004. If so, we 
may see charges stabilize in the CY 2005 claims data which would enable 
us to use the CMHC data to compute the CY 2007 rate.
    We proposed a 15 percent reduction to the combined hospital-based 
and CMHC median per diem cost for CY 2006. We have conducted further 
analysis of more complete CY 2004 claims data combined with more 
recently available cost-to-charge ratios. The newer data continue to 
produce a combined hospital-based and CMHC median per diem cost that is 
an unacceptable decrease from CY 2005 PHP APC rate. We continue to 
believe that 15 percent is an appropriate reduction because it 
recognizes decreases in median per diem costs in the hospital data and 
the CMHC data, and also reduces the risk of adverse impact on access to 
these services that might result from a large single-year rate 
reduction.
    To apply this methodology, we reduce $289 (the CY 2005 combined 
hospital-based and CMHC median per diem cost) by 15 percent, resulting 
in a combined median per diem cost of $245.65. After scaling, the 
resulting APC final rate for PHP of $246.04 for CY 2006, of which 
$49.21 is the beneficiary's coinsurance.
    Comment: A few commenters stated that CMHC facility costs increased 
in virtually every area including salaries, benefits, supplies, 
insurance, dietary support, transportation, communications and 
administrative support and that they experienced overall increases in 
expenses of more than 5 percent in most areas. These commenters 
requested that CMS increase the per diem rate paid for PHP services 
consistent with the inflation rate for the medical industry. Another 
commenter suggested we use inpatient costs per day as the basis for the 
PHP median per diem cost. This commenter suggested that CMS develop an 
adjustment factor relative to the inpatient psychiatric facility 
prospective payment system per diem base rate to form the basis for the 
PHP per diem rate.
    Response: The statute does not provide for the update strategies 
suggested by these commenters and is specific as to the update 
methdology.
    Comment: A few commenters indicated that the methodology used to 
compute the PHP APC distorts per diem costs because the claims include 
non-paid days.
    Response: If a provider has charges on a bill for which they do not 
receive payment, this will be reflected in that provider's cost-to-
charge ratio. This lower cost-to-charge ratio will be applied to the 
larger charges and will result in the appropriate cost per diem.
    Comment: A few commenters stated that they are unable to collect 
coinsurance from their patients, that Medicaid cuts have made it more 
difficult to stay viable, and that the proposed rate reduction would 
cause PHP programs to close.
    Response: The Medicare bad debt policy and Medicaid payment 
policies are beyond the scope of the July 25, 2005 OPPS proposed rule. 
We note the bad debt policy can be located in the Medicare Provider 
Reimbursement Manual, Pub. 15, Chapter 3 or through the following link: 
http://www.cms.hhs.gov/manuals/pub151/PUB_15_1.asp.
    Comment: With respect to the methodology used to establish the PHP 
APC amount, commenters expressed concern that data from settled cost 
reports fails to include costs reversed on appeal and that there are 
inherent problems in using claims data from a different time period 
like available cost-to-charge ratios on settled cost reports.
    These commenters also stated that this can only artificially lower 
the actual median costs. The commenters claims that when cost reports 
are settled, generally 2 years or more after the actual year of 
services, they have operated on actual revenues of 80 percent of the 
per diem.
    Response: We use the best available data in computing the APCs. 
With respect to PHP services, we specifically issued a Program 
Memorandum on January 17, 2003 directing FIs to update the cost-to-
charge ratios on an on-going basis whenever a more recent full year 
cost report is available. In this way, we hoped to minimize the time 
lag between the cost-to-charge ratios and claims data.
    Comment: One commenter related that administrative costs for CMHCs 
continue to be a major impediment to operating PHPs for Medicare 
beneficiaries. Medicare does not cover transportation to and from 
programs and does not cover meals. Almost all programs offer 
transportation because in most cases Medicare beneficiaries with 
serious mental illnesses would not be able to access these programs 
without the transportation.
    Response: The services that are covered as part of a PHP are 
specified in section 1861(ff) of the Act. Meals and transportation are 
specifically excluded under section 1861(ff)(2)(I) of the Act.
    Comment: Several commenters simply summed the payment rates for 
three Group Therapy Sessions (APC 0325) and one Extended Individual 
Therapy Session (APC 0323) and requested that amount as the minimum for 
a day of PHP. These same commenters then questioned why the per diem 
amount is considerably less than the combined cost of these services.
    Response: We do not believe this is an appropriate comparison. It 
is important to note that the APC services cited by

[[Page 68550]]

the commenter (APC 0325 and APC 0323) are not PHP services, but rather 
single outpatient therapeutic sessions. PHP is a complete program of 
services with efficiencies and economies of scale provided in contrast 
to individual psychotherapy services. We also believe that the 
commenters used only the median cost from single bills, for example, 
where group psychotherapy was the only service furnished. As stated 
earlier, we used data from PHP programs (both hospitals and CMHCs) to 
determine the median cost of a day of PHP. PHP is a complete program of 
services with efficiencies and economies of scale provided in contrast 
to individual psychotherapy services.
    The PHP APC (0033) reflects the program of services provided in 
that it consists of the cost of all services provided each day and does 
not reflect a sole service. Although we require that each PHP day 
include a psychotherapy service, we do not specify the specific mix of 
other services provided and have focused our analysis on the cost per 
day rather than the cost of each service furnished within the day.
    Comment: One commenter requested that the same provisions given to 
rural hospital outpatient departments also be given to rural CMHCs.
    Response: We believe the commenter may be referring to the 
statutory hold harmless provisions. Section 1833(t)(7)(D) of the Act 
authorizes such payments, on a permanent basis, for children's 
hospitals and cancer hospitals and, through CY 2005, for rural 
hospitals having 100 or fewer beds and sole community hospitals in 
rural areas. Section 1866(t)(7)(D) of the Act does not authorize hold 
harmless payments to CMHC providers.
    Comment: We received several comments from CMHCs stating that their 
costs are higher as hospitals can share and spread their costs to other 
departments. These commenters also indicated that the CMHC patient 
acuity level is more intense than the hospital patients as hospital 
outpatient departments need only provide 1 or 2 therapies, yet still 
receive the full per diem.
    Response: By definition, a PHP bill must have at least 3 partial 
hospitalization HCPCS codes for each day of service, one of which must 
be a psychotherapy HCPCS code (other than brief psychotherapy). This 
requirement is applied to all partial hospitalization bills, whether 
provided in an outpatient hospital department or in a CMHC. Therefore, 
hospital outpatient departments must provide the same level of program 
intensity and must provide for the same level of patient acuity as 
CMHCs in order to receive payment.
    Comment: A few commenters requested that CMS revise the CMHC cost 
report form (CMS-2088) to include a field which allows the CMHC to 
report its Medicare PHP days. They also recommended that we revise 
settlement worksheet D on the CMS-2088 to include new fields that 
display the Medicare PHP cost per day and separate PHP reimbursement 
between outlier and non-outlier reimbursement (since the current cost 
report form commingles both types of reimbursement). Finally, the 
commenters recommended that we revise the CMHC Provider Statistical & 
Reimbursement Report Type: 76P to include a field which reports actual 
paid Medicare PHP days.
    Response: We appreciate the commenters suggestions for improving 
the Medicare cost report for CMHCs. We plan to explore these and other 
modifications to improve CMHC cost reporting so that we may use CMHC 
data in future ratesetting.
    Comment: A few commenters stated that hospitals that offer partial 
hospitalization services should not be penalized for the instability in 
data reporting that stems from CMHCs.
    Response: We believe hospitals-based PHPs have actually benefited 
from our combining hospital and CMHC data to compute the PHP APC rate. 
The median calculated from hospital outpatient department PHPs has 
consistently been far less then the median amount that is computed for 
CMHCs.
    Comment: One commenter who represents CMHCs expressed frustration 
over several unsuccessful attempts at becoming a member of the APC 
panel.
    Response: The qualifications and selection of the APC Panel members 
is outside the scope of this regulation. We refer the commenter to 
http://www.cms.hhs.gov/faca/apc/default.asp for information on the APC 
panel.
3. Separate Threshold for Outlier Payments to CMHCs
    In the November 7, 2003 final rule with comment period (68 FR 
63469), we indicated that, given the difference in PHP charges between 
hospitals and CMHCs, we did not believe it was appropriate to make 
outlier payments to CMHCs using the outlier percentage target amount 
and threshold established for hospitals. There was a significant 
difference in the amount of outlier payments made to hospitals and 
CMHCs for PHP. Further analysis indicated the use of OPPS outlier 
payments for CMHCs was contrary to the intent of the general OPPS 
outlier policy. Therefore, for CYs 2004 and 2005, we established a 
separate outlier threshold for CMHCs. We designated a portion of the 
estimated 2.0 percent outlier target amount specifically for CMHCs, 
consistent with the percentage of projected payments to CMHCs under the 
OPPS in each of those years, excluding outlier payments.
    As stated in the November 15, 2004 final rule with comment period, 
CMHCs were projected to receive 0.6 percent of the estimated total OPPS 
payments in CY 2005 (69 FR 65848). The CY 2005 CMHC outlier threshold 
is met when the cost of furnishing services by a CMHC exceeds 3.5 times 
the PHP APC payment amount. The current outlier payment percentage is 
50 percent of the amount of costs in excess of the threshold.
    CMS and the Office of the Inspector General are continuing to 
monitor the excessive outlier payments to CMHCs. As previously stated, 
we used CY 2004 claims data to calculate the CY 2006 per diem payment. 
These data show the effect of the separate outlier threshold for CMHCs 
that was effective January 1, 2004. During CY 2004, the separate 
outlier threshold for CMHCs resulted in $1.8 million in outlier 
payments to CMHCs, within the 2.0 percent of total OPPS payments 
identified for CMHCs. In contrast, for CY 2003, more than $30 million 
was paid to CMHCs in outlier payments. We believe this difference in 
outlier payments indicates that the separate outlier threshold for 
CMHCs has been successful in keeping outlier payments to CMHCs in line 
with the percentage of OPPS payments made to CMHCs.
    In the proposed rule, CMHCs were projected to receive 0.6 percent 
of the estimated total OPPS payments in CY 2006. As noted in section 
II.H. of this preamble, for CY 2006, we proposed to set the target for 
hospital outpatient outlier payments at 1.0 percent of total OPPS 
payments. We also proposed allocate a portion of that 1.0 percent, 0.6 
percent (or 0.006 percent of total OPPS payments), to CMHCs for PHP 
services. As discussed in section II.G. below, we proposed to set a 
dollar threshold in addition to an APC multiplier threshold for 
hospital OPPS outlier payments. However, because PHP is the only APC 
for which CMHCs may receive payment under the OPPS, we would not expect 
to redirect outlier payments by imposing a dollar threshold. Therefore, 
we did not set a dollar threshold for CMHC outliers. We proposed to set 
the outlier threshold for CMHCs for CY 2006 at 3.45 percent times the 
APC payment amount and the CY 2006 outlier payment percentage 
applicable to costs in excess of the threshold at 50 percent. As we did 
with the hospital

[[Page 68551]]

outlier threshold, we used hospital charge inflation factor to inflate 
charges to CY 2006.
    We received no comments on our proposal. As discussed in section 
II.H, using more recent data for this final rule, we set the target for 
hospital outpatient outlier payments at 1.0 percent of total OPPS 
payments. We also allocate a portion of that 1.0 percent, 0.6 percent 
(or 0.006 percent of total OPPS payments), to CMHCs for PHP services. 
As we proposed, we set a dollar threshold in addition to an APC 
multiplier threshold for hospital OPPS outlier payments. However, 
because PHP is the only APC for which CMHCs may receive payment under 
the OPPS, we would not expect to redirect outlier payments by imposing 
a dollar threshold. Therefore, we did not set a dollar threshold for 
CMHC outliers. For CY 2006, we set the outlier threshold for CMHCs at 
3.40 percent times the APC payment amount and the CY 2006 outlier 
payment percentage applicable to costs in excess of the threshold at 50 
percent. As we did with the hospital outlier threshold, we used 
hospital charge inflation factor to inflate charges to CY 2006.

C. Conversion Factor Update for CY 2006

    Section 1833(t)(3)(C)(ii) of the Act requires us to update the 
conversion factor used to determine payment rates under the OPPS on an 
annual basis. Section 1833(t)(3)(C)(iv) of the Act provides that, for 
CY 2006, the update is equal to the hospital inpatient market basket 
percentage increase applicable to hospital discharges under section 
1886(b)(3)(B)(iii) of the Act.
    The forecast of the hospital market basket increase for FY 2006 
published in the IPPS final rule on August 12, 2005, is 3.7 percent (70 
FR 47392), rather than the 3.2 percent forecast published in the IPPS 
proposed rule on May 4, 2005 (70 FR 23384) and referenced in the CY 
2006 OPPS proposed rule. To set the OPPS proposed conversion factor for 
CY 2006, we increased the CY 2005 conversion factor of $56.983, as 
specified in the November 15, 2004 final rule with comment period (69 
FR 65842), by 3.7 percent.
    In accordance with section 1833(t)(9)(B) of the Act, we further 
adjusted the conversion factor for CY 2005 to ensure that the revisions 
we are making to our updates by means of the wage index are made on a 
budget neutral basis. We calculated a budget neutrality factor of 
1.001485209 for wage index changes by comparing total payments from our 
simulation model using the FY 2006 IPPS final wage index values to 
those payments using the current (FY 2005) IPPS wage index values. In 
addition, to accommodate the rural adjustment discussed in section 
II.G. of this preamble, we calculated a budget neutrality factor of 
0.99614506 by comparing payments with the rural adjustment to those 
without. For CY 2006, we estimate that allowed pass-through spending 
will equal approximately $45.5 million, which represents 0.17 percent 
of total OPPS projected spending for CY 2006. The conversion factor is 
also adjusted by the difference between the 2.0 percent pass-through 
set-aside and the 0.17 percent estimate of pass-through spending. 
Finally, decreasing payments for outliers to 1.0 percent of total 
payments, as proposed, returned 1.0 percent to the conversion factor.
    The market basket increase update factor of 3.7 percent for CY 
2006, the required wage index budget neutrality adjustment of 
approximately 1.001485209, the return of 1.0 percent in total payments 
from a reduced outlier target, the return of 1.83 percent of the pass-
through set-aside, and the adjustment for the rural payment adjustment 
of 0.99614506 result in a conversion factor for CY 2006 of $59.511.
    We received several public comments on the proposed conversion 
factor update for CY 2006.
    Comment: Several commenters requested CMS to revise the market 
basket update included in the final OPPS rule to include a 3.7 percent 
market basket update, consistent with the IPPS final rule.
    Response: We have used a 3.7 percent market basket increase update 
factor in our conversion factor calculation for the CY 2006 OPPS 
update.
    Comment: One commenter suggested that CMS increase total payments 
to hospitals by 3.2 percent and not the 1.9 percent total payment 
increase indicated in the regulatory impact analysis section of the 
proposed rule.
    Response: The 1.9 percent reported in column 6 of Table 33 in the 
regulatory analysis section of the proposed rule is not the 3.2 percent 
that appears in column 5 because it models all payments to hospitals. 
The 1.9 percent reflects the loss of payment for drugs outside of OPPS 
authorized by Pub. L. 108-173, that expires in CY 2006. The statute 
requires CMS to take into account, for purposes of establishing a 
budget neutral CY 2006 update, the additional costs associated with 
payments for specified covered outpatient drugs. The regulatory impact 
analysis accompanying this final rule with comment period demonstrates 
a similar loss. The market basket increase update factor of 3.7 percent 
is offset by the drug payments in CY 2006 that were made outside the 
system in CY 2005, to result in an overall increase of 2.2 percent.
    Accordingly, we are finalizing the conversion factor update for CY 
2006 of $59.511.

D. Wage Index Changes for CY 2006

    Section 1833(t)(2)(D) of the Act requires the Secretary to 
determine a wage adjustment factor to adjust, for geographic wage 
differences, the portion of the OPPS payment rate and the copayment 
standardized amount attributable to labor and labor-related cost. This 
adjustment must be made in a budget neutral manner. As we have done in 
prior years, we proposed to adopt the IPPS wage indices and extend 
these wage indices to TEFRA hospitals that participate in the OPPS but 
not the IPPS.
    As discussed in section II.A. of this preamble, we standardize 60 
percent of estimated costs (labor-related costs) for geographic area 
wage variation using the IPPS wage indices that are calculated prior to 
adjustments for reclassification to remove the effects of differences 
in area wage levels in determining the OPPS payment rate and the 
copayment standardized amount.
    As published in the original OPPS April 7, 2000 final rule (65 FR 
18545), OPPS has consistently adopted the final IPPS wage indices as 
the wage indices for adjusting the OPPS standard payment amounts for 
labor market differences. As initially explained in the September 8, 
1998 OPPS proposed rule, we believed and continue to believe that using 
the IPPS wage index as the source of an adjustment factor for OPPS is 
reasonable and logical, given the inseparable, subordinate status of 
the hospital outpatient within the hospital overall. In accordance with 
section 1886(d)(3)(E) of the Act, the IPPS wage index is updated 
annually. In the CY 2006 OPPS proposed rule, in accordance with our 
established policy, we proposed to use the FY 2006 final version of 
these wage indices with any corrections posted on the CMS Web site, to 
determine the wage adjustments for the OPPS payment rate and copayment 
standardized amount that we will publish in our final rule for CY 2006.
    We note that the FY 2006 IPPS wage indices continue to reflect a 
number of changes implemented in FY 2005 as a result of the new OMB 
standards for defining geographic statistical areas, the implementation 
of an occupational mix adjustment as part of the wage index,

[[Page 68552]]

and new wage adjustments provided for under Pub. L. 108-173. The 
following is a brief summary of the proposed changes in the FY 2005 
IPPS wage indices, continued for FY 2006, and any adjustments that we 
are applying to the OPPS for CY 2006. We refer the reader to the FY 
2006 IPPS final rule (70 FR 47363 through 47387, August 12, 2005) for a 
detailed discussion of the changes to the wage indices. In this final 
rule with comment period, we are not reprinting the FY 2006 IPPS wage 
indices referenced in the discussion below, with the exception of the 
out-migration wage adjustment table (Addendum L of this final rule with 
comment period). We refer readers to the CMS Web site for the OPPS at 
http://www.cms.hhs.gog/providers/hopps. At this Web site, the reader 
will find a link to the FY 2006 IPPS wage indices tables and any 
corrections made to them.
    1. The continued use of the new Core Based Statistical Areas 
(CBSAs) issued by the Office of Management and Budget (OMB) as revised 
standards for designating geographical statistical areas based on the 
2000 Census data, to define labor market areas for hospitals for 
purposes of the IPPS wage index. The OMB revised standards were 
published in the Federal Register on December 27, 2000 (65 FR 82235), 
and OMB announced the new CBSAs on June 6, 2003, through an OMB 
bulletin. In the FY 2005 hospital IPPS final rule, CMS adopted the new 
OMB definitions for wage index purposes. In the FY 2006 IPPS final 
rule, we again stated that hospitals located in MSAs will be urban and 
hospitals that are located in Micropolitan Areas or Outside CBSAs will 
be rural. To help alleviate the decreased payments for previously urban 
hospitals that became rural under the new MSA definitions, we allowed 
these hospitals to maintain their assignment to the MSA where they 
previously had been located for the 3-year period from FY 2005 through 
FY 2007. To be consistent with IPPS, we will continue the policy we 
began in CY 2005 of applying the same criterion to TEFRA hospitals paid 
under the OPPS but not under the IPPS and to maintain that MSA 
designation for determining a wage index for the specified period. 
Beginning in FY 2008, these hospitals will receive their statewide 
rural wage index, although those hospitals paid under the IPPS will be 
eligible to apply for reclassification. In addition to this ``hold 
harmless'' provision, the FY 2005 IPPS final rule implemented a 1-year 
transition for hospitals that experienced a decrease in their FY 2005 
wage index compared to their FY 2004 wage index due solely to the 
changes in labor market definitions. These hospitals received 50 
percent of their wage indices based on the new MSA configurations and 
50 percent based on the FY 2004 labor market areas. In the FY 2006 IPPS 
final rule, we discussed the cessation of the 1-year transition and 
announced that hospitals will receive 100 percent of their wage index 
based upon the new CBSA configurations beginning in FY 2006. Again, for 
the sake of consistency with IPPS, TEFRA hospitals will receive 100 
percent of their wage index based upon the new CBSA configurations 
beginning in CY 2006.
    2. We are applying the occupational mix adjustment for FY 2006 IPPS 
to 10 percent of the average hourly wage and leave 90 percent of the 
average hourly wage unadjusted for occupational mix. As noted in the FY 
2006 IPPS final rule, we are, essentially, using the same CMS Wage 
Index Occupational Mix Survey and Bureau of Labor Statistics data to 
calculate the adjustment. Because there are no significant differences 
between the FY 2005 and the FY 2006 occupational mix survey data and 
results, we believe it is appropriate to adopt the IPPS rule and apply 
the same occupational mix adjustment to 10 percent of the FY 2006 wage 
index.
    3. The reclassifications of hospitals to geographic areas for 
purposes of the wage index. For purposes of the OPPS wage index, we are 
adopting all of the IPPS reclassifications for FY 2006, including 
reclassifications that the Medicare Geographic Classification Review 
Board (MGCRB) approved under the one-time appeal process for hospitals 
under section 508 of Pub. L. 108-173. We note that section 508 
reclassifications will terminate March 31, 2007.
    4. We are continuing to apply an adjustment to the wage index to 
reflect the ``out-migration'' of hospital employees who reside in one 
county but commute to work in a different county with a higher wage 
index, in accordance with section 505 of Pub. L. 108-173 (FY 2006 IPPS 
final rule (70 FR 47383 and 47384, August 12, 2005)). Hospitals paid 
under the IPPS located in the qualifying section 505 ``out-migration'' 
counties receive a wage index increase unless they have already been 
reclassified under section 1886(d)(10) of the Act, redesignated under 
section 1886(d)(8)(B) of the Act, or reclassified under section 508. As 
discussed in the FY 2006 IPPS final rule, we finalized our policy that 
reclassified hospitals not receive the out-migration adjustment unless 
they waive their reclassified status. For OPPS purposes, we are 
continuing our policy from CY 2005 to apply the same 505 criterion to 
TEFRA hospitals paid under the OPPS but not paid under the IPPS. 
Because TEFRA hospitals cannot reclassify under sections 1886(d)(8) and 
1886(d)(10) of the Act or section 508, they are eligible for the out-
migration adjustment. Therefore, TEFRA hospitals located in a 
qualifying section 505 county will also receive an increase to their 
wage index under OPPS. Addendum L to this final rule with comment 
period lists all hospitals that will receive an out-migration 
adjustment to their wage index in 2006 including TEFRA hospitals that 
will receive an out-migration adjustment under this OPPS final rule 
with comment period. (See also Table 4J of the Addendum to the FY 2006 
IPPS final rule).
    We used the final FY 2006 IPPS indices to adjust the payment rates 
and coinsurance amounts that are included in this OPPS final rule with 
comment period for CY 2006. With the exception of reclassifications 
resulting from the implementation of the one-time appeal process under 
section 508 of Pub. L. 108-173, all changes to the wage index resulting 
from geographic labor market area reclassifications or other 
adjustments must be incorporated in a budget neutral manner. 
Accordingly, in calculating the OPPS budget neutrality estimates for CY 
2006, we have included the wage index changes that result from MGCRB 
reclassifications, implementation of section 505 of Pub. L. 108-173, 
and other refinements made in the FY 2006 IPPS final rule, such as the 
hold harmless provision for hospitals changing status from urban to 
rural under the new CBSA geographic statistical area definitions. 
However, section 508 set aside $900 million to implement the section 
508 reclassifications. We considered the increased Medicare payments 
that the section 508 reclassifications would create in both the IPPS 
and OPPS when we determined the impact of the one-time appeal process. 
Because the increased OPPS payments already counted against the $900 
million limit, we did not consider these reclassifications when we 
calculated the OPPS budget neutrality adjustment.
    We received two public comments on the application of the FY 2006 
IPPS wage indices under the OPPS.
    Comment: One commenter supported our proposal to extend the IPPS 
wage indices to OPPS because this simplifies payment for hospitals.
    One commenter suggested that OPPS use different labor share 
percentages for hospitals with a wage index below 1.0

[[Page 68553]]

and hospitals with a wage index above 1.0. The commenter specifically 
cited the requirement in Pub. L. 108-173 that IPPS use a larger labor 
share percentage for hospitals with wage indexes over 1.0 and a 
relatively smaller labor share percentage for hospitals with wage 
indexes less than 1.0. This commenter specifically requested that CMS 
use a labor share of 50 percent for hospitals with wage indexes less 
than 1.0.
    Response: Section 403 of Pub. L. 108-173 requires that IPPS 
hospitals be paid using a labor-related share of 62 percent unless this 
labor-related share would result in lower payments than would otherwise 
be made. Unlike IPPS, OPPS has no mandate to reduce the labor-related 
share. The OPPS labor-related share was determined through regression 
analyses conducted for the initial OPPS proposed rule (63 FR 47581, 
September 8, 1998). Those analyses identified 60 percent as the 
appropriate labor share for outpatient services. We confirmed that this 
labor-related share is still appropriate during our regression analysis 
for the payment adjustment for rural hospitals in this final rule. In 
these regression equations, the coefficient of the hospital wage index 
is the estimated percentage change in unit costs attributable to a 1 
unit percent increase in the wage index, which is an estimate of the 
share of outpatient unit costs attributable to labor. Both Table 5 and 
Table 6 in section II.G. of this preamble indicate a coefficient of 63 
percent for the wage index. In light of both analyses, we believe that 
the current 60 percent labor-related share remains appropriate for OPPS 
payment purposes.
    After carefully considering the public comments received, we are 
finalizing our wage index adjustment policy for CY 2006 OPPS as 
proposed without modification.

E. Statewide Average Default Cost-to-Charge Ratios (CCRs)

    CMS uses CCRs to determine outlier payments, payments for pass-
through devices, and monthly interim transitional corridor payments 
under the OPPS. Some hospitals do not have a valid CCR. These hospitals 
include, but are not limited to, hospitals that are new and have not 
yet submitted a cost report, hospitals that have a CCR that falls 
outside predetermined floor and ceiling thresholds for a valid CCR, or 
hospitals that have recently given up their all-inclusive rate status. 
Last year, we updated the default urban and rural CCRs for CY 2005 in 
our final rule, published on November 15, 2004 (69 FR 65821 through 
65825). As we proposed, in this final rule with comment period, we have 
updated the default ratios using the most recent cost report data for 
CY 2006.
    We calculated the statewide default CCRs using the same CCRs that 
we use to adjust charges to costs on claims data. Table 3 of the 
proposed rule (70 FR 42696) listed the proposed CY 2006 default urban 
and rural CCRs by State. These CCRs are the ratio of total costs to 
total charges from each provider's most recently submitted cost report, 
for those cost centers relevant to outpatient services. We also 
adjusted these ratios to reflect final settled status by applying the 
differential between settled to submitted costs and charges from the 
most recent pair of settled to submitted cost reports.
    For the proposed rule, 80.79 percent of the submitted cost reports 
represented data for CY 2003. We have since updated the cost report 
data we use to calculate cost to charge ratios with additional 
submitted cost reports for CY 2004. For the final rule, 51.66 percent, 
the majority of the submitted reports utilized in the default ratio 
calculation, were for CY 2003. We only used valid CCRs to calculate 
these default ratios. That is, we removed the CCRs for all-inclusive 
hospitals, CAHs, and hospitals in Guam and the U.S. Virgin Islands 
because these entities are not paid under the OPPS, or in the case of 
all-inclusive hospitals, because their CCRs are suspect. We further 
identified and removed any obvious error CCRs and trimmed any outliers. 
We limited the hospitals used in the calculation of the default CCRs to 
those hospitals that billed for services under the OPPS during CY 2003.
    Finally, we calculated an overall average CCR, weighted by a 
measure of volume for CY 2003, for each State except Maryland. This 
measure of volume is the total lines on claims and is the same one that 
we use in our impact tables. For Maryland, we used an overall weighted 
average CCR for all hospitals in the Nation as a substitute for 
Maryland CCRs, which appeared in Table 3. Very few providers in 
Maryland are eligible to receive payment under the OPPS, which limits 
the data available to calculate an accurate and representative CCR. The 
overall decrease in default statewide CCRs can be attributed to the 
general decline in the ratio between costs and charges widely observed 
in the cost report data.
    We did not receive any public comments concerning the proposed 
statewide average default CCRs. Therefore, we are finalizing them as 
shown in Table 3 below for OPPS services furnished on or after January 
1, 2006.

BILLING CODE 4120-01-C

[[Page 68554]]

[GRAPHIC] [TIFF OMITTED] TR10NO05.010


[[Page 68555]]


[GRAPHIC] [TIFF OMITTED] TR10NO05.011

BILLING CODE 4120-01-P

F. Expiring Hold Harmless Provision for Transitional Corridor Payments 
for Certain Rural Hospitals

    When the OPPS was implemented, every provider was eligible to 
receive an additional payment adjustment (transitional corridor 
payment) if the payments it received for covered OPD services under the 
OPPS were less than the payments it would have received for the same 
services under the prior reasonable cost-based system (section 
1833(t)(7) of the Act). Section 1833(t)(7) of the Act provides that the 
transitional corridor payments are temporary payments for most 
providers, with two exceptions, to ease their transition from the prior 
reasonable cost-based payment system to the OPPS system. Cancer 
hospitals and children's hospitals receive the transitional corridor 
payments on a permanent basis. Section 1833(t)(7)(D)(i) of the Act 
originally provided for transitional corridor payments to rural 
hospitals with 100 or fewer beds for covered OPD services furnished 
before January 1, 2004. However, section 411 of Pub. L. 108-173 amended 
section 1833(t)(7)(D)(i) of the Act to extend these payments through 
December 31, 2005, for rural hospitals with 100 or fewer beds. Section 
411 also extended the transitional corridor payments to SCHs located in 
rural areas for services

[[Page 68556]]

furnished during the period that begins with the provider's first cost 
reporting period beginning on or after January 1, 2004, and ends on 
December 31, 2005. Accordingly, the authority for making transitional 
corridor payments under section 1833(t)(7)(D)(i) of the Act, as amended 
by section 411 of Pub. L. 108-173, will expire for rural hospitals 
having 100 or fewer beds and SCHs located in rural areas on December 
31, 2005. For CY 2006, transitional corridor payments will continue to 
be available to cancer and children's hospitals. (We note that the 
succeeding section II.G. of this preamble discusses an additional 
provision of section 411 of Pub. L. 108-173 that related to a study to 
determine appropriate adjustment to payments for rural hospitals under 
the OPPS beginning January 2006.)
    We received four public comments concerning this hold harmless 
policy.
    Comment: The commenters expressed concern about the impact that the 
expiration of the transitional corridor hold harmless payments would 
have on small rural hospitals because these are vulnerable facilities 
that provide important access to care in their communities.
    One commenter recommended that the provision be expanded to 
permanently extend the hold harmless payments to small rural hospitals 
and rural SCHs, as is currently the case for cancer hospitals and 
children's hospitals. Two commenters referenced efforts by a large 
hospital association to work with Congress on legislation to provide 
for this expansion.
    Response: We appreciate the comments that were submitted and we 
have carefully reviewed each of them. As the commenters acknowledge, 
section 1833(t)(7)(D) of the Act, as amended by section 411 of Pub. L. 
108-173, provides that OPPS transitional corridor payments will expire 
for rural hospitals having 100 or fewer beds and SCHs located in rural 
areas on December 31, 2005. Therefore, we are providing for the 
termination of these payments in this final rule with comment period. 
However, as noted in section II.G. of this final rule with comment 
period, we are providing a 7.1 percent adjustment for rural sole 
community hospitals in accordance with section 411 of Pub. L. 108-173.

G. Adjustment for Rural Hospitals

    Section 411 of Pub. L. 108-173 added a new paragraph (13) to 
section 1833(t) of the Act. New section 1833(t)(13)(A) specifically 
instructs the Secretary to conduct a study to determine if rural 
hospital outpatient costs exceed urban hospital outpatient costs. 
Moreover, under new section 1833(t)(13)(B) of the Act, the Secretary is 
given authorization to provide an appropriate adjustment to rural 
hospitals by January 1, 2006, if rural hospital costs are determined to 
be greater than urban hospital costs.
    As described in our CY 2006 OPPS proposed rule, we used regression 
analysis to study the differences in outpatient cost per unit between 
rural and urban hospitals because we believed that a simple comparison 
of unit costs would not capture the myriad of factors that contribute 
to observed costs, including labor supply, complexity, and volume of 
services. For this final rule with comment period, we reran these 
regression analyses that we conducted in the proposed rule and 
conducted additional analyses in response to issues raised in public 
comments.
    For this final rule with comment period, our regression analysis 
included all 4,088 hospitals billing under OPPS for which we could 
model accurate cost per unit estimates. For each hospital, total 
outpatient costs and descriptive information were derived from a more 
complete set of CY 2004 Medicare claims than was used in the analysis 
for the proposed rule and the hospital's most recently submitted cost 
report. The description of claims used, our methodology for creating 
costs from charges, and a description of the specific hospitals 
included in our modeling are discussed in section II. A. of this 
preamble. We excluded separately payable drugs and biologicals, 
services receiving pass-through payments, and any service paid under a 
separate payment system from our analysis. We excluded the 49 hospitals 
in Puerto Rico because their wage indices and unit costs are so 
different that they would have skewed results. Finally, we excluded 
facilities whose unit outpatient costs were outside of 3 standard 
deviations from the geometric mean unit outpatient cost.
    We calculated the total unit outpatient cost for each hospital by 
dividing total outpatient cost by the total number of APC units 
discounted for the joint performance of multiple surgical procedures. 
(See section II.G.1. below for a definition of discounted units.) As in 
the analysis for the proposed rule, we modeled both explanatory and 
payment regression models. In an ``explanatory model'' approach, all 
variables that are hypothesized to be important determinants of cost 
are included in the cost regression, whether or not they are going to 
be used as payment adjustments. We used the explanatory regression 
models to assess which class of rural hospitals, if any, is 
significantly more costly than urban hospitals. In a ``payment model'' 
approach, the only independent variables included in the cost 
regression are those variables considered for payment adjustments. We 
used the payment model to determine the amount of the adjustment for 
any class of hospitals identified as significantly more costly in the 
explanatory model. The regression equations for both models were 
specified in double logarithmetic form. The dependent variable in the 
explanatory regression equation was unit outpatient cost. The dependent 
variable in the payment regressions was standardized unit outpatient 
costs, that is, unit outpatient costs adjusted to reflect unit payment 
by dividing through by the provider's service-mix index which was 
adjusted by the provider's wage index. The service-mix index is a 
measure of the resource intensity of services provided by each 
hospital. Both regression equation models included quantitative 
independent variables transformed into natural logarithms and 
categorical independent variables. Categorical independent (dummy) 
variables included hospital characteristics such as rural location or 
type of hospital (short stay or specialty hospital). In regression 
analysis, dummy variables capture the difference in means of the 
dependent variable in the class of hospitals of interest and all other 
hospitals, holding all other variables in the equation constant.
1. Factors Contributing to Unit Cost Differences Between Rural 
Hospitals and Urban Hospitals and Associated Explanatory Variables
    For this final rule with comment period, we retained the same set 
of explanatory variables as used in the regression analysis for the 
proposed rule because we believe that these variables capture the most 
important factors contributing to differences in unit costs between 
rural and urban hospitals.
     First, unit outpatient costs are expected to vary directly 
with the prices of inputs used to produce outpatient services, 
especially labor. Wage rates tend to be lower in rural areas than in 
urban areas. We used the OPPS hospital wage index for CY 2006 as our 
measure of relative differences in labor input costs.
     Second, there may be economies of scale in producing 
outpatient services, which imply that unit costs will vary inversely 
with the volume of outpatient services provided. We used the total 
number of discounted units as our indicator of volume. Discounted units

[[Page 68557]]

are the total number of units after we adjust for the multiple 
procedure reduction of 50 percent that applies to payment for surgical 
services when two surgical procedures are performed during the same 
operative session. For example, if a procedure is paid at 100 percent 
of payment 1,000 times and the same procedure is paid at 50 percent of 
payment 100 times, the discounted units for that procedure equal 1,050 
units (the sum of 1,000 units at full payment plus 100 units at 50 
percent payment).
     Third, independent of the volume of outpatient services, 
hospitals that provide more complex outpatient services are expected to 
have higher unit costs than hospitals with less complex service-mixes. 
Typically, greater complexity involves a combination of higher 
equipment and labor costs. Rural hospitals usually have less volume and 
perform less complex services than urban hospitals. We used a service-
mix index defined as the ratio of the number of discounted units 
weighted by APC relative weights divided by the number of unweighted 
discounted units as our measure of complexity. The service-mix index 
reflects the average APC weight of each facility's outpatient services. 
From our analysis, we also believe that the number of beds captures 
variation in unit costs attributable to the additional complexity of 
services performed by a hospital that is not explained by their service 
mix index.
     Fourth, the size of a hospital may influence the volume 
and service-mix of outpatient services. Large hospitals generally 
provide a wider range of more complex services than do small hospitals. 
Large hospitals may also have larger volumes in ancillary departments 
that are shared between outpatient and inpatient services, and as a 
result, benefit from greater economies of scale than do small 
hospitals. Rural hospitals tend to be smaller than urban hospitals. Our 
primary measure of outpatient volume is discounted units of APCs, which 
only reflects the volume of Medicare services paid under the outpatient 
PPS. This measure does not include the inpatient utilization of shared 
ancillary departments or non-Medicare outpatient services. For all of 
these reasons, it seems appropriate to include a broader measure of 
facility size in the explanatory regression model. Therefore, as 
explained below, we used the total number of facility beds to measure 
facility size. Unit outpatient costs may be positively or negatively 
related to facility size depending on whether complexity effects, noted 
above, or scale economies are more important.
     In addition to the above factors, we included additional 
categorical variables to indicate the types of specialty hospitals that 
participate in OPPS, specifically cancer, children's, long-term care, 
rehabilitation, and psychiatric hospitals because we do not believe 
that the costs, volume, and service-mix associated with these hospitals 
looks like the costs, volume, and service mix of a typical OPPS 
provider.
     Finally, we included several categorical variables for 
rural/urban location and type of rural hospital to capture variation 
unexplained by the other independent variables in the model. Urban 
hospitals are the reference group for all of the different types of 
hospitals examined included in the regressions equations below. Table 4 
provides descriptive statistics for the dependent variables and key 
independent variables by urban and rural status. Without controlling 
for the other influences on per unit cost, rural hospitals have a lower 
cost per unit than urban hospitals. However, when standardized for the 
service-mix wage indices, average unit costs are nearly identical 
between urban and rural hospitals.

     Table 4.--Means and Standard Deviations (In Parenthesis) for Key Variables by Rural and Urban Location
----------------------------------------------------------------------------------------------------------------
                                                                        Rural                     Urban
                                                             ---------------------------------------------------
                          Variable                                           Standard                  Standard
                                                                 Means      Deviation      Means      Deviation
----------------------------------------------------------------------------------------------------------------
Unit Outpatient Cost........................................      $157.57     ($64.94)      $188.76     ($93.53)
Standardized Unit Outpatient Cost...........................       $75.51     ($55.70)       $73.54     ($40.98)
Wage Index..................................................       0.8807     (0.1012)       1.0212     (0.1479)
Service-Mix Index...........................................       2.3636     (0.9357)       2.7544     (1.6037)
Outpatient Volume...........................................       21,021     (21,770)       38,469     (46,925)
Beds........................................................           78         (56)          196        (170)
Number of Hospitals.........................................        1,206  ...........        2,882
----------------------------------------------------------------------------------------------------------------

2. Results
    For this final rule with comment period, we began our analysis by 
rerunning the regression models that we had examined for the proposed 
rule. As a group, all rural hospitals continue to demonstrate weak 
evidence of slightly higher unit costs than urban hospitals, after 
controlling for labor input prices, service-mix complexity, volume, 
facility size, and type of hospital. In the explanatory model, 
regressing unit costs on all of the independent variables discussed 
above, the coefficient for the rural categorical variable was 0.024 
(p=0.0613). If the unit costs of rural hospitals are the same as the 
unit costs of urban hospitals, the probability of observing a value as 
extreme as or more extreme than 2.4 percent would be approximately 6 
percent or less. This suggests that rural hospitals are approximately 
2.4 percent more costly than urban hospitals after accounting for the 
impact of other explanatory variables. This is the same coefficient 
observed in the regression analyses for the proposed rule. The results 
of this regression appear in Table 5. This regression demonstrated 
reasonably good explanatory power with an adjusted R2 of 0.54 
(rounded). Adjusted R2 is the percentage of variation in the dependent 
variable explained by the independent variables and is a standard 
measure of how well the regression model fits the data. The regression 
coefficients of the key explanatory variables all move in the expected 
direction: positive for the wage index, indicating that rural hospitals 
can be expected to have lower unit outpatient costs because they tend 
to be located in areas with lower wage rates; positive for the 
outpatient service-mix index, consistent with the hypothesis that rural 
hospitals' less complex outpatient service-mixes result in lower unit 
costs than those of the typical urban hospital; negative for outpatient 
service volume, implying that, on average, rural hospitals' lower 
service volumes are a source of higher unit cost compared to urban 
hospitals; and positive for the

[[Page 68558]]

facility size variable (beds), suggesting that facility size is more 
reflective of complexity than any economies of scale. The payment 
regression that accompanies this explanatory model indicates an 
adjustment for all rural hospitals of 4.3 percent.

BILLING CODE 4120-01-P
[GRAPHIC] [TIFF OMITTED] TR10NO05.012

BILLING CODE 4120-01-C
    As we did for our proposed rule, we divided rural hospitals into 
categories that reflected their eligibility for the expiring hold 
harmless provision under section 1833(t)(7)(D) of the Act in order to 
determine whether the small difference in costs was uniform across 
classes of rural hospitals or whether all of the variation was 
attributable to a specific type of rural hospitals. Specifically, we 
divided rural hospitals into rural SCHs, rural hospitals with 100 or 
fewer beds that are not rural SCHs, and other rural hospitals. The 
first two categories of rural hospitals are currently eligible for 
payments under the expiring hold harmless provision.
    As indicated in the proposed rule, we found that rural SCHs 
demonstrated significantly higher cost per unit than urban hospitals 
after controlling for labor input prices, service-mix complexity, 
volume, facility size, and type of hospital. The results of this 
regression appear in Table 6. With the exception of the new rural 
variables, the independent variables have the same sign and 
significance as in Table 5. Rural SCHs have a positive and significant 
coefficient. The rural SCH variable has an explanatory regression 
coefficient of 0.06044 and an observed probability of 0.0003. If the 
unit costs of rural SCHs are the same as those of urban hospitals, the 
probability of observing a value as extreme or more extreme than 6.2 
percent would be less than 0.1 percent. This is sufficient evidence to 
accept that rural SCHs are more costly than urban hospitals, holding 
all other variables constant.
    Notably, we observe no significant difference between all small 
rural hospitals with 100 or fewer beds and urban hospitals or between 
other rural hospitals and urban hospitals. In the explanatory 
regression presented in Table 6, the dummy variable for small rural 
hospitals has an observed coefficient of 0.01203 and an associated 
probability of 0.4748. If the unit costs of small rural hospitals are 
the same as those of urban hospitals, the probability of observing a 
value as extreme or more extreme than 1.2 percent would be less than 50 
percent. With such a high probability, there is insufficient evidence 
to conclude that rural hospitals with 100 or fewer beds are more costly 
than urban hospitals, holding all other variables constant. The results 
are almost identical when

[[Page 68559]]

volume and facility size are not included in the equation. Finally, the 
dummy variable for other rural hospitals has an observed coefficient of 
-0.01646 and an associated probability of 0.4545. If the unit costs of 
other rural hospitals are the same as those of urban hospitals, the 
probability of observing a value as extreme or more extreme than -1.7 
percent would be less than 50 percent. These results are also present 
when facility size and volume are not included in the equation. As with 
small rural hospitals, this is insufficient evidence to conclude that 
other rural hospitals are more costly than urban hospitals. Further, 
for this group of rural hospitals, the coefficient is negative, 
indicating lower cost per unit.
[GRAPHIC] [TIFF OMITTED] TR10NO05.013

    Based on the above analysis, we continue to believe that a payment 
adjustment for rural SCHs is warranted. The accompanying payment 
regression, also appearing in Table 6, indicates a cost impact of 7.1 
percent. Thus, in accordance with the authority provided in section 
1833(t)(13)(B) of the Act, as added by section 411 of Pub. L. 108-173, 
we are implementing a 7.1 percent payment increase for rural SCHs for 
CY 2006. This adjustment will apply to all services and procedures paid 
under the OPPS, excluding drugs, biologicals, and services paid under 
the pass-through payment policy. As stated in the proposed rule, this 
adjustment is budget neutral, and will be applied before calculating 
outliers and coinsurance. We will not reestablish the adjustment amount 
on an annual basis, but we may review the adjustment in the future, and 
if appropriate, may revise the adjustment. Additional descriptive 
statistics are available on the CMS Web site.
    We received 19 public comments concerning these results.
    Comment: Several commenters supported our proposed payment 
increased for rural SCHs of 6.6 percent.
    Response: We appreciate the commenters' support. As we discussed 
above, based on our most recent analysis, we are implementing an 
adjustment of 7.1 percent in this final rule with comment period. We 
believe that an adjustment at this level remains consistent with the 
views expressed by the commenters.
    Comment: Several commenters expressed concern that the regression 
analysis, as presented, does not separately set out the regression 
results for rural hospitals with 100 or fewer beds that are not rural 
SCHs. They indicate that, while CMS stated that this class of hospitals 
did not demonstrate significance in the explanatory regression 
analyses, it did not definitively display these results. The

[[Page 68560]]

commenters highlighted the importance of showing these results because 
these are the facilities that will be losing their hold harmless 
protection in CY 2006. One of the commenters cited MedPAC's 2005 Report 
to Congress, which noted that previous MedPAC research indicated higher 
costs for low-volume hospitals which are predominantly rural. The 
commenters urged CMS to specifically report the regression results with 
small rural hospitals with 100 or fewer beds identified separately.
    Response: We agree with the commenters that we should identify 
small rural hospitals with 100 or fewer beds separately in the 
analysis. The results in Table 6 demonstrate that small rural hospitals 
with 100 or fewer beds do not appear to have unit costs different from 
those of urban hospitals after controlling for other contributors to 
unit cost, including volume.
    Comment: Several commenters requested clarification on the 
definition of rural in order to assess which hospitals would be 
eligible for the rural adjustment. The commenters asked: Would a SCH 
located in a rural area that has been reclassified for wage index 
purposes into an urban area be eligible for the SCH adjustment? Would a 
SCH located in an urban area that has been reclassified for wage index 
purposes into a rural area be eligible for the SCH adjustment?
    Response: SCHs will be considered rural for the rural adjustment, 
and for purposes of the OPPS rural adjustment only, under section 
1833(t)(13)(B) of the Act if a hospital is geographically located in a 
rural area or has been reclassified to a rural area for wage index 
purposes. Therefore, a SCH located in a rural area that has been 
reclassified for wage index purposes into an urban area will be 
eligible for the adjustment, regardless of whether the SCH has been 
reclassified to an urban area for wage index purposes. In addition, a 
SCH located in an urban area that has been reclassified for wage index 
purposes into a rural area also will be eligible for the adjustment. 
New Sec.  419.43(g)(1)(ii) of the regulations, which we are finalizing 
in this final rule with comment period, will provide that an SCH is 
eligible for the adjustment if the hospital is ``located in a rural 
area as defined in Sec.  412.64(b) of this chapter or is treated as 
being located in a rural area under Sec.  412.103.'' To clarify the 
text in response to the comments received, we are referencing Sec.  
412.103 in the final regulation text instead of the reference to 
section 1886(d)(8)(E) of the Act. This definition of a ``SCH located in 
a rural area'' only will apply for the purposes of the rural adjustment 
in this rule.
    Comment: One commenter asked if rural SCHs that are participating 
in the Rural Community Hospital Demonstration Program would be eligible 
for the rural adjustment.
    Response: Rural SCHs participating in the Rural Community Hospital 
Demonstration Program are eligible to receive this rural adjustment. 
The Rural Community Hospital Demonstration Program, authorized under 
section 410A of Pub. L 108-173, assesses whether rural hospitals will 
benefit from cost-based reimbursement and is limited to payment for 
inpatient services. Although SCHs participating in the demonstration 
program are not eligible to receive traditional SCH payments made under 
the IPPS, these hospitals retain their SCH status.
    Comment: Several commenters requested clarification of whether CMS 
intends to make this adjustment available beyond CY 2006, and whether 
it intends to reestablish the adjustment amount on an annual basis.
    Response: We will not reestablish the adjustment amount on an 
annual basis, but we may review the adjustment in the future and, if 
appropriate, revise the adjustment.
    Comment: A few commenters requested that CMS extend the rural 
adjustment to CMHCs or make some other special allowance or provision 
for their rural location.
    Response: Section 1833(t)(13)(A) of the Act limits the scope of 
this analysis and any adjustment to comparing rural and urban hospitals 
costs.
    Comment: Several commenters requested that CMS extend the proposed 
rural adjustment to all SCHs, not just rural hospitals, under its 
equitable adjustment authority in section 1833(t)(2)(E) of the Act. The 
commenters described the necessary access to services that urban SCHs 
provide and highlighted that both urban and rural SCHs have been 
recognized for special protections by Congress in other payment systems 
because they are the sole source of inpatient hospital services 
reasonably available to Medicare beneficiaries.
    One commenter used the public use file that CMS provided on its Web 
site and conducted detailed analyses to assess the appropriateness of 
an adjustment for urban SCHs. The commenter compared urban SCHs, rural 
SCHs, other urban hospitals, and other rural hospitals on the number of 
beds, their service mix, and wage index. The commenter also conducted 
regression analysis. The first model the commenter examined included a 
variable for rural location and a variable for SCH status in addition 
to the other variables used in CMS' explanatory model. The commenter 
reported that the SCH variable is significant, suggesting that SCHs are 
more costly than other non-SCHs controlling for rural or urban status. 
The commenter concluded that the results indicated SCHs are 
significantly more costly than hospitals that are not SCHs and that 
geographic location does not influence this finding.
    The same commenter also examined an explanatory model that 
resembled CMS' explanatory model. The commenter indicated that this 
model included separate variables for urban SCHs, rural SCHs, and all 
other rural hospitals in order to isolate the unit cost differences 
between urban SCHs and other hospitals. The commenter reported that, in 
this model, the unit costs of urban SCHs were not significantly 
different from urban, non-SCH unit costs. With regard to this last 
finding, the commenter suggested that the lack of significance is less 
important than the comparability in the magnitude of the coefficient 
for rural and urban SCHs, and that both types of hospitals have 
coefficients at 6 percent. Finally, the commenter examined the 
significance of the rural indicator in an explanatory regression model 
conducted only with SCH hospitals. Within this population, the 
commenter reported that all explanatory variables are statistically 
significant, except an indicator for rural status, and suggested that 
this finding further supports extending the adjustment to urban SCHs. 
The commenter concluded by requesting that CMS repeat its regression to 
confirm that SCH status, and not geographic location, is indicative of 
higher costs, and if it finds this to be true, to appropriately adjust 
for higher costs.
    Response: We do not believe it is sufficient to confirm that all 
SCHs are significantly more costly than non-SCHs, as the commenter 
demonstrated in its first regression model because the statutory 
authority for this adjustment is to be based upon the comparison 
between urban and rural hospitals. The regression model that includes a 
variable for SCH status and a variable for rural location only confirms 
that all SCHs have higher costs than hospitals that are not SCHs and 
that, having controlled for SCH status, rural and urban hospitals are 
not different. Rural SCHs comprise 90 percent of all SCH, and are the 
basis for the observed significance on the SCH variable. 
Notwithstanding the mandate for this rural adjustment, we believe that 
urban SCHs would have to demonstrate strong

[[Page 68561]]

empirical evidence that they are significantly more costly than other 
urban hospitals. We do not find the strong empirical evidence 
supporting an adjustment for urban SCHs, as we do for rural SCHs.
    In many respects, urban SCHs look like urban hospitals on some of 
the key variables presented in Table 4. Urban SCHs have a mean cost per 
unit of $183.89, and urban hospitals have a mean cost per unit of 
$188.76. Urban SCHs have a mean standardized unit cost of $74.01, and 
all urban hospitals have a mean standardized cost of $73.54. Finally, 
urban SCHs have a mean volume of 36,714, and urban hospitals have a 
mean volume of 38,469. Similar to the commenter, we also ran an 
explanatory regression analysis that included urban SCHs as a separate 
class of hospitals in addition to rural SCHs, small rural hospitals, 
and other rural hospitals. In these results, the coefficient associated 
with urban SCHs was 0.05960 and the associated probability was 0.1624. 
If the unit costs of urban SCHs are the same as those of urban 
hospitals, the probability of observing a value as extreme or more 
extreme than 6.1 percent would be less than 20 percent. We acknowledge 
the commenter's statement that the size of the coefficient on the urban 
SCH dummy variable is comparable to that on the dummy variable for 
rural SCHs. However, we do not believe that the size of the coefficient 
is sufficient evidence. The lack of significance associated with such a 
large coefficient is attributable to the much higher standard error 
accompanying urban SCHs compared to rural SCHs. Higher standard error 
indicates that there is large variability in unit costs for urban SCHs 
after controlling for all other variables in the equation. Some urban 
SCHs may have unit costs as high as rural SCHs, but clearly many do 
not. We believe that this observation accounts for the lack of 
significance on the rural variable in the commenter's regression 
analyses, which was limited to the population of SCHs.
    Comment: One commenter requested that CMS examine whether the 
outpatient costs of Medicare-Dependent Small Rural Hospitals (MDHs), a 
subgroup of rural hospitals, are higher than urban hospitals' 
outpatient costs, and provide an adjustment to payments if appropriate.
    Response: We did not find any evidence that rural MDHs are more 
costly than urban hospitals. We ran an explanatory regression analysis 
that included rural MDHs as a separate class of small rural hospitals 
from other small rural hospitals because 90 percent of rural MDHs were 
also small rural hospitals. We also included all of the other variables 
in Table 6 above, including rural SCHs and other rural hospitals. In 
these results, the coefficient associated with rural MDHs was -0.01955, 
with an associated probability of 0.4438. If the unit costs of MDHs are 
the same as those of urban hospitals, the probability of observing a 
value as extreme or more extreme than 2 percent would be less than 50 
percent.
    Comment: One commenter argued that CMS excluded variables from the 
regression model that control for ``financial pressure'' and ``market 
structure.'' The commenter argued that higher costs can be the result 
of inefficient operations as much as they could also be the result of 
higher input costs created by rural location, and that measures of 
financial pressure or market structure would capture any variation in 
unit cost attributable to a lack of local competition. The commenter 
suggested that SCHs may be inefficient because they already have 
special payment status under the IPPS and the OPPS. Finally, the 
commenter suggested that, because beneficiaries' access to care is the 
central objective of any payment policy, CMS should consider a low-
volume adjustment that better captures higher costs that the hospital 
cannot control. At the same time, the commenter acknowledged that 
section 1833(t)(13)(A) of the Act specifically requires an analysis of 
urban and rural costs.
    Response: While it is not inappropriate to include additional 
variables in the explanatory regression analysis, we first note that 
section 1833(t)(13)(A) of the Act specifically calls a determination of 
whether costs faced by rural hospitals are higher than those faced by 
urban hospitals. For this reason, we believe that the model in Table 6 
ably controls for scale efficiencies in a comparison of urban and rural 
costs. Our adjusted R2 of 54 percent also demonstrates a relatively 
good fit. We acknowledge that some of the SCHs eligible for the 
adjustment may also be more costly because of inefficiencies due to 
limited competition or because they currently receive special payment 
status under the IPPS and the OPPS. However, we also agree with the 
commenter that beneficiary access is an important goal. We believe that 
the current model is sufficiently robust to identify hospitals with 
significantly higher costs such that payment under the OPPS alone might 
impact beneficiary access. The SCH status of these hospitals suggests 
that they are important to beneficiary access. Rural SCHs receive their 
designation because they are the only, or one of a few, sources of care 
for beneficiaries. For example, these hospitals may be the only 
immediately available source of emergency services for Medicare 
beneficiaries.
    In accordance with the authority provided in section 1833(t)(13)(B) 
of the Act, as added by section 411 of Pub. L. 108-173, we are 
finalizing our policy by including a payment adjustment for rural SCHs 
of 7.1 percent and finalizing the regulation text at Sec.  419.43(g) as 
noted above.

H. Hospital Outpatient Outlier Payments

    Currently, the OPPS pays outlier payments on a service-by-service 
basis. For CY 2005, the outlier threshold is met when the cost of 
furnishing a service or procedure by a hospital exceeds 1.75 times the 
APC payment amount and exceeds the APC payment rate plus a $1,175 
fixed-dollar threshold. We introduced a fixed-dollar threshold in CY 
2005 in addition to the traditional multiple threshold in order to 
better target outliers to those high cost and complex procedures where 
a very costly service could present a hospital with significant 
financial loss. If a provider meets both of these conditions, the 
multiple threshold and the fixed-dollar threshold, the outlier payment 
is calculated as 50 percent of the amount by which the cost of 
furnishing the service exceeds 1.75 times the APC payment rate. For a 
discussion on CMHC outliers, see section II.B.3. of this final rule 
with comment period.
    As explained in our CY 2005 final rule with comment period (69 FR 
65844), we set our projected target for aggregate outlier payments at 
2.0 percent of aggregate total payments under the OPPS. Our outlier 
thresholds were set so that estimated CY 2005 aggregate outlier 
payments would equal 2.0 percent of aggregate total payments under the 
OPPS.
    For CY 2006, we proposed to set our projected target for aggregate 
outlier payments at 1.0 percent of aggregate total payments under the 
OPPS. A portion of that 1.0 percent, an amount equal to 0.6 percent of 
outlier payments, would be allocated to CMHCs for partial 
hospitalization program service outliers. In support of this decision, 
we cited MedPAC's March 2004 Report to Congress, in which MedPAC 
recommended that Congress pursue the statutory change needed to 
eliminate the outlier policy under the OPPS. We specifically 
highlighted several of the reasons given by MedPAC for the elimination 
of the outlier policy because they are equally applicable to any

[[Page 68562]]

reduction in the size of the percentage of OPPS payments dedicated to 
outlier payments. One of MedPAC's arguments included the very narrow 
definition of many APCs with limited packaging frequently resulting in 
multiple service payments for any given claim. In addition, we noted 
that outlier policies are susceptible to ``gaming'' through charge 
inflation and that the OPPS is the only ambulatory payment system with 
an outlier policy. Finally, we cited MedPAC's observation that the 
distribution of outlier payments benefits some hospital groups more 
than others.
    In order to ensure that estimated CY 2006 aggregate outlier 
payments would equal 1.0 percent of estimated aggregate total payments 
under the OPPS, we proposed that the outlier threshold be modified so 
that outlier payments are triggered when the cost of furnishing a 
service or procedure by a hospital exceeds 1.75 times the APC payment 
amount and exceeds the APC payment rate plus a $1,575 fixed-dollar 
threshold. Ultimately, we chose to modify the fixed dollar threshold to 
target 1.0 percent of estimated aggregate total payment under the OPPS 
and not to modify the current 1.75 multiple in order to further our 
policy of targeting outlier payments to complex and expensive 
procedures with sufficient variability to pose a financial risk for 
hospitals. We note that modifying the multiple threshold would have 
done less to target outlier payments to complex and expensive 
procedures.
    We calculated the fixed-dollar threshold for the proposed rule 
using the same methodology as we did in CY 2005. The claims that we use 
to model each OPPS lag by 2 years. For this final rule with comment 
period, we used CY 2004 claims to model the CY 2006 payment system. In 
order to estimate CY 2006 outlier payments for the proposed rule, we 
inflated the charges on the CY 2004 claims using the same inflation 
factor of 1.0865 that we used to estimate the IPPS fixed-dollar outlier 
threshold for the IPPS FY 2006 proposed rule. For 2 years, the 
inflation factor is 1.1804. The methodology for determining this charge 
inflation factor was discussed at length in the IPPS proposed rule (70 
FR 47493, August 12, 2005). As we stated in our final rule for 2005, we 
believe that the use of this charge inflation factor is appropriate for 
OPPS because, with the exception of the routine service cost centers, 
hospitals use the same cost centers to capture costs and charges across 
inpatient and outpatient services (69 FR 65845, November 15, 2004). As 
also noted in the IPPS final rule, we believe that a charge inflation 
factor is more appropriate than an adjustment to costs because this 
methodology closely captures how actual outlier payments are made and 
calculated (70 FR 47495, August 12, 2005). We then applied the overall 
cost-to-charge ratio (CCR) that we calculate from each Hospital's Cost 
Report (CMS-2552-96) as part of our process for estimating median APC 
costs. The calculation of this overall CCR is discussed in greater 
detail in section II.A. of this preamble. We estimated outlier payments 
using these costs for several different fixed-dollar thresholds, 
holding the 1.75 multiple constant until the aggregated outlier 
payments equaled 1.0 percent of aggregated total payments under the 
OPPS. In addition, for CY 2006, we proposed an outlier threshold for 
CMHCs of 3.45 times the APC payment rate.
    For this final rule with comment period, we recalculated the fixed-
dollar threshold in light of updated claims data, a revised charge 
inflation estimate, and more timely CCRs. As in the proposed rule, we 
did not change the multiple threshold of 1.75 times the APC payment 
rate, but concentrated on adjusting the fixed-dollar threshold. We 
again used the same inflation factor that we used to estimate the IPPS 
fixed-dollar threshold. Because the charge inflation factor for the 
IPPS was revised to 14.94 percent for 2 years in the IPPS FY 2006 final 
rule (70 FR 47493, August 12, 2005), we inflated charges on all CY 2004 
OPPS claims by 1.1494.
    We then applied the hospital specific overall CCR which we 
calculated for purposes of our APC cost estimation. We simulated 
aggregated outlier payments using these costs for several different 
fixed dollar thresholds holding the 1.75 multiple constant until the 
total outlier payments equaled 1.0 percent of aggregated total OPPS 
payments. We estimate that a threshold of $1,250 combined with the 
multiple threshold of 1.75 times the APC payment rate will allocate 1.0 
percent of aggregated total OPPS payments to outlier payments. We used 
a lower charge inflation factor of 14.94 percent to increase charges to 
reflect 2006 dollars. The proposed fixed dollar threshold declined to 
$1,250 from $1,575 in the proposed rule primarily because we used the 
lower charge inflation factor of 1.1494.
    The following is an example of an outlier calculation for CY 2006 
under our final policy. A hospital charges $26,000 for a procedure. The 
APC payment for the procedure is $3,000, including a rural adjustment, 
if applicable. Using the provider's CCR of 0.30, the estimated cost to 
the hospital is $7,800. To determine whether this provider is eligible 
for outlier payments for this procedure, the provider must determine 
whether the cost for the service exceeds both the APC outlier cost 
threshold (1.75 x APC payment) and the fixed-dollar threshold ($1,250 + 
APC payment). In this example, the provider meets both criteria:
    (1) $7,800 exceeds $5,250 (1.75 x $3,000)
    (2) $7,800 exceeds $4,250 ($1,250 + $3,000)
    To calculate the outlier payment, which is 50 percent of the amount 
by which the cost of furnishing the service exceeds 1.75 times the APC 
rate, subtract $5,250 (1.75 x $3,000) from $7,800 (resulting in 
$2,550). The provider is eligible for 50 percent of the difference, in 
this case $1,275 ($2,550/2). The formula is (cost-(1.75 x APC payment 
rate))/2.
    For CMHCs, in CY 2005, the outlier threshold is met when the cost 
of furnishing a service or procedure by a CMHC exceeds 3.5 times the 
APC payment rate. If a CMHC provider meets this condition, the outlier 
payment is calculated as 50 percent of the amount by which the cost 
exceeds 3.5 times the APC payment rate. For this final rule with 
comment period, updated data reduces the multiple outlier threshold for 
CMHCs to 3.4. The outlier threshold for a CMHC is met when the cost of 
furnishing a service or procedure by a CMHC exceeds 3.4 times the APC 
payment rate. If a CMHC provider meets this condition, the outlier 
payment is calculated as 50 percent of the amount by which the cost 
exceeds 3.4 times the APC payment rate.
    We received 25 public comments concerning our proposed outlier 
policy.
    Comment: One commenter supported CMS' decision to reduce the 
percentage of total payments set aside for outlier payments from 2.0 
percent to 1.0 percent.
    Response: We appreciate the commenter's support. Although the 
fixed-dollar threshold has changed due to more accurate data than in 
the proposed rule, we do not believe that this change would impact the 
views expressed by the commenter.
    Comment: Several commenters expressed concern that, in light of an 
increase in the threshold from $1,175 to $1,575, CMS may have set the 
threshold for outlier payments too high. They requested clarification 
as to how CMS determined that a $400 increase in the fixed-dollar 
threshold was appropriate and how the $1,575 fixed-dollar threshold was 
calculated. The commenters specifically noted that in the IPPS final 
rule CMS reduced the charge inflation factor used to set the fixed-
dollar threshold from 18.04

[[Page 68563]]

percent to 14.94 percent, and suggested that CMS make a similar 
adjustment to the OPPS methodology.
    Response: As discussed above, for the proposed rule, we used a 
charge inflation factor of 1.1804 to inflate the charges on CY 2004 
claims to CY 2006 dollars. We then applied the overall CCR that we 
calculate as part of our APC median estimation process to those 
inflated charges to estimate costs. We compared these estimated costs 
to 1.75 times the proposed APC payment amount and to the APC payment 
amount plus a number of fixed-dollar thresholds until we identified a 
threshold that produced total outlier payments equal to 1.0 percent of 
total aggregated OPPS payments. This methodology increased the fixed-
dollar threshold by $400.
    We repeated the same estimation process for this final rule, using 
a complete set of CY 2004 claims, the updated charge inflation estimate 
of 14.94 percent from the IPPS final rule, as requested by commenters, 
and each hospital's overall CCR, as calculated for our APC median 
setting process. The final fixed dollar threshold for OPPS 2006 is 
$1,250 plus the APC payment rate, and the final multiple threshold is 
1.75 times the APC payment rate.
    Comment: Commenters expressed concern that CMS has never reported 
the actual amount of outlier payments for the OPPS made in past years. 
They noted that CMS routinely reports prior year outlier payments for 
the IPPS. The commenters also expressed concern that CMS may not spend 
the percentage of total aggregated OPPS payment set aside each year for 
outlier payments. One commenter hypothesized that outlier payments had 
been underspent in previous years, and that the proposed reduction in 
outlier payments was designed to realign the policy with actual 
payment. The commenters urged CMS to publish data on actual outlier 
payments made in CY 2004 and prior years in the final rule. They also 
recommended that actual outlier payments for CY 2005 OPPS be reported 
as soon as CMS is able to obtain accurate data and that CMS continue to 
report these data in the future.
    Response: As we have stated in prior rules (see for example 69 FR 
65847, November 15, 2004), we have not provided aggregate outlier 
payments for past years because we do not use those estimates to set 
the outlier thresholds and because we make outpatient claims available. 
However, we understand that providers might wish to know this 
information, especially in light of recent changes in the OPPS outlier 
policy. In the final set of CY 2004 OPPS claims, aggregated outlier 
payments were 2.5 percent of aggregated total OPPS payments. In the 
final set of CY 2003 OPPS claims, aggregated outlier payments were 3.1 
percent of aggregated total OPPS payments. For both years, the 
estimated outlier payments were set at 2 percent of total aggregated 
OPPS payments. At this time, we cannot make accurate estimates about 
aggregated total outlier payments for CY 2005, but we intend to provide 
this information in our proposed rule for CY 2007. We intend to 
continue reporting the percentage of total payments made in outlier 
payments for the most recent and complete set of claims in future 
rules. We note above our reasons for proposing to reduce the projected 
target percent of total aggregated OPPS payments attributable to 
outlier payments.
    Comment: Several commenters suggested that CMS did not provide 
sufficient analytic support to justify a reduction in outlier payments 
from 2.0 percent to 1.0 percent, relying only on MedPAC's 
recommendations. The commenters urged CMS not to change its outlier 
policy or to delay implementation until greater technical analyses 
could be conducted. One commenter suggested that, without CMS' 
technical analyses, stakeholders cannot conduct their own analyses. The 
commenters frequently questioned our reference to the March 2004 MedPAC 
Report to Congress and stated that outlier payments are not evenly 
distributed among hospitals as justification for reducing the 
percentage of total payments dedicated to outlier payments. They noted 
that differences in outlier payments would be expected for hospitals 
serving different populations. Several commenters cited the continued 
instability in rates as a reason for continuing at 2.0 percent. One 
commenter specifically hypothesizes that instability in payment rates 
may be attributable to a lack of stability in unit costs, suggesting a 
continued need for outlier payments. Another commenter acknowledged 
that the variability in costs for APCs was clearly less than that for 
DRGs, but that the current policy of setting aside two percent of total 
payments, already accounted for this difference.
    Response: Our decision to reduce the projected target amount of 
total payments set aside for outlier payments is based on the technical 
analyses that MedPAC conducted in its March 2004 Report to Congress 
demonstrating that the CY 2004 OPPS outlier policy was ineffective at 
addressing complex cases of financial risk and on the arguments that 
MedPAC made against outlier payments. As noted above, MedPAC argued 
that the fairly narrow definition of the APC groups makes outlier 
payments less necessary for the OPPS, that the limited packaging in 
OPPS frequently resulting in multiple service payments for any given 
claim, and that the susceptibility to ``gaming'' through charge 
inflation continues. MedPAC's 2004 Report to Congress also suggested 
that our outlier policy could be redistributing outlier payments among 
hospitals based on cost structures or charging patterns rather than 
differences in case-mix. We agree with the commenters that an unequal 
distribution of outlier payments according to differences in case mix 
is appropriate, the concern is that different case mix does not account 
for outlier payment distributions.
    We do not believe that the moderate fluctuation in APC payment 
rates that continues to be present in the OPPS is an adequate argument 
against reducing the percentage of aggregated total OPPS payments set 
aside for outlier payments for several reasons: changes in payment 
rates appropriately reflect changes in costs, the variability of costs 
is less for complex and expensive procedures, and outlier payments in 
OPPS target services not cases. As discussed in section II.A. of this 
preamble, we believe that the moderate changes in the payment rates 
remaining after the system has been operating for several years is, in 
large part, a function of the small APC group size and service basis. 
The small group size of the APCs makes changes in service costs more 
transparent than if groups were larger. Aggregation generally reduces 
variation. Changes in payment rates from year to year appropriately 
reflect true changes in the cost of a specific service. Changes in cost 
and charging patterns captured in a provider's cost report will lead to 
changes in the median cost of services from year to year. In addition, 
we are required to adjust the APCs each year to ensure that groups are 
comparable with ``respect to the use of resources.'' The ``2 times'' 
rule requires that the highest median cost for an item or service 
within the group not be greater than two times the lowest median cost. 
The ``2 times'' rule specifically limits the amount of variability of 
unit costs in any group, forcing the APC payment rates to reflect 
changes in costs. It embeds some fluctuation into APC payment rates, 
but also reduces the need for an expansive outlier policy.
    The observed variability in unit costs is greater for low cost and 
simple procedures and smaller for complex, expensive procedures. In its 
2004 Report to Congress, MedPAC found that

[[Page 68564]]

the highest variability in estimated costs was associated with the 
lowest cost items. This observation continues to be true in the CY 2004 
claims. On average, HCPCS codes with low median costs demonstrate 
greater variability, as measured by the coefficient of variation, than 
HCPCS codes with high median costs. The coefficient of variation is the 
percent of the standard deviation accounted for by the mean and enables 
a relative comparison of variation across groups. This trend also is 
evident in the APC coefficient of variation. The bottom 50 percent of 
APCs arrayed by median costs have an average coefficient of variation 
of 82 percent, whereas the top 50 percent of APCs, arrayed by median 
cost, have an average coefficient of variation of 63 percent.
    Finally, OPPS outlier payments are targeted to services, rather 
than cases. Unlike the IPPS, outlier payments are not for extremely 
costly patients but extremely costly services. In many cases, an 
extremely costly case in the outpatient setting may not warrant an 
outlier payment because no specific service was excessively costly. The 
small number of services included in any APC group means that the 
provider will receive payment for most services billed on a claim. 
Reducing total outlier payments to 1.0 percent of total OPPS payments 
effectively raises the payment for all other services because the 
foregone 1.0 percent of total spending is returned to the conversion 
factor. We acknowledge the comment stating that the comparative 
difference in cost variability between the IPPS and the OPPS is already 
accounted for in the difference between the 5 to 6 percent estimated 
outlier target under IPPS and the 2 percent projected outlier estimate 
under OPPS. However, we believe that setting total outlier payments at 
1.0 percent of total aggregated OPPS payments sets aside an appropriate 
amount of dollars for unexpected and costly services.
    Comment: One commenter indicated concern that CMS proposed an 
additional change to the outlier payments before having one year of 
experience with the fixed-dollar threshold introduced in CY 2005.
    Response: We do not believe that these two policies are related. 
The amount of total aggregated OPPS payments set aside for outlier 
payments is an entirely different policy from the manner in which those 
payments are distributed to hospitals. We did not institute the fixed-
dollar threshold to reduce outlier payments, but rather to target 
payments to expensive and costly cases. The fixed-dollar threshold will 
continue to have this effect within a smaller amount of outlier 
payments.
    Comment: Several commenters suggested that CMS did not sufficiently 
demonstrate the impact on hospitals of reducing the percentage of 
estimated total payments dedicated to outlier payments 2.0 percent to 
1.0 percent and requested this analysis. The commenters expressed 
concern that hospitals providing sophisticated and expensive 
technologies to very sick patients would be placed at greater risk of 
financial loss. Most of the commenters suggested that the reduction in 
the outlier percentage be delayed until CMS can fully evaluate the 
impact, while other commenters simply urged for a return to the 2-
percent target amount.
    Response: For the proposed rule, we did not include a specific 
analysis of the redistributive impact of outliers because the fixed-
dollar threshold policy did not change, only the aggregate amount of 
dollars paid. We did include outlier payments in our impact tables, and 
we made the amount of outlier payment estimated for each hospital 
available on our Web site. However, we appreciate commenters' desire to 
more fully view the impact of the outlier policy. For this final rule 
with comment period, we have provided a separate table in our 
regulatory impact analysis, section XIX of this preamble, showing the 
differences in total aggregated OPPS payment for CY 2006 attributable 
to the change in the outlier policy. We estimate that no class of 
hospital will experience more than a 1 percent change in total payments 
due to outlier payments and many classes of hospitals receive greater 
payments.
    Comment: Several commenters suggested that CMS pay outlier claims 
at the same rate at which inpatient outlier claims are paid, that is, 
80 percent of cost. Various rationales were provided, including 
consistency with the IPPS, ensuring that hospitals can recoup the 
variable costs of providing expensive care, and improving the adequacy 
of payments.
    Response: We believe that the payment percentage of 50 percent is 
appropriate for the OPPS because, in general, a costly OPPS service 
poses less of a financial risk for hospitals than a costly case under 
the IPPS. If we did increase the payment percentage to 80 percent, we 
would have to compensate elsewhere to maintain the 1.0 percent set 
aside for outlier payments, probably by raising the fixed-dollar 
threshold. Changing the payment percentage to 80 percent would merely 
concentrate a more generous outlier payment on a much smaller number of 
extremely costly services each year.
    Comment: One commenter recommended a new methodology for estimating 
the fixed-dollar outlier threshold for both the OPPS and the IPPS. The 
commenter suggested that, in addition to inflating charges from CY 2004 
to CY 2006, CMS also should adjust CCRs to reflect proportionally 
slower inflation in costs. The commenter believed that this would 
result in deflating overall CCRs. The commenter specifically 
recommended that CMS update the CCRs for the OPPS to the latest 
available hospital-specific data.
    Response: We agree with the commenter that the CCRs that we use to 
set the outlier thresholds should be as recent as possible. We also 
believe that these CCRs should reflect, as closely as possible, the 
actual CCRs that the fiscal intermediary will use to determine outlier 
payments in CY 2006. As we did for the IPPS final rule (70 FR 47493, 
August 12, 2005), we used the overall CCRs from the most recent 
provider-specific file, in this case, the July 2005 OPSF, to estimate 
costs from inflated charges on CY 2004 claims. The OPSF contains CCRs 
from each provider's most recent tentatively settled cost report. 
Because of the time it takes to complete cost reports and upload them 
in the fiscal intermediaries' standard systems, for at least part of CY 
2006, the CCRs on the OPSF are the same ones that the fiscal 
intermediaries will use to determine outlier payments. However, unlike 
the IPPS, the overall CCRs on the OPSF are higher than those that we 
use to estimate APC medians. The median overall CCR that we calculate 
from each hospital's cost report as a default CCR in estimating costs 
from charges in order to set relative weights is 0.305, whereas the 
median overall CCR on the OPSF is 0.32. Were we to use the CCRs from 
the OSPF, the fixed dollar threshold would increase, from $1,250 to 
$1,800.
    We will consider using the CCRs found in the OSPF for the CY 2007 
OPPS outlier calculations, similar to our calculations under IPPS. 
However, in view of the newness of a fixed-dollar threshold for OPPS 
outlier payments and our concern that using the OSPF CCRs for this 
final rule would result in an $1,800 fixed dollar threshold that is 
considerably higher than the proposed threshold, we have decided to use 
the CCRs that we calculated for the APC median setting process for our 
outlier calculations as we have in past years. These CCRs are timely, 
as the majority of them are created from cost reports with fiscal years 
beginning in 2004 and 2003.
    Comment: One commenter requested that CMS reverse its decision to 
reduce

[[Page 68565]]

the percentage of total payments attributable to outlier payments to 1 
percent and return outlier payments to the target level of 3 percent 
established under the Balanced Budget Act (BBA) of 1997.
    Response: For all of the reasons stated above, we do not believe 
that outlier payments should be increased to 3 percent of total 
payments. We further note that the BBA, as revised by the Balanced 
Budget Refinement Act (BBRA) of 1999, set an upper limit of ``no more 
than'' 3.0 percent for outlier policies, giving the Secretary the 
discretion to set a lower estimated target percent.
    Comment: One commenter expressed concern that decreasing the 
outlier pool and increasing the fixed dollar threshold may encourage 
greater packaging in order to increase procedure charges.
    Response: We do not believe that greater packaging is an issue for 
the OPPS outlier policy. Should providers choose to package more 
services into the charges for payable procedures and not report 
packaged services, over time, those higher costs would lead to higher 
payment rates for payable procedures. This would, in turn, increase the 
fixed dollar outlier threshold. Further, rolling the charges for 
packaged services into the charges for payable procedures is expected 
under OPPS.
    Comment: One commenter requested that CMS describe the services 
that qualify for outlier payments.
    Response: The actual services that qualify for outlier payments 
under the fixed dollar threshold policy introduced in CY 2005 will 
likely be quite similar to those receiving payments under 2005 OPPS. As 
noted above, at this time, we do not have a complete set of CY 2005 
claims. However, in our analysis replicating the analysis done by 
MedPAC in its March 2004 Report to Congress, we estimate that costly 
services such as APC 0246 (Cataract Procedures with IOL Insert), APC 
0080 (Diagnostic Cardiac Catheterization), and APC 0131 (Level II 
Laparoscopy) would receive a large percentage of outlier payments under 
the fixed-dollar threshold policy.
    Accordingly, after considering the public comments received, for CY 
2006, we are finalizing the OPPS outlier policy of two thresholds for 
hospitals of a multiple threshold of 1.75 times the APC payment amount 
and a fixed dollar threshold of $1,250 plus the APC payment amount and 
one threshold for CMHCs of 3.4 times the APC payment amount.

I. Calculation of the National Unadjusted Medicare Payment

    The basic methodology for determining prospective payment rates for 
OPD services under the OPPS is set forth in existing regulations at 
Sec.  419.31 and Sec.  419.32. The payment rate for services and 
procedures for which payment is made under the OPPS is the product of 
the conversion factor calculated in accordance with section II.C. of 
this final rule with comment period and the relative weight determined 
under section II.A. of this final rule with comment period. Therefore, 
the national unadjusted payment rate for APCs contained in Addendum A 
to this final rule with comment period and for HCPCS codes to which 
payment under the OPPS has been assigned in Addendum B to this final 
rule with comment period (Addendum B is provided as a convenience for 
readers) was calculated by multiplying the final CY 2006 scaled weight 
for the APC by the final CY 2006 conversion factor.
    However, to determine the payment that will be made in a calendar 
year under the OPPS to a specific hospital for an APC for a service 
other than a drug, in a circumstance in which the multiple procedure 
discount does not apply, we take the following steps:
    Step 1. Calculate 60 percent (the labor-related portion) of the 
national unadjusted payment rate. Since initial implementation of the 
OPPS, we have used 60 percent to represent our estimate of that portion 
of costs attributable, on average, to labor. (Refer to the April 7, 
2000 final rule with comment period (65 FR 18496 through 18497) for a 
detailed discussion of how we derived this percentage.)
    Step 2. Determine the wage index area in which the hospital is 
located and identify the wage index level that applies to the specific 
hospital. The wage index values assigned to each area reflect the new 
geographic statistical areas as a result of revised OMB standards 
(urban and rural) to which hospitals are assigned for FY 2006 under the 
IPPS, reclassifications through the Medicare Classification Geographic 
Review Board, section 1866(d)(8)(B) ``Lugar'' hospitals, and section 
401 of Pub. L. 108-173, and the reclassifications of hospitals under 
the one-time appeals process under section 508 of Pub. L. 108-173. The 
wage index values include the occupational mix adjustment described in 
section II.D. of this final rule with comment period that was developed 
for the FY 2006 IPPS.
    Step 3. Adjust the wage index of hospitals located in certain 
qualifying counties that have a relatively high percentage of hospital 
employees who reside in the county, but who work in a different county 
with a higher wage index, in accordance with section 505 of Pub. L. 
108-173. Addendum L contains the qualifying counties and the final wage 
index increase developed for the FY 2006 IPPS. This step is to be 
followed only if the hospital has chosen not to accept reclassification 
under Step 2 above.
    Step 4. Multiply the applicable wage index determined under Steps 2 
and 3 by the amount determined under Step 1 that represents the labor-
related portion of the national unadjusted payment rate.
    Step 5. Calculate 40 percent (the nonlabor-related portion) of the 
national unadjusted payment rate and add that amount to the resulting 
product of Step 4. The result is the wage index adjusted payment rate 
for the relevant wage index area.
    Step 6. If a provider is a SCH, as defined in Sec.  419.92, and 
located in a rural area, as defined in Sec.  412.63(b), or is treated 
as being located in a rural area under Sec.  412.103 of the Act, 
multiply the wage index adjusted payment rate by 1.071 to calculate the 
total payment.
    We received no public comments concerning our proposal for 
calculating the national unadjusted Medicare payment rate. Therefore; 
we are adopting as final, for OPPS services furnished on or after 
January 1, 2006, our proposed methodology for calculating the national 
unadjusted Medicare payment amount.

J. Beneficiary Copayments for CY 2006

1. Background
    Section 1833(t)(3)(B) of the Act requires the Secretary to set 
rules for determining copayment amounts to be paid by beneficiaries for 
covered OPD services. Section 1833(t)(8)(C)(ii) of the Act specifies 
that the Secretary must reduce the national unadjusted copayment amount 
for a covered OPD service (or group of such services) furnished in a 
year in a manner so that the effective copayment rate (determined on a 
national unadjusted basis) for that service in the year does not exceed 
specified percentages. For all services paid under the OPPS in CY 2006, 
and in calendar years thereafter, the specified percentage is 40 
percent of the APC payment rate. Section 1833(t)(3)(B)(ii) of the Act 
provides that, for a covered OPD service (or group of such services) 
furnished in a year, the national unadjusted coinsurance amount cannot 
be less than 20 percent of the OPD fee schedule amount.

[[Page 68566]]

2. Copayment for CY 2006
    For CY 2006, we proposed to determine copayment amounts for new and 
revised APCs using the same methodology that we implemented for CY 2004 
(see the November 7, 2003 OPPS final rule with comment period, 68 FR 
63458). We used the same methodology to determine the final unadjusted 
copayment amounts for services payable under the OPPS that will be 
effective January 1, 2006. These copayment amounts are shown in 
Addendum A and Addendum B of this final rule with comment period.
3. Calculation of the Unadjusted Copayment Amount for CY 2006
    To calculate the unadjusted copayment amount for an APC group, take 
the following steps:
    Step 1. Calculate the beneficiary payment percentage for the APC by 
dividing the APC's national unadjusted copayment by its payment rate. 
For example, using APC 0001, $7.00 is 29 percent of $23.79.
    Step 2. Calculate the wage adjusted payment rate for the APC, for 
the provider in question, as indicated in section II.I. of this 
preamble.
    Step 3. Multiply the percentage calculated in Step 1 by the payment 
rate calculated in Step 2. The result is the wage-adjusted copayment 
amount for the APC.
    We received two public comments concerning our proposed methodology 
for calculating the beneficiary unadjusted copayment amount.
    Comment: One commenter recommended that CMS maintain the 
coinsurance amount above 40 percent of the APC payment amount as the 
proposed payment rate for CY 2006 is lower than the CY 2005 payment 
rate when adjusted for inflation.
    Response: We appreciate the commenter's recommendation but note 
that the statute does not provide for this. Section 1833(t)(8)(C)(ii) 
of the Act specifies that the Secretary must reduce the national 
unadjusted copayment amount for a covered OPD service (or group of such 
services) furnished in a year in a manner so that the effective 
copayment rate (determined on a national unadjusted basis) for that 
service in the year does not exceed specified percentages. For all 
services paid under the OPPS in CY 2006, and in calendar years 
thereafter, that specified percentage is 40 percent of the APC payment 
rate.
    Comment: One commenter objected to beneficiaries being liable for 
more than 20 percent of the Medicare payment rate for services paid 
under the OPPS. The commenter acknowledged that the law limits the 
copayment for a single service to the amount of the inpatient 
deductible, but objected to there being no limit to the amount of 
coinsurance that a beneficiary can incur per year or even for a single 
outpatient encounter. The commenter acknowledged that the amount of 
beneficiary copayment liability is set in statute but urged CMS to work 
with Congress to restore beneficiary coinsurance of hospital outpatient 
services to the level it views as appropriate.
    Response: As the commenter indicated, the level of beneficiary 
coinsurance is set based on specific statutory criteria.
    Comment: One commenter recommended that CMS work with Congress to 
restore the beneficiary coinsurance for hospital outpatient services to 
the appropriate level. By ``appropriate,'' we assume the commenter 
means that coinsurance for all OPPS services should be 20 percent, 
which is the coinsurance rate for other services paid under Medicare 
Part B.
    Response: We appreciate the commenter's recommendation and will 
take it into consideration. However, until the statute at section 
1833(t)(8)(C)(ii) of the Act is revised, the Secretary must adhere to 
the current requirements of the law, which caps the beneficiary 
coinsurance payment at 40 percent of the APC payment rate. In addition, 
the law requires that the coinsurance amount be no less than 20 percent 
of the APC rate.
    Accordingly, we are adopting as final, for OPPS services furnished 
on or after January 1, 2006, our proposed methodology for calculating 
the beneficiary unadjusted copayment amount.

III. Ambulatory Payment Classification (APC) Group Policies

A. Introduction

    1. Treatment of New HCPCS Codes Discussed in the CY 2006 OPPS 
Proposed Rule
    During the second quarter of CY 2005, we created 11 HCPCS codes 
that were not addressed in the November 15, 2004 final rule with 
comment period that updated the CY 2005 OPPS. (Table 14 of the CY 2006 
OPPS proposed rule.) We have designated the payment status of those 
codes and added them to the April update of the CY 2005 OPPS 
(Transmittal 514). In the proposed rule, we also solicited public 
comments on the proposed APC assignments of these services.

           Table 7.--New HCPCS Codes Implemented in April 2005
------------------------------------------------------------------------
              HCPCS code                          Description
------------------------------------------------------------------------
C9127................................  Injection, paclitaxel protein-
                                        bound particles, per 1 mg.
C9128................................  Injection, pegaptamib sodium, per
                                        0.3 mg.
C9223................................  Injection, adenosine for
                                        therapeutic or diagnostic use, 6
                                        mg (not to be used to report any
                                        adenosine phosphate compounds,
                                        instead use A9270).
C9440................................  Vinorelbine tartrate, brand name,
                                        per 10 mg.
C9723................................  Dynamic infrared blood perfusion
                                        imaging (DIRI).
C9724................................  Endoscopic full-thickness
                                        plication in the gastric cardia
                                        using endoscopic plication
                                        system (EPS); includes
                                        endoscopy.
Q4079................................  Injection, natalizumab, 1 mg.
Q9941................................  Injection, Immune Globulin,
                                        Intravenous, Lyophilized, 1 g.
Q9942................................  Injection, Immune Globulin,
                                        Intravenous, Lyophilized, 10 mg.
Q9943................................  Injection, Immune Globulin,
                                        Intravenous, Non-Lyophilized, 1
                                        g.
Q9944................................  Injection, Immune Globulin,
                                        Intravenous, Non-Lyophilized, 10
                                        mg.
------------------------------------------------------------------------

    Further, consistent with our annual APC updating policy, we 
proposed to assign the new HCPCS codes for CY 2006 to the appropriate 
APCs and incorporate them into our final rule with comment period for 
CY 2006.
    We did not receive any public comments on the new procedural C 
codes, their status indicators, or their APC assignments for the two 
new OPPS procedures (C9723 and C9724) implemented in April 2005. 
Therefore, we are adopting as final our proposal to assign these HCPCS 
codes C9723 and

[[Page 68567]]

C9724 for CY 2006 to the appropriate APCs, as shown in Addendum B of 
this final rule with comment period, without modification.
    We received a number of public comments related to drugs described 
by new HCPCS codes implemented in April 2005 in the OPPS; specifically, 
HCPCS codes C9127, C9128, C9223, C9440, Q4079, Q9941, Q9942, Q9943, and 
Q9944. See section V. of this preamble (Payment Changes for Drugs, 
Biologicals, and Radiopharmaceutical Agents) for a discussion of these 
comments, including comment summaries, our responses and a description 
of our final OPPS payment policies. In addition, our final payment 
policy for CY 2006 is included in Addendum B of this final rule with 
comment period.
2. Treatment of New CY 2006 HCPCS Codes
    In the proposed rule, we proposed that we would assign new HCPCS 
codes for CY 2006 to appropriate APCs and/or status indicators and that 
we would implement them in our final rule. However, we received some 
comments regarding individual new HCPCS codes that commenters expect to 
be implemented for the first time in the CY 2006 OPPS. We do not 
specifically respond to those comments in this final rule. We could not 
discuss APC and/or status indicator assignments for new CY 2006 HCPCS 
codes in the proposed rule because the new CY 2006 HCPCS codes were not 
available when we issued the proposed rule. Rather, as has been our 
practice in the past, we implement new HCPCS codes in the OPPS final 
rule, at which time we invite public comment about our treatment of the 
new codes. We subsequently respond to those comments in the final rule 
for the following year's OPPS update.
    New 2006 HCPCS codes are designated in Addendum B with Comment 
Indicator ``NI.'' The status indicator and/or APC assignments for all 
HCPCS codes flagged with Comment Indicator ``NI'', which are new 2006 
HCPCS codes, are subject to public comment.
3. Treatment of New Mid-Year Category III CPT Codes
    Twice each year, the AMA issues Category III CPT codes, which the 
AMA defines as temporary codes for emerging technology, services, and 
procedures. The AMA established these codes to allow collection of data 
specific to the service described by the code which otherwise could 
only be reported using a Category I CPT unlisted code. The AMA releases 
Category III CPT codes in January, for implementation beginning the 
following July, and in July, for implementation beginning the following 
January. In the past, CMS has treated new Category III CPT codes 
implemented in July of the previous year or January of the OPPS update 
year in the same manner that new Category I CPT codes and new Level II 
HCPCS codes implemented in January of the OPPS update year are treated; 
that is, we provide APC and/or status indicator assignments in the 
final rule updating the OPPS for the following calendar year. New 
Category I and Category III CPT codes, as well as new Level II HCPCS 
codes, are flagged with Comment Indicator ``NI'' in Addendum B of the 
final rule to indicate that we are assigning them an interim payment 
status which is subject to public comment following publication of the 
final rule that implements the annual OPPS update.
    We are concerned that not recognizing for 6 months (from July to 
January) the Category III codes that the AMA releases each January for 
implementation in July may hinder timely collection of data pertinent 
to the services described by the codes. Moreover, delay in recognizing 
these codes could inhibit access to the services they describe because 
of provider reluctance to furnish a service that defaults to the OPPS 
payment assigned to unlisted codes. Also, we have on occasion found 
redundancy between Category III CPT codes and some of the C-codes, 
which are only payable under the OPPS and created by us in response to 
applications for New Technology services. Therefore, beginning in CY 
2006, we are modifying this process and recognizing Category III CPT 
codes that are released by the AMA in January to be effective beginning 
July of the same calendar year in which they are issued, rather than 
deferring recognition of those codes to the following calendar year 
update of the OPPS. Adopting this approach means that new Category III 
CPT codes will be recognized under the OPPS biannually rather than 
annually.
    Some of the new Category III CPT codes may describe services that 
our medical advisors determine to be similar in clinical 
characteristics and resource use to HCPCS codes in an existing APC. In 
these instances, we may assign the Category III CPT code to the 
appropriate clinical APC. Other Category III CPT codes may describe 
services that our medical advisors determine are not compatible with an 
existing clinical APC, yet are appropriately provided in the hospital 
outpatient setting. In these cases, we may assign the Category III CPT 
code to what we estimate is an appropriately priced New Technology APC. 
In other cases, we may assign a Category III CPT code one of several 
non-separately payable status indicators, including N, C, B, or E, 
which we feel is appropriate for the specific code. We expect that we 
will already have received applications for New Technology status for 
some of the services described by new Category III CPT codes, which may 
assist us in determining appropriate APC assignments. If the AMA 
establishes a Category III CPT code for a service for which an 
application has been submitted to CMS for New Technology status, CMS 
may not have to issue a temporary Level II HCPCS code to describe the 
service, as has often been the case in the past when Category III CPT 
codes were only recognized by the OPPS on an annual basis.
    Therefore, beginning in July 2006, CMS will implement in the 
regular quarterly update of the OPPS the Category III CPT codes that 
the AMA releases in January 2006 for implementation in July 2006. CMS 
will implement in the January 2007 update of the OPPS the Category III 
CPT codes that the AMA releases in July 2006, and so forth.

B. Variations Within APCs

1. Background
    Section 1833(t)(2)(A) of the Act requires the Secretary to develop 
a classification system for covered hospital outpatient services. 
Section 1833(t)(2)(B) provides that this classification system may be 
composed of groups of services, so that services within each group are 
comparable clinically and with respect to the use of resources. In 
accordance with these provisions, we developed a grouping 
classification system, referred to as the Ambulatory Payment 
Classification Groups (or APCs), as set forth in Sec.  419.31 of the 
regulations. We use Level I and Level II HCPCS codes and descriptors to 
identify and group the services within each APC. The APCs are organized 
such that each group is homogeneous both clinically and in terms of 
resource use. Using this classification system, we have established 
distinct groups of surgical, diagnostic, partial hospitalization 
services, and medical visits. We also have developed separate APC 
groups for certain medical devices, drugs, biologicals, 
radiopharmaceuticals, and brachytherapy devices.
    We have packaged into each procedure or service within an APC group 
the cost associated with those items or services that are directly 
related

[[Page 68568]]

and integral to performing a procedure or furnishing a service. 
Therefore, we do not make separate payment for packaged items or 
services. For example, packaged items and services include: use of an 
operating, treatment, or procedure room; use of a recovery room; use of 
an observation bed; anesthesia; medical/surgical supplies; 
pharmaceuticals (other than those for which separate payment may be 
allowed under the provisions discussed in section V of this preamble); 
and incidental services such as venipuncture. Our packaging methodology 
is discussed in section II.A. of this final rule with comment period.
    Under the OPPS, we pay for hospital outpatient services on a rate-
per-service basis that varies according to the APC group to which the 
service is assigned. Each APC weight represents the hospital median 
cost of the services included in that APC relative to the hospital 
median cost of the services included in APC 0601 (Mid-Level Clinic 
Visits). The APC weights are scaled to APC 0601 because a mid-level 
clinic visit is one of the most frequently performed services in the 
outpatient setting.
    Section 1833(t)(9)(A) of the Act requires the Secretary to review 
the components of the OPPS not less than annually and to revise the 
groups and relative payment weights and make other adjustments to take 
into account changes in medical practice, changes in technology, and 
the addition of new services, new cost data, and other relevant 
information and factors. Section 1833(t)(9)(A) of the Act, as amended 
by section 201(h) of the BBRA of 1999, also requires the Secretary, 
beginning in CY 2001, to consult with an outside panel of experts to 
review the APC groups and the relative payment weights (the APC Panel 
recommendations for CY 2006 OPPS and our responses to them are 
discussed in sections III.B. and III.C.4. of this preamble).
    Finally, as discussed earlier, section 1833(t)(2) of the Act 
provides that, subject to certain exceptions, the items and services 
within an APC group cannot be considered comparable with respect to the 
use of resources if the highest median (or mean cost, if elected by the 
Secretary) for an item or service in the group is more than 2 times 
greater than the lowest median cost for an item or service within the 
same group (referred to as the ``2 times rule''). We use the median 
cost of the item or service in implementing this provision. The statute 
authorizes the Secretary to make exceptions to the 2 times rule in 
unusual cases, such as low-volume items and services.
2. Application of the 2 Times Rule
    In accordance with section 1833(t)(2) of the Act and Sec.  419.31 
of the regulations, we annually review the items and services within an 
APC group to determine, with respect to comparability of the use of 
resources, if the median of the highest cost item or service within an 
APC group is more than 2 times greater than the median of the lowest 
cost item or service within that same group (``2 times rule''). We make 
exceptions to this limit on the variation of costs within each APC 
group in unusual cases such as low-volume items and services. The 
statute provides no exception in the case of a drug or biological that 
has been designated as an orphan drug under section 526 of the Federal 
Food, Drug, and Cosmetic Act because these drugs are assigned to 
individual APCs.
    During the APC Panel's February 2005 meeting, we presented median 
cost and utilization data for the period of January 1, 2004, through 
September 30, 2004, concerning a number of APCs that violated the 2 
times rule and asked the APC Panel for its recommendation. After 
carefully considering the information and data we presented, the APC 
Panel recommended moving a total of 65 HCPCS codes from their currently 
assigned APCs to different APCs to resolve the 2 times rule violations. 
Of the 65 HCPCS code reassignments recommended by the APC Panel, we 
concurred with 58 of the recommended reassignments. Therefore, we 
proposed to reassign the HCPCS codes as indicated in Table 7 of the 
proposed rule (70 FR 42703).
    The seven HCPCS code movements that the APC Panel recommended, but 
upon further review we proposed not to accept, are discussed below. We 
include in our discussion the assignments we also proposed and the 
final assignments for CY 2006.
    a. APC 0146: Level I Sigmoidoscopy, APC 0147: Level II 
Sigmoidoscopy, APC 0428: Level III Sigmoidoscopy. APCs 0146 and 0147 
were exceptions to the 2 times rule in CY 2005. At the time of the 
proposed rule, our analysis of those two APCs based on partial year CY 
2004 data revealed greater violations of the 2 times rule and changing 
relative frequencies of simple and complex procedures in these two 
APCs. Thus, for CY 2006 the APC Panel assisted us in reconfiguring 
these two APCs into three related APCs to resolve the two times 
violations and improve their clinical and resource homogeneity based on 
the partial CY 2004 hospital claims data and to remove these APCs from 
the list of exceptions. The APC Panel recommended maintaining CPT codes 
45303 (Proctosigmoidoscopy, rigid; with dilation) and 45305 
(Proctosigmoidoscopy, rigid; with biopsy, single or multiple) in APC 
0146 because the median cost for these codes appeared too high, and 
they believed that the CY 2004 claims were aberrant. In addition, the 
APC Panel recommended that CMS move CPT code 45309 
(Proctosigmoidoscopy, rigid; with removal of single tumor, polyp, or 
other lesion by snare technique) from APC 0147 and assign it to a new 
proposed APC 0428. Based on the results of our review of several years 
of claims data and our study of hospital resource homogeneity, we 
disagreed that those claims data were aberrant. We proposed to move CPT 
codes 45303 and 45305 to APC 0147 and to keep CPT 45309 in APC 0147, to 
resolve the 2 times rule violation.
    We received no public comments concerning our proposed APC 
assignments for CPT codes 45303, 45305 and 45309 and are making final 
our proposal, without modification.
    b. APC 0342: Level I Pathology, APC 0433: Level II Pathology, APC 
0343: Level III Pathology. To resolve a 2 times rule violation, the APC 
Panel recommended moving CPT codes 88108 (Cytopathology, concentration 
technique, smears and interpretation) and 88112 (Cytopathology, 
selective cellular enhancement technique with interpretation, except 
vaginal or cervical) from APC 0343 to a proposed new APC 0433. The APC 
Panel also recommended moving CPT codes 88319 (Determinitive 
histochemistry or cytochemistry to identify enzyme constituents) and 
88321 (Consultation and report on referred slides prepared elsewhere) 
from APC 0342 to a proposed new APC 0433. Based on the results of our 
review of several years of hospital claims data and our study of 
hospital resource homogeneity, we proposed a different way to resolve 
the 2 times rule violation. We proposed to place CPT codes 88319 and 
88112 in APC 0343 and to place CPT codes 88108 and 88321 in new APC 
0433.
    We received no public comments concerning our proposal.
    We will finalize, without modification our proposal to assign CPT 
codes 88112 and 88319 to APC 0343 and to assign CPT codes 88108 and 
88321 to new APC 0433.
    c. Other Comments on the Proposed List of APC Assignments to 
Address 2 Times Violations. We received a few comments concerning our 
proposed reassignments for several of the other

[[Page 68569]]

HCPCS codes (for example, CPT codes 57155, 75790, and 88187) indicated 
in Table 7 of the proposed rule (70 FR 42703) and the responses are 
included in clinically relevant sections, elsewhere in this preamble.
    After carefully reviewing our final data and all comments received 
concerning our proposed assignments of the 58 HCPCS codes, we are 
finalizing those assignments as proposed.
3. Exceptions to the 2 Times Rule
    As discussed earlier, we may make exceptions to the 2 times limit 
on the variation of costs within each APC group in unusual cases such 
as low-volume items and services. At the time of the proposed rule, 
taking into account the APC changes that we proposed for CY 2006 based 
on the APC Panel recommendations discussed in section III.B.1. of this 
preamble and the use of CY 2004 claims data to calculate the median 
costs of procedures classified in the APCs, we reviewed all the APCs to 
determine which APCs would not satisfy the 2 times rule criteria. We 
used the following criteria to decide whether to propose exceptions to 
the 2 times rule for affected APCs:
     Resource homogeneity
     Clinical homogeneity
     Hospital concentration
     Frequency of service (volume)
     Opportunity for upcoding and code fragments.
    For a detailed discussion of these criteria, refer to the April 7, 
2000 OPPS final rule with comment period (65 FR 18457).
    Table 8 published in the proposed rule (70 FR 42705) listed the 
APCs that we proposed to exempt from the 2 times rule based on the 
criteria cited above. For cases in which a recommendation by the APC 
Panel appeared to result in or allow a violation of the 2 times rule, 
we generally accepted the APC Panel's recommendation because those 
recommendations were based on explicit consideration of resource use, 
clinical homogeneity, hospital specialization, and the quality of the 
data used to determine the APC payment rates that we proposed for CY 
2006. The median costs for hospital outpatient services for these and 
all other APCs can be found on the CMS Web site: http//www.cms.hhs.gov.
    We received a number of comments about some of the procedures 
assigned to APCs that we proposed to make exempt from the 2 times rule 
for CY 2006. Those discussions are elsewhere in the preamble, in 
sections related to the types of procedures that were the subject of 
the comments.
    For the proposed rule the listed exceptions to the 2 times rule 
were based on data from January 1, 2004 through September 30, 2004. For 
this final rule with comment period, we used data from January 1, 2004 
through December 31, 2004. Thus, after responding to all of the 
comments on the proposed rule and making changes to APCs based on those 
comments, we analyzed the full CY 2004 data to identify APCs with 2 
times rule violations.
    Based on those final data, we found that there were 41 APCs with 2 
times violations. We were able to remedy two violations of the 2 times 
rule that appeared in the final data for APC 0363 (Level I 
Otorhinolaryngologic Function Tests) and APC 0010, (Level I Destruction 
of Lesion). We moved CPT code 92588 (Evoked otoacoustic emissions; 
comprehensive or diagnostic evaluation) from APC 0363 to APC 0660 
(Level II Otorhinolaryngologic Function Tests) to address a 2-times 
violation in APC 0363. We applied the criteria as described earlier to 
finalize the APCs that are exceptions to the 2 times rule for CY 2006.
    Listed below in Table 8 is the final revised list of APCs that are 
exceptions to the 2 times rule for CY 2006.

BILLING CODE 4120-01-P

[[Page 68570]]

[GRAPHIC] [TIFF OMITTED] TR10NO05.014


[[Page 68571]]


BILLING CODE 4120-01-C

C. New Technology APCs

1. Introduction
    In the November 30, 2001 final rule (66 FR 59903), we finalized 
changes to the time period a service was eligible for payment under a 
New Technology APC. Beginning in CY 2002, we retain services within New 
Technology APC groups until we gather sufficient claims data to enable 
us to assign the service to a clinically appropriate APC. This policy 
allows us to move a service from a New Technology APC in less than 2 
years if sufficient data are available. It also allows us to retain a 
service in a New Technology APC for more than 3 years if sufficient 
data upon which to base a decision for reassignment have not been 
collected.
    Every year we receive many requests for higher payment amounts for 
specific procedures under the OPPS because they require the use of 
expensive equipment. We are taking this opportunity to respond in 
general to the issue of hospitals' capital expenditures as they relate 
to the OPPS and Medicare.
    Under the OPPS, our goal is to make payments that are appropriate 
for the services that are necessary for treatment of Medicare 
beneficiaries. The OPPS and most other Medicare payment systems are 
budget neutral and so, although we do not pay full hospital costs for 
procedures, we believe that our payment rates generally reflect the 
costs that are associated with providing care to Medicare beneficiaries 
in cost-efficient settings. Further, we believe that our rates are 
adequate to assure access to services for most beneficiaries.
    For many emerging technologies there is a transitional period 
during which utilization may be low, often because providers are first 
learning about the techniques and their clinical utility. Quite often, 
the requests for higher payment amounts are for new procedures in that 
transitional phase. The requests, and their accompanying estimates for 
expected Medicare beneficiary or total patient utilization, often 
reflect very low rates of patient use, resulting in high per use costs 
for which requestors believe Medicare should make full payment. 
Medicare does not, and we believe should not, assume responsibility for 
more than its share of the costs of procedures based on Medicare 
beneficiary projected utilization and does not set its payment rates 
based on initial projections of low utilization for services that 
require expensive capital equipment. For the OPPS, we rely on hospitals 
to make their business decisions regarding acquisition of high cost 
capital equipment taking into consideration their knowledge about their 
entire patient base (Medicare beneficiaries included) and an 
understanding of Medicare's and other payors' payment policies.
    As stated earlier, in a budget neutral environment we do not make 
payments that fully cover hospitals' costs, including those for the 
purchase and maintenance of capital equipment. We rely on providers to 
make their decisions regarding the acquisition of high cost equipment 
with the understanding that the Medicare program must be careful to 
establish its initial payment rates for new services that lack hospital 
claims data based on realistic utilization projections for all such 
services delivered in cost efficient hospital outpatient settings. As 
the OPPS acquires claims data regarding hospital costs associated with 
new procedures, we will regularly examine the claims data and any 
available new information regarding the clinical aspects of new 
procedures to confirm that our OPPS payments remain appropriate for 
procedures as they transition into mainstream medical practice.
2. Refinement of New Technology Cost Bands
    In the November 7, 2003 final rule with comment period, we last 
restructured the New Technology APC groups to make the cost intervals 
more consistent across payment levels (68 FR 63416). We established 
payment levels in $50, $100, and $500 intervals and expanded the number 
of New Technology APCs. We also retained two parallel sets of New 
Technology APCs, one set with a status indicator of ``S'' (Significant 
Procedure, Not Discounted When Multiple) and the other set with a 
status indicator of ``T'' (Significant Procedures, Multiple Reduction 
Applies). We did this restructuring because the number of procedures 
assigned to New Technology APCs had increased, and narrower cost bands 
were necessary to avoid significant payment inaccuracies for new 
technology services. Therefore, we dedicated two new series of APCs to 
the restructured New Technology APCs, which allowed us to narrow the 
cost bands and afforded us the flexibility to create additional bands 
as future needs dictated.
    As the number of procedures that qualify for placement in the New 
Technology APCs has continued to increase over the past 2 years, we 
recognized that the $0 to $50 cost band represented by ``S'' status APC 
1501 (New Technology, Level I, $0-$50) and ``T'' status APC 1538 (New 
Technology, Level I, $0-$50) spanned too broad of a cost interval to 
accurately represent the lower costs of an ever-increasing number of 
procedures that are appropriate for New Technology APC assignment. 
Therefore, we proposed to refine this cost band to five $10 increments, 
resulting in the creation of an additional 10 New Technology APCs to 
accommodate the two parallel sets of New Technology APCs, one set with 
a status indicator of ``S'' and the other set with a status indicator 
of ``T.'' We also proposed to eliminate the two $0 to $50 cost band New 
Technology APCs 1501 and 1538, so that the cost bands of all New 
Technology APCs would continue to be mutually exclusive. Table 9 
published in the proposed rule (70 FR 42706) contained a listing of the 
10 additional New Technology APCs that we proposed for CY 2006.
    As we explained in the November 30, 2001 final rule (66 FR 59897), 
we generally keep a procedure in the New Technology APC to which it is 
initially assigned until we have collected data sufficient to enable us 
to move the procedure to a clinically appropriate APC. However, in 
cases where we find that our original New Technology APC assignment was 
based on inaccurate or inadequate information, or where the New 
Technology APCs are restructured, we may, based on more recent resource 
utilization information (including claims data) or the availability of 
refined New Technology APC bands, reassign the procedure or service to 
a different New Technology APC that most appropriately reflects its 
cost. Therefore, we proposed to discontinue New Technology APCs 1501 
and 1538, and reassign the procedures currently assigned to them to 
proposed New Technology APCs 1491 through 1500. Table 10 published in 
our proposed rule (70 FR 42707) summarized these proposed New 
Technology APC reassignments.
    We received no public comments in response to our proposed 
refinement of the New Technology APC cost bands. Therefore, for CY 
2006, we are finalizing our proposal to discontinue New Technology APCs 
1501 and 1538, and reassign the procedures currently assigned to them 
to New Technology APCs 1491 through 1500. Table 9 lists the final New 
Technology APCs 1491 through 1500 for CY 2006.

[[Page 68572]]



                Table 9.--New Technology APCs for CY 2006
------------------------------------------------------------------------
                                                               Final CY
                                                  Status         2006
        APC                 Descriptor           Indicator     payment
                                                                 rate
------------------------------------------------------------------------
1491..............  New Technology--Level IA             S            $5
                     ($0-$10).
1492..............  New Technology--Level IB             S            15
                     ($10-$20).
1493..............  New Technology--Level IC             S            25
                     ($20-$30).
1494..............  New Technology--Level ID             S            35
                     ($30-$40).
1495..............  New Technology--Level IE             S            45
                     ($40-$50).
1496..............  New Technology--Level IA             T             5
                     ($0-$10).
1497..............  New Technology--Level IB             T            15
                     ($10-$20).
1498..............  New Technology--Level IC             T            25
                     ($20-$30).
1499..............  New Technology--Level ID             T            35
                     ($30-$40).
1500..............  New Technology--Level IE             T            45
                     ($40-$50).
------------------------------------------------------------------------

3. Requirements for Assigning Services to New Technology APCs
    In the April 7, 2000, final rule (65 FR 18477), we created a set of 
New Technology APCs to pay for certain new technology services under 
the OPPS. We described a group of criteria for use in determining 
whether a service is eligible for assignment to a New Technology APC. 
We subsequently modified this set of criteria in our November 30, 2001, 
final rule (66 FR 59897 to 59901), effective January 1, 2002. These 
modifications were based on changes in the data (we were no longer 
required to use CY 1996 data to set payment rates) and on our 
continuing experience with the assignment of services to New Technology 
APCs.
    In the course of reviewing applications for New Technology APC 
assignments under the OPPS, we have encountered many situations in 
which there is extremely limited clinical experience with new 
technology services regarding their use and efficacy in the typical 
Medicare population. In some cases, there has been ambiguity regarding 
how the new technology services fit within the standard coding 
framework for established procedures, and there may be no specific 
coding available for the new technology services in other settings or 
for use by other payers. Nevertheless, applicants requesting assignment 
of services to New Technology APCs request that we provide billing and 
payment mechanisms under the OPPS for the new technology services 
through the establishment of codes, descriptors, and payment rates. As 
stated in section I.F. of this preamble, we remain committed to the 
overarching goal of ensuring that Medicare beneficiaries have timely 
access to the most effective new medical treatments and technologies in 
clinically appropriate settings. In the CY 2006 proposed rule, we 
indicated that we believed that our current New Technology APC 
assignment process helps to assure such access, and that an enhancement 
to the New Technology APC application process might further encourage 
appropriate dissemination of and Medicare beneficiary access to new 
technology services.
    We are interested in promoting review of the coding, clinical use, 
and efficacy of new technology services by the greater medical 
community through our New Technology APC application and review process 
for the OPPS. Therefore, in addition to our current information 
requirements at the time of application, we proposed to require that an 
application for a code for a new technology service be submitted to the 
American Medical Association's (AMA's) CPT Editorial Panel before we 
accept a New Technology APC application for review. In making this 
proposal, we specifically indicated that we would not change our 
current criteria for assignment of a service to a New Technology APC. 
Rather, the intent of the proposed new requirement was to encourage 
timely review of a new service or procedure by the wider medical 
community as CMS is reviewing it for possible new coding and assignment 
to a New Technology APC under the OPPS. The AMA's CPT Editorial Panel 
has only one CPT code application that is used by applicants requesting 
consideration for either Category I or III codes. We indicated that we 
would accept either a Category I or Category III code application to 
the CPT Editorial Panel. The application requests relevant clinical 
information regarding new services, including their appropriate use and 
the patient populations expected to benefit from the services, which 
would provide us with useful additional information. CPT code 
applications are reviewed by the CPT Editorial Panel, whose members 
bring diverse clinical expertise to that review. In the proposed rule, 
we indicated our belief that consideration by the CPT Editorial Panel 
might facilitate appropriate dissemination of the new technology 
services across delivery settings and bring to light other needed 
coding changes or clarifications. We further proposed that a copy of 
the submitted CPT application be filed with us as part of the 
application for a New Technology APC assignment under the OPPS, along 
with CPT's letter acknowledging or accepting the coding application. We 
reminded the public that we do not consider an application complete 
until all informational requirements are provided. In addition, we 
reminded the public that when we assign a new service a HCPCS code and 
provide for payment under the OPPS, these actions do not imply coverage 
by the Medicare program, but indicate only how the procedure or service 
may be paid if covered by the program. Fiscal intermediaries must 
determine whether a service meets all program requirements for 
coverage, for example, that it is reasonable and necessary to treat the 
beneficiary's condition and whether it is excluded from payment. CMS 
may also make National Coverage Determinations (NCDs) on new technology 
procedures.
    We received a large number of public comments concerning our 
proposal.
    Comment: Many commenters suggested that the AMA CPT Editorial Panel 
may not be the most appropriate forum for a federally mandated 
decision. Some of these commenters pointed out that meetings of the 
panel and the considerations on which it bases decisions are not open 
to the public. Other commenters questioned whether there is an inherent 
conflict in the proposal, as CMS and the AMA are distinctly separate 
organizations with different objectives and constituencies, so that it 
may not be in the interest of Medicare beneficiaries to tie CMS policy 
to proceedings of the AMA. Other commenters suggested that even the 
requirement that the AMA acknowledge receipt of the coding application 
suggests that the AMA has potential ``veto'' power over CMS authority 
and

[[Page 68573]]

may thus constitute an unlawful delegation of federal decision making.
    Response: We wish to clarify that it was not our proposal to rely 
upon the decisions of the CPT Editorial Panel. Nor did we propose to 
adopt the objectives or policies of the AMA or the CPT Editorial Panel. 
Rather, we proposed only to require initiation of the process for 
obtaining a CPT code in order to foster the common objective of 
appropriately recognizing new technology services and properly coding 
those services. Under our proposal, we would continue to make 
determinations about the need for new HCPCS codes and about appropriate 
assignments to New Technology APCs to establish payment rates 
completely independently of the CPT Editorial Panel. We also proposed 
only that the applicant show us a letter of acknowledgement or receipt 
from the AMA, not that the AMA would send us such a letter or withhold 
such a letter as a way to exercise veto power.
    Comment: One commenter stated that while it is possible for 
manufacturers to file CPT applications to the AMA, the AMA has usually 
discouraged this practice and specialty societies have been slow to 
support CPT applications not vetted through them. Another commenter 
indicated that manufacturers are often not in receipt of letters from 
the AMA indicating receipt of a CPT coding application, and hence may 
not be able to provide these letters with their application for New 
Technology APC assignment. Other commenters claimed that if a 
manufacturer waits to gather clinical and utilization information 
sufficient to support a Category I code, the application may no longer 
meet CMS's definition of ``truly new'' and may be ineligible for a New 
Technology APC assignment.
    Response: Our proposal did not specifically require that 
manufacturers submit applications to the CPT Editorial Panel. In fact, 
we specifically proposed only that such an application ``be 
submitted,'' and did not stipulate the identity of the applicant. In 
addition, we were not proposing to require that manufacturers provide 
us with copies of letters they had received directly from the AMA. We 
understand, however, that manufacturers ordinarily work in concert with 
the actual applicants for new CPT codes, and expect that it is 
reasonable for a manufacturer to be able to obtain such a letter. We 
also specifically required only the initiation of the application 
process, not the receipt of a positive (or negative) decision by the 
CPT Editorial Panel, in order to prevent the process from delaying our 
decision beyond the point at which a New Technology APC assignment is 
appropriate. Our proposal was meant only to encourage the appropriate 
dissemination of information, data collection, and review by the wider 
medical community concerning new technologies. Finally, it is worth 
emphasizing that while our objective is to consider for assignment to 
New Technology APCs services that represent technologies that are 
``truly new,'' for designation under the OPPS we specifically rely on 
our criteria which require that a service or procedure not be described 
by any existing HCPCS code or combination of codes, that it cannot be 
adequately represented in the claims data being used for the most 
current annual OPPS update, and that there is no appropriate clinical 
APC for its assignment. We do not believe that our proposal to require 
initiation of the CPT application process would result in delays beyond 
the point at which these criteria could still be met.
    Comment: One commenter stated that there are only three submission 
deadlines per year for CPT applications, which do not comport to the 
quarterly schedule for filing New Technology applications to CMS.
    Response: The filing dates for New Technology applications are 
informational dates published on our website as reference points for 
application receipt related to the earliest date for adding a new code 
for an approved service to a New Technology APC, that is, the beginning 
of the following quarter. The actual dates for adding new services, if 
approved, are often later than the next quarter, depending on specific 
issues related to comprehensive evaluation of a specific application, 
which often involves requests for additional information.
    Comment: One commenter recommended as an alternative that CMS 
create codes for qualifying services and assign them to a New 
Technology APC and stipulate that those applicants must apply to the 
CPT Editorial Panel for a new code within one year.
    Response: We do not believe that it would be advisable to accept 
this recommendation. First, we do not have a policy of making 
contingent approvals for payment. All requirements for Medicare payment 
must be met at the time a code and payment rate are established. In 
addition, this recommendation would require establishing a mechanism to 
monitor compliance with the condition of approval. Finally, the 
necessity of withdrawing some HCPCS codes from coding and payment 
because of non-compliance has great potential for causing confusion 
among providers.
    Comment: One commenter stated that our concern about limited 
experience with new technologies in the Medicare population is more 
appropriately related to coverage of new procedures, rather than to 
coding issues. Assignment of a service to a New Technology APC is meant 
to create a mechanism for gathering utilization data, and does not 
guarantee coverage and payment of a technology. Coverage for new 
technologies remains the discretion of Medicare contractors, unless CMS 
makes a national coverage determination. This commenter claimed that 
the proposal to require a CPT coding application implies that CMS would 
be effectively removing the Medicare contractors from the coverage 
decision-making process.
    Response: We do not believe that our proposal would have the effect 
of removing Medicare contractors from the process of making coverage 
decisions, or otherwise usurp the role of the coverage decision-making 
process. Rather, the proposal would serve merely to promote evaluation 
of new services by the wider medical community, so that the results of 
this evaluation could serve to assist in broader distribution of new 
clinical information, establishment of appropriate standard coding, and 
wider dissemination of promising technologies. Even when the CPT 
Editorial Panel establishes a new code, Medicare contractors have 
discretion to make local coverage decisions, and CMS retains the right 
to make national coverage determinations with regard to the procedure 
or service.
    Comment: Some commenters indicated that there are unique payment 
concerns related to applying for a Category III CPT code, asserting 
that many Medicare contractors view Category III CPT codes as an 
indication that a technology is experimental or investigational. One 
commenter provided as an example a proposed and final policy of one CMS 
contractor not to cover any technologies described by Category III CPT 
codes, ``since these codes have been created to track new, unproven 
therapies and tests.'' Another commenter claimed that assignment of a 
Category III CPT code often results in non-coverage decisions by both 
local carriers and fiscal intermediaries.
    Response: The example provided by commenters about the implications 
of Category III CPT codes for coverage decisions by Medicare 
contractors appears to be relevant outside the context of the OPPS, 
mainly within the physician payment context. We have been unable to 
identify any fiscal

[[Page 68574]]

intermediary that has adopted any such broad noncoverage policy 
regarding Category III CPT codes.
    Comment: One group of commenters urged us not to adopt the proposed 
requirement that a CPT application submission to the AMA's CPT 
Editorial Panel be required before we accept a New Technology APC 
application for review. These commenters asserted that a CPT coding 
application, in and of itself, will not provide us with input from the 
greater medical community, unless we wait until the CPT Editorial Panel 
has made a coding decision and that decision has been made public. 
Because of the timing of the CPT code review process, it is not 
reasonable for CMS to wait until the CPT Editorial Panel has made a 
public coding decision, which can take 6-12 months for an internal 
decision, and 6-24 months before publishing a coding decision for a 
Category I code. These commenters also believed that this requirement 
would delay access to new services, asserting that applying for a CPT 
code is a lengthy process and involves months of gathering information 
on the technology and its use, working with relevant specialty 
societies to obtain support for a new code and to develop a clinical 
vignette, and consulting within the CPT Editorial Panel. In order to 
obtain a Category I code, the new technology must have widespread usage 
across the country and in multiple locations, and its efficacy must be 
documented in U.S. peer-reviewed journal articles. Other commenters 
stated that a number of issues regarding the CPT coding process make 
our proposal impractical, in addition to the lack of a guaranteed 
timely review by the CPT Editorial Panel. The AMA does not have 
``official'' evidence and utilization thresholds for coding 
applications. However, commenters indicated that physician specialty 
societies often require certain thresholds of utilization or clinical 
evidence be met before a Category I CPT application for a new service 
is submitted, and there is considerable variation in such thresholds 
among the specialty societies. If a manufacturer submits an application 
without society support or before there is widespread utilization, the 
application is more likely to be denied or assigned a Category III CPT 
code, even if that was not requested. Some commenters indicated that 
there are payment concerns in applying for a Category III CPT code, 
asserting that most private payers view Category III CPT codes as 
indication that a technology is experimental or investigational, and 
therefore refuse to cover procedures or services described by Category 
III CPT codes. These commenters asserted that because of the risk of 
non-coverage of Category III CPT codes, manufacturers may forego 
applying for New Technology APC assignments, or will be hesitant to 
apply for both a New Technology APC assignment and CPT code 
simultaneously. Without unique service codes, it will be more difficult 
for CMS to track new services and eventually to assign them to 
clinically appropriate APCs. The result will be fewer New Technology 
APC applications, and less beneficiary access to new technologies. A 
few commenters asserted that little would be gained by the mere filing 
of a CPT application without a coding determination from the CPT 
Editorial Panel, because the information in both applications is 
similar. One commenter suggested that if there is information from the 
CPT application that CMS requires to evaluate the New Technology APC 
application, we should add such questions to our application.
    In lieu of using the CPT coding process to encourage review by the 
wider medical community, a few commenters recommend that CMS appoint a 
standing advisory committee of clinical representatives, or another 
independent group of medical experts from specialties and hospitals, to 
review New Technology APC applications and provide input to CMS. Other 
commenters also suggested that we convene an independent group of 
medical experts to assist in the review of applications as necessary.
    A number of other commenters, principally from hospitals and 
hospital associations, supported our proposal to require a CPT 
application prior to our consideration of a New Technology APC 
application because they favored less ambiguity in the coding 
framework. Some of these commenters said that there is a proliferation 
of C-codes and G-codes, which are burdensome to hospitals as such codes 
are often not recognized by other payers, and our proposal will 
minimize the need for expedited issuance of C-codes or G-codes. They 
asserted that hospitals would benefit by reduced duplication of codes 
for services recognized by Medicare and other payers. Other commenters 
claimed that the correct process for coding new services is to start by 
way of the CPT Editorial Panel review process rather than the New 
Technology APC application process. Other commenters also supported the 
requirement on the grounds that the CPT review process is rigorous, 
including input by physician specialty societies, which indicates the 
level of acceptance of a new technology in the medical community, 
relevant to the OPPS because physicians perform new technology 
procedures in the hospital setting. One commenter indicated that there 
may be specific occasions when it is necessary to submit applications 
to the CPT Editorial Panel and CMS simultaneously. Another commenter 
requested that we recognize potential delays resulting from this 
additional step and expedite our review of New Technology APC 
applications. Finally, one commenter indicated appreciation of the 
reasons for the proposal, but asked that this new requirement remain as 
stated, that an application needs to be submitted to the AMA CPT 
Editorial Panel, but that it did not necessarily need to be reviewed 
and processed by the CPT Editorial Panel prior to CMS's consideration 
of the New Technology APC application.
    Response: In light of the strong division among the commenters on 
the merits of our proposal to require that a CPT coding request be 
submitted prior to submission of a New Technology APC application, we 
have decided not to adopt this proposal at this time. Many of the 
comments reflect confusion about the specifics of the proposal. 
Therefore, we are concerned that, because the commenters did not 
understand some specifics of this proposal during their review of the 
CY 2006 proposed rule, we may similarly not be in a position to 
understand all the implications of the concerns noted by the 
commenters. In particular, we did not intend to tie our decision-making 
regarding applications for New Technology APC assignment to the CPT 
Editorial Panel process, but wished to promote review of the coding, 
clinical use, and efficacy of new technology services by the wider 
medical community to facilitate the swift spread of promising new 
technologies into medical practice.
    While we are deferring our proposal, we continue to believe that 
timely review of potential new services by the wider medical community 
is valuable, given our experience that many services that have 
requested OPPS coding and assignment to a New Technology APC have 
demonstrated limited clinical efficacy. We also continue to believe 
that new technology services deserve timely standard and comprehensive 
coding established through the CPT Editorial Panel review process to 
permit appropriate payment and data collection regarding their 
utilization patterns and clinical outcomes. We also do not agree with 
many of the criticisms directed against the proposal. For example, as 
stated previously, we do not agree that

[[Page 68575]]

our proposal to have applicants file a CPT coding request before 
submission of a New Technology APC application would make the CPT 
coding process a Federal decisionmaking forum. This is because we would 
not require a decision to be made by the CPT Editorial Panel. However, 
in light of the numerous and considered comments opposed to the 
proposal, we are not proceeding with it at this time.
    At the same time, we remain committed to the general goal of 
promoting review of the coding, clinical use, and efficacy of new 
technology services by the wider medical community. We continue to 
believe that such broad and early review of new technology procedures 
would enhance our ability to make appropriate initial and subsequent 
decisions on assignments of new services to New Technology APCs and 
would facilitate the more rapid dissemination of promising new 
technologies to all service settings and appropriate patient 
populations. Therefore, we will continue to study how to best achieve 
these goals of timely review of new technologies by the general medical 
community to validate their clinical worth and distinctiveness in 
comparison with existing services and to promote more rapid 
dissemination of effective new procedures throughout standard medical 
practice. In doing so, we will continue to consider whether the 
proposal we advanced would serve that goal. We would specifically 
welcome further input on this proposal or alternatives to it. We may 
reintroduce this proposal or advance alternative approaches at a later 
date.
    As a preliminary matter, we are not inclined to accept one 
alternative recommended by some commenters. Specifically, we are not 
inclined to establish a standing advisory committee to provide input on 
New Technology applications to the OPPS, as some have suggested. A 
standing committee involving outside experts would add additional 
review time that would impede upon our application process, as well as 
prevent us from evaluating New Technology applications for addition to 
the OPPS on a quarterly basis, as appropriate. We prefer to maintain 
the flexibility that our current process provides. In addition, the 
specific medical expertise required to evaluate new technologies would 
likely vary widely from application to application. This factor would 
render consultation with a standing advisory committee with fairly 
stable membership more difficult to maintain.
4. New Technology Services
a. Ablation of Bone Tumors
    Comment: One commenter requested that we reassign CPT code 20982 
(Ablation, bone tumor(s) (eg, osteoid osteoma, metastasis) 
radiofrequency, percutaneous, including computed tomographic guidance) 
from New Technology Level XX, APC 1557 to New Technology Level XXII, 
APC 1559. The commenter stated that the procedure has been in New 
Technology APC 1557 for 2 years, and that the payment rate for that APC 
is not adequate to cover the hospitals' costs. The commenter asserted 
that assignment to that APC was based on inadequate information. The 
commenter used physician practice expense data to estimate costs to 
perform the ablation procedure, and stated that the costs far surpass 
the OPPS payment amount, largely due to the high cost of the necessary 
radiofrequency probe. Further, the commenter added that its analysis 
found that 2 of the 16 single claims CMS used to calculate the median 
cost for CPT code 20982 for the proposed rule were inaccurate because 
no charge for the ablation device, as indicated by the absence of a 
separate supply charge, was included. The commenter believed that those 
two claims had a significant effect on the median cost for CPT code 
20982, because of the small number of claims for the procedure. The 
commenters' analysis further showed that the median cost for these 
procedures was $2,156 based on 14 claims that included a supply charge.
    Response: As we have stated in this preamble, we are committed to 
relying on our claims data for making APC assignments as much as 
possible. While we appreciate the external data provided by the 
commenter regarding the costs of supplies associated with the practice 
expense inputs for the Medicare Physician Fee Schedule, that payment 
system utilizes a different methodology for establishing payment for 
services that is not directly applicable to payment rates under the 
OPPS. In the case of CPT code 20982, we believe that our hospital 
claims data are adequate to support our proposal to maintain the 
service in New Technology APC 1557 for CY 2006. CPT code 20982 was a 
new code for CY 2004 so we have 1 year of hospital data for this 
procedure. For CPT code 20982, we have 17 single claims from CY 2004 
with a procedure-specific median cost of $1,578. As we do not require 
that hospitals bill a separate supply charge for the probe that is used 
for this service because there is no specific device C-code available, 
we have no reason to believe that claims for CPT code 20982 without a 
separate supply charge do not contain charges for all costs associated 
with the procedure. The catheter charges may be wrapped into the charge 
for the procedure itself. The code-specific median indicates that even 
the current New Technology APC payment at $1,850 may be too high, but 
given the information provided by the commenter and the relatively low 
number of CY 2004 claims available for calculating the median cost for 
CPT code 20982, we are finalizing our proposal for CY 2006 and are 
retaining CPT code 20982 for at least 1 more year in New Technology APC 
1557.
b. Breast Brachytherapy
    Comment: In response to the November 15, 2004 final rule with 
comment period (69 FR 65682), one commenter applauded our assignment of 
CPT codes 19296 (Placement of radiotherapy afterloading balloon 
catheter into the breast for interstitial radioelement application) and 
19298 (Placement of radiotherapy afterloading balloon catheters, 
multiple tube and button type, into the breast for interstitial 
radioelement application) to New Technology APC 1524 (Level XIV $3000-
$3500), and CPT code 19297 (Placement of radiotherapy afterloading 
balloon catheter into the breast for interstitial radioelement 
application; concurrent with partial mastectomy) to New Technology APC 
1523 (Level XXIII $2500-$3000) for CY 2005. The commenter stated that 
these payment amounts adequately cover the costs of the applicator 
devices involved in the procedures.
    Response: We agree with the commenter's acknowledgement that the 
payment amounts that we assigned to CPT codes 19296, 19297, and 19298 
for CY 2005 adequately cover the resource costs associated with these 
procedures. Therefore, for CY 2006, we are maintaining CPT codes 19296 
and 19298 in New Technology APC 1524 and CPT code 19297 in New 
Technology APC 1523.
c. Enteryx Procedure
    A new CPT code, 0133T (Upper gastrointestinal endoscopy, including 
esophagus, stomach, and either the duodenum and/or jejunum as 
appropriate, with injection of implant material into and along the 
muscle of the lower esophageal sphincter (e.g., for treatment of 
gastroesophageal reflux disease)), was created for implementation 
January 1, 2006 to describe the procedure currently coded under the 
OPPS as HCPCS code C9704 (Injection or insertion of inert substance

[[Page 68576]]

for submucosal/intramuscular injections(s) into the upper 
gastrointestinal tract, under fluoroscopic guidance). For CY 2005, 
C9704 was assigned to New Technology APC 1556, with a payment rate of 
$1,750. As discussed below, we determined an appropriate APC assignment 
for this procedure for CY 2006. However, in the period between 
publication of the proposed rule and the end of the comment period, the 
product manufacturer recalled this product and the Food and Drug 
Administration has warned physicians about the danger of its use.
    In our analyses to determine the most appropriate APC assignment 
for the new CPT code, we found that the most accurate payment will be 
made by retaining the procedure's current APC assignment. We did not 
automatically assign CPT code 0133T to APC 1556 because that CPT code 
explicitly includes the endoscopy that is integral to the service, 
whereas the current C-code does not. For that reason we calculated the 
claims-based median cost for the procedure by using single claims for 
HCPCS code C9704, on the premise that if the procedure required 
endoscopy and the endoscopy was not separately billed then the 
endoscopy charges were reflected in the charges for HCPCS code C9704 as 
well as claims for HCPCS code C9704 that had a charge for an endoscopy 
included to assure us that we were capturing the charges for the entire 
procedure from as many claims as possible. Thus, to determine an 
appropriate APC placement for CPT code 0133T we analyzed all single 
claims for HCPCS code C9704, as well as claims that had HCPCS code 
C9704 combined with either CPT code 43234 (Upper gastrointestinal 
endoscopy, simple primary examination (e.g., with small diameter 
flexible endoscope)), or CPT code 43235 (Upper gastrointestinal 
endoscopy including esophagus, stomach, and either the duodenum and/or 
jejunum as appropriate; diagnostic, with or without collection of 
specimen(s) by brushing or washing).
    The median cost from these claims which would crosswalk to the new 
CPT code is $1,660. Therefore, we believe that it is still appropriate 
to retain the procedure, coded for CY 2006 as CPT code 0133T, in New 
Technology APC 1556 rather than assigning it to a different New 
Technology APC or a clinical APC at this time. We will be deleting 
HCPCS code C9704. As with all procedures assigned to New Technology 
APCs, we will reevaluate it for next year to determine whether 
assignment to a clinical APC is more appropriate.
d. Extracorporeal Shock Wave Treatment
    Comment: Several commenters to both the November 15, 2004 final 
rule with comment period and to our July 25, 2005 proposed rule opposed 
our placement of new HCPCS codes for high energy Extracorporeal Shock 
Wave Therapy (ESWT) services into New Technology APC 1547. In response 
to a New Technology application for ESWT, we created new codes for high 
energy ESWT for chronic lateral epicondylitis (C9720-tennis elbow) and 
for chronic plantar fasciitis (C9721) effective January 1, 2005, and 
placed them into New Technology APC 1547, with a payment rate of $850 
for CY 2005. A number of commenters requested that these ESWT services 
be placed in New Technology APC 1559, which has a payment rate of 
$2,250. A manufacturer of ESWT equipment, who commented, cited our 
regulations (42 CFR Sec.  419.31) in stating that APC groups ``must 
be'' comparable in terms of clinical use and resources required. This 
commenter, as well as another manufacturer, claimed that New Technology 
APC 1547 does not cover the costs of the ESWT procedures for chronic 
lateral epicondylitis and for chronic plantar fasciitis. The commenters 
provided their estimated costs of the procedure at about $2,300 per 
service for both clinical indications. One commenter also indicated 
that it understood that the AMA's CPT Editorial Panel intended to issue 
new codes for the two high energy ESWT services beginning in CY 2006. 
It stated that when these new CPT codes become effective, providers and 
payers will be faced with two different sets of codes for high energy 
ESWT, the CPT codes and the HCPCS C-codes, and this will cause 
difficulties with provider billing and reimbursement.
    Commenting parties expressed their belief that our placement of 
ESWT did not cover the costs of ESWT for plantar fasciitis, claiming 
that the ESWT equipment costs between $250,000 and $400,000 for each 
unit, varying by manufacturer, and summarizing other additional costs, 
such as those for an annual maintenance contract, a specialized 
technician, and anesthesia, along with a specialized transport vehicle 
for the ESWT equipment. Commenters asserted that high energy ESWT is 
comparable to the resource costs of services in Level II Foot 
Musculoskeletal Procedures, APC 0056 with a CY 2005 payment rate of 
$2,380.72, except that ESWT includes the capital costs for the 
equipment, transport vehicle, and technician mentioned earlier. The 
commenters also stated that high energy ESWT has a similar technology 
and cost structure, including technological devices, maintenance 
contracts, and specialized technical personnel, to extracorporeal shock 
wave lithotripsy, for the fragmentation of kidney stones. These 
commenters proposed that high energy ESWT be placed in APC 1559. One 
hospital indicated that its average cost for ESWT is $2,100. Another 
commenter who compared high energy ESWT with lithotripsy stated that if 
we wished to compare ESWT with the costs of other procedures, then we 
should use lithotripsy, which also employs high energy extracorporeal 
shock waves, but for the treatment of kidney stones. The commenter 
claimed that many of the other costs associated with the two procedures 
were similar as well, with the exception of an imaging component used 
with lithotripsy. The commenter noted that lithotripsy's APC 
assignment, APC 0169, has a payment rate close to that of New 
Technology APC 1559. Another commenter, commenting only on HCPCS code 
C9721, recommended that high energy ESWT for treatment of chronic 
plantar fasciitis be placed in either clinical APC 0055 (Level I Foot 
Musculoskeletal Procedures) or APC 0056 (Level II Foot Musculoskeletal 
Procedures), claiming that it fits most closely clinically to 
procedures in APC 0055, and that high energy ESWT is more homogeneous 
to either APC 0055 or 0056 clinically and economically than to its 
assigned New Technology APC. The commenter also stated that any new CPT 
code beginning in CY 2006 for high energy ESWT for chronic plantar 
fasciitis should replace HCPCS code C9721 and should be placed in APC 
0055 or 0056.
    Response: When we determine that a new service is eligible for 
placement into a New Technology APC, we then perform our own cost 
analysis and cost estimate, in addition to taking the projected costs 
submitted in a New Technology APC application into consideration. As we 
stated in our November 30, 2001 final rule (66 FR 59900) concerning 
placement of new services into APCs, ``* * * we will not limit our 
determination of the cost of the procedure to information submitted by 
the applicant. Our staff will obtain information on cost from other 
appropriate sources before making a determination of the cost of the 
procedure to hospitals.'' We compared the necessary hospital resources 
such as procedure room time, personnel, anesthesia and other resources 
of the ESWT procedure to various other procedures for which we have 
historical

[[Page 68577]]

hospital claims data. Additionally, we took into consideration 
projected costs submitted in the New Technology APC application, 
including the capital costs and equipment utilization assumptions, 
concluding that HCPCS codes C9720 and C9721 should be assigned to New 
Technology APC 1547. New Technology APCs, by their very definition, do 
not contain services that are clinically homogeneous, but instead, 
based solely on hospital resource considerations, the services have 
estimated costs that place them into the same New Technology payment 
band. In contrast, services assigned to the same clinical APC are 
homogeneous with respect to both their clinical characteristics and 
hospital resource utilization.
    There are new CPT codes for CY 2006 that describe high energy ESWT 
services, and hospitals providing these services in CY 2006 will use 
the CPT codes to report them instead of the two predecessor C codes. In 
particular, CPT code 0102T (Extracorporeal shock wave, high energy, 
performed by a physician, requiring anesthesia other than local, 
involving lateral humeral epicondyle) will replace HCPCS code C9720. In 
addition, CPT code 28890 (Extracorporeal shock wave, high energy, 
performed by a physician, requiring anesthesia other than local, 
including ultrasound guidance, involving the plantar fascia) will 
replace HCPCS code C9721. We have closely reviewed the hospital cost 
information provided by the commenters, along with our CY 2004 hospital 
claims data for other outpatient hospital services. We are not 
confident yet, in the absence of hospital claims data for the 
predecessor C codes or the new CPT codes, that we can appropriately 
place CPT codes 0102T and 28890 in clinical APCs where they would share 
clinical and resource homogeneity with other services. Therefore, for 
CY 2006 we are assigning CPT codes 0102T and 28890 to New Technology 
APC 1547 with a payment rate of $850. We believe that the payment rate 
is appropriate based on all cost and utilization information available 
to us regarding high energy ESWT and other services provided in a 
hospital outpatient setting.
    Comment: One commenter, the applicant for assignment of high energy 
ESWT to a New Technology APC, claimed that our assignment of ESWT to a 
New Technology APC violates the Administrative Procedure Act (APA). The 
commenter asserted that the OPPS proposed rule published August 16, 
2004 (69 FR 50448) failed to mention ESWT or its placement in an APC. 
Moreover, the commenter claimed that our lack of discussion of our 
methodology made proper comments difficult if not impossible. The 
commenting party claimed that finalizing a rule without explanation is 
unlawful. The commenter furthermore claimed that the placement of ESWT 
in APC 1547 was arbitrary, capricious, and in excess of statutory 
authority in violation of the Administrative Procedure Act. The 
commenter claimed that it appeared that CMS ignored the applicant's 
data that it submitted regarding resource use, instead comparing the 
resource costs for ESWT with entirely different procedures, resulting 
in inaccurate conclusions regarding the costs of ESWT services. 
Moreover, the commenter claimed that we have improperly classified ESWT 
into the same APC as endoscopic epidural lysis, which it claims 
violated the statutory requirement to group procedures based on both 
costs and clinical and resource comparability.
    Response: We disagree that our assignment of ESWT to New Technology 
APC 1547 was arbitrary, capricious, and in violation of the APA or the 
Medicare statute. As stated in our response above, we perform our own 
cost analysis and estimate the cost of any eligible new service, while 
taking the projected hospital costs submitted in the New Technology APC 
application into consideration. As we have indicated above, our 
November 30, 2001 final rule concerning placement of new services into 
APCs states that we do not limit our determination of the cost of the 
procedure to information submitted by the applicant. We obtain 
information on costs from other appropriate sources before making a 
determination of the cost of the procedure to hospitals. In the case of 
the ESWT procedures, our clinical review team of physicians compared 
the resources such as procedure room time, anesthesia, and other 
resources of the ESWT procedure to the resources of various other 
outpatient hospital procedures for which we have historical hospital 
claims data. We believe that our claims data on other procedures in 
terms of hospital resource use yield relevant cost information for use 
in developing cost estimates for new procedures without a claims 
history. As explained above, we took the New Technology APC applicant's 
costs into account as we reviewed its projected hospital costs 
thoroughly and, in particular, utilized information regarding expected 
service frequency, capital equipment, and other costs in our total cost 
estimate for the procedures. As discussed earlier, assignment to a New 
Technology APC does not imply clinical homogeneity with other services 
assigned to the same New Technology APC. We also note that we could not 
have included these two C-codes in the proposed rule for CY 2005, since 
we had not yet completed our evaluation of the New Technology APC 
application and rendered a decision until well after that proposed rule 
was published. As we have announced numerous times elsewhere, we will 
add New Technology service codes and assign their payment rates in our 
quarterly updates, where applicable and available, to facilitate timely 
integration of new codes into the OPPS. The timing of the ESWT 
procedures decision made the addition of the codes and payment rates 
coincident with our CY 2005 final rule publication. In order to have 
provided a discussion of the codes in a proposed rule, implementation 
of the codes would have been delayed a full year.
e. GreenLight Laser
    During the August 2005 APC Panel meeting, the Panel recommended 
accepting CMS' proposed creation of APC 0429 for CY 2006 and the 
inclusion of HCPCS C9713, which describes use of the GreenLight Laser 
System, in this APC. We received several public comments concerning the 
reassignment of HCPCS codes C9713, 52647, 52648, 50080, and 50081 to 
APC 0429.
    Comment: Several commenters requested that CMS maintain HCPCS code 
C9713 in its New Technology APC for one more year, which would give 
hospitals more time to learn how to correctly code for this service. 
The commenters stated that our proposed reassignment of the procedure 
to a clinical APC was premature because the decision was based on only 
9 months of claims data. They suggested that many hospitals may not 
even have known about the new HCPCS code C9713 because it was not 
implemented until April 5, 2004, and, therefore, CMS received even 
fewer correctly coded claims than the true number of outpatient 
hospital services actually described by HCPCS code C9713 that were 
performed on Medicare beneficiaries during the 9 month period.
    The commenters pointed out that there is evidence that hospitals 
have not been using the HCPCS code properly and reminded us that some 
members of the APC Panel stated that their hospitals were not coding 
these procedures correctly.
    The commenters stated that the short period of time for collection 
of claims data and the low median cost calculated for HCPCS code C9713 
based on those claims support their conjecture that the claims are not 
correct, and that the

[[Page 68578]]

procedure should remain in its CY 2005 New Technology APC for at least 
one more year to allow for collection of more accurate claims data.
    Response: For CY 2006, CPT revised the descriptors of two procedure 
codes for prostate laser procedures described by CPT codes 52647 and 
52648. The revised CPT code descriptors are as follows: 52647 (Laser 
coagulation of prostate, including control of postoperative bleeding, 
complete (vasotomy, meatotomy, cystourethroscopy, urethral calibration 
and /or dilation, and internal urethrotomy are included if performed); 
and 52648 (Laser vaporization of prostate, including control of 
postoperative bleeding, complete (vasectomy, meatotomy, 
cystourethroscopy, urethral calibration and/or dilation internal 
urethrotomy and transurethral resection of prostate are included if 
performed). These descriptors for the CPT codes will be implemented on 
January 1, 2006. Our policy in the OPPS is to maintain only one HCPCS 
code that describes a specific procedure, and to the extent possible 
adopt CPT coding for services provided under the OPPS. In this case we 
determined, based on our review of the new descriptors, that procedures 
reported using HCPCS code C9713 in CY 2005 could be appropriately 
billed with CPT codes for CY 2006.
    We also concluded that the resource use and clinical aspects of the 
laser vaporization procedure reported with HCPCS code C9713 and of the 
prostate procedures reported using CPT codes 52647 and 52648 prior to 
revision were so similar that it was appropriate to move, as proposed, 
the CY 2004 hospital claims data for HCPCS code C9713 to APC 0429 to 
contribute to the APC's median cost calculation for CY 2006. In 
addition, there was no reason to postpone adoption of the revised CPT 
codes for use in the OPPS. Although we had less than a full year of 
hospital claims data available for HCPCS code C9713, we had well over 
1,600 single claims upon which to calculate median costs for the 
procedure, and those claims data confirmed the resource similarity of 
this service to the services coded by CPT codes 52647 and 52648. The 
medians for these three procedures only range from $2,475 to $2,602 and 
the clinical indications for the procedures are also similar. For CY 
2006 we are adopting the newly available revised CPT codes for 
reporting the procedure previously described by HCPCS code C9713 and 
deleting HCPCS code C9713, effective January 1, 2006.
    Creation of a new Level V APC 0042 for Cystourethroscopy and Other 
Genitourinary Procedures, the level to which we assigned the CY 2004 
data for the prostate laser procedures described by HCPCS code C9713 
and CPT codes 52647 and 52648, along with cost data for two other 
procedures also reassigned to that APC, resulted in tighter median cost 
distributions within all levels of the APCs for cystouresthroscopy and 
other genitourinary procedures. We are confident in the median costs 
for all of these prostate procedures because we have over 1,000 single 
claims for each of those procedures.
    Although HCPCS code C9713 was placed in a New Technology APC for 
only one year, assignment to an appropriate clinical APC is always our 
goal for procedures that spend time assigned to New Technology APCs. In 
this case, the creation of a Category I CPT code that describes the 
procedure reported by HCPCS code C9713 during CY 2004 and CY 2005 in 
the OPPS occurred more quickly than is often the case. We believe that 
the procedure's assignment with similar procedures to a new clinical 
APC is appropriate and will result in accurate payment. Also, we expect 
that adoption of a revised CPT code for reporting the noncontact laser 
vaporization of the prostate procedure will reduce hospitals' 
administrative burden as they will be able report CPT codes for 
prostate services provided in CY 2006, rather than C-codes specific to 
the OPPS.
    After carefully considering all comments we received, we are 
finalizing, without modification, our proposal to assign CPT codes 
52647, 52648, 50080, and 50081 to new APC 0429, Level V 
Cystourethroscopy and Other Genitourinary Procedures. The CY 2004 
hospital claims data for HCPCS code C9713 have been assigned to APC 
0429 for purposes of establishing the final CY 2006 payment rate for 
that APC.
f. Magnetoencephalography (MEG)
    We proposed to reassign MEG procedures to clinical APC 0043, using 
CY 2004 claims data to establish median costs on which payments would 
be based.
    We received a number of public comments concerning the reassignment 
of CPT codes 95965, 95966, 95967.
    Comment: A number of commenters addressed our proposal to assign 
magnetoencephalography (MEG) procedures to APC 0430. There are three 
MEG procedures affected by our proposal: CPT code 95965, MEG recording 
and analysis for spontaneous brain magnetic activity; CPT code 95966, 
MEG for evoked magnetic fields, single modality; and CPT code 95967, 
MEG for evoked magnetic fields, each additional modality to be listed 
separately in addition to CPT code 95965 for primary procedure. Each of 
those procedures is currently assigned to a separate New Technology 
APC, and the commenters believed that they should remain in those APCs 
for CY 2006. The commenters believed that assignment to APC 0430 was 
inappropriate because the proposed payment level of $674 was inadequate 
to cover the costs of the procedures and because the procedures should 
not be assigned to only one level as their required hospital resources 
differ significantly.
    The commenters stated that the median costs based on CMS' hospital 
claims data are erroneous because hospitals are not providing accurate 
charges for the procedures. Further, they stated that our data did not 
represent the true costs of the procedures because MEG procedures are 
performed on very few Medicare patients.
    In addition to the written comments we received on our proposed 
rule, hospital and manufacturer representatives made presentations to 
the APC Panel during its August 2005 meeting. At that time, the Panel 
recommended that CMS retain the MEG procedures in their current New 
Technology APCs and that we collect more external data and provide a 
detailed review of the data for the Panel's consideration at its next 
meeting.
    Response: The MEG procedures have been assigned to New Technology 
APCs for 4 years. In CY 2002, all three services were assigned a 
payment rate of $150 in a single New Technology APC. As these CPT codes 
were new for CY 2002 and, therefore, first open to comment in the CY 
2002 final rule, we received several comments regarding the costs of 
the services. For CY 2003, all three services were assigned to higher 
paying New Technology APCs, with a rate of $2,250 for CPT code 95965, 
$1,375 for CPT code 95966, and $875 for CPT code 95967. For CY 2004 and 
CY 2005, the procedures were again assigned to higher paying New 
Technology APCs, with CPT code 95965 moving to a rate of $5,250; CPT 
code 95966 to a rate of $1,450; and CPT code 95967 to a rate of $950.
    For CY 2006, we proposed to assign these procedures to one new 
clinical APC because assignment to New Technology APCs is generally 
temporary while we are gathering hospitals claims data, and we now have 
3 years of data upon which to base clinical APC assignments. Over the 
entire 3-year period, the median costs

[[Page 68579]]

for all 3 services, especially CPT code 95965, have generally been far 
less than the OPPS payment rates. In fact, the CY 2005 median cost 
(based on CY 2003 claims data) for CPT code 95965 was only 16 percent 
of the payment rate, and for CY 2006 the median cost (based on CY 2004 
claims) was only 12 percent of the rate.
    These procedures are rarely performed on Medicare beneficiaries 
and, therefore, we have a small number of claims now and have no 
expectation that the volume will increase. Patients targeted for MEG 
investigation procedures are typically between 17 and 32 years old. 
Furthermore, industry expectations are that the technology's growth 
will be in installations outside of hospitals. Nevertheless, almost all 
services with ongoing expectations of low volume for Medicare 
beneficiaries, including obstetrical services, reside in clinical APCs, 
not New Technology APCs. From CY 2003 claims data we were able to use 
20 of the 21 claims submitted for CPT code 95965, 7 of the 7 claims 
submitted for CPT code 95966, and 4 of the 6 submitted for CPT code 
95967 to calculate median costs of the procedures. For CY 2006 based on 
CY 2004 hospital claims data, we were able to use 10 of the 10 claims 
submitted for CPT code 95965 and 3 of the 4 submitted for CPT code 
95966, while we had no claims for CPT code 95967.
    In contrast to the comments, we are committed to relying 
increasingly on those data, especially in a case like this where the 
few hospitals that offer this technology have been billing these 
procedures for at least four years and the technology is no longer new. 
However, we also are sensitive to the potential access effects of 
relying on a low volume of claims to establish payment rates, as well 
as to the APC Panel's recommendation regarding these procedures as 
noted by the commenters. Therefore, for CY 2006 we considered charge 
and cost information provided to us during the comment period in 
addition to our claims data. A commenter provided total charge 
information billed to multiple payers, including Medicare, for MEG 
services from one hospital which showed charges of about $10,500. Also 
included in the information we received during the comment period were 
cost estimates for the procedures from various sources, and the 
estimates of costs varied considerably. For example, we were provided 
with estimates of hospital costs per case for CPT code 95965 that 
ranged from $8,321 to $4,054. We believe that some of that variation 
may be due to differences in the number of cases used in amortization 
estimates, as the costs of the equipment used in MEG procedures are 
significant. However, the fact that volume varies from one provider to 
another does not mean that we will base our payments on the high cost 
per case that results from allocating costs over only a few cases. In 
the case of MEG, we are especially sensitive to this given the very low 
level of Medicare beneficiary participation in the technology because 
of the clinical circumstances in which MEG services are typically 
provided. The OPPS payment rates for services need to make appropriate 
payments for the services provided to Medicare beneficiaries, 
recognizing that, as a budget neutral payment system, the OPPS does not 
pay the full hospital costs of services. We expect that our payment 
rates generally will reflect the costs that are associated with 
providing care to Medicare beneficiaries in cost-efficient settings.
    We agree with the APC Panel and the commenters that there are no 
currently existing clinical APCs containing other services where MEG 
services could be appropriately assigned, based on clinical and 
resource homogeneity with other OPPS services. We carefully considered 
our claims data, information provided by commenters, and the APC Panel 
recommendation that we retain the MEG procedures in New Technology 
APCs. As a result of this analysis, we determined that using a 50/50 
blend of the code-specific median costs from our most recent CY 2004 
hospital claims data and the CY 2005 code-specific payment amounts as 
the basis for assignment of the procedures for CY 2006 would be one way 
to recognize both the current payment rates for the procedures, which 
were originally based on the theoretical costs to hospitals of 
providing MEG services, and the median costs based upon our hospital 
claims data regarding actual MEG services provided to Medicare 
beneficiaries by hospitals. Accordingly, for CY 2006, because we are 
not fully confident in our claims data for MEG procedures and there are 
no clinical APCs containing other services that share clinical and 
hospital resource characteristics with MEG procedures, we believe that 
it is most appropriate to place MEG services in New Technology APCs for 
CY 2006 to accommodate these adjusted costs. We agree with the 
commenters that these APCs should be ``S'' status so no multiple 
procedure reduction will apply, as we are determining an adjusted cost 
for each specific MEG service. For CPT codes 95965 and 95966, we 
averaged the services' median costs from CY 2004 claims data with their 
CY 2005 payment rates to determine adjusted costs for the procedures 
and, therefore, their appropriate New Technology APC assignments. There 
were no CY 2004 claims for CPT code 95967, and thus, no median cost to 
use for such an adjustment. For that procedure, we based the New 
Technology APC assignment on the historical relationship (66 percent in 
CY 2005) between the New Technology APC payment for that procedure and 
the New Technology APC payment for CPT code 95966, the code to which 
CPT code 95967 is an add-on. We used 66 percent of our CY 2006 payment 
rate for CPT code 95966 to determine the adjusted cost of CPT code 
95967 and establish the New Technology payment amount for CPT code 
95967 for CY 2006. The table below provides the CY 2006 payment rates 
and the resulting APC assignments for MEG services.
    As suggested by the APC Panel, we will continue to study the APC 
assignments for these procedures over the coming year and invite 
members of the public to submit any information they believe will be 
helpful to us. We have given these procedures special consideration 
through this adjustment methodology for CY 2006 to help assure that 
Medicare beneficiaries have appropriate access to MEG services. With an 
additional year of data and improved consistency of billing by 
hospitals providing MEG services, we are hopeful that the claims-based 
median costs of these services in future years will more consistently 
and appropriately reflect hospitals' costs of providing MEG procedures.

                               Table 10.--CY 2006 APC Assignments for MEG Services
----------------------------------------------------------------------------------------------------------------
                                                                                                      CY 2006
                       CPT                        CY 2006 median      CY 2005      Adjusted cost  payment amount/
                                                       cost           payment                           APC
----------------------------------------------------------------------------------------------------------------
95965...........................................         $644.71          $5,250       $2,947.35     $2,750/1523
95966...........................................        1,013.34           1,450        1,231.67      1,250/1514
95967...........................................             N/A             950          818.97        850/1510
----------------------------------------------------------------------------------------------------------------


[[Page 68580]]

g. Positron Emission Tomography (PET) Scans

    (1) Nonmyocardial PET Scans
    Positron emission tomography (PET) serves an important role in the 
clinical care of many Medicare beneficiaries. As stated in the November 
15, 2004 final rule with comment period (69 FR 65716), we believe there 
are sufficient claims data to assign nonmyocardial PET scans to a 
single clinical APC. However, to minimize any potential impact that a 
payment reduction resulting from this move might have had on 
beneficiary access to this technology, we set the CY 2005 OPPS payment 
for nonmyocardial PET scans based on a 50/50 blend of their CY 2005 
median cost and the payment rate of the CY 2004 New Technology APC to 
which they were assigned. Therefore, nonmyocardial PET scans were 
assigned to New Technology APC 1513 (New Technology--Level XIV ($1,000-
$1,200) for a blended payment rate of $1,150 in CY 2005.
    At the February 2005 APC Panel meeting, the Panel agreed with a 
presenter's assertion that the resource costs associated with 
nonmyocardial PET scans are similar to the costs associated with 
myocardial PET scans, and recommended that myocardial PET scans be 
placed in the same New Technology APC 1513 in which the nonmyocardial 
PET scans currently reside. Furthermore, presenters at the February 
2005 APC Panel meeting expressed concern that movement of nonmyocardial 
PET scans from their New Technology APC to lower paying clinical APC 
0285 could impede beneficiary access to this technology, similar to 
concerns articulated by commenters in previous years.
    As a result of a recent Medicare national coverage determination 
(Publication 100-3, Medicare Claims Processing Manual section 220.6), 
effective January 28, 2005, we discontinued the PET G-codes listed in 
Table 10, and activated the CPT codes listed below in Table 11 for 
myocardial and nonmyocardial PET scans and concurrent PET/CT scans for 
anatomical localization. These lists of codes along with claims 
processing instructions, are provided in Change Request 3756, 
Transmittal 514, Publication 100-04, Medicare Claims Processing Manual.
[GRAPHIC] [TIFF OMITTED] TR10NO05.015


   Table 12.--CPT Codes for Covered PET Scan Indications Effective for
              Dates of Service on or After January 28, 2005
------------------------------------------------------------------------
               CPT code                           Description
------------------------------------------------------------------------
78459................................  Myocardial imaging, positron
                                        emission tomography (PET),
                                        metabolic evaluation.
78491................................  Myocardial imaging, positron
                                        emission tomography (PET),
                                        perfusion, single study at rest
                                        or stress.
78492................................  Myocardial imaging, positron
                                        emission tomography (PET),
                                        perfusion, multiple studies at
                                        rest and/or stress.
78608................................  Brain imaging, positron emission
                                        tomography (PET); metabolic
                                        evaluation.
78811................................  Tumor imaging, positron emission
                                        tomography (PET); limited area
                                        (e.g., chest, head/neck).
78812................................  Tumor imaging, positron emission
                                        tomography (PET); skull base to
                                        mid thigh.
78813................................  Tumor imaging, positron emission
                                        tomography (PET); whole body.
78814................................  Tumor imaging, positron emission
                                        tomography (PET) with
                                        concurrently acquired computed
                                        tomography (CT) for attenuation
                                        correction and anatomical
                                        localization; limited area
                                        (e.g., chest, head/neck).
78815................................  Tumor imaging, positron emission
                                        tomography (PET) with
                                        concurrently acquired computed
                                        tomography (CT) for attenuation
                                        correction and anatomical
                                        localization; skull base to mid
                                        thigh.
78816................................  Tumor imaging, positron emission
                                        tomography (PET) with
                                        concurrently acquired computed
                                        tomography (CT) for attenuation
                                        correction and anatomical
                                        localization; whole body.
------------------------------------------------------------------------

    In the CY 2006 OPPS proposed rule, we proposed to maintain CPT 
codes 78608, 78609, 78811, 78812, and 78813 for nonmyocardial PET scans 
in New Technology APC 1513 (New Technology--Level XIII, $1,100-$1,200) 
at a payment rate of $1,150, the same APC placement as their 
predecessor G-codes, to ensure continuing beneficiary

[[Page 68581]]

access to this technology. We also proposed to maintain CPT codes 
78814, 78815, and 78816, which describe concurrent PET/CT scans for 
anatomical localization, in New Technology APC 1514 (New Technology--
Level XIV, $1,200-$1,300) at a payment rate of $1,250, based on input 
claiming that the costs associated with PET/CT technology are higher 
than the costs of PET technology alone.
    Comment: Several commenters to the November 15, 2004 final rule 
with comment period (69 FR 65682) urged that we replace the G-codes for 
PET procedures with the established CPT codes for PET scans, while 
commenters to the July 25, 2005 proposed rule (70 FR 42674) applauded 
our transition to the CPT codes for PET scans. These commenters stated 
that movement to the established CPT codes for PET scans would greatly 
reduce the burden on hospitals of tracking and billing the G codes 
which are not recognized by other payors, and would allow for more 
uniform hospital billing of these scans. Furthermore, while a few 
commenters urged that we increase the payment for PET scans, the 
majority of commenters supported our proposal to maintain nonmyocardial 
PET scans in New Technology APC 1513 (paying $1,150), consistent with 
the payment level under their predecessor G-codes. Commenters stated 
that hospital claims data do not accurately reflect the costs of 
providing these services, and beneficiary access to this technology 
would be threatened if hospital claims data alone were used to set the 
CY 2006 payment rates.
    Response: We agree with commenters that movement from the G-codes 
to the established CPT codes for PET scans allows for more uniform 
billing of these scans. Furthermore, we concur, in general, with 
commenters' recommendations that the payment levels under the 
established CPT codes for PET scans be consistent with the payment 
levels under their predecessor G-codes. Therefore, we are maintaining 
newly established CPT codes 78608, 78811, 78812, and 78813 for 
nonmyocardial PET scans in New Technology APC 1513 (New Technology--
Level XIII, $1,100-$1,200) at a payment rate of $1,150. In addition, 
for myocardial PET scans we are assigning CPT codes 78459 and 78491 to 
newly established APC 0306 (Myocardial Positron Emission Tomography 
(PET) imaging, single study, metabolic evaluation) and CPT code 78492 
to newly established APC 0307 (Myocardial Positron Emission Tomography 
(PET) imaging, multiple studies), where the APC medians have been 
calculated based on data from their predecessor G-codes, as discussed 
in more detail below. However, we are changing the status indicator for 
CPT code 78609 (Brain imaging, PET; perfusion evaluation) from ``S'' 
(separately paid under the OPPS) to ``E'' (not paid under the OPPS) 
retroactive to January 28, 2005, as historically there has been and 
currently there remains no coverage for this service under the Medicare 
program.
    Comment: Numerous comments applauded our recognition of the newly 
established CPT codes for concurrent PET/CT scans and acknowledgement 
of the clinical usefulness of concurrent PET/CT scans for attenuation 
correction and anatomical localization in the management of patients 
with cancer. However, several commenters expressed concern that the 
proposed assignment of PET/CT scans (CPT codes 78814, 78815, and 78816) 
to New Technology APC 1514 (paying $1,250) may not adequately cover the 
costs of providing PET/CT services. These commenters explained that 
hospitals incur more capital and maintenance costs with PET/CT than 
with conventional PET. For instance, a large trade association 
commented that a new PET/CT scanner costs approximately $1.8 million, 
compared to $1.2 million for a conventional PET scanner. Another 
commenter quoted annual maintenance costs of approximately $240,000 for 
a new PET/CT scanner, compared to $120,000 for a conventional PET 
scanner. These commenters asserted that the proposed payment rate for 
PET/CT scans does not recognize the additional diagnostic benefits 
provided by concurrent PET/CT scans over traditional diagnostic PET and 
CT scans. These commenters further explained that the CT scan performed 
during a PET/CT is not limited to one part of the body but includes the 
entire area imaged by the PET scan and, therefore, is more efficient 
than performing one PET scan plus several separate CT scans for 
different regions of the body. Several commenters recommended that we 
assign the newly established CPT codes for PET/CT scans (CPT codes 
77814, 78815, and 78816) to New Technology APC 1519 (paying $1,750) 
based on external data and an economic analysis submitted by one of the 
commenters, which reported the costs of providing a PET/CT scan at 
approximately $1,717. In contrast, a leading mobile provider of PET/CT 
scans reported an average cost of $1,485 for providing a PET/CT scan, 
which included FDG, mileage to sites, technologists, supplies, 
equipment maintenance, and scheduling.
    Response: While we acknowledge that concurrent PET/CT scans for 
attenuation correction and anatomical localization in the management of 
patients with cancer may be clinically useful, we have received no 
convincing data that support the assignment of PET/CT scans (CPT codes 
78814, 78815, and 78816) to an APC paying higher than $1,250. The 
external data and economic analysis submitted by one of the commenters 
failed to meet the criterion for consideration of external data that we 
proposed in our August 12, 2003 proposed rule (68 FR 47987) and 
finalized in our November 7, 2003 final rule (68 FR 63424). The 
external data and analysis was not provided with the level of detail 
that would have allowed us to verify the claims data nor to have 
adjusted the claims data should we have determined an adjustment was 
necessary. Furthermore, one commenter reported an average cost of 
$1,485 for providing a PET/CT scan, which included FDG, among other 
related costs. Considering that FDG will be paid separately at charges 
adjusted to cost for CY 2006 (estimated typically to be about $250), 
the payment rate of $1,250 for PET/CT scans (not including FDG) 
adequately covers the cost of $1,485 that this commenter reported for 
providing PET/CT scans (including FDG). While we acknowledge that PET/
CT scanners may be more costly to purchase and maintain than dedicated 
PET scanners, a PET/CT scanner is versatile and may also be used to 
perform individual CT scans, thereby potentially expanding its use if 
PET/CT scan demand is limited. Therefore, for CY 2006, we are 
maintaining CPT codes 78814, 78815, and 78816, which describe 
concurrent PET/CT scans for attenuation correction and anatomical 
localization, in New Technology APC 1514 (New Technology--Level XIV, 
$1,200-$1,300) at a payment rate of $1,250.
    Comment: One commenter expressed concern that the proposed payment 
rate of $1,250 for a PET/CT scan may not cover the costs of a 
diagnostic CT when performed in conjunction with a PET/CT scan. The 
commenter stated that although many of the technical resources for 
acquiring diagnostic CT data when performed as a single acquisition 
with a PET/CT scan are the same as for the CT for attenuation 
correction and anatomical localization, the initial capital costs are 
greater for a PET/CT scanner capable of performing a diagnostic CT. In 
addition, there are added costs for acquiring the diagnostic CT data 
such as for the contrast agent and appropriate personnel. This 
commenter expressed interest in a continued dialogue with CMS on the 
issue of appropriate payment for the

[[Page 68582]]

technical costs of performing a diagnostic CT acquired simultaneously 
with a PET/CT scan.
    Response: We appreciate the commenter's concerns regarding 
appropriate billing and OPPS payment for a PET scan with CT for 
attenuation correction and anatomical localization and a diagnostic CT 
scan performed as a single acquisition. We will consider this issue 
should we issue more specific hospital billing guidance regarding 
various combinations of medically reasonable and necessary PET and CT 
scans.
(2) Myocardial PET Scans
    Comment: Two commenters to the November 15, 2004 final rule with 
comment period (69 FR 65682) urged CMS to delete HCPCS code G0230 (PET 
imaging, metabolic assessment for myocardial viability following 
inconclusive SPECT study) and recognize CPT code 78459 (myocardial 
imaging, positron emission tomography, metabolic evaluation) by 
changing its status indicator from ``B'' to ``S.''
    Response: As a result of a recent Medicare national coverage 
determination Publication 100-3, Medicare Claims Processing Manual 
section 220.6), effective January 28, 2005, we discontinued HCPCS code 
G0230 and activated CPT code 78459, changing its status indicator from 
``B'' to ``S.'' For CY 2006, we are maintaining CPT code 78459 as the 
active code for billing ``myocardial imaging, positron emission 
tomography, metabolic evaluation.''
    Comment: Several commenters to the November 15, 2004 final rule 
with comment period (69 FR 65682) and the CY 2006 OPPS proposed rule 
(70 FR 42674) stated that the payment rate for APC 0285 does not 
accurately reflect the costs associated with performing multiple 
studies of PET myocardial perfusion imaging. They noted that, as 
configured, APC 0285 violated the two times rule for CY 2005 and was 
proposed as an exception to the two times rule for CY 2006. These 
commenters suggested that CMS split myocardial PET scans into two APCs 
to distinguish the resource consumption differences between single-
study and multiple-study PET imaging.
    Response: We agree with commenters that the significant cost 
differences between single study and multiple studies myocardial PET 
imaging services reflected in our historical hospital claims data for 
the G-code myocardial PET scan services support the splitting of APC 
0285 into two myocardial PET scan APCs for more accurate rate-setting 
for these services for CY 2006. Furthermore, the splitting of APC 0285 
resolves the two times violation that occurred in the CY 2006 proposed 
rule configuration of APC 0285. Therefore, we are assigning single-
study myocardial PET imaging procedures and metabolic evaluation of 
myocardial PET imaging to APC 0306 (Myocardial Positron Emission 
Tomography (PET) imaging, single study, metabolic evaluation) with a 
median cost of $800, based on the CY 2004 hospital claims data for the 
predecessor G-codes that have been replaced with CPT codes 78459 and 
78491. In addition, we are assigning multiple-study myocardial PET 
imaging procedures to APC 0307 (Myocardial Positron Emission Tomography 
(PET) imaging, multiple studies) with a median cost of $2,482, based on 
the CY 2004 hospital claims data for the predecessor G-codes that have 
been replaced with CPT code 78492.
    Comment: One commenter explained that myocardial PET perfusion 
studies may be performed with or without gating similar to myocardial 
SPECT procedures. However, for myocardial PET perfusion studies, there 
are no additional codes to describe gating; therefore, the provider 
receives the same payment regardless of having performed a gated study 
versus a non-gated study. The commenter requested that the payment rate 
for myocardial PET perfusion studies be adjusted to assure proper 
payment for gated studies.
    Response: While we recognize that the CPT codes describing 
myocardial PET scans make no distinction between gated and non-gated 
studies, we received numerous comments urging that we discontinue the 
G-codes for PET scans and recognize these CPT codes for PET scans. 
Furthermore, the splitting of the myocardial PET scans into two APCs to 
distinguish single-study imaging from multiple-study imaging, as 
discussed in detail above, may improve payment for certain gated 
studies that involve multiple studies and address the commenter's 
concern for adequate payment for gated studies.
h. Proton Beam Treatment
    In the CY 2005 OPPS proposed rule (69 FR 50467), we proposed to 
reassign CPT codes 77523 (Proton treatment delivery, intermediate) and 
77525 (Proton treatment delivery, complex) from New Technology APC 1511 
(New Technology, Level XI, $900-$1,000) to clinical APC 0419 (Proton 
Beam Therapy, Level II). In response to this proposal, we received 
numerous comments urging that we maintain CPT codes 77523 and 77525 in 
New Technology APC 1511 at a payment rate of $950 for CY 2005, arguing 
that the proposed payment rate of $678 for CY 2005 would halt diffusion 
of this technology and negatively impact patient access to this cancer 
treatment. Commenters explained that the low volume of claims submitted 
by only two facilities provided volatile and insufficient data for 
movement into the proposed clinical APC 0419. They further explained 
that the extraordinary capital expense of between $70 and $125 million 
and high operating costs of a proton beam facility necessitate adequate 
payment for this service to protect the financial viability of this 
emerging technology.
    In the November 15, 2004 final rule with comment period (69 FR 
65719 through 65720), we considered the concerns expressed by numerous 
commenters that patient access to proton beam therapy might be impeded 
by a significant reduction in OPPS payment. Therefore, we set the CY 
2005 payment rate for CPT codes 77523 and 77525 by calculating a 50/50 
blend of the median cost for intermediate and complex proton beam 
therapies of $690 derived from CY 2003 claims and the CY 2004 New 
Technology payment rate of $950. We used the result of this calculation 
($820) to assign intermediate and complex proton beam therapies (CPT 
codes 77523 and 77525) to New Technology APC 1510 (New Technology--
Level X ($800-$900) for a blended payment rate of $850 for CY 2005.
    Our examination of the CY 2004 claims data has revealed a second 
year of a stable, albeit modest, number of claims on which to set the 
CY 2006 payment rates for CPT codes 77523 and 77525. However, unlike 
the median of $690 for the proposed CY 2005 Level II proton beam 
radiation therapy clinical APC containing CPT codes 77523 and 77525 
derived from the CY 2003 claims data, the median for a comparable Level 
II proton beam radiation therapy clinical APC was $934 derived from 
partial CY 2004 claims data at the time of development of the CY 2006 
proposed rule. This more recent median appears to more accurately 
reflect the significant capital expense and high operating costs of a 
proton beam therapy facility, and supports patient access to proton 
beam therapy. Therefore, we proposed to move CPT codes 77523 and 77525 
from New Technology APC 1510 to clinical APC 0667 (Level II Proton Beam 
Radiation Therapy) based on a median cost of $934 for CY 2006.
    Comment: Numerous commenters applauded our proposal to reassign CPT 
codes 77523 (Proton treatment delivery, intermediate) and 77525 (Proton

[[Page 68583]]

treatment delivery, complex) from New Technology APC 1510 (New 
Technology--Level X ($800-$900) to clinical APC 0667 (Level II Proton 
Beam Radiation Therapy), setting payment on the median cost of $1,133 
derived from the CY 2004 claims, an increase from the median cost of 
$934 in the proposed rule. Commenters also supported our proposal to 
maintain CPT codes 77520 (Proton treatment delivery; simple, without 
compensation) and 77522 (Proton treatment delivery; simple, with 
compensation) in APC 0664 (Level I Proton Beam Radiation Therapy), 
setting the payment on the median cost of $947 derived from the full 
year CY 2004 claims. Commenters stated that these proposed payments 
more accurately reflect the significant capital expense and operating 
costs of a proton beam therapy center. Commenters also were pleased 
with our proposal to maintain separate APCs for distinguishing simple 
from intermediate and complex proton beam therapies, stating that the 
distinction is necessary to differentiate between the resource demands 
of the different treatment levels. Commenters urged CMS to continue 
protecting beneficiary access to this technology, especially during 
this early stage of clinical adoption to ensure economic viability of 
both existing facilities and those in various stages of construction 
and development.
    Response: We agree with commenters that the CY 2004 median cost 
data for proton beam therapy services more accurately reflect the 
significant capital expense and high operating costs of a proton beam 
therapy facility. Furthermore, our reassignment of CPT codes 77523 and 
77525 from New Technology APC 1510 to clinical APC 0667 based on the 
improved median cost data and stable frequency is consistent with our 
policy of transitioning New Technology services into a clinically 
appropriate APC with payment based on median cost data once the data 
for these services become sufficiently stable to protect patient access 
to such services. Therefore, we are finalizing our proposal to reassign 
intermediate and complex proton beam therapy services (CPT codes 77523 
and 77525) from New Technology APC 1510 to clinical APC 0667, and to 
maintain simple proton beam therapy services (CPT codes 77520 and 
77522) in APC 0664 for CY 2006.
i. Smoking Cessation Counseling
    Comment: Two commenters expressed concern about our proposal to 
move smoking cessation HCPCS codes G0375 (Smoking and tobacco-use 
cessation counseling visit; 3-10 minutes) and G0376 (Smoking and 
tobacco-use cessation counseling visit; greater than 10 minutes) from 
their current New Technology APC 1501 (Level I, $0-$50) with a payment 
rate of $25, to New Technology APC 1491 (Level IA, $0-$10) with a 
payment rate of $5. Both commenters contended that the current payment 
rate of $25 is not sufficient to cover resources associated with this 
type of visit. Both commenters expressed the conviction that, once 
claims data reflecting the costs of the service become available, it 
would become clear that a payment rate closer to $52 is warranted. One 
commenter urged us to maintain these codes in their current New 
Technology APC until provider claims data become available. The other 
commenter took the position that placement in a New Technology APC is 
not appropriate, as the services could reasonably be placed in an 
existing clinical APC. Specifically, this commenter recommended that 
HCPCS codes G0375 and G0376 be assigned immediately to APC 0600 (Low 
Level Clinic Visits), which the commenter considers appropriate in 
terms of resource costs and clinical characteristics. Finally, both 
commenters pointed out that there was an inconsistency in our tables in 
the proposed rule with regard to the APC assignments of codes G0375 and 
G0376. Specifically, Table 10 in the proposed rule (70 FR 42706) showed 
HCPCS code G0375 assigned to New Technology APC 1491 (with a payment 
rate of $5), while HCPCS code G0376 was assigned to New Technology APC 
1492 (with a payment rate of $15). However, Addendum B of the proposed 
rule (70 FR 42936) showed both HCPCS codes G0375 and G0376 assigned to 
New Technology APC 1491 (with a payment rate of $5).
    Response: We thank the commenters for bringing to our attention a 
typographical error that appeared in Table 10 of the proposed rule (70 
FR 42706). This error did not come to our attention in time for 
correction. Our intent, as indicated in Addendum B, was to assign both 
HCPCS codes G0375 and G0376 to APC 1491 (with a payment rate of $5). We 
regret the error. We do not agree with the commenter who suggested that 
it is appropriate at this time to remove HCPCS codes G0375 and G0376 
from assignment to a New Technology APC and to assign them to clinical 
APC 0600 (Low Level Clinic Visits). One purpose of assignment to a New 
Technology APC is to provide an opportunity to collect claims data from 
our system, in order to allow for the ultimate placement of a code in 
the most appropriate clinical APC in terms of hospital resource 
requirements. At this time, we lack any data that would justify placing 
these codes in the clinical APC recommended by the commenter or in any 
other clinical APC. We believe that these smoking cessation services, 
because they are so specifically defined with respect to coding and 
coverage, may not require similar hospital resources as those required 
of other services assigned to APC 0600. As two specific G-codes were 
developed for these new smoking cessation services, the specific 
services likely bear little clinical resemblance to many of the 
evaluation and management services assigned to APC 0600, whose median 
cost currently reflects CY 2004 claims from hospitals. We also cannot 
agree with the commenter recommending placement of these codes in one 
or more higher-paying New Technology APCs. Our proposal to reassign 
these codes from their current New Technology APC 1501 (with a payment 
rate of $25) to New Technology APC 1491 (with a payment rate of $5) was 
based on our assessment that the hospital facility resources required 
for this service are likely to be very limited. At the time of 
activation of these new G-codes in CY 2005, New Technology APC 1501 was 
the New Technology APC applicable to new OPPS services with expected 
hospital costs of between $0 and $50. As we proposed to refine the New 
Technology cost bands for CY 2006 and are finalizing that proposal in 
this final rule, we believe that for CY 2006 assignment of the smoking 
cessation G-codes to New Technology APC 1491 now more appropriately 
reflects the hospital resources required for these services. Therefore, 
for CY 2006, we are finalizing that proposal in this final rule. 
However, for CY 2007 rate-setting, we will reassess the APC placement 
of these codes in light of the available partial year CY 2005 hospital 
claims data.
j. Stereoscopic Kv X-ray
    Comment: A number of commenters addressed our creation of a new 
code for stereoscopic kilovolt x-ray imaging, HCPCS code C9722 
(Stereoscopic kilovolt x-ray imaging with infrared tracking for 
localization of target volume), and assignment of the service to a New 
Technology APC. Commenters stated that the ``definition,'' which 
appears to refer to the code descriptor, combines two technologies into 
one HCPCS code. A commenter claimed that this descriptor excludes other 
superior technologies to acquire kilovolt (kV) x-ray images for 
localization of target volume that do not rely on infrared

[[Page 68584]]

tracking. Commenters asserted that the key feature of the service is 
the use of kV x-ray imaging for localization of target volume, while 
the infrared tracking feature is used for patient monitoring only to 
ensure immobilization, not for positioning and localization. A 
commenter stated that many kV x-ray systems do not use infrared 
tracking. The commenters, including a number of cancer centers, 
recommended modifying the descriptor of HCPCS code C9722 to 
``Stereoscopic kV x-ray imaging with or without infrared tracking for 
localization of target volume,'' claiming that this would allow 
hospitals equal reimbursement for providing the service regardless of 
the vendor from whom they bought the kV x-ray equipment. One commenter 
stated that the kV x-ray is part of Image Guided Radiation Therapy 
(IGRT), a new generation of conformal radiation therapy techniques, and 
that it was working with the CPT Editorial Panel to submit CPT 
applications for stereoscopic x-ray guidance, as well as other IGRT 
technologies. A commenter stated that there is a new CPT code for 
stereoscopic x-ray guidance effective January 1, 2006, and recommended 
that we crosswalk HCPCS code C9722 to the new CPT code.
    Response: The AMA's CPT Editorial Panel created new CPT code 77421, 
``Stereoscopic X-ray guidance for localization of target volume for the 
delivery of radiation therapy'', which will be effective January 1, 
2006. We will replace HCPCS code C9722 with CPT code 77421 for CY 2006, 
mapping the new code to the same New Technology APC as for CY 2005--APC 
1502. As with the instructions embedded in the descriptor for HCPCS 
code C9722, CPT code 77421 should not be reported with the five G-codes 
for stereotactic radiosurgery treatment to be billed under the OPPS in 
CY 2006. As CPT code 77421 makes no reference to infrared tracking, the 
commenters' concerns are addressed by the use of this CPT code and its 
descriptor.
k. Stereotactic Radiosurgery (SRS)
    In a correction to the November 7, 2003 final rule with comment 
period, issued on December 31, 2003 (68 FR 75442), we considered a 
commenter's request to combine HCPCS codes G0242 (Cobalt 60-based 
stereotactic radiosurgery planning) and HCPCS code G0243 (Cobalt 60-
based stereotactic radiosurgery delivery) into a single procedure code 
in order to capture the costs of this treatment in single procedure 
claims because the majority of patients receive the planning and 
delivery of this treatment on the same day. We responded to the 
commenter's request by explaining that several other commenters stated 
that HCPCS code G0242 was being misused to code for the planning phase 
of linear accelerator-based stereotactic radiosurgery planning. Because 
the claims data for HCPCS code G0242 represented costs for linear 
accelerator-based stereotactic radiosurgery planning (due to misuse of 
the code), in addition to Cobalt 60-based stereotactic radiosurgery 
planning, we were uncertain of how to combine these data with HCPCS 
code G0243 to determine an accurate payment rate for a combined code 
for planning and delivery of Cobalt 60-based stereotactic radiosurgery.
    In consideration of the misuse of HCPCS code G0242 and the 
potential for causing greater confusion by combining HCPCS codes G0242 
and G0243 into a single procedure code, for CY 2004 we created a 
planning code for linear accelerator-based stereotactic radiosurgery 
(HCPCS code G0338) to distinguish this service from Cobalt 60-based 
stereotactic radiosurgery planning. We maintained both HCPCS codes 
G0242 and G0243 for the planning and delivery of Cobalt 60-based 
stereotactic radiosurgery, consistent with the use of the two G-codes 
for planning (HCPCS code G0338) and delivery (HCPCS codes G0173, G0251, 
G0339, G0340, as applicable) of each type of linear accelerator-based 
stereotactic radiosurgery (SRS). We indicated that we intended to 
maintain these new codes in their current New Technology APCs until we 
had sufficient hospital claims data reflecting the costs of the 
services to consider moving them to clinical APCs.
    During the February 2005 APC Panel meeting, the APC Panel discussed 
the clinical and resource cost similarities between planning for Cobalt 
60-based and linear accelerator-based SRS. The APC Panel also discussed 
the use of CPT codes instead of specific G-codes to describe the 
services involved in SRS planning, noting the clinical similarities in 
radiation treatment planning regardless of the mode of treatment 
delivery. Acknowledging the possible need for CMS to separately track 
planning for SRS, the APC Panel eventually recommended that we create a 
single HCPCS code to encompass both Cobalt 60-based and linear 
accelerator-based SRS planning. However, a hospital association and 
other presenters at the APC Panel meeting urged that we discontinue the 
use of G-codes for SRS planning, and instead, recognize the current CPT 
codes that describe the specific component services involved in SRS 
planning to reduce the burden on hospitals of maintaining duplicative 
codes for the same services to accommodate different payers. Lastly, 
one presenter urged that we combine HCPCS codes G0242 (Cobalt 60-based 
stereotactic radiosurgery planning) and G0243 (Cobalt 60-based 
stereotactic radiosurgery delivery) into a single procedure code to 
reflect that the majority of patients receive the planning and delivery 
of this treatment on the same day as a single fully integrated service.
    The APC Panel recommended that we make no changes to the coding or 
APC placement of SRS delivery codes G0173, G0243, G0251, G0339, and 
G0340 for CY 2006. We first established the above full group of 
delivery codes in CY 2004, so we have only one year of hospital claims 
data reflecting costs of all of the services. In addition, presenters 
to the APC Panel described current ongoing deliberations amongst 
interested professional societies around the descriptions and coding 
for SRS. The APC Panel and presenters suggested that we wait for the 
outcome of these deliberations prior to making any significant changes 
to SRS delivery coding or payment rates.
    In an effort to balance the recommendations of the APC Panel with 
the recommendations of presenters at the APC Panel meeting, in 
accordance with the APC Panel recommendations, we proposed to make no 
changes to the APC placement of the following SRS treatment delivery 
codes for CY 2006: HCPCS codes G0173, G0243, G0251, G0339, and G0340.
    In the CY 2006 proposed rule, we acknowledged concerns expressed by 
some presenters urging that we discontinue the use of the G-codes for 
SRS planning, and instead, recognize the current CPT codes that 
describe the specific component services involved in SRS planning to 
reduce the burden on hospitals of maintaining duplicative codes for the 
same services to accommodate different payers. In addition, we 
indicated that we had no need to separately track SRS planning 
services, which share clinical and resource homogeneity with other 
radiation treatment planning services described by current CPT codes.
    When HCPCS code G0242 was established for SRS planning, several 
radiology planning services were considered in determining its APC 
placement. In the November 30, 2001 final rule, in which we described 
our determination of the total cost for SRS planning based on our 
claims experience, we added together the median costs of the following 
CPT codes

[[Page 68585]]

that we found to be regularly billed with SRS delivery (CPT code 61793 
in the available hospital data): 77295, 77300, 77370, and 77315. In the 
CY 2006 proposed rule, our examination of the costs from the CY 2004 
claims data available to us at that time for the above-mentioned CPT 
codes closely approximated the CY 2004 median costs reported for HCPCS 
codes G0242 and G0338. The APC median costs for the above-mentioned CPT 
codes based on the CY 2004 claims data utilized for the proposed rule 
totaled $1,297, while the median cost for HCPCS code G0242 was $1,366 
and the median cost for HCPCS code G0338 was $1,100 based on the 
partial year CY 2004 claims data. In addition, three of the above-
mentioned CPT codes were included on the proposed bypass list for CY 
2006, so we did not anticipate that the billing of these codes on the 
same day as an SRS treatment service would cause significant problems 
with multiple bills for SRS services. Therefore, we proposed to 
discontinue HCPCS codes G0242 and G0338 for the reporting of charges 
for SRS planning under the OPPS, and to instruct hospitals to bill 
charges for SRS planning using all of the available CPT codes that most 
accurately reflect the services provided.
    We acknowledged one APC Panel presenter's concern that the coding 
structure of Cobalt 60-based SRS, using either the current SRS planning 
G-code or the appropriate CPT codes for planning services as we 
proposed for CY 2006, might not necessarily reflect the same day, 
integrated Cobalt 60-based SRS service furnished to the majority of 
patients receiving Cobalt 60-based SRS. Thus, we specifically requested 
public comment on the clinical, administrative, or other concerns that 
could arise if we were to bundle Cobalt 60-based SRS planning services, 
currently reported using HCPCS code G0242 and proposed for CY 2006 to 
be billed using the appropriate CPT codes for planning services, into 
the Cobalt 60-based SRS treatment service, currently reported under the 
OPPS using HCPCS code G0243. Under such a scenario, the SRS treatment 
service described by HCPCS code G0243 would be placed in a higher 
paying New Technology APC to reflect payment for the costs of the SRS 
planning and delivery as an integrated service. Hospitals would be 
prohibited from billing other radiation planning services along with 
the Cobalt 60-based SRS treatment delivery code. In contrast to Cobalt 
60-based SRS coding, we did not consider bundling the planning for 
linear accelerator-based SRS with the treatment delivery services, 
given the various timeframes for planning that may occur with linear 
accelerator-based SRS.
    As discussed in detail above, the APC Panel recommended that CMS 
create a single HCPCS code to encompass both Cobalt 60-based and linear 
accelerator-based SRS planning. Furthermore, the Panel recommended that 
we make no changes to the coding or APC placement of SRS treatment 
delivery HCPCS codes G0173, G0243, G0251, G0339, and G0340 for CY 2006.
    For reasons discussed below, we are discontinuing HCPCS codes G0242 
and G0338 for the reporting of charges for SRS planning under the OPPS 
for CY 2006, and instructing hospitals to bill charges for SRS 
planning, regardless of the mode of treatment delivery, using all of 
the available CPT codes that most accurately reflect the services 
provided. In addition, while we are reassigning HCPCS code G0243 to 
clinical APC 0127 for CY 2006, we are making no changes to the APC 
placement of SRS treatment delivery HCPCS codes G0173, G0251, G0339, 
and G0340.
    We received a number of public comments on these SRS issues.
    Comment: We received numerous comments supporting our proposal to 
discontinue HCPCS codes G0242 (Cobalt 60-based stereotactic 
radiosurgery planning) and G0338 (Linear accelerator-based SRS 
planning) for the reporting of charges for SRS planning, and to 
instruct hospitals to bill charges for SRS planning using available CPT 
codes that most accurately reflect the services provided. These 
commenters agreed that available CPT codes more accurately describe the 
services involved in SRS planning and are less administratively 
burdensome for providers because other payors recognize them. Some 
commenters urged that we retain separate codes for reporting the 
planning and treatment delivery of Cobalt 60-based SRS, whether through 
the use of existing G-codes (HCPCS codes G0242 and G0243) or through 
available CPT codes. Several of these commenters explained that 
although the planning and treatment delivery of Cobalt 60-based SRS 
most often occur on the same date of service, there are instances in 
which the planning and treatment are not delivered on the same date of 
service due to an unanticipated problem that arises during the planning 
that precludes the treatment delivery. In such instances where only 
planning for the Cobalt 60-based SRS is performed, commenters stated 
that CMS would need to clarify how providers should bill these services 
if separate codes are not maintained for the planning and treatment 
delivery of Cobalt 60-based SRS. Commenters expressed concern that 
combining the planning code (HCPCS code G0242) and treatment delivery 
code (HCPCS code G0243) for Cobalt 60-based SRS into a single 
combination code would necessitate the use of a modifier when they are 
not performed on the same date of service and would complicate the 
billing of these services and increase the administrative burden on 
hospitals. One commenter suggested that, if we decide to maintain HCPCS 
code G0242 for Cobalt 60-based SRS planning rather than transition to 
the CPT codes, we consider placing the planning code (HCPCS code G0242) 
on the bypass list as an alternative solution to generating more single 
bills for future rate-setting, rather than combining the planning and 
treatment delivery codes for Cobalt 60-based SRS into a single 
combination code.
    In contrast, a few commenters urged that we continue to recognize 
HCPCS codes G0242 and G0338 for the reporting of SRS planning rather 
than transition to the available CPT codes that describe these 
services. These commenters predicted that another year of stability 
would allow CMS to collect more reliable data for use in setting the CY 
2008 payment rates for SRS planning services.
    Many commenters urged that we refrain from treating various forms 
of SRS (i.e., Cobalt 60-based and linear accelerator-based) differently 
by ``bundling'' planning into the treatment delivery for Cobalt 60-
based SRS by creating a single combination code, while ``unbundling'' 
planning and treatment delivery for linear accelerator-based SRS by 
paying separately for these services. These commenters asserted that 
the planning and treatment delivery of SRS, regardless of the form of 
delivery, are clinically distinct services that should be reported 
separately to distinguish their distinct resource requirements. One 
commenter refuted claims that the administration of the planning and 
treatment delivery of SRS on the same date of service is unique to 
Cobalt 60-based SRS, arguing that the planning and treatment delivery 
of LINAC-based SRS likewise are typically performed on the same day, 
and that a mere time proximity of the two services does not necessitate 
a single combination code for either form of SRS. Several commenters 
cautioned against establishing different coding schemes for various SRS 
services that would likely cause confusion for coders, inaccurate 
coding, and unreliable data for future rate setting.

[[Page 68586]]

    Numerous other commenters urged CMS to combine the planning code 
(HCPCS code G0242) and treatment delivery code (HCPCS code G0243) for 
Cobalt 60-based SRS into a single surgical code, preferably CPT code 
61793 (stereotactic radiosurgery, particle beam, gamma ray, or linear 
accelerator, one or more sessions), which would replace all of the SRS 
G codes regardless of the mode of delivery. These commenters stated 
that the planning and treatment delivery of Cobalt 60-based SRS are 
always performed on the same day and that a single combination code 
would be less confusing for coders, provide more accurate claims data, 
and result in a more appropriate payment for Cobalt 60-based SRS. While 
some of these commenters urged that we assign this single combination 
code to a higher paying New Technology APC consistent with its CY 2004 
median cost data until more accurate cost data are available for 
determining an appropriate clinical APC, other commenters strongly 
opposed the designation of Cobalt 60-based SRS as a new technology 
service, noting that Cobalt 60-based SRS became a standard of care for 
treating cancer patients over two decades ago and a new technology 
label is no longer appropriate. Commenters stated that CMS' designation 
of Cobalt 60-based SRS as a new technology service has led other 
insurers to consider the treatment to be experimental, which frequently 
delays, and sometimes prevents, access to treatment for critically ill 
patients. These commenters urged that we assign this new combination 
code reflecting planning and delivery of Cobalt 60-based SRS to a 
surgical APC and set the payment based on the median cost calculated 
from the CY 2004 hospital claims data. Some of these commenters 
recommended that this single combination code describe all forms of 
SRS, while other commenters emphasized the importance of maintaining 
separate combination codes for Cobalt 60-based SRS and LINAC-based SRS 
to distinguish the significant clinical and resource cost differences 
associated with these services.
    One commenter urged that if CMS replaces the G-codes for SRS 
planning with available CPT codes describing these services, we should 
not assign HCPCS code G0243 (Cobalt 60-based SRS treatment delivery) to 
a New Technology APC paying higher than its CY 2005 payment rate of 
$5,250. This commenter supported our proposal to make no changes to the 
APC placement of SRS treatment delivery codes that describe a complete 
course of treatment in one session, stating that the proposed payment 
of $5,250 for all single session SRS treatment services for CY 2006 is 
appropriate based on the hospital resources involved in furnishing 
these services.
    Response: We thank the many commenters for their insightful 
thoughts and recommendations for the reporting of hospital charges for 
SRS services under the OPPS for CY 2006. In recognition of the 
heightened level of diligence that the current coding scheme for SRS 
services requires of hospital coders to ensure that charges for these 
services are reported under the appropriate G-code, we carefully 
considered several options for simplifying the coding scheme for SRS 
services while maintaining a certain level of data specificity to 
reflect the differential clinical considerations and hospital resource 
utilization that are necessary to inform future rate setting.
    First, we considered several recommendations by commenters to 
bundle the planning for Cobalt 60-based SRS into the treatment delivery 
(HCPCS code G0243) for Cobalt 60-based SRS by either establishing a 
single combination G-code describing both the planning and delivery of 
Cobalt 60-based SRS or by instructing providers to report CPT code 
61793 for such services. However, we agree with the majority of 
commenters who expressed strong opposition to a single combination G-
code or CPT code to report the planning and treatment delivery of 
Cobalt 60-based SRS, noting the following concerns: (1) The 
administrative burden on providers of maintaining duplicative codes for 
SRS planning to accommodate various payors (that is, G-codes for 
Medicare and CPT codes for non-Medicare payors); (2) the added 
complexity of attaching a modifier to the code for instances when 
planning and delivery are not provided on the same date of service 
because treatment does not proceed due to an unanticipated problem; (3) 
the confusion for coders and unreliable data that could emanate from 
inconsistent coding schemes for different forms of SRS (that is, Cobalt 
60-based and LINAC-based SRS); and (4) the nonspecificity of the 
descriptor for CPT code 61793 which describes all forms of SRS 
treatment delivery and makes no mention of SRS planning services. We 
also agree with the majority of commenters who stated that the G-codes 
(G0242 and G0338) for SRS planning are duplicative of existing CPT 
codes that adequately describe such services and that are much less 
administratively burdensome on hospitals because they are recognized by 
non-Medicare payors. Furthermore, our analysis of the CY 2004 claims 
data revealed that the median costs for HCPCS codes G0242 and G0338 
closely approximated the sum of the median costs for the CPT codes 
(77295, 77300, 77315, 77370) that were most commonly billed under the 
OPPS for SRS planning prior to the establishment of HCPCS codes G0242 
and G0338. In addition, we remind commenters that three of the above-
mentioned CPT codes are included on the bypass list for CY 2006, so we 
do not anticipate that the billing of these codes on the same day as an 
SRS treatment delivery service will cause significant problems with 
multiple bills for SRS services, eliminating any need for recognizing a 
single combination G-code or CPT code which describes both planning and 
treatment delivery SRS services for the purpose of generating more 
single bills. Finally, based on additional confirmation from commenters 
that the similarities in clinical characteristics and resource costs 
associated with treatment planning for services delivering radiation, 
regardless of the mode of treatment delivery, dispel the need to 
separately track planning services for SRS, we are discontinuing HCPCS 
codes G0242 and G0338 for the reporting of charges for SRS planning 
under the OPPS for CY 2006, and instructing hospitals to bill charges 
for SRS planning, regardless of the mode of treatment delivery, using 
all of the available CPT codes that most accurately reflect the 
services provided.
    We also agree with the majority of commenters who strongly urged 
that we reassign HCPCS code G0243 (Cobalt 60-based treatment delivery) 
from New Technology APC 1528 to a clinical APC, pointing out that 
Cobalt 60-based SRS became a standard of care for treating cancer 
patients over two decades ago and, therefore, a new technology label no 
longer appropriately describes the service. Furthermore, the median 
costs from hospital claims for HCPCS code G0243 based on a significant 
number of single claims each year have been quite stable over the past 
three years, supporting movement of this service out of a New 
Technology APC and into a clinical APC based on its median cost data 
from CY 2004. Therefore, we are reassigning HCPCS code G0243 from New 
Technology APC 1528 to clinical APC 0127 and setting its payment rate 
based on a median cost of $7,297 for CY 2006.
    Lastly, we agree with commenters who emphasized the significant 
clinical and resource cost differences associated with the treatment 
delivery of Cobalt 60-based SRS and LINAC-based SRS, and

[[Page 68587]]

that establishment of a single code to describe all forms of SRS 
treatment delivery would result in a loss of essential data specificity 
for determining appropriate future payment rates for these services. 
For instance, based on the CY 2004 claims data, the median costs for 
the various forms of SRS treatment delivery ranged from $2,502 to 
$7,296. These significant differences in median cost data emphasize the 
importance of maintaining different codes that distinguish the various 
forms of SRS treatment delivery for the purpose of setting the most 
appropriate payment rates for these services. We believe it would be 
premature, as well, to move the LINAC-based SRS treatment delivery 
procedures to clinical APCs for CY 2006 because we have only one year 
of claims data reflecting their current coding structure, although we 
have hundreds of single claims for some of the services. We will be 
examining our claims data carefully for the next OPPS update, because 
we will then have 2 years of data for these LINAC-based SRS treatment 
delivery services now assigned to New Technology APCs. Therefore, we 
are maintaining HCPCS codes G0173 and G0339 in New Technology APC 1528, 
HCPCS code G0251 in New Technology APC 1513, and HCPCS code G0340 in 
New Technology APC 1525 for CY 2006. And as mentioned elsewhere in this 
section, we are reassigning HCPCS code G0243 from New Technology APC 
1528 to clinical APC 0127.
    Comment: One commenter urged that we create a new CPT code titled 
``Surgeon-based Gamma Stereotactic Radiosurgery, complete course, one 
procedure, per lesion'' to describe Cobalt 60-based SRS planning and 
treatment delivery and assign this CPT code to a new surgical APC 
titled ``Surgeon-based Gamma Stereotactic Radiosurgery.'' This 
commenter recommended that we set the payment rate of this new APC 
based on the combined median costs from claims data for HCPCS codes 
G0242 and G0243.
    Response: We appreciate the commenter's suggestion; however, CMS 
does not possess the authority to create CPT codes, which are 
established and maintained by the American Medical Association. 
Furthermore, under the OPPS, we do not label APCs according to the type 
of clinician delivering the service (that is, surgeon versus non-
surgeon) because such categorization is irrelevant to establishing 
payment for hospital services billed under the OPPS. Rather, we provide 
titles for clinical APCs that describe the actual hospital services 
assigned to the APCs for which providers should report their hospital 
costs and charges. In addition, as discussed above, we agree with the 
majority of commenters who opposed the recognition of a single 
combination code (that is, CPT code 61793) for the planning and 
delivery of Cobalt 60-based SRS services, for reasons stated 
previously, i.e. the administrative burden of maintaining duplicative 
codes, the added complexity of attaching a modifier to the code for 
instances when planning and delivery are not provided on the same date 
of service because treatment does not proceed due to an unanticipated 
problem, the confusion for coders and unreliable data that could 
emanate from inconsistent coding schemes for different forms of SRS 
(that is, Cobalt 60-based and LINAC-based SRS), and the nonspecificity 
of the descriptor for CPT code 61793 which describes all forms of SRS 
treatment delivery and makes no mention of SRS planning services. 
Therefore, as discussed elsewhere in this section, for CY 2006, we are 
discontinuing HCPCS code G0242 and recognizing existing CPT codes for 
the reporting of Cobalt 60-based SRS planning, and moving HCPCS code 
G0243 (Cobalt 60-based SRS treatment delivery) from New Technology APC 
1528 to clinical APC 0127 based on a median cost of $7,296.
    Comment: Several commenters recommended that we make HCPCS code 
G0339 (Image guided, robotic, linear accelerator-based (LINAC) SRS 
treatment delivery, complete session, first session of fractionated 
treatment) a permanent code and continue to pay this service at the CY 
2005 payment rate of $5,250. These commenters also recommended that we 
eliminate HCPCS code G0340 (Image guided, robotic, linear accelerator-
based (LINAC) SRS treatment delivery, fractionated treatment, 2nd-5th 
sessions) and instruct hospitals to report HCPCS code G0339 for all 
fractionated treatment sessions, stating that the resource costs are 
the same for each session regardless of the number of treatment 
sessions that the patient receives.
    Response: We disagree with the commenters' assertions that the 
resource costs are the same for each session of image-guided, robotic 
LINAC-based SRS treatment delivery regardless of the number of 
treatment sessions that the patient receives. Based on CY 2004 claims 
data, the median cost for HCPCS code G0339 ($4,917) was considerably 
higher than the median cost for HCPCS code G0340 ($2,502), and does not 
support the elimination of HCPCS code G0340 or its payment at a rate 
comparable to the payment rate for HCPCS code G0339. As the SRS 
treatment delivery G-codes are national Level II HCPCS codes that we 
utilize for billing SRS treatments in the OPPS, we are uncertain what 
changes the commenter would like us to make for the codes to be 
``permanent.'' Therefore, for CY 2006, we are maintaining HCPCS code 
G0339 in New Technology APC 1528, and HCPCS code G0340 in New 
Technology APC 1525.
    Comment: One commenter urged CMS to assign HCPCS codes G0251 and 
G0340, for fractionated non-robotic and image-guided robotic LINAC-
based SRS respectively, to the same APC, contending that these 
procedures involve similar resources and should be paid equally. In 
contrast, another commenter asserted that image-guided robotic LINAC-
based SRS is substantially more resource intensive than non-robotic 
LINAC-based SRS, and that CMS should maintain HCPCS code G0251 in a 
separate APC from HCPCS code G0340 to distinguish their levels of 
resource requirements.
    Response: We began recognizing HCPCS code G0251 to describe 
fractionated sessions of non-robotic LINAC-based SRS treatment delivery 
in CY 2004, which yielded no single procedure claims data for HCPCS 
code G0251 to substantiate a similarity or lack of similarity of its 
resource costs in comparison with HCPCS code G0340 (fractionated, 2nd-
5th sessions, image-guided robotic LINAC-based SRS treatment delivery). 
However, the large divergence in the median cost of $2,802 for the 
complete session of non-robotic LINAC-based SRS treatment delivery 
(HCPCS code G0173), in comparison with the median cost of $4,917 for 
the complete and first fractionated sessions of image-guided robotic 
LINAC-based SRS treatment delivery (HCPCS code G0339), indicates that 
fractionated image-guided robotic LINAC-based SRS treatment delivery is 
likely substantially more resource intensive than fractionated non-
robotic LINAC-based SRS treatment delivery. Therefore, for CY 2006, we 
are maintaining HCPCS code G0251 in New Technology APC 1513 and HCPCS 
code G0340 in New Technology APC 1525. However, for CY 2007, we will 
reexamine our APC placement of HCPCS codes G0251 and G0340 based on CY 
2005 hospital claims data.
    Comment: One commenter to the November 15, 2004 final rule with 
comment period (69 FR 65682) disagreed with CMS' statement that CPT 
codes 0082T (Stereotactic body radiation, treatment delivery, one or 
more treatment areas, per day) and

[[Page 68588]]

0083T (Stereotactic body radiation therapy, treatment management, per 
day) are bundled into the current G-codes for SRS treatment delivery. 
The commenter stated that stereotactic body radiation treatment 
delivery and management are new technologies and, thus, are not 
included in the current G-codes for SRS treatment delivery; however, 
the commenter provided no cost data nor any explanation as to how 
stereotactic body radiation treatment differs from the current 
procedures described by the G-codes for SRS treatment delivery. 
Instead, the commenter simply requested that CMS designate these new 
tracking codes for stereotactic body radiation treatment delivery and 
management as new technology services and assign these codes to a New 
Technology APC.
    Response: We disagree with the commenter's unsubstantiated 
assertion that the current G-codes for SRS treatment delivery do not 
already describe or include some services that could also be identified 
as stereotactic body radiation treatment delivery and management 
described by CPT codes 0082T and 0083T, respectively. Furthermore, we 
received no evidence to support the commenter's assertion that these 
services represent new technologies that could not be represented in 
our hospital claims data. Therefore, for CY 2006, we are maintaining 
CPT code 0082T with a status indicator of ``B'' because we consider an 
alternate code to be available for billing this service under the OPPS. 
Likewise, for CY 2006, we are maintaining CPT code 0083T with a status 
indicator of ``N'', indicating that the charges for this service are 
packaged into the payment for other services paid separately under the 
OPPS.

D. APC--Specific Policies

    We received many comments on our proposed changes to specific 
groups of services as discussed in the CY 2006 OPPS proposed rule 
preamble and displayed in Addendum B. We have grouped these comments, 
and our responses, into five general clinical categories as shown 
below.
    We received one comment that generally addresses our APC assignment 
methodology.
    Comment: One commenter objected to the placement of codes for 
unlisted services in the lowest APC that is clinically appropriate and 
to the lack of discussion of this policy in the CY 2006 OPPS proposed 
rule. The commenter asked that CMS examine claims data and match 
unlisted services to the diagnosis to determine if there is a more 
appropriate APC than the lowest level.
    Response: We discussed this policy in the CY 2005 OPPS proposed 
rule which we published on August 16, 2004 (69 FR 50448), and we made 
our existing policy final in the November 15, 2004 final rule (69 FR 
65682). We proposed no changes to this policy in the CY 2006 OPPS 
proposed rule (which we published on July 25, 2005 (70 FR 42674)) and, 
therefore, we have not changed the policy. The HCPCS codes for unlisted 
services should be used only if there is no existing code that can be 
used alone or with existing modifiers to report the service that was 
furnished. We believe that their use should be very rare. We do not 
believe that examination of the diagnoses on claims for unlisted 
procedures would enable us to properly place the codes into APCs 
because there are so many different types of services at different 
levels of resource use that could apply to a single diagnosis. There is 
a 2-year lag between the year of hospital claims data and the OPPS 
payment rates that are established based on the data. New procedure-
specific HCPCS codes are developed on an annual basis, and there are 
continuous changes in procedures for many diagnoses as medical practice 
evolves. Therefore, we have no confidence that the array of unlisted 
services billed by hospitals, and by implication their median costs, in 
a given year for patients with certain diagnoses would necessarily have 
any relationship to unlisted services, and their median costs, billed 2 
years later for patients with the same diagnoses. Moreover, placing 
unlisted services in the lowest level APC encourages use of existing 
codes where it is possible and also encourages development of new HCPCS 
codes for services for which codes do not exist.
1. Cardiac and Vascular Procedures
a. Acoustic Heart Sound Recording and Analysis
    Comment: One commenter requested that CMS change the status 
indicator for CPT code 0069T (Acoustic heart sound recording and 
computer analysis only). The commenter requested that we assign the 
procedure to APC 0099 with an ``S'' status indicator rather than ``N,'' 
as is currently assigned to CPT code 0069T. The commenter stated that 
the test's current status as a packaged procedure results in 
inequitable payment to the hospital. They stated that the cost of an 
EKG with the acoustic heart sounds recording is $55 whereas, the cost 
of an EKG without is $31, and that because we have packaged the 
procedure, the hospital is underpaid by $24 for each test it performs.
    Response: It is our understanding that the acoustic heart sound 
recording and analysis is intended for a specific, targeted group of 
patients to enhance the provider's ability to diagnose heart failure. 
The technology, as described by CPT code 0069T, always is performed in 
conjunction with an EKG and as such is ideal for packaging. It is the 
hospitals responsibility to increase their charges to reflect the 
additional costs for those EKGs that include the acoustic heart sound 
recording. If the hospital uses the test according to the manufacturer 
guidelines, the costs will be distributed over the large number of EKGs 
that are performed in the hospital outpatient department and, over 
time, the additional costs may be recognized in the OPPS rates as 
increased median costs for EKGs in general.
    Comment: One commenter requested that CPT code 0069T (Acoustic 
heart sound recording and computer analysis only) become separately 
payable. The commenter was concerned that CMS interpreted the code to 
be an add-on code to an EKG procedure. The commenter clarified that CPT 
code 0069T is often used as a stand-alone procedure, provided without 
an EKG procedure.
    Response: We are accepting the APC Panel's recommendations that CPT 
code 0069T remain packaged for CY 2006. The Panel reviewed this code 
and determined it to be an add-on code to an electrocardiography 
service, as indicated by the American Medical Association's descriptor 
of this code. In addition, we are concerned that there may be 
unnecessary utilization of this procedure if it is separately payable 
because it is an add-on code to EKG services, for which there were 
almost 6 million claims under the OPPS in CY 2004. Lastly, we continue 
to believe that this service is a minor procedure that may be performed 
quickly accompanied by an EKG and likely other separately payable 
services, and thus is appropriately packaged.
b. Cardiac Electrophysiologic Services (APC 0087)
    Comment: Commenters objected to the decline in proposed payment 
rate for APC 0087 from prior years. They also objected to what they 
view as a two times violation in APC 0087 and asked that we move 
electrophysiologic ``mapping'' CPT codes 93609, 93613, and 93631 to APC 
0086 because the CPT code median costs for these codes are much higher 
than the median costs for the other codes in APC 0087. They state that 
because ``mapping'' CPT codes 93609, 93613, and 93631 are billed with 
other cardiac electrophysiologic services

[[Page 68589]]

already assigned to APC 0086, then these ``mapping'' services should 
also be assigned to the same clinical APC. They also asked that we use 
only claims that contain the device codes required for these CPT codes 
in setting the median cost for the APC into which CMS places these 
codes.
    Response: We disagree that there is a 2 times violation, under our 
rules, in APC 0087. The law permits an exception to the two times rule 
for ``low volume items and services.'' We define any service that does 
not meet our test as a ``significant service'' to be a ``low volume 
item or service.'' A significant service is a service with a single 
bill frequency greater than 1,000 (which no services in APC 0087 meet) 
or a service with a single bill frequency greater than 99 and more than 
2 percent of the single bills (which no services in APC 0087 meet). 
Because APC 0087 does not have any codes which meet the test of being 
significant, all of the codes in APC 0087 are ``low volume'' under our 
definition, and there is no two times violation.
    Notwithstanding the absence of a 2 times violation under our rules, 
we acknowledge the commenter's concerns, and we will ask for the APC 
Panel's views regarding the assignment of these codes to APC 0087 in 
preparation for the CY 2007 OPPS update. We also recognize that, for 
many of the procedures assigned to APC 0087, multiple procedure claims 
are the norm. We will also work with the APC Panel to develop potential 
strategies which could enable us to use more claims for rate setting 
for these cardiac electrophysiologic services. We disagree, however, 
that because the electrophysiology ``mapping'' codes are performed with 
other cardiac electrophysiology studies, the clinical and resource 
characteristics of the ``mapping'' procedures necessarily are similar 
to the base services provided.
    See section IV.A. for our discussion of adjustments to median costs 
for device-dependent APCs for the CY 2006 OPPS. See Table 16 for the 
adjusted median cost for APC 0087 for the CY 2006 OPPS.
c. Cardioverter-Defibrillator Implantation (APC 0107, 0108)
    The median costs for APC 0107 (Implantation of Cardioverter-
Defibrillator) and APC 0108 (Insertion/Replacement/Repair of 
Cardioverter-Defibrillator Leads and Insertion of Cardioverter-
Defibrillator) have been adjusted each year since CY 2003 when pass-
through payment expired for cardioverter-defibrillators, because the 
unadjusted medians have differed significantly from the prior year's 
payment medians. Moreover, because we use single procedure claims to 
set the median costs, the median costs for these APCs have always been 
set on a relatively small number of claims as compared to the total 
frequency of claims for the services under the OPPS. For example, for 
the CY 2006 OPPS proposed rule, the unadjusted median cost for APC 0107 
was set based on 445 single procedure claims, which is 5.5 percent of 
the 8,073 claims on which a procedure code in the APC was billed. 
Similarly, the unadjusted median cost for APC 0108 was set based on 520 
single procedure claims, which is 8.7 percent of the 6,003 claims on 
which a procedure code in the APC was billed. Commenters have 
frequently told us that using the single procedure median costs for 
these APCs does not accurately reflect the costs of the procedures 
because claims from typical clinical circumstances involving multiple 
procedures, which constitute the majority of claims under these APCs, 
are not used to establish the medians.
    At the February 2005 APC Panel meeting, the APC Panel recommended 
that CMS package CPT codes 93640 and 93641 (electrophysiologic 
evaluation at time of initial implantation or replacement of 
cardioverter-defibrillator leads). The APC Panel recommended that we 
always package the costs for these codes because the definitions of the 
codes state that these evaluations are done at the time of lead 
implantation. Therefore, CPT codes 93640 and 93641 would never be 
correctly reported without a code in APC 0107 or APC 0108 also being 
reported. In addition, when a service assigned to APC 0107 or APC 0108 
is provided, we would expect that CPT codes 93640 or 93641 for 
electrophysiologic evaluation and testing would also be performed 
frequently, and CY 2004 claims data for services in APC 0107 and APC 
0108 confirm this. The APC Panel believed that packaging the costs of 
CPT codes 93640 and 93641 would result in more single bills available 
for setting the median costs for APC 0107 and APC 0108, and thus would 
likely yield more appropriate median costs for those APCs. Those 
medians would then include the costs of the electrophysiologic testing 
commonly performed at the time of the implantable cardioverter-
defibrillator (ICD) insertion.
    The APC Panel further recommended that CMS treat CPT code 33241 
(Subcutaneous removal of cardioverter-defibrillator) as a bypass code 
when the code appeared on the same claims with services assigned to APC 
0107 or APC 0108. The APC Panel recommended bypassing charges for this 
code only when it appeared on the same claim with codes in APC 0107 or 
APC 0108, because when a cardioverter defibrillator (ICD) is removed 
and replaced in the same operative session, it is appropriate to 
attribute all of the packaged costs on the claim to the implantation of 
the device rather than to the removal of the device. The line costs for 
CPT code 33241 that are removed from the claims in this case would be 
discarded and would not be used to set the median cost for APC 0105 
(the APC in which the code is located).
    We modeled the median costs that would be calculated for APCs 0107 
and 0108, if we were to make the changes recommended by the APC Panel 
for these APCs, under four possible scenarios: (1) The cardioverter-
defibrillator device is inserted without removal or testing; (2) the 
device is inserted and tested with no removal; (3) the device is 
removed and inserted but not tested; and (4) the device is removed, 
inserted, and tested. For each unique scenario, we then compared the 
sum of the unadjusted median costs, the sum of the proposed adjusted 
median costs and the sum of the costs that we modeled using the APC 
Panel recommendations. These results were shown in the proposed rule in 
Tables 16 and 17.
    We proposed to set the medians for these APCs at 85 percent of 
their CY 2005 payment medians and based our modeling of the scalar and 
the impact analysis on that proposal, although we believed that the APC 
Panel recommendations have significant merit, particularly when we move 
to complete reliance on claims data in updating the OPPS for CY 2007. 
Although we proposed to adjust the median costs for these APCs in the 
same manner as other device-dependent APCs, we stated in the proposed 
rule that we will consider, based on the public comments, whether it 
would be appropriate to apply the multiple procedure claims methodology 
to these APCs for the CY 2006 OPPS. We specifically invited public 
comments on the APC Panel recommendations regarding packaging and 
bypassing services frequently performed with procedures assigned to APC 
0107 and APC 0108, with the goal of increasing single bills available 
for rate-setting in order to improve the accuracy of median costs based 
upon hospital claims.
    We received many public comments concerning our proposal.
    Comment: Many commenters stated that the payments CMS proposed for 
APCs 0107 and 0108 are inadequate to cover the acquisition costs of the

[[Page 68590]]

devices, much less the full hospital costs of providing the services. 
They asserted that the proposed payments for APCs 0107 and 0108 are 
only 84 percent of the cost of the device alone, leaving the hospital 
with an out of pocket loss for the device and no payment for the 
service costs. They indicated that if the proposed payment rates are 
made final, APCs 0107 and 0108 will have incurred reductions of 20.5 
percent and 29.4 percent respectively since CY 2002. They urged that 
CMS use external data for the device portion of the median cost or at a 
minimum, accept the APC Panel recommendation to set the payment rate 
for APCs 0107 and 0108 at no less than the CY 2005 OPPS payment rate 
updated by the full market basket increase. They say that beneficiary 
access to care will be inhibited by continued inadequate payments for 
these services.
    Response: We have considered the comments and, as proposed, will 
adjust the medians for the services in APCs 0107 and 0108 under the 
same policy being applied to other device-dependent APCs. See section 
IV.A. of this preamble for our discussion of the use of external data, 
and requests to update the CY 2005 OPPS median costs and payment rates 
by the market basket for purposes of setting the CY 2006 OPPS payments. 
Also see section IV. A. of this preamble for our discussion of 
adjustments to median costs for device-dependent APCs. See Table 16 for 
the CY 2006 adjusted median costs for device-dependent APCs, including 
APCs 0107 and 0108.
    Comment: One commenter supported the recommendations of the APC 
Panel that CMS package CPT codes 93640 and 93641 (electrophysiologic 
evaluation at time of initial implantation or replacement of 
cardioverter-defibrillator) and treat CPT code 33241 (subcutaneous 
removal of cardioverter-defibrillator) as a bypass code when it appears 
on claims with services assigned to APCs 0107 or 0108. The commenter 
believed that these changes would result in a more robust set of claims 
to be used to set the median costs for APCs 0107 and 0108. Other 
commenters indicate that with or without these changes, the increased 
volume of claims is unlikely to result in adequate median costs for 
these procedures.
    Response: We believe that it may be appropriate to package CPT 
codes 93640 and 93641 into the services assigned to APCs 0107 and 0108, 
and that it may be appropriate to bypass CPT code 33241 only when it 
appears on the same claim with codes in APCs 0107 or 0108, and we will 
explore doing this in the future. The APC Data Subcommittee will 
continue to advise us on efforts to increase the amount of usable 
claims data for services that very frequently are provided along with 
other separately payable procedures.
    As noted above, consistent with payment for other device-dependent 
APCs, the CY 2006 OPPS payment for APCs 0107 and 0108 is set based on 
90 percent of the CY 2005 OPPS adjusted median cost. See Table 16 for a 
complete listing of device-dependent APCs and the adjusted median costs 
on which the payment rates are based.
d. Endovenous Ablation (APC 0092)
    Comment: One commenter addressed our final rule (November 15, 2004) 
regarding the APC assignment of new CPT codes 36475 (Endovenous 
radiofrequency ablation, first vein) and 36476 (Endovenous 
radiofrequency ablation, vein add-on). The commenter asserted that the 
assignment to APC 0092 (Level I Vascular Ligation) was inappropriate 
and results in payment that is inadequate to cover the costs of the 
procedure. The commenter recommended creation of two new APCs, Level I 
and Level II endovenous ablation procedures, and advocated assignment 
of both CPT codes 36475 and 36476 to the higher of the two levels. The 
commenter stated that radiofrequency (RF) ablation procedures are quite 
different from other vein stripping methods and require substantially 
more operating room time and hospital resources than do vein stripping 
or endovenous laser procedures.
    Further, the commenter stated that our assignment of CPT codes 
36475 and 36476 to APC 0092 was inconsistent with the cost data CMS 
analyzed for making pass-through payments for the ablation catheter 
(HCPCS code C1888, which expires December 31, 2005). The commenter 
asserted that we failed to add the costs for the ablation device into 
the procedure when we made the assignment to APC 0092. The commenter 
also stated that hospitals and the manufacturer have submitted cost 
information and charge data to CMS that support assignment of the 
procedures to an APC with a payment rate of about $2,500.
    We received one comment, from the same commenter, on our proposed 
rule. The commenters stated that the RF ablation procedures are more 
like those assigned to APC 0086, Ablate Heart Dysrythm Focus, than 
those in APC 0092 (Level I Vascular Ligation). Similar to its comment 
on the final rule, the commenter recommended that CMS reassign CPT 
codes 36475 and 36476 to a new APC with a payment amount of 
approximately $2,800. The commenter also recommended that we assign new 
CPT codes 36478 (Endovenous ablation therapy of incompetent vein, 
extremity, inclusive of all imaging guidance and monitoring, 
percutaneous, laser; first vein treated) and 36479 (Endovenous ablation 
therapy of incompetent vein, extremity, inclusive of all imaging 
guidance and monitoring, percutaneous, laser; second and subsequent 
veins treated in a single extremity, each through separate access 
sites) to the lower level of the two new endovascular ablation 
procedure APCs that they requested, with a payment rate of 
approximately $2,300.
    In its proposed rule comments, the commenter provided detailed 
information about the costs of the endovenous ablation procedures from 
the practice expense cost inputs for the Medicare Physician Fee 
Schedule. The commenter based its recommendations for OPPS payment on 
those data and provided prices for the RF ablation catheter ($680) and 
the laser fiber kit ($325), as well as for the capital equipment for 
each procedure type.
    Response: Prior to the CY 2005 implementation of CPT codes 36475 
and 36476 for radiofrequency ablation and CPT codes 36478 and 36479 for 
laser ablation, the radiofrequency ablation device used in the 
endovenous ablation procedure was coded using HCPCS code C1888 
(Catheter, ablation, non-cardiac, endovascular) and was separately paid 
as a pass-through until December 31, 2004 when the pass-through status 
expired.
    We received a significant number of bills for HCPCS code C1888 
(1787 units) in CY 2004 and considered the median cost ($636) based on 
those bills, along with clinical information and historical hospital 
claims data for other OPPS services in making the APC assignments of 
the new CPT codes. We assigned all RF and laser endovenous ablation 
procedures for the first vein and second and subsequent veins to APC 
0092, status indicator ``T,'' with other vein procedures and a CY 2005 
payment rate of $1,538. However, in response to the comment we 
reconsidered our decision. While there are no two times rule violations 
for APCs 0092 and 0091 for CY 2006, the median costs for individual 
procedures assigned to those APCs significantly overlap. Nevertheless, 
APC 0091 has a somewhat higher payment rate for CY 2006. Given the 
costs for the disposables and other resources used in delivery of both 
laser and RF endovenous ablation services, we determined that 
assignment to the higher paying of these APCs was a more

[[Page 68591]]

accurate placement than APC 0092 as we proposed. Therefore, for CY 
2006, CPT codes 36475, 36476, 36478, and 36479 will be assigned to APC 
0091. The ``T'' status of the APC should ensure appropriate payment 
when ablation of more than one vein is performed in an operative 
session. For CY 2007 we will have hospital claims data for those codes 
for the first time, and, with the assistance of the APC Panel, we will 
reconsider the APC assignments for them and the other procedures 
assigned to APCs 0091 and 0092 because we believe that for procedures 
assigned to APCs 0091 and 0092 CY 2007 APC reconfiguration may be 
advisable.
e. External Counterpulsation Therapy (APC 0678)
    Comment: One commenter submitted comments about external 
counterpulsation therapy (EECP, HCPCS code G0166). The commenter 
requested that we base the CY 2006 payment for this procedure on the 
OPPS relative weight for the procedure from CY 2005. The commenter was 
concerned because the OPPS rate for this procedure has decreased every 
year since CY 2000, and they believed that the lower payments might 
result in diminished beneficiary access to the therapy. The commenter 
believed that the low costs in the CMS data may be due to hospitals 
filing inaccurate claims.
    Response: Although the OPPS payment rate for EECP has decreased 
every year since CY 2000 as noted by the commenter, we are committed to 
relying on our hospital claims data for this APC. In addition, we note 
that the total numbers of OPPS claims for this service have increased 
over the past several years, from 26,836 in CY 2002, to 37,568 in CY 
2003, and again to 40,362 in our most recent claims data for CY 2004. 
We have no reason to believe that Medicare beneficiaries are having 
trouble accessing this therapy. Hospitals have been billing Medicare 
for EECP since CY 2000 and so should be filing accurate bills. The 
procedure is in an APC that has no other procedures that can affect its 
median, and the median cost for the CY 2006 OPPS is based on more than 
38,000 single claims. Therefore, we will finalize our proposed CY 2006 
APC assignment and payment rate for APC 0678, based on our standard 
OPPS methodology.
f. Intracardiac Echocardiography (APC 0670)
    Comment: One comment submitted comments about the APC assignment 
for CPT code 93662 (Intracardiac echocardiography during therapeutic/
diagnostic intervention, including imaging supervision and 
interpretation). The commenter objected to the procedure's assignment 
to APC 0670 (Level II Intravascular and Intracardiac Ultrasound and 
Flow Reserve) for several reasons. First among those reasons was that 
the procedure should not be assigned to the same APC as is CPT code 
92978, Intravascular ultrasound (coronary vessel or graft) during 
diagnostic evaluation and/or therapeutic intervention including imaging 
supervision, interpretation and report. The commenter stated that the 
two procedures are dissimilar clinically and with respect to resource 
consumption. The differences between the two procedures listed by the 
commenter were: the intracardiac echocardiography (ICE) procedure can 
be used to image the entire heart rather than just a coronary vessel as 
does the intravascular ultrasound (IVUS) procedure; ICE is closely 
associated with electrophysiology and interventional cardiology 
procedures; IVUS is an imaging technique used as an adjunct to 
coronary/peripheral stent deployment; IVUS catheters cost from $500 to 
$700 whereas ICE catheters cost from $900 to $2,800; and the mean and 
median costs for the procedures are very different.
    Response: The ICE procedure is a CPT code ``add-on,'' and so 
normally is not reported alone on OPPS bills. For that reason, only 10 
of the 541 claims for the procedure were single claims that we could 
use to calculate its procedure-specific median cost of $1,815. In fact, 
all four of the procedures assigned to APC 0670 are ``add-on'' codes, 
and two of the procedures had no single claims for CY 2004 because one 
of the codes, CPT code 31620 (Endobronchial ultrasound (EBUS) during 
bronchoscopic diagnostic or therapeutic intervention(s)), was new for 
CY 2005 and CPT code 93571 (Intravascular Doppler velocity and/or 
pressure derived coronary flow reserve measurement (coronary vessel or 
graft) during coronary angiography including pharmacologically induced 
stress; initial vessel) was packaged under the OPPS in CY 2004 and when 
unpackaged for CY 2005, no single claims were available. The fourth 
code in APC 0670, CPT code 92978, the IVUS procedure, had a median cost 
of $1,505 and 115 single claims and, therefore, had a disproportionate 
influence on the median cost for the APC.
    We do not agree that there are no significant clinical similarities 
among the procedures assigned to APC 0670. These similarities include 
their ``add-on'' status and their use of intravascular or 
intrabronchial catheters or wires with complex capabilities to provide 
clinical information, such as images or flow data. The hospital 
resources required for all of these services are highly related to the 
costs of the technologies used for the procedures. In general, our 
hospital claims data are quite consistent with assignment of CPT code 
93662 to APC 0670 with a median cost of $1,505 for CY 2006, along with 
the other services previously described. We note that our CY 2004 total 
claims volume for CPT code 93662 almost doubled between CY 2003 and CY 
2004, providing no evidence that Medicare beneficiaries are having 
trouble accessing this service.
    As discussed elsewhere in this preamble, we are working on 
alternative strategies for determining the costs for procedures that 
are reported as CPT ``add-on'' codes. When we are better able to 
identify those costs, we will reevaluate the assignment of the ICE and 
IVUS procedures. At this time, however, we believe that APC 0670 is the 
most appropriate assignment for CPT codes 93662 and 92978.
g. Percutaneous Thrombectomy and Thrombolysis (APC 0676)
    Comment: One commenter submitted comments regarding the APC 
assignment for CPT code 92973, Percutaneous transluminal coronary 
thrombectomy and CPT code 37195 (Thrombolysis, cerebral, by intravenous 
infusion). The commenter stated that the payment rate for APC 0676 
(Thrombolysis and Thrombectomy) was based largely on only one of the 
procedures assigned to the APC, CPT code 36550 (Declotting by 
thrombolytic agent of implanted vascular access device or catheter), 
and that it was inappropriately low for CPT codes 92973 and 37195. The 
commenter stated that the procedures coded by CPT codes 92973 and 37195 
require a mechanical device costing hundreds of dollars or significant 
quantities of expensive lytic agents, respectively. The comment also 
suggested that the difficulty that CMS has in obtaining accurate cost 
data for these procedures is due to the fact that they are rarely 
reported as single claims, and that next year there will be new codes 
for percutaneous thrombectomy that will help to remedy that situation.
    Response: For CY 2006, we proposed to retain CPT code 92973 in APC 
0676 and to remove CPT code 37195 from the inpatient list and assign it 
to APC 0676 as well. The median cost for each of these procedures was 
based on one single claim each, out of 149 and 28 total claims 
respectively. The very low volume of single claims is expected for 
these two procedures because CPT code

[[Page 68592]]

92973 is an ``add-on'' code and would not be expected to be reported 
alone, and CPT code 37195 was on the inpatient list in CY 2004, and 
therefore, we do not have many outpatient hospital claims for it.
    The commenter's point that the APC 0676 payment rate was based 
mainly on one of the other procedures assigned to that APC is correct. 
The procedure coded with CPT code 36550 (Declotting by thrombolytic 
agent of implanted vascular access device or catheter) had a very high 
volume of single claims with a procedure-specific median cost of $128 
so that its claims disproportionately influenced the APC median cost of 
$135. There were 5,099 single claims for that procedure and the next 
highest volume of single claims in APC 0676 was only 439 claims for CPT 
code 37201 (Transcatheter therapy, infusion for thrombolysis other than 
coronary).
    While we acknowledge the small number of claims for CPT code 92973, 
we agree with the commenter than its continued assignment to APC 0676 
could lead to significant underpayment for this service that utilizes a 
costly catheter. Therefore, we will reassign CPT code 92973 to APC 0088 
(Thrombectomy) with an APC median of $2,171 for CY 2006, where other 
procedures that are more clinically and resource coherent with CPT code 
92973 reside. As this service is an ``add-on'' code to other surgical 
procedures and is assigned status indicator ``T,'' we expect that its 
payment rate will be reduced by 50 percent when it is correctly billed 
with other surgical procedures.
    With respect to CPT code 37195, we will finalize its assignment to 
APC 0676 for CY 2006. We expect that the lytic drugs that will be 
administered to a patient during this procedure will generally be 
separately payable under the OPPS, as well as some of the other 
services that typically will be provided to a patient receiving 
cerebral thrombolysis by intravenous infusion. While we expect that 
performance of this procedure in the hospital outpatient setting will 
remain rare, we believe that APC 0676 should make appropriate payment 
for CPT code 37195 for CY 2006. As always, we will examine the costs 
from hospital claims as new data become available to ensure that the 
OPPS payment is appropriate.
h. Coronary Flow Reserve (APCs 0416 and 0670)
    Comment: One commenter requested that CMS make permanent the 
revised APC 0670 (Level II Intravascular and Intracardiac Ultrasound 
and Flow Reserve) and new APC 0416 (Level I Intravascular and 
Intracardiac Ultrasound and Flow Reserve), as presented in the November 
15, 2004 final rule. In addition, the commenter requested that we 
reactivate discontinued HCPCS code C3556 which was used previously for 
three specific brands of sensors, including guidewire-mounted coronary 
flow reserve sensors. The commenter believed that the requirement to 
report HCPCS device codes for device-dependent APCs would result in 
inaccurate cost information for the flow reserve sensors because these 
devices are currently coded using HCPCS code C1769 which is also used 
to code all types of guidewires.
    Response: We appreciate the comment concerning these new and 
revised APCs as we published them in the November 15, 2004 final rule. 
We have made those changes final.
    Beginning April 1, 2001, many manufacturer and device-specific 
HCPCS codes established for device pass-through payment purposes were 
discontinued in favor of more general codes to describe categories of 
devices. HCPCS code C3556 was discontinued as of April 1, 2001 as part 
of that action. The guidewire-mounted coronary flow reserve sensors 
previously reported with HCPCS code C3556 were cross-walked to HCPCS 
code C1769, which was established for coding guidewires. The Medicare, 
Medicaid and SCHIP Benefits Improvement and Protection Act (BIPA) of 
2000 required us to establish categories, or types, of devices and no 
longer create codes to describe each device specifically. Further, we 
do not create new device codes unless one is needed to support accurate 
payment for devices that meet our criteria for transitional pass-
through payment. There is no such need in this case as the guidewire-
mounted coronary flow reserve sensor received its full period of device 
pass-through payments.
    We do not believe that use of HCPCS code C1769 will result in 
inaccurate cost data for coronary flow reserve measurement services. 
Reporting the device code on claims for device-dependent procedures is 
meant to ensure that the bills upon which we rely for calculation of 
the median costs include the device costs integral to the procedures. 
We base this policy on our belief that if a hospital includes the code 
for the device on the bill, even though there is no separate payment 
for the device, the bill is more likely to be an accurate and complete 
report of hospital charges (and thereby, costs). We expect that 
hospitals reporting the required guidewire device C-code along with a 
coronary flow reserve measurement service will provide an appropriate 
charge for the device used in the procedure.
    The new requirement for device coding is one technique that we 
believe will help us to address the ongoing problem of hospitals 
inadvertently failing to accurately and fully bill the charges for all 
hospital resources utilized to perform procedures. By requiring that 
the device code be on the claim, we are more confident that the device 
costs have been included in the hospital's bill and that we will 
capture accurate costs for rate setting for the procedure as a whole.
i. Vascular Access Procedures (APCs 0621, 0622, and 0623)
    Many of the codes that currently describe vascular access 
procedures were new in the CY 2004 version of CPT and were assigned 
into APC groups by crosswalking the newly created CPT codes to the 
deleted codes' APC assignments. Although the new codes were implemented 
in January 2004, because of the delay between a bill being submitted to 
Medicare and when the bill data are viable for analysis, we did not 
have cost and utilization data for the new codes available for analysis 
until this year in preparation for the CY 2006 OPPS.
    Since those original APC assignments were made, we have received 
requests from the public for specific APC assignment changes. We were 
reluctant to make changes without data to support reassignments and, 
therefore, made few changes to those original APC assignments.
    As an outcome of an analysis of procedure-specific median costs and 
2 times rule violations in preparation for the CY 2006 update of the 
OPPS, for the proposed rule we developed a new APC configuration for 
vascular access procedure codes and several other related codes. The 
proposed new assignments were supported by CY 2004 hospital claims data 
and are based on median cost and clinical considerations.
    Thus, for CY 2006 we proposed to reassign many of the CPT codes 
that are currently in the following APCs:
     APC 0032 (Insertion of Central Venous/Arterial Catheter)
     APC 0109 (Removal of Implanted Devices)
     APC 0115 (Cannula/Access Device Procedures)
     APC 0119 (Implantation of Infusion Pump)
     APC 0124 (Revision of Implanted Infusion Pump)
     APC 0187 (Miscellaneous Placement/Repositioning)
    The configuration that we proposed placed all of the procedures 
currently

[[Page 68593]]

assigned to APC 0187 into more clinically appropriate APCs. We also 
proposed to reassign all of the vascular access procedure codes 
currently assigned to any of the identified APCs to existing or newly 
reconfigured clinical APCs to create more clinical and median cost 
homogeneity. As a result of the proposed reassignments, those clinical 
APCs were comprised of a different mix of codes than is currently the 
case for the CY 2005 OPPS. There were no codes assigned to APC 0187 
because the only procedures that remained in APC 0187 after reassigning 
the vascular access procedures as we proposed were CPT code 75940 (X-
ray placement of vein filter) and CPT code 76095 (Stereotactic breast 
biopsy), which we reassigned to more clinically appropriate APCs. We 
proposed to reassign CPT code 75940 to APC 0297 (Level II Therapeutic 
Radiologic Procedures) and CPT code 76095 to APC 0264 (Level II 
Miscellaneous Radiology Procedures).
    We proposed to create three new clinical APCs, APC 0621 (Level I 
Vascular Access Codes), APC 0622 (Level II Vascular Access Codes), and 
APC 0623 (Level III Vascular Access Codes) and assign procedures to 
each of these based on median cost and clinical homogeneity. We also 
proposed to rename APCs 0109 and 0115 as follows: APC 0109 (Removal of 
Implanted Devices); and APC 0115 (Cannula/Access Device Procedures).
    We presented this proposal to the APC Panel at its February 2005 
meeting. The APC Panel was supportive of the proposed reassignments and 
recommended that we make these changes. Therefore, for the stated 
reasons we proposed the APC modifications for CY 2006 OPPS as 
summarized in Table 13 of the proposed rule (70 FR 42713).
    We received a few comments on our proposal.
    Comment: All of the comments were supportive of our reconfiguration 
of the APCs and encouraged us to make the proposal final.
    Response: We appreciate the commenters' support.
    Therefore, we are finalizing our proposal without modification for 
FY 2006.
BILLING CODE 4120-01-P

[[Page 68594]]

[GRAPHIC] [TIFF OMITTED] TR10NO05.016


[[Page 68595]]


BILLING CODE 4120-01-C
2. Radiology, Radiation Oncology, and Nuclear Medicine
a. Angiography and Venography (APCs 0279, 0280, and 0668)
    Comment: One commenter supported our proposal to reassign CPT code 
75790 (Angiography, arteriovenous shunt, radiological supervision and 
interpretation) from APC 0281 (Venography of Extremity) to APC 0279 
(Level II Angiography and Venography except Extremity). However, this 
same commenter objected to our proposal to move CPT codes 75820 
(Venography, extremity, unilateral, radiological supervision and 
interpretation) and 75822 (Venography, extremity, unilateral, 
radiological supervision and interpretation) from APC 0281 (Venography 
of Extremity) to APC 0668 (Level I Angiography and Venography except 
Extremity). The commenter contended that CPT codes 75790, 75820, and 
75822 share similar clinical characteristics and resource requirements 
and, therefore, should be mapped to the same APC 0279. For instance, 
the commenter stated that all three services require the use of 
guidewires, catheters, local anesthetic, and contrast. Furthermore, the 
commenter asserted that CPT code 75822 involves a bilateral procedure 
which requires much higher resource costs than other services assigned 
to APC 0668. Lastly, the commenter stated that CPT codes 75790, 75820, 
and 75822 share similar clinical characteristics with CPT code 75658 
(Angiography, brachial, retrograde, radiological supervision and 
interpretation), which currently resides in APC 0279, differing only 
with respect to whether a vein is accessed versus an artery in an 
extremity. The commenter urged that CMS reassign CPT codes 75790, 
75820, and 75822 to APC 0279 for CY 2006. In addition, the commenter 
recommended that CMS modify the title of APC 0668 to exclude language 
referring to extremities based on the commenter's belief that none of 
the other CPT codes assigned to APC 0668 relate to extremities.
    Response: Based on our analysis of our CY 2004 claims data we 
disagree with the commenter that services described by CPT codes 75790, 
75820, and 75822 require similar hospital resources. CPT code 75790 has 
a median cost of $548, based on over 18,000 single claims from CY 2004, 
and is assigned to APC 0279 (Level II Angiography and Venography), 
which has a median cost of $517. We believe that this APC appropriately 
reflects the clinical and hospital resource characteristics of CPT code 
75790 and provides appropriate payment to hospitals for this service.
    In contrast, CPT code 75720 has a median cost of only $258, based 
on almost 3,500 single claims that represent over half of the total 
claims for the service. Similarly, CPT code 75722 has a median cost of 
$349, based on over 2,400 claims that represent more than half of the 
total claims for the service. Both of these procedures are assigned to 
APC 0668 which has a median cost of $375. We believe that APC 0668 
appropriately reflects the clinical and hospital resource 
characteristics of both of these procedures. Thus, although these three 
codes were assigned to the same clinical APC 0281 for CY 2005, when we 
eliminated that APC and reassigned the three services, we were able to 
place them in such a way as to provide more accurate payments for each 
of the services.
    We appreciate the commenter's drawing our attention to the phrase 
``Except Extremity'' that remained in the APC titles for APCs 0668, 
0279, and 0280 after we eliminated the CY 2005 APC for extremity 
venography services. For CY 2006, we have removed the phrase ``Except 
Extremity'' from the APC title for APCs 0668, 0279, and 0280, so they 
are now renamed Levels I, II, and III Angiography and Venography, 
respectively.
b. Brachytherapy (APCs 0312, 0313, and 0651)
    Comment: Commenters objected to the proposed reduction in the 
payment rates for APCs 0312, 0313 and 0651 for the CY 2006 OPPS. They 
indicated that the reductions could result in decreased access to care. 
They recommended that CMS use only claims on which a brachythearpy 
source appears with the procedure code, which they describe as 
``correctly coded'' claims, as the basis for the median cost 
calculations for these APCs. They indicated that using only claims on 
which the brachytherapy source code was billed results in median costs 
that are higher than the median costs calculated using all single 
procedure claims. At its August 2005 meeting, the APC Panel recommended 
that we evaluate this proposal. The commenters also asked that CMS 
expand the adjustment proposed for selected device dependent APCs to 
APCs 0312, 0313 and 0651. They asked that CMS consider alternative 
methodologies to utilize single and multiple procedure claims for rate 
setting purposes so that more claims could be used. They also asked 
that CMS use external proprietary and confidential data to determine 
median costs for rate-setting. They said that because brachytherapy 
sources are required to furnish these services, they should be treated 
like device dependent APCs with regard to adjustment of medians and 
required editing for the presence of sources on the claims.
    Response: We have not accepted the commenters' recommendations to 
use external data for the reasons we cite in the discussion of external 
data in section II. of this preamble. Moreover, we have not accepted 
the recommendation that we use only claims that contain a brachytherapy 
source on the claim to calculate the median costs for APCs 0312, 0313, 
and 0651 because we believe that the presence of a source on the claim 
is not relevant, since sources are paid separately. While the median 
costs presented by the commenters based on claims that contain sources 
resulted in higher median costs, we do not see a valid reason to limit 
the claims to claims with sources because the presence of the source is 
not relevant to the median cost of the procedural APC. We have no 
reason to believe that the claims without sources on the claim do not 
contain the full charges for the procedural services furnished. We have 
applied adjustments to the median costs for device dependent APCs for 
CY 2006 because of the difficulties in ensuring device charges are 
fully reflected on claims for these services, thus allowing appropriate 
packaging of the device costs into the APC payments. This rationale 
does not apply to the APCs for application of brachytherapy sources, so 
we have not applied the device dependent APC median adjustment policy 
to APCs 0312, 0313, and 0651 for CY 2006.
    We disagree that these services should be treated like device 
dependent APCs solely because they require brachytherapy sources. The 
critical distinction is that the APC payment for device dependent APCs 
includes payment for the packaged devices, while payment for these 
brachytherapy source application APCs is exclusive of payment for the 
sources, which are paid on the basis of charges reduced to cost. The 
editing for the presence of key devices on claims for services assigned 
device dependent APCs is not ``correct coding'' editing. Instead, the 
edit is made to maximize the likelihood that the charge for the 
principle device required to perform the service is included on the 
claim so that we will capture the cost of the device in setting the 
median cost for the APC.
    Although the brachytherapy procedure comments have largely

[[Page 68596]]

focused on the payment for CPT code 77778, the application of the 
brachytherapy sources, we note that all the related procedures, such as 
needle or catheter use and placement, must be considered for a full 
analysis of payment for brachytherapy services. The brachytherapy 
source application service is but one component of the entire 
procedure. The hospital also bills for the placement of the needles or 
catheters, the imaging and planning services, and is paid separately 
for the sources at charges reduced to costs.
    Because of the particularly large drop in median cost from the 
median based on CY 2003 data compared to the median cost based on CY 
2004 claims data for APC 0651, we extensively reviewed the cost of APC 
0651, which is most commonly billed for the provision of interstitial 
prostate brachytherapy and frequently appears on the same claim with 
CPT code 55859, the code for placement of needles or catheters into the 
prostate. Contrary to the commenters' belief that ``correctly coded'' 
claims for CPT code 77778 also contain brachytherapy sources, in most 
cases of prostate brachytherapy both CPT codes 55859 and 77778 are 
found on the same claim with a radiologic guidance code (often CPT 
codes 76000 or 76965) and/or with a radiation planning code (usually 
CPT code 77290). This results in a correctly coded claim for 
interstitial brachytherapy designated as a multiple procedure claim. 
Furthermore, these claims not only contain the two major procedures 
(CPT codes 55859 and 77778), but they also often contain the three 
ancillary procedures (CPT codes 76000, 76965 and/or 77290), which are 
not on the bypass list because they have packaging in excess of $50 or 
they have packaging on more than 5 percent of single bills.
    In our review, we identified 11,341 claims containing both CPT 
codes 55859 and 77778 on the same date of service. We then looked for 
claims in this subgroup that contained no separately paid codes other 
than the three ancillary services (after we applied the bypass list and 
removed any codes on it). This gave us 7,533 claims containing CPT 
codes 55859 and 77778 with no other major procedures except for the 3 
ancillary services. We believe that claims with CPT codes 55859, 77778 
and one or more of these 3 ancillary services represent the most 
typical combinations of services furnished when brachytherapy sources 
are applied. We then calculated two combination median costs: a 
combination package and combination bypass. The first combination 
median cost was calculated by treating these three codes as if they 
were grouped into one comprehensive service by adding the costs of 
these codes to the costs on the claim for CPT codes 55859 and 77778 and 
all other packaged costs. This ``combination group median'' is 
$3,187.86. This ``combination group median'' overstates the costs of 
CPT codes 55859 and 77778 by the extent to which the costs of the three 
ancillary services and the packaging that is associated with them are 
reflected in it. We then calculated a second combination median cost in 
which we treated these three ancillary codes as if they were on the 
bypass list by removing the line item charges for these codes and 
associated all packaging on the claim with CPT codes 55859 and 77778. 
This ``combination bypass median'' is $2,968.64. This ``combination 
bypass median'' overstates the costs of CPT codes 55859 and 77778 to 
the extent that the packaged costs associated with the 3 ancillary 
services are reflected in it.
    We then compared the sum of the single bill medians calculated from 
our OPPS stated methodology for CPT codes 55859 and 77778 to both of 
these combination medians. The sum of the single bill medians for these 
codes (without any costs from the three ancillary procedures) is 
$2,662.62. We then summed the medians for CPT codes 55859, 77778, 
76000, and 77290, a typical combination of codes for these services, 
resulting in a sum of $2,975.50, similar in range to both the 
``combination group median'' and the ``combination bypass median.''
    Under our analysis, the sum of the single bill medians for 
insertion of needles or catheters in the prostate and the application 
of brachytherapy sources is well within the range of the combination 
medians we calculated based on the multiple procedure claims. 
Accordingly, we have no reason to believe that the single bill median 
costs for the services reported by CPT codes 55859 and 77778 do not 
otherwise appropriately reflect the costs for those services. 
Therefore, we have used the standard OPPS methodology for clinical 
brachytherapy services to set the payment rates for the CY 2006 OPPS.
    Comment: One commenter stated that date of service stratification 
results in pseudo single claims for APCs 0312 and 0651 that lack 
packaging because all packaging on the claim has the same date of 
service as the other procedure on the claim (i.e. not the procedure 
code in APC 0312 or 0651). The commenter indicated that the median 
costs for these ``pseudo no package'' claims is significantly lower 
than the medians for other single procedure bills for these services 
and, therefore, should be deleted from the claims used to set the 
median costs for these APCs.
    Response: We have no basis to believe that the charges for the 
procedure code are not all-inclusive charges for all packaged items and 
services associated with the procedure when a single charge appears for 
a procedure code. Again, we encourage hospitals to bill all relevant 
HCPCS codes that appropriately reflect the services provided.
c. Computed Tomography (APCs 0283 and 0333)
    Comment: One commenter supported our proposal to pay separately for 
low osmolar contrast material (LOCM) and most magnetic resonance 
contrast agents. However, the commenter expressed concern that the 
separate payment for these agents will not adequately compensate for 
the reduced payment which CMS proposed for APCs 0283 (CT with contrast) 
and 0333 (CT and CTA without contrast followed by contrast). The 
commenter stated that they did not understand CMS' rationale for 
proposing to reduce payments for APCs 0283 and 0333 to a level that 
results in an overall net loss for contrast-enhanced CT studies.
    Response: We do not agree with the commenter's assertion that the 
proposed CY 2006 payment rates for APCs 0283 and 0333 will necessarily 
reduce overall payments for contrast-enhanced CT studies. First, the 
proposed CY 2006 payments for APCs 0283 and 0333 decreased by less than 
3 percent compared to their CY 2005 payment rates. Second, our proposal 
to pay separately for LOCM products (HCPCS codes Q9945 through Q9951) 
as a result of the mean costs per day of their predecessor codes (HCPCS 
codes A4644 through A4646) exceeding $50, may increase overall payments 
for some contrast-enhanced CT studies while decreasing overall payments 
for other contrast-enhanced CT studies, depending on the volume and 
concentration of the LOCM used. The CY 2006 final payment rates for 
APCs 0283 and 0333 were calculated from CY 2004 hospital claims data 
utilizing the standard OPPS methodology based on our comprehensive 
payment policies for CY 2006, which include unpackaging LOCM.
    Therefore, hospital charges for LOCM in association with single 
claims for services assigned to APCs 0283 and 0333 were not packaged 
into the median cost calculations for these APCs. As a result, we would 
expect the APC payment rates for APCs 0283 and 0333 to decline slightly 
for CY 2006. For CY 2006, we are applying our standard

[[Page 68597]]

OPPS rate setting methodology using CY 2004 hospital claims data to set 
the payment rates for APCs 0283 and 0333, and are paying separately for 
LOCM based on the payment methodology described in section V.B.3.a.(3) 
of this preamble.
d. Computed Tomographic Angiography (APC 0333)
    In Addendum B of the CY 2006 proposed rule (70 FR 42776), we 
proposed to maintain a number of imaging procedures discussed below in 
their CY 2005 APCs.
    Comment: Several comments expressed concern that the CY 2006 
proposed payment rate for Computerized Tomographic Angiography (CTA) 
procedures (APC 0662) continues to be lower than the proposed payment 
rate for conventional CT procedures. These commenters recommended that 
CMS set the payment rate for CTA procedures at a level equal to the 
payment for a CT scan (APC 0333) plus a three-dimensional image 
reconstruction (APC 0282) by either increasing the payment for APC 0662 
or reassigning CTA procedures to an existing APC whose payment rate 
more closely reflects the resource costs of performing CTA procedures.
    Response: As we stated in the November 15, 2004 final rule with 
comment period (69 FR 65722), accurate cost information about the cost 
of image reconstruction for CTA specifically, and for CT alone as 
utilized with CTA, would be required in order to implement the 
commenter's suggestion that we make the payment rate for CTA (APC 0662) 
equal to the sum of the rates for CT alone (APC 333) plus image 
reconstruction (APC 282). Such cost information is not available. The 
CY 2004 image reconstruction CPT code 76375 (coronal, sagittal, 
multiplanar, oblique, 3-dimensional and/or holographic reconstruction 
of computed tomography, magnetic resonance imaging, or other 
tomographic modality) is not limited to image reconstruction performed 
for CTA and may be used in a number of other procedures. Based on the 
available CPT codes for CTA, we would not expect any current 
utilization of CPT code 76375 to be for CTA post-image processing, 
unless there was no appropriate CTA code to describe the body region 
imaged, which we believe would rarely be the case. In addition, we 
would not expect our current cost data for CTA alone to necessarily 
reflect the resources utilized for the CT portion of CTA.
    Commenters provided no evidence suggesting that Medicare 
beneficiaries have experienced difficulty accessing these services in 
the hospital outpatient setting. To the contrary, our number of claims 
for CTA procedures increased steadily between CY 2002 and CY 2003 and 
nearly doubled from CY 2003 to CY 2004. Furthermore, we used over 50 
percent (99,000 single claims out of nearly 180,000 total claims) of 
the CY 2004 claims for CTA procedures to calculate the CY 2006 payment 
rate for these services.
    We now have several years of robust claims data for CTA procedures 
and have no reason to doubt this data. Based on the full year of CY 
2004 data, the median costs for the APCs 0333 (CT) and 0662 (CTA) are 
about equal, and have decreased minimally from their median costs based 
on CY 2003 claims data. Because hospitals set their own charges for 
services, which we then convert to costs, we still see no reason why 
adding the costs for CT alone plus the costs for image reconstruction 
would necessarily provide a better estimate of costs for CTA than our 
analysis of our specific CTA claims. Furthermore, no other existing 
clinical APC appears to contain services that share more clinical and 
resource cost homogeneity with CTA procedures than APC 0662, whose 
median cost reflects solely the claims data from 8 CTA procedures. For 
this reason, we are not reassigning CTA procedures to any other 
clinical APC(s) for CY 2006. Instead, for CY 2006, we are applying our 
standard OPPS rate-setting methodology for calculating the payment rate 
for CTA procedures residing in APC 0662. Once again, we encourage all 
hospitals to take all actions necessary to ensure that they are billing 
accurately and including in their charges all resources utilized to 
deliver CTA services.
e. Computed Tomographic Guidance (APC 0332)
    Comment: One commenter objected to the proposed payment rate of 
$194 for CPT code 76362 (Computed tomography guidance for, and 
monitoring of, visceral tissue ablation), which was proposed to be 
assigned to APC 0332 (Computerized Axial Tomography and Computerized 
Angiography without Contrast) for CY 2006. The commenter said that, 
although CMS included only 9 single claims in the calculation of the 
$371 median cost for CPT code 76362 in the proposed rule, they 
identified 202 single bills with a median cost of $580 for CPT code 
76362. The commenter indicated that it found that CPT code 76362 was 
not being treated as a major procedure in CMS' median cost 
calculations, and it could not determine if CMS packaged the cost for 
CPT code 76362 into the payment for the other separately payable 
procedure on the claim. The commenter indicated that it simulated 
removing the exception (although they did not specify what they did) 
and by doing so found 202 single bills with a median cost of $580 for 
the code. The commenter asked that we place CPT code 76362 in New 
Technology APC 1507 (Level VII $500-$600) so that payment would be set 
at $550. The commenter also requested that CMS add CPT code 76362 to 
the bypass list in future years.
    Response: We do not agree that CPT code 76362 would be 
appropriately assigned to New Technology APC 1507 because CT is not a 
new technology. The use of CT guidance for and monitoring of visceral 
tissue ablation is a more recent application of this well-established 
technology. We acknowledge that we have few single bills upon which to 
base our calculation of the median cost of this service, but this is 
consistent with our expectations based on the nature of the service. We 
believe that all correctly coded claims would also include a CPT code 
for the specific ablation service that was monitored using CT and 
billed along with CPT code 76362.
    We believe that the primary costs directly attributable to CTP code 
76362, as opposed to the accompanying ablation procedure, are the 
hospital resources required for the lengthy operation of the necessary 
CT scanner. In examining the clinical characteristics of the use of CT 
for visceral tissue ablation, we believe that the CT use time for the 
procedure, although variable depending on the specific ablation 
procedure provided, would typically be longer than the CT use time for 
most noncontrast CTs assigned to APC 0332.
    Because the commenter indicated their comfort with CPT code 76362 
being added to the bypass list, we analyzed the line item charges for 
all units of service of CPT code 76362 billed by hospitals in CY 2004. 
The median charge per unit based on over 1,000 units was $1,165. 
Application of a hospital average CCR of 0.28 for the diagnostic 
radiology cost center to the median charge of $1,165 for CPT code 76362 
yielded a procedure-specific line item cost of approximately $325 for 
this service. This is quite consistent with our final single claim 
median cost of $363 based on 9 single claims.
    Therefore, we are reassigning CPT code 76362 to APC 0333 
(Computerized Axial Tomography and Computerized Angiography Without 
Contrast Followed by Contrast) with an APC median cost of $303 for CY 
2006, where

[[Page 68598]]

CT procedures that include both noncontrast and contrast studies in one 
examination session reside. We believe that, although the ablation 
monitoring service is not necessarily provided both without and with 
contrast, the longer time of use of the CT scanner for CPT code 76362 
is more consistent with the scanner use time for services assigned to 
APC 0333. In addition, the median cost of APC 0333 is similar to the 
median cost of CPT code 76362 based on single claims and to the other 
cost estimate based on our analysis of all billed units of the code.
    With respect to the commenter's data findings, CPT code 76362 is 
considered to be a minor procedure (notwithstanding the status 
indicator of ``S''), because it so frequently occurs on the same claim 
as other separately paid procedures and is ancillary to them. As such, 
when a minor procedure is on the same claim as a major procedure, the 
claim is considered to be a single major procedure claim and the costs 
of the minor procedure are not used to set the median for the minor 
procedure, nor are they packaged into the payment for the major 
procedure. The only single claims that are used in the calculation of 
the median cost for the minor procedure code and, therefore, for the 
APC to which the code is assigned are single minor procedure claims 
which are derived from circumstances in which the minor procedure 
appears alone on a claim or when it appears as one of several multiple 
minor procedures on a claim and can be split off because the services 
have different dates of service.
    We considered making CPT code 76362 a major procedure and adding 
the service to the bypass list. However, the code does not meet the 
empirical criteria we have established for considering new additions to 
the bypass list. Of the total claims for CPT code 76362, we had only 9 
single procedure claims (less than the 100 required for a code to go 
onto the bypass list); 6 of the 9 claims (67 percent) contained 
packaged services (more than the 5 percent limit) that yielded a median 
of $1,231 (considerably above the $50 median limit). Hence, because the 
data for CPT code 76362 from CY 2004 do not meet any of the criteria 
for addition of the code to the bypass list, we will not convert it to 
a major procedure and add it to the bypass list for CY 2006. However, 
we will consider for CY 2007 whether we should make an exception to our 
empirical criteria for additions to the bypass list for services such 
as CPT code 76362. We will continue to develop a more appropriate 
median cost for the procedure and it seems plausible that the procedure 
should have very little associated packaging.
f. Computerized Reconstruction (APC 0417)
    Comment: One comment expressed concern about the payment rate for 
HCPCS code G0288 (Reconstruction, computed tomographic angiography of 
aorta for preoperative planning and evaluation post vascular surgery). 
The commenter was concerned because the proposed rule indicated that 
the rate for HCPCS code G0288 would decrease for CY 2006, continuing a 
trend of decreases that began in CY 2004. The commenter made several 
recommendations to CMS that it believed would help to limit the 
decreased rate for CY 2006 and to prevent continuation of the downward 
trend for coming years. The first recommendation was for CMS to mandate 
which revenue code hospitals are to use to report HCPCS code G0288. The 
commenter recommended use of revenue code 0780, Telemedicine. This was 
based on their finding that hospitals used 17 different revenue codes 
to report HCPCS code G0288. The commenter stated that more consistent 
use of a revenue code would alleviate the effects of providers not 
billing charges high enough to result in cost findings near the 
acquisition costs.
    Next, the commenter recommended that for CY 2006, CMS use the 
hospital overall CCRs to calculate the median for HCPCS code G0288. The 
commenter believed use of the overall CCRs would increase the median 
for APC 0417 to approximately $415.
    Third, the commenter recommended as a fallback measure, in case the 
first two recommendations could not be implemented, that CMS should use 
the CY 2005 rate, adjusted upward in accordance with the CY 2006 
conversion factor, for APC 0417 in CY 2006.
    Finally, the commenter requested that the descriptor for HCPCS code 
G0288 be revised to read, ``Three-dimensional pre-operative and post-
operative computer-aided measurement planning and simulation in 
accordance with measurements and modeling specifications of the Society 
for Vascular Surgery.'' They stated that the revised descriptor would 
ensure that the code would be used more accurately.
    Response: Regarding the commenter's last request, that we revise 
the descriptor for HCPCS code G0288, we do not believe that is 
necessary. HCPCS code G0288 was revised in CY 2004 to clarify that the 
service can be provided for both treatment planning prior to surgery 
and for postsurgical monitoring. Other than this one comment, we have 
had no indication that there is confusion among providers about when to 
use the code. In addition, we generally allow hospitals to allocate 
their charges across revenue codes as they feel is appropriate to their 
specific institutional settings, and we see no reason to deviate from 
this policy for the service described by HCPCS code G0288. We do not 
understand how specifying a revenue code for reporting would 
necessarily ensure adequate hospital charges for the service.
    In response to the commenter's recommendations regarding our 
hospital cost data, we conducted a detailed examination of our CY 2004 
claims data and, like the commenter, found that hospitals used 17 
different revenue codes to report HCPCS code G0288. However, we also 
found that although 8 different cost centers for HCPCS code G0288 were 
used in our conversion of charges to costs for the service, for 83 
percent of the approximately 5,300 single bills utilized for rate 
setting we converted hospital charges to costs using one cost center, 
namely Diagnostic Radiology. Therefore, while we acknowledge that 
utilizing an overall hospital CCR for HCPCS code G0288 yields a higher 
median cost, $335 for APC 0417 based on our analysis, as opposed to a 
median cost of $235 utilizing our standard revenue code to cost center 
crosswalk, we do not believe that it would be appropriate to substitute 
specific hospital overall CCRs in our calculation of this APC's median. 
We utilize one hospital-specific departmental CCR for the conversion of 
charges to costs for most of the single claims, and we have no reason 
to believe that the CCR in this case is inappropriate. Also, hospitals 
should bill adequate and complete charges for the service to account 
for all of the hospital resources required.
    Additionally, we see no reason to adjust the payment rate for APC 
0417 to the CY 2005 rate adjusted upward in accordance with the CY 2006 
conversion factor. We note that despite reductions in payment rates 
over the last several years, the number of total procedures billed 
under the OPPS for HCPCS code G0288 has continued to rise from 2,065 in 
CY 2002, to 4,733 in CY 2003, and most recently to 8,421 in CY 2004. We 
have no evidence that Medicare beneficiaries are having trouble 
accessing this service based on our hospital claims information. 
Therefore, we believe that it is appropriate for us to use our 
historical hospital cost data as the basis for the CY 2006 payment 
amount, and we are

[[Page 68599]]

finalizing our payment rate for APC 0417 at $235.66 for CY 2006.
g. Diagnostic Computed Tomographic Colonography (APC 0333)
    We proposed to reassign CPT 0067T (diagnostic computed tomographic 
colonography (CTC-Dx)) to APC 0333 (CT and CTA without contrast 
followed by contrast) for CY 2006.
    Comment: One commenter responded to the November 15, 2004 final 
rule with comment period (69 FR 65682), explaining that CPT code 0067T 
(diagnostic computed tomographic colonography (CTC-Dx)) was established 
in CY 2005 to replace the previous coding scheme for CT colonography 
involving two computed tomography (CT) scans (i.e., abdomen and pelvis) 
and three-dimensional image reconstruction. Furthermore, the commenter 
explained that the two CT components of a CTC-Dx may be administered in 
a variety of ways: (1) CT without contrast, (2) CT with contrast, or 
(3) CT without contrast followed by a CT scan with contrast. The 
commenter stated that CMS' assignment of CPT code 0067T to APC 0332 (CT 
and CTA without contrast) for CY 2005 failed to recognize the cost 
differential between a CT scan and the variety of ways in which a CTC-
Dx scan is administered, along with the costs associated with the 
three-dimensional image reconstruction. The commenter urged CMS to 
reconsider the APC placement of CPT code 0067T, taking into account its 
advantages as a less invasive and less costly alternative to a 
colonoscopy.
    Response: Due to the recent establishment of CPT code 0067T in CY 
2005, we will have no hospital claims data for determining its resource 
requirements until CY 2007. For CY 2005, we assigned CPT code 0067T to 
APC 0332 (CT and CTA without contrast) because we considered the 
clinical characteristics of CTC-Dx to be relatively similar to other 
services assigned to APC 0332. We thank the commenter for bringing to 
our attention the variety of ways in which a CTC-Dx can be 
administered, notably a CT scan without contrast followed by a CT scan 
with contrast. In light of this additional information, for CY 2006 we 
proposed to reassign CPT 0067T to APC 0333 (CT and CTA without contrast 
followed by contrast), where similar services reside involving a CT 
scan without contrast followed by a CT scan with contrast. We are 
finalizing our proposal to reassign CPT 0067T to APC 0333 for CY 2006. 
However, in preparation for CY 2007 rate setting, we will reexamine the 
APC placement of CPT code 0067T based on available CY 2005 hospital 
claims data.
h. Intensity Modulated Radiation Therapy (IMRT) (APCs 0310 and 0412)
    In Addendum B of the CY 2006 proposed rule, we proposed to maintain 
CPT code 77301 (Radiotherapy dose plan, intensity modulated radiation 
therapy (IMRT)) in APC 0310 (Level III Therapeutic Radiation Treatment 
Preparation) based on the CY 2004 hospital claims data submitted for 
CPT code 77301. In addition, we proposed to maintain CPT codes 0073T 
(Compensator-based IMRT treatment delivery) and 77418 (Multileaf 
collimator-based intensity modulated treatment delivery) in APC 0412 
(IMRT treatment delivery) for CY 2006.
    We received several public comments related to IMRT issues.
    Comment: One commenter expressed concern that the proposed payment 
rate for CPT code 77301 does not reflect the actual physics planning 
time and resources for this procedure. The commenter recommended that 
we take into consideration the costs associated with IMRT planning for 
a typical head and neck case, including the time spent by the 
dosimetrists, physicists, and physicians, when setting the payment for 
CPT code 77301.
    Response: The proposed procedure-specific median cost of $827 for 
CPT code 77301 was calculated using 16,417 single procedure claims out 
of 16,885 total claims (97 percent of the total claims). We proposed to 
maintain CPT code 77301 in APC 0310 (Level III Therapeutic Radiation 
Treatment Preparation) grouped with only one other service, CPT code 
77295 (Set radiation therapy field), whose proposed median procedure-
specific cost of $844 had the effect of increasing the proposed payment 
for CPT code 77301 due to its significantly higher single frequency of 
claims used to set the payment for APC 0310. We have no reason to 
believe that the single procedure claims for CPT code 77301 that 
represent IMRT planning for head and neck treatment reflect more 
accurate costs and charges than those claims for CPT 77301 that 
represent IMRT planning for other body areas. Thus, we would have no 
justification for discarding such a subset of claims that appear to be 
accurately reported under CPT code 77301, but merely require less 
resource utilization for certain covered clinical indications. Rather, 
the high percentage of single procedure claims for this service, which 
remains at 97 percent for the final rule data, along with its 
relatively stable median cost for several years, confirms our belief 
that the CY 2006 median cost for CPT code 77301 accurately reflects 
hospitals' costs for the service. We believe these data represent, on 
average, the resources consumed by hospitals for the provision of IMRT 
planning services. We note that the OPPS does not provide payment for 
physicians' professional services that may be required for procedures. 
Therefore, for CY 2006, we are maintaining CPT code 77301 in APC 0310 
with an APC median cost of $825, higher than the final code-specific 
median cost of CPT code 77301 of $786.
    Comment: In response to the November 15, 2004 final rule with 
comment period (69 FR 65682) and the CY 2006 OPPS proposed rule (70 FR 
42674), several commenters applauded our decision to establish a 
national payment rate for category III CPT code 0073T for compensator-
based IMRT treatment delivery. These commenters stated that our 
decision to pay for compensator-based IMRT treatment delivery will 
encourage patient access and diffusion of this cost-effective 
technology. Furthermore, these commenters agreed with our rationale to 
assign CPT codes 0073T (Compensator-based IMRT treatment delivery) and 
77418 (Multileaf collimator-based IMRT treatment delivery) to the same 
APC 0412 (IMRT treatment delivery) for rate setting purposes, noting 
that the IMRT treatment delivery costs are virtually identical for both 
modalities. In contrast, one commenter to the November 15, 2004 final 
rule with comment period (69 FR 65682) was opposed to the assignment of 
CPT code 0073T to APC 0412. This commenter explained that CPT code 
0073T was created specifically to distinguish compensator-based IMRT 
treatment delivery from multileaf collimator-based IMRT treatment 
delivery, described by CPT code 77418. The commenter believed that the 
assignment of CPT codes 0073T and 77418 to the same APC 0412 precludes 
CMS from collecting distinct claims data for each code, and urged CMS 
to assign CPT code 0073T to a New Technology APC and reserve APC 0412 
for CPT code 77418.
    Response: Our decision to place CPT codes 0073T and 77418 in the 
same APC 0412 supports the clinical homogeneity of APC 0412. Because we 
had no CY 2003 claims data for the newly established Category III CPT 
code 0073T, we concluded that its resource costs were likely reflected 
to some degree in the costs and charges reported for CPT code 77418, 
considering that this was the only CPT code available to providers for 
the billing of compensator-based IMRT treatment delivery prior to 
January 1, 2005. Contrary to a belief held by one of the commenters, 
the assignment of CPT codes 0073T and

[[Page 68600]]

74418 to the same APC 0412 for payment purposes does not preclude CMS 
from collecting distinct claims data for these two codes. Once the CY 
2005 claims data for CPT code 0073T become available for setting the CY 
2007 payment rate, we will reexamine the APC placement of CPT code 
0073T. In the meantime, for CY 2006 we will maintain CPT codes 0073T 
and 77418 in the same APC 0412.
    Comment: One commenter explained that, effective January 1, 2005, 
the descriptor for CPT code 77418 (Multileaf collimator-based intensity 
modulated treatment delivery) was changed to explicitly exclude 
compensator-based IMRT treatment delivery and a new Category III code 
0073T was created to describe compensator-based IMRT delivery. This 
commenter requested that we either update the December 19, 2003 
Medicare Program Transmittal 32 (CR 3007) or issue a new Medicare 
Program Transmittal to include compensator-based IMRT treatment 
delivery code 0073T. The commenter provided CMS with recommended 
language to clarify the billing of compensator-based IMRT treatment 
delivery under the OPPS for CY 2006.
    Response: We appreciate the commenter bringing to our attention the 
need to update our billing guidance to reflect the newly established 
Category III CPT code 0073T for the billing of compensator-based IMRT 
treatment delivery. We thank the commenter for providing CMS with 
recommended language and will consider such language as we revise our 
guidance on the billing of compensator-based IMRT treatment delivery 
under the OPPS for CY 2006.
i. Kidney Imaging (APC 0267)
    Comment: One commenter expressed concern that CMS's proposed 
reassignment of CPT code 78700 (Kidney imaging, static) from APC 0404 
(Level I Renal and Genitourinary Studies) to APC 0267 (Level III 
Diagnostic Ultrasound) disrupts the clinical homogeneity of the two 
APCs. The commenter stated that the resource requirements and clinical 
characteristics of kidney imaging have not changed in the past year and 
urged CMS to maintain CPT code 78700 in APC 0404 for CY 2006.
    Response: We agree with the commenter's observation that the 
clinical attributes of CPT code 78700 more closely resemble the 
services assigned to APC 0404 rather than APC 0267. Although our 
proposal to reassign CPT code 78700 to APC 0267 was based on its median 
cost data collected for the proposed rule, the more recent median cost 
data from CY 2004 for CPT code 78700 do not preclude its return to APC 
0404. Therefore, in the interest of preserving the clinical homogeneity 
of APCs 0267 and 0404, we are not adopting our proposed reassignment 
and will retain CPT code 78700 in APC 0404 for CY 2006.
j. Magnetic Resonance Guided Focused Ultrasound Ablation (APC 0193)
    We received one public comment on the CY 2006 OPPS proposed rule 
concerning the APC assignments for HCPCS codes 0071T and 0072T, along 
with several related comments on the November 15, 2004 final rule with 
comment period.
    Comment: Several commenters submitted comments on the November 15, 
2004 final rule regarding the APC assignments of magnetic resonance 
guided focused ultrasound (MRgFUS) therapy for uterine fibroids. We 
proposed to retain magnetic resonance guided focused ultrasound 
(MRgFUS) procedures in APC 0193 for CY 2006. The commenters believed 
that the procedure's assignment to APC 0193 (Level V Female 
Reproductive Procedures) resulted in significant underpayment. They 
asserted that MRgFUS is a new technology and that CMS should assign the 
two Category III CPT codes to two separate New Technology APCs, based 
on external cost data, until adequate claims data are available upon 
which to base assignments to clinical APCs.
    More recently, hospital and manufacturer representatives made a 
presentation at the August 2005 meeting of the APC Panel and also 
commented on our July 25, 2005 proposed rule. The Panel recommended 
that CMS work with stakeholders to assign CPT codes 0071T and 0072T, 
focused ultrasound ablation of uterine leiomyomata including magnetic 
resonance guidance, to an appropriate New Technology APC(s).
    The procedures are coded with Category III CPT codes 0071T (Focused 
ultrasound ablation of uterine leiomyomata, including MR guidance; 
total leiomyomata volume less than 200 cc of tissue) and 0072T (Focused 
ultrasound ablation of uterine leiomyomata, including MR guidance; 
total leiomyomata volume greater or equal to 200 cc of tissue). These 
codes were new CPT codes in CY 2006. The commenters and the presenters 
at the APC Panel suggested that we assign CPT code 0071T to New 
Technology APC 1528 (Level XXV) and CPT code 0072T to New Technology 
APC 1532 (Level XXVI).
    Response: In light of the additional information that has been 
presented to us, we agree that it would be more accurate to assign the 
two procedures to separate APCs to account for the higher level of 
resources required to ablate the larger growths. However, we do not 
agree that it is most appropriate to assign MRgFUS procedures to New 
Technology APCs 1528 and 1532. Although FDA approval of one specific 
ablation technology was relatively recent, MRgFUS therapy bears a 
significant relationship to technologies already in widespread use in 
hospitals, in particular MRI and ultrasound services. The use of 
focused ultrasound for thermal tissue ablation has been in development 
for decades, and the recent application of MRI to focused ultrasound 
therapy provides monitoring capabilities that may make the therapy more 
clinically useful. We believe that MRgFUS therapy is a new and 
integrated application of existing technologies (MRI and ultrasound) 
and, therefore, is not necessarily most accurately assigned to a New 
Technology APC. We believe that the technology used in this service 
fits as well into existing clinical APCs for female reproductive 
services, as do many other modalities that are currently assigned to 
those clinical groups. In addition, MRgFUS procedures are most often 
performed on younger women and are only seldom performed on Medicare 
beneficiaries. We believe that placing them in clinical APCs with other 
female reproductive procedures will enable us both to set accurate 
payment amounts and to maintain appropriate clinical homogeneity of the 
APCs.
    Cost data for MRgFUS procedures provided to us for two hospitals 
showed high, but disparate costs. The costs per case reported by each 
of the hospitals were significantly different from one another and were 
much higher than reports of costs from other publicly available 
sources. We suspect that much of the variation reflects differences in 
capital costs and projections of utilization and procedure times, as 
well as in the types of personnel used to perform the procedures. We 
understand that the MRI equipment can also be used to perform 
conventional MRI procedures, and the MRI equipment costs should be 
allocated accordingly so that amortization of the costs will be shared 
by those tests. The OPPS payment rates for services need to make 
appropriate payments for the services to Medicare beneficiaries, 
recognizing that, as a budget neutral payment system, the OPPS does not 
pay the full hospital costs of services. We expect that our

[[Page 68601]]

payment rates generally will reflect the costs that are associated with 
providing care to Medicare beneficiaries in cost-efficient settings.
    We compared the necessary hospital resources for the MRgFUS 
procedures, including specialized equipment, MRI/procedure room time, 
personnel, anesthesia and other required resources, to various other 
procedures for which we have historical hospital claims data. 
Additionally, we took into consideration projected costs for the MRgFUS 
procedures submitted to us, and other available information regarding 
the clinical characteristics and costs of those services. Upon 
consideration of all of the information available to us, we have 
determined that a higher level of payment would be more appropriate for 
the MRgFUS procedures. However, we are rejecting the recommendation of 
the APC Panel, and we will assign CPT codes 0071T and 0072T to APC 0195 
(Level IX Female Reproductive Procedures) and 0202 (Level X Female 
Reproductive Procedures), respectively for CY 2006. These new APC 
assignments provide significantly higher payment rates than we proposed 
for these services in CY 2006. We believe that these placements in APCs 
0195 and 0202 will provide appropriate payments for MRgFUS services to 
provide access for Medicare beneficiaries who need them.
k. Non-Imaging Nuclear Medicine Studies (APC 0389)
    In Addendum B of the CY 2006 proposed rule (70 FR 42776), we 
proposed to maintain CPT codes 78270 (Vitamin B-12 absorption study; 
without intrinsic factor), 78271 (Vitamin B-12 absorption study; with 
intrinsic factor), and 78272 (Vitamin B-12 absorption study; with and 
without intrinsic factor) in APC 0389 (Non-Imaging Nuclear Medicine) 
for CY 2006.
    We received one public comment related to the above-mentioned 
nuclear medicine procedures.
    Comment: One commenter expressed concern that the resource 
requirements associated with CPT codes 78271 (Vitamin B-12 absorption 
study; with intrinsic factor), and 78272 (Vitamin B-12 absorption 
study; with and without intrinsic factor) far exceed the median cost of 
APC 0389 (Non-imaging Nuclear Medicine) in which they reside. The 
commenter noted that the exceptionally low single claim counts for 
these procedures have little or no impact on the overall median cost 
for APC 0389 due to the thousands of other single claim counts for 
lower cost CPT codes that reside in APC 0389. To protect beneficiary 
access to these services, the commenter requested that CMS consider 
either freezing the payment rate for APC 0389 at its CY 2005 payment 
rate or buffering the proposed 12 percent decrease from its CY 2005 
payment rate. The commenter noted that, in addition to underpayment for 
the nuclear medicine procedures, the three radiopharmaceuticals that 
could be used in the tests ( C1079--Supply of radiopharmaceutical 
diagnostic imaging agent, cyanocobalamin Co-57/58, per 0.5 mCi; C9013--
Supply of Co-57 cobaltous chloride, radiopharmaceutical diagnostic 
imaging agent; and Q3012--Supply of oral radiopharmaceutical diagnostic 
imaging agent, cyanocobalamin cobalt Co-57, per 0.5 mCi) were proposed 
to change from status indicator ``K'' in CY 2005 to status indicator 
``N'' for CY 2006. The commenter was concerned that the packaging of 
the necessary radiopharmaceuticals, in addition to the reduced payment 
rate for the tests, could threaten Medicare beneficiaries' access to 
these procedures.
    Response: While we acknowledge the commenter's concern that the 
procedure-specific median costs for CPT codes 78271 ($244) and 78272 
($310) appear to far exceed the median cost of APC 0389 ($86) for CY 
2006 based on the CY 2004 hospital claims data, we remind the commenter 
that the exceptionally low single claim counts that they brought to our 
attention for CPT codes 78271 (9 single claims) and 78272 (5 single 
claims) significantly increase the volatility of their median costs 
from year-to-year. Moreover, the higher CY 2005 single claim counts for 
CPT codes 78271 (209 single claims) and 78272 (133 single claims) based 
on the CY 2003 hospital claims data yielded lower median costs for CPT 
codes 78271 ($98) and 78272 ($159). These lower median costs may have 
been due to separate CY 2005 payments for the required 
radiopharmaceuticals, in comparison with the median costs from CY 2004 
claims developed based on the CY 2006 payment policy of packaging the 
radiopharmaceuticals.
    In reviewing the claims data for all of the CPT codes assigned to 
APC 0389 for CY 2005, we noted that, in addition to CPT codes 78271 and 
78272, several other services had consistently higher procedure-
specific median costs than the CY 2006 APC median cost ($86), including 
CPT code 78003 (Thyroid uptake; stimulation, suppression or discharge); 
CPT code 78190 (Kinetics, study or platelet survival, with or without 
differential organ/tissue localization); CPT code 78270 (Vitamin B-12 
absorption study; without intrinsic factor); and CPT code 78191 
(Platelet survival study) with median costs of $167, $170, $186, and 
$384, respectively. As these services were all low volume, with fewer 
than 100 claims each, there was no two times violation in APC 0389, 
despite the finding that the least expensive procedure assigned to APC 
0389 had a median cost of $76. The higher level of hospital resources 
required for the more costly non-imaging nuclear medicine procedures 
was notable.
    While we will not adjust the CY 2006 median cost of APC 0389 by 
using its CY 2005 median cost or dampening the decline between CY 2005 
and CY 2006 as suggested by the commenter, we acknowledge that the 
structure of the APC would benefit from reconfiguration. Therefore, we 
are splitting the services assigned to APC 0389 for CY 2005 into two 
groupings for CY 2006: APC 0389, Level I Non-Imaging Nuclear Medicine; 
and newly created APC 0392, Level II Non-Imaging Nuclear Medicine. The 
assignment of CPT codes to these two APCs is shown in Table 14 below.

  Table 14.--Assignment of CPT Codes to APCs 0389 and 0392 for CY 2006
------------------------------------------------------------------------
                APC 0389                             APC 0392
------------------------------------------------------------------------
78725, Kidney function study...........  78003, Thyroid, stimulation,
                                          suppression.
78000, Thyroid, single uptake..........  78190, Platelet survival,
                                          kinetics.
78001, Thyroid, multiple uptakes.......  78191, Platelet survival.
78999U, Nuclear diagnostic exam........  78270, Vitamin B-12 absorption
                                          exam; without intrinsic
                                          factor.
                                         78271, Vitamin B-12 absorption
                                          exam; with intrinsic factor.
                                         78272, Vitamin B-12 absorption
                                          exam; with and without
                                          intrinsic factor.
------------------------------------------------------------------------


[[Page 68602]]

    In this reconfiguration, the median cost of APC 0389 for CY 2006 is 
$85, and the median cost for APC 0392 is $209. We believe that these 
new APC configurations will result in more accurate payments for non-
imaging nuclear medicine studies, by improving clinical and resource 
homogeneity within the groupings. We note that for the purposes of any 
studies contemplated by the commenter, different codes will be 
available for reporting the required radiopharmaceuticals in the CY 
2006 OPPS. Specifically HCPCS code C9013 will be deleted, HCPCS code 
A9546 (Cobalt CO-57/58, cyanocobalamin, diagnostic, per study dose, up 
to 1 microcurie) will replace HCPCS code C1079, and HCPCS code A9559 
(Cobalt CO-57 cyanocobalamin, oral, diagnostic, per study dose, up to 1 
microcurie) will replace HCPCS code Q3012. We anticipate that these new 
permanent HCPCS codes for radiopharmaceuticals will simplify billing 
and provide more accurate hospital claims data as the basis for 
potential packaging determinations in future years. With the transition 
to these new radiopharmaceutical HCPCS codes, we will closely monitor 
the claims data for APCs 0389 and 0392 in the future, as any changes in 
the packaging status of required radiopharmaceuticals could affect the 
median costs of services assigned to them and alter the resource 
homogeneity of the groupings.
l. Therapeutic Radiation Treatment (APC 0304)
    Comment: One commenter objected to our proposal to maintain CPT 
code 77370 (Radiation physics consult) in APC 0304 (Level I Therapeutic 
Radiation Treatment Preparation) for CY 2006, noting that the procedure 
experienced over a 50 percent decrease in its payment rate between CYs 
2004 and 2005. The commenter explained that this procedure often 
involves a significant amount of time spent by the physics department 
in developing the treatment planning, immobilization, and proper beam 
placement for the patient. The commenter requested that CMS consider 
the amount of time spent by the physicists and dosimetrists in 
collaborating with the physician when determining the APC placement of 
CPT code 77370 for CY 2006.
    Response: The CY 2006 median cost of $140 for CPT code 77370 is 
based on 96 percent of the CY 2004 total claims (41,123 single 
procedure claims out of 42,753 total claims). Similarly, the CY 2005 
median cost of $136 for CPT code 77370 was based on 95 percent of the 
CY 2003 total claims (40,723 single procedure claims out of 42,985 
total claims). The robust claims data reported by hospitals over the 
past several years support the placement of CPT code 77370 in APC 0304 
for CY 2006. Furthermore, the commenter provided no supporting evidence 
that the proposed payment of $105 for CY 2006 would jeopardize 
beneficiary access to this service. Therefore, for CY 2006 we are 
maintaining CPT code 77370 in APC 0304.
m. Urinary Bladder Study (APC 0340)
    At the February 2005 APC panel meeting, the APC Panel recommended 
that we move CPT code 78730 (Urinary bladder residual study) from APC 
0340 (Minor Ancillary Procedures) to APC 0404 (Level I Renal and 
Genitourinary Studies) for CY 2006, suggesting that the CY 2003 data 
for CPT code 78730 may have been derived from incorrectly coded 
hospital claims. For reasons discussed in detail below, we are 
maintaining CPT code 78730 in APC 0340 for CY 2006.
    We received a number of public comments related to such imaging 
procedures.
    Comment: One commenter stated that the resource requirements of CPT 
code 78730 (Urinary bladder residual study) do not resemble other 
services assigned to APC 0340 (Minor Ancillary Procedures). The 
commenter explained that the high volume and low median cost data for 
CPT code 78730 resulted from inappropriate use of this code to report 
other services unrelated to nuclear medicine. The commenter noted that 
during the February 2005 APC Panel meeting, the APC Panel recommended 
that CMS move CPT code 78730 from APC 0340 to APC 0404 (Level I Renal 
and Genitourinary Studies), suggesting that the CY 2003 data for CPT 
code 78730 may have been derived from incorrectly coded hospital 
claims. The commenter urged CMS to recognize the full costs associated 
with the nuclear medicine aspects of the procedure by reassigning CPT 
code 78730 to APC 0404 for CY 2006.
    Response: In the November 15, 2004 final rule with comment period 
(69 FR 65705), we noted that CPT code 78730 was originally created and 
valued for the MPFS as a procedure requiring the services of a nuclear 
medicine technician, but that the use of the code subsequently had 
changed to be used primarily by urologists rather than by nuclear 
medicine physicians. While we reassigned CPT code 78730 to APC 0340 for 
CY 2005 based on robust CY 2003 claims data, we solicited other 
physician specialties to submit resource data for us to review in the 
context of our hospital claims data so that we could reexamine the 
appropriate APC placement of CPT code 78730 for CY 2006. While we 
acknowledge the commenter's repeated concern that the median cost for 
CPT code 78730 may reflect miscoded claims, the commenter again 
provided no supporting evidence of what they believe to be the true 
resource costs associated with CPT code 78730. If some of the reported 
claims data are inaccurate, we have no way to determine which claims 
are more or less accurate than others. Rather, a relatively stable 
number of single procedure claims has generated a consistent median 
cost for CPT code 78730 over the past four years (that is, ranging from 
$39 based on the CY 2001 claims data to $53 based on the CY 2004 claims 
data) and supports our assignment of CPT code 78730 to APC 0340 with an 
APC median cost of $36, as opposed to APC 0404 with an APC median cost 
of $217. Therefore, we are maintaining CPT code 78730 in APC 0340 for 
CY 2006. However, in preparation for the CY 2007 OPPS update, we will 
reexamine the APC placement of CPT code 78730 by reviewing any resource 
data submitted by commenters in the context of our CY 2005 hospital 
claims data. Commenters may wish to identify approaches to 
distinguishing correctly coded claims so that we could develop a 
procedure-specific median cost based on correctly coded hospital claims 
data. As the commenter believes the vast majority of claims for CPT 
code 78730 were miscoded over many years, they may wish to explore a 
change in the code with the AMA's CPT Editorial Panel or request their 
dissemination of guidance on use of the code, to clarify the code's 
intended use and assist providers in correctly billing for services 
provided.
3. Gastrointestinal and Genitourinary Procedures
a. Cystourethroscopy With Lithotripsy (APC 0163)
    Comment: A few commenters requested that CMS assign CPT code 52353 
(Cystourethroscopy, with ureteroscopy and/or pyeloscopy; with 
lithotripsy) to the new APC 0429 (Level V Cystourethroscopy and other 
Genitourinary Procedures). The commenters stated that this procedure 
has been grouped into the same APC (0163, Level IV Cystourethroscopy 
and other Genitourinary Procedures) with many of the procedures that we 
reassigned into APC 0429 and that CPT code 52353 should also be 
assigned to that APC. They stated that the procedure described by CPT 
code 52353

[[Page 68603]]

is used for the same indications as are those in APC 0429, and that 
much of the same capital equipment is used to perform CPT code 52353 
and those in APC 0429.
    The commenters asserted that although the median cost in CMS's 
hospital claims data for CPT code 52353 is lower than those for 
procedures in APC 0429, its median cost is the highest in APC 0163 and 
its costs are actually higher than reflected in the claims data since 
hospitals are failing to report all of the costs associated with the 
flexible ureteroscope required for the procedure.
    Based on their analysis of the proposed rule data, the commenters 
found that assignment of CPT code 52353 to APC 0429 would only result 
in small decreases in the median costs for both APCs 0163 and 0429. 
They estimated that the median cost for APC 0163 would drop by 
approximately $19 and that the median cost for APC 0429 would decrease 
by approximately $100. They stated that these drops would not represent 
payment disruptions for the other procedures in the APCs.
    Response: The median cost for CPT code 52353, $2,117, is the 
highest in APC 0163, but the procedure-specific median costs in APC 
0163 vary from lowest to highest by very little. The median cost for 
APC 0163 is $1,997, only $120 lower than the code-specific median cost 
for CPT code 52353.
    The median cost for APC 0429 is $2,502, and the median costs of the 
individual procedures with more than 50 single claims assigned to that 
APC (representing a total of 13,200 claims) vary from $2,475 to $2,602, 
a difference of only $127. We believe that the decrease in the APC 0429 
median that would result from assignment of CPT code 52353 (14,570 
claims) would unfairly disadvantage the procedures that we proposed to 
assign there, and that the $100 drop that the commenters referred to as 
not representing payment disruptions would not be viewed similarly by 
hospitals billing for the procedures we proposed for assignment to APC 
0429. In addition, we have no reason to doubt the accuracy of our 
median cost for CPT code 52353 based on thousands of CY 2004 single 
hospital claims, nor do we understand why hospitals would 
differentially not be including charges for the costs of all required 
equipment and supplies for this procedure on their hospital claims in 
comparison with their billing for other procedures. Any small 
underpayment that would result from the continued assignment of CPT 
code 52353 to APC 0163 would be less than the potential for overpayment 
if the code were moved to APC 0429, which contains some procedures that 
have different clinical characteristics and services with higher median 
costs.
    We will reevaluate the APC assignment for CPT code 52353 for CY 
2007 and finalize our proposal, without modification, to retain it in 
APC 0163 for CY 2006.
b. GI Stenting (APC 0384)
    Comment: Commenters, including the APC Panel, asked that we use 
only claims containing devices to set the APC median cost for APC 0384, 
or alternatively, freeze the 2006 CY OPPS payment rate at the CY 2005 
OPPS payment.
    Response: We considered the comments and have decided to apply the 
same policy to these services that we will apply to other device-
dependent APCs. In the case of this APC, the median on which the CY 
2006 OPPS payments will be based was calculated using claims that 
contain the device codes applicable to the services assigned to APC 
0384. See the discussion of payment for device dependent APCs in 
section VI.A for our discussion of adjustments to median costs for 
device-dependent APCs. See Table 16 for the median cost on which the CY 
2006 payment rate for APC 0384 is based.
    Comment: Some commenters, including the APC Panel, recommended that 
we establish a separate APC for CPT codes 43268 and 43269 for 
endoscopic retrograde cholangiopancreatography (ERCP) services because 
they believed that these services use fluoroscopy while the other codes 
in APC 0384 do not. Other commenters opposed this change because they 
said that all services in APC 0384 require use of similar supplies, 
equipment, and fluoroscopic assistance. They indicated that the 
hospital resources that are required to furnish a specific GI stenting 
service are determined more by nuances arising from gaining access to 
the site at which the stent will be placed, sedating the patient, and 
providing fluoroscopic monitoring, than by the specific location where 
the stent is being placed.
    Response: We did not create a new APC for ECRP-related stent 
procedures because those procedures are appropriately placed with the 
other services in APC 0384, both with respect to clinical 
characteristics and resources used, particularly in view of the 
clinical rationale provided by the commenters. In addition, the number 
of single claims available for establishing payment rates for APC 0384 
is already relatively small. We are concerned that if we were to move 
the two ERCP procedures to another APC, there would be very few single 
claims remaining in APC 0384 to establish that APC's median cost.
c. Insertion of Uterine Tandems and/or Vaginal Ovoids for Clinical 
Brachytherapy (APC 0192)
    Comment: Several commenters disagreed with our proposal to reassign 
CPT code 57155 (Insertion of uterine tandems and/or vaginal ovoids for 
clinical brachytherapy) from APC 0193 (Level V Female Reproductive 
Procedures) to 0192 (Level IV Female Reproductive Procedures). The 
commenters were concerned that the reassignment would result in a 66 
percent decrease in payment, and that there was no discussion of the 
reassignment in the proposed rule. They requested that the procedure be 
retained in its current CY 2005 APC assignment, and that in the future 
CMS discuss all changes to APC assignments in the preambles of their 
proposed rules. They asserted that there have been no changes in the 
technology or provision of these services that would justify a 
reduction in payment and that the dramatic decrease in payment amount 
proposed by CMS would have a negative effect on Medicare beneficiaries' 
access to this important treatment for vaginal and/or uterine cancer.
    Response: The procedure described by CPT code 57155 is for the 
insertion of the ``holders'' for brachytherapy sources when 
brachytherapy is to be delivered to specific sites. The procedure to 
load the radioactive elements and the brachytherapy sources themselves 
are separately payable under the OPPS. CPT code 57155 was first 
reassigned from APC 0192 to APC 0193 for CY 2004 Hospital claims data 
from CY 2002, utilized for the CY 2004 OPPS update, yielded a code-
specific median cost for CPT code 57155 of about $743, based on 132 
single claims. However, CY 2003 data, utilized for the CY 2005 OPPS 
update, provided a code-specific median for CPT code 57155 of 
approximately $232 based on 350 single claims, creating a 2 times 
violation in APC 0193. For CY 2005, our final OPPS payment policy 
specifically excepted APC 0193 from the two times rule in light of this 
violation.
    While we did not propose to reassign CPT code 57155 for the CY 2005 
OPPS, we now have a second year of hospital claims data from CY 2004 
that indicate that CPT code 57155 should be assigned to a lower level 
Female Reproductive Procedures APC. Therefore, in addendum B of the 
proposed rule, we proposed to reassign CPT code 57155 to APC 0193. The 
median cost for CPT code 57155 of $353 based on 867 single claims is in 
the same range as the

[[Page 68604]]

medians for other procedures assigned to APC 192 for CY 2006, making it 
an appropriate placement for CPT code 57155. If CPT code 57155 were to 
be assigned to APC 0193 which has a median cost of about $870, we would 
once again have to except APC 0193 from the two times rule for CY 2006. 
Based on stable claims data for the past 2 years and significant 
numbers of single bills, we used our standard OPPS methodology and the 
updated CY 2004 claims data to determine that hospital claims data for 
CPT code 57155 are accurate and appropriate to use for making the CY 
2006 APC assignment for CPT code 57155. Therefore, we will finalize our 
proposal to assign CPT code 57155 to APC 0192.
d. Laparoscopic Ablation Procedures (APC 0131)
    Comment: One commenter requested that CMS reassign CPT code 47370 
(Laparoscopy, surgical; ablation of one or more liver tumor(s); 
radiofrequency) to APC 0132 (Level III Laparoscopy). The procedure is 
currently assigned to APC 0131, Level II Laparoscopy, and the commenter 
stated that the costs for the procedure far exceed the payment rate in 
that APC. The commenter analyzed OPPS claims for CYs 2002, 2003, and 
2004 and found that the median cost for that procedure has been more 
than ``two times greater than the median of the lowest cost item or 
service'' in APC 0131 during all of those years. Further, they asserted 
that the procedure's median cost is actually more similar to those of 
the procedures assigned to APC 0132.
    Response: We examined our median cost data for the years referenced 
in the comment and concur with their findings that the median cost for 
CPT code 47370 has been notably higher than those for other procedures 
in APC 0131 for several years. For CY 2006, we have 28 single claims, 
and the procedure-specific median cost of $5,088 is significantly 
higher than the median costs for most of the procedures assigned to APC 
0131. The median cost for CPT code 47370 also is higher than the median 
costs for other procedures currently assigned to APC 0132. We believe 
that for purposes of clinical homogeneity, APC 0132 is the most 
appropriate APC assignment for the procedure but we will continue to 
monitor it for future APC assignment changes. For CY 2006, we will 
assign CPT code 47370 to APC 0132 (Level III Laparoscopy).
    Comment: One commenter requested that CMS reassign CPT code 50542 
(Laparoscopy, surgical; ablation of renal mass lesion(s)) to APC 0132 
(Level III Laparoscopy). The procedure is currently assigned to APC 
0131 (Level II Laparoscopy), and the commenter stated that the costs 
for the procedure far exceed the payment rate in that APC. The 
commenter analyzed OPPS claims and found that two of the 11 single 
claims available for the proposed rule did not reflect separate charges 
for the ablation device and was concerned that with so few claims, 
these two apparently incorrect claims may have a significant effect on 
the median cost.
    Response: We examined our median cost data for CY 2005 and CY 2006. 
For CY 2005, there were 11 single claims used for the final rule median 
and the assignment of the procedure to APC 0131 was appropriate. For CY 
2006, we have 16 single claims and the median cost is significantly 
higher than the median costs for most of the procedures assigned to APC 
131. The median cost for CPT code 50542 is $3,940, within the range of 
median costs for procedures assigned to APC 0132 for CY 2006. We will 
assign CPT code 50542 to APC 0132 (Level III Laparoscopy) for CY 2006.
e. Plicator Procedure (APC 0422)
    Comment: One commenter submitted comments about the APC assignment 
for new HCPCS code C9724 (EPS gastric cardia plicator) used in the 
treatment of gastroesophageal reflux disease (GERD). The commenter 
suggested that the procedure's assignment to APC 0422 (Level II Upper 
GI Procedures) is inappropriate because it is a new technology and that 
placement violates the OPPS two times rule. The commenter recommended 
that we assign the procedure to an APC with a higher payment rate and 
suggested that we may want to create a level III upper GI procedures 
APC. They reported that the cost of the Plicator Procedure kit 
($1,795), in addition to the endoscopy (approximately $460) is two 
times more costly than CPT 43228 (Esophagoscopy, rigid or flexible; 
with ablation of tumor(s), polyp(s), or other lesion(s), not amenable 
to removal by hot biopsy forceps, bipolar cautery or snare technique), 
a high volume procedure that is also assigned to APC 0422.
    Response: In April 2004, CMS received an application for this 
procedure to qualify for payment as a New Technology under the OPPS. In 
April 2005, CMS assigned it to HCPCS code C9724 and placed it in APC 
0422 for payment under the OPPS. We have no claims data for the 
procedure due to its very recent HCPCS code assignment. We assigned it 
to APC 0422 because there are other endoscopic procedures for the 
treatment of GERD assigned to that APC and we believed, based on 
specific information available to us about the plicator service and 
hospital cost and clinical information regarding other services payable 
under the OPPS, that APC 0422 was an appropriate assignment for HCPCS 
code C9724. We continue to believe that is the most appropriate APC 
placement for the procedure. We will reevaluate that assignment when we 
have claims data on which to base a reassignment.
    We find that there is no basis for the suggestion that assignment 
of HCPCS code C9724 represents a two times rule violation because there 
are no data for HCPCS code C9724 to compare to median costs for the 
other significant procedures assigned to that APC.
    We are finalizing our proposal to assign HCPCS code C9724 to APC 
0422 for CY 2006.
f. Prostate Cryosurgery (APC 0674)
    For CY 2006 OPPS, we proposed to set the payment rate for APC 0674 
(Prostate Cryoablation) based on an unadjusted median cost of $5,780. 
We received many public comments concerning the payment for prostate 
cryoablation.
    Comment: Commenters objected to the proposed payment rate for 
cryoablation of the prostate (APC 0674) because they believed that the 
proposed payment was not sufficient to cover the cost of the procedure. 
The commenters indicated that a hospital incurs costs of greater than 
$9,000 to furnish the service. Commenters furnished copies of bills, 
invoices and cancelled checks intended to substantiate their claims 
that the total costs are in excess of $9,000 because the costs of the 
probes alone are no less than $4,000. They indicated that the proposed 
Medicare payment rate, if implemented, would result in a shortfall of 
over $3,000 per case. Commenters said that hospitals tend to under 
report and under charge their true costs for cryosurgery procedures, 
and that there are incentives to resist billing changes that would 
result in higher charges for the procedures. Commenters said that CMS 
should recalculate the median cost for APC 0674 by excluding claims 
that do not have a charge of at least $6,000 under either HCPCS code 
C2618 or revenue codes 270, 272 or 278 because any charge for 
cryoablation probes less than $6,000 would be inadequate to result in a 
reasonable cost for the device. Commenters indicated that, at a 
minimum, CMS should not set the payment rate for APC 0674 at less than 
the CY 2005 payment rate plus inflation.
    Response: We share the commenters' concern that these services 
continue to be available to Medicare beneficiaries

[[Page 68605]]

and we will pay APC 0674 under the general policy which we apply to 
device-dependent APCs. Under this general policy, we have set the 
median cost for APC 0674 using only claims that contain the device code 
for the cryoablation probes used in this service. See section IV.A. for 
our discussion of adjustments to median costs for device dependent 
APCs. See Table 16 for the adjusted median cost for APC 0674 for CY 
2006.
    Comment: Commenters indicated that the proposed Medicare payment 
rate would result in reduced or no access for Medicare beneficiaries. 
One commenter stated that in the past 2 years, a total of 29 hospitals 
either ceased performing or elected not to start a cryosurgery program 
due to inadequate Medicare payment. Commenters stated that inadequate 
payment under the OPPS would result in hospitals providing more 
expensive care in the inpatient setting under DRG 315 that could be 
much more costly to Medicare.
    Response: Our review of the claims from hospitals used to set the 
median costs for APC 0674 shows that from CYs 2003 to 2004, the number 
of claims for APC 0674 grew from 1,516 to 2,328 or by 35 percent in one 
year. Similarly, the number of hospital providers furnishing the 
service grew from 222 to 317 or by 30 percent in one year. Neither the 
growth in the number of claims or the number of hospitals furnishing 
the service indicates that there is a barrier to access to care. 
Moreover, while 29 hospitals may have ceased performing the procedure 
or decided not to begin a cryosurgery program, the growth in hospitals 
furnishing the service from CYs 2003 to 2004 is substantial. This is 
particularly meaningful because the device came off of pass-through 
payment in CY 2004 and the payment for the device was packaged into the 
payment for the procedure in CY 2004, rather than being paid separately 
under the pass-through payment methodology. We see no reason to believe 
that Medicare beneficiaries have problems in accessing this service. 
Moreover, as commenters indicate in the discussion of calculation of 
payment weights, hospitals take many factors into consideration in 
determining whether to offer a service, only one of which is the rate 
of Medicare payment.
g. Stretta Procedure (APC 0422)
    CPT code 43257, effective January 1, 2005, is used for 
esophagoscopy with delivery of thermal energy to the muscle of the 
lower esophageal sphincter and/or gastric cardia for the treatment of 
gastresophageal reflux disease. This code describes the Stretta 
procedure, including use of the Stretta System and all endoscopies 
associated with the Stretta procedure. Prior to CY 2005, the Stretta 
procedure was recognized under HCPCS code C9701 in the OPPS. For the CY 
2005 OPPS, HCPCS code C9701 was deleted and CPT code 43257 was utilized 
for the Stretta procedure. In CY 2005, the Stretta procedure was 
transitioned from a New Technology APC to clinical APC 0422 (Level II 
Upper GI Procedures) based on several years of hospital cost data. 
Procedures within APC 0422 were similar to the Stretta procedure in 
terms of clinical characteristics and resource use.
    We received several public comments in response to the CY 2005 
methodology for calculating the median cost for APC 0422 set forth in 
our CY 2005 OPPS final rule with comment period.
    Comment: Commenters objected to the APC assignment of the Stretta 
procedure (HCPCS code C9701 in 2003; CPT code 43257 beginning in 2004) 
to APC 0422. Commenters indicated that CMS should recalculate the 
median cost for the procedure by packaging in the costs of all 
endoscopies (regardless of CPT code) that were performed on the same 
date as the Stretta procedure and assigning the procedure to a New 
Technology APC based on the recalculated median cost. They said that 
absent this change, CMS should clarify that hospitals may bill and will 
be paid for each endoscopy done at the time of the Stretta procedure. 
Commenters asked that we make these changes effective January 1, 2005.
    Response: We did not make these changes for CY 2005 because we 
believe that we correctly calculated the median cost for the Stretta 
procedure by incorporating the cost of a single endoscopy (CPT codes 
43234 and 43235) when billed into the reported median cost for Stretta 
in the calculation of the final rule median cost for the new CPT code 
43257 for CY 2005, based on the codes hospitals correctly reported in 
CY 2004 for the full Stretta service. Moreover, we believe that 
assignment of the procedure to the APC that contains similar procedures 
for the treatment of gastroesophageal reflux disease is appropriate. 
Therefore, we believe that the Stretta procedure is placed in an APC 
for CY 2005 which is appropriate both with regard to clinical 
characteristics and resource use. As the code descriptor for CPT code 
43257 includes upper gastrointestinal endoscopy, we do not expect that 
hospitals would separately bill for each endscopy done at the time of 
the Stretta procedure.
    For CY 2006, we proposed to use both CY 2004 single claims for 
HCPCS code C9701 and multiple procedure claims containing one unit of 
HCPCS code C9701 and one unit of either CPT code 43234 or CPT code 
43235 to calculate the Stretta procedure's contribution to the median 
for APC 0422. Claims reporting one endoscopy code (CPT code 43234 or 
CPT code 43235) along with HCPCS code C9701 were included in the 
proposed median calculation because, in CY 2002, CMS authorized the 
separate and additional billing of a single endoscopy code with HCPCS 
code C9701, while CPT code 43257 now includes all endoscopies performed 
during the procedure.
    Using this proposed methodology, we calculated a median cost for 
CPT code 43257 (HCPCS code C9701 in the CY 2004 claims data) of $1,669. 
Using these claims in the calculation of the median cost for APC 0422, 
we calculated a median cost of $1,386. We proposed to use this 
methodology, applied to the more complete final rule with comment 
period claims set, to calculate the final CY 2006 OPPS median cost for 
APC 0422.
    We received several public comments on our proposed methodology for 
calculating the median cost for APC 0422.
    Comment: One commenter objected to the proposed payment for CPT 
code 43257, the Stretta procedure for the CY 2006 OPPS. The commenter 
indicated that the payment would create economic disincentives to the 
utilization of the service and might ultimately impose greater costs on 
Medicare and its beneficiaries. The commenter asked that CMS create a 
new APC to which we would assign CPT code 43257 and CPT code 0008T, and 
that we use a different methodology from that proposed to calculate the 
median cost. The commenter indicated that because CPT codes 43228 and 
43830 have higher volumes but lower costs, the inclusion of them in the 
same APC as CPT code 43257 does not enable payment of CPT code 43257 at 
a level that is appropriate to pay the costs of the service. Therefore, 
the commenter requested that we create a new clinical APC to enable 
higher payment for CPT code 43257. The commenter believed that creating 
the new APC is analogous to what CMS proposed to do for vascular access 
devices for the CY 2006 OPPS.
    The commenter also asked that CMS undertake special claims 
manipulation to establish the median cost for the new APC. The 
commenter's preference was that we add the median cost for CPT code 
43235 to the cost of all claims for

[[Page 68606]]

HCPCS code C9701 (CPT code 43257 in 2005) which did not also contain at 
least one unit of an endoscopy code on the claim. These inflated claims 
costs would then be combined with all claims for HCPCS code C9701 which 
also contain at least one unit of an endoscopy code and with the claims 
for CPT code 0008T to set the median cost for the APC they wanted us to 
create. The commenter offered a less preferred alternative of using 
only claims that contained both HCPCS code C9701 and CPT codes 43234, 
42235 or any other endoscopy code to calculate the median cost, which 
would not yield as robust a set of claims for median setting.
    Response: We have not created a new APC for CPT code 43257 and CPT 
code 0008T, and we have kept them both in APC 0422 for the CY 2006 
OPPS. The services reported by these CPT codes are clinically similar 
to the other procedures in APC 0422. In addition the resources used to 
furnish the services are very similar to the other services in APC 0442 
based on hospital claims data. We see no reason to create a new APC for 
CPT codes 43257 and 0008T.
    We also have not undertaken the special claims manipulation that 
the commenter requested. We do not believe that it is valid to add the 
median cost for an endoscopy to the costs for claims for which an 
endoscopy is not billed on the same claim. Similarly, we do not believe 
that it is valid to include all of the charges for endoscopies other 
than a single unit of CPT code 43234 or 43235 in the calculation of the 
median cost for the Stretta procedure. As the commenter indicates, 
endoscopy is a fundamental part of the Stretta service described by CPT 
code 43257. Therefore, there is every reason to believe that a hospital 
included all charges pertaining to the service in the charge for C9701 
(the predecessor of CPT code 43257).
    To set the median cost for APC 0422, we used all single procedure 
claims for CPT code 43257, and we also used claims with CPT code 43257 
which contained one and only one unit of either CPT codes 43234 or 
43235 on the same date of service. We packaged the costs of the single 
unit of the additional endoscopy and used these claims records in the 
calculation of the median cost for APC 0422.
    For CY 2006 OPPS, the payment for APC 0422 is based on the median 
cost of $1,434 that was derived from this process. The median for CPT 
code 43257 which we derived from this process is $1,669. CPT codes 
43257 and 0008T remain assigned to APC 0422.
h. Urological Stenting Procedures (APCs 0163 and 0164)
    Comment: A few commenters requested reassignment of two urology 
procedures to newly created APC 0429 (Level V Cystourethroscopy). The 
commenters requested that CPT codes 0084T (Insertion of a temporary 
prostatic urethral stent) and 52282 (Cystourethroscopy, with insertion 
of urethral stent) be assigned to the new APC.
    CPT 52282 is currently assigned to APC 0163 (Level IV 
Cystourethroscopy and other Genitourinary Procedures) and the 
commenters stated that it is neither clinically similar to the other 
procedures in that APC nor is it similar in terms of hospital 
resources. Those commenters also stated that CPT code 0084T is better 
suited for assignment to APC 0429 than to APC 0164 (Level I Urinary and 
Anal Procedures), to which it is currently assigned.
    The commenters requested that if we do not reassign CPT codes 52282 
and 0084T to APC 0429, that we at least move CPT code 52282 to APC 0385 
(Level I Prosthetic Urological Procedures), where it was assigned for 
CY 2004. They stated that CMS moved it from APC 0385 for CY 2005 
because CMS determined that the urethral stent being implanted was not 
a prosthetic device, a decision with which they strongly disagree. They 
asserted that the urethral stent, like collagen implants injected into 
the urethra and other devices, meets the Medicare definition of a 
prosthetic device and should be assigned to an APC in line with that 
designation.
    Response: Based on careful examination of the claims data and the 
comments, we continue to find that assignment for these procedures to 
APCs 0163 and 0164 is appropriate. The median cost for CPT code 52282, 
$1,955, is considered within the range of median costs for the other 
procedures assigned to APC 0163. The APC median cost is $1,997, and the 
narrow procedure-specific range of median costs within the APC is 
$1,730 to $2,117. In contrast, the median cost for APC 0385, $4,384, is 
more than twice that of the median cost of CPT code 52282. In addition, 
the median cost for APC 0429 of $2,501 is significantly higher that the 
median cost for CPT code 52282.
    While APC 0385 (Level I Prosthetic Urological Procedures), as its 
title suggests, was established as an APC for some urological 
procedures requiring prosthetics, it is not required that all 
procedures utilizing urological prosthetics be assigned to an APC with 
``prosthetic'' in the title. Instead, urological procedures that do, or 
do not, utilize prosthetics, like other services paid under the OPPS, 
are assigned to APCs based on clinical and resource homogeneity with 
other services in those clinical APCs. CPT code 52282 for 
cystourethroscopy with insertion of a urethral stent shares common 
clinical characteristics with other cystourethrscopy services also 
assigned to APC 0163. Therefore, we continue to believe that APC 0163 
is the most appropriate APC assignment for CPT code 52282 for CY 2006.
    In addition, we have no claims data for CPT code 0084T because it 
was a new code for CY 2005. We assigned it to APC 0164 based on 
available information regarding the specific service, as well as 
clinical and cost information for other hospital services payable under 
the OPPS. CPT Changes: An Insider's View 2005, describes CPT code 0084T 
as the prepping of a patient for a typical sterile urethral device 
insertion procedure, followed by activities to select and deploy the 
stent in the prostatic urethra, and assessment of the patient's ability 
to void prior to discharge from the clinic. As stated earlier, we based 
our assignment for CPT code 0084T on the expected clinical and hospital 
resource characteristics of the service, rather than on whether or not 
the procedure required a prosthetic. Procedures utilizing urological 
prosthetics do not necessarily show the most clinical and resource 
compatability with other services assigned to APCs with prosthetic 
urological procedures in their APC titles, as such individual 
procedures may exhibit a wide range of clinical and cost differences. 
We assigned CPT code 0084T to a clinical APC that includes other 
urinary and anal procedures. We do not agree that its assignment to APC 
0429, the highest level cytourethroscopy APC that contains complex 
laser prostate and percutaneous nephrostolithotomy procedures with a 
median cost of $2,502, is an appropriate placement for CPT code 0084T 
for CY 2006. We continue to believe that APC 0164 is the most 
appropriate APC assignment for CPT code 0084T for CY 2006. We will have 
CY 2005 claims data for CPT code 0084T and will reassess its APC 
assignment based on those data for the CY 2007 OPPS update.
    We are finalizing, without modification, our proposal to retain CPT 
code 52282 in APC 0163 and CPT code 0084T in APC 0164 for CY 2006.

[[Page 68607]]

4. Other Surgical Services
a. Excision-Malignant Lesions (APCs 0019 and 0020)
    Comment: One commenter submitted comments regarding CPT codes 11620 
(Excision, malignant lesion, excised diameter 0.5 cm or less) and the 
code 11621 (excised diameter 0.6 to 1.0 cm). The commenter, 
representing a hospital, stated that there appeared to be an error in 
the placement of CPT code 11620 in APC 0020 (Level II Excision/Biopsy) 
and CPT code 11621 in APC 0019 (Level I Excision/Biopsy) because CPT 
code 11621 is the more invasive procedure of the two, yet it had been 
placed in an APC with a lower payment rate for CY 2006.
    Response: This is not an error. APCs are arranged based on a 
combination of considerations, including clinical homogeneity and 
median costs from hospital claims data reflecting hospital resources 
used. We have several hundred single claims for CY 2003 and CY 2004 for 
each of the services. Our data for these years consistently show that 
CPT code 11621 was performed almost twice as often as CPT code 11620, 
but it also had a consistently lower median cost, reflecting less 
hospital resources required for the excision of a larger lesion in 
comparison with a smaller lesion. Based on CY 2004 hospital claims 
data, CPT code 11621 has a median cost of about $314 based on 659 
single claims and is appropriately assigned to APC 0019, with a median 
cost of about $247. To place CPT code 11621 in APC 0020 (median cost of 
about $413) would create a significant overpayment. Conversely, CY 2004 
claims data reveal a median cost of about $511 for CPT code 11620, 
based on 347 single claims, and therefore, the code is appropriately 
placed in APC 0020.
    There could be many reasons why the hospital claims data reflect 
greater resource utilization for the procedure that the commenter 
believes is ``less invasive,'' such as different supplies or equipment 
used for smaller excisions or variations in surgical techniques and 
related procedural times depending on the size of the lesion. We feel 
confident that our stable median cost data accurately reflect that the 
hospital resources are greater for the excision procedure described by 
CPT code 11620, and therefore, will finalize our proposed CY 2006 APC 
assignments for CPT code 11620 in APC 0020 and for CPT code 11621 in 
APC 0019.
b. External Fixation (APCs 0046 and 0050)
    Comment: One commenter suggested that the current configuration of 
APC 0046 (Open/Percutaneous Treatment Fracture or Dislocation) 
significantly underpays procedures that involve external fixation 
devices. The commenter gave several recommendations on ways to realign 
the procedures. First, they recommended that CMS distinguish procedures 
that involve external fixation devices by allowing hospitals to bill 
either CPT code 20690 (Application of a uniplane, unilateral, external 
fixation system) or CPT code 20692 (Application of multiplane, 
unilateral, external fixation system) together with a fracture 
procedure code, and that these combinations of codes would be placed in 
a new APC specifically for ``fracture procedures with fixation 
devices.'' The commenter reasoned that establishing one or two new APCs 
for these procedures when billed together would eliminate the ongoing 
two times rule violation, preserve clinical homogeneity, and more 
appropriately reimburse hospitals. Second, if CMS were to establish two 
new APCs, one should be for lower extremity fractures and the second 
should include upper extremity fractures.
    Response: CPT codes 20690 and 20692 are currently in APC 0050, and 
no changes were proposed for the CY 2006 OPPS. There are no 2 times 
violations in the APC in which they are located, and each of these 
codes represents 1 percent or less of the total volume in the APC. 
Therefore, we see no reason to create a new APC for these codes as we 
believe APC 0050 provides appropriate payment to hospitals when 
services described by CPT codes 20690 and 20692 are provided and billed 
in accordance with correct coding guidelines. However, the CPT codes 
for treatment of a fracture often include ``with'' or ``without 
fixation'' in the definition of the code. Where fixation is included in 
the definition of the code, it would be miscoding to also report 20690 
or 20692; these codes should be reported if, and only if, fixation is 
not included in the CPT code for treatment of the fracture. Providers 
should review the CPT instructions and look to the AMA's guidance on 
coding if they have questions about when these codes should be 
reported.
    We do acknowledge, however, that we have excepted APC 0046 from the 
two times rule for several years, as we will again for CY 2006. This is 
a large APC to which many procedures are assigned, and the median costs 
of the significant procedures in this APC range from a low of about 
$1,231 to a high of approximately $3,460. We will ask the APC Panel at 
its next biannual meeting to consider whether this APC could be 
reconfigured to improve its clinical and resource homogeneity.
c. Intradiscal Annuloplasty (APC 0203)
    Comment: During the August 2005 meeting of the APC Panel, there was 
one presentation by a provider in support of a higher payment amount 
for intradiscal annuloplasty procedures. The presenter provided 
clinical and cost information to the Panel and stated that the 
procedures' current assignments to APC 0203 (Level IV Nerve Injections) 
did not describe the clinical features or hospital resources associated 
with CPT codes 0062T (Percutaneous intradiscal annuloplasty, any 
method, unilateral or bilateral including fluoroscopic guidance; single 
level) and 0063T (Percutaneous intradiscal annuloplasty, any method, 
unilateral or bilateral including fluoroscopic guidance; one or more 
additional levels). Further, the presenter suggested that a more 
appropriate APC assignment that would achieve more clinical and 
hospital resource homogeneity would be either APC 0050 (Level II 
Musculoskeletal Procedures except Hand and Foot), or APC 0051 (Level 
III Musculoskeletal Procedures except Hand and Foot). The APC Panel 
agreed with the presenter and recommended that CMS assign the procedure 
to either APC 0050 or 0051.
    Commenters on our proposed rule also requested that CMS assign CPT 
codes 0062T and 0063T to an APC that more accurately reflects the level 
of the procedures' resource use. The commenters also suggested that 
placement in either APC 0050 or 0051 would be the most appropriate from 
both clinical and payment aspects. They, like the presenter to the APC 
Panel, believed that a musculoskeletal APC was a more clinically 
accurate description of the procedure than its CY 2005 assignment with 
nerve injections in APC 0203.
    Response: CPT codes 0062T and 0063T were new for January 2005. 
Thus, we had no hospital claims data upon which to base our APC 
assignment of these procedures, and we were interested in the 
additional information that was provided to us for our CY 2006 update 
to the OPPS. Commenters indicated that performance of the procedures 
requires a single use electrothermal catheter that costs more than 
$1,000 and operating room time of one hour. In addition, other more 
costly capital equipment is required in comparison with procedures 
assigned to

[[Page 68608]]

APC 0203. The presenter to the APC Panel stated that the procedure 
costs range from $4,000 to about $7,000.
    We found the information provided in the APC Panel presentation and 
the public comments to the proposed rule, in addition to the APC 
Panel's recommendation and historical hospital claims data regarding 
other services payable under the OPPS, to be convincing in favor of 
assignment of this procedure to APC 0050, with an APC median cost of 
$1,423 for CY 2006. We agree that placement in APC 0050 will result in 
more accurate payment and more APC clinical homogeneity for the 
procedure. For our CY 2007 update, we will have hospital claims data 
for the procedure and we will reevaluate the assignment.
d. Kyphoplasty (APC 0051)
    Comment: Two commenters on the November 15, 2004 final rule with 
comment period (69 FR 65681), a device manufacturer and an orthopedic 
surgeon, commended CMS for creating C-codes (HCPCS codes C9718 
Kyphoplasty, one vertebral body, unilateral or bilateral injection; and 
C9719, Kyphoplasty, each additional vertebral body) for this procedure 
in the hospital outpatient setting. The commenters stated, however, 
that placement in APC 0051, Level III Musculoskeletal Procedures Except 
Hand and Foot, (CY 2005 payment rate of $2,043) does not appropriately 
reflect the hospital resources used in performing these procedures, and 
that these assignments violate the two times rule because the resources 
associated with kyphoplasty are more than two times the cost of the 
resources for procedures in APC 0051. Both commenters recommended that 
kyphoplasty procedures be placed in APC 0425, Level II Arthroplasty 
with Prosthesis, at a CY 2005 payment rate of $5,562 in order to better 
reflect the clinical features and resources needed to perform the 
procedures. One commenter alternatively suggested creating a new APC 
solely for kyphoplasty.
    Additionally, these two commenters also submitted new comments to 
the July 25, 2005 proposed rule containing new recommendations 
pertaining to the same issues. The commenters recommended that CMS 
either reassign kyphoplasty procedures to APC 0681 (Knee Arthroplasty) 
with a payment rate of $8,103 or create a new APC for kyphoplasty 
titled ``Vertebral spinal augmentation and stabilization using balloon 
inflation'' with a payment rate of $8,750. They also repeated their 
prior recommendation to place kyphoplasty services in APC 0425; 
however, one commenter suggested that this should only be a ``stop gap 
measure'' for one year until CMS can gather claims data. This commenter 
also recommended that if the CPT codes for kyphoplasty have a status 
indicator of ``T,'' they should then be placed in the same APC, as the 
add-on code would be subject to the multiple procedure reduction. The 
commenters reasoned that movement to a new APC would better reflect the 
clinical resources used and referenced outside data showing hospital 
median charges that range from $4,500 to $41,000, with an average 
charge of approximately $15,700.
    A third individual commenter representing a hospital recommended 
that CMS either increase reimbursement for kyphoplasty, or change its 
status indicator to ``C'' to be more consistent with InterQual 
``Guidelines for Surgery and Procedures in the Inpatient Setting'' and 
the Ingenix Cross Coder.
    Response: For CY 2005, CMS created two C-codes for the kyphoplasty 
procedure: C9718 Kyphoplasty, one vertebral body, unilateral or 
bilateral injection and HCPCS code C9719 Kyphoplasty, one vertebral 
body, unilateral or bilateral injection; each additional vertebral body 
(List separately in addition to code for primary procedure). These 
procedures were placed in APC 0051 with a ``T'' status indicator 
because we believed that this APC was appropriate for these procedures 
in terms of clinical characteristics and resource costs.
    Though we do not yet have claims data, we have been told that a 
bone biopsy is performed more than half the time in addition to the 
kyphoplasty procedure. For CY 2005, under the OPPS the bone biopsy 
could be billed separately along with one or more of the kyphoplasty C-
codes. The typical deep bone biopsy code used for a vertebral body 
procedure, CPT code 20225, was assigned to APC 0020 (Level II Excision/
Biopsy), which had a ``T'' status indicator and a payment rate of $434 
for CY 2005. Both the biopsy and kyphoplasty procedures had a status 
indicator of ``T''; therefore, when performed together the hospital 
would receive fifty percent of the payment rate for the bone biopsy 
($217). We have been told that hospitals typically also bill one or 
more fluoroscopy codes for necessary guidance, such as CPT codes 76003 
(Fluroscopic guidance for needle placement), or 76005 (Fluroscopic 
guidance and localization of needle or catheter tip for spine or 
paraspinous diagnosis or therapeutic injection procedures, including 
neurolytic agent destruction), along with the kyphoplasty procedure, 
and we note that these fluoroscopic services were packaged for CY 2005. 
Thus, for CY 2005 payment to a hospital providing a single level 
kyphoplasty procedure and billing packaged fluoroscopic guidance that 
was also accompanied by a bone biopsy would be about $2,260.
    For CY 2006, several new CPT codes were created to describe the 
kyphoplasty procedure. These codes are:
     CPT 22523--Percutaneous vertebral augmentation, including 
cavity creation (fracture reduction and bone biopsy included when 
performed) using mechanical device, one vertebral body, unilateral or 
bilateral cannulation (e.g., kyphoplasty); thoracic
     CPT 22524--Percutaneous vertebral augmentation, including 
cavity creation (fracture reduction and bone biopsy included when 
performed) using mechanical device, one vertebral body, unilateral or 
bilateral cannulation (e.g., kyphoplasty); lumbar
     CPT 22525--Percutaneous vertebral augmentation, including 
cavity creation (fracture reduction and bone biopsy included when 
performed) using mechanical device, one vertebral body, unilateral or 
bilateral cannulation (e.g., kyphoplasty); each additional thoracic or 
lumbar vertebral body (List separately in addition to code for primary 
procedure)
    CPT codes 22523 and 22524 generally correspond to C code C9718, and 
CPT code 22525 generally corresponds to C code C9719. We will be 
deleting the two kyphoplasty C-codes for CY 2006, and hospitals will 
use the appropriate CPT codes to bill for kyphoplasty services. The new 
CPT codes include a bone biopsy when performed so hospitals will no 
longer separately bill CPT code 20225 when a bone biopsy accompanies a 
kyphoplasty procedure.
    CPT code 76012 (Radiological supervision and interpretation, 
percutaneous vertebroplasty or vertebral augmentation including cavity 
creation, per vertebral body; under fluoroscopic guidance) for 
fluoroscopic guidance also has changed in definition for CY 2006 to 
include specific reference to vertebral augmentation including cavity 
creation, which is characteristic of the kyphoplasty procedure. For CY 
2006, hospitals using fluoroscopic guidance for kyphoplasty would bill 
CPT code 76012, which has a status indicator S and is assigned to APC 
0274 for calendar year CY 2006 with a payment rate of $173.53. Thus, 
while a hospital providing a kyphoplasty service in CY 2006 will no 
longer receive separate payment under the OPPS for an accompanying bone 
biopsy, hospitals

[[Page 68609]]

will be able to bill for and receive separate payment for necessary 
fluoroscopic guidance. Thus, if there were no change for CY 2006 in the 
assignment of kyphoplasty services to APC 0051, as they were initially 
placed for CY 2005, payment to a hospital providing a single level 
kyphoplasty procedure and billing separately payable fluoroscopic 
guidance that was also accompanied by a bone biopsy would be about 
$2,352.
    Based on modifications in coding associated with the change from C-
codes to new CPT codes and additional clinical and hospital resource 
information, we believe it is appropriate to move the kyphoplasty 
procedures from APC 0051 to another APC for CY 2006. As we originally 
developed C-codes for outpatient hospital billing of kyphoplasty 
services after extensive clinical review, we do not agree with one 
commenter that kyphoplasty should by placed on the OPPS inpatient list. 
In addition, as kyphoplasty procedures do not entail implantation of a 
prosthesis, we do not agree with the commenters that kyphoplasty is 
comparable to services that require a prosthesis and, therefore, we 
will not place the new CPT codes in APC 0425 (Level II Arthroplasty 
with prosthesis). We also will not place the new CPT codes in APC 0681 
(Knee arthroplasty) because we do not believe that the services are 
clinically coherent with knee arthroscopy procedures, and because we do 
not believe that resources required for kyphoplasty warrant that level 
of payment. We also will not create a separate APC solely for 
kyphoplasty procedures because we have no claims data from CY 2004 upon 
which to base a calculation of median cost for such an APC.
    After considering the additional comments submitted, we have 
decided to place CPT codes 22523, 22524, and 22525 in APC 0052 (Level 
IV Musculoskeletal Procedures Except Hand and Foot) for CY 2006, based 
on clinical and resource compatibility with other procedures assigned 
to that APC. We agree with the commenters that the initial level 
procedures and the add-on code for each additional level should be 
assigned to the same ``T'' status APC. Although we received outside 
data on hospital charges and costs for this procedure, the data that 
was presented to us was highly variable in terms of charges and 
presented cost data for only one hospital. We will examine the median 
costs from hospital claims data for these services when it becomes 
available for the CY 2007 OPPS update.
e. Neurostimulator Electrode Implantation (APCs 0040 and 0225)
    Comment: Commenters, including the APC Panel, recommended that the 
services currently assigned to APCs 0040 (percutaneous implantation of 
neurostimulators electrodes, excluding cranial nerve) and 0225 
(implantation of neurostimulators electrodes, cranial nerve) be 
reorganized into three APCs, based on clinically coherent groupings of 
percutaneous, laminectomy or incision, and cranial neurostimulator 
electrode implantation. They indicated that such a realignment would 
enhance clinical and cost congruence of the procedure groupings. Other 
commenters objected to the reassignment of CPT code 63655 from APC 0225 
to APC 0040.
    Response: We agree with the proposal for creation of a new 
neurostimulator electrode implantation APC and have made the change. 
CPT codes 63655 (from APC 0225), 64575 (from APC 0040), 64577 (from APC 
0225), 64580 (from APC 0225) and 64581 (from APC 0040) have been 
reassigned to newly created APC 0061 (Laminectomy or incision for 
implantation of neurostimulators electrodes, excluding cranial nerve).
    See section IV. A. for our discussion of adjustments to median 
costs for device-dependent APCs. See Table 16 for the adjusted median 
costs for APCs 0040, 0225 and 0061 for CY 2006.
f. Neurostimulator Generator Implantation (APC 0222)
    Comment: Commenters indicated that the proposed payment for 
neurostimulator generator implantation is inadequate and that CMS 
should use external data to set the payment rates. They explained that 
if payment rates were not increased, providers would cease providing 
the services. They asked that CMS set the median cost at the CY 2005 
OPPS payment median inflated by the market basket.
    Response: The proposed payment for APC 0222 (Implantation of 
neurological device) was based on a median cost that was set at 85 
percent of the CY 2005 payment median. As with some other device-
dependent APCs, the median cost on which the CY 2006 OPPS payment rate 
will be based will be set at 90 percent of the CY 2005 OPPS payment 
median. See the discussion of device-dependent APCs in section IV.A of 
this preamble.
    Comment: Commenters objected to the payment for rechargeable 
neurostimulators under APC 0222 because they said that the payment rate 
for APC 0222 is inadequate for the payment of nonrechargeable devices, 
and that hospitals will not permit implantation of the rechargeable 
neurostimulators for this inadequate payment. They stated that CMS 
recognized the need for additional payment for rechargeable 
neurostimulators when it provided a new technology add-on payment under 
the IPPS for 2006, and that CMS should create a new category for 
rechargeable neurostimulators and should grant pass-through status for 
rechargeable neurostimulators for the CY 2006 OPPS.
    Response: CMS does not announce decisions regarding pass-through 
status in regulations. There are many new items and services that fall 
under existing categories and pass-through status for each is 
determined on the merits of the specific application. When and if pass-
through status for rechargeable neurostimulators is granted, it will be 
implemented through the OCE with creation of an appropriate category 
and status indicator assignment. Additions to the items qualifying for 
pass-through status are announced in quarterly updates of the OPPS 
claims processing and billing instructions sent to our contractors and 
posted on the CMS Web site.
g. Thoracentesis/Lavage (APC 0070)
    Comment: One commenter said that CPT code 32019 (Insert pleural 
catheter) should be assigned to APC 0652 (Insertion of intraperitoneal 
catheters) because the clinical and resource characteristics of APC 
0652 are more appropriate to CPT code 32019 than are the 
characteristics of APC 0070, the code's placement for CY 2005. The 
commenter indicated that APC 0070 is not an appropriate placement for 
CPT code 32019 because it is not like CPT code 32020 (tube thoracostomy 
with or without water seal) to which it is often compared and is 
assigned to APC 0070. The commenter stated that CPT code 32020 is a 
short term procedure, typically done at bedside with a single 
percutaneous incision, and uses a catheter with a simpler and different 
design. The commenter stated that CPT code 32019 is a long term 
procedure, typically done in a treatment room, using multiple incisions 
and subcutaneous tunneling, and a catheter with a more complex design. 
The commenter did not specifically describe the clinical or resource 
characteristics of APC 0652 that justify the conclusion that CPT code 
32019 is more appropriately placed in APC 0652.
    Response: We agree that the procedure reported by CPT code 32019 is 
likely more resource intensive than CPT code 32020 and other higher

[[Page 68610]]

volume codes in APC 0070. Therefore, we are reassigning CPT code 32019 
to APC 0427 (level III tube changes and repositioning) for the CY 2006. 
We do not agree that it is necessarily similar in resource use to the 
insertion of intraperitoneal catheter or cannula procedures currently 
assigned to APC 0652. We will examine the claims data for this code and 
review that decision when there are claims data for the code, which was 
new for CY 2004 and for which no cost data are available for use in the 
CY 2006 OPPS.
5. Other Services
a. Allergy Testing (APC 0370)
    A number of providers have expressed confusion related to the 
reporting of units for allergy testing described by CPT codes 95004 
through 95078. Most of the CPT codes in the code range are assigned to 
APC 0370 (Allergy Tests) for the CY 2005 OPPS. Nine of those CPT codes 
instruct providers to specify the number of tests or use the singular 
word ``test'' in their descriptors, while five of them do not contain 
such an instruction or do not contain ``tests'' or ``testing'' in their 
descriptors. Some providers have stated that the lack of clarity 
related to the reporting of units has resulted in erroneous reporting 
of charges for multiple allergy tests under one unit (that is, ``per 
visit'') for the CPT codes that instruct providers to specify the 
number of tests.
    In light of the variable hospital billing that may be inconsistent 
with the CPT code descriptors, we carefully examined the CY 2004 single 
and multiple procedure claims data for the allergy test codes that 
reside in APC 0370 to set the CY 2006 payment rates. Our examination of 
the CY 2004 claims data revealed that many of the services for which 
providers billed multiple units of an allergy test reported a 
consistent charge for each unit. Conversely, some providers that billed 
only a single unit of an allergy test reported a charge many times 
greater than the ``per test'' charge reported by providers billing 
multiple units of an allergy test.
    Our analysis of the claims data appeared to validate reports made 
by a number of providers that the charges reported on many of the 
single procedure claims represent a ``per visit'' charge, rather than a 
``per test'' charge, including claims for the allergy test codes that 
instruct providers to specify the number of tests. Because the OPPS 
relies only on these single procedure claims in establishing payment 
rates, we believed that this inaccurate coding would have resulted in 
an inflated CY 2006 median cost for services that were in the CY 2005 
configuration of APC 0370.
    Therefore, we proposed to move the allergy test CPT codes that 
instruct providers to specify the number of tests or use the singular 
word ``test'' in their descriptors from APC 0370 to proposed APC 0381 
(Single Allergy Tests) for CY 2006. We proposed to calculate a ``per 
unit'' median cost for proposed APC 0381 using a total of 306 claims 
containing multiple units or multiple occurrences of a single CPT code. 
Packaging on the claims was allocated equally to each unit of the CPT 
code. Using this ``per unit'' methodology, we proposed a median cost 
for APC 0381 of $11 for CY 2006. Because we believed the single 
procedure claims for the codes remaining in APC 0370 reflected accurate 
coding of these services, we proposed to use the standard OPPS 
methodology to calculate the median for APC 0370. Table 12 as published 
in the proposed rule (70 FR 42711) listed the proposed assignment of 
CPT codes to APC 0370 and proposed APC 0381 for CY 2006.
    We received one public comment concerning our proposed policy 
changes for allergy test procedures.
    Comment: One commenter supported our proposal to move the allergy 
test CPT codes into two APC configurations to differentiate between CPT 
codes that represent ``per visit'' and ``per test'' services.
    Response: We agree with the commenter that differentiating single 
allergy tests (``per test'') from multiple allergy tests (``per 
visit'') by assigning these services to two different APCs provides 
hospital coders with better clarity for billing these services and more 
accurately places these tests with like services sharing similar 
resource costs. Therefore, for CY 2006, we are finalizing our proposal 
to assign single allergy tests to newly established APC 0381 and 
maintaining multiple allergy tests in APC 0370. We expect that the 
improved clinical and resource homogeneity of these APCs, along with 
improved hospital coding of these services, will result in more 
accurate claims data for setting the CY 2008 payment rates for these 
services. In the meantime, for CY 2006, we are finalizing our proposal 
to calculate a ``per unit'' median cost for APC 0381 using a total of 
340 claims containing multiple units or multiple occurrences of a 
single CPT code. Using this ``per unit'' methodology, we are setting 
the payment rate for APC 0381 based on a median cost of $11 for CY 
2006. Because we believe the single procedure claims for the codes 
remaining in APC 0370 reflect accurate coding of these services, we are 
finalizing our proposal to use the standard OPPS methodology to 
calculate the median for APC 0370. Table 15 lists the assignment of CPT 
codes to APCs 0370 and 0381 for CY 2006. We will be providing billing 
guidance to hospitals in CY 2006 clarifying the billing of allergy 
testing services under the OPPS that should be reported with charges 
per test rather than per visit, so that the accuracy of hospital claims 
data improves and allows us in the future to calculate median costs for 
both APCs 0370 and 0381 using our standard OPPS process.

 Table 15.--Assignment of CPT Codes to APC 0370 and APC 0381 for CY 2006
------------------------------------------------------------------------
                APC 0370                             APC 0381
------------------------------------------------------------------------
95056, Photosensitivity tests..........  95004, Percutaneous allergy
                                          skin tests.
95060, Eye allergy tests...............  95010, Percutaneous allergy
                                          titrate test.
95078, Provocative testing.............  95015, Intradermal allergy
                                          titrate-drug/bug.
95180, Rapid desensitization...........  95024, Intradermal allergy
                                          test, drug/bug.
95199U, Unlisted allergy/clinical        95027, Intradermal allergy
 immunologic service or procedure.        titrate-airborne.
                                         95028, Intradermal allergy test-
                                          delayed type.
                                         95044, Allergy patch tests.
                                         95052, Photo patch test.
                                         95065, Nose allergy test.
------------------------------------------------------------------------


[[Page 68611]]

b. Apheresis (APC 0112)
    Comment: Several commenters commended our proposal to reassign CPT 
code 36515 (Therapeutic apheresis; with extracorporeal immunoadsorption 
and plasma reinfusion) from APC 0111 (Blood product exchange) to APC 
0112 (Apheresis, Photopheresis, and Plasmapheresis) for CY 2006. These 
commenters stated that the resource requirements and the clinical 
characteristics of CPT code 36515 more closely resemble the services 
assigned to APC 0112. However, these commenters expressed concern that 
the proposed 25 percent reduction in payment for APC 0112 (from $2,127 
in CY 2005 to $1,590 proposed for CY 2006) will not cover the costs 
associated with the disposable supplies, specially trained medical 
staff, and equipment used in conjunction with the services assigned to 
APC 0112 and described by CPT codes 36515, 36516 (Therapeutic 
apheresis; with extracorporeal selective adsorption or selective 
filtration and plasma reinfusion), and 36522 (Photopheresis, 
extracorporeal). For example, commenters explained that the cost of the 
disposable supplies alone for CPT codes 36515 and 36516 nearly equals 
the proposed payment for APC 0112. One commenter provided practice 
expense information from the Medicare Physician Fee Schedule to 
substantiate supply costs of over $1,400 for CPT codes 36515 and 36516 
and over $900 for CPT code 36522. Many commenters alleged that over 
half the hospitals reporting claims for CPT codes 36515 and 36516 in CY 
2004 did not fully reflect the costs of the disposables in their 
charges for the procedure. Some of these commenters stated that 
hospitals that charge separately for the disposables are likely to 
charge more accurately for the full procedure than hospitals that 
bundle the entire costs of the disposable supplies into their charge 
for the procedure. These commenters urged that CMS set the payment rate 
for APC 0112 based only on claims where separate charges for supplies 
have been identified. Other commenters recommended that we exclude the 
CY 2004 claims data for CPT codes 36515 and 36516 and set the payment 
rate for APC 0112 based solely on the claims for CPT code 36522, whose 
proposed CPT code median cost appeared to be accurate to the majority 
of commenters. In addition, several commenters urged that we reexamine 
our calculation of the median cost for APC 0112 for errors in the 
computation, due to their observation that the proposed median cost of 
APC 0112 was significantly lower than the proposed median cost for CPT 
code 36522, which comprised 83 percent of the single claims used to set 
the proposed payment rate for APC 0112.
    One commenter noted that CPT code 36516 is utilized for billing 
LDL-apheresis treatments, and expressed concern that only 40 percent of 
the CY 2004 claims used to calculate the proposed payment for CPT code 
36516 actually reported diagnoses consistent with LDL-apheresis 
treatments on the claim. This commenter provided a list of hospitals 
which the commenter believed to be misreporting CPT code 36516, based 
on the commenter's experience as a distributor and knowledge of the 
market, and requested that we exclude the claims for CPT codes 36515 
and 36516 submitted by these providers when calculating the payment 
rate for APC 0112. Another commenter provided a detailed analysis of 
the claims for CPT codes 36515, 36516, and 36522 that we used to 
calculate the proposed payment rate for APC 0112. Based on this claims 
analysis, of the 24 providers that billed CPT code 36515, 29 percent 
reported costs for the entire procedure at or below $170, and 67 
percent reported medical supply costs at or below $1,412. The commenter 
also noted that nearly half of the single claims for CPT code 36515 
were not billed with ICD-9 codes that supported the medical necessity 
of protein A column apheresis, leading the commenter to conclude that 
such providers were miscoding the services they performed. For 
instance, the commenter suspected that several hospitals may have 
incorrectly billed CPT code 36515 when reporting the collection of 
venous blood by venipuncture (CPT code 36415) based on the charges 
reported by these hospitals matching a typical charge for venipuncture. 
Further claims analysis also revealed that, of the 46 providers that 
billed CPT code 36516, 63 percent reported medical supply costs at or 
below $1,485. Furthermore, the commenters said that only 44 percent of 
the single claims for CPT code 36516 were billed with ICD-9 diagnosis 
codes that supported the medical necessity of LDL-apheresis. The 
commenter concluded that the underreporting of costs and assignment of 
inappropriate ICD-9 diagnosis codes to claims reporting CPT codes 36515 
and 36516 were strong indicators that many providers failed to include 
the charges for medical supplies on the claims for CPT codes 36515 and 
36516 or miscoded the services they provided.
    Several commenters suggested that because the procedures assigned 
to APC 0112 utilize device systems to modify or selectively remove 
agents from the blood, these services should be treated in a manner 
similar to either device dependent APCs or blood and blood products. 
For instance, commenters recommended that we apply the same methodology 
to APC 0112 as we proposed to apply to blood and blood products, 
limiting the decrease in median cost to 10 percent on the basis that 
the services assigned to APC 0112 could be considered closely related 
to blood and blood products. Alternatively, these commenters suggested 
that we should consider treating APC 0112 as a device dependent APC, 
limiting the decrease in median cost to 15 percent on the basis that 
the device systems are integral to the procedures assigned to APC 0112 
and comprise a significant cost component of these procedures. One of 
these commenters urged that we add APC 0112 to the list of device 
dependent APCs, and set the payment floor at 100 percent of the CY 2005 
payment rate plus the market basket update for all device dependent 
APCs.
    Response: We appreciate commenters' concerns that we use accurate 
and complete claims data to develop the median cost to set the payment 
rate for APC 0112 for CY 2006. In response to requests by several 
commenters that we reexamine our calculation of the median cost for APC 
0112, we closely studied the single claims charge and cost 
distributions for CPT codes 36515, 36516, and 36522, those single 
claims we used to set the payment rate for APC 0112. First, we noted 
that we had 4,828 single bills drawn from a total of 6,071 bills for 
services in APC 0112, allowing us to use approximately 80 percent of 
all claims in establishing the median cost for APC 0112. This large 
percentage of single bills held true for each of the 3 CPT codes 
assigned to the APC as well. The availability of almost 5,000 single 
bills for rate setting, a 15 percent increase over the number of single 
bills available for the CY 2005 OPPS update, increases our confidence 
in the accuracy of the median cost of APC 0112 calculated for CY 2006.
    Next, we confirmed that we made no errors in the calculation of the 
APC median cost. The apparent inconsistency between the relatively high 
median cost of CPT code 36522, which provided the majority of single 
claims for APC 0112, and the relatively lower APC median cost was 
explained by the observed distribution of costs of single claims for 
all of the services assigned to APC 0112. Almost half of the costs of 
single claims for CPT code 36522 are closer to the APC median. The cost 
of single claims for CPT code

[[Page 68612]]

36522 at the 45th percentile is $1,597.45. We applied all of our usual 
processes, including standard trimming, to the calculation of the APC 
median cost.
    In our analysis of the distributions of costs from claims for all 
three CPT codes assigned to APC 0112, we observed that CPT code 36515, 
in particular, had some claims with very low costs of less than $200 up 
through the 50th percentile of claims costs. While, in the commenters' 
opinions, claims with even higher costs could not have represented the 
full costs of the procedures, we were not confident that we had reason 
to exclude claims with higher costs in calculating the median cost of 
APC 0112. Therefore, we identified 12 hospital providers submitting 
claims for CPT code 36515 with the lowest fifteen percent of costs and 
then recalculated the median cost for APC 0112, excluding all claims 
for CPT code 36515 reported by these 12 providers. We found essentially 
no change in the median cost of APC 0112 in this recalculation, as 
compared with its median cost based on all single claims.
    Because commenters suggested that we set the APC median cost using 
only claims with medical supply revenue code charges, we proceeded to 
analyze all single claims for APC 0112 for the presence of separate 
line item charges under revenue codes 270 (Medical/Surgical Supplies) 
and 272 (Sterile Supplies) that could most likely represent separate 
charges for the costly disposables that commenters indicated are 
required for all 3 CPT codes assigned to the APC. The median cost for 
claims with medical supply revenue code charges is higher, at $2,800, 
compared with the median cost for claims without medical supply revenue 
code charges, $1,400. However, we do not believe it is appropriate to 
subset the claims based on the presence of medical supply revenue code 
charges for calculating the median APC cost for several reasons. First, 
we noted that between 80 and 90 percent of the single claims for each 
CPT code and, consequently, of all single bills used to estimate the 
median cost for APC 0112 did not have separate charges under one of the 
two specified revenue codes. This is fully consistent with our past 
guidance to hospitals that it is appropriate to bundle the costs of all 
supplies (excluding implantable devices with active device codes) into 
the line item charges for the procedures with which they were used. For 
those claims billed with charges in the 270 and 272 medical supply 
revenue codes, we observed that the specific median cost associated 
with those revenue codes was only $349. Because this median cost is 
well below the approximately $900-1,400 cost commenters expected for 
the disposable supplies, we are not convinced that the bills with 
separate revenue code charges are truly more reflective of the full 
costs of the apheresis procedures. Finally, we observed that there were 
actually higher total costs in the distribution of those claims without 
separate billing of revenue code charges, up to $12,296 in comparison 
with a maximum of $10,131 for those claims with separate revenue codes 
charges. Considering the small percentage of providers reporting 
separate supply charges for CPT codes 36515, 36516, and 36522 under 
revenue codes 0270 and 0272, and the low median cost for such revenue 
code charges, the majority of providers appear more likely to have 
included their disposable supply charges in their overall charges for 
the procedures rather than to have reported such charges under a supply 
revenue code. We have no reason to believe, based on our analysis, that 
the claims with separate charges for supplies are more correctly coded 
or more accurately reflective of the costs of services assigned to APC 
0112.
    In conclusion, we are not making any adjustments to our standard 
processes for developing APC median costs for CY 2006 for APC 0112. We 
will not screen claims for the presence of specified diagnoses that the 
commenters feel are appropriately treated with these procedures and 
assume that all other claims are miscoded. The three services treat a 
number of different medical conditions, and while there are some local 
coverage policies for the procedures, it would be difficult to identify 
the correct ICD-9 diagnosis coding for those claims reflecting all of 
the cases of appropriate utilization of these services. We are not 
calculating the payment rate for APC 0112 based solely on those claims 
where separate charges for supplies have been identified. Although we 
recognize that some of the charges reported for CPT codes 36515 and 
36516 in particular are unexpectedly low, we disagree with those 
commenters who asserted that the hospital claims data for CPT codes 
36515 and 36516 are flawed to the extent that would justify discarding 
all such claims and basing the payment rate for APC 0112 solely on 
claims for CPT code 36522. We will not exclude all claims for two of 
the three procedures assigned to APC 112 to calculate the APC's median 
cost, because we believe that the APC median cost should reflect the 
variable costs of all services assigned to it. Consistent with details 
provided in the comments, we do not believe that the costs of 
procedures described by CPT codes 36515, 36516, and 36522 are the same, 
as the services are each provided using very specific disposable 
supplies for patients with different clinical conditions. In addition, 
we do not agree with those commenters who argued that the services 
described by CPT codes 36515, 36516, and 36522 should be treated in a 
manner similar to either device dependent APCs or blood and blood 
products by mitigating their payment reductions. We do not consider a 
procedure requiring a disposable supply to be a device dependent APC, 
which utilizes implantable devices. In addition, we do not believe that 
the data concerns regarding these procedures that treat the blood are 
similar to the supply and availability challenges associated with 
maintaining the nation's blood supply. Therefore, for CY 2006, we are 
applying our standard OPPS rate-setting methodology to all single 
claims for APC 0112, setting the payment rate for APC 0112 based on a 
median cost of $1,568.
c. Audiology (APCs 0364, 0365, and 0366)
    Comment: One commenter, an association representing audiologists, 
requested more detailed explanation for several proposed movements of 
CPT codes among APCs. We proposed for CY 2006 to make the following APC 
migrations: CPT codes 92533 (audiometry, air & bone) and 92572 
(staggered spondaic word test) from APC 0364 to APC 0365; CPT code 
92561 (Bekesy audiometry, diagnosis) from APC 0365 to APC 0364; and CPT 
code 92577 (Stenger test, speech) from APC 0365 to APC 0366. The 
commenter did not object to the changes.
    Response: With respect to proposed APC reassignments of services 
that are not specifically discussed in the proposed rule, in general we 
proposed changes to improve the clinical and resource homogeneity of 
the involved APCs, and, in particular, to address violations of the two 
times rule resulting from variable median costs.
    In this instance, CPT code 92561 was moved from the Level II 
Audiometry APC to the Level I Audiometry APC because the data from CY 
2004 hospital claims showed that the code-specific median cost of $19 
for CPT code 92561 was most compatible with the median cost of APC 
0364, at $27. To leave the code in APC 0365 would create a significant 
overpayment, and there was another clinically appropriate APC

[[Page 68613]]

available. A similar rationale applied to CPT code 92577, whose code-
specific median cost of $108 was more coherent with the median cost of 
APC 0366 (Level III Audiometry) of $100 than the median cost of the 
Level II APC at $80. While we excepted APC 0364, the CY 2005 APC 
assignment for CPT code 92553, from the two times rule for CY 2005, we 
proposed to move CPT code 92553 to APC 0365 for CY 2006 to eliminate 
our need to except APC 0364 from the two times rule for CY 2006. When 
compared with the median costs of other procedures in APC 0365, the 
median cost of CPT code 92553 of $43 was reasonably consistent with the 
median costs of other codes assigned to APC 0365 and to the overall APC 
median cost of $71. Due to this code's significant volume of single 
claims and stable median costs, we believed that it was appropriate to 
propose its reassignment based on both clinical and hospital resource 
considerations. We are finalizing our APC assignments for CPT codes 
92561, 92577, and 92553 as proposed for CY 2006.
    We proposed to move CPT code 92572 (staggered spondaic word test) 
from APC 0364 to APC 0365 for CY 2006 because we believed that its 
resource requirements, as reflected in hospital claims data, were more 
consistent with other services assigned to APC 0365 than to procedures 
assigned to APC 0364. CY 2003 hospital claims data for CPT code 92572 
revealed a median cost of about $100 based on 19 single claims. CY 2004 
claims data, based on 10 single claims, yielded a median cost of about 
$167. Although the median does not appear to be as stable for this code 
as the others discussed nor is the volume of claims large, upon review 
of final CY 2004 hospital claims data in response to this comment and 
examination of the clinical characteristics of the service, we believe 
that CPT code 92572 is most appropriately assigned to APC 0366 for CY 
2006. Therefore, we will not finalize our proposal to move CPT code 
92572 to APC 0365, but will instead reassign the service to APC 0366 
for the CY 2006 OPPS.
d. Bone Marrow Harvesting (APC 0111)
    Comment: Several commenters stated that the proposed payment of 
$735 for CPT code 38230 (Bone marrow harvesting for transplantation) 
does not adequately cover the costs of providing this service. These 
commenters called our attention to the large difference in the proposed 
median cost of $1,209 for CPT code 38230 and the proposed median cost 
of $747 for APC 0111, where CPT code 38230 resides. Commenters also 
noted the volatility of the CPT code median as a result of the 
extremely low frequency of 9 claims, noting that the costs of these 
claims ranged from $140 to $66,770. Commenters strongly urged CMS to 
reassign CPT code 38230 from APC 0111 (Blood product exchange) to APC 
0123 (Bone marrow harvesting and bone marrow/stem cell transplant) to 
more accurately reflect the high cost of this procedure and to improve 
the clinical homogeneity of the two APCs, stating that the APC title 
for APC 0123 is more applicable to CPT code 38230 than the title of APC 
0111.
    Response: Hospitals have reported a consistently low median costs 
for CPT code 38230 for the past several years, prompting us to reassign 
this service to a lower paying APC, from APC 0123 to APC 0111, for CY 
2005. However, closer analysis of this code-specific low median cost 
leads us to suspect that a number of providers are likely billing this 
code for services that are not described by CPT code 38230, bone marrow 
harvesting for transplantation. Considering the typical clinical 
characteristics of the service, we would expect the costs of the 
necessary hospital resources to more closely approximate the median 
costs of services assigned to APC 0123 for CY 2006. Therefore, we will 
return CPT code 38230 to APC 0123 for CY 2006. However, we will 
reevaluate the appropriateness of this APC assignment during the OPPS 
update for CY 2007. In the meantime, we advise providers to exercise 
greater care when reporting CPT code 38230 to ensure that this code is 
billed correctly only for services described by the CPT code and that 
all costs associated with providing the bone marrow harvesting 
procedure are included in charges on the claims for the service.
e. Computer Assisted Navigational Procedures
    Comment: Two commenters expressed concern about computer assisted 
navigation for orthopedic procedures (CPT codes 0054T, 0055T, and 
0056T). Both commenters were concerned that CMS had not assigned these 
procedures to an APC for OPPS payment, but instead had proposed their 
status indicators as ``B'' while another computer assisted navigational 
procedure, CPT code 61795 (Stereotactic computer assisted volumetric 
(navigational) procedure, intracranial, extracranial, or spinal), had 
previously been assigned status indicator ``S'' in APC 302 (Level III 
Radiation Therapy). Both commenters recommended that orthopedic 
computer assisted navigational procedures should be assigned to APC 
0302 with the other computer assisted navigational procedures, or 
alternatively each procedure (CPT codes 61795, 0054T, 0055T, and 0056T) 
should be placed in a new clinical APC with a payment rate equaling the 
payment rate of APC 0302.
    Response: We agree with the commenters that these computer assisted 
navigational procedures share a common technological theme in their 
clinical use during surgical procedures and may use comparable hospital 
resources. We, therefore, will place CPT codes 0054T, 0055T, and 0056T 
in APC 0302 with CPT 61795 for CY 2006. We will also give APC 0302 a 
new name, ``Computer Assisted Navigational Procedures,'' because the 
APC contains only these four services and is thus most appropriately 
described by that title.
f. Hyperbaric Oxygen Therapy (APC 0659)
    When hyperbaric oxygen therapy (HBOT) is prescribed for promoting 
the healing of chronic wounds, it typically is prescribed on average 
for 90 minutes, which would be billed using multiple units of HBOT to 
achieve full body hyperbaric oxygen therapy. In addition to the 
therapeutic time spent at full hyperbaric oxygen pressure, treatment 
involves additional time for achieving full pressure (descent), 
providing air breaks to prevent neurological and other complications 
from occurring during the course of treatment, and returning the 
patient to atmospheric pressure (ascent). The OPPS recognizes HCPCS 
code C1300 (Hyperbaric oxygen under pressure, full body chamber, per 30 
minute interval) for HBOT provided in the hospital outpatient setting.
    We explained in the August 16, 2004 proposed rule (69 FR 50495) 
that our CY 2003 claims data revealed that many providers were 
improperly reporting charges for 90 to 120 minutes under only one unit 
rather than three or four units of HBOT. This inaccurate coding 
resulted in an inflated median cost of $177.96 for HBOT, derived using 
single service claims and ``pseudo'' single service claims. Because of 
these single claims coding anomalies, we proposed to calculate a ``per 
unit'' median cost for APC 0659, using only multiple units or multiple 
occurrences of HBOT, excluding claims with only one unit of HBOT and 
excluding packaged costs. To convert HBOT charges to costs, we used the 
CCR from the respiratory therapy cost center when available; otherwise, 
we used the hospital's overall CCR. Using this ``per unit'' 
methodology, we proposed a median cost for APC 0659 of $82.91 for CY 
2005.

[[Page 68614]]

    In the November 15, 2004 final rule with comment period (69 FR 
65758), we agreed with commenters that there was sufficient evidence 
that the CCR for HBOT was not reflected solely in the respiratory 
therapy cost center; rather, the CCR for HBOT was reflected in a 
variety of cost centers. Therefore, we calculated a ``per unit'' median 
cost of $93.26 for HBOT, using only multiple units or multiple 
occurrences of HBOT and each hospital's overall CCR.
    Our examination of the CY 2004 single procedure claims filed for 
HCPCS code C1300 revealed similar coding anomalies to those encountered 
in the CY 2003 single procedure claims data. Therefore, for CY 2006 
rate-setting, we recalculated a ``per unit'' median cost for HCPCS code 
C1300 using only multiple units or multiple occurrences of HBOT and 
each hospital's overall CCR, which is the same methodology we used for 
setting the CY 2005 payment rate for HBOT. Excluding claims with only 
one unit of HBOT, we used a total of 41,152 claims to calculate the 
proposed median for APC 0659 for CY 2006. Applying the methodology 
described above, we proposed a median cost for APC 0659 of $93.37 for 
CY 2006.
    We received several public comments concerning our proposed APC 
payment for HBOT.
    Comment: Several commenters approved of our decision to rely on 
each hospital's overall CCR rather than the respiratory therapy CCR in 
our calculation of HBOT median costs. However, the commenters noted 
that most hospitals providing HBOT services report the costs and 
charges associated with providing this service on a separate line of 
their cost report. These commenters further encouraged us to use the 
CCR specific to HBOT for hospitals that report HBOT separately. They 
also asked CMS to encourage hospitals not reporting costs and charges 
for HBOT separately, to do so in the future.
    Response: Unfortunately, the Healthcare Cost Report Information 
System (HCRIS), the electronic database of the Hospital Cost Report 
(CMS-2552-96) that we use to estimate costs from charges, rolls up 
costs and charges on each hospital's cost report into a standard list 
of cost centers. Because HBOT is not included on the standard list of 
cost centers, CMS does not have readily available information about the 
specific costs and charges that each institution garners in providing 
HBOT services. Until last year, we had hypothesized that most hospitals 
providing HBOT services reported the costs and charges for those 
services as a separate line item in their respiratory therapy cost 
center. Commenters convinced us that hospitals did not report their 
HBOT costs and charges in a uniform location on their cost report. In 
the final rule for CY 2005, we used the overall CCR for each hospital 
rather than the respiratory therapy CCR to calculate the median cost 
for HBOT (APC 0659). While we could encourage hospitals to report their 
costs and charges for HBOT separately, at this time extra effort by 
hospitals would not allow us to improve the accuracy of our HBOT median 
cost calculation because we lose line-item specificity when the data is 
entered into HCRIS.
    Comment: One commenter commissioned a study to analyze our rate-
setting methodology and conducted an independent survey of hospitals 
that provide HBOT services. Surveys conducted in CYs 2004 and 2005 
asked all hospitals providing HBOT services to identify the standard 
cost center associated with the line on their cost report where the 
hospital reports costs and charges for HBOT: 206 hospitals, or 44 
percent of all hospitals providing HBOT services, responded to one of 
the surveys. The commenter believes that the survey results are 
generalizable to all hospitals providing HBOT services because the 
demographics of those hospitals not responding to the surveys are 
comparable to those responding to the surveys. For each of the 
responding hospitals, the survey results provided the standard cost 
center on each hospital cost report. The study calculated an HBOT CCR 
for each hospital based on the costs and charges in the associated 
standard cost center, not just the costs and charges for HBOT. On the 
basis of these results, the study then generalized an HBOT CCR to the 
56 percent of hospitals not responding to the surveys. Specifically, 
the study simulated HBOT CCRs for each of the non-responding hospitals 
by applying a methodology that generalized to the non-responding 
hospitals HBOT-specific findings from similar hospitals. The study 
results led the commenter to conclude that the proposed median cost of 
$93.37 was too low, and that a more accurate estimate of median cost 
per unit is $118.94. On the basis of this analysis the commenter 
requested that CMS use the median cost of $118.94 to set the payment 
rate for APC 0659. The commenter noted that APC 0659, where the HCPCS 
code for HBOT (C1300) is assigned, is unusual as it is one of only a 
few APCs that contain only one HCPCS code. They concluded that as no 
averaging of the costs of services occurs, any changes in the median 
cost for C1300 in APC 0659 have a particularly great impact on the APC 
median, as compared to changes in the median cost for a procedure 
assigned to an APC to which multiple services are assigned.
    Response: We receive many submissions of external data from 
commenters supporting their requests for higher median cost estimates 
for specific procedures. In many cases, submitted data have not met the 
minimum standards required for setting payment rates. We have 
previously provided preferred characteristics of external data to be 
submitted in comments regarding devices (68 FR 47987). While we have 
not specifically provided criteria for non-device external data, the 
subset of our published characteristics that could be applicable to a 
service such as HBOT include the public availability of the data, its 
representativeness of a diverse group of hospitals both by location and 
type, and its identification of its data sources. As part of the CY 
2005 study, hospitals gave their consent for their identification and 
cost report information to be made public, an essential characteristic 
of data submitted as part of a public comment. The submitted HBOT CY 
2005 survey data represent a varied group of 120 hospitals, both by 
location and type of hospital, as well as 31 percent of the population 
of total hospitals providing HBOT services according to CY 2004 
hospital claims. Inclusion of HBOT survey data from the CY 2004 survey 
increases the response rate to 44 percent. The survey results provide 
us with the specific standard cost center in which costs and charges 
for HBOT are located for the responding hospitals, allowing us to 
relate the HBOT charge data to cost-to-charge information provided in 
hospital cost reports for these hospitals. We are appreciative of this 
study in that it provides us with some useful information as we examine 
our payment for HBOT services.
    These survey results based on this modest response may, therefore, 
be representative of the 464 hospitals that submitted HBOT claims to 
the OPPS in CY 2004. However, only a small minority of OPPS hospitals 
actually provides HBOT services, and there is such significant regional 
variation in the frequency of billing of hospital outpatient HBOT 
services that it is unlikely to be fully explained by the different 
health characteristics of regional populations. We understand that HBOT 
may also be provided in freestanding centers, and the business 
decisions around its location may depend upon the local healthcare 
infrastructure. Therefore, while the

[[Page 68615]]

responding hospitals may be similar to the non-responding hospitals 
with respect to hospital category and geographic location, we are not 
confident that these characteristics alone signify that the minority of 
responding hospitals is truly reflective of the relatively small number 
of OPPS providers billing for HBOT. In addition, we are not certain 
that comparability of hospitals with respect to their category and 
geographic location is related to individual hospital decisions about 
where to include HBOT costs and charges on their Medicare cost reports. 
Therefore, we are not convinced that it would be appropriate to 
generalize these HBOT cost center findings to non-responding hospitals 
to calculate an adjusted payment rate for HBOT.
    In addition to our concern about generalizability based on the 
methodology discussed above, we have several additional reservations 
about employing the approach recommended by the commenter without the 
benefit of additional comment from other parties. First, employing this 
approach may establish an important precedent, which may well be cited 
by other commenters concerned with the median costs of other services. 
The OPPS is a prospective payment system that relies upon the coherent 
grouping of services that share clinical as well as resource 
utilization characteristics and the packaging of many ancillary 
services to determine payments. We are concerned that differentially 
employing methods that depend on additional external collection of 
information from hospitals may have unintended and potentially negative 
consequences in a payment system based on averages and relative values. 
It stands to reason that, as in the case of HBOT, commenters will only 
submit special surveys and proposals to refine rate-setting when they 
have at least a strong reason to believe that such customized methods 
will increase the rates for the specific services in which they are 
interested. In a budget-neutral payment system based on relative 
weights, this poses the risk that using this specific external 
information for select services will actually distort the process of 
establishing the relative weights in favor of some services but to the 
disadvantage of other services where such information is not available 
or not as potentially influential based on the APC assignments of those 
services. In a relative system such as the OPPS, it may be more 
important to employ a consistent set of data than to adopt specially 
``enhanced'' data and methods for some services, but not for all 
services generally. Indeed, a consistent data set may be more likely to 
yield accurate relative values than a mixed data set consisting of both 
values calculated from hospital claims data and values determined by 
enhanced methods.
    Lastly, our capacity to review, evaluate, and adapt special 
approaches to increase payment levels for individual services in the 
OPPS is necessarily limited. Based on all of our concerns previously 
discussed, it is consequently important that we obtain some idea of the 
extent of other possible requests for use of special methods and non-
claims based data to increase payment levels for particular services or 
groups of services before setting such a precedent for one specific 
OPPS service, where there appear to be no pressing access concerns 
based on our OPPS payment rates to date. Our hospital claims data 
reveal steadily increasing frequencies of HBOT claims, from 101,843 
services in CY 2002, to 188,604 services in CY 2003, and once again to 
242,558 services in CY 2004. This more than doubling of HBOT services 
in hospital outpatient departments over a 2-year time period indicates 
that Medicare beneficiaries are unlikely to be experiencing difficulty 
in accessing medically necessary HBOT services in the context of the 
OPPS payment rates for HBOT.
    Before we engage in further rulemaking, we therefore specifically 
invite input on other situations where special approaches may be 
appropriate and where high quality external data might be made 
available. We are interested in the possible merits of these other 
approaches and in potential criteria that we might use to assess when a 
special methodology should be employed. We believe these comments can 
help us to develop options for consideration for the CY 2007 OPPS 
update. In the meantime, we intend to continue our efforts to improve 
the precision of the OPPS relative weights by increasing our use of 
multiple procedure claims and refining our cost estimation process.
    While we solicit additional public comment on this subject matter, 
for CY 2006 rate-setting we are finalizing our proposal to recalculate 
a ``per unit'' median cost for HCPCS code C1300 using only multiple 
units or multiple occurrences of HBOT and each hospital's overall CCR, 
which is the same methodology we used for setting the CY 2005 payment 
rate for HBOT. Excluding claims with only one unit of HBOT, we used a 
total of 47,101 claims to calculate the final median cost for APC 0659 
for CY 2006. Applying the methodology described above, we are setting 
the final payment rate for APC 0659 based on a median cost of $90.09 
for CY 2006.
    Comment: One commenter pointed out that they had difficulty 
replicating CMS's median cost estimate, in part because the public 
dataset that we make available included cost data calculated with the 
respiratory therapy CCR, that the calculation of the ``overall CCR'' 
was not sufficiently defined in regulations to be replicated, and that 
using the cost centers marked with a ``Y'' on the ``Revenue Code to 
Cost Center Crosswalk Description'' did not yield an overall CCR 
comparable to the one that we used.
    Response: We acknowledge the commenter's concern regarding the 
accessibility and quality of data available to replicate CMS's median 
cost calculations. While we believe that we have fulfilled our public 
obligation to provide access to data to support public comments, users 
of the data can sometimes identify improvements. We agree that the 
overall CCR calculation should be more transparent. We have provided 
additional information about this calculation both in the final rule 
under our discussion of APC median calculations and on our Web site. We 
also agree that we should have placed the hospital specific overall CCR 
to estimate costs for HBOT on our public use file. We will remedy this 
for the CY 2007 rulemaking process.
g. Ophthalmology Examinations (APC 0601)
    Comment: One commenter, representing eye physicians and surgeons, 
agreed with our decision to exempt the APC 0235 (Level I Posterior 
Segment Eye Procedures) from the 2 times rule for CY 2006. The 
commenter also agreed with our proposal to move several other 
ophthalmology procedures into higher paying APC groups (CPT codes 
65265, 65285, 66220, 67025, 67027, 67036, 67038, 67039, and 67121). See 
70 FR 42704, July 25, 2005 for a table including the proposed changes.
    However, this commenter disagreed with the proposal to move CPT 
codes 92004 (eye exam, new patient) and 92014 (eye exam, established 
patient) from APC 0602 (High Level Clinic Visits) to APC 0601 (Mid 
Level Clinic Visits). The commenter urged CMS to reconsider this 
decision and keep these codes in APC 0602.
    Response: At its February 2005 meeting, the APC Panel recommended 
that CMS restructure APCs 0601 and 0602 to eliminate violations of the 
two times rule. At the time of the proposed rule for CY 2006, the 
available median cost data for these two codes showed

[[Page 68616]]

that the hospital resources for both codes were more homogenous with 
other services assigned to the mid level clinic visit APC 0601, as 
compared to services assigned to the high level clinic visit APC 0602. 
Keeping these codes in APC 0602 for CY 2006 would have resulted in 
significant overpayments for both codes based on historical hospital 
claims data.
    We now have additional claims data, reflecting more complete median 
costs for both codes from CY 2004 claims. Upon review of CPT code 
92004, its median cost of $82 based on almost 21,000 single claims is 
more consistent with the median costs of other services assigned to APC 
0602 ($88), and assigning this code to APC 0602 for CY 2006 would not 
cause a two times rule violation. We, therefore we will not finalize 
our CY 2006 proposal to move CPT code 92004 to APC 0601, but instead we 
will reassign CPT code 92004 back to APC 0602 for CY 2006. However, the 
median cost of CPT code 92014 ($67) based on nearly 100,000 single 
claims remains more consistent with the median cost of APC 0601 ($60). 
Based on OPPS hospital claims data, hospitals are consistently 
reporting higher costs for comprehensive eye exams for new patients in 
comparison with comprehensive eye exams for established patients. These 
differences in costs likely result from the additional hospital 
resources required to provide eye exams to new patients, in keeping 
with current clinical practice. To return CPT code 92014 to APC 0602 
for CY 2006 would significantly overpay comprehensive eye examinations 
for established patients. We therefore finalize our CY 2006 proposal to 
assign CPT code 92014 to APC 0601.
h. Pathology Services
    Comment: One commenter supported the proposed status indicator of B 
for HCPCS codes D0472-D0999 because the commenter indicated that 
providers should bill the appropriate CPT code in place of these codes. 
The commenter urged CMS to require its contractors to deny claims for 
HCPCS codes D0472-D0999.
    Response: We agree that these HCPCS codes duplicate existing CPT 
codes and therefore have designated them as not payable or recognized 
under OPPS. As a practical matter, this change in status indicator has 
little or no impact on providers because of this entire code series, in 
all of CY 2004, only 3 units of HCPCS code D0999 were billed by 
hospitals under OPPS. This CY 2006 final rule with comment period 
applies to payments under the OPPS and a comment that we should deny 
claims for these codes submitted by all other providers in all other 
settings is outside the scope of this final rule.
    Comment: One commenter objected to payment of CPT code 86586 under 
the OPPS and asked that we place it on the clinical laboratory fee 
schedule for CY 2006 because currently, the only source of payment is 
under the OPPS and therefore independent laboratories cannot be paid 
for it.
    Response: We agree with this comment and we will pay for this code 
under the clinical lab fee schedule in CY 2006. This code will 
therefore not be paid under the OPPS in 2006.
    Comment: One commenter objected to payment being made under the 
OPPS for CPT codes 80500-80502 and 88187-88189, which are for physician 
interpretation and report services. The commenter asked that we change 
their status indicators to ``M'' so that the codes would not be 
billable to a fiscal intermediary nor payable under the OPPS. The 
commenter believed that these services should only be paid to 
physicians on claims submitted by carriers.
    Response: These services currently have status indicator ``X'' and 
are separately paid under OPPS. We believe that payment to hospitals is 
appropriate because of the resources hospitals furnish for the 
physician to be able to perform these services in a hospital (that is, 
space, computer, office supplies, medical records system).
i. Photodynamic Therapy of the Skin (APC 0013)
    Comment: One commenter supported the proposed move of CPT code 
96567 (Photodynamic Therapy of the Skin) from APC 0013, with a proposed 
payment rate of $66, to APC 0016 with a proposed payment rate of $153. 
The commenter also expressed appreciation that the drug used with this 
procedure (HCPCS code J7308) is paid separately and not bundled into 
the payment for the procedure. The commenter asked that CMS continue to 
monitor the median costs reported by hospitals so that Medicare 
beneficiaries may continue to have access to this procedure and the 
drug associated with the procedure.
    Response: We appreciate the thoughtful comments submitted by this 
pharmaceutical manufacturer. We will finalize the placement of CPT code 
96567 in APC 0016 as proposed. As always, we will continue to monitor 
claims data submitted by hospitals to ensure appropriate payment for 
all procedures.
j. Wound Care
    As stated in the July 25, 2005 proposed rule (70 FR 42692), based 
upon a recommendation from the APC Panel we referred CPT code 97602 
(non-selective wound care) for MPFS evaluation of its bundled status in 
relation to services provided under the OPPS. In the proposed rule for 
CY 2006, we assigned CPT code 97602 a status indicator of ``A,'' 
meaning that while it was not payable under the OPPS, it was payable 
under a fee schedule other than the OPPS, specifically the MPFS. We 
explained that, under the MPFS, the nonselective wound care services 
described by CPT code 97602 are ``bundled'' into the selective wound 
care debridement codes (CPT codes 97597 and 97598). Furthermore, under 
the MPFS, a separate payment is never made for ``bundled'' services 
and, because of this designation, the provider does not receive 
separate payment for furnishing non-selective wound care services 
described by CPT code 97602.
    We received several public comments concerning our proposed 
treatment of CPT code 97602 under the OPPS.
    Comment: Several commenters objected to our proposal to maintain a 
status indicator of ``A'' for CPT code 97602, which does not allow for 
separate payment under the OPPS. These commenters contended that CMS' 
recognition of this code only under the MPFS as a bundled service is 
equivalent to CMS asking hospitals to furnish but not charge for this 
service. They asserted that our decision not to pay for this service 
under the OPPS is based on a misclassification of this code as an 
``always therapy'' service. They further explained that registered 
nurses, as opposed to physical therapists, routinely perform non-
selective wound care services in the hospital outpatient setting. These 
commenters urged CMS to acknowledge non-selective wound care as meeting 
the definition of covered outpatient therapeutic services under the 
OPPS. Two commenters requested that we assign the newly proposed status 
indicator ``Q'' to CPT code 97602 so that separate payment can be made 
under the OPPS when this is the only payable service provided under the 
OPPS. These two commenters also suggested that we pay this service at 
the same payment rate as services assigned to APC 0600 (Low Level 
Clinic Visits).
    Another commenter strongly recommended that CMS also review our 
status indicator assignment of ``A'' to CPT codes 97605 (Negative 
pressure wound therapy; total wound(s) surface area less than or equal 
to 50 sq. cm.) and 97606 (Negative pressure wound

[[Page 68617]]

therapy; total wound(s) surface area greater than 50 sq. cm.), in 
addition to CPT code 97602 as mentioned by other commenters and 
discussed above. The commenter urged that we pay separately for these 
services under the OPPS, emphasizing that these codes represent 
comprehensive wound care management and are typically not performed 
with any other service. Furthermore, the commenter objected to our 
designation of CPT codes 97602, 97605, and 97606 as ``always therapy'' 
services, contending that these services are often performed by 
registered nurses and should be classified as ``sometimes therapy'' 
services and assigned a status indicator of ``S'' which pays separately 
under the OPPS. Finally, this commenter recommended that we assign CPT 
codes 97602, 97605, and 97606 to New Technology APC 1502 (Level II $50-
$100) with a payment rate of $75 for CY 2006 until we can collect 
hospital claims data to aid us in assigning these services to a 
clinical APC based on hospital median costs.
    Response: We thank the commenters for their views on the 
classification and payment status of wound care services under the 
OPPS. Pursuant to a congressional mandate (Balanced Budget Act of 1997, 
Pub. L. 105-33) to pay for all therapy services under one prospective 
payment system, as provided under section 1834(k)(5) of the Act, we 
created a therapy code list to identify and track outpatient therapy 
services paid under the MPFS. We provide this list of therapy codes 
along with their respective designation in the Medicare Claims 
Processing Manual Pub. 100-04, section 20. We define an ``always 
therapy'' service as a service that must be performed by a qualified 
therapist under a certified therapy plan of care, and a ``sometimes 
therapy'' service as a service that may be performed by a non-therapist 
outside of a certified therapy plan of care. As recommended by the 
commenters, we have carefully reviewed our designation of CPT codes 
97602, 97605, and 97606 as ``always therapy'' codes and our assignment 
of payment status indicator ``A'' to these codes under the OPPS. In 
light of the comments, we have also reexamined our classification of 
CPT codes 97597 (selective wound care; total wound(s) surface area less 
than or equal to 20 sq. cm.) and 97598 (selective wound care; total 
wound(s) surface area greater than 20 sq. cm.) as ``sometimes therapy'' 
codes with respect to payment under the OPPS. The past implications of 
designating CPT codes 97602, 97605, and 97606 as ``always therapy'' 
services, in addition to assigning these codes a status indicator of 
``A'' under the OPPS indicating they were to be paid off the MPFS, were 
that hospitals may have been unable to bill and be paid for these 
services when they were provided as non-therapy in the hospital 
outpatient setting. When some of these OPPS services were packaged 
under the MPFS, hospitals received no separate payment, and when other 
services were paid off the MPFS, the services were required to meet the 
criteria for therapy services. However, this requirement for payment to 
hospitals only as therapy services was inconsistent with Medicare's 
designation of CPT codes 97597 and 97598 as ``sometimes therapy'' 
services, that could be appropriately provided either as therapy 
services or as non-therapy services. Therefore, for CY 2006, we are 
reclassifying CPT codes 97602, 97605, and 97606 as ``sometimes 
therapy'' services that may be appropriately provided either as therapy 
or non-therapy services, as well as maintaining our designation of CPT 
codes 97597 and 97598 as ``sometimes therapy'' services.
    In order to pay hospitals accurately when delivering these 
``sometimes therapy'' services independent of a therapy plan of care, 
we are establishing payment rates for CPT codes 97597, 97598, 97602, 
97605, and 97606 under the OPPS when performed as non-therapy services 
in the hospital outpatient setting. To further clarify, hospitals will 
receive separate payment under the OPPS when they bill for wound care 
services described by CPT codes 97597, 97598, 97602, 97605, and 97606 
that are furnished to hospital outpatients by non-therapists 
independent of a therapy plan of care. In contrast, when such services 
are performed by a qualified therapist under an approved therapy plan 
of care, providers should attach an appropriate therapy modifier (that 
is, GP for physical therapy, GO for occupational therapy, and GN for 
speech-language pathology) and/or report their charges under a therapy 
revenue code (that is, 420, 430, or 440) to receive payment under the 
MPFS. The OCE logic will either assign these services to the 
appropriate APC for payment under the OPPS if the services are non-
therapy, or will direct contractors to the MPFS established payment 
rates if the services are identified on hospital claims with a therapy 
modifier or therapy revenue code as therapy.
    Under the OPPS, we considered several options for determining the 
APC placement of CPT codes 97597, 97598, 97602, 97605, and 97606. As 
two commenters suggested, we considered placing these codes in APC 0600 
(Low Level Clinic Visits); however, we concluded that these services do 
not share similar enough characteristics in terms of clinical 
homogeneity and resource requirements to other services assigned to APC 
0600. In particular, specialized supplies are likely necessary for the 
procedures, unlike many of the supplies used in services assigned to 
APC 0600. Likewise, we also considered one commenter's recommendation 
to assign CPT codes 97597, 97598, 97602, 97605, and 97606 to New 
Technology APC 1502 with a payment rate of $75. However, because we do 
not consider wound care services to be appropriately described by a new 
technology designation under the OPPS, nor do we expect the resource 
intensity of these services to approach $75, we are not assigning these 
services to New Technology APC 1502. Instead, we sought to place these 
codes in clinical APCs with like services sharing similar resource 
requirements. Therefore, for CY 2006, we are assigning CPT code 97602 
to APC 0340 (Minor Ancillary Procedures) because we consider the 
resource requirements of this service to be similar to the hospital 
resources necessary for many of the other minor hospital procedures 
assigned to this APC. While it may be that our CY 2004 hospital claims 
data may not reflect all claims for services that could have been 
described by CPT code 97602 because some hospitals may have been 
billing for an evaluation and management service if nonselective wound 
care was the only procedure provided on a day, we note that based on 
almost 75,000 single claims the median cost of $42 for CPT code 97602 
is very consistent with the CY 2006 median cost of $36 for APC 0340. In 
addition, we are assigning CPT codes 97597 and 97605 to APC 0012 (Level 
I Debridement and Destruction), and CPT codes 97598 and 97606 to APC 
0013 (Level II Debridement and Destruction) because we consider these 
services to closely resemble both the clinical characteristics and 
resource requirements of the other debridement services assigned to 
these APCs. We have listed these five codes in Addendum B with status 
indicator ``X'' for CPT code 97602 and status indicator ``T'' for CPT 
codes 97597, 97598, 97605, and 97606, along with their individual APC 
assignments to indicate their payment rates in common hospital 
outpatient circumstances where the services are provided as non-
therapy. If a claim indicates, as described above, that the services 
are provided as therapy, the claim for such services will be paid under 
the MPFS.

[[Page 68618]]

    When hospitals provide wound care services, they should bill the 
most appropriate CPT codes to describe those services. Hospitals should 
not bill for an evaluation and management service along with the wound 
care service unless a significant, separately identifiable evaluation 
and management service, correctly identified with modifier -25 on the 
claim, was also provided to the patient during the same encounter. 
Lastly, under the OPPS we consider payment for nonselective wound care 
to always be included in payment for selective wound care or negative 
pressure wound therapy if both services are provided at the same 
anatomic site in one encounter. Therefore, hospitals should not bill 
for both services when nonselective wound care is provided with 
selective wound care or negative pressure wound therapy at the same 
anatomic site in a single encounter. Hospitals would appropriately use 
the -59 modifier to indicate nonselective and selective wound care or 
negative pressure wound therapy services provided in a single encounter 
at different anatomic sites.

IV. Payment Changes for Devices

A. Device-Dependent APCs

    Device-dependent APCs are populated by HCPCS codes that usually, 
but not always, require that a device be implanted or used to perform 
the procedure. For the CY 2002 OPPS, we used external data, in part, to 
establish the device-dependent APC medians used for weight setting. At 
that time, many devices were eligible for pass-through payment. For the 
CY 2002 OPPS, we estimated that the total amount of pass-through 
payments would far exceed the limit imposed by statute. To reduce the 
amount of a pro rata adjustment to all pass-through items, we packaged 
75 percent of the cost of the devices, using external data furnished by 
commenters on the August 24, 2001 proposed rule and information 
furnished on applications for pass-through payment, into the median 
costs for the device-dependent APCs associated with these pass-through 
devices. The remaining 25 percent of the cost was considered to be 
pass-through payment.
    In the CY 2003 OPPS, we determined APC medians for device-dependent 
APCs using a three-pronged approach. First, we used only claims with 
device codes on the claim to set the medians for these APCs. Second, we 
used external data, in part, to set the medians for selected device-
dependent APCs by blending that external data with claims data to 
establish the APC medians. Finally, we also adjusted the median for any 
APC (whether device-dependent or not) that declined more than 15 
percent. In addition, in the CY 2003 OPPS we deleted the device codes 
(``C'' codes) from the HCPCS file in the belief that hospitals would 
include the charges for the devices on their claims, notwithstanding 
the absence of specific codes for devices used.
    In the CY 2004 OPPS, we used only claims containing device codes to 
set the medians for device-dependent APCs and again used external data 
in a 50-50 blend with claims data to adjust medians for a few device-
dependent codes when it appeared that the adjustments were important to 
ensure access to care. However, hospital device code reporting was 
optional.
    In the CY 2005 OPPS, which was based on CY 2003 claims data, there 
were no device codes on the claims and, therefore, we could not use 
device-coded claims in median calculations as a proxy for completeness 
of the coding and charges on the claims. For the CY 2005 OPPS, we 
adjusted device-dependent APC medians for those device-dependent APCs 
for which the CY 2005 OPPS payment median was less than 95 percent of 
the CY 2004 OPPS payment median. In these cases, the CY 2005 OPPS 
payment median was adjusted to 95 percent of the CY 2004 OPPS payment 
median. We also reinstated the device codes and made the use of the 
device codes mandatory where an appropriate code exists to describe a 
device utilized in a procedure and also implemented HCPCS code edits to 
facilitate complete reporting of the charges for the devices used in 
the procedures assigned to the device-dependent APCs.
1. Public Comments and Our Responses on the November 15, 2004 OPPS 
Final Rule With Comment Period
    We solicited public comments concerning the methodology set forth 
in our CY 2005 OPPS final rule with comment period (November 15, 2004, 
69 FR 65681). A summary of the comments we received and our responses 
follow:
    Comment: One commenter asked that CMS implement device edits other 
than those included in Table 19 of the November 15, 2004 final rule 
with comment period in April 2005. The commenter asked that CMS add the 
following APCs to the list of device-dependent APCs and implement 
device editing for them using the specific device codes provided by the 
commenter: APC 0088 (Thrombectomy), APC 0141 (Level I Upper GI 
Procedures), APC 0151 (Endoscopic Retrograde Cholangio-
Pancreatography), APC 0154 (Hernia/Hydrocele Procedures), APC 0187 
(Miscellaneous Placement/Repositioning), APC 0315 (Level II 
Implantation of Neurostimulator), APC 0415 (Level II Endoscopy Lower 
Airway), APC 0416 (Level I Intravascular and Intracardiac Ultrasound 
and Flow Reserve), and APC 0676 (Level II Thrombolysis and 
Thrombectomy).
    Response: We implemented the device edits for device-dependent APCs 
in two phases for CY 2005. Those identified in Table 19 of the November 
15, 2004 final rule with comment period (69 FR 65763) were implemented 
effective for services furnished April 1, 2005, and later. The 
remaining edits for device-dependent APCs were implemented effective 
for services furnished October 1, 2005, and later. We implemented the 
edits in two phases so that we could ensure that any systems issues 
that might arise with implementation of the first set of edits would be 
resolved before we implemented the remainder of the edits. We limited 
the edits we implemented to those for services included in the list of 
device-dependent APCs that we posted on the CMS Web site for public 
review to minimize the possibility of unintended claims processing 
problems. At this time, we have not expanded the scope of device-
dependent APCs or the scope of the edits because of concerns raised by 
hospitals regarding the administrative burden that edits impose on 
hospitals. We will evaluate the impact of the edits on hospitals and on 
our claims data before we consider expanding the scope of the edits to 
other services such as those suggested by the commenter.
    Comment: One commenter recommended that device codes C1750 (Cath, 
hemodialysis, long-term) and C1752 (Cath, hemodialysis, short-term) be 
allowed when billing for services using CPT codes 36557 (Insert 
tunneled cv cath), 36558 (Insert tunneled cv cath), and 36581 (Replace 
tunneled cv cath). The commenter further recommended that CMS allow the 
use of device code C1898 (Lead, pmkr, other than trans) when billing 
for services using CPT codes 33211 (Insertion of heart electrode), 
33216 (Insert lead pace-defib, one), and 33217 (Insert lead pace-defib, 
dual).
    Response: We agree with the commenter's recommendations and made 
the changes when the edits were implemented in the two phases for CY 
2005 discussed above in response to the preceding comment.
    Comment: One commenter recommended that device codes for

[[Page 68619]]

brachytherapy needles, catheters, and sources be required when 
providers bill for the following CPT codes for brachytherapy 
application: 77761, 77762, 77763, 77776, 77777, 77778, 77781, 77782, 
77783, and 77784. Numerous other commenters strongly opposed device 
editing for brachytherapy procedures due to the burden that it would 
impose on them.
    Response: We did not require these edits for CY 2005. The needles 
and catheters that are placed for the application of brachytherapy 
sources are not placed when the procedures cited are performed but are 
generally placed in procedures that are coded separately. In the case 
of application of seeds for prostate brachytherapy (CPT code 77778), 
the needles or catheters are placed when CPT code 55859 (Percut/needle 
insert, pros) is performed and not as part of CPT code 77778. Moreover, 
for CY 2005, sources of brachytherapy are billed and paid separately on 
the basis of charges reduced to cost and, therefore, are irrelevant to 
the calculation of a median cost for the application of the 
brachytherapy sources because, unlike other devices, the cost of 
brachytherapy sources is not packaged into the payment for the service 
in which the sources are required.
2. CY 2006 Proposal, APC Panel Recommendations, and Responses to Public 
Comments Received
    In the CY 2006 OPPS proposed rule, we proposed to base the OPPS 
device-dependent APC medians on CY 2004 claims, the most current data 
available. In CY 2004, the use of device codes was optional. Thus, for 
the CY 2006 OPPS proposed rule, we proposed to calculate median costs 
for these APCs using all single bills without regard to whether there 
was a device code reported on the claim. We calculated median costs for 
this set of APCs using the standard median calculation methodology. 
This methodology uses single procedure claims to set the median costs 
for the APC. We then compared these unadjusted median costs to the 
adjusted median costs that we used to set the payment rates for the CY 
2005 OPPS. We found that 21 APCs experienced increases in median cost 
compared to the CY 2005 OPPS adjusted median costs, 1 APC median was 
unchanged, 16 APCs experienced decreases in median costs, and 8 APCs 
were proposed to be reconfigured in such a way that no valid comparison 
was possible. Table 15 published in the CY 2005 OPPS proposed rule 
showed the comparison of these median costs (70 FR 42714).
    As we stated previously, in CY 2004, CMS reissued HCPCS codes for 
devices and asked hospitals to voluntarily code devices utilized to 
provide services. As part of our development of the medians for this 
final rule with comment period, we examined CY 2004 claims that 
contained device codes that met our device edits, as posted on the OPPS 
Web site at http://www.cms.hhs.gov/providers/hopps/default.asp. We 
found that, in many cases, the number of claims that passed the device 
edits was quite small. To use these claims to set medians for the CY 
2006 OPPS would mean that the medians for some of these APCs would be 
set based on very small numbers of claims, reflecting the fact that, in 
CY 2004 when device coding was optional under the OPPS, relatively few 
hospitals chose to code for devices. Therefore, we did not propose to 
use only claims that passed the device edits to set the median costs 
for device-dependent APCs for the CY 2006 OPPS.
    When we considered whether to base the weights for these APCs on 
the unadjusted median costs, we found that, for 10 of the 38 APCs for 
which the APC composition is stable, basing the payment weight on the 
unadjusted median cost would result in a reduction of more than 15 
percent in the median cost for the CY 2006 OPPS compared to the CY 2005 
OPPS.
    In the CY 2006 proposed rule, we stated that we fully expect to use 
the unadjusted median costs for device-dependent APCs as the basis of 
their payment weights for the CY 2007 OPPS because device coding is 
required for CY 2005 and device editing is being implemented in CY 
2005, so that all CY 2005 claims should reflect the costs of devices 
used to provide services. Nevertheless, we recognized that a payment 
reduction of more than 15 percent from the CY 2005 OPPS to the CY 2006 
OPPS may be problematic for hospitals that provide the services 
contained in these APCs. Therefore, for the CY 2006 OPPS, we proposed 
to adjust the median costs for the device-dependent APCs listed in 
Table 15 of the CY 2006 proposed rule (70 FR 42714) for which 
comparisons with prior years are valid to the higher of the CY 2006 
unadjusted APC median or 85 percent of the adjusted median on which 
payment was based for the CY 2005 OPPS. We stated that we viewed this 
as a transitional step from the adjusted medians of past years to the 
use of unadjusted medians based solely on hospital claims data with 
device codes in future years.
    As stated in the proposed rule (70 FR 42714), we expect that CY 
2006 will be the last year in which we would make an across-the-board 
adjustment to the median costs for these device-dependent APCs based on 
comparisons to the prior year's payment medians. We believe that 
mandatory reporting of device codes for services furnished in CY 2005, 
combined with the editing of claims for the presence of device codes, 
where such codes are appropriate, would result in claims data that more 
fully reflect the relative costs of these services and that across-the-
board adjustments to median costs for these APCs would no longer be 
appropriate.
a. APC Panel Recommendations
    In the CY 2005 proposed rule, we proposed to treat APCs 0107 and 
0108 in the same manner as we proposed to treat other device-dependent 
APCs. We note that at its August 2005 meeting, the APC Panel 
recommended that CMS set the payment rates for cardioverter 
defibrillator APCs (APCs 0107 and 0108) at the CY 2005 payment rates 
plus the full market basket increase for CY 2006. We did not accept 
this recommendation because to do so would greatly contradict our 
stated policy of applying a single standardized methodology wherever 
possible to establish APC payment amounts that are appropriately 
relative to one another.
    The APC Panel also recommended that CMS add APC 0416 (Level I 
Intravascular and Intracardiac Ultrasound and Flow Reserve) and, in 
particular, CPT code 37250 (Iv us first vessel add-on) to the list of 
device-dependent APCs and require device editing for CPT code 37250.
    We did not accept this recommendation. Many services that require 
devices are not included in the set of APCs to which we have given 
special attention as they came off pass-through status. We package the 
costs of relatively high cost devices into the median costs for the 
device-dependent APCs, and the absence of charges for these devices on 
claims is the reason for special treatment of the APCs in the past. The 
absence of charges also gives rise to our application of device editing 
to the services in the device-dependent APCs so that our hospital 
claims data are more complete for these specific services. At this 
time, we see no compelling reason to expand this list of device-
dependent APCs. This is particularly true given that we expect that, 
for CY 2007, these APCs will not receive special attention as a class. 
However, we note that we will make case-by-case decisions regarding the 
adjustment of median costs where we believe that it is appropriate.

[[Page 68620]]

b. Public Comments Received and Our Responses
    We received numerous public comments concerning our proposal. 
Following is a summary of those comments and our responses:
(1) Adjustment of Median Costs
    Comment: Some commenters supported the proposed median cost 
adjustment for device-dependent APCs and supported the use of claims 
data to set the relative weights for the CY 2006 OPPS. However, many 
commenters stated that the proposed payments are inadequate to 
compensate hospitals for the full costs of the devices and procedures 
for many APCs, including, but not limited to, implantation of cochlear 
implants, neurostimulators, urologic prosthetics, and cardioverter 
defibrillators.
    Commenters presented a variety of requests for revised median costs 
or revised payment rates. Many commenters asked that CMS accept and use 
external data in place of claims data and requested that CMS accept and 
use confidential and proprietary information that cannot be made 
public. Other commenters objected to the use of external data to set 
median costs that are the basis of the rates and to the use of any 
proprietary or confidential information that cannot be shared with the 
public. Some commenters asked CMS to substitute specific amounts they 
identified for the device portion of the median cost, for the full 
median cost, or for the payment amount for the APCs of interest to 
them. Commenters urged CMS to restrict the claims used to calculate the 
median costs for device-dependent APCs to those with specified 
diagnoses, or to those with specified HCPCS device codes, or with 
specified revenue code charges only if the charges associated with 
those codes exceeded amounts they recommended. Some commenters asked 
that CMS set the CY 2006 median cost at the CY 2005 adjusted median 
with an inflation adjustment for the full market basket increase for CY 
2006. Other commenters asked CMS to adjust the medians to no less than 
95 percent of the CY 2005 OPPS adjusted medians for all APCs, as well 
as for device-dependent APCs. These commenters stated that a 
transitional step to 85 percent was too great to prevent disruption to 
care.
    Some commenters asked CMS to disregard requests to set the payment 
rates at 100 percent of the CY 2005 OPPS payment rates plus inflation 
for neurostimulator and cardioverter defibrillator APCs, which they 
stated have been given preferential treatment over other device-
dependent APCs in past years. These commenters requested that the same 
adjustment policy apply to all device-dependent APCs. Some commenters 
asked CMS to use only claims that contained appropriate device codes in 
the calculations of the median costs because the presence of the device 
code and a charge for the device are more likely to produce the best 
possible estimate of relative cost for the service. All commenters who 
addressed this general issue of device-dependent APCs supported an 
adjustment of some type to median costs for these high cost APCs.
    Response: After considering all of the comments received, we have 
set the median costs for device-dependent APCs for CY 2006 at the 
highest of: The median cost of all single bills; the median cost 
calculated using only claims that contain pertinent device codes and 
for which the device cost is greater than $1; or 90 percent of the 
payment median that was used to set the CY 2005 payment rates. We set 
90 percent of the CY 2005 payment median as a floor in consideration of 
comments that stated that a 15-percent reduction from the CY 2005 
payment median was too large of a transitional step. We also 
incorporated, as part of our methodology, the recommendation to base 
payment on medians that were calculated using only claims that passed 
the device edits. We believe that this policy provides a reasonable 
transition to full use of claims data in CY 2007, while better 
moderating the amount of decline from the CY 2005 OPPS payment rates. 
Table 16 of this final rule with comment period contains the CY 2005 
payment median, the CY 2006 unadjusted single bill median, the amount 
represented by 90 percent of the CY 2005 payment median, the CY 2006 
median calculated using only claims containing appropriate devices, and 
the CY 2006 adjusted median on which payment is based. As we discussed, 
in the CY 2006 proposed rule, we did not adjust the medians for APC 
0122 (Level II Tube Changes and Repositioning), APC 0427 (Level III 
Tube Changes and Repositioning) APC 0166 (Level I Urethral Procedures), 
APC 0168 (Level II Urethral Procedures), APC 0621 (Level I Vascular 
Access Procedures), APC 0622 (Level II Vascular Access Procedures), and 
APC 0623 (Level III Vascular Access Procedures) because of substantial 
migration of HCPCS codes within these APCs.
    We did not inflate the CY 2005 median cost or payment rate by the 
market basket, or substitute specific amounts derived from external 
studies or other external sources, as requested by commenters, because 
doing so would contradict our stated policy of using claims data 
developed from a single source, and applying a single standardized 
methodology wherever possible to establish payment amounts that are 
appropriately relative to one another. The Medicare claims database we 
use contains all claims for all services paid under the OPPS for all 
Medicare patients (other than those in Medicare managed care programs). 
As such, we believe that it is the best and most reliable source for 
standardized utilization and cost data in the Nation with regard to 
Medicare outpatient hospital care. Because the OPPS is a relative 
weight system, we believe it is important that, to the maximum extent 
possible, the relative weights be calculated using standardized 
processes and a standardized base of claims data.
(2) Effects of Inconsistent Markup of Charges
    Comment: Some commenters objected to the use of claims data because 
they believed the payments that result are less than the cost of the 
procedures and the devices due to the high markup of low cost items and 
services and the low markup of high cost items and services. They 
indicated that the use of CCRs applied to hospital charges results in 
median costs that are inadequate for high cost devices because the 
markup on high cost devices is insufficient to result in the correct 
costs for the devices after application of CCRs calculated from all 
services in the applicable departments. Commenters offered a variety of 
recommendations for dealing with this phenomenon that they identified 
as ``charge compression.'' They suggested that CMS establish a sample 
of hospitals from which data would be collected for use in place of 
claims data or to validate the data derived from claims. They also 
suggested that CMS establish a new cost center solely for high cost 
devices and calculate an appropriate CCR for this new specialized cost 
center. Some of the commenters recommended that CMS conduct a study of 
the data of volunteer hospitals to determine an appropriate CCR for 
high cost devices that would be applied to all hospitals. They noted 
that CMS could adjust claims-based medians by substituting proprietary 
confidential cost data for the device portion of the median costs. They 
suggested that CMS could also calculate a charge decompression factor 
that would estimate the markup function from charges on claims and 
device acquisition cost data and incorporate these data into setting 
two CCRs: one for high cost devices and one for low cost

[[Page 68621]]

devices, which would be used in place of actual hospital CCRs. Lastly, 
the commenters also suggested that CMS could create a broad stakeholder 
panel to address this issue.
    Other commenters stated that the use of the hospital's average CCR 
results in computed costs and relative weights that are more or less 
than specific actual costs, but that this averaging is appropriate and 
desirable in a PPS and should continue. They stated that the 
alternative is a micromanaged payment system that resembles the system 
that Congress discarded in favor of a bundled PPS. The commenters urged 
CMS to remain committed to the principles of a PPS and the use of 
averaging, rather than seeking to pay the actual cost for one element 
of costs at the expense of all other items and services, which they 
stated would occur as a result of the application of budget neutrality 
adjustments required by law. They reiterated that many factors go into 
the decision of what services to furnish in a hospital, and that the 
payment for a specific service is only one of the applicable factors.
    Response: We agree that the use of the hospital's average CCR 
results in computed costs and relative weights that may be more or less 
than specific actual costs and that this averaging is appropriate and 
desirable in a PPS and should continue. One of the principal purposes 
of determining median costs for weight setting in a budget neutral 
payment system is to determine the appropriate relativity in resource 
use among services, so that the fixed amount of money can be fairly and 
equitably distributed among hospitals based on case-mix. We note that, 
in general, the median costs derived from this process may not 
represent the actual acquisition costs of the services being furnished, 
nor will they ever represent acquisition costs. They are estimated 
relative costs that are converted to relative weights, scaled for 
budget neutrality, and then multiplied by a conversion factor to result 
in payments that, as we have previously discussed, were designed in 
such a manner that they are not expected to pay the full costs of the 
services.
(3) Effects of Multiple Procedure Reduction
    Comment: Some commenters stated that all device-dependent APCs 
should be assigned a status indicator of ``S'' (significant service, 
separately payable) because none of the procedures assigned to these 
APCs should ever be reduced when performed with another procedure. 
Commenters stated that much of the cost of these procedures is a 
function of the cost of the device, and that the device cost remains 
unchanged whether the procedure in which it is required is performed 
with other surgical procedures or not. Commenters specifically objected 
to the movement of CPT code 33225 (L ventric pacing lead add-on) from 
New Technology APC 1525 in CY 2005 where it has a status indicator of 
``S'' to APC 0418 ( Insertion of Left Ventricular Pacing Elect) for CY 
2006, in which it was proposed to have status indicator ``T,'' because 
the payment for the procedure, when performed in addition to another 
procedure, would be reduced by 50 percent although most of the cost of 
the procedure is in the device, the cost of which remains fixed. 
Commenters also specifically objected to the assignment of status 
indicator ``T'' to APCs 0223 and 0227 because it results in a reduction 
in payment when services to place a catheter and implant an infusion 
pump are provided in the same session.
    Response: We decide on a service-by-service basis whether the 
assignment of a status indicator ``S'' or ``T'' is appropriate. In the 
case of most device-dependent APCs, the service in question is never 
reduced because it is always the procedure with the highest payment 
rate (for example, cochlear implants and insertion of a cardioverter 
defibrillator (ICD)), and the assignment of a status indicator ``T'' is 
necessary so that the lower cost services are reduced in payment to 
reflect the efficiencies that occur when they are done at the same time 
as the highest paid procedure.
    In the case of CPT code 33225 for insertion of a left ventricular 
pacing electrode at time of insertion of an ICD, we believe that 
payment at 50 percent of the payment rate for APC 0418 is appropriate 
for this add-on procedure based on the information furnished to us by 
manufacturers, hospitals, and physicians who are familiar with the 
service. This procedure is always done as an adjunct to insertion of a 
cardioverter defibrillator and a significant portion of the cost of the 
procedure is in the extension of operating room time and not in the 
cost of the device, drugs, or supplies needed to furnish the service. 
While CPT code 33225 is an add-on code, we discuss our ongoing 
exploration of possible solutions to the data challenges in developing 
appropriate payment rates for add-on codes in the data section (section 
II.A.) of this final rule with comment period. Also assigned to APC 
0418 is the stand-alone procedure for insertion of the left ventricular 
lead, and we believe the add-on lead insertion is appropriately reduced 
by 50 percent in comparison with the payment rate for the stand-alone 
insertion procedure. Therefore, we believe that payment at 50 percent 
of the amount for APC 0418 to which we proposed to assign CPT code 
33225 is appropriate and, as proposed, we have moved CPT code 33225 to 
APC 0418 with a status indicator of ``T.''
    When a spinal infusion pump is implanted along with an intrathecal 
or epidural catheter, CPT codes billed likely include those assigned to 
APCs 0227 and 0223, respectively. The higher paying APC 0227 for 
implantation of the infusion pump would receive full payment, while the 
catheter insertion APC 0223 would receive 50 percent of the APC payment 
because both APCs are assigned ``T'' status indicators. We believe this 
reduction is appropriate, as there are some efficiencies when both 
services are performed in a single session. In addition, we note that 
the CPT code for the catheter implantation includes the possibility of 
repositioning in its descriptor, so it is possible that this procedure 
may not require a new device every time it is performed. Therefore, we 
believe that the procedures assigned to APCs 0223 and 0227 are 
appropriately assigned ``T'' status indicators.
(4) Impact of Proposed Rates on Access to Care
    Comment: Some commenters stated that under the proposed payments, 
Medicare beneficiaries may not get the device-related services they 
need because Medicare payments would be inadequate to compensate 
hospitals for their costs, and that hospitals would not furnish the 
services to Medicare beneficiaries for the rates that Medicare proposed 
to pay in CY 2006. They stated that hospitals will either cease 
providing certain services, or they will decide not to furnish them due 
to low Medicare payment rates.
    Response: We share the commenters' concern that beneficiaries have 
access to all of the care they need, regardless of the type of service. 
As other commenters have stated, hospitals decide upon the range of 
services to offer based on a variety of factors, of which Medicare 
outpatient hospital payment is only one. We believe that the best way 
to ensure access to care for Medicare beneficiaries is to establish the 
OPPS using as many claims as possible from all hospitals so that the 
relative weights on which the payments are based result in the most 
fair and equitable distribution possible of Medicare's funding for 
outpatient hospital services.
    We note that our regulations at 42 CFR 489.53(a)(2) state that a 
hospital

[[Page 68622]]

risks termination of its Medicare provider agreement if it treats 
Medicare beneficiaries differently from other similar patients in the 
hospital.
(5) Addition of Other APCs as Device-Dependent APCs
    Comment: Some commenters asked that CMS expand the list of APCs for 
which medians will be adjusted to include all APCs that require the use 
of a device. Specifically, they requested that we apply any median 
adjustment for device-dependent APCs also to APC 0112 (Apheresis, 
Photopheresis, and Plasmapheresis), APC 0312 (Radioelement 
Applications), APC 0313 (Brachytherapy), and APC 0651 (Complex 
Interstitial Radiation Source Application). They asked that CMS set the 
median for all such APCs that use a device at the CY 2005 OPPS adjusted 
median after inflating by the full market basket increase for CY 2006. 
Commenters asked that CMS add APC 0416 Level I Intravascular and 
Intracardiac Ultrasound and Flow Reserve) and, in particular, CPT code 
37250 (Iv us first vessel add-on) to the list of device-dependent APCs 
and require device editing for CPT code 37250. They stated that this 
service requires a device, that its APC should be treated like all 
other device-dependent APCs, and that claims for the service should be 
returned if they are submitted without the HCPCS code for the device so 
that the full cost of the device will be included on every claim.
    Response: As previously stated in response to the APC Panel's 
recommendation on a similar issue, many services that require devices 
are not included in the set of APCs to which we have given special 
attention as they came off pass-through status. We package the costs of 
relatively high cost devices into the median costs for the device-
dependent APCs, and the absence of charges for these devices on claims 
is the reason for special treatment of the APCs in the past. The 
absence of charges also leads to our application of device editing to 
the services in the device-dependent APCs so that our hospital claims 
data are more complete for these specific services. At this time, we 
see no compelling reason to expand this list of device-dependent APCs. 
This is particularly true given that we expect that, for CY 2007, these 
APCs will not receive special attention as a class. However, we note 
that we will make case-by-case decisions regarding the application of 
edits where appropriate.
(6) Instructions on Reporting Device Charges
    Comment: Some commenters asked that CMS educate providers on how to 
report charges for devices and technologies that do not have HCPCS 
codes, and that CMS issue explicit instructions regarding consistent 
use of revenue codes for reporting charges for devices and technologies 
to ensure that such charges are fully reported on claims.
    Response: CMS' instructions regarding the need to report device 
codes and charges are included in the Internet Only Manual, Claims 
Processing Manual 100-4, Chapter 4 (CMS Web site: http://www.cms.hhs.gov/manuals/). Section 61.1 of that manual provides 
instructions on the requirement to report the device code and directs 
providers to the CMS Web site for the most current list of HCPCS codes 
for devices and for the most recent set of procedure code to device 
edits. In addition, section 20.5.1 specifies revenue centers that 
should be used when devices are reported. As always, when devices do 
not have appropriate HCPCS codes for reporting, hospitals should be 
sure to include all charges associated with their use on claims for 
services with which the devices were used.
(7) Application of Wage Index to Device-Dependent APCs Containing 
Devices
    Comment: Some commenters objected to the application of the wage 
index to an APC into which devices were packaged. They indicated that 
applying the wage index will continue to further undervalue new 
technology services. They asked that CMS revise its policy and apply 
the wage index only to the service portion of the procedure for APCs 
for which the device cost is more than 80 percent of the total APC 
payment.
    Response: Whether the application of the wage index to 60 percent 
of the APC payment will raise or reduce the payment for the service 
depends on the wage index value of the area in which the hospital is 
located. However, while we do not believe that the application of the 
wage index underpays new technology items or services, we acknowledge 
the commenter's request, and we will consider it as we develop our 
policies for future updates of the OPPS.
(8) Recalls of High Cost Devices
    Comment: Some commenters are concerned that claims for items 
subject to a recall not be used for claims setting as there is no 
charge for the device on the claim, and the use of the claim could skew 
the median cost. These commenters also asked that CMS provide explicit 
guidance on how to report devices for which the provider incurred no 
cost due to replacement by the manufacturer under a recall of the 
device.
    Response: The recalls of a significant number of cardioverter 
defibrillators and pacemakers to which the commenters referred occurred 
very late in CY 2004 and in CY 2005. Therefore, we believe that they 
have no effect on the CY 2004 claims used to set the rates for the CY 
2006 OPPS. We are aware of the potential impact on data used for 
ratesetting for the CY 2007 OPPS and are already considering a strategy 
for ensuring that the CY 2005 claims data we will use for the CY 2007 
OPPS will be appropriately reflective of the costs of the devices. We 
note that one way of doing this is to not use claims that contain 
device charges of $1.01 or less in the calculation of the median costs 
for these APCs. In the July 2005 OPPS instruction, Change Request 3915, 
dated June 30, 2005, we issued interim instructions regarding how 
hospitals should report device codes and charges when the device was 
furnished without cost by the manufacturer under a recall. 
Specifically, we advised hospitals to report the HCPCS code for the 
device and a token charge of $1.01 or less on the line with the device 
code. Accordingly, we will use the device code and charge combination 
to find these claims in the CY 2005 data.
    For the future, beginning January 1, 2006, hospitals should report 
modifier ``FB'' on the claim with the device code (where there is one 
to report) or with the procedure code (where there is no appropriate 
device code) to indicate that a device used in the procedure was 
furnished without cost to the provider and, therefore, is not being 
charged to Medicare or the beneficiary. The device edits will recognize 
the modifier and will not return the claim to the provider as 
incomplete because the device code is not on the claim. CMS will issue 
instructions regarding use of the modifier in the January 2006 OPPS 
change request issuance.
(9) Separate Payment for High Cost Devices
    Comment: Some commenters asked that we pay separately for high cost 
devices and recommended that CMS define ``high cost'' devices as those 
with a cost greater than 50 percent of the APC payment rate. They 
indicated that even with device editing, they do not believe

[[Page 68623]]

that hospitals will be diligent about reporting all of their services 
or setting charges that reflect the costs of the devices. They believed 
that separate payments for high cost devices is the only way to achieve 
valid cost data for devices and related services.
    Response: In general, we believe that packaging the costs of items 
needed to furnish services into the payments for the services and the 
assignment of multiple services to a single APC create incentives for 
efficiency and for the selection of the least costly device that meets 
the patient's needs. Therefore, for the CY 2006 OPPS, we will continue 
to package payment for all devices without pass-through status, and 
which are not brachytherapy sources, into the payments for the 
procedures that utilize them. However, we recognize that there may be 
valid reasons to consider whether it would be appropriate to pay 
separately for some high cost devices, and we will consider whether 
there are circumstances in which this may be appropriate in the future.
    After carefully reviewing all comments received concerning our 
proposed median cost adjustment for device-dependent APCs for CY 2006, 
we have set the medians for device-dependent APCs at the highest of: 
the median cost of all single bills; the median cost calculated using 
only claims that contain pertinent device codes and for which the 
device cost is greater than $1; or 90 percent of the payment median 
that was used to set the CY 2005 payment rates. Table 16 below shows 
the adjusted median costs for the listed device-dependent APCs for 
which comparisons with prior years are valid to the highest of the CY 
2006 unadjusted APC median, 90 percent of the adjusted median on which 
payment was based for the CY 2005 OPPS, or the median calculated using 
only claims that meet the device code edits implemented in CY 2005.
BILLING CODE 4120-01-P

[[Page 68624]]

[GRAPHIC] [TIFF OMITTED] TR10NO05.017


[[Page 68625]]


[GRAPHIC] [TIFF OMITTED] TR10NO05.018


[[Page 68626]]


BILLING CODE 4120-01-C

B. Pass-Through Payments for Devices

1. Expiration of Transitional Pass-Through Payments for Certain Devices
    Section 1833(t)(6)(B)(iii) of the Act requires that, under the 
OPPS, a category of devices be eligible for transitional pass-through 
payments for at least 2, but not more than 3 years. This period begins 
with the first date on which a transitional pass-through payment is 
made for any medical device that is described by the category. In our 
November 15, 2004 final rule with comment period (69 FR 65773), we 
specified three device categories currently in effect that would cease 
to be eligible for pass-through payment effective January 1, 2006.
    The device category codes became effective April 1, 2001, under the 
provisions of the BIPA. Prior to pass-through device categories, we 
paid for pass-through devices under the OPPS on a brand-specific basis. 
All of the initial 97 category codes that were established as of April 
1, 2001, have expired; 95 categories expired after CY 2002 and 2 
categories expired after CY 2003. All of the categories listed in Table 
17, along with their expected expiration dates, were created since we 
published the criteria and process for creating additional device 
categories for pass-through payment on November 2, 2001 (66 FR 55850 
through 55857). We based the expiration dates for the category codes 
listed in Table 17 on the date on which a category was first eligible 
for pass-through payment.
    There are three categories for devices that would have been 
eligible for pass-through payments for at least 2 years as of December 
31, 2005. In the November 15, 2004 final rule with comment period, we 
finalized the December 31, 2005 expiration dates for these three 
categories--C1814 (Retinal tamponade device, silicone oil), C1818 
(Integrated keratoprosthesis), and C1819 (Tissue localization excision 
device). Each category includes devices for which pass-through payment 
was first made under the OPPS in CY 2003 or CY 2004.
    In the November 1, 2002 final rule, we established a policy for 
payment of devices included in pass-through categories that are due to 
expire (67 FR 66763). For CY 2003, we packaged the costs of the devices 
no longer eligible for pass-through payments into the costs of the 
procedures with which the devices were billed in CY 2001. Brachytherapy 
sources for other than prostate brachytherapy, which are now separately 
paid in accordance with section 621(b)(2) of Pub. L. 108-173, are an 
exception to this established policy. For CY 2005, we continued to 
apply this policy, the same as we did in CYs 2003 and 2004, to 
categories of devices that expired on December 31, 2004.
2. Proposed and Final Policy for CY 2006
    For CY 2006, we proposed to implement the final decision we made in 
the November 15, 2004 final rule with comment period that finalizes the 
expiration date for pass-through status for device categories C1814, 
C1818, and C1819. Therefore, as of January 1, 2006, we will discontinue 
pass-through payment for C1814, C1818, and C1819. In accordance with 
our established policy, we proposed to package the costs of the devices 
assigned to these three categories into the costs of the procedures 
with which the devices were billed in CY 2004, the year of hospital 
claims data used for the CY 2006 OPPS update.
    We received two public comments concerning the expiration of pass-
through payment for these three device categories.
    Comment: One commenter recommended that CMS extend the pass-through 
payment for device category C1819 until December 31, 2006, rather than 
ending pass-through payment on December 31, 2005. The commenter 
expressed concern that our median cost data for the procedure codes 
utilizing a tissue localization excision device do not include the 
costs attributed to device category C1819, and that the volume of C1819 
claims is not sufficient to affect the median costs for CPT codes 19125 
(Excision, breast lesion) and 19160 (Removal of breast tissue).
    Response: We finalized the pass-through payment for device category 
code C1819 in the CY 2005 final rule with comment period and responded 
to a similar comment in that same rule (69 FR 65773). In this CY 2006 
final rule with comment period, we are merely implementing that 
decision effective for services furnished on or after January 1, 2006. 
Moreover, we believe that the device costs represented by device 
category code C1819 are found in our median cost data, as we have CY 
2004 hospital claims billed with C1819 that have been used to establish 
CY 2006 payment rates. As the device median cost was only approximately 
$67 and the median cost of APC 0028 (Level I Breast Surgery), where the 
accompanying procedure CPT codes 19125 and 19160 mentioned in the 
comment reside, is over $1,100, we anticipate that the packaging of 
this device will not limit appropriate access. We note that as usage of 
this device grows, the device costs may become more prominent 
contributors to the median costs of procedures utilizing the device, as 
long as hospitals report the device code and its associated charges on 
their claims.
    Comment: One commenter expressed concern regarding the appropriate 
packaging of expiring device categories from pass-through payment for 
ophthalmologic devices after December 31, 2005. The commenter 
recommended that device category code C1814 be packaged with HCPCS 
codes 67036 (Removal of inner eye fluid), 67040 (Laser treatment of 
retina), 67108 (Repair detached retina), and 67112 (Rerepair detached 
retina), all of which the commenter claimed are paid under APC 0672. 
The commenter recommended that device category code C1818 be packaged 
with HCPCS code 65770 (Revise cornea with implant), which is proposed 
to be paid through APC 0244 (Cornea Transplant).
    Response: Our policy is to package the expired device categories' 
costs with the costs relating to the procedure codes with which they 
were billed in our claims data. We will apply this policy to device 
category codes C1814 and C1818 as well. To the extent that the HCPCS 
codes reported in our claims data for the services associated with 
device codes C1814 and C1818 are the same as those HCPCS service codes 
noted in the comment, the median cost data for those HCPCS codes will 
include the costs associated with codes C1814 and C1818.
    As indicated in the November 15, 2004 final rule with comment 
period, device categories C1814, C1818 and C1819 will expire from pass-
through payment on December 31, 2005. We remind the public that these 
C-codes are still active for the billing and reporting of devices and 
their charges along with the HCPCS codes for the procedures with which 
they are used. When billing for procedures utilizing devices that have 
active device codes, hospitals are required to report the codes for the 
devices on their claims for the procedures.

[[Page 68627]]



                  Table 17.--List of Current Pass-Through Device Categories by Expiration Date
----------------------------------------------------------------------------------------------------------------
                                                                                      Date(s)       Expiration
                HCPCS codes                        Category long descriptor          populated         date
----------------------------------------------------------------------------------------------------------------
C1814......................................  Retinal tamponade device, silicone           4/1/03        12/31/05
                                              oil.
C1818......................................  Integrated keratoprosthesis........          7/1/03        12/31/05
C1819......................................  Tissue localization excision device          1/1/04        12/31/05
----------------------------------------------------------------------------------------------------------------

C. Other Policy Issues Relating to Pass-Through Device Categories

1. Provisions for Reducing Transitional Pass-Through Payments to Offset 
Costs Packaged Into APC Groups
a. Background
    In the November 30, 2001 final rule, we explained the methodology 
we used to estimate the portion of each APC payment rate that could 
reasonably be attributed to the cost of the associated devices that are 
eligible for pass-through payments (66 FR 59904). Beginning with the 
implementation of the CY 2002 OPPS quarterly update (April 1, 2002), we 
deducted from the pass-through payments for the identified devices an 
amount that reflected the portion of the APC payment amount that we 
determined was associated with the cost of the device, as required by 
section 1833(t)(6)(D)(ii) of the Act. In the November 1, 2002 interim 
final rule with comment period, we published the applicable offset 
amounts for CY 2003 (67 FR 66801).
    For the CY 2002 and CY 2003 OPPS updates, to estimate the portion 
of each APC payment rate that could reasonably be attributed to the 
cost of an associated device eligible for pass-through payment, we used 
claims data from the period used for recalibration of the APC rates. 
That is, for CY 2002 OPPS updating, we used CY 2000 claims data and for 
CY 2003 OPPS updating, we used CY 2001 claims data. For CY 2002, we 
used median cost claims data based on specific revenue centers used for 
device related costs because C-code cost data were not available until 
CY 2003. For CY 2003, we calculated a median cost for every APC without 
packaging the costs of associated C-codes for device categories that 
were billed with the APC. We then calculated a median cost for every 
APC with the costs of the associated device category C-codes that were 
billed with the APC packaged into the median. Comparing the median APC 
cost without device packaging to the median APC cost including device 
packaging enabled us to determine the percentage of the median APC cost 
that is attributable to the associated pass-through devices. By 
applying those percentages to the APC payment rates, we determined the 
applicable amount to be deducted from the pass-through payment, the 
``offset'' amount. We created an offset list comprised of any APC for 
which the device cost was at least 1 percent of the APC's cost.
    The offset list that we have published each year is a list of 
offset amounts associated with those APCs with identified offset 
amounts developed using the methodology described above. As a rule, we 
do not know in advance which procedures residing in certain APCs may be 
billed with new device categories. Therefore, an offset amount is 
applied only when a new device category is billed with a HCPCS 
procedure code that is assigned to an APC appearing on the offset list. 
The list of potential offsets for CY 2005 is currently published on the 
CMS Web site: http://www.cms.hhs.gov, as ``Device-Related Portions of 
Ambulatory Payment Classification Costs for 2005.''
    For CY 2004, we modified our policy for applying offsets to device 
pass-through payments. Specifically, we indicated that we would apply 
an offset to a new device category only when we could determine that an 
APC contains costs associated with the device. We continued our 
existing methodology for determining the offset amount, described 
earlier. We were able to use this methodology to establish the device 
offset amounts for CY 2004 because providers reported device codes (C-
codes) on the CY 2002 claims used for the CY 2004 OPPS update. For the 
CY 2005 update to the OPPS, our data consisted of CY 2003 claims that 
did not contain device codes and, therefore, for CY 2005 we utilized 
the device percentages as developed for CY 2004. In the CY 2004 OPPS 
update, we reviewed the device categories eligible for continuing pass-
through payment in CY 2004 to determine whether the costs associated 
with the device categories are packaged into the existing APCs. Based 
on our review of the data for the device categories existing in CY 
2004, we determined that there were no close or identifiable costs 
associated with the devices relating to the respective APCs that are 
normally billed with them. Therefore, for those device categories, we 
set the offset to $0 for CY 2004. We continued this policy of setting 
offsets to $0 for the device categories that continued to receive pass-
through payment in CY 2005.
    For the CY 2006 OPPS update, CY 2004 hospital claims are available 
for analysis. Hospitals billed device C-codes in CY 2004 on a voluntary 
basis. We have reviewed our CY 2004 data, examining hospital claims for 
services that included device C-codes and utilizing the methodology for 
calculating device offsets noted above. The numbers of claims for 
services in many of the APCs for which we calculated device percentages 
using CY 2004 data were quite small. Many of these APCs already had 
relatively few single claims available for median calculations compared 
with the total bill frequencies because of our inability to use many 
multiple bills in establishing median costs for all APCs, and 
subsetting the single claims to only those including C-codes often 
reduced those single bills by 80 percent or more. Our claims 
demonstrate that relatively few hospitals specifically coded for 
devices utilized in CY 2004. Thus, we are not confident that CY 2004 
claims reporting C-codes represent the typical costs of all hospitals 
providing the services. Therefore, we did not propose to use CY 2004 
claims with device coding to propose CY 2006 device offset amounts. In 
addition, we did not propose to use the CY 2005 methodology, for which 
we utilized the device percentages as developed for CY 2004. Two years 
have passed since we developed the device offsets for CY 2004, and the 
device offsets originally calculated from CY 2002 hospitals' claims 
data may not appropriately reflect the contributions of device costs to 
procedural costs in the current outpatient hospital environment. In 
addition, a number of the APCs on the CY 2004 and CY 2005 device offset 
percentage lists are either no longer in existence or have been so 
significantly reconfigured that the past device offsets likely do not 
apply.
b. Proposed and Final Policy for CY 2006
    For CY 2006, we proposed to continue to review each new device 
category on a case-by-case basis as we have done in CY 2004 and CY 
2005, to determine whether device costs associated with

[[Page 68628]]

the new category are packaged into the existing APC structure. If we do 
not determine for any new device category the device costs associated 
with the new category are packaged into existing APCs, we proposed to 
continue our current policy of setting the offset for the new category 
to $0 for CY 2006. There are currently no established categories that 
would continue for pass-through payment in CY 2006. However, we may 
establish new categories in any quarter. If we create a new device 
category and determine that our data contain a sufficient number of 
claims with identifiable costs associated with the devices in any APC, 
we would adjust the APC payment if the offset is greater than $0. If we 
determine that a device offset greater than $0 is appropriate for any 
new category that we create, we proposed to announce the offset amounts 
in the program transmittal that announces the new category.
    For CY 2006, we proposed to use available partial year or full year 
CY 2005 hospital claims data to calculate device percentages and 
potential offsets for CY 2006 applications for new device categories. 
Effective January 1, 2005, we require hospitals to report device C-
codes and their costs when hospitals bill for services which utilize 
devices described by the existing C-codes. In addition, during CY 2005 
we are implementing device edits for many services that require devices 
and for which appropriate device C-codes exist. Therefore, we expect 
that the number of claims, including device codes and their respective 
costs, will be much more robust and representative for CY 2005 than for 
CY 2004. We also note that offsets would not be used for any existing 
categories at this time. If a new device category is created for 
payment, for CY 2006 we proposed to examine the available CY 2005 
claims data, including device costs, to determine whether device costs 
associated with the new category are already packaged into the existing 
APC structure, as indicated earlier. If we conclude that some related 
device costs are packaged into existing APCs, we proposed to utilize 
the methodology described earlier and first used for the CY 2003 OPPS 
to determine an appropriate device offset percentage for those APCs 
with which the new category would be reported.
    We proposed not to publish a list of APCs with device percentages 
as a transitional policy for CY 2006 because of the previously 
discussed limitations of the CY 2004 OPPS data with respect to device 
costs associated with procedures. We expect to reexamine our previous 
methodology for calculating the device percentages and offset amounts 
for the CY 2007 OPPS update, which will be based on CY 2005 hospital 
claims data where device C-code reporting is required.
    We did not receive any public comments in response to our 
proposals.
    Accordingly, we are finalizing our proposed policy for CY 2006 for 
calculating device percentages and applying offsets.
2. Criteria for Establishing New Pass-Through Device Categories
a. Surgical Insertion and Implantation Criterion
    One of our criteria, as set forth in Sec.  419.66(b)(3) of the 
regulations, for establishing a new category of devices for pass-
through payment is that the item be surgically inserted or implanted. 
The criterion that a device be surgically inserted or implanted is one 
of our original criteria adopted when we implemented the BBRA 
requirement that we establish pass-through payment for devices. This 
criterion helps us define whether an item is a device, as distinguished 
from other items, such as materials and supplies. We further clarified 
our definition of the surgical insertion and implantation criterion in 
the November 13, 2000 final rule (65 FR 67805). In that rule, we stated 
that we consider a device to be surgically inserted or implanted if it 
is introduced into the human body through a surgically created 
incision. We also stated that we do not consider an item used to cut or 
otherwise create a surgical opening to be a device that is surgically 
inserted or implanted.
    In our November 15, 2004 final rule with comment period, we 
responded to comments received on our CY 2005 OPPS proposed rule, which 
requested that we revisit our surgical insertion and implantation 
criterion for establishing a new device category. The commenters 
specifically requested that CMS eliminate the current requirement that 
items that are included in new pass-through device categories must be 
surgically inserted or implanted through a surgically created incision. 
The commenters expressed concern that the current requirement may 
prevent access to innovative and less invasive technologies, 
particularly in the areas of gynecologic, urologic, colorectal, and 
gastrointestinal procedures. These commenters asked that CMS change the 
surgical insertion or implantation criterion to allow pass-through 
payment for potential new device categories that include items 
introduced into the human body through a natural orifice, as well as 
through a surgically created incision. Several of the commenters 
recommended that CMS allow the creation of a new pass-through category 
for items implanted or inserted through a natural orifice, as long as 
the other existing criteria are met.
    In responding to the commenters, we stated in the November 15, 2004 
final rule with comment period (69 FR 65774) that we were also 
interested in hearing the views of other parties and receiving 
additional information on these issues. While we appreciate and welcome 
additional comments on these issues from the medical device makers, we 
were also interested in hearing the views of Medicare beneficiaries, of 
the hospitals that are paid under the OPPS, and of physicians and other 
practitioners who attend to patients in the hospital outpatient 
setting. For that reason, we solicited additional comments on this 
topic within the 60-day comment period for the November 15, 2004 final 
rule with comment period (69 FR 65774 through 65775). In framing their 
comments, we asked that commenters consider the following questions 
specific to devices introduced into the body through natural orifices:
    1. Whether orifices include those that are either naturally or 
surgically created, as in the case of ostomies. If you believe this 
includes only natural orifices, why do you distinguish between natural 
and surgically created orifices?
    2. How would you define ``new,'' with respect to time and to 
predecessor technology? What additional criteria or characteristics do 
you believe distinguish ``new'' devices that are surgically introduced 
through an existing orifice from older technology that also is inserted 
through an orifice?
    3. What characteristics do you consider to distinguish a device 
that might be eligible for a pass-through category even if inserted 
through an existing orifice from materials and supplies such as 
sutures, clips or customized surgical kits that are used incident to a 
service or procedure?
    4. Are there differences with respect to instruments that are seen 
as supplies or equipment for open procedures when those same 
instruments are passed through an orifice using a scope?
(1) Public Comments Received on the November 15, 2004 Final Rule With 
Comment Period and Our Responses
    Below is a summary of the public comments we received on the four 
stated surgical insertion and implantation device criterion questions 
and our responses to them.
    Comment: Most commenters generally framed their responses to the 
four

[[Page 68629]]

questions listed above. Commenters were generally in favor of modifying 
our surgical insertion and implantation criterion so that devices that 
are placed into patients without the need for a surgical incision would 
not be ineligible for pass-through payment, claiming that devices that 
are inserted through a natural orifice offer important benefits to 
Medicare beneficiaries, such as avoidance of more costly and more 
invasive surgery. One commenter stated that procedures that could be 
performed with minimal morbidity and on an outpatient basis are the 
trend for surgery and should be encouraged. Another commenter believed 
that our criterion of surgical insertion or implantation through a 
surgically created incision was ineffective as a clear and 
comprehensive description of surgical procedures, including endoscopic 
and laparoscopic procedures.
    Regarding the first specific question we posed, whether devices 
introduced into the body through natural orifices includes orifices 
that are either naturally or surgically created, commenters generally 
stated CMS should include devices as potentially eligible for pass-
through categories whether they are introduced through orifices that 
are either naturally or surgically created, as in the case of ostomies, 
if the devices meet other cost and clinical criteria, in order to 
encourage the development of new technologies.
    Regarding the second question restated above, which asked how the 
public would define ``new'' with respect to time and to predecessor 
technology, some commenters stated that they believed the current 
clinical and cost criteria are sufficient and that no additional 
criteria or characteristics are needed. Several commenters indicated 
that the timeframe for what CMS considers ``new'' could be clarified so 
that if the device in question was not FDA approved or not used for the 
services in the OPD during the year of the hospital claims that 
provided the basis for the most recent OPPS update, it should be 
considered ``new.'' Some commenters elaborated by example. They stated 
that if CMS changes the surgical insertion or implantation requirement 
to include devices inserted through natural orifices in CY 2005, 
devices approved by the FDA and in use in the OPD in CY 2003 or 
previously would not be eligible, while devices approved by FDA in CY 
2004 or later and used in the OPD settings would be eligible for pass-
through consideration. Another commenter stated that the definition of 
``new'' device should include those devices that require only an FDA 
investigational device exemption (IDE) clearance. The commenter further 
stated that these devices should be granted ``new'' status at the time 
of FDA release as an IDE. The commenter stated that if FDA required a 
premarket approval (PMA) for the device, a determination of newness 
should be made on a case-by-case basis.
    Regarding the question of what characteristics distinguish a device 
that might be eligible for a pass-through category even if inserted 
through an existing orifice from materials and supplies that are used 
incident to a service or procedure, some commenters generally believed 
that the current clinical and cost criteria are sufficient to 
distinguish devices that might be eligible from materials and supplies. 
Other commenters stated that the device must be an integral part of the 
procedure or that it should include the characteristic of having a 
diagnostic or therapeutic purpose, without which the procedure could 
not be performed. Thus, according to these commenters, the device must 
function for a specific procedure, while supplies may be used for many 
procedures. One commenter pointed out that many devices are now 
implanted through the use of naturally occurring orifices or without 
significant incisions. This commenter indicated that the requirement of 
a ``traditional incision'' no longer serves the purpose of 
distinguishing between devices that are and are not implanted, or 
between devices and supplies and instruments. The commenter stated that 
retaining the requirement of a traditional incision could create 
incentives to use more invasive technology, if that is the technology 
that is eligible for pass-through payments and less invasive technology 
is not. The commenter suggested excluding tools and disposable supplies 
by excluding any item that is used primarily for the purpose of cutting 
or delivering an implantable device. However, the commenter recommended 
not reducing payment when delivery systems are packaged with the 
device. The commenter further recommended that the term ``incision'' be 
clearly defined to include all procedures involving the cutting, 
breaking, or puncturing of tissue or skin, regardless of how small that 
cut is, provided that the device is attached to or inserted into the 
body via this cut, puncture, or break. Another commenter stated that 
there are items included in a surgical kit that have significant cost 
and are single use, for example, guidewires, implying that it is 
sometimes difficult to determine what a supply is.
    Regarding our question about whether there are differences with 
respect to instruments that are seen as supplies or equipment for open 
procedures when those same instruments are passed through an orifice 
using a scope, commenters believed that the definitions of supplies and 
eligible devices are independent of the use of a scope during a 
procedure, and stated there were no distinguishing features of supplies 
or equipment. One commenter reiterated that the current clinical and 
cost criteria are sufficient to distinguish eligible devices (that is, 
those with ``a specific therapeutic use'') from materials and supplies. 
Commenters believed that the use of a scope should not be a factor in 
the distinction between devices and supplies.
    One commenter urged us to consider the points that the surgical 
incision requirement is not mandated by statute and that CMS' criterion 
to limit devices to only those that are surgically inserted or 
implanted may have been based upon concern that less restrictive 
criteria would cause spending on pass-though items to exceed the pool 
of money set to fund the pass-though payments. The commenter indicated 
that this concern would no longer be valid, given the relatively few 
items currently paid on a pass-through basis.
    Response: As we stated in the November 15, 2004 final rule, we 
share the view that it is important to ensure access for Medicare 
beneficiaries to new technologies that offer substantial clinical 
improvement in the treatment of their medical conditions. We also 
recognize that since the beginning of the OPPS, there have been 
beneficial advances in technologies and services for many conditions, 
which have both markedly altered the courses of medical care and 
ultimately improved the health outcomes of many beneficiaries.
    We carefully considered the comments and proposed to maintain our 
current criterion that a device must be surgically inserted or 
implanted, but also proposed to modify the way we currently interpret 
this criterion under Sec.  419.66(b)(3) of the regulations. We proposed 
to consider eligible those items that are surgically inserted or 
implanted either through a natural orifice or a surgically created 
orifice (such as through an ostomy), as well as those that are inserted 
or implanted through a surgically created incision. We noted that we 
would maintain all of our other criteria in Sec.  419.66 of the 
regulations, as elaborated in our various rules, such as the November 
1, 2002 final rule (67 FR 66781 through 66787).

[[Page 68630]]

Specifically, we noted that we would maintain the clarification made at 
the time we clarified the surgically inserted or implanted criterion in 
our August 3, 2000 interim final rule with comment period, namely, that 
we do not consider an item used to cut or otherwise create a surgical 
opening to be a device that is surgically implanted or inserted (65 FR 
67805).
    With this proposed revision of our definition of devices that are 
surgically inserted or implanted, we reminded the public that device 
category eligibility for transitional pass-through payment continues to 
depend on meeting our substantial clinical improvement criterion, where 
we compare the clinical outcomes of treatment options using the device 
to currently available treatments, including treatments using devices 
in existing or previously existing pass-through device categories. We 
expect that requested new pass-through device categories that 
successfully demonstrate substantial clinical improvement for Medicare 
beneficiaries would describe new devices, where the additional device 
costs would not be reflected in the hospital claims data providing the 
costs of treatments available during the time period used for the most 
recent OPPS update.
(2) Public Comments Received on the CY 2006 OPPS Proposed Rule and Our 
Responses
    We received many comments concerning our proposals to modify the 
surgical insertion or implantation criterion for new pass-through 
device categories.
    Comment: Commenters supported our proposal to modify the way we 
currently interpret our criterion that a device must be surgically 
inserted or implanted under Sec.  419.66(b)(3) of the regulations, but 
suggested that CMS consider eligible those items that are surgically 
inserted or implanted either through a natural orifice or a surgically 
created orifice (such as through an ostomy), as well as items that are 
surgically inserted or implanted through a surgically created incision. 
A few commenters suggested that CMS modify the regulatory language to 
codify this change, by explicitly stating in Sec.  419.66(b)(3) that 
the device is implanted or inserted through a natural or surgically 
created orifice or through a surgically created incision. These 
commenters made this request in the context of stating that the 
proposed interpretation resolves the current need to make a traditional 
surgical incision to insert or implant a device through an orifice for 
that device to be considered eligible for a pass-through device 
category.
    Response: We appreciate the support for our proposal to modify our 
interpretation of the surgical insertion or implantation criterion for 
pass-through payment eligibility for devices. Our current criterion is 
that a device must be surgically inserted or implanted, while our 
interpretation of this criterion up to this point has been to consider 
eligible only those devices that are inserted or implanted through a 
surgically created incision, as clarified in our August 3, 2000 interim 
final rule. As stated above, other clarifications in that interim final 
rule remain. We do not believe that it is either essential or advisable 
to revise the regulations. Therefore, we are not changing the current 
language of Sec.  419.66(b)(3), as some commenters have suggested. 
However, we are adopting as final our interpretation that surgical 
insertion or implantation criteria include devices that are surgically 
inserted or implanted via a natural or surgically created orifice, as 
well as those devices that are inserted or implanted via a surgically 
created incision. We will maintain all of the other criteria in Sec.  
419.66 of the regulations, as elaborated in our various rules, such as 
the November 1, 2002 final rule (67 FR 66781 through 66787) and our 
August 3, 2000 interim final rule with comment period, namely, that we 
do not consider an item used to cut or otherwise create a surgical 
opening to be a device that is surgically implanted or inserted (65 FR 
67805).
b. Existing Device Category Criterion
    One of our criteria, as set forth in Sec.  419.66(c)(1) of the 
regulations, to establish a new device category for pass-through 
payment is that the devices that would populate the category not be 
described by any existing or previously existing category. Commenters 
to our various proposed rules, as well as applicants for new device 
categories, have expressed concern that some of our existing and 
previously existing device category descriptors are overly broad, and 
that the category descriptors as they are currently written may 
preclude some new technologies from qualifying for establishment of a 
new device category for pass-through payment. These parties have 
recommended that CMS consider modifying the descriptors for existing 
device categories, especially when a device would otherwise meet all 
the other criteria for establishing a new device category to qualify 
for pass-through payment.
    We agree that implementation of the requirement that a new device 
category not be described by an existing or previously existing 
category merits review. Beginning with CY 2006, 3 years will have 
elapsed since the vast majority of the 97 initial device categories we 
established on April 1, 2001, will have expired: 95 categories expired 
after December 31, 2002, and 2 categories expired after December 31, 
2003. Several additional years will have passed since those categories 
were first populated in CY 2000 or CY 2001. Thus, while some of the 
initial device category descriptors sufficed at the time they were 
first created, further clarification as to the types of devices that 
they are meant to describe is indicated. Therefore, we proposed to 
create an additional category for devices that meet all of the criteria 
required to establish a new category for pass-through payment in 
instances where we believe that an existing or previously existing 
category descriptor does not appropriately describe the new type of 
device. This may entail the need to clarify or refine the short or long 
descriptors of the previous category. We will evaluate each situation 
on a case-by-case basis. We proposed that any such clarification will 
be made prospectively from the date the new category would be made 
effective.
    We also proposed to revise Sec.  419.66(c)(1) of the regulations, 
accordingly, to reflect, as one of the criteria for establishing a 
device category, our determination that a device is not appropriately 
described by any of the existing categories or by any category 
previously in effect. In order to determine if a ``new'' device is 
appropriately described by an existing or previously existing category 
of devices, we proposed to apply two tests based upon our evaluation of 
information provided to us in the device category application. First, 
we will expect an applicant for a new device category to show that its 
device is not similar to devices (including related predicate devices) 
whose costs are reflected in the OPPS claims data in the most recent 
OPPS update. Second, we will require an applicant for a new device 
category to demonstrate that utilization of its device provides a 
substantial clinical improvement for Medicare beneficiaries compared 
with currently available treatments, including procedures utilizing 
devices in existing or previously existing device categories. We will 
consider a new device that meets both of these tests not to be 
appropriately described by one of the existing or previously existing 
pass-through device categories.
    We received a large number of public comments concerning our 
proposal to create an additional category for devices

[[Page 68631]]

that meet all of the criteria required to establish a new category for 
pass-through payment in instances where we believe that an existing or 
previously existing category descriptor does not appropriately describe 
the new type of device.
    Comment: Commenters generally supported our proposal to create an 
additional category for devices that meet all of the criteria required 
to establish a new category for pass-through payment in instances where 
we believe that an existing or previously existing category descriptor 
does not appropriately describe the new type of device, and which may 
entail the need to clarify or refine the short or long descriptors of 
the previous category. The commenters believed that CMS has sufficient 
documentation on devices in expired categories to differentiate those 
devices from new devices, as well as the authority to clarify the 
definitions of previously existing categories. The commenters gave 
examples of devices that they believe are not appropriately described 
by existing categories and whose descriptors are overly broad. 
Commenters also supported the application of the two tests that we 
proposed to apply in order to determine if the devices in device 
category applications are described by an existing or previously 
existing category. One commenter expressed that it would be useful for 
CMS to provide additional details on how we intend to evaluate whether 
a new technology is similar to existing technologies. Another commenter 
expressed concern that we have not developed standards of proof of 
substantial clinical improvement, which is one of the proposed tests, 
and encouraged CMS to develop further explanation of the substantial 
clinical improvement test.
    Response: We appreciate the commenters' support for our proposed 
modification to our policy that a device may not be described by an 
existing or previously existing device category. Regarding the 
recommendations made for clarifying whether a nominated new device is 
similar to an existing technology, as new device applications consist 
of unique technologies, evaluation of what constitutes a similar 
technology or substantial clinical improvement is done on an individual 
application basis. We refer the commenters to our discussion of the 
substantial clinical improvement criterion that is found in our 
November 1, 2002 final rule (67 FR 66782-66783), which provides a list 
of criteria and examples of clinical outcomes that are used to 
determine if a request for a new category of devices meets our 
substantial clinical improvement criterion.
    Comment: A few commenters recommended that CMS consider pending 
pass-through applications in light of this modification to the existing 
category criterion, and that CMS make modifications to existing or 
previously existing categories effective January 1, 2006, where all 
device category criteria are met.
    Response: It is our intention to evaluate pending pass-through 
device category applications against any changes to criteria as a 
result of this final rule with comment period. If any pending 
applications are then eligible for establishment of a new device 
category for pass-through payment, we will endeavor to add those for 
payment effective January 1, 2006. Any payment instructions would be 
announced in the program transmittal implementing our CY 2006 OPPS 
update.
    Comment: In commenting on our proposal to modify the existing 
device category criterion for pass-through payment for devices, a 
number of commenters noted that rechargeable implantable pulse 
generator (IPG) neurostimulators should be provided with pass-through 
payment status, and that a new category is needed specifically for 
rechargeable neurostimulators. The commenters claimed that rechargeable 
neurostimulators have allowed a significant advance to the field of 
neuromodulation for the treatment of chronic intractable pain. The 
commenters stated there is a high degree of patient compliance with 
rechargeable neurostimulators, and these devices will reduce the cost 
of spinal cord stimulation over time by reducing the number of surgical 
battery replacements. A large number of commenters stated that the new 
class of rechargeable IPG neurostimulators meets our proposed new tests 
to determine if a device is described by an existing or previously 
existing category. The commenters requested that CMS clarify the 
previously existing category to state that it described nonrechargeable 
neurostimulators. The commenters recommended that CMS apply any revised 
criterion to pending applications.
    Response: We note that two pass-through applications now under 
consideration are for devices currently described by a previously 
existing pass-through category. These applications are for implantable 
rechargeable neurostimulators. Neurostimulators are covered by a 
previously existing OPPS device category for pass-through payment, 
C1767, Generator, neurostimulator (implantable). This same type of 
rechargeable device was considered for the IPPS new technology add-on 
payment, and passed all that payment system's criteria, including 
demonstrating substantial clinical improvement. Therefore, with the 
adoption of our proposal to clarify an existing or previously existing 
device category if an existing or previously existing device category 
does not appropriately describe a new device and the device would 
otherwise be eligible for a new pass-through device category, we will 
consider the rechargeable neurostimulator applications for pass-through 
payment beginning January 2006, in which case we would also consider 
the need to clarify or refine the description of category C1767. Any 
coding and payment information will be announced in the program 
transmittal implementing the OPPS for CY 2006. We also note that we 
have included an estimate for a rechargeable neurostimulator category 
in our pass-through spending estimate in section VI.B of this rule, 
should there be creation of a new device category for pass-through 
payment for such devices.
    We are finalizing this proposal without change. We will create an 
additional category for devices that meet all of the criteria required 
to establish a new category for pass-through payment in instances where 
we believe that an existing or previously existing category descriptor 
does not appropriately describe the new type of device. This may entail 
the need to clarify or refine the short or long descriptors of the 
previous category. We will evaluate each situation on a case-by-case 
basis and apply the two tests described above. Any such clarification 
to a category descriptor will be made prospectively from the date the 
new category would be made effective. We are also finalizing our 
proposed revision of our regulations at Sec.  419.66(c)(1) to reflect 
this change.

V. Payment Changes for Drugs, Biologicals, and Radiopharmaceuticals

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

1. Background
    Section 1833(t)(6) of the Act provides for temporary additional 
payments or ``transitional pass-through payments'' for certain drugs 
and biological agents. As originally enacted by the BBRA, this 
provision required the Secretary to make additional payments to 
hospitals for current orphan drugs, as designated under section 526 of 
the Federal Food, Drug, and Cosmetic Act (Pub. L. 107-186); current 
drugs and biological agents

[[Page 68632]]

and brachytherapy used for the treatment of cancer; and current 
radiopharmaceutical drugs and biological products. For those drugs and 
biological agents referred to as ``current,'' the transitional pass-
through payment began on the first date the hospital OPPS was 
implemented (before enactment of BIPA (Pub. L. 106-554), on December 
21, 2000).
    Transitional pass-through payments are also required for certain 
``new'' drugs, devices, and biological agents that were not being paid 
for as a hospital OPD service as of December 31, 1996, and whose cost 
is ``not insignificant'' in relation to the OPPS payment for the 
procedures or services associated with the new drug, device, or 
biological. Under the statute, transitional pass-through payments can 
be made for at least 2 years but not more than 3 years. In Addenda A 
and B to this final rule with comment period, pass-through drugs and 
biological agents are identified by status indicator ``G.''
    The process to apply for transitional pass-through payment for 
eligible drugs and biological agents can be found on our CMS Web site: 
www.cms.hhs.gov. If we revise the application instructions in any way, 
we will post the revisions on our Web site and submit the changes to 
the Office of Management and Budget (OMB) for approval, as required 
under the Paperwork Reduction Act (PRA). Notification of new drugs and 
biologicals application processes is generally posted on the OPPS Web 
site at: http://www.cms.hhs.gov/providers/hopps.
2. Expiration in CY 2005 of Pass-Through Status for Drugs and 
Biologicals
    Section 1833(t)(6)(C)(i) of the Act specifies that the duration of 
transitional pass-through payments for drugs and biologicals must be no 
less than 2 years and no longer than 3 years. The drugs whose pass-
through status will expire on December 31, 2005, meet that criterion. 
In the CY 2006 OPPS proposed rule, in Table 19 (70 FR 42722) we listed 
the 10 drugs and biologicals for which we proposed that pass-through 
status would expire on December 31, 2005.
    We received one public comment concerning the proposed expiration 
of pass-through status for those drugs and biologicals on December 31, 
2005.
    Comment: One commenter noted that the proposed rule did not make 
clear whether drugs coming off pass-through status will be reassigned 
to J-codes or will continue to be listed under their C-codes for 
payment purposes and requested clarification in the final rule.
    Response: In order to reduce redundancy and simplify coding for 
drugs, biologicals, and radiopharmaceuticals under the OPPS, we are 
deleting the temporary C-codes for items that also have permanent HCPCS 
codes and are paying for those items under the permanent HCPCS codes if 
it is appropriate to do so. Among the items whose pass-through status 
will expire on December 31, 2005, are HCPCS codes C9123, C9203, C9205, 
C9211, and C9212, which will be deleted effective December 31, 2005. 
For services furnished on or after January 1, 2006, hospitals should 
use HCPCS code J7344 to bill for Transcyte, HCPCS code Q9955 to bill 
for Perflexane lipid micro, HCPCS code J9263 to bill for Oxaliplatin, 
and HCPCS code J0215 to bill for Alefacept. Later in the preamble, we 
list all of the C-codes in Table 25 that will be deleted on December 
31, 2005 and replaced with other existing or new HCPCS codes in CY 
2006.
    For this final rule with comment period, in Table 18 below, we are 
specifying the drugs and biologicals for which pass-through status will 
expire on December 31, 2005. This listing is the same as that published 
in the proposed rule.

        Table 18.--List of Drugs and Biologicals for Which Pass-Through Status Expires December 31, 2005
----------------------------------------------------------------------------------------------------------------
                     HCPCS                         APC                        Short descriptor
----------------------------------------------------------------------------------------------------------------
C9123.........................................       9123  Transcyte, per 247 sq cm.
C9203.........................................       9203  Perflexane lipid micro.
C9205.........................................       9205  Oxaliplatin.
C9211.........................................       9211  Inj, alefacept, IV.
C9212.........................................       9212  Inj, alefacept, IM.
J0180.........................................       9208  Agalsidase beta injection.
J1931.........................................       9209  Laronidase injection.
J2469.........................................       9210  Palonosetron HCl.
J3486.........................................       9204  Ziprasidone mesylate.
J9041.........................................       9207  Bortezomib injection.
----------------------------------------------------------------------------------------------------------------

3. Drugs and Biologicals With Pass-Through Status in CY 2006
    In the CY 2005 OPPS proposed rule (70 FR 42722 and 42723), we 
proposed to continue pass-through status in CY 2006 for 14 drugs and 
biologicals. These items, which were listed in Table 20 of the CY 2006 
OPPS proposed rule (70 FR 42723), were given pass-through status as of 
April 1, 2005. The APCs and HCPCS codes for drugs and biologicals that 
we proposed to continue with pass-through status in CY 2006 are 
assigned status indicator ``G'' in Addenda A and B of this final rule 
with comment period.
    Section 1833(t)(6)(D)(i) of the Act sets the payment rate for pass-
through eligible drugs (assuming that no pro rata reduction in pass-
through payment is necessary) as the amount determined under section 
1842(o) of the Act. We note that this section of the Act also states 
that if a drug or biological is covered under a competitive acquisition 
contract under section 1847B of the Act, the payment rate is equal to 
the average price for the drug or biological for all competitive 
acquisition areas and the year established as calculated and adjusted 
by the Secretary. The competitive acquisition program had not been 
implemented at the time of issuance of the CY 2006 proposed rule. 
Therefore, we did not have payment rates for certain drugs and 
biologicals that would be covered under this program at that time. 
Section 1847A of the Act, as added by section 303(c) of Pub. L. 108-
173, establishes the use of the average sales price (ASP) methodology 
as the basis for payment of drugs and biologicals described in section 
1842(o)(1)(C) of the Act and furnished on or after January 1, 2005. 
This payment methodology is set forth in Sec.  419.64 of the 
regulations. Similar to the payment policy established for pass-through 
drugs and biologicals in CY 2005, we proposed to pay under the OPPS for 
drugs and biologicals with pass-through status in CY 2006 consistent 
with the provisions of section 1842(o) of the Act, as amended by

[[Page 68633]]

section 621 of Pub. L. 108-173, at a rate that is equivalent to the 
payment these drugs and biologicals would receive in the physician 
office setting.
    Section 1833(t)(6)(D)(i) of the Act also sets the amount of 
additional payment for pass-through eligible drugs and biologicals (the 
pass-through payment amount). The pass-through payment amount is the 
difference between the amount authorized under section 1842(o) of the 
Act, and the portion of the otherwise applicable fee schedule amount 
(that is, the APC payment rate) that the Secretary determines is 
associated with the drug or biological.
    In the CY 2006 OPPS proposed rule, (70 FR 42722 and 42731) we 
proposed to continue to make separate payment in CY 2006 for new drugs 
and biologicals with a HCPCS code consistent with the provisions of 
section 1842(o) of the Act, as amended by section 621 of Pub. L. 108 
173, at a rate that is equivalent to the payment they would receive in 
a physician office setting, whether or not we have received a pass-
through application for the item. Accordingly, in CY 2006 the pass-
through payment amount would equal zero for those new drugs and 
biologicals that we determine have pass-through status. That is, when 
we subtract the amount to be paid for pass-through drugs and 
biologicals under section 1842(o) of the Act, as amended by section 621 
of Pub. L. 108-173, from the portion of the otherwise applicable fee 
schedule amount or the APC payment rate associated with the drug or 
biological that would be the amount paid for drugs and biologicals 
under section 1842(o) of the Act as amended by section 621 of Pub. L. 
108-173, the resulting difference is equal to zero.
    We proposed to use payment rates based on the ASP data from the 
fourth quarter of 2004 for budget neutrality estimates, impact 
analyses, and to complete Addenda A and B of the proposed rule because 
these were the most recent numbers available to us during the 
development of the proposed rule. These payment rates were also the 
basis for drug payments in the physician office setting effective April 
1, 2005. To be consistent with the ASP-based payments that would be 
made when these drugs and biologicals are furnished in physician 
offices, we stated in our proposed rule (70 FR 42722 and 42723) that we 
planned to make any appropriate adjustments to the amounts shown in 
Addenda A and B of the proposed rule when we publish our final rule and 
also on a quarterly basis on our Web site during CY 2006 if later 
quarter ASP submissions indicate that adjustments to the payment rates 
for these pass-through drugs and biologicals are necessary.
    In Table 20 of the proposed rule, we listed the drugs and 
biologicals for which we proposed that pass-through status continue in 
CY 2006. We assigned pass-through status to these drugs and biologicals 
as of April 1, 2005. Since publication of the CY 2006 OPPS proposed 
rule, we have approved three additional drugs and biologicals for pass-
through payment beginning on or after July 1, 2005. These products are 
Abraxane, which has been assigned HCPCS code C9127 (Injection, 
Paclitaxel Protein Bound Particles, per 1 mg); Macugen, which has been 
assigned HCPCS code C9128 (Injection, Pegaptanib Sodium, per 0.3 mg); 
and Clolar, which has been assigned HCPCS code C9129 (Injection, 
Clofarabine, per 1 mg). (See Change Request 3915, Transmittal 599 
issued on June 30, 2005.) In addition, two more products have been 
approved for pass-through status beginning on or after October 1, 2005. 
They are Retisert, which has been assigned HCPCS code C9225 (Injection, 
fluocinolone acetonide intravitreal implant, per 0.59 mg) and Prialt, 
which has been assigned HCPCS code C9226 (Injection, ziconotide for 
intrathecal infusion, per 5 mcg). (See Change Request 4035, Transmittal 
691 issued on September 30, 2005). For CY 2006, the C-codes C9127, 
C9128, C9129, and C9226 have been deleted and replaced with permanent 
HCPCS codes J9264, J2503, J9027, and J2278, respectively. These new 
eligible pass-through items are listed in Table 19 below. We also have 
included in Addenda A and B to this final rule with comment period the 
CY 2006 APC payment rates for all pass-through drugs and biologicals.
    We received several public comments on the proposed listing and 
payment rates for drugs and biologicals with pass-through status 
continuing in CY 2006.
    Comment: A few commenters indicated that our proposal to apply the 
same payment methodology to pass-through drugs and to drugs that are 
classified as a ``specified covered outpatient drug'' may not 
appropriately recognize and pay hospitals for the additional costs that 
are often associated with new technologies that are given pass-through 
status. One commenter indicated that the proposal negated the intent of 
the pass-through payment, which was meant to compensate hospitals for 
costs not covered by existing APC payments. Commenters urged CMS to 
consider maintaining a differential in payment systems between 
innovative and older drugs in order to ensure adequate access to newer 
therapies within the hospital outpatient setting. One commenter 
suggested that CMS consider making the pass-through payment methodology 
consistent with the methodology applied to new drugs in the physician 
office setting (that is, wholesale acquisition cost or the applicable 
payment methodology in effect on November 1, 2003) to distinguish and 
provide sufficient payment for the class of pass-through drugs in 
future years.
    Response: Section 1833(t)(6)(D)(i) of the Act sets the additional 
payment amount for pass-through eligible drugs or biologicals as the 
difference between the amount determined under section 1842(o) of the 
Act and the APC payment rate determined by the Secretary associated 
with the drug or biological. As we explained earlier, section 1847A of 
the Act, as added by section 303(c) of Pub. L. 108-173, establishes the 
use of the ASP methodology as the basis for payment of drugs and 
biologicals described in section 1842(o)(1)(C) of the Act and furnished 
on or after January 1, 2005. Our proposal to pay for drugs and 
biologicals with pass-through status in CY 2006 using the ASP 
methodology at a rate that is equivalent to the payment these drugs and 
biologicals would receive in the physician office setting is consistent 
with the provisions of section 1842(o) of the Act, as amended by 
section 621 of Pub. L. 108-173. Specifically, in CY 2006, we will be 
paying for drugs and biologicals with pass-through status under the 
OPPS based on the ASP methodology and using ASP data specific to the 
drug or biological itself. We note that there may be certain drugs and 
biologicals with pass-through status that are payable under different 
HCPCS codes in the physician offices and outpatient departments, and 
for such cases, payment for the drug or biological under the OPPS will 
be based on the ASP data for the item described by the code that is 
used under the OPPS. We agree that pass-through payments are designed 
to recognize differences between the payment rates under the OPPS and 
the payment rates for certain drugs and biologicals in the physician 
office setting. Statutory changes in the payment methodology for pass-
through drugs and biologicals mean that such cost differentials no 
longer exist.
    We have used payment rates based on the ASP data from the second 
quarter of CY 2005 for budget neutrality estimates, impact analyses, 
and to complete Addenda A and B of this final rule with comment period 
because these were the most recent numbers available to us during the 
development of this rule. These payment rates are also the basis

[[Page 68634]]

for drug payments in the physician office setting effective October 1, 
2005. However, the payment rates for pass-through drugs and biologicals 
that will be effective in the OPPS on January 1, 2006 will be based on 
ASP data from the third quarter of CY 2005, which will also be the 
basis for drug payments in physician offices as of January 1, 2006. To 
be consistent with the ASP-based payments that will be made when these 
pass-through drugs and biologicals are furnished in physician offices, 
we plan to make any appropriate adjustments in CY 2006 to the payment 
rates for these items if later quarter ASP submissions indicate that 
adjustments to the payment rates are necessary.
    As noted earlier, section 1833(t)(6)(D)(i) of the Act also states 
that if a drug or biological is covered under a competitive acquisition 
contract under section 1847B of the Act, the payment rate is equal to 
the average price for the drug or biological for all competitive 
acquisition areas and year established as calculated and adjusted by 
the Secretary. The competitive acquisition program still has not been 
implemented with issuance of this final rule with comment period. We 
expect implementation by July 1, 2006. For this final rule with comment 
period, we do not have payment rates for certain drugs and biologicals 
that would be covered under this program at that time. However, when 
the competitive acquisition program is implemented in CY 2006, the OPPS 
payment rates for pass-through drugs and biologicals that will also be 
covered under the program will be based on the competitive acquisition 
program methodology in CY 2006.
    We refer readers to section V.B.3.a. of this preamble for a 
discussion of payment policies for specified covered outpatient drugs.
    Comment: The manufacturer of natalizumab (HCPCS code Q4079) 
supported continued pass-through status for this product, but was 
concerned that continuation of the 1-mg unit descriptor will create 
confusion among providers and inject the potential of erroneously 
denied or underpaid claims. The commenter indicated that a 300 mg dose 
of the product is always uniformly infused and urged CMS to amend the 
coding descriptor to reflect its clinical use.
    Response: We recognize the commenter's concern. However, the 
National HCPCS Panel coordinates decisions regarding the descriptors of 
permanent HCPCS codes. Therefore, we will not respond to this comment 
as it is outside the scope of this rule.
    Table 19 below lists the drugs and biologicals that will have pass-
through status in CY 2006. Addenda A and B of this final rule with 
comment period list the final CY 2006 rates for these pass-through 
drugs and biologicals, which are based on ASP data reported by 
manufacturers from the second quarter of CY 2005. These items are 
assigned to status indicator ``G.''
    Comment: A commenter recommended that CMS finalize the proposal to 
continue payment for HCPCS codes C9221 and C9222 as pass-through 
biologics in CY 2006 and requested that CMS confirm that the proposed 
payment rate of $1,234.36 for HCPCS code C9221 reflected ASP+6 percent.
    Response: We agree with the commenters that HCPCS codes C9221 and 
C9222 should be paid as pass-through items in CY 2006; therefore, these 
items are listed in Table 19 along with other drugs and biologicals 
that will also have pass-through status under the OPPS in CY 2006 and 
are also assigned to status indicator ``G'' in Addendum B of this final 
rule with comment period.
    Comment: A commenter indicated that the HCPCS code C9127 
(paclitaxel protein-bound particles for injectable suspension, per 1 
mg) was granted pass-through status effective July 1, 2005; however, 
the CY 2006 proposed rule listed this code with a status indicator 
``K'' rather than status indicator ``G.'' The commenter requested that 
this code be assigned to status indicator ``G'' in the final rule 
indicating its pass-through status.
    Response: In the proposed rule, we listed only the drugs and 
biologicals that received pass-through status as of April 1, 2005. As 
indicated earlier, there are additional drugs and biologicals that have 
been approved for pass-through status since the publication of the 
proposed rule, and HCPCS code C9127 is one of the drugs that received 
pass-through status effective July 1, 2005. We note that HCPCS code 
C9127 has been deleted effective December 31, 2005 and replaced with 
HCPCS code J9264 in CY 2006. Consequently, in this final rule we have 
assigned HCPCS code J9264 to status indicator ``G'' in Addendum B in 
this final rule with comment period.
    Comment: Another commenter indicated that it was pleased with CMS' 
proposal to continue pass-through status in CY 2006 for the drug 
Orthovisc, which is reported under HCPCS code C9220; however, it was 
also concerned that once the period of eligibility for pass-through 
payments expired, there will not be a code corresponding to HCPCS code 
C9220 that will be available for use. The commenter expressed concern 
about the CMS HCPCS Workgroup's preliminary recommendation to deny a 
unique code for Orthovisc and to include Orthovisc with other 
viscosupplements described by HCPCS code J7317. The commenter stated 
its belief that a new code is necessary and appropriate for Orthovisc 
under the established HCPCS process, and such a decision would 
recognize the unique characteristics of Orthovisc, distinguish it from 
other viscosupplements, allow for appropriate payment, and facilitate 
patient access. The commenter indicated that it resubmitted its J-code 
application under the new HCPCS process on December 24, 2004 and 
requested that CMS recognize Orthovisc as a unique product and grant it 
a unique HCPCS code.
    Response: Effective January 1, 2006, the National HCPCS Panel has 
created HCPCS code J7318 (Hyaluron/derive intra-art inj) to describe 
all of the sodium hyaluronate products, including Orthovisc. Decisions 
regarding the creation of permanent HCPCS codes are coordinated by the 
National HCPCS Panel. Comments related to the HCPCS code creation 
process and decisions made by the National HCPCS Panel are outside the 
scope of this rule. However, we note that in CY 2006 because HCPCS code 
C9220 will continue to have pass-through status under the OPPS both 
HCPCS code C9220 and HCPCS code J7318 will be payable under the OPPS, 
and their payment rates will be established using the ASP data for all 
of the products described by these codes. Therefore, we encourage 
providers to continue billing for Orthovisc, which has pass-through 
status, using HCPCS code C9920 in order to receive appropriate payment 
for furnishing this drug in the hospital outpatient setting.
    Comment: A few commenters requested the CMS clarify in the final 
rule how payment for infusion drugs administered through an item of 
DME, such as drugs administered through an implantable or external 
infusion pump, will be paid under the OPPS in CY 2006. One commenter 
was especially concerned about the payment rate for HCPCS code C9226 
(Brand name: Prialt), which is administered through an intrathecal 
pump. The commenters noted CMS' statement that CY 2006 payment for 
drugs and biologicals under the OPPS will follow that of the physician 
office setting; however, CMS did not specifically state that this 
particular group of drugs, which are not paid under the ASP 
methodology, will continue to be paid at 95 percent of AWP in CY 2006. 
Commenters requested that CMS clarify that infusion

[[Page 68635]]

drugs administered through an item of DME and furnished in the hospital 
outpatient setting, like Prialt, will be paid at 95 percent of AWP 
pursuant to section 1842(o)(1)(D) of the Act. One commenter also 
requested that CMS clarify that Prialt is not an orphan drug.
    Response: HCPCS code C9226 was approved for pass-through status 
effective October 1, 2005. As a pass-through drug under the OPPS, 
payment for Prialt was established using the ASP methodology. (See 
Change Request 4035, Transmittal 691 issued on September 30, 2005). As 
with other new drugs without ASP data, payment for Prialt was set at 
WAC+6% ($32.24 per 5 mcg) effective October 1, 2005. We note that 
Prialt is not considered a single-indication orphan drug under OPPS. As 
the commenters noted, section 1842(o)(1)(D) of the Act states that 
drugs infused through DME are paid at 95 percent of AWP until such time 
as they are incorporated into the DME competitive bidding program. 
However, section 1842(o)(1) of the Act (which governs section 
1842(o)(1)(D)) specifically states that this payment methodology only 
applies when a ``drug or biological is not paid on a cost or 
prospective payment basis.'' Payment for drugs under the OPPS is 
established on the basis of prospective rates. The provision that 
requires payment for DME infusion drugs at 95 percent of AWP is 
therefore not applicable to Prialt or any other DME infusion drugs 
furnished in the hospital outpatient setting. Therefore, in CY 2006 we 
will continue to pay for Prialt and other non-pass-through DME infusion 
drugs using the ASP methodology instead of paying at 95 percent of AWP. 
We note that HCPCS code C9226 has been deleted effective December 31, 
2005 and replaced with J2278 in CY 2006. Consequently, in this final 
rule, we have assigned HCPCS code J2278 to status indicator ``G'' in 
Addendum B in this final rule with comment period.

                  Table 19.--List of Drugs and Biologicals With Pass-Through Status in CY 2006
----------------------------------------------------------------------------------------------------------------
                  HCPCS Code                       APC                        Short descriptor
----------------------------------------------------------------------------------------------------------------
C9220.........................................       9220  Sodium hyaluronate.
C9221.........................................       9221  Graftjacket Reg Matrix.
C9222.........................................       9222  Graftjacket SftTis.
C9225.........................................       9225  Fluocinolone acetonide.
J0128.........................................       9216  Abarelix injection.
J0878.........................................       9124  Daptomycin injection.
J2278.........................................       1694  Ziconotide injection.
J2357.........................................       9300  Omalizumab injection.
J2503.........................................       1697  Pegaptanib sodium injection.
J2783.........................................       0738  Rasburicase.
J2794.........................................       9125  Risperidone, long acting.
J7518.........................................       9219  Mycophenolic acid.
J8501.........................................       0868  Oral aprepitant.
J9027.........................................       1710  Clofarabine injection.
J9035.........................................       9214  Bevacizumab injection.
J9055.........................................       9215  Cetuximab injection.
J9264.........................................       1712  Paclitaxel injection.
J9305.........................................       9213  Pemetrexed injection.
Q4079.........................................       9126  Injection, Natalizumab, 1 mg.
----------------------------------------------------------------------------------------------------------------

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

1. Background
    Under the CY 2005 OPPS, we currently pay for drugs, biologicals 
including blood and blood products, and radiopharmaceuticals that do 
not have pass-through status in one of two ways: packaged payment and 
separate payment (individual APCs). We explained in the April 7, 2000 
final rule (65 FR 18450) that we generally package the cost of drugs 
and radiopharmaceuticals into the APC payment rate for the procedure or 
treatment with which the products are usually furnished. Hospitals do 
not receive separate payment from Medicare for packaged items and 
supplies, and hospitals may not bill beneficiaries separately for any 
packaged items and supplies whose costs are recognized and paid within 
the national OPPS payment rate for the associated procedure or service. 
(Program Memorandum Transmittal A-01-133, issued on November 20, 2001, 
explains in greater detail the rules regarding separate payment for 
packaged services.)
    Packaging costs into a single aggregate payment for a service, 
procedure, or episode of care is a fundamental principle that 
distinguishes a prospective payment system from a fee schedule. In 
general, packaging the costs of items and services into the payment for 
the primary procedure or service with which they are associated 
encourages hospital efficiencies and also enables hospitals to manage 
their resources with maximum flexibility. Notwithstanding our 
commitment to package as many costs as possible, we are aware that 
packaging payments for certain drugs, biologicals, and 
radiopharmaceuticals, especially those that are particularly expensive 
or rarely used, might result in insufficient payments to hospitals, 
which could adversely affect beneficiary access to medically necessary 
services.
    Section 1833(t)(16)(B) of the Act, as added by section 621(a)(1) of 
Pub. L. 108-173, requires that the threshold for establishing separate 
APCs for drugs and biologicals be set at $50 per administration for CYs 
2005 and 2006. For CY 2005, we finalized our policy to continue paying 
separately for drugs, biologicals, and radiopharmaceuticals whose 
median cost per day exceeds $50 and packaging the costs of drugs, 
biologicals, and radiopharmaceuticals whose median cost per day is less 
than $50 into the procedures with which they are billed. For CY 2005, 
we also adopted an exception policy to our packaging rule for one 
particular class of drugs, the oral and injectable 5HT3 forms of anti-
emetic treatments (69 FR 65779 through 65780).
2. Criteria for Packaging Payment for Drugs, Biologicals, and 
Radiopharmaceuticals
    In accordance with section 1833(t)(16)(B) of the Act, for CY 2006, 
the threshold for establishing separate

[[Page 68636]]

APCs for drugs and biologicals is required to be set at $50 per 
administration. Therefore, in the CY 2006 proposed rule we proposed to 
continue our existing policy of paying separately for drugs, 
biologicals, and radiopharmaceuticals whose per day cost exceeds $50 
and packaging the cost of drugs, biologicals, and radiopharmaceuticals 
whose per day cost is less than $50 into the procedures with which they 
are billed. We also proposed to continue our policy of exempting seven 
oral and injectable 5HT3 anti-emetic products from our packaging rule 
(Table 21 of the CY 2006 OPPS proposed rule, 70 FR 42723), thereby 
making separate payment for all of the 5HT3 anti-emetic products. As 
stated in our CY 2005 final rule with comment period (69 FR 65779 
through 65780), chemotherapy is very difficult for many patients to 
tolerate, as the side effects are often debilitating. In order for 
beneficiaries to achieve the maximum therapeutic benefit from 
chemotherapy and other therapies with side effects of nausea and 
vomiting, anti-emetic use is often an integral part of the treatment 
regimen. We want to continue to ensure that our payment rules do not 
impede a beneficiary's access to the particular anti-emetic that is 
most effective for him or her as determined by the beneficiary and his 
or her physician.

    Table 20.--Anti-Emetics To Exempt From $50 Packaging Requirement
------------------------------------------------------------------------
           HCPCS Code                       Short description
------------------------------------------------------------------------
J1260..........................  Dolasetron mesylate.
J1626..........................  Granisetron HCl injection.
J2405..........................  Ondansetron HCl injection.
J2469..........................  Palonosetron HCl.
Q0166..........................  Granisetron HCl 1 mg oral.
Q0179..........................  Ondansetron HCl 8 mg oral.
Q0180..........................  Dolasetron mesylate oral.
------------------------------------------------------------------------

    For the CY 2006 proposed payment rates, we calculated the per day 
cost of all drugs, biologicals, and radiopharmaceuticals that had a 
HCPCS code in CY 2004 and were paid (via packaged or separate payment) 
under the OPPS using claims data from January 1, 2004 to December 31, 
2004. In CY 2004, multisource drugs and radiopharmaceuticals had two 
HCPCS codes that distinguished the innovator multisource (brand) drug 
or radiopharmaceutical from the noninnovator multisource (generic) drug 
or radiopharmaceutical. We aggregated claims for both the brand and 
generic HCPCS codes in our packaging analysis of these multisource 
products. Items such as single indication orphan drugs, certain 
vaccines, and blood and blood products were excluded from these 
calculations and our treatment of these items is discussed separately 
in sections V.F., V.E., and X.B., respectively, of this preamble.
    In order to calculate the per day cost for drugs, biologicals, and 
radiopharmaceuticals to determine their packaging status in CY 2006, we 
proposed several changes in the methodology that was described in 
detail in the CY 2004 OPPS proposed rule (68 FR 47996 through 47997) 
and finalized in the CY 2004 final rule with comment period (68 FR 
63444 through 63447). For CY 2006, to calculate the per day cost of the 
drugs, biologicals, and radiopharmaceuticals, our proposed methodology 
was the following:
    Step 1. After application of the CCRs, we aggregated all line-items 
for a single date of service on a single claim for each product. This 
resulted in creation of a single line-item with the total number of 
units and the total cost of a drug or radiopharmaceutical given to a 
patient in a single day.
    Step 2. We then created a separate record for each drug or 
radiopharmaceutical by date of service, regardless of the number of 
lines on which the drug or radiopharmaceutical was billed on each 
claim. For example, ``drug X'' is billed on a claim with two different 
dates of service, and for each date of service, the drug is billed on 
two line-items with a cost of $10 and 5 units for each line-item. In 
this case, the computer program would create two records for this drug, 
and each record would have a total cost of $20 and 10 units of the 
product.
    Step 3. We trimmed records with unit counts per day greater or less 
than 3 standard deviations from the geometric mean. (This is a new step 
in the methodology that we proposed for CY 2006.)
    Step 4. For each remaining record for a drug or 
radiopharmaceutical, we calculated the cost per unit of the drug. If 
the HCPCS descriptor for ``drug X'' is ''per 1 mg'' and one record was 
created for a total of 10 mg (as indicated by the total number of units 
for the drug on the claim for each unique date of service), the 
computer program divided the total cost for the record by 10 to give a 
per unit cost. We then weighted this unit cost by the total number of 
units in the record. We did this by generating a number of line-items 
equivalent to the number of units in that particular claim. Thus, a 
claim with 100 units of ``drug X'' and a total cost of $200 would be 
given 100 line-items, each with a cost of $2, while a claim of 50 units 
with a cost of $50 would be given 50 line items, each with a cost of 
$1.
    Step 5. We trimmed the unit records with cost per unit greater or 
less than 3 standard deviations from the geometric mean.
    Step 6. We aggregated the remaining unit records to determine the 
mean cost per unit of the drug or radiopharmaceutical.
    Step 7. Using only the records that remained after records with 
unit counts per day greater or less than 3 standard deviations from the 
geometric mean were trimmed (step 3), we determined the total number of 
units billed for each item and the total number of unique per-day 
records for each item. We divided the count of the total number of 
units by the total number of unique per-day records for each item to 
calculate an average number of units per day.
    Step 8. Instead of using median cost as done in previous years, we 
used the payment rate for each drug and biological effective April 1, 
2005 for the physician office setting, which was calculated using the 
ASP methodology, and multiplied the payment rate by the average number 
of units per day for each drug or biological to arrive at its per day 
cost. For items that did not have an ASP-based payment rate, we used 
their mean unit cost derived from the CY 2004 hospital claims data to 
determine their per day cost. Our reasoning for using these cost data 
is discussed in section V.B.3.a. of this preamble.
    Step 9. We packaged the items with per day cost based on the ASP 
methodology or mean cost less than $50 and made items with per day cost 
greater than $50 separately payable.
    In the past, many commenters had alleged that hospitals do not 
accurately bill the number of units for drugs and radiopharmaceuticals 
consistent with expected appropriate clinical use. We have consistently 
decided not to determine whether a hospital claim reports a clinically 
appropriate unit dose of a drug for rate-setting purposes. Variations 
among patients with respect to appropriate doses, the variety of 
indications with different dosing regimens for some agents, and the 
possibility of off-label uses make it difficult to know when units are 
incorrectly reported. However, we believed that trimming the units 
would improve the accuracy of estimates by removing those records with 
the most extreme units, without requiring us to speculate about 
clinically appropriate dosing. Therefore, we believed that trimming the 
records with unit counts greater or less than 3 standard deviations 
from the geometric mean would eliminate claims from our analysis that 
might not appropriately

[[Page 68637]]

represent the actual number of units of a drug or radiopharmaceutical 
furnished by a hospital to a patient during a specific clinical 
encounter. Because it reduced extreme variation, trimming on greater or 
less than 3 standard deviations from the geometric mean made this trim 
more conservative and removed fewer records. This change in methodology 
gave us even greater confidence in the cost estimates we use for our 
packaging decisions.
    We specifically requested comments on the changes that we proposed 
in our methodology for packaging drugs and radiopharmaceuticals. In 
response, we received numerous public comments on the proposed 
methodology.
    Comment: Many commenters supported CMS' continued use of the $50 
per day cost threshold to determine whether a drug, biological, or 
radiopharmaceutical will be packaged or paid separately. One commenter 
indicated that this system allows hospital outpatient departments to 
have an efficient option for packaging and for collecting payments for 
less costly drugs. Numerous commenters also supported CMS' proposal to 
exempt the 5HT3 anti-emetic products from the current $50 packaging 
threshold and pay for all of them separately, noting that the policy 
will help to ensure that Medicare beneficiaries have access to the 
particular anti-emetic that is most effective for them as determined by 
the beneficiary and his or her physician. One commenter, to the 
contrary, indicated that the current threshold for separate payment of 
radiopharmaceuticals is too high and distorts the resource homogeneity 
of the nuclear medicine APCs and recommended that CMS make separate 
payments for all radiopharmaceuticals.
    Response: We appreciate the commenters' support of our proposals 
for CY 2006 to establish a packaging threshold for drugs, biologicals, 
and radiopharmaceuticals at $50 per day and to pay separately for the 
seven 5HT3 anti-emetic products. Section 1833(t)(16)(B) of the Act 
requires that the threshold for establishing separate APCs for drugs 
and biologicals be set at $50 per administration for CY 2006. 
Therefore, we cannot change the threshold amount for 
radiopharmaceuticals, to which the policy also applies, as one of the 
commenters has suggested.
    In determining the packaging status of drugs, biologicals, and 
radiopharmaceuticals for CY 2006, we calculated the per day costs of 
these items using the general methodology described above. However, as 
it is our policy to use updated data for the final rule, to determine 
the final per day costs of these items we used the payment rate for 
each drug and biological effective October 1, 2005 for the physician 
office setting, which was calculated using the ASP methodology, along 
with updated hospital claims data from CY 2004. The payment rate was 
multiplied by the average number of units per day for each drug or 
biological, which were recalculated using all of the CY 2004 hospital 
claims data used for this final rule with comment period, to arrive at 
each product's per day cost. For items that did not have an ASP-based 
payment rate, we used their mean unit cost, which we also recalculated 
using all of the CY 2004 hospital claims data used for this final rule 
with comment period to determine their per day cost.
    We note that there are two drugs for which we proposed to pay 
separately in our proposed rule that now have per day costs less than 
$50 based on the updated cost and claims data. In these cases, we are 
applying our equitable adjustment authority to the packaging threshold 
according to the policy that we finalized in the CY 2005 final rule for 
drugs and biologicals with similar circumstances (69 FR 65780). 
Therefore, for CY 2006, we are applying the following policy to these 
drugs and biologicals:
     Drugs and biologicals that were paid separately in CY 
2005, were proposed for separate payment in CY 2006, and have per day 
costs less than $50 based on updated ASPs and hospital claims data used 
for this CY 2006 final rule with comment period will continue to 
receive separate payment in CY 2006.
     Those drugs and biologicals that were packaged in CY 2005, 
were proposed for separate payment in CY 2006, and have per day costs 
less than $50 based on updated ASPs and hospital claims data used for 
this CY 2006 final rule with comment period will remain packaged in CY 
2006.
    Table 21 lists the two drugs and biologicals to which this policy 
will apply, along with their CYs 2005 and 2006 payment status 
indicators.

 Table 21.--Drugs and Biologicals With Per Day Costs Less Than $50 Using Final Rule Data, But Were Proposed for
                                                Separate Payment
----------------------------------------------------------------------------------------------------------------
                                                                                 CY 2005 status   CY 2006 status
                    HCPCS                                Description               indicator        indicator
----------------------------------------------------------------------------------------------------------------
J0580........................................  Penicillin g benzathine inj....               N                N
J3350........................................  Urea injection.................               K                K
----------------------------------------------------------------------------------------------------------------

    We also note that there were several drugs, biologicals, and 
radiopharmaceuticals that we proposed to package in the proposed rule 
and that now have per day costs greater than $50 using updated ASPs and 
all of the hospital claims data from CY 2004 used for this final rule 
with comment period. In accordance with our established policy for such 
cases, for CY 2006 we will pay for these drugs, biologicals, and 
radiopharmaceuticals separately. Table 22 lists the drugs and 
biologicals that were proposed as packaged items, but will be paid 
separately in CY 2006.

 Table 22.--Drugs and Biologicals With Per Day Costs Above $50 for Which
                Separate Payment Will Be Made in CY 2006
------------------------------------------------------------------------
          HCPCS \1\                           Description
------------------------------------------------------------------------
90665........................  Lyme disease vaccine, im.
90717........................  Yellow fever vaccine, sc.
A9504........................  Technetium tc 99m apcitide.
J0350........................  Injection anistreplase 30 u.
J0470........................  Dimecaprol injection.
J2700........................  Oxacillin sodium injection.
J2910........................  Aurothioglucose injection.
J3470........................  Hyaluronidase injection.
J7197........................  Antithrombin iii injection.
------------------------------------------------------------------------

    Comment: One commenter supported the addition of ``step 3'' to the 
calculation of the per day cost methodology used to determine the 
packaging status of drugs, biologicals, and radiopharmaceuticals and 
stated that the addition of the new step will improve the accuracy of 
the per day cost calculation by enabling CMS to trim out very high 
units of service associated with very low costs that may 
inappropriately lower the overall median cost.
    Response: We appreciate the commenter's support of the change in 
our methodology to determine the per

[[Page 68638]]

day costs of drugs, biologicals, and radiopharmaceuticals and are 
finalizing this change for CY 2006, along with the other proposed 
changes for determining per day costs of these items.
    Comment: We received comments on the packaging status of one drug 
and several radiopharmaceuticals where the commenters indicated that 
the items were incorrectly packaged and should be paid separately in CY 
2006. Specific items mentioned in the comments were HCPCS codes J1245, 
A9513, C1079, C9013, and Q3012. One commenter asserted that confusing 
HCPCS descriptors contributed to the submission of inaccurate claims 
data to CMS. This commenter also noted that the inconsistent market 
availability of some of these products resulted in small numbers of 
claims and variable cost data, which CMS used to determine the per day 
costs of these items. The commenters indicated that there are other 
products that are used for the same indication as some of these 
products, and also that there are clinical situations where physician 
would prefer to utilize one particular product over another. Therefore, 
commenters did not want payment rules to affect access to particular 
products that may be most clinically effective for patients.
    Response: We understand the commenters' concerns about the 
packaging of these items. Based on the methodology we used to calculate 
per day costs of these items, as described earlier in the preamble, we 
determined that the per-day costs of these products were below $50. 
Therefore, these items were packaged. When we recalculated the per day 
costs of these items using updated CY 2004 claims data and ASP-based 
payment rates based on data from the second quarter of CY 2005 for the 
final rule, we observed that the per day costs of these items remained 
below $50. For radiopharmaceuticals, we recalculate their mean per day 
costs using updated CY 2004 claims data.
    As described earlier, we applied an additional unit trimming step 
in the methodology to determine per day costs of items in CY 2006. We 
stated our belief that trimming the units would improve the accuracy of 
the per day cost estimates by removing those records with the most 
extreme units, without requiring us to speculate about clinically 
appropriate dosing. Therefore, we believe that the new trimming step 
eliminates claims from our analysis that might not appropriately 
represent the actual number of units of a drug or radiopharmaceutical 
furnished by a hospital to a patient during a specific clinical 
encounter. We indicated that this change in methodology gave us even 
greater confidence in the cost estimates we use for our packaging 
decisions. Also, section 621(a)(2) of Pub. L. 108-173 requires that the 
threshold for establishing separate APCs for drugs and biologicals be 
set at $50 per administration for CY 2006. Therefore, we cannot change 
the packaging threshold amount from $50, which would be required of us 
if we were to pay for these items separately. For these reasons, we 
believe that it is appropriate for us to package these items in CY 2006 
under OPPS. We expect that the modest per day costs of these packaged 
items will allow hospitals to make the most clinically appropriate 
choices of products in their care of patients, as hospitals will also 
bill a variety of separately payable services for the care provided.
    Comment: One commenter indicated that it is operationally 
impossible to establish a separate process for charging anti-emetic 
drugs when they are used only in conjunction with chemotherapy since 
the majority of their surgical outpatients receive these drugs. The 
commenter inquired as to whether CMS could develop an edit to only pay 
for the anti-emetic drug when it is connected to a cancer diagnosis.
    Response: We note that separate payments for these 5HT3 injectable 
and oral anti-emetic drugs will be made as long as these drugs are 
covered by Medicare, regardless of the clinical indications for the 
drugs' use. The policy described above for the 5HT3 anti-emetic drugs 
applies only to the packaging status of these items, not to their 
coverage status. Hospitals should continue billing for these injectable 
and oral anti-emetic drugs in accordance with existing coverage rules.
    Section 1833(t)(16)(B) of the Act that requires the threshold for 
establishing separate APCs for drugs and biologicals to be set at $50 
per administration will expire at the end of CY 2006. Therefore, we 
will be evaluating other packaging thresholds for these products for 
the CY 2007 OPPS update. We specifically requested comments on the use 
of alternative thresholds for packaging drugs and radiopharmaceuticals 
in CY 2007.
    We received a number of public comments in response to this 
request.
    Comment: Commenters made various suggestions for establishing the 
packaging threshold for CY 2007. Several commenters encouraged CMS to 
set the packaging threshold no higher than $50 in CY 2007 and beyond. 
Other commenters suggested that CMS provide separate payment for all 
infused and injectable drugs, regardless of their per day costs, and 
only continue to package oral drugs in CY 2007. Other commenters echoed 
this general suggestion, but further suggested that the oral anti-
emetic drugs be paid separately along with the infused and injectable 
drugs. One commenter stated that CMS should continue to pay separately 
for all drugs and biologicals that were separately paid in the past, 
including all therapies that had received pass-through status. Another 
commenter suggested that, to the extent CMS may elect to raise the 
packaging threshold in CY 2007 and beyond, the threshold be linked to 
an appropriate price indexing mechanism. In establishing the 
appropriate price indexing measure, the commenter urged CMS to give 
substantial consideration to the impact resulting from capturing more 
high-cost drugs in packaged payment groups, including the effect such a 
policy may have on beneficiary access to needed treatments, with 
particular focus on avoiding unintended disadvantages for newer 
innovator products. Other commenters suggested that CMS determine 
appropriate payment levels that will be sufficient to ensure patient 
access in its consideration of the use of alternative thresholds for 
packaging drugs in CY 2007, and that CMS utilize ASP data from CY 2005 
to determine the appropriate parameters for a packaging threshold in CY 
2007. On the other hand, MedPAC indicated that it has long been 
concerned about the incentives created by the unpackaging of drugs that 
exists in the OPPS. For example, MedPAC stated that, under the OPPS, 
providers have an incentive to use a higher-cost drug that is paid 
separately in place of a lower-cost drug that is packaged. If hospitals 
act on this incentive, it could raise beneficiaries' overall cost 
sharing, Part B premiums, and program spending. MedPAC added that 
setting payment rates for small packages is likely to be less accurate 
than setting rates for larger packages. It pointed out that, with 
greater packaging, variations in charging practices are more likely to 
balance out, leading to payment rates that, on average, are more 
reflective of costs.
    Response: We appreciate receiving these suggestions for 
establishing an appropriate packaging threshold for CY 2007 and will 
take the recommendations into consideration as we work on our packaging 
proposal for the CY 2007 OPPS.

[[Page 68639]]

3. Payment for Drugs, Biologicals, and Radiopharmaceuticals Without 
Pass-Through Status That Are Not Packaged
a. Payment for Specified Covered Outpatient Drugs
(1) Background
    Section 1833(t)(14) of the Act, as added by section 621(a)(1) of 
Pub. L. 108-173, requires special classification of certain separately 
paid radiopharmaceuticals, drugs, and biologicals and mandates specific 
payments for these items. Under section 1833(t)(14)(B)(i) of the Act, a 
``specified covered outpatient drug'' is a covered outpatient drug, as 
defined in section 1927(k)(2) of the Act, for which a separate APC 
exists and that either is a radiopharmaceutical agent or is a drug or 
biological for which payment was made on a pass-through basis on or 
before December 31, 2002.
    Under section 1833(t)(14)(B)(ii) of the Act, certain drugs and 
biologicals are designated as exceptions and are not included in the 
definition of ``specified covered outpatient drugs.'' These exceptions 
are--
     A drug or biological for which payment is first made on or 
after January 1, 2003, under the transitional pass-through payment 
provision in section 1833(t)(6) of the Act.
     A drug or biological for which a temporary HCPCS code has 
not been assigned.
     During CYs 2004 and 2005, an orphan drug (as designated by 
the Secretary).
    Section 1833(t)(14)(F) of the Act defines the categories of drugs 
based on section 1861(t)(1) and sections 1927(k)(7)(A)(ii), 
(k)(7)(A)(iii), and (k)(7)(A)(iv) of the Act. The categories of drugs 
are ``sole source drugs (includes a biological product or a single 
source drug),'' ``innovator multiple source drugs,'' and ``noninnovator 
multiple source drugs.'' The definitions of these specified categories 
for drugs, biologicals, and radiopharmaceuticals were discussed in the 
January 6, 2004 OPPS interim final rule with comment period (69 FR 
822), along with our use of the Medicaid average manufacturer price 
database to determine the appropriate classification of these products. 
Because of the many comments received on the January 6, 2004 interim 
final rule with comment period, the classification of many of the 
drugs, biologicals, and radiopharmaceuticals changed from that 
initially published. We announced these changes to the public on 
February 27, 2004, through Transmittal 112, Change Request 3144. We 
also implemented additional classification changes through Transmittal 
132 (Change Request 3154, released March 30, 2004) and Transmittal 194 
(Change Request 3322, released June 4, 2004).
    Section 1833(t)(14)(A) of the Act, as added by section 621(a)(1) of 
Pub. L. 108-173, also provides that payment for these specified covered 
outpatient drugs for CYs 2004 and 2005 is to be based on its 
``reference average wholesale price (AWP).'' Section 1833(t)(14)(A)(ii) 
of the Act, as added by section 621(a) of Pub. L. 108-173 requires that 
in CY 2005--
     A sole source drug must be paid no less than 83 percent 
and no more than 95 percent of the reference AWP.
     An innovator multiple source drug must be paid no more 
than 68 percent of the reference AWP.
     A noninnovator multiple source drug must be paid no more 
than 46 percent of the reference AWP.
    Section 1833(t)(14)(G) of the Act defines ``reference AWP'' as the 
AWP determined under section 1842(o) the Act as of May 1, 2003. We 
interpreted this to mean the AWP set under the CMS single drug pricer 
(SDP) based on prices published in the Red Book on May 1, 2003.
    For CY 2005, we finalized our policy to determine the payment rates 
for specified covered outpatient drugs under the provisions of Pub. L. 
108-173 by comparing the payment amounts calculated under the median 
cost methodology as done for procedural APCs to the AWP percentages 
specified in section 1833(t)(14)(A)(ii) of the Act.
(2) Changes for CY 2006 Related to Pub. L. 108-173
    Section 1833(t)(14)(A)(iii) of the Act, as added by section 
621(a)(1) of Pub. L. 108 173, requires that payment for specified 
covered outpatient drugs in CY 2006 be equal to the average acquisition 
cost for the drug for that year as determined by the Secretary subject 
to any adjustment for overhead costs and taking into account the 
hospital acquisition cost survey data collected by the Government 
Accountability Office (GAO) in CYs 2004 and 2005. If hospital 
acquisition cost data are not available, the law requires that payment 
be equal to payment rates established under the methodology described 
in section 1842(o), section 1847A, or section 1847B of the Act as 
calculated and adjusted by the Secretary as necessary.
(3) Data Sources Available for Setting CY 2006 Payment Rates
    Section 1833(t)(14)(D) of the Act, as added by section 621(a)(1) of 
Pub. L. 108-173, outlines the provisions of the hospital outpatient 
drug acquisition cost survey mandated for the GAO. This provision 
directs the GAO to collect data on hospital acquisition costs of 
specified covered outpatient drugs and to provide information based on 
these data that can be taken into consideration for setting CY 2006 
payment rates for these products under the OPPS. Accordingly, the GAO 
conducted a survey of 1,400 acute care, Medicare-certified hospitals 
and requested hospitals to provide purchase prices for specified 
covered outpatient drugs purchased between July 1, 2003 and June 30, 
2004. The survey yielded a response rate of 83 percent; 1,157 hospitals 
provided usable information. To ensure that its methodology for data 
collection and analysis was sound, the GAO consulted an advisory panel 
of experts in pharmaceutical economics, pharmacy, medicine, survey 
sampling and Medicare payment.
    The GAO reported the average and median purchase prices for 55 
specified covered outpatient drug categories for the period July 1, 
2003 to June 30, 2004. These items represented 86 percent of Medicare 
spending for specified covered outpatient drugs during the first 9 
months of CY 2004. The initial GAO data did not include any 
radiopharmaceuticals. The report noted that the purchase price 
information accounted for volume and other discounts provided at the 
time of purchase, but excluded subsequent rebates from manufacturers 
and payments from group purchasing organizations. The GAO survey data 
were available in time for consideration in the CY 2006 OPPS proposed 
rule.
    At the time of issuance of the CY 2006 OPPS proposed rule, another 
available source of drug pricing information was the ASP data from the 
fourth quarter of CY 2004, which were used to set payment rates for 
drugs and biologicals in the physician office setting effective April 
1, 2005. We had ASP-based prices for approximately 475 drugs and 
biologicals (including contrast agents) payable under the OPPS. 
However, we did not then have (and we still do not have) any ASP data 
on radiopharmaceuticals. Payments for most of the drugs and biologicals 
paid in the physician office setting were based on ASP+6 percent. 
Payments for items with no reported ASP were based on wholesale 
acquisition cost (WAC).
    Lastly, the third source of cost data that we had at the time of 
issuance of the proposed rule for drugs, biologicals, and 
radiopharmaceuticals was the mean and median costs derived from the CY 
2004 hospital claims data. In our data analysis for the proposed rule, 
we

[[Page 68640]]

compared the payment rates for drugs and biologicals using data from 
all three sources described above. As section 1833(t)(14)(A)(iii) of 
the Act clearly specifies that payment for specified covered outpatient 
drugs in CY 2006 be equal to the ``average'' acquisition cost for the 
drug, we limited our analysis to the mean costs of drugs determined 
using the GAO acquisition cost survey and the hospital claims data, 
instead of using median costs.
    For the proposed rule, we estimated aggregate expenditures for all 
drugs and biologicals (excluding radiopharmaceuticals) that would be 
separately payable in CY 2006 and for the 55 drugs and biologicals 
reported by the GAO using mean costs from the claims data, the GAO mean 
purchase prices, and the ASP-based payment amounts (ASP+6 percent in 
most cases), and calculated the equivalent average ASP-based payment 
rate under each of the three payment methodologies. The results which 
we presented in the proposed rule are shown in Table 23 below.

  Table 23.--Comparison of Relative Pricing for OPPS Drugs and Biologicals Under Various Payment Methodologies
----------------------------------------------------------------------------------------------------------------
                                                                                           ASP equivalent (all
        Type of pricing data           Time period of pricing   ASP equivalent (55 GAO     separately billable
                                                data                  drugs only)                 drugs)
----------------------------------------------------------------------------------------------------------------
GAO mean purchase price.............  12 months ending June    ASP+3%..................  N/A
                                       2004.
ASP+6%..............................  4th quarter of 2004....  ASP+6%..................  ASP+6%
Mean cost from claims data..........  1st 9 months of 2004...  ASP+8%..................  ASP+8%
----------------------------------------------------------------------------------------------------------------

    Prior to any adjustments for the differing time periods of the 
pricing data, the results indicated that using the GAO mean purchase 
prices as the basis for paying the 55 drugs and biologicals would be 
equivalent to paying for those drugs and biologicals, on average, at 
ASP+3 percent. In addition, using mean unit cost from hospital claims 
data to set the payment rates for the drugs and biologicals that would 
be separately payable in CY 2006 would be equivalent to basing their 
payment rates, on average, at ASP+8 percent.
    In determining the payment rates for drugs and biologicals in CY 
2006, we did not propose to use the GAO mean purchase prices for the 55 
drugs and biologicals because the GAO data reflect hospital acquisition 
costs from a less recent period of time. The survey was conducted from 
July 1, 2003 to June 30, 2004; thus, the purchase prices are generally 
reflective of the time that is the midpoint of this period, which is 
January 1, 2004. The hospital purchase price data also do not fully 
account for rebates from manufacturers or payments from group 
purchasing organizations made to hospitals. We also noted that it would 
be difficult to update the GAO mean purchase prices during CY 2006 and 
in future years.
    We also did not propose, in general, to use mean costs from CY 2004 
hospital claims data to set payment rates for drugs and biologicals in 
CY 2006. In previous OPPS rules, we stated that pharmacy overhead costs 
are captured in the pharmacy revenue cost centers and reflected in the 
median costs of drug administration APCs, and the payment rate we 
established for a drug, biological, or radiopharmaceutical APC was 
intended to pay only for the cost of acquiring the item (66 FR 59896 
and 67 FR 66769). However, findings from a MedPAC survey of hospital 
charging practices indicated that hospitals set charges for drugs, 
biologicals, and radiopharmaceuticals high enough to reflect their 
handling costs as well as their acquisition costs. Therefore, the mean 
costs calculated using charges from hospital claims data converted to 
costs are representative of hospital acquisition costs for these 
products, as well as their pharmacy overhead costs. For CY 2006, the 
statute specifies that payments for specified covered outpatient drugs 
are required to be equal to the ``average'' acquisition cost for the 
drug. Payments based on mean costs would represent the products' 
acquisition costs plus overhead costs, instead of acquisition costs 
only. Therefore, at the time of issuance of the proposed rule, we 
determined that it would be appropriate for us to use a source of cost 
information other than the CY 2004 hospital claims data to set the 
payment rates for most drugs and biologicals in CY 2006.
    Based on these considerations, we proposed to pay ASP+6 percent as 
the acquisition payment for separately payable drugs and biologicals in 
CY 2006. Given the data as described above, we determined at the time 
of issuance of the proposed rule that this was our best estimate of 
average acquisition costs for CY 2006. We noted in the proposed rule 
(70 FR 42726) that the comparison between the GAO purchase price data 
and the ASP data indicated that the GAO data, on average, were 
equivalent to ASP+3 percent. However, as noted earlier, we determined 
that this comparison was problematic for two reasons. First, there were 
differences in the time periods for the two sources of data. The GAO 
data were from the 12 months ending June 2004, and the ASP data were 
from the fourth quarter of CY 2004. It could be argued that prices 
increased in the intervening time period. However, we determined that 
there was no source of reliable information on specific price changes 
for this time period for the drugs studied by the GAO. In the future, 
we will have better information on price trends for Medicare Part B 
drugs as more quarters of pricing information are reported under the 
ASP system.
    We also noted that the comparison between the GAO data and the ASP 
data was problematic as the ASP data included rebates and other price 
concessions and the GAO data did not. Inclusion of these rebates and 
price concessions in the GAO data would decrease the GAO prices 
relative to the ASP prices, suggesting that ASP+6 percent may be an 
overestimate of hospitals' average acquisition costs. Unfortunately, we 
did not have a source of information on the magnitude of the rebates 
and price concessions for the specific drugs in the GAO data at that 
time.
    Therefore, we determined in the proposed rule that it was difficult 
to adjust the GAO prices for inflation, rebates, and price concessions 
to make the comparison with ASP more precise. We indicated that we 
would continue to examine new data to improve our future estimates of 
acquisition costs. In future years, our proposed pricing would be 
modified as appropriate to reflect the most recent data and analyses 
available. We also noted that, in addition to the importance of making 
accurate

[[Page 68641]]

estimates of acquisition costs for drug pricing, there were important 
implications for prices of other services due to the required budget 
neutrality of the OPPS. For example, drugs and biological prices set at 
ASP+3 percent instead of ASP+6 percent would have made available 
approximately an additional $60 million for other items and services 
under the OPPS.
    In the proposed rule, we also noted that ASP data are unavailable 
for some drugs and biologicals. For the few drugs and biologicals, 
other than radiopharmaceuticals as discussed later, where ASP data were 
unavailable, we proposed to use the mean costs from the CY 2004 
hospital claims data to determine their packaging status for rate-
setting. Until we received ASP data for these items, we proposed that 
payment would be based on their mean cost.
    Our proposal used payment rates based on ASP data from the fourth 
quarter of CY 2004 because these were the most recent numbers available 
to us during the development of the proposed rule. To be consistent 
with the ASP-based payments that would be made when these drugs and 
biologicals are furnished in physician offices, we stated in our 
proposed rule (70 FR 42726) that we planned to make any appropriate 
adjustments to the amounts shown in Addenda A and B to the proposed 
rule for these items based on more recent ASP data from the second 
quarter of CY 2005, which is the basis for setting payment rates for 
drugs and biologicals in the physician office setting effective October 
1, 2005, prior to our publication of the CY 2006 OPPS final rule, and 
also on a quarterly basis on our Web site during CY 2006. We noted that 
we would determine the packaging status of each drug or biological only 
once during the year during the update process. However, for the 
separately payable drugs and biologicals, we would update their ASP-
based payment rates on a quarterly basis.
    We also noted that we intend for the quarterly updates of the ASP-
based payment rates for separately payable drugs and biologicals to 
function as future surveys of hospital acquisition cost data, as 
section 1833(t)(14)(D)(ii) of the Act instructs us to conduct periodic 
subsequent surveys to determine hospital acquisition cost for each 
specified covered outpatient drug.
    We specifically requested comments on our proposal to pay for drugs 
and biologicals (including contrast agents) under the OPPS using the 
ASP-based methodology that is also used to set the payment rates for 
drugs and biologicals furnished in physician offices and the adequacy 
of the payment rates to account for hospital acquisition costs of the 
drugs and biologicals.
    During the August 2005 meeting of the APC Panel, the Panel 
recommended that CMS evaluate all the separately payable drug to be 
paid at ASP+6 percent under the OPPS and pay particular attention to 
those whose payments would drop or rise precipitously. We appreciate 
the Panel's support of our payment proposal and discuss the final CY 
2006 policies for drugs and biologicals below.
    We received many public comments in response to our proposal to pay 
for drugs and biologicals under the OPPS using the ASP methodology.
    Comment: Many commenters, including national organizations 
representing leading pharmaceutical and biotechnology companies, 
hospital associations, and hospitals, supported CMS' proposal to pay 
for most separately payable drugs and biologicals at ASP+6 percent. 
These commenters stated that paying for drugs and biologicals at this 
rate appeared to be both a reasonable and the best available estimate 
of average hospital acquisition cost. One commenter stated that ASPs 
reported by manufacturers are as close to real-time costs as any data 
source CMS uses for rate-setting. Some of the commenters indicated that 
this policy offered hospitals the assurance that the payment rates will 
reflect market conditions as those rates will be updated on a quarterly 
basis. Other supporters of this proposal noted that the policy had the 
additional benefit of providing consistent payment rates under the OPPS 
and under Part B in the physician office setting, thus helping to avoid 
financial incentives for selection of sites of service. One commenter 
indicated that the proposed policy also offered simplicity to the OPPS, 
both for CMS and providers, by treating almost all separately paid 
drugs uniformly and noted that paying for pass-through drugs the same 
way as other separately payable drugs without pass-through status 
created appropriate incentives to provide the most effective therapies, 
regardless of their costs and payment amounts.
    A comment from MedPAC acknowledged the problems presented by the 
GAO purchase price information and recognized the use of ASP data as a 
viable alternative. However, MedPAC indicated that a limitation of ASP 
data is that CMS derives ASPs from manufacturers' sales to all 
distribution channels, including wholesalers, group purchasing 
organizations, hospitals, and other providers such as physicians. 
Therefore, the ASPs do not specifically reflect hospital acquisition 
costs. Furthermore, MedPAC indicated that reporting may not be 
consistent across manufacturers, and CMS may need to verify the 
accuracy of ASP data through confidential audits. Although MedPAC 
stated that it supports CMS' proposed use of ASPs, it remained 
concerned about the proposal to pay for most specified covered 
outpatient drugs at a rate of ASP+8 percent, specifically ASP+6 percent 
for the drug and an additional 2 percent for handling costs. MedPAC 
noted that CMS' analysis of hospitals' mean purchase prices for drugs 
studied in the GAO survey indicated that the hospitals' mean purchase 
prices were equivalent to ASP+3 percent. Given that average ASP values 
have declined in recent quarters and that the GAO's data did not fully 
reflect rebates, MedPAC stated that the proposed payment rates for 
drugs alone may be too high.
    Several commenters, however, remained concerned that this proposal 
will result in significant reductions in payments below acquisition 
costs for certain types of drugs and biologicals, such as IVIG and 
drugs and biologicals used to treat rare disorders, and was inadequate 
to protect beneficiary access to these therapies. One commenter 
indicated that payments increased to ASP+8 percent also resulted in 
compensation below acquisition costs for certain products. Many of 
these commenters urged CMS to monitor patient access problems and take 
prompt steps to adjust payment rates where necessary to address such 
problems. Several commenters requested that CMS implement the APC 
Panel's recommendation to monitor for ``precipitous'' drops in payment 
rates during the transition to ASP-based payments and apply a dampening 
policy to the payment rates for certain drugs and biologicals. Several 
dampening options were suggested, such as limiting payment decreases to 
15 percent from CY 2005, paying at the higher of ASP+8 percent or 90 
percent of drugs' CY 2005 payment rates, and freezing payment at the CY 
2005 levels. One commenter recommended that no change be made to the 
payment rates for drugs and biologicals from CY 2005 to CY 2006. 
Another commenter urged CMS to gather data on the adequacy of ASP 
payment over the next year and report to Congress if the agency finds 
that ASP is not an appropriate payment formula.
    A comment from a large cancer care provider raised several issues 
concerning the use of ASPs. The commenter noted that the prices and 
discounts included in the calculation of

[[Page 68642]]

ASP often are not passed along to providers. The commenter added that 
small hospitals without purchasing power are likely to purchase drugs 
above ASP rates. In addition, the commenter noted that because 
manufacturers typically raise prices two to three times per year, the 
two-quarter lag in the calculation of ASP may cause hospitals to suffer 
losses each time they administer drugs. Another commenter questioned 
whether ASP could be calculated regionally instead of nationally. One 
commenter noted that CMS did not make clear in the proposed rule what 
data will be used to establish payment rates for separately payable 
drugs and biologicals as of January 1, 2006. The commenter indicated 
that ASP data for the third quarter of CY 2005 will be available on 
October 30, 2005 and requested that these data be used to set payment 
rates for the first quarter of CY 2006.
    Response: We appreciate the commenters' support of our proposal to 
pay for separately payable drugs and biologicals at ASP+6 percent. For 
this final rule with comment period, we again evaluated the three data 
sources that we have available to us for setting the CY 2006 payment 
rates for drugs and biologicals. As described in the proposed rule, 
these data sources are the GAO reported average and median purchase 
prices for 55 specified covered outpatient drug categories for the 
period July 1, 2003 to June 30, 2004; ASP data; and mean and median 
costs derived from hospital claims data used for this final rule with 
comment period. For this final rule with comment period, we are able to 
use updated ASP data from the second quarter of CY 2005, which are used 
to set payment rates for drugs and biologicals in the physician office 
setting effective October 1, 2005. We are also able to use updated 
claims data, reflecting all of the hospital claims data from CY 2004 
and updated CCRs.
    In our data analysis for this final rule with comment period, we 
again compared the payment rates for drugs and biologicals using data 
from all three sources described above. As described in the proposed 
rule, we limited our analysis to the mean costs of drugs and 
biologicals determined using the GAO acquisition cost survey and the 
hospital claims data, instead of using median costs. We estimated 
aggregate expenditures for all drugs and biologicals (excluding 
radiopharmaceuticals) that would be separately payable in CY 2006 and 
for the 55 drugs and biologicals reported by the GAO using mean costs 
from the claims data, the GAO mean purchase prices, and the ASP-based 
payment amounts (ASP+6 percent in most cases), and then calculated the 
equivalent average ASP-based payment rate under each of the three 
payment methodologies. The results based on updated ASP and claims data 
are presented in Table 24 below.

  Table 24.--Comparison of Relative Pricing for OPPS Drugs and Biologicals Under Various Payment Methodologies
----------------------------------------------------------------------------------------------------------------
                                                                                           ASP equivalent (all
        Type of pricing data           Time period of pricing   ASP equivalent (55 GAO     separately billable
                                                data                  drugs only)                 drugs)
----------------------------------------------------------------------------------------------------------------
GAO mean purchase price.............  12 months ending June    ASP+4%..................  N/A
                                       2004.
ASP+6%..............................  2nd quarter of 2005....  ASP+6%..................  ASP+6%
Mean cost from claims data..........  12 months of 2004......  ASP+6%..................  ASP+6%
----------------------------------------------------------------------------------------------------------------

    Prior to any adjustments for the differing time periods of the 
pricing data, the results indicated that using the GAO mean purchase 
prices as the basis for paying the 55 drugs and biologicals would be 
equivalent to paying for those drugs and biologicals, on average, at 
ASP+4 percent. In addition, using mean unit cost from hospital claims 
to set the payment rates for the drugs and biologicals that would be 
separately payable in CY 2006 would be equivalent to basing their 
payment rates, on average, at ASP+6 percent. We note that these levels 
are slightly different from the estimates we determined for the 
proposed rule, where the GAO data were equivalent to ASP+3 percent and 
mean costs derived from the CY 2004 claims data were equivalent to 
ASP+8 percent, on average. (See Table 22 of the CY 2006 OPPS proposed 
rule, 70 FR 42725).
    We understand the concerns raised by commenters about the 
reductions in payment rates for certain drugs and biologicals with the 
transition from an AWP-based methodology to an ASP-based methodology. 
However, our intent is to pay for drugs and biologicals based on their 
hospital acquisition costs, and we believe that market-based ASP data, 
which are reported by the manufacturers, better represent these costs 
than dampened payment rates. We also note that commenters did not 
present actual evidence demonstrating that access problems currently 
exist for some of these products. They presented anecdotal reports and 
results based on surveys that we can not validate. Therefore, we 
believe that it is still appropriate for us to base payment for these 
items on the ASP data.
    As noted earlier and in the proposed rule, findings from a MedPAC 
survey of hospital charging practices indicated that hospitals set 
charges for drugs, biologicals, and radiopharmaceuticals high enough to 
reflect their pharmacy handling costs as well as their acquisition 
costs. Therefore, the mean costs calculated using charges from hospital 
claims data converted to costs are representative of hospital 
acquisition costs for these products, as well as their related pharmacy 
overhead costs. Our calculations indicated that using mean unit costs 
to set the payment rates for all separately payable drugs and 
biologicals would be equivalent to basing their payment rates on the 
ASP+6 percent, on average. This result also seems to confirm MedPAC's 
comment that paying for the acquisition cost of drugs alone at ASP+6 
percent may be too high. Because pharmacy overhead costs are already 
built into the charges for drugs, biologicals, and 
radiopharmaceuticals, our current data therefore indicate that payment 
for drugs and biologicals and pharmacy overhead at a combined ASP+6 
percent rate would serve as the best proxy for the combined acquisition 
and overhead costs of each of these products.
    Therefore, in this final rule with comment period for CY 2006, we 
are adopting a policy of paying for the acquisition and overhead costs 
of separately paid drugs and biologicals at a combined rate of ASP+6 
percent. In other words, payment at ASP+6 percent will serve as a proxy 
to make

[[Page 68643]]

appropriate payment for both the acquisition cost and overhead cost of 
each of these products. We discuss in additional detail our responses 
regarding payments for pharmacy overhead costs later in the preamble.
    As noted in the proposed rule, ASP data are unavailable for some 
drugs and biologicals. For these few drugs and biologicals, we used the 
mean costs from the CY 2004 hospital claims data to determine their 
packaging status for rate-setting. Until we receive ASP data for these 
items, payment will be based on their mean cost calculated from CY 2004 
hospital claims data. The payment rates for separately payable drugs 
and biologicals shown in Addenda A and B to this final rule with 
comment period represent payments for their acquisition costs in 
addition to their overhead costs.
    For this final rule with comment period, we are using payment rates 
based on ASP data from the second quarter of CY 2005 because these are 
the most recent numbers available for the development of this final 
rule. To be consistent with the ASP-based payments that would be made 
when these drugs and biologicals are furnished in physician offices, as 
proposed, we plan to make any appropriate adjustments to the amounts 
shown in Addenda A and B to this final rule with comment period for 
these items on a quarterly basis as more recent ASP data become 
available and post the payment rate changes on our Web site during each 
quarter of CY 2006. Effective January 1, 2006, we will base payment 
rates for separately payable drugs and biologicals on ASP data from the 
third quarter of CY 2005, which will also be the basis for setting 
payment rates for drugs and biologicals in the physician office setting 
effective January 1, 2006. We discussed in the proposed rule that we 
would determine the packaging status of each drug or biological only 
once during the year during the update process; however, for the 
separately payable drugs and biologicals, we would update their ASP-
based payment rates on a quarterly basis. Specifically, for CY 2006, 
the packaging status of each drug or biological has been established 
using the ASP data from the second quarter of CY 2005 and the 
appropriate packaging status indicator can be found for these items in 
Addendum B of this final rule with comment period. During CY 2006, we 
will only update quarterly the payment rates for the separately payable 
drugs and biologicals whose payments are based on the ASP methodology.
    Comment: One commenter requested that CMS standardize the HCPCS 
code descriptions in Addendum B, so that the drug names appear first 
(and can be sorted alphabetically), rather than using ``injection'' as 
the first word. The commenter also sought clarification on the dosage 
sizes of several HCPCS codes and identified HCPCS codes for drugs that 
the commenters believed are obsolete.
    Response: We note that the HCPCS code descriptions in Addendum B of 
our final rule with comment period are based on the short descriptors 
assigned to the HCPCS codes by the National HCPCS Panel. The National 
HCPCS Panel also determines the units associated with the HCPCS codes. 
We suggest that the commenter pursue its concerns related to the HCPCS 
codes through the process set up by the National HCPCS Panel.
    Comment: One commenter indicated that there are currently five 
sodium hyaluronate products approved for use in the United Stated that 
differ in terms of molecular weights, proposed biological effects, 
active ingredient doses per treatment, number of treatments per course, 
and labeling for repeated treatment courses. Because of the existing 
coding mechanism for these products, the commenter noted that the 
proposed payment rates associated with the HCPCS codes may create 
financial incentives for hospitals to stock and use certain products 
instead of choosing products based on clinical judgment and appropriate 
treatment for patients. The commenter expressed the belief that the 
dosing differences among these agents warrant the creation of specific 
codes for each single source product and has submitted recommendations 
to CMS for specific coding and nomenclature for adoption in CY 2006.
    Response: We recognize the commenter's concerns about payment for 
these sodium hyaluronate products under the OPPS. As noted earlier, the 
National HCPCS Panel has created HCPCS code J7318 (Hyaluron/derive 
intra-art inj) to describe all of the sodium hyaluronate products 
effective January 1, 2006. The payment rate for HCPCS code J7318 in CY 
2006 will be established using the ASP data for all of the products 
described by this code. HCPCS code J7318 will be used in the OPPS 
during CY 2006 to report the administration of all products described 
by that code that do no have another OPPS-specific code available due 
to their pass-through status.
    Comment: We received many comments on the significant proposed 
reduction in payment rates from CY 2005 to CY 2006 for several wound 
care products. The products of concern are Apligraf, Dermagraft, and 
Orcel, which are reported by HCPCS codes C1305, C9201, and C9200 
respectively under the OPPS in CY 2005. Commenters indicated that the 
proposed CY 2006 payment rates for the acquisition and overhead costs 
of all three of these products were incorrectly based on the CY 2004 
claims data, instead of ASP+8 percent as proposed for other separately 
payable drugs and biologicals, and they were very concerned that 
decreased payments will significantly underpay hospitals and jeopardize 
patient access to these therapies. One of the commenters stated that 
CMS based payment for Apligraf on mean costs derived from the CY 2004 
claims data because there had been no ASP payment rate specific to 
HCPCS code C1305 and noted that the ASP rate for Apligraf is reported 
by CMS in the physician office setting under HCPCS code J7340. Other 
commenters raised similar concerns for Dermagraft whose ASP rate is 
reported in the physician office setting under HCPCS code J7342, 
instead of HCPCS code C9201. With respect to Orcel, one commenter 
stated that this product was not commercially available during CY 2004 
and, as a result, neither ASP data nor hospital outpatient claims data 
should have existed for the product. The commenter recommended that, in 
the absence of either claims or ASP data, CMS should follow its payment 
policy for drugs and biologicals that do not have ASP data and 
establish the payment rate for Orcel using WAC. If WAC was not 
available, then CMS should set payment for Orcel at 95 percent of the 
May 1, 2003 AWP.
    Response: We recognize the commenters' concerns about the proposed 
reduction in payment rates for these wound care products in CY 2006. 
The commenters were correct in stating that we based the payment rates 
for these items on their mean costs derived from the CY 2004 claims 
data in the proposed rule because we believed that we did not have any 
ASP data for these C-codes. We appreciate the commenters indicating to 
us that HCPCS codes C1305 and C9201 are billed using HCPCS codes J7340 
and J7342, respectively, in the physician office, and the ASP data 
submitted for these products were associated with their permanent J-
codes.
    For this final rule with comment period, we reviewed the NDCs for 
which ASP data from the second quarter of CY 2005 were reported under 
HCPCS codes J7340 and J7342, and verified that these NDCs included 
Apligraf and Dermagraft products, respectively. Therefore, for CY 2006, 
we will be deleting the HCPCS code C1305 for Apligraf and HCPCS code 
C9201 for Dermagraft and paying for these

[[Page 68644]]

products using the ASPs calculated for HCPCS codes J7340 and J7342, 
respectively. As one of the commenters noted, ASP data are not 
available currently for HCPCS code C9200, which describes Orcel. Based 
on our review of the descriptor for HCPCS code J7340, we determined 
that this code appropriately describes Orcel; therefore, we will be 
deleting HCPCS code C9200 and paying for this product using HCPCS code 
J7340. Even though the calculation of the ASP-based payment rate for 
HCPCS code J7340 does not currently account for the ASP of Orcel, we 
believe that it is still appropriate for us to pay for Orcel using 
HCPCS code J7340 since this code appropriately describes this product. 
Also, once Orcel becomes available in the market and we receive ASP 
data for this product, the ASP-based payment rate for HCPCS code J7340 
will properly reflect the market price for Orcel. We believe that this 
coding policy will lessen confusion for providers, enhance coding 
consistency between the OPPS and physician offices, and result in 
appropriate payment rates for these three wound care products in CY 
2006.
    In addition to reviewing whether permanent HCPCS codes duplicate 
the three temporary C-codes describing wound care products in the CY 
2005 OPPS, we also reviewed whether there are permanent HCPCS codes 
that currently exist or will be created in CY 2006 that describe the 
other C-codes for drugs, biologicals, and radiopharmaceuticals that are 
payable under the OPPS in CY 2005 to determine if we could streamline 
coding for other items as well. Based on our review, we found that 
there are several C-codes for drugs, biologicals, and 
radiopharmaceuticals that are payable under OPPS in CY 2005 that will 
be replaced with new permanent HCPCS codes in CY 2006. We also found 
that there are some C-codes that are also described by other permanent 
HCPCS codes that existed in CY 2005. In cases where it is appropriate 
to do so, we are deleting these C-codes and replacing them with new CY 
2006 HCPCS codes or existing HCPCS codes that appropriately describe 
products currently coded in the OPPS by the C-codes. As discussed later 
in the preamble, we are also deleting the C-codes that were created to 
represent the innovator multiple source (brand) drugs and instructing 
hospitals to use the HCPCS codes for noninnovator multiple source 
(generic) drugs to bill for both the brand and generic forms of a drug 
in CY 2006. Table 25 lists the C-codes that we are deleting effective 
December 31, 2005 and the permanent HCPCS codes that will be replacing 
them in CY 2006. For services furnished on or after January 1, 2006, 
hospitals should use replacements codes to bill for the products whose 
C-codes will be deleted on December 31, 2005.

BILLING CODE 4210-01-P

[[Page 68645]]

[GRAPHIC] [TIFF OMITTED] TR10NO05.019


[[Page 68646]]


[GRAPHIC] [TIFF OMITTED] TR10NO05.020


[[Page 68647]]


[GRAPHIC] [TIFF OMITTED] TR10NO05.021

BILLING CODE 4210-01-C
    Comment: One commenter noted that CMS should confirm that payment 
for echocardiography contrast agents will be based on ASP+6 percent 
plus an appropriate amount to reflect handling (no less than two 
percent) so that payment for these items is consistent with all other 
separately payable drugs under OPPS. A few commenters indicated that 
CMS should implement the new HCPCS codes for echocardiography contrast 
agents, which will be effective January 1, 2006, to facilitate uniform 
billing for all echocardiography contrast agents across all sites of 
service.
    Response: In CY 2005, echocardiography contrast agents are

[[Page 68648]]

described by three C-codes, which are HCPCS code C9112 (Perflutren 
lipid micro, 2ml), HCPCS code C9202 (Octafluoropropane), and HCPCS code 
C9203 (Perflexane lipid micro). In the proposed rule, we proposed to 
deleted these C-codes and pay for the products using Q-codes in CY 
2006. As noted in the previous response to comments, these three C-
codes will be deleted as of December 31, 2005 and replaced with HCPCS 
codes Q9957, Q9956, and Q9955, respectively. Hospitals should use the 
new Q-codes in CY 2006 when billing for these echocardiography contrast 
agents. We also note we will be paying for the acquisition and overhead 
costs of these separately payable echocardiography contrast agents at a 
combined rate of ASP+6 percent in CY 2006.
    Comment: We received many comments that expressed concerns about 
the proposed reductions in OPPS payment rates for intravenous 
immunoglobulin (IVIG) products. Commenters requested that CMS make 
special consideration in its payment for IVIG due to the current access 
problems facing patients that rely on this lifesaving therapy. 
Commenters indicated that payment at ASP+6 percent has not been 
adequate to permit the continued purchase and administration of IVIG in 
physician offices, infusion suites, and home care settings, resulting 
in a shift of care to hospitals. Consequently, hospitals have been 
overburdened by the increase in demand for IVIG, which has not been 
easily accessible. The commenters indicated that CMS' goal in setting 
payment rates for IVIG should be to ensure that patients have access to 
all brands of IVIG in all sites of care. Commenters requested that CMS 
use any and all authority and flexibility to address the existing 
payment problems that will arise if the proposed OPPS payment rates for 
IVIG are implemented and recommended several actions. In order of 
priority, commenters' recommendations were to: (1) Provide a proxy add-
on payment rate for IVIG when determining the CY 2006 payment levels; 
(2) in the absence of a proxy add-on, apply the 15-percent dampening 
provision proposed for device-dependent APCs to determine the CY 2006 
payment rates for IVIG; (3) establish unique HCPCS codes for each brand 
of IVIG and set their payment rates on the ASP data specific to each 
product; (4) classify IVIG as a biologic response modifier and pay its 
administration through a high complexity intravenous infusion APC; and 
(5) exclude prompt pay discounts when calculating the ASPs for the IVIG 
HCPCS codes and equalize the lag time between the ASP reporting by 
manufacturers and CMS' posting of the ASP-based payment rates for the 
OPPS and Part B physician office payment rates. One commenter urged CMS 
to revert to the original J-codes for IVIG (J1563 and J1564) and 
maintain the CY 2005 payment rates. Other commenters suggested that, at 
minimum, CMS should continue payment for IVIG at the CY 2005 payment 
rates of 83 percent of AWP for 2 years, during which time CMS, 
consulting with Congress, manufacturers, distributors, providers, and 
patient groups, should conduct a study to determine the best payment 
methodology for IVIG with the goal of ensuring access to IVIG and 
continuity of care in all practice settings.
    Response: As discussed earlier, we believe that ASP data are 
reflective of present hospital acquisition costs for separately payable 
drugs and biologicals under the OPPS. We believe this to be true for 
IVIG as well. We therefore cannot agree that it is appropriate to make 
adjustments to the payment rates for IVIG based on past prices, as we 
have more current ASP data available that reflect current market 
pricing for all of the brands of IVIG.
    With respect to establishing brand-specific HCPCS codes for the 
different IVIG products, we note that the procedures for HCPCS coding 
specifically reject brand-specific coding, and we do not see a 
compelling reason to override that standard. For further discussion of 
HCPCS coding, see http://www.cms.hhs.gov/medicare/hcpcs/codpayproc.asp. Finally, we note that in CY 2006 the OPPS and physician 
offices will both be paid based on the most recently available 
quarter's ASP data, with implementation of payment rate changes in both 
systems on the same date. As noted earlier, effective January 1, 2006 
we will base payment rates for all separately payable drugs and 
biologicals under the OPPS on ASP data from the third quarter of CY 
2005, which will also be the basis for setting payment rates for drugs 
and biologicals in the physician office setting effective January 1, 
2006. After considering these factors, we are finalizing our proposal 
to pay for IVIG under the OPPS at ASP+6 percent for CY 2006, the same 
payment rate as in the physician office setting.
    We will, however, continue to work with the IVIG community, 
manufacturers, Congress, and other entities to seek better 
understanding of the supply and market issues influencing the current 
IVIG environment. We have discussed the accuracy of the ASP data with 
the manufacturers and have been assured by these manufacturers that 
their ASPs have been developed in accordance with applicable guidance 
and that the resulting price reflects the current IVIG market. At the 
same time, the IVIG manufacturers' association, the Plasma Protein 
Therapeutics Association, reports that the overall supply of IVIG is 
adequate and has improved in the past several months. However, based on 
the comments received and our ongoing work with manufacturers, patient 
groups, and other stakeholders, we continue to be concerned about CY 
2005 reports of patients experiencing difficulties in accessing timely 
IVIG treatments and reports of providers experiencing difficulties in 
obtaining adequate amounts of IVIG products on a consistent basis to 
meet their patients' needs in the current marketplace. Most brands of 
IVIG have been put on allocation by manufacturers, and some 
manufacturers have reported allocating products to a smaller number of 
distributors and reducing the size of inventories. In addition, there 
have been reports of diversion of products to the secondary market and 
secondary distributors raising prices markedly. The Secretary's 
Advisory Committee on Blood Safety and Availability has recommended 
immediate steps be taken to ensure access to IVIG so that patients' 
needs are being met. However, the complexity of the IVIG marketplace 
makes it unclear what particular systematic approaches would be most 
effective in addressing the many individual circumstances that have 
been shared with us while not exacerbating what appears to be a 
temporary disruption in the marketplace.
    IVIG is a complicated biological product that is purified from 
human plasma obtained from human plasma donors. Its purification is a 
complex process that occurs along a very long timeline, and only a 
small number of manufacturers provide commercially available products. 
Historically, numerous factors, including decreased manufacturing 
capacity, increased usage, more sophisticated processing steps, and low 
demand for byproducts from IVIG fractionation have affected the supply 
of IVIG. For CY 2006, there are two HCPCS codes that describe all IVIG 
products, based on their lyophilized versus liquid preparation.
    The recent patterns of utilization of IVIG also are unusual in 
comparison with most other drugs and biologicals. Different IVIG 
products are FDA-approved in a number of therapeutic areas for various 
specific conditions, which include: Anti-infective therapy (bone marrow 
transplant); immune

[[Page 68649]]

globulin replacement therapy (primary immune deficiencies and chronic 
lymphocytic leukemia); anti-inflammatory therapy (Kawasaki disease); 
and immunomodulation therapy (idiopathic thrombocytopenic purpura). 
IVIG therapy, which has been available for about 25 years, was 
initially reserved for the treatment of these FDA-approved indications. 
More recently, IVIG has been increasingly used off-label so that off-
label uses now significantly exceed on-label uses. Many of these off-
label uses are for autoimmune, neurological, or systemic inflammatory 
conditions. Some off-label uses of IVIG are supported by a robust 
evidence base, while for other medical conditions the evidence has not 
demonstrated that IVIG infusions are of significant therapeutic 
benefit. In addition, despite the growing uses of IVIG there are 
definite risks associated with IVIG treatment, including both early 
inflammatory reactions and more rare but serious renal and 
thromboembolic complications, as well as the inherent risk associated 
with receipt of any biological product even with the ongoing 
improvements in the safety of these types of products.
    Medicare currently has one national coverage determination in place 
since CY 2002 regarding IVIG infusions to treat autoimmune blistering 
diseases, and there are numerous local coverage policies that describe 
Medicare coverage for specific off-label indications. In the context of 
these national and local coverage policies, IVIG use in hospital 
outpatient departments has climbed steeply over the most recent years 
for which data are available, from about 40,000 infusion days in CY 
2002, to 60,000 days in CY 2003, and again to over 70,000 days in CY 
2004. The infusion of IVIG in physician offices increased from about 
2.3 million grams in CY 2003 to 4.0 million grams in CY 2004. In the 
face of growing demand for IVIG in the absence of significant changes 
in the prevalence of medical conditions for which there is high quality 
evidence regarding the effectiveness of IVIG therapy, we are concerned 
that all patients with medical need for IVIG continue to have access to 
this expensive and valuable therapy. Over the upcoming year, we will be 
using our historical claims databases to study the epidemiology of IVIG 
treatment of Medicare beneficiaries in outpatient settings. We expect 
that the health system as a whole should encourage an accountable and 
scientifically grounded use of IVIG, and we welcome discussions with 
industry, providers, and other interested entities around efforts to 
ensure that IVIG is responsibly utilized for evidence-based clinical 
indications so that optimal benefit is obtained.
    Based on the potential access concerns, the growing demand for 
IVIG, and the unique features of IVIG detailed above, as well as our 
move to an ASP payment methodology for IVIG in the OPPS for CY 2006, as 
we seek to gain improved understanding of the contemporary, volatile 
IVIG marketplace we will employ a two-pronged approach during CY 2006 
to help ensure the availability of IVIG to physicians and hospital 
outpatient departments who care for Medicare beneficiaries and will be 
paid ASP+6 percent for the IVIG products.
    First, in addition to ongoing monitoring and outreach activities 
within the Department of Health and Human Services, the Office of the 
Inspector General (OIG) is studying the availability and pricing of 
IVIG as part of its monitoring of market prices pursuant to section 
1847A(d)(2)(A). We expect the OIG's work to provide a significant 
contribution to the analysis of the current situation with respect to 
the specific activities of manufacturers and distributors that may be 
contributing to possible access problems for IVIG as we move to the ASP 
payment methodology in both physician office and hospital outpatient 
settings. We hope to understand those particular market behaviors that 
may have led to such public alarm about the availability of IVIG and 
the adequacy of our payment rate of ASP+6 percent, concerns that have 
been particularly strong and persistent for IVIG in comparison with 
other drugs paid under the same ASP methodology.
    Second, we will provide additional payment in CY 2006. Presently 
the IVIG marketplace is a dynamic one, where a significant portion of 
IVIG products previously available in CY 2005 are being discontinued 
and other products are expected to enter the market over the next year. 
In light of this temporary market instability, we understand that 
manufacturers have continued allocation procedures aimed at stabilizing 
the supply of IVIG. Even so, we understand that providers may face 
purchasing whichever brand of IVIG is available, even if it is not a 
brand the patient is known to tolerate. Many patients treated with IVIG 
receive regular infusions on a predictable schedule. To meet this need, 
hospital staff must conduct significant preadministration services 
prior to IVIG infusions to monitor and manage their inventory, locate 
available IVIG products, reschedule infusions according to product 
availability and patients' needs, and implement physicians' 
determinations regarding whether the available formulations are 
appropriate for patients and whether specific dosing adjustments are 
required. Product-specific factors must be evaluated in light of 
patients' clinical indications for the IVIG infusions, their underlying 
medical conditions, and their past reactions to various IVIG products, 
and hospital staff must locate appropriate doses of IVIG products in 
light of these considerations. If the appropriate IVIG product 
formulations were more widely and reliably available, we do not believe 
that routine IVIG infusions would require these extensive 
preadministration-related services prior to each infusion.
    To continue to ensure appropriate patient access to IVIG in CY 2006 
during this short-term period of market instability for IVIG, beginning 
for dates of service on or after January 1, 2006 through December 31, 
2006, we will temporarily allow a separate payment to hospitals to 
reflect the additional resources that are associated with locating and 
acquiring adequate IVIG products and preparing for an outpatient 
hospital infusion of IVIG in the current environment. We expect that 
making separate payment for these additional necessary services will 
help insure that hospitals are able continue to provide IVIG infusions 
to their patients who depend upon them. We will also provide an 
additional payment to physician offices for these special services, to 
ensure that patients continue to have access to IVIG infusions in the 
most medically appropriate settings, without undesirable shifts in 
sites of service for their care.
    Because the extra hospital resources currently associated with the 
preadministration-related services for intravenous infusion of 
immunoglobulin are not accounted for in the CY 2004 hospital claims 
data used to establish payments rates for the CY 2006 drug 
administration HCPCS codes that will be billed for IVIG infusions, we 
are creating a temporary G-code to describe these additional 
preadministration services related to the intravenous infusion of 
immunoglobulin. We have established the following G-code for hospital 
outpatient billing for CY 2006:
     G0332; Preadministration-related services for intravenous 
infusion of immunoglobulin, per infusion encounter (This service is to 
be billed in conjunction with administration of immunoglobulin.)

[[Page 68650]]

    Hospitals may bill this service once per day in association with a 
patient encounter for administration of IVIG, in addition to billing 
for the appropriate drug administration service(s) and for appropriate 
units of the HCPCS code that describes the IVIG product infused. In 
addition, hospitals may also bill for any significant and separately 
identifiable evaluation and management (E/M) service they perform at a 
level 2 through 5 in association with the infusion encounter, appending 
modifier -25 to the E/M service. We have established the payment level 
for this service in outpatient hospital departments by crosswalking it 
to the payment level established for the physician office for CY 2006. 
We believe that the hospital resources required for HCPCS code G0332 
should be very similar to the practice expense for this service in the 
physician office, and, because no physician work is included in the 
physician office payment for the new service, the HCPCS code G0332 
payment rates in physician office and hospital outpatient settings 
should be generally comparable. HCPCS code G0332 is a new service with 
no claims history under the OPPS and we cannot identify an appropriate 
clinical APC for its assignment based on considerations of clinical and 
resource homogeneity. Therefore, we are assigning HCPCS code G0332 to 
New Technology APC 1502 (status indicator ``S'') with a payment rate of 
$75 for CY 2006, based on a direct crosswalk to the New Technology APC 
that corresponds with the physician office CY 2006 payment of 
approximately $69.
    We believe that this temporary separate payment provided through 
HCPCS code G0332 in CY 2006 for the physician office and hospital 
outpatient resources associated with additional IVIG preadministration-
related services due to the present significant fluctuations in the 
IVIG marketplace will ensure that Medicare beneficiaries depending on 
IVIG experience no adverse health consequences from the market 
instability for IVIG products. In the meantime, we will continue to 
evaluate the market factors affecting the pricing and availability of 
IVIG products in the context of our ASP+6 percent payment methodology 
and our separate payment for HCPCS code G0332 in CY 2006. We expect 
that in CY 2006 with continued collection of updated ASP data for IVIG; 
improved understanding of the IVIG marketplace; more focused attention 
on the medical necessity of the utilization of IVIG; ongoing 
collaboration between CMS, the IVIG community, manufacturers, 
providers, and other interested entities; and this temporary separate 
payment for hospital and physician office resources required for the 
intensive preadministration services related to IVIG infusion, the IVIG 
marketplace will stabilize over the upcoming year. Substantial 
preadministration-related services for IVIG infusions should no longer 
be required of physician offices and hospital outpatient departments 
that provide IVIG infusions to patients who need them. Therefore, this 
additional payment for G0332 is effective for CY 2006 only. Thus, we 
will be closely monitoring this issue once again in the context of our 
rulemaking for CY 2007.
    Comment: One commenter requested that CMS provide separate payment 
for all magnetic resonance imaging contrast agents, including imaging 
agents covered by HCPCS code Q9953.
    Response: In CY 2006, the HCPCS codes that will be used to describe 
magnetic resonance imaging contrast agents are HCPCS codes Q9952 (Inj 
Gad-base MR contrast, ml), Q9953 (Inj Fe-based MR contrast, ml) and 
Q9954 (Oral MR contrast, 100 ml). In the proposed rule, we proposed to 
pay separately for HCPCS code Q9952 and HCPCS code Q9954; however, we 
proposed to package HCPCS code Q9953 because we were not able to 
estimate its per administration cost. For CY 2006, we will be paying 
separately for HCPCS code Q9952 and HCPCS code Q9954, as proposed. 
Additionally, we will provide separate payment for HCPCS code Q9953 
since we have now determined its per day cost to be higher than $50 in 
this final rule with comment period.
    Comment: One commenter indicated that WinRho SDF Liquid is a new 
intravenous gamma globulin product that recently received marketing 
clearance from the FDA, and that this product was created to replace 
the first generation therapy, WinRho SDF. The commenter noted that 
WinRho SDF Liquid does not require reconstitution, whereas WinRho SDF 
is a lyophilized product that requires reconstitution and is described 
by HCPCS code J2792. According to the commenter, if WinRho SDF Liquid 
is also assigned to HCPCS code J2792, then the OPPS payment in CY 2006 
is likely to be below the acquisition cost of this new product. 
Therefore, the commenter requested that CMS establish separate codes to 
distinguish between the liquid and lyophilized forms of Rho D Immune 
Globulin.
    Response: We recognize the commenter's concern about payment for 
this new intravenous gamma globulin product under the OPPS. The 
National HCPCS Panel coordinates decisions regarding the creation of 
permanent HCPCS codes; therefore, comments related to the HCPCS code 
creation process are outside the scope of this rule.
    Comment: One commenter was concerned that where the ASP information 
does not exist, CMS will use the CY 2004 hospital claims data, and with 
drug cost increases averaging 5 to 10 percent over the past two years, 
the payments would not be enough to cover the costs of providing these 
drugs.
    Response: We understand the commenter's concern. However, as we 
stated in the proposed rule, until ASP data are available for certain 
drugs and biologicals, their payment rates will be based on their mean 
costs derived from the CY 2004 claims data. We note that with respect 
to items for which we currently do not have ASP data, once their ASP 
data become available in later quarter submissions, their payment rates 
under the OPPS will be adjusted so that the rates are based on the ASP 
methodology and set to ASP+6 percent. Therefore, we encourage the 
manufacturers of these drugs and biologicals to report their ASPs to 
CMS.
    We received several public comments on the November 15, 2004 final 
rule with comment period concerning issues related to payment for drugs 
and biologicals in CY 2005. For those issues that have not already been 
addressed in other sections of this preamble, below is a summary of 
those comments and our responses.
    Comment: One commenter stated that CMS incorrectly calculated a 
payment rate of $6.60 per cm2 for the product Integra described by 
HCPCS code C9206 (Collagen-Glycosaminoglycan Bilayer Matrix, per cm2) 
and that the payment rate was inappropriate in the OPPS setting. The 
commenter noted that Integra is provided in four sizes that are 
appropriate for different clinical needs and settings, and the payment 
rate set by CMS represented a single payment rate based on the cost of 
the largest package size used in the inpatient setting. The commenter 
recommended that either three additional and separate payment HCPCS 
codes be established for the different sizes, with payment rates 
established according to their different WACs, or that the payment rate 
for Integra be based on the costs of the smallest packaging sizes, 
which are the ones used in the hospital outpatient department. In 
addition, the commenter recommended that the unit descriptor for HCPCS 
code C9206 be changed to 25 cm2 so that it is consistent with the 
descriptors of the CPT codes used with this product and also so that it 
is convenient and easy to apply for

[[Page 68651]]

hospital personnel inputting codes on claim forms.
    Response: Effective January 1, 2005, HCPCS code C9206 (Collagen-
Glycosaminoglycan Bilayer Matrix, per cm2) was created to describe 
Integra. To accommodate the different package sizes that currently 
exist or may enter the market in the future, our policy is to create a 
HCPCS code descriptor based on the lowest possible dosage or size of 
the product; therefore, we assigned a unit of cm2 to HCPCS code C9206. 
The payment rate of $6.60 per cm2 for this biological was calculated 
using the standard methodology used to determine the payment rates for 
drugs and biologicals in the physician office setting, where for drugs 
and biologicals without an ASP, our methodology prescribes the use of 
the lesser of the median WAC for all sources of the generic forms of 
the product or the brand name product with the lowest WAC. Therefore, 
because Integra is a brand name product with four different package 
sizes and prices, we set the payment rate for HCPCS code C9206 at 
$6.60, which was the lowest WAC per cm2. This payment rate was in 
effect during the first quarter of CY 2005. We note that the payment 
rates for C9206 for the second quarter of CY 2005 and following 
quarters were based on 106 percent of its ASP, based on the ASP 
methodology for drugs furnished in the physician office setting on or 
after January 1, 2005. We note that for CY 2006, HCPCS code C9206 has 
been deleted and replaced with the permanent HCPCS code J7343.
    Comment: One commenter requested that CMS revise the first quarter 
CY 2005 ASP rate for HCPCS code J0180 (Injection, agalsidase beta, 1 
mg) from $121.12 to $121.14 because it believes that CMS made an error 
in the weighting of the different ASP figures provided to CMS for the 
two National Drug Codes for this product.
    Response: The methodology used to establish the ASP-based payment 
rates for drugs and biologicals is discussed in the CY 2006 Medicare 
Physician Fee Schedule final rule. Therefore, we will not respond to 
this comment since it is outside the scope of this rule.
    Comment: One commenter expressed concern about the creation of the 
new HCPCS code J3396 (Injection, verteporfin, 0.1 mg) in CY 2005 for 
verteporfin and the deletion of HCPCS code J3395 (Injection, 
verteporfin, 15 mg). The commenter stated that the new code will create 
confusion among providers and urged CMS to reinstate HCPCS code J3395 
for use with verteporfin injections and/or to clarify and implement 
measures to ensure that the change to HCPCS code J3396 will not impact 
providers' ability to accurately bill for their use of this medication.
    Response: Decisions regarding the creation of permanent HCPCS codes 
are coordinated by the National HCPCS Panel. Comments related to the 
HCPCS code creation process and decisions made by the National HCPCS 
Panel are outside the scope of this rule.
    In CY 2005, we applied an equitable adjustment to determine the 
payment rate for darbepoetin alfa (HCPCS code Q0137) pursuant to 
section 1833(t)(2)(E) of the Act. However, for CY 2006, we proposed to 
establish the payment rate for this biological using the ASP 
methodology. The ASP data represent market prices for this biological; 
therefore, we believe it is appropriate to use the ASP methodology to 
establish payment rates for darbepoetin alfa because this method will 
permit market forces to determine the appropriate payment for this 
biological. We specifically requested comments on the proposed payment 
policy for this biological.
    We received several public comments on our proposal.
    Comment: A number of commenters expressed concern about our 
proposal to establish payment for both epoetin alfa (marketed under the 
trade name of Procrit [supreg]) and darbepoetin alfa (marketed under 
the trade name of Aranesp[supreg]) using the ASP methodology. Several 
commenters urged CMS to implement this proposal so that a market-
oriented, ASP-based payment system can function as the Pub.L. 108-173 
intended without any arbitrary government interference. In addition, 
one of the commenters indicated that this policy would promote 
appropriate patient and physician choice in making health care 
decisions. One of the commenters supported the proposal to establish a 
payment rate for darbepoetin alfa using the ASP methodology and to 
discontinue application of an equitable adjustment to its payment rate. 
This commenter also stated that CMS accurately noted in the CY 2006 
proposed rule that ``the ASP data represent market prices for this 
biological,'' and that using the ASP methodology to establish the CY 
2006 OPPS payment rate for darbepoetin alfa ``will permit market forces 
to determine the appropriate payment for this biological.'' Therefore, 
the commenter reasoned that an equitable adjustment is not needed in CY 
2006 since payments for all separately payable drugs and biologicals 
will be based on market prices. The commenter also provided clinical 
and economic data to further support CMS' proposal not to apply an 
equitable adjustment to the payment rate for darbepoetin alfa in CY 
2006. For example, the commenter noted that new clinical data 
demonstrate that darbepoetin alfa and epoetin alfa achieve comparable 
clinical outcomes at comparably priced doses. By applying the proposed 
payment rates for doses of the two drugs based on current clinical 
guidelines and validated randomized controlled trials, the commenter 
concluded that overall Medicare and beneficiary spending would decrease 
for similar clinical outcomes with the use of darbepoetin alfa rather 
than epoetin alfa. In addition, the commenter highlighted that applying 
an equitable adjustment to the payment rate for darbepoetin alfa in CY 
2006 would, in fact, increase Medicare and beneficiary spending on 
darbepoetin alfa. This commenter also recommended that if CMS plans to 
utilize its equitable adjustment authority again, then the conversion 
ratio should be increased to 400:1 to reflect the results of a new 
clinical study that proves the clinical comparability of darbepoetin 
alfa and epoetin alfa at such a dosing ratio.
    One commenter on this topic also provided detailed results of 
clinical studies that the commenter believes provide a strong rationale 
for continuing the equitable payment adjustment for darbepoetin alfa 
and demonstrate that the appropriate conversion ratio for making this 
adjustment is less than or equal to 260:1. The commenter stated that 
Medicare and beneficiary spending for these two drugs under the 
proposed payment policy for CY 2006 will be higher in order to achieve 
comparable therapeutic effects unless CMS maintains the equitable 
adjustment policy and re-establishes a conversion ratio that is less 
than or equal to 260:1.
    Response: We appreciate the many thoughtful and detailed comments 
on our proposed CY 2006 payment rates for darbepoetin alfa and epoetin 
alfa. Based on our ASP market price data from the second quarter of CY 
2005 for these two drugs, we observed that the payment rates for 
epoetin alfa and darbepoetin alfa would decrease by similar levels in 
CY 2006 from their current CY 2005 payment rates. Payment for epoetin 
alfa would decrease by 17 percent and payment for darbepoetin alfa 
would decrease by 18 percent. In CY 2006, if we continued the CY 2005 
equitable adjustment policy of determining the payment rate for 
darbepoetin alfa using a conversion ratio of 330 Units of epoetin alfa 
to 1 microgram of darbepoetin alfa (330:1), then the payment rate for 
darbepoetin alfa would decrease by 17 percent, the same rate of

[[Page 68652]]

change as that for epoetin alfa. Following the payment methodology 
described earlier for separately payable drugs and biologicals where 
payment for their acquisition and overhead costs would be equal to 
ASP+6 percent in CY 2006, the payment rate for epoetin alfa would be 
$9.22 per 1000 Units and the payment rate for darbepoetin alfa would be 
$3.01 per microgram. However, if we applied the CY 2005 conversion 
ratio of 330:1, the payment rate for darbepoetin alfa would be $3.04 
per microgram.
    In determining our payment policy for darbepoetin alfa in CY 2006, 
we reviewed the results of the many recent clinical studies that were 
provided in the comments. We independently assessed the methodological 
rigor of the study designs and the generalizability of the results of 
the various studies. This assessment included the appropriateness and 
comparability of the sizes and characteristics of the subject groups, 
the duration of the trials, the administered doses of the 
investigational agents, the drop out rates in the treatment arms, and 
the consideration of other possible causes of study bias. With the 
limitations of the studies supporting either an increase or a decrease 
in the conversion factor, the quality and quantity of the currently 
available published evidence do not provide sufficient, clear evidence 
to support a change in the appropriate conversion factor at this time. 
Methodological shortcomings included insufficient sample sizes, 
excessive dropout rates, inadequate study duration, and failure to 
adequately account for confounding effects. Some studies have yet to be 
published as full, peer-reviewed journal articles; abstracts do not 
provide sufficient detail for our review. Overall, the results of these 
clinical studies were not consistent or conclusive in defining a 
single, different conversion ratio for dosing between these two 
products, particularly with respect to the timing of specific doses of 
the two drugs required to achieve several different meaningful clinical 
outcomes. The results of contemporary clinical studies demonstrated 
that a wide range of conversion ratios could be considered, and these 
ratios varied by a factor of two or more depending on the specific 
study design, the measured clinical outcomes, and the treated patient 
populations. As we have noted above, the payment rate for darbepoetin 
alfa at ASP+6 percent ($3.01 per microgram) is slightly lower than but 
consistent with the payment rate for darbepoetin alfa using the 330:1 
conversion ratio ($3.04 per microgram) that we established in CY 2005. 
This conversion ratio is also well within the range of the conversion 
ratios that may be supported by the available clinical data. We 
therefore do not believe that there is sufficient clinical evidence to 
indicate that we should specifically employ our equitable adjustment 
authority to adjust the payment rate for darbepoetin alfa in CY 2006. 
By finalizing this payment policy specifically for the CY 2006 OPPS, 
based on our latest payment rate analysis and independent review of the 
recent clinical literature, it is not our intention to preclude the use 
of a conversion ratio to establish the OPPS payment rates for epoetin 
alfa and darbepoetin alfa in the future. Rather, as long as the market 
price for darbepoetin alfa is consistent with a payment rate derived 
using a clinically appropriate conversion ratio, invoking our equitable 
adjustment authority would not lead to a different result. However, we 
retain our authority to apply an equitable adjustment in the future to 
determine the payment rate for darbepoetin alfa pursuant to section 
1833(t)(2)(E) of the Act. We will once again assess the need to 
exercise this authority when we next update the payment rates under the 
OPPS based on the latest available clinical evidence on the appropriate 
conversion ratio and based on the actual pricing experience at that 
time.
    Effective April 1, 2005, several HCPCS codes were created to 
describe various concentrations of low osmolar contrast material 
(LOCM). These new codes are HCPCS codes Q9945 through Q9951. However, 
in Transmittal 514 (April 2005 Update of the OPPS), we instructed 
hospitals to continue reporting LOCM in CY 2005 using the existing 
HCPCS codes A4644, A4645, and A4646 and made Q9945 through Q9951 not 
payable under the OPPS. For CY 2006, we proposed to activate the new Q-
codes for hospitals and discontinue the use of HCPCS codes A4644 
through A4646 for billing LOCM products. We have CY 2004 hospital 
claims data for HCPCS codes A4644 through A4646, which show that the 
mean costs per day for these products are greater than $50. Because we 
did not have CY 2004 hospital claims data for HCPCS codes Q9945 through 
Q9951, we crosswalked the cost data for the HCPCS A-codes to the new Q-
codes. There is no predecessor code that crosswalks to HCPCS code Q9951 
for LOCM with a concentration of 400 or greater mg/ml of iodine. 
Therefore, we proposed that our general payment policy of paying 
separately for new codes while hospital data are being collected would 
apply to HCPCS code Q9951. As our historical hospital mean per day 
costs for the three A-codes exceeded the packaging threshold and our 
payment policy for new codes without predecessors applied to one of the 
new codes, we proposed to pay for the HCPCS codes Q9945 through Q9951 
separately in CY 2006 at payment rates calculated using the ASP 
methodology. We noted that because the new Q-codes describing LOCM were 
more descriptively discriminating and had different units than the 
previous A-codes for LOCM, as well as widely varying ASPs, we expected 
that the packaging status of these Q-codes might change in future years 
when we have specific OPPS claims data for these new codes. We 
specifically invited comments on our proposed policy to pay separately 
for LOCM described by HCPCS codes Q9945 through Q9951 in CY 2006.
    We received several public comments in response to our request.
    Comment: Several commenters supported CMS' proposal to pay 
separately for LOCM using HCPCS codes Q9945 through Q9951, indicating 
that this policy will help to protect beneficiary access to the most 
appropriate therapies. The commenters believed that this change would 
promote consistency across sites of services. A comment from a 
manufacturer of contrast agents expressed concern about the use of the 
new Q-codes for LOCM and the corresponding ASP payment methodology to 
determine their payment rates. The commenter noted that the proposed 
payment rates for the contrast media codes increase as the iodine or 
active material concentration decreases and believed that the coding 
tiers adopted by CMS do not appropriately categorize the various media 
products. The commenter was also concerned that such a payment scheme 
might be a perverse incentive for hospitals to use a lower 
concentration LOCM in diagnostic imaging procedures in order to qualify 
for higher payment rates or motivate clinically unnecessary and 
potentially dangerous switches in contrast media selections. The 
commenter recommended that CMS review whether an alternative payment 
mechanism would be more appropriate for LOCM and proposed a revised 
version of the Q-code classifications for LOCM.
    Response: We appreciate the commenters' support of our proposal to 
implement new HCPCS codes for LOCM in CY 2006 and pay for them 
separately. In the final rule, the payment rates for these codes are 
based on their market prices from the second quarter of CY 2005, and we 
believe that the ASP-based

[[Page 68653]]

rates appropriately reflect the acquisition and pharmacy overhead costs 
of these products under each of the HCPCS codes. Decisions regarding 
the creation of permanent HCPCS codes are coordinated by the National 
HCPCS Panel. We suggest that commenters who have concerns about the new 
Q-codes for LOCM should pursue appropriate changes through the process 
set up by the National HCPCS Panel to establish HCPCS codes.
(4) CY 2006 Proposed and Final Payment Policy for Radiopharmaceutical 
Agents
    We do not have ASP data for radiopharmaceuticals. Therefore, for CY 
2006, we proposed to calculate per day costs of radiopharmaceuticals 
using mean unit costs from the CY 2004 hospital claims data to 
determine the items' packaging status similar to the drugs and 
biologicals with no ASP data. In a separate report, the GAO provided 
CMS with hospital purchase price information for nine 
radiopharmaceuticals. As part of the GAO survey described earlier, the 
GAO surveyed 1,400 acute-care, Medicare-certified hospitals and 
requested hospitals to provide purchase prices for radiopharmaceuticals 
from July 1, 2003 to June 30, 2004. The radiopharmaceutical part of the 
survey yielded a response rate of 61 percent, where 808 hospitals 
provided usable information. The GAO reported the average and median 
purchase prices for nine radiopharmaceuticals for the period July 1, 
2003, to June 30, 2004. These items represented 9 percent of the 
Medicare spending for specified covered outpatient drugs during the 
first 9 months of CY 2004. The report noted that the purchase price 
information accounted for volume and other discounts provided at the 
time of purchase, but excluded subsequent rebates from manufacturers 
and payments from group purchasing organizations.
    When we examined differences between the CY 2005 payment rates for 
these nine radiopharmaceutical and their GAO mean purchase prices, we 
found that the GAO purchase prices were substantially lower for several 
of these agents. We also found similar patterns when we compared the CY 
2005 payment rates for radiopharmaceuticals with their CY 2004 median 
and mean costs from hospital claims data. In the proposed rule, we 
indicated that our intent was to maintain consistency, whenever 
possible, between the payment rates for these agents from CY 2005 to CY 
2006, because such rapid reductions could adversely affect beneficiary 
access to services utilizing radiopharmaceuticals.
    As we did not have ASPs for radiopharmaceuticals that best 
represent market prices, we proposed as a temporary 1-year policy for 
CY 2006 to pay for radiopharmaceuticals that were separately payable in 
CY 2006 based on the hospital's charge for each radiopharmaceutical 
agent adjusted to cost. As we noted in the proposed rule, MedPAC has 
indicated that hospitals currently include the charge for pharmacy 
overhead costs in their charge for the radiopharmaceutical. Therefore, 
we also noted in the proposed rule that paying for these items on the 
basis of charges converted to cost would be the best available proxy 
for the average acquisition cost of the radiopharmaceutical along with 
its handling cost until we received ASP and overhead information on 
these agents. We noted that we expected hospitals' different purchasing 
and preparation and handling practices for radiopharmaceuticals to be 
reflected in their charges, which would be converted to costs using 
hospital-specific CCRs. To better identify the separately payable 
radiopharmaceuticals to which this policy would apply, we proposed to 
assign them to status indicator ``H.'' We specifically requested public 
comment on the proposed payment policy for separately payable 
radiopharmaceuticals in CY 2006.
    We received many comments on this proposal.
    Comment: Numerous commenters expressed concern about our proposal 
to pay for separately payable radiopharmaceuticals at hospitals' 
charges converted to cost in CY 2006. Most of the commenters generally 
supported the proposed payment methodology for radiopharmaceuticals in 
CY 2006. However, several of the commenters noted their belief that 
this methodology may trigger drastic decreases in the payment rates for 
certain items based on their review of hospital charge data for these 
agents. Some of the commenters urged CMS to consider refining the 
methodology for CY 2006 and offered several options. Several commenters 
recommended that CMS utilize hospital-specific overall CCRs, rather 
than departmental CCRs, indicating that overall CCRs were more 
reflective of hospitals' overall charges and that department-specific 
CCRs would fail to convert charges for radiopharmaceuticals to 
``average'' acquisition costs, resulting in significantly lower 
payments than the CY 2005 levels. Some of the commenters expressed 
concern about the effect of cost compression using a CCR method, 
stating that the proposed methodology will result in underpayment for 
more expensive radiopharmaceuticals. The commenters noted that because 
hospitals do not tend to maintain a constant CCR, as 
radiopharmaceutical costs increase, the differences between actual 
costs and the CMS derived costs increase exponentially. One commenter 
suggested that CMS address this issue by establishing a national and 
unique CCR for radiopharmaceuticals during CY 2006, which could more 
accurately account for radiopharmaceutical handling and overhead costs, 
while a few other commenters recommended that CMS facilitate hospital 
reporting of accurate charges for radiopharmaceuticals by clarifying 
exactly which cost-to-charge ratio would apply to each hospital to 
calculate the hospital outpatient payment for radiopharmaceuticals in 
CY 2006. Another commenter suggested that CMS provide a template that 
hospitals may use to prepare their claims for radiopharmaceuticals, 
including handling and other costs, and provide instructions to fiscal 
intermediaries regarding the implementation of this policy. One of the 
commenters suggested that CMS recognize the general reasonable concern 
regarding using the hospital-specific overall cost-to-charge 
methodology for highly expensive radiopharmaceuticals, and identified 
19 radiopharmaceuticals with hospital acquisition costs per patient 
study greater than $500, for which it recommended that CMS use external 
data to verify and pay based on invoice acquisition costs plus handling 
fees, or freeze the CY 2005 payment rates for these 
radiopharmaceuticals, or both. Other commenters suggested limiting 
decreases in payment rates for separately payable radiopharmaceuticals 
from CY 2005 to CY 2006, including (1) establishing a payment floor 
during CY 2006, based on an appropriate percentage of the CY 2005 
payment rate for specific radiopharmaceuticals; (2) ensuring that the 
resultant payment rate for each product in CY 2006 does not fall below 
the level identified in the GAO data or, if GAO data were unavailable, 
that the payment not be less than 95 percent of the CY 2005 payment 
rate for the product; and (3) ensuring that payments for these products 
do not fall below 95 percent of their CY 2005 rates. One commenter, to 
the contrary, indicated that while the concerns of other commenters 
advocating a payment floor

[[Page 68654]]

under the proposed methodology for CY 2006 are understandable, CMS 
should not implement a floor in addition to implementing a CCR approach 
for payment. This commenter noted that there were variations in the 
cost data reported by hospitals in their charge reports, and it was 
important that hospitals, as well as manufacturers, be encouraged to 
report accurately to CMS and that setting an artificial payment floor 
reduces hospitals' incentives to do so. The commenter further stated 
that because the proposed policy already would provide hospitals with 
an opportunity to report charges accurately for each claim, there was 
no need for CMS to provide any additional safeguards to ensure 
sufficient payment and that hospitals would already have the ability to 
receive appropriate payment by reporting appropriate charges for these 
agents in their claims.
    Lastly, several of the commenters indicated that CMS incorrectly 
stated that overhead costs for radiopharmaceuticals are included in the 
hospital charges for the radiopharmaceuticals. One commenter stated 
that some hospital costs associated with radiopharmaceutical purchase 
and use are captured in hospital charges. However, the preparation, 
distribution, administration, and safe disposal of 
radiopharmaceuticals, along with labor costs and necessary patient and 
hospital staff protection costs, are not uniformly and accurately 
reflected in hospital charges. These commenters urged CMS to provide 
hospital outpatient departments with clear guidance on the array of 
costs associated with radiopharmaceutical acquisition and handling that 
should be appropriately included in their charges for 
radiopharmaceuticals, so that payments and data in CY 2006 accurately 
reflect hospital acquisition and pharmacy overhead costs for each 
radiopharmaceutical. One commenter also noted that an additional 
payment for overhead and handling of radiopharmaceuticals should be 
made because these costs are not captured in charges for the 
radiopharmaceuticals.
    Response: We appreciate the commenters' support of our proposed 
payment policy for separately payable radiopharmaceuticals in CY 2006. 
As recommended by several commenters, in this final rule with comment 
period, we are using hospital-specific overall CCRs to derive the costs 
of these items from the hospitals' reported charges. We acknowledge the 
commenters' concerns about the use of the CCRs resulting in cost 
compression. We believe that hospitals have the ability to set charges 
for items properly so that charges converted to costs can appropriately 
account fully for their acquisition and overhead costs. The specific 
payment rates for separately payable radiopharmaceuticals are not being 
determined on a prospective basis in CY 2006 because hospitals will 
receive a newly calculated payment for each claim submitted for a 
separately payable radiopharmaceutical, based on the specific 
radiopharmaceutical charge on that claim and the applicable overall 
hospital CCR. Therefore, if necessary we believe that hospitals can 
appropriately adjust their charges for radiopharmaceuticals so that the 
calculated costs properly reflect their actual costs. Specifically, it 
is appropriate for hospitals to set charges for these agents in CY 2006 
based on all costs associated with the acquisition, preparation, and 
handling of these products so that their payments under the OPPS can 
accurately reflect all of the actual costs associated with providing 
these products to hospital outpatients. We believe that payment for 
these items using charges converted to costs will be the best available 
proxy for the average acquisition costs of the radiopharmaceuticals 
along with their handling costs and that no additional dampening based 
on historical payment rates is necessary to pay appropriately for 
radiopharmaceuticals. Therefore, for CY 2006, we are finalizing the 
proposed policy to pay for radiopharmaceuticals that are separately 
payable based on the hospital's charge for each radiopharmaceutical 
adjusted to cost. We note that we will not be indicating exactly which 
cost-to-charge ratio will apply to each hospital, as the fiscal 
intermediaries determine those values. We also note that we have never 
provided such information in previous years for pass-through devices 
and brachytherapy sources which are also paid under the same 
methodology. As indicated in the proposed rule, we are assigning all 
radiopharmaceuticals that will be separately payable in CY 2006, to 
which this policy will apply, status indicator ``H'' in Addendum B of 
this final rule with comment period.
    Comment: A commenter indicated that the OPPS Final Rule should 
reflect the use of HCPCS code A9523, rather than HCPCS code C1083, to 
describe the imaging agent in the Zevalin therapeutic regimen in the 
event that the HCPCS Committee modifies the HCPCS descriptor of HCPCS 
code A9523 to reflect a per dose unit.
    Response: We note that HCPCS codes C1083 and A9523 will be deleted 
on December 31, 2005 and replaced with the new HCPCS code A9543 
(Yttrium Y-90 ibritumomab tiuxetan, therapeutic, per treatment dose, up 
to 40 millicuries) for services furnished on or after January 1, 2006.
    Comment: One commenter recommended that HCPCS code G3001 
(Administration and supply of tositumomab, 450 mg), currently 
applicable to both doses of the non-radioactive component of therapy 
and its administration, be amended to apply only to the non-radioactive 
component of the regimen. The commenter also recommended that hospitals 
should be allowed to use CPT code 90784 for the administration of the 
non-radioactive component of BEXXAR and HCPCS code G3001 to reflect the 
supply of tositumomab, thus allowing hospitals to identify the non-
radioactive product accurately in their claims with a familiar product 
code and receive appropriate payment for the infusion of the product. 
Consequently, the commenter strongly urged CMS to retain HCPCS code 
G3001 as a product-only code, so that these facilities can continue to 
provide treatment to Medicare beneficiaries.
    Response: As we had stated in the November 7, 2003 final rule with 
comment period for CY 2004 (68 FR 63443), unlabeled tositumomab is not 
approved as either a drug or a radiopharmaceutical, but it is a supply 
that is required as part of the Bexxar treatment regimen. We do not 
make separate payment for supplies used in services provided under the 
OPPS. Payments for necessary supplies are packaged into payments for 
the separately payable services provided by the hospital. 
Administration of unlabeled tositumomab is a complete service that 
qualifies for separate payment under its own APC. This complete service 
is currently described by HCPCS code G3001. Therefore, we do not agree 
with the commenter's recommendation that we assign a separate code to 
the supply of unlabeled tositumomab. Rather, we will continue to make 
separate payment for the administration of tositumomab, and payment for 
the supply of unlabeled tositumomab is packaged into the administration 
payment.
    Comment: One commenter suggested that CMS establish HCPCS 
descriptors based on ``per dose'' units for radiopharmaceuticals, 
indicating that such a policy would help facilitate a smoother 
transition as CMS moves to establish payments for radiopharmaceuticals 
based on average acquisition costs and pharmacy handling APCs.
    Response: For CY 2006, the National HCPCS Panel has changed the

[[Page 68655]]

descriptors of many of the radiopharmaceutical product to indicate per 
dose units. The new CY 2006 HCPCS codes and their descriptors can be 
found on the HCPCS Web site at http://www.cms.hhs.gov/medicare/hcpcs/. 
The payment status indicators associated with these codes can be found 
in Addendum B of this final rule with comment period.
    Comment: One commenter suggested that CMS require hospitals to 
report HCPCS codes and charges for all radiopharmaceuticals to 
facilitate accurate data collection and help ensure that the costs and 
charges of radiopharmaceuticals (as well as the associated handling 
costs) are considered in establishing payment rates under the OPPS. 
Another commenter commended CMS for clarification and education 
provided to hospitals regarding the importance of coding and reporting 
charges for radiopharmaceuticals and encouraged CMS to continue to 
remind hospitals to report charges regardless of N, K, or H status 
indicators assigned to the radiopharmaceuticals, as these charges have 
a key role in setting future APC rates and assignment of appropriate 
status indicators.
    Response: We will continue to strongly encourage hospitals to 
report charges for all drugs, biologicals, and radiopharmaceuticals 
using the correct HCPCS codes for the items used, including the items 
that have packaged status in CY 2006. We agree with the commenters, 
that a robust set of claims for each packaged or separately payable 
item paid under the OPPS aids in obtaining the most accurate data for 
future packaging decisions and rate-setting. In the CY 2005 final rule, 
we noted that, with just a very few exceptions, hospitals appeared to 
be reporting charges for drugs, biologicals and radiopharmaceuticals 
using the existing HCPCS codes, even when such items had packaged 
status (69 FR 65811). Therefore, we do not believe it is necessary to 
institute a coding requirement for drugs, biologicals, and 
radiopharmaceuticals in CY 2006 as we are currently doing for device 
category codes required to be reported when used in procedures.
    Section 303(h) of Pub. L. 108-173 exempted radiopharmaceuticals 
from ASP pricing in the physician office setting where the fewer 
numbers (relative to the hospital outpatient setting) of 
radiopharmaceuticals are priced locally by Medicare contractors. 
However, the statute does not exempt radiopharmaceutical manufacturers 
from ASP reporting. We currently do not require reporting for 
radiopharmaceuticals because we do not pay for any of the 
radiopharmaceuticals using the ASP methodology. However, for CY 2006, 
we proposed to begin collecting ASP data on all radiopharmaceuticals 
for purposes of ASP-based payment of radiopharmaceuticals beginning in 
CY 2007.
    As we had stated in the November 7, 2003 final rule with comment 
period for CY 2004 (68 FR 42728), in the CY 2006 proposed rule we 
recognized that there are significant complex issues surrounding the 
reporting of ASPs for radiopharmaceuticals. Most radiopharmaceuticals 
must be compounded from a ``cold kit'' containing necessary 
nonradioactive materials for the final product to which a radioisotope 
is added. There are critical timing issues, given the short half-lives 
of many radioisotopes used for diagnostic or therapeutic purposes. 
Significant variations in practices exist with respect to what entity 
purchases the constituents and who then compounds the 
radiopharmaceutical to develop a final product for administration to a 
patient. For example, manufacturers may sell the components of a 
radiopharmaceutical to independent radiopharmacies. These 
radiopharmacies may then sell unit or multi-doses to many hospitals. 
However, some hospitals also may purchase the components of the 
radiopharmaceutical and prepare the radiopharmaceutical themselves. In 
some cases, hospitals may generate the radioisotope on-site, rather 
than purchasing it. The costs associated with acquiring the 
radiopharmaceutical in these instances may vary significantly. In 
addition, there may only be manufacturer pricing for the components. 
However, the price set by the manufacturer for one component of a 
radiopharmaceutical may not directly translate into the acquisition 
cost of the ``complete'' radiopharmaceutical, which may result from the 
combination of several components. In general, for drugs other than 
radiopharmaceuticals, the products sold by manufacturers with National 
Drug Codes (NDCs) correspond directly with the HCPCS codes for the 
products administered to patients so ASPs may be directly calculated 
for the HCPCS codes. In the case of radiopharmaceuticals, this 1 to 1 
relationship may not hold, potentially making the calculation of ASPs 
for radiopharmaceuticals more complex.
    In addition, some hospitals may generate their own radioisotopes, 
which they then use for radiopharmaceutical compounding, and they may 
sell these complete products to other sites. The costs associated with 
this practice could be difficult to capture through ASP reporting. We 
invited very specific comments on these and all other relevant issues 
surrounding implementation of ASP reporting for radiopharmaceuticals.
    We received numerous public comments on our proposal to begin 
collecting ASP data on all radiopharmaceuticals for purposes of ASP-
based payment of radiopharmaceuticals beginning in CY 2007.
    Comment: Many commenters provided detailed discussions of the 
policy, including practical and legal challenges related to our 
proposal to require ASP reporting for radiopharmaceuticals in CY 2006. 
Some of these commenters indicated that radiopharmaceuticals are 
formulated, distributed, compounded, and administered in unique 
distribution channels that preclude the determination of ASP relevant 
to a radiopharmaceutical HCPCS code by the manufacturer. Most 
radiopharmaceuticals are typically formed from two or more components. 
Thus, one manufacturer does not know if a hospital combining individual 
components to generate the end product, a patient dose, uses 
exclusively the manufacturer's raw materials, or instead combines raw 
materials from more than one manufacturer. In this case, the 
manufacturer has no way to calculate the ASP of the end product patient 
dose, as the manufacturer only knows the sales prices of its own 
components. Consequently, radiopharmaceutical manufacturers could not 
in good faith sign CMS required ASP-reporting certifications as they 
generally have no knowledge or access to end product unit prices. In 
addition, the components may be combined to generate a vial of 
radiopharmaceutical from which multiple patient doses can be drawn. 
Pricing for a patient unit dose would thus vary, depending on how many 
patient doses are drawn from a vial. Commenters also noted that a 
significant proportion of radiopharmaceuticals are sold as components 
to independent freestanding radiopharmacies or nuclear pharmacies. 
These radiopharmacies prepare patient unit doses, which are then 
purchased by hospitals. The manufacturer of the component may not know 
what the radiopharmacies' prices are for a final unit dose product, and 
may be precluded from accessing such information. Some of the 
commenters indicated that if ASP reporting were imposed, it might 
require reporting from

[[Page 68656]]

commercial radiopharmacies, entities that are currently not subject to 
ASP reporting.
    Many commenters also questioned whether CMS has the legal authority 
to impose ASP reporting on radiopharmaceutical manufacturers and the 
authority to implement payment for radiopharmaceuticals based on ASP. 
They noted that Pub. L. 108-173 exempted radiopharmaceuticals from the 
ASP-based payment methodology in physician offices. One of the 
commenters stated that when Congress exempted radiopharmaceuticals from 
the Pub. L. 108-173 provision modifying Part B payments for drugs and 
biologicals furnished in the physician office setting, it did so 
because of the unique nature and complexities associated with 
radiopharmaceuticals rather than the unique nature of the physician 
office setting. Therefore, it was unlikely that Congress intended for 
CMS to collect ASP data for radiopharmaceuticals that would be 
precluded from use in a Part B radiopharmaceutical payment methodology.
    Most of the commenters agreed that the variability and complexities 
associated with radiopharmaceuticals and their preparation make uniform 
application of the ASP processes to products virtually impossible for 
CMS. One commenter believed that it may be appropriate to pay hospitals 
for therapeutic radioimmunotherapies based on the same calculation for 
ASP as used for physician-administered pharmaceuticals. However, this 
commenter did not provide an opinion on the applicability of the ASP 
methodology for diagnostic radiopharmaceuticals. Another commenter 
suggested that ASP data could be adapted to the unique features of 
radiopharmaceuticals if CMS considered collecting ASP data from 
independent radiopharmacies in addition to manufacturers. The commenter 
noted that if CMS were to use some form of ASPs for outpatient hospital 
radiopharmaceutical payments, it must--(1) qualify manufacturer 
reporting; (2) use a weighted average that includes manufacturer and 
radiopharmacy ASP data; (3) work with stakeholders to determine the 
appropriate crosswalk between NDCs and HCPCS codes; (4) conduct surveys 
of the relationships between end-user acquisition costs at the HCPCS 
level from independent radiopharmacies and hospital radiopharmacies and 
the manufacturer-reported ASPs; and (5) develop a specific proposal for 
reporting radiopharmaceutical ASPs appropriately and allow stakeholders 
to comment on the proposal before it is finalized.
    Most commenters urged CMS to recognize the operational and 
statutory impediments to ASP reporting for radiopharmaceuticals and the 
inherent difficulties in establishing the OPPS payments for these 
products based upon any ASP methodology. Rather than attempting to 
determine ASP for radiopharmaceuticals based on some manipulation of a 
hypothetical radiopharmaceutical ASP, many commenters urged CMS to 
consider continuation of the CCR methodology to pay for separately 
payable radiopharmaceuticals using the overall hospital-specific CCRs 
with some refinements in CY 2007, as this policy may generate combined 
hospital average acquisition and overhead costs, consistent with 
statutory requirements. One commenter suggested that CMS consider all 
issues surrounding radiopharmaceutical acquisition, dispensing, and 
dosage before adopting any alternative payment mechanisms. Other 
commenters urged CMS to continue working with hospitals and 
manufacturers to ensure that both short-term and long-term payment 
methodologies for radiopharmaceuticals would sufficiently pay providers 
for medically necessary diagnostic tests and therapies and generate 
valid and reliable data to support future payment rates.
    Response: We appreciate all of the comments that we received on our 
proposal to begin ASP reporting for radiopharmaceuticals in CY 2006. We 
recognize that there are many complex issues surrounding our ability to 
collect accurate ASP data for these agents in CY 2006. At this time, we 
agree with the commenters about the difficulties in translating ASP 
information gathered from manufacturers regarding radiopharmaceutical 
raw materials into individual patient doses of specific 
radiopharmaceuticals, as described by particular HCPCS codes. As this 
transitional step would be essential to any future OPPS 
radiopharmaceutical payment methodology based on ASP data, we are 
hesitant at this time to establish required ASP reporting for 
radiopharmaceuticals, with its accompanying administrative 
complexities. Therefore, in this final rule with comment period, we are 
not adopting our proposal to require reporting of ASP data by 
radiopharmaceutical manufacturers in CY 2006. Instead, we will continue 
to further explore the issues surrounding ASP reporting and 
crosswalking ASPs to patient doses of radiopharmaceuticals. In 
addition, we will take into consideration other radiopharmaceutical 
payment alternatives to ASP reporting suggested by commenters as we 
develop our policies for the CY 2007 OPPS. We will continue to seek 
input and guidance from hospitals, radiopharmaceutical manufacturers, 
and other interested organizations as we contemplate alternative 
payment methodologies for radiopharmaceuticals.
    Comment: Several commenters requested that for CY 2007 and future 
years CMS carefully review and analyze radiopharmaceutical costs 
acquired in CY 2006 and consider continuing the use of the CCR 
methodology for payment, along with other possible options. Some 
commenters suggested that CMS consider the impact to the payment system 
and the burden to hospitals to significantly change payment methods for 
radiopharmaceuticals from year to year. Other commenters encouraged CMS 
to work in close consultation in the future with hospitals and 
manufacturers to help ensure that the costs of radiopharmaceuticals are 
properly captured in the OPPS rates beyond CY 2006. One commenter 
stated that data from the GAO survey of hospital acquisition costs 
could be one basis for acquiring information on which national payment 
rates could be established. Another commenter recommended that CMS 
explore the possibility of treating radiotherapies such as Bexxar and 
Zevalin differently from traditional radiopharmaceuticals in order to 
preserve patient access to them.
    Response: We appreciate receiving these suggestions for 
establishing an appropriate payment methodology for 
radiopharmaceuticals beyond CY 2006 and will take all of the 
recommendations into consideration when we start developing our payment 
proposal for radiopharmaceuticals for the CY 2007 OPPS. Other payment 
options for radiopharmaceuticals that we will also consider include 
basing payments on mean costs derived from hospital claims data or 
creating charge-based payment rates for these items. Another option 
would be to develop a hospital payment methodology using the invoice 
data submitted to carriers when radiopharmaceuticals are administered 
in physician offices. It is not our intention to maintain the CY 2006 
methodology of paying for radiopharmaceuticals on the basis of charges 
converted to costs permanently. Rather, we will actively seek other 
sources of information on radiopharmaceutical costs that might provide 
a basis for payment. We

[[Page 68657]]

welcome suggestions about such sources of data and alternative 
methodologies.
    We discuss in section V.B.3.a.(5) of this preamble our CY 2006 
proposed payment policies for overhead costs of drugs, biologicals, and 
radiopharmaceuticals. In section V.D. of this preamble, we discuss the 
methodology that we proposed to use to determine the CY 2006 payment 
rates for new drugs, biologicals, and radiopharmaceuticals.
    While payments for drugs, biologicals and radiopharmaceuticals are 
taken into account when calculating budget neutrality, we note that we 
proposed to pay for the acquisition costs of drugs, biologicals, and 
radiopharmaceuticals without scaling these payment amounts. We proposed 
not to scale these payments because we believed that Congress, in 
section 621 of Pub.L. 103-178, intended for payments for these drugs to 
be based on average acquisition costs. Scaling these payments would 
mean that they are no longer based solely on acquisition costs. 
Therefore, at the time of the proposed rule we believed that it was 
most consistent with the statute not to scale these payment rates. In 
section V.B.3.a.(5) of this preamble, we also discuss that we proposed 
to add 2 percent of the ASP to the payment rates for drugs and 
biologicals with rates based on the ASP methodology to provide payment 
to hospitals for pharmacy overhead costs associated with furnishing 
these products. We proposed to scale these additional payment amounts 
for pharmacy overhead costs. In the CY 2006 proposed rule, we 
specifically invited public comments on whether it was appropriate to 
exempt payment rates for drugs, biologicals, and radiopharmaceuticals 
from scaling and scale the additional payment amount for pharmacy 
overhead costs.
    We note that further discussion of the budget neutrality 
implications of the various drug payment proposals that we considered 
is included in section XIX.C. of this preamble.
    We received a few public comments on these scaling issues 
associated with drugs, biologicals, and radiopharmaceuticals.
    Comment: MedPAC expressed concern that CMS proposed to apply budget 
neutrality adjustments to all APCs, while exempting payment for the 
acquisition costs of specified covered outpatient drugs from these 
adjustments. MedPAC's concern was that this policy, by reducing the 
payment rates for clinical APCs but not drugs, may exacerbate any 
existing incentives for hospitals to use separately payable products. 
For example, the financial incentive to use a SCOD instead of a 
packaged drug would be increased by the proposed method of budget 
neutrality adjustment, creating higher payments for hospitals that are 
relatively high users of SCODs and reducing payments for low users. 
Another commenter supported the use of these rates for budget 
neutrality estimates and impact analysis.
    Response: We understand MedPAC's concern about our proposal to not 
scale the payment rates for separately payable drugs and biologicals. 
The statute contains a general requirement (section 1833(t)(9)(B)) that 
changes to the APC relative weights, APC groups, and other adjustments 
``for a year may not cause the estimated amount of expenditures under 
this part for the year to increase or decrease.'' We therefore apply a 
budget neutrality adjustment, or scalar, to the APC relative weights to 
satisfy this requirement. Section 1833(t)(14)(A)(iii)(I) requires that, 
beginning in CY 2006, we pay for a separately payable drug on the basis 
of ``the average acquisition cost of the drug.'' We believe that the 
best interpretation of the specific requirement that we pay for such 
drugs on the basis of average acquisition cost, is that these payments 
themselves should not be adjusted as part of meeting the statutory 
budget neutrality requirement. If we were to apply the budget 
neutrality scalar to these payments, we would no longer be paying the 
average acquisition cost, but rather an adjusted average acquisition 
cost, for separately payable drugs. For CY 2006, as described earlier, 
we will be paying for the acquisition and overhead costs of drugs and 
biologicals at ASP+6 percent, without scaling for budget neutrality. We 
believe that these amounts are the best proxies we have for the 
aggregate average acquisition and pharmacy overhead costs of drugs and 
biologicals. We continue to believe that not scaling these payments is 
most consistent with the statutory requirement of paying for the 
acquisition costs of drugs on the basis of average costs. Because we 
are no longer identifying a separate payment amount for overhead costs, 
we will not scale any part of the ASP+6 percent payment for drugs in 
order to maintain consistency with the statutory requirement to pay on 
the basis of average acquisition costs. It is also worth noting that 
the budget neutrality adjustment is not always negative. For CY 2006, 
for example, the budget neutrality adjustment is 1.012508103. Therefore 
applying the adjustment to clinical APCs but not to drug payments does 
not always increase any incentive that otherwise may exist for a 
hospital to use a SCOD instead of a packaged drug.
(5) MedPAC Report on APC Payment Rate Adjustment for Specified Covered 
Outpatient Drugs
    Section 1833(t)(14)(E) of the Act, as added by section 621(a)(1) of 
Pub. L. 108-173, required MedPAC to submit a report to the Secretary, 
not later than July 1, 2005, on adjusting the APC rates for specified 
covered outpatient drugs to take into account overhead and related 
expenses, such as pharmacy services and handling costs. This provision 
also required that the MedPAC report include the following: a 
description and analysis of the data available for adjusting such 
overhead expenses; recommendation as to whether a payment adjustment 
should be made; and the methodology for adjusting payment, if an 
adjustment is recommended. Section 1833(t)(14)(E)(ii) of the Act, as 
added by section 621(a)(1) of Pub. L. 108-173, authorized the Secretary 
to adjust the APC weights for specified covered outpatient drugs to 
reflect the MedPAC recommendation.
    The statute mandates MedPAC to report on whether drug APC payments 
under the OPPS should be adjusted to account for pharmacy overhead and 
nuclear medicine handling costs associated with providing specified 
covered outpatient drugs. In creating its framework for analysis, 
MedPAC interviewed stakeholders, analyzed cost report data, conducted 
four individual hospital case studies, and received technical advice on 
grouping items with similar handling costs from a team of experts in 
hospital pharmacy, hospital finance, cost accounting, and nuclear 
medicine.
    As we discussed in the CY 2006 OPPS proposed rule (70 FR 42728), 
MedPAC concluded that the handling costs for drugs, biologicals, and 
radiopharmaceuticals delivered in the hospital outpatient department 
are not insignificant, as medications typically administered in 
outpatient departments generally require greater pharmacy preparation 
time than do those provided to inpatients. MedPAC found that little 
information is currently available about the magnitude of these costs. 
According to the MedPAC analysis, hospitals historically set charges 
for drugs, biologicals, and radiopharmaceuticals at levels that 
reflected their respective handling costs, and payments covered both 
drug acquisition and handling. Moreover, hospitals vary considerably in 
their likelihood of providing specific services which utilize drugs, 
biologicals,

[[Page 68658]]

or radiopharmaceuticals with different handling costs.
    As we also reported in the CY 2006 OPPS proposed rule, MedPAC 
developed seven drug categories for pharmacy and nuclear medicine 
handling costs, according to the level of resources used to prepare the 
products (Table 23 of the proposed rule, 70 FR 42729) Characteristics 
associated with the level of handling resources required included 
radioactivity, toxicity, mode of administration, and the need for 
special handling. Groupings ranged from dispensing an oral medication 
on the low end of relative cost to providing radiopharmaceuticals on 
the high end. MedPAC collected cost data from four hospitals that were 
then used to develop relative median costs for all categories but 
radiopharmaceuticals (Category 7+). The case study facilities were not 
able to provide sufficient cost information regarding the handling of 
outpatient radiopharmaceuticals to develop a cost relative for Category 
7+. The MedPAC study classified about 230 different drugs, biologicals, 
and radiopharmaceuticals into the seven categories based on input from 
their expert panel and each case study facility.
    In its report, MedPAC recommended the following:
     Establish separate, budget neutral payments to cover the 
costs hospitals incur for handling separately payable drugs, 
biologicals, and radiopharmaceuticals; and
     Define a set of handling fee APCs that group drugs, 
biologicals, and radiopharmaceuticals based on attributes of the 
products that affect handling costs; instruct hospitals to submit 
charges for these APCs; and base payment rates for the handling fee 
APCs on submitted charges reduced to costs.
    MedPAC found some differences in the categorizations of drug and 
radiopharmaceutical products by different experts and across the case 
study sites. In the majority of cases where groupings disagreed, 
hospitals used different forms of the products, which were coded with 
the same HCPCS code. For example, a drug may be purchased as a 
prepackaged liquid or as a powder requiring reconstitution. Such a drug 
would vary in the handling resources required for its preparation and 
would fall into a different drug category depending on its form. In 
addition, the handling cost groupings may vary depending on the 
intended method of drug delivery, such as via intravenous push or 
intravenous infusion. For a number of commonly used drugs, MedPAC 
provided two categories in their final consensus categorizations, with 
the categories 2 and 3 reported as the most frequent combination. For 
example, MedPAC placed HCPCS codes J1260 (Injection, dolasetron 
mesylate, 10 mg) and J2020 (Injection, linezolid, 200 mg) in consensus 
categories 2 and 3, acknowledging that the appropriate categorization 
could vary depending on the clinical preparation and use of the drug. 
We noted in the proposed rule (70 FR 42729) that we have no information 
regarding hospitals' frequencies of use of various forms of drugs 
provided in the outpatient department under the OPPS, as the case 
studies only included four facilities and the technical advisory 
committee was similarly small. Thus, in many cases it is impossible to 
assign a drug exclusively and appropriately to a certain overhead 
category that would apply to all hospital outpatient uses of the drug 
because of the different handling resources required to prepare 
different forms of the drugs.
    There are over 100 separately payable drugs, biologicals, and 
radiopharmaceuticals that are separately payable under the OPPS but for 
which MedPAC provided no consensus categorizations in its 7 drug 
groups. In preparation for the CY 2006 proposed rule, we independently 
examined these products and considered the handling cost categories 
that could be appropriately assigned to each product as described by an 
individual HCPCS code. As discussed above, many of the drugs had 
several forms, which would place them in different handling cost 
groupings depending on the specific form of the drug prepared by the 
hospital pharmacy for a patient's treatment. In addition, as we stated 
in the proposed rule, we believe that hospitals may have difficulty 
discriminating among the seven categories for some drugs, because the 
applicability of a given category description to a specific clinical 
situation could be ambiguous. Indeed, in the MedPAC study, initially 
only about 80 percent of the case study pharmacists agreed with the 
expert panel category assignments. However, concurrence increased that 
percentage to almost 90 percent after discussion and review. 
Nevertheless, there remained a number of drugs for which differences in 
categorization by the case study facilities and the expert panel 
persisted.
    In light of our concerns over our ability to appropriately assign 
drugs to the seven MedPAC drug categories so that the categories 
accurately described the drugs' attributes in all of the OPPS hospitals 
and the MedPAC recommendations, for CY 2006 we proposed to establish 
three distinct HCPCS C-codes and three corresponding APCs for drug 
handling categories to differentiate overhead costs for drugs and 
biologicals, by combining several of the categories identified in the 
MedPAC report. We proposed to collapse the MedPAC categories 2, 3, and 
4 into a single category described by HCPCS code CXXXX, and MedPAC 
categories 5 and 6 into another category described by HCPCS code CYYYY, 
while maintaining MedPAC category 1 as described by HCPCS code CWWWW. 
(Our rationale for not proposing to create an overhead payment category 
for radiopharmaceuticals is discussed below.) We proposed merging 
categories in this way generally because we believed that doing so 
would resolve the categorization dilemmas resulting from the most 
common scenarios where drugs might fall into more than one grouping and 
minimized the administrative burden on hospitals to determine which 
category applied to the handling of a drug in a specific clinical 
situation. In addition, these broader handling cost groupings would 
minimize any undesirable payment policy incentives to utilize 
particular forms of drugs or specific preparation methods. We proposed 
only to collapse those categories whose MedPAC relative weights 
differed by less than a factor of two, consistent with the principle 
outlined in section 1833(t)(2) of the Act that provides that items and 
services within an APC group cannot be considered comparable with 
respect to the use of resources if the median cost of the highest cost 
item or service within an APC group is more than 2 times greater than 
the median cost of the lowest cost item or service within that same 
group.
    As discussed in previous final rules and in the CY 2006 OPPS 
proposed rule, we believed that pharmacy overhead costs are captured in 
the pharmacy revenue cost centers and reflected in the median cost of 
drug administration APCs, and the payment rate we established for a 
drug, biological, or radiopharmaceutical APC was intended to pay only 
for the cost of acquiring the item (66 FR 59896, 67 FR 66769, and 70 FR 
42729 through 42730). As a MedPAC survey of hospital charging practices 
indicated that hospitals' charges for drugs, biologicals, and 
radiopharmaceuticals reflect their handling costs as well as their 
acquisition costs, we believed pharmacy overhead costs would be 
incorporated into the OPPS payment rates for drugs, biologicals, and 
radiopharmaceuticals if the rates were based on hospital claims

[[Page 68659]]

data. However, in light of our proposal to establish three distinct C-
codes for drug handling categories, we also proposed to instruct 
hospitals to charge the appropriate pharmacy overhead C-code for 
overhead costs associated with each administration of each separately 
payable drug and biological based on the code description that best 
reflected the service the hospital provided to prepare the product for 
administration to a patient. We would collect hospital charges for 
these C-codes for 2 years, and consider basing payment for the 
corresponding drug handling APCs on the charges reduced to costs in CY 
2008, similar to the payment methodology for other procedural APCs. 
Median hospital costs for the drug handling APCs should reflect the CY 
2006 practice patterns across all OPPS hospitals of handling drugs 
whose preparation was described by each of the C-codes, reflecting the 
differential utilization of various forms of drugs and alternative 
methods of preparation and delivery through hospitals' billing and 
charges for the C-codes. Table 24 of the proposed rule (70 FR 42730) 
listed the drug handling categories, C-codes, and APCs we proposed for 
CY 2006.
    We proposed these three categories because we believed that they 
were sufficiently distinct and reflective of the resources necessary 
for drug handling to permit appropriate hospital billing and to capture 
the varying overhead costs of the drugs and biologicals separately 
payable under the OPPS. We did not propose to adopt the median cost 
relatives reported for MedPAC's six categories (excluding 
radiopharmaceuticals). This was because it was very difficult to 
accurately crosswalk the cost relatives for the six categories to the 
three categories we proposed. In addition, we were not confident that 
the cost relatives that were based on cost data from four hospitals 
appropriately reflected the median relative resource costs of all 
hospitals that would bill these drug handling services under the OPPS. 
Instead, we believed it was most appropriate to collect hospital 
charges for the drug handling services based on attributes of the 
products that affected the hospital resources required for their 
handling, and to consider making future payments under the OPPS using 
the proposed C-codes based on the medians of charges converted to costs 
for the drug handling APC associated with each administration of a 
separately payable drug or biological.
    For CY 2006, pursuant to section 1833(t)(14)(E)(ii) of the Act, we 
proposed an adjustment to cover the costs hospitals incur for handling 
separately payable drugs and biologicals. As we did not have separate 
hospital charge data on pharmacy overhead, we proposed for CY 2006 to 
pay for drug and biological overhead costs based on 2 percent of the 
ASP. As described earlier, we estimated aggregate expenditure for all 
separately payable OPPS drugs and biologicals (excluding 
radiopharmaceuticals) using mean costs from the claims data and then 
determined the equivalent average ASP-based rates. Our calculations at 
the time of the proposed rule indicated that using mean unit costs to 
set the payment rates for all separately payable drugs and biologicals 
would be equivalent to basing their payment rates on ASP+8 percent. As 
noted previously, because pharmacy overhead costs are already built 
into the charges for drugs, biologicals, and radiopharmaceuticals as 
indicated by the MedPAC study described above, we believed on the basis 
of the data available at the time of our development of the proposed 
rule that payments for drugs and biologicals and overhead at a combined 
ASP+8 percent would serve as a proxy for representing both the 
acquisition and overhead cost of each of these products. Moreover, as 
we proposed to pay for all separately payable drugs and biologicals 
using the ASP methodology, where payment rates for most of these items 
were set at ASP+6 percent, we believed that an additional 2 percent of 
the ASP would provide adequate additional payment for the overhead 
costs of these products and be consistent with historical hospital 
costs for drug acquisition and handling. Even though we did not propose 
to scale the payment rates for drugs and biologicals based on the ASP 
methodology, we proposed to scale the additional payment amount of 2 
percent of the ASP for pharmacy overhead costs. Therefore, for CY 2006, 
we proposed to pay an additional 2 percent of the ASP scaled for budget 
neutrality for overhead costs associated with separately payable drugs 
and biologicals, along with paying ASP+6 percent for the acquisition 
costs of the drugs and biologicals. We specifically requested public 
comments on this proposed policy for paying for pharmacy overhead costs 
in CY 2006 and on the proposed policy regarding hospital billing of 
drug handling charges associated with each administration of each 
separately payable drug or biological using the proposed C-codes.
    During the August 2005 meeting of the APC Panel, the Panel made 
three recommendations regarding our proposals for determining and 
paying for overhead costs associated with providing drugs and 
biologicals. The Panel recommended that CMS: (1) Reconsider carefully 
the proposal to pay 2 percent of ASP for hospital pharmacy overhead 
costs to ensure that it is in line with hospital costs and that CMS 
take into account external data gathered during the comment period; (2) 
pay for the pharmacy overhead costs of both packaged and separately 
paid drugs, employing a mechanism that adds only minimal additional 
administrative burden for hospitals; and (3) delay the implementation 
of the proposed codes for drug handling cost categories until January 
2007 so that further data and alternative solutions for making payments 
to hospitals for pharmacy overhead costs can be collected, analyzed by 
CMS, and presented to the Panel at its winter 2006 meeting. The final 
CY 2006 policies on pharmacy overhead costs are discussed below.
    We received many public comments concerning our proposals.
    Comment: Commenters were pleased that CMS recognized that 
additional payments should be provided to hospitals to cover handling 
costs associated with administering drugs and biologicals in the 
hospital outpatient setting. However, many commenters were concerned 
that the proposed payment of 2 percent of the ASP for these costs was 
not adequate to ensure that hospitals would be able to continue to 
provide these services. Commenters indicated that these handling costs 
could be substantial and cited comments in the MedPAC study on pharmacy 
handling costs attributing 26 to 28 percent of pharmacy department 
costs to overhead costs. Several commenters noted that MedPAC stated in 
its report that pharmacy overhead costs are inconsistently reported in 
hospital charge data. Therefore, these commenters concluded that our 
analysis of the HCPCS drug charge data derived from CY 2004 provider 
claims is not likely to reflect pharmacy handling charges accurately 
and consistently. One commenter stated that an additional payment of 2 
percent of ASP for drug handling is not adequate for certain drugs that 
have very high handling costs due to special equipment or procedures 
related to the drug's toxicity, or special compounding or preparation 
requirements. Several other commenters stated that hospitals are facing 
increased pharmacy handling costs and overhead expenses as a result of 
at least one, and possibly two, new government requirements that 
reflect new criteria for compounding sterile products and new 
procedures to ensure staff and patient safety. According to the 
commenters, these additional costs were

[[Page 68660]]

not reflected in the CY 2004 hospital claims data, and therefore were 
not accounted for in CMS' estimate of 2 percent of ASP for the pharmacy 
overhead costs of drugs and biologicals.
    Commenters provided various recommendations for CMS to consider in 
determining appropriate payment levels for drug handling costs in CY 
2006. One commenter encouraged CMS to use industry data to set an 
equitable payment rate for these pharmacy overhead costs instead of the 
percentage of ASP proposed. Another commenter recommended that CMS 
increase the payment for pharmacy overhead costs to more closely 
approximate the findings reported by MedPAC. Several commenters 
recommended implementing a dampening policy in CY 2006, so that drug 
payments are no lower than 95 percent of the CY 2005 payment levels. 
Another dampening policy suggested was that CMS pay for separately 
payable drugs and biologicals at the higher of ASP+8 percent or 90 
percent of the CY 2005 payment rate. One commenter recommended that CMS 
consider freezing payments in CY 2006 for those drugs whose payments 
would decline significantly from the CY 2005 rates, particularly those 
drugs that may have especially complex and costly handling 
requirements. Some of these commenters indicated that a dampening 
policy would allow CMS to provide hospitals with a transition mechanism 
as it moved toward an ASP-based payment methodology, and at the same 
time provide adequate payment for these items until CMS collected 
sufficient pharmacy overhead charge data to establish accurate cost-
based payment rates for drug handling expenses.
    MedPAC expressed concern about the methodology to pay hospitals 2 
percent of ASP for each separately payable drug administered because of 
the proportional nature of this proposal. MedPAC suggested that CMS 
consider another alternative because the proposed method ties payment 
for handling costs directly to the acquisition cost of a drug. MedPAC 
noted that payment for the handling cost of a particular drug could 
differ sharply from the handling cost hospitals actually incur; for 
example, a drug with a high acquisition cost does not necessarily also 
have high handling costs. MedPAC also expressed concern that this 
method of paying for pharmacy overhead could result in higher drug 
acquisition costs for hospitals because it gives manufacturers an 
incentive to increase prices. MedPAC proposed an alternative 
methodology under which CMS would estimate the total dollars that 
should be dedicated to paying pharmacy handling costs and determine how 
much of the total should be allocated to groups of drugs that are 
similar with respect to their handling costs. MedPAC noted that 2 
percent of ASP, as suggested by our analysis of the data on hospitals' 
acquisition and overhead costs, would be a viable basis for creating 
such a pool. Under the MedPAC methodology, hospitals would receive the 
same payment for the handling cost of each specified covered outpatient 
drug within the same category of handling costs, regardless of the 
acquisition costs of the specific drugs assigned to the category.
    One commenter urged CMS to implement a pharmacy service and 
handling add-on of at least 8 percent of ASP, in addition to the 
acquisition cost payment of ASP+6 percent. The commenter used the 
hospital outpatient claims data to examine the percentage add-on to ASP 
that would be necessary to maintain aggregate payments in CY 2006 at 95 
or 100 percent of the CY 2005 level. The commenter found that, to 
maintain payments at 95 or 100 percent of the CY 2005 levels for 
chemotherapy or supportive care drugs, except radiopharmaceuticals, 
add-on amounts of 7.6 percent of ASP or 13.3 percent of ASP, 
respectively, would be necessary. The commenter stated that payment at 
this level would be an appropriate interim measure to limit the 
potential decreases in drug payments until data are collected to 
implement a better long-term solution. Many other commenters supported 
this proposal to pay 8 percent of ASP for overhead costs in addition to 
paying ASP+6 percent for acquisition costs (for a total payment of ASP 
plus 14 percent for drug acquisition and overhead costs).
    Another commenter recommended that CMS adopt a process similar to 
what it proposed to support the 2 percent payment for CY 2006 and 
suggested a variation to the proposed methodology. The commenter 
indicated that CMS could compute a reasonable estimate of handling 
costs by use of current claims data by first computing the mean cost of 
each drug and then deducting the ASP+6 percent amount. The commenter 
added that, after statistical outliers are excluded, CMS would have a 
reasonable estimate of the handling costs either by drug HCPCS code or 
by three categories without hospitals incurring the additional burden 
of billing a new handling charge. The commenter stated that CMS could 
then add the estimated handling costs to the drug ASP+6 percent payment 
to create a single payment for both the acquisition and handling costs. 
The commenter indicated that this method should also be more accurate 
than the current proposal of 2 percent of ASP for handling costs that 
applies equally to all three categories. The commenter expressed 
concern that the proposed 2 percent of ASP for handling costs is 
significantly lower than the percentage indicated by both MedPAC and 
CMS studies. Because the drug handling cost must be paid in a budget 
neutral manner, the commenter questioned the adoption of an 
administratively burdensome process which attempted to redistribute 
OPPS payments for only 2 percent of drug payments. The commenter 
recommended that CMS withdraw its proposed billing requirement for 
handling charges and simply adopt the 2 percent of ASP payment method 
proposed for CY 2006 and future years if CMS believes that its data 
indicate that drug handling costs are only 2 percent of drug payments. 
The commenter added that submitting handling charges for the proposed 
C-codes would be burdensome for such a relatively small payment 
refinement benefit. Several other commenters believed that, while an 
imperfect measure, increasing payment for drug handling costs by 2 
percent of ASP would be appropriate as a temporary measure.
    Some commenters also indicated that CMS should work with hospital 
and pharmacy stakeholders to develop an approach to establish 
differential add-on payments for drug handling costs to account for a 
wide variety of drug handling categories. Lastly, one commenter noted 
that if CMS implements this policy, it should continue to analyze and 
refine payment for pharmacy overhead costs in the future to ensure that 
2 percent of the ASP adjustment provides adequate payment for these 
services.
    Response: We understand the commenters' concerns about basing the 
additional payment amount for overhead costs of drugs and biologicals 
on 2 percent of an item's ASP. We agree with MedPAC and other 
commenters on the proposed rule that hospital charges for drugs and 
biologicals are generally reflective of both their acquisition and 
overhead costs. MedPAC did indicate in its comments that 2 percent 
would be a viable basis for creating the drug overhead pool. Therefore, 
we are not convinced by those commenters who contended that drug 
overhead costs are much higher than 2 percent of ASP (for example, 25 
to 30 percent of total drug costs). As described earlier, using updated 
CY 2004 claims data and ASP information from the second quarter of CY 
2005, we determined that using

[[Page 68661]]

mean unit costs to set the payment rates for the drugs and biologicals 
that would be separately payable in CY 2006 would be equivalent to 
basing their payment rates, on average, at ASP+6 percent. Consequently, 
we believe that it is appropriate for us to base payment for average 
acquisition and overhead costs for separately payable drugs and 
biologicals on ASP+6 percent for CY 2006 because both acquisition and 
overhead costs are reflected in the charges submitted by hospitals for 
these items. We have no reason to believe that, in the aggregate, a 
payment rate of ASP+6 percent would be insufficient to provide combined 
appropriate payment for both the hospital acquisition and overhead 
costs related to providing drugs and biologicals to hospital 
outpatients.
    In the light of this decision to proceed with an integrated payment 
of ASP+6 percent for the acquisition and overhead costs of drugs, we 
also are not adopting MedPAC's recommendation to create and 
appropriately distribute a drug overhead payment pool in this final 
rule with comment period. We understand MedPAC's concern that a flat 
percentage add-on payment for overhead costs might underpay these costs 
for some drugs and overpay for others. However, on the basis of our 
claims data, we believe that the payment rate that we are adopting will 
provide adequate payment for both acquisition and overhead costs in the 
aggregate. We also note the difficulties in determining the relative 
values of the separate drug handling cost categories in order to 
allocate spending from MedPAC's overhead drug pool. However, we will 
continue to study and consider this alternative as we develop our 
future policies on payment for drug costs in general and overhead costs 
in particular. As we evaluate other options for paying for drug 
handling costs in the future, we will also consider different 
methodologies that could be used to develop clinically meaningful and 
distinct payment levels for the diverse pharmacy overhead resources 
associated with administration of drugs and biologicals. We welcome 
comments and information about sources of data that could be useful in 
further developing a methodology for payment of drug overhead costs for 
the CY 2007 proposed rule.
    Comment: Two commenters were concerned that the proposed additional 
payment of 2 percent of ASP did not fully cover hospital costs of 
procuring, storing, and furnishing clotting factors to patients with 
hemophilia. The commenters noted that the CY 2005 payment for a 
clotting factor in the physician office setting is based on ASP+6 
percent plus an additional furnishing fee to cover the costs of 
providing the product to Medicare beneficiaries. According to the 
commenters, this fee was set at $0.14 per unit of clotting factor for 
CY 2005 and is required to be updated annually. The commenters also 
noted that an add-on payment is made to hospitals for clotting factors 
provided to patients in the hospital inpatient setting. They indicated 
that for hospital inpatient services the current additional payment for 
a clotting factor equals 95 percent of its AWP; however, for CY 2006, 
CMS proposed to set the payment rate and the furnishing fee for 
clotting factors used in the hospital inpatient setting at the same 
rate as for clotting factors provided in physician offices under Part 
B. The commenters argued that the hospital outpatient handling costs 
should not be treated differently than in the physician office because 
the costs of inventory, specialized refrigeration, assay management, 
and formulation of clotting factors are similar for all providers of 
these drugs and do not very between the hospital inpatient and 
outpatient setting. The commenters were concerned that the proposed 2 
percent of ASP did not fully cover the additional costs of furnishing 
clotting factors to Medicare beneficiaries in the hospital outpatient 
setting and urged CMS to apply the Part B furnishing fee to the 
hospital outpatient setting as well. One of the commenters additionally 
requested that CMS not include clotting factors in the collection of 
overhead cost data using the proposed C-codes, as CMS has already 
established a mechanism for calculating and updating the costs 
associated with providing these drugs under the Medicare Physician Fee 
Schedule and Inpatient Prospective Payment System, and it sought 
clarification in the preamble and regulatory text of the final rule on 
all payment provisions related to clotting factors.
    Response: Section 303 of Pub. L. 108-173 established section 1847A 
of the Act which requires that almost all Medicare Part B drugs not 
paid on a cost or prospective basis be paid at 106 percent of average 
sales price (ASP) and provided for payment of a furnishing fee for 
blood clotting factors, effective January 1, 2005. In CY 2006, payment 
for clotting factors furnished in both the physician office setting and 
inpatient hospital setting will be made at ASP+6 percent plus an 
additional amount for the furnishing fee. We agree with the commenters' 
statements about the use of similar resources to furnish clotting 
factors across all types of service settings and believe that it is 
appropriate to adopt a methodology for paying for clotting factors 
under the OPPS that is consistent with the methodology applied in the 
physician office setting and the inpatient hospital setting. Therefore, 
in CY 2006, we will be paying for clotting factors at ASP+6 percent in 
the OPPS and providing payment for the furnishing fee that will also be 
a part of the payment for clotting factors furnished in physician 
offices under Medicare Part B. This furnishing fee will be updated each 
calendar year based on the consumer price index, and we will update the 
amount appropriately each year under the OPPS. In CY 2005, the 
furnishing fee is $0.14 per unit, and for CY 2006, it will be updated 
to $0.146 per unit. Effective January 1, 2006, we will make payment for 
clotting factors at ASP+6 percent using ASP data from the third quarter 
of 2005 along with paying for the furnishing fee using the updated 
amount for CY 2006. The final CY 2006 regulations establishing the ASP 
methodology and the furnishing fee for blood clotting factors under 
Medicare Part B can be found in the CY 2006 Medicare Physician Fee 
Schedule final rule. We believe that this methodology will allow us to 
provide adequate payment for both the acquisition and overhead costs of 
clotting factors under the OPPS in CY 2006.
    Comment: One commenter requested that CMS clarify how it will pay 
hospitals for the costs incurred with handling intrathecal drugs, 
noting that MedPAC did not discuss the handling costs of intrathecal 
drugs in its report on pharmacy overhead costs. The commenter noted 
that intrathecal drugs involve significant handling costs; therefore, 
CMS should ensure that intrathecal drugs are paid a sum sufficient to 
cover their handling costs.
    Response: In CY 2006, payment for intrathecal drugs will be 
determined using the same ASP methodology as will be used for other 
separately payable drugs and biologicals, where payment for acquisition 
and overhead costs will be set at ASP+6 percent.
    Comment: We received many comments on our proposal to implement C-
codes for drug handling categories in CY 2006. Many of the commenters 
opposed the proposal, while other commenters supported it.
    A national association of hospitals expressed strong opposition to 
the proposal to require hospitals to report their drug handling charges 
using C-codes in order for CMS to pay pharmacy overhead costs and 
recommended that CMS find an alternative method to

[[Page 68662]]

identify drug handling costs. The commenter raised several concerns 
regarding this proposal. For example, the commenter indicated that by 
proposing to require hospitals to bill a handling charge when the 
industry practice has been to bill a combined charge to reflect both 
the drug acquisition cost and handling cost is contrary to a basic, 
long standing tenet of the Medicare Act in 42 U.S.C. 1395 that CMS 
interpreted as prohibiting any interference with hospital charge 
structures. Also, the commenter noted that Medicare providers must have 
a consistent charge structure in order to prepare the Medicare cost 
report and to apportion costs within the Medicare cost report. The 
proposal to require hospitals to begin billing the drug handling charge 
as a separate line-item charge will present billing and payment 
concerns for all other payers because drug handling charges would also 
have to be billed also to private payers and the Medicaid program, or 
the provider would have to be able to generate consistent charges for 
proper Medicare apportionment costs. However, since most other payers 
do not recognize C-codes and may refuse to accept and/or pay for such 
handling charges, it would raise concern for a provider as to whether 
it must pursue collection in order to have a consistent charge 
structure for payment and apportionment. The commenter noted that drug 
handling costs are not presently billed separately by the vast majority 
of hospitals, and most of these hospitals do not have sophisticated 
cost accounting systems that would permit the determination of handling 
costs for each billable drug. Reporting pharmacy overhead charges with 
C-codes would result in a tremendous burden to hospitals, requiring the 
modification of their pharmacy charge masters to reduce each current 
drug charge to reflect only the drug acquisition cost and to remove the 
drug handling costs currently included in each drug line item's charge. 
Hospitals that do not have sophisticated cost accounting systems would 
have difficulty in determining the applicable amount attributable to 
the handling costs. The commenter indicated that even if this 
administratively burdensome process of billing for handling charges is 
adopted, CMS would still be unable to determine the drug handling costs 
at the individual drug level because an average pharmacy department CCR 
would be applied to billed charges to determine drug handling costs, 
and these CCRs were never intended to determine cost at the specific 
procedure level, such as drug handling costs for individual drugs. The 
commenter also expressed concern that CMS' proposal to pay the drug 
handling costs only for separately payable drugs would create an 
additional burden for hospitals as they must identify and modify only 
those drug charge items that qualify for separate payment under the 
OPPS. Charges for packaged drugs must continue to include the overhead 
costs as part of the drug's line item charge or the appropriate revenue 
code charge. Because Medicare beneficiaries frequently require more 
than one drug in an outpatient encounter, it may be impossible to 
identity any correlation between the drug HCPCS code reported and the 
drug handling category HCPCS code reported. Additionally, there would 
be no incentives for hospitals to perform the charge master maintenance 
and educate pharmacy staff as neither the presence nor accuracy of the 
drug handling HCPCS codes will impact the proposed CY 2006 payment of 
drug handling costs. Another concern raised was that CMS would be able 
to determine appropriate payment rates for these C-codes in future 
years using the claims data only if hospitals can reasonably estimate 
their drug handling costs and if hospitals mark up their drug handling 
costs in line with their overall pharmacy mark-up. The last concern 
cited by the commenter was that there may be an issue if hospitals 
report the new drug handling costs separately without restructuring 
their existing drug charges to remove the drug handling costs already 
included in the drug charges.
    Other commenters echoed these concerns. One commenter indicated 
that even though collecting charge data for handling costs may be 
useful for CMS, the reporting requirement would overwhelm coding and 
nursing staffs already challenged with the complex task of ensuring 
that the correct dosage of the drug is billed. Another commenter 
strongly opposed the use of C-codes to bill for drug handling costs 
because it would present an operational nightmare because every drug 
required ``handling.'' The commenter, therefore, requested that CMS not 
implement this proposal until further assessments of the system 
implications associated with such a change are completed.
    Several commenters raised other coding, billing, and charging 
issues related to this proposal. For example, commenters questioned 
whether CMS would expect multiple line-items to be reported per date of 
service if multiple drugs from the same drug handling family are 
provided. They also asked whether CMS would require providers to report 
a single revenue code with the pharmacy handling C-codes, or would the 
revenue codes need to match the actual drug revenue code. The 
commenters urged CMS to review the coding and billing requirements 
necessary to implement such a mechanism correctly.
    One commenter strongly opposed the proposal requiring hospitals to 
establish separate pharmacy overhead charges for separately payable 
drugs and biologicals and use the three proposed C-codes for charging 
these overhead costs in CY 2006. This commenter indicated that it would 
be extremely burdensome and difficult for hospitals to implement the 
proposal. The commenter also indicated that there are many complex 
issues and administratively burdensome aspects to adopting this 
proposal for charging for drug handling using these new C-codes. The 
commenter pointed out that even assuming that hospitals could provide 
differential charges, other concerns remain. For example, the commenter 
indicated that hospitals would have to evaluate the normal mark-up 
formula for all pharmacy items and deduct the handling costs for only 
the separately payable drugs under Medicare, while the drug handling 
charges for packaged drugs would remain incorporated within overall 
charges for those drugs. The commenter stated that because the C-codes 
would only be recognized by and acceptable to Medicare, but not to 
other payers, hospitals would have to modify their billing systems to 
separate out the drug handling charge from the drug charge for Medicare 
claims, but bill them as a single line-item for other payers. The 
commenter believed that there would also be confusion about how the 
drug handling C-codes would apply when a hospital pharmacy mixes 
multiple doses of a drug for a patient, and in particular the question 
of whether the hospital would report a single C-code for handling costs 
or multiple C-codes in this situation. The commenter also expressed 
concern that some hospitals may not be able to accommodate the proposed 
C-codes because drug pricing is generated through a pharmacy charging 
system often located outside the hospital's normal charging system. For 
these reasons, the commenter indicated that it is unclear how CMS would 
expect providers to report drug charges in the inpatient setting versus 
the outpatient setting because many hospitals use the same charge 
master for inpatient and outpatient services.
    One of the commenters noted that when hospital clinic nurses and 
pharmacies bill for drugs, they do not view the patient-specific data 
to

[[Page 68663]]

determine if the patient has Medicare coverage and whether the drug is 
separately payable to make decisions about whether to report additional 
services. The commenter pointed out that dispensing fees vary 
significantly in each hospital due to variances in overhead and 
handling fees incurred. The commenter believed that the proposal 
requires more research and consideration in order to reduce the 
administrative burden that would be required of hospital staff and 
adequately capture all pharmacy overhead and handling costs incurred. 
This commenter supported establishing payment for pharmacy overhead 
costs based on the additional 2 percent of ASP added to each APC drug 
payment, as this method simplifies the payment mechanism.
    Many commenters stated that CMS should not implement the proposed 
drug handling C-codes in CY 2006 and should instead study alternate 
mechanisms for obtaining drug handling cost data, including using the 
cost report to compute an average pharmacy handling percentage that may 
be used in the future along with the ASP+6 percent model for drug 
acquisition costs. Other commenters recommended that CMS work with 
stakeholder groups to collect additional data and develop simpler, 
alternative solutions for ensuring that hospitals are appropriately 
paid for their pharmacy overhead and drug handling costs. Some 
commenters stated that such approaches should incorporate the payment 
for drug handling directly into the payment rate for the drug itself, 
rather than requiring separate coding systems. One commenter suggested 
that CMS obtain more accurate information by surveying hospital 
pharmacy departments and studying data on the departmental costs of 
hospital pharmacies. Another commenter stated that CMS should collect 
data and make payments in a manner similar to the way in which data are 
collected and payments provided through the Quality Measurement 
Demonstration Project that was implemented in physicians' offices in CY 
2005.
    Several commenters supported our proposal to implement the C-codes 
for drug handling categories. They supported the development of the 
three proposed distinct C-codes for drug handling categories and the 
collection of hospital claims data over the next 2 years for use in 
establishing payment rates based on actual costs in CY 2008 and beyond. 
One of the commenters supported basing payment for these new categories 
in CY 2008 on a weighted average of the overhead costs for all drugs to 
which the categories will apply, thus ensuring the most accurate 
payment level possible while meeting the objective of the proposal to 
streamline the overhead payment system.
    A few commenters did not believe the three drug handling categories 
proposed were sufficient to cover the wide range of drug handling costs 
for all of the separately payable drugs used by hospital outpatient 
departments and stated that the categories proposed by MedPAC would 
allow greater differentiation of drug handling costs. One commenter 
explained that more refined categories can and should be developed and 
urged CMS to reevaluate the use of the MedPAC categories and to release 
a listing of the drugs assigned to each drug handling category for 
hospital review. These commenters indicated that limiting the number of 
categories for which hospitals report their drug handling costs would 
not provide accurate cost data and were concerned that CMS' 
descriptions of these categories did not provide sufficient clarity for 
hospitals to appropriately classify all of their drugs. One commenter 
noted that intrathecal drugs should be assigned to category three or a 
new overhead cost category for intrathecal drugs should be created.
    MedPAC was pleased that CMS' proposed methodology to pay for 
overhead and handling costs beginning in CY 2008 reflected its 
recommendations and noted that the methodology would be similar to that 
used to set payment rates for procedural APCs. However, MedPAC 
encouraged CMS to explore whether it would be reasonable to expand the 
number of handling cost APCs beyond the proposed three categories after 
the charge data necessary to set rates for the three handling cost APCs 
are collected.
    Several commenters supported the creation of a mechanism for 
hospitals to begin capturing and reporting pharmacy costs. However, 
they indicated that it will take hospitals considerable time and effort 
to develop this approach as most hospitals do not currently report 
pharmacy costs directly or capture these costs fully. One commenter 
recommended that CMS tie reporting of the new C-codes for handling fees 
to actual payment amounts for the services so that hospitals would have 
an incentive to quickly develop a mechanism to report these codes. 
Other commenters supported the general C-code methodology, but were 
concerned that there was insufficient time to properly instruct and 
educate hospitals on how and when to use these codes. Therefore, to 
ensure that the new C-codes can be used effectively, these commenters 
recommended that CMS consult with hospital organizations on this issue, 
and after reviewing their feedback, consider delaying C-code 
implementation until January 1, 2007 while continuing to refine the 
codes and develop instructions for their use. The APC Panel also 
recommended that CMS delay implementation of this proposal in order to 
collect more data and study alternatives.
    If this policy is implemented for CY 2006, some commenters 
suggested that CMS provide a grace period of no less than 90 days after 
the implementation of the CY 2006 OPPS to allow hospitals time to make 
necessary system changes and to educate pharmacy staff, finance staff, 
and coders on the required use of the drug handling C-codes. Other 
commenters noted that a grace period of no less than 6 months would be 
required after the implementation of the CY 2006 OPPS. One commenter 
insisted that CMS collect hospital charge data for overhead costs for 2 
years to determine if the proposed 2 percent of the ASP add-on rate is 
adequate and consider new payment rates for these pharmacy overhead 
services in CY 2008.
    Response: We have carefully considered all the comments and the 
concerns raised by the commenters. In light of the extensive 
operational issues related to coding, billing, and charging for C-codes 
for drug handling categories identified by commenters, we believe there 
is good reason at this time not to proceed with our proposal for CY 
2006. Therefore, we are not finalizing our proposal to collect data on 
pharmacy overhead costs in CY 2006. Rather, we will continue to solicit 
input from the industry, APC Panel, and hospitals to explore 
alternative methodologies for capturing meaningful and complete 
pharmacy overhead costs, for potential use in providing appropriate 
payments to hospitals for such services in future updates of the OPPS. 
We note that for CY 2006 we are requiring specific coding for certain 
devices, as we require the billing of all separately payable drugs and 
request that hospitals report packaged drugs. We believe that hospitals 
can easily ascertain the acquisition costs of devices and decide on an 
appropriate markup that includes device handling, and these device 
costs (except for devices with pass-through status) are then 
appropriately packaged into payments for the separately payable 
procedures that utilize the devices. Similarly, we believe that 
hospitals are aware of the acquisition costs of drugs and provide an 
appropriate markup that includes pharmacy overhead. These billed drugs 
are then either separately paid at ASP+6% for CY 2006 or their

[[Page 68664]]

payment is packaged into payments for the separately payable procedures 
where the drugs are administered. However, as discussed above, 
hospitals do not keep track of their pharmacy overhead costs nor their 
device handling costs separately. Rather, these broad overhead and 
handling costs are typically built into the charges for the drugs or 
devices themselves, In many ways, the device charge reported on a claim 
is like the drug charge, in that both currently reflect the acquisition 
cost of the device or drug and the handling cost of the device or drug 
(special handling, storage, etc.). Just as we do not require hospitals 
at this time to further differentiate their device charges into 
acquisition and handling components, based on our review of comments to 
the CY 2006 proposed rule we are also not going to require hospitals 
for CY 2006 to separate the traditionally highly linked drug 
acquisition and pharmacy overhead charges.
    Comment: Several commenters urged CMS to recognize that low-cost 
drugs and biologicals may have substantial handling costs depending on 
the type and volume of the drugs administered, and therefore, 
recommended that CMS apply additional payments to packaged drugs and 
biologicals, as well as to separately payable therapies. The APC Panel 
also recommended that CMS pay for the overhead costs of both packaged 
and separately paid drugs. One of the commenters suggested that the use 
of the proposed C-codes for drug handling categories also be extended 
to include packaged drugs. One commenter recommended that CMS make an 
add-on payment of at least $14.80 per dose of packaged drug 
administered, and that CMS consider establishing a new G-code for 
pharmacy handling services associated with packaged drugs for this 
purpose. The commenter based its recommendation on an analysis of the 
amount of required pharmacist and pharmacy technician time, plus 
indirect overhead costs, associated with preparing each dose of a 
packaged drug. Another commenter indicated that CMS may believe that 
overhead costs for packaged drugs are reflected in the payments for 
drug administration APCs; however, the commenter did not believe that 
the drug administration APC payment rates are sufficient to pay 
providers for administration services, or the acquisition and handling 
costs associated with packaged drugs. In addition, one commenter 
indicated that CMS should ensure that the add-on payment is applied 
equally to all drugs, including those on pass-through and new to the 
market.
    One commenter strongly opposed the expansion of the drug handling 
C-code reporting proposal to packaged drugs, citing that this policy 
would exponentially increase the coding and administrative burden on 
hospitals due to the large number of drugs that would require special 
charging practices for Medicare purposes. For example, the commenter 
noted that hospitals generally do not provide detailed billing for 
drugs that are not separately paid. The commenter believed that because 
all drugs do not have their own unique HCPCS codes, creating new codes 
for all drugs would be a significant burden. The commenter added that, 
given the large volume of drugs used in hospital outpatient 
departments, expanding drug handling coding requirements to all of 
these drugs, regardless of their packaging status, would dramatically 
increase hospital administrative costs associated with this proposal. 
Other commenters expressed similar views.
    Response: We agree with the commenters who stated that extending 
specific payment for handling costs to packaged drugs would impose an 
excessive burden on hospitals. As the commenters noted, this policy 
would exponentially increase the coding and administrative burden that 
our proposed use of C-codes would have imposed. In addition, as we have 
stated previously, overhead costs are built into the charges for drugs, 
and these charges are already accounted for in setting the weights for 
the procedural APCs into which some drugs are packaged. Accordingly, we 
believe that additional payment for overhead costs of packaged drugs 
would be duplicative and have not made a separate provision for 
additional payment.
    As discussed earlier, we proposed to pay for separately payable 
radiopharmaceuticals based on their charges on the claims submitted by 
hospitals converted to costs. MedPAC found that the handling resource 
costs associated with radiopharmaceuticals were especially difficult to 
study and estimate because of the varying resource requirements for 
handling radiopharmaceuticals in a variety of hospital outpatient 
settings for different clinical uses. These various methods of 
preparation of radiopharmaceuticals, and the individual 
radiopharmaceuticals themselves, differ significantly in the costs of 
their handling, with substantial variation in such factors as site of 
preparation, personnel time, shielding, transportation, equipment, 
waste disposal, and regulatory compliance requirements. However, as 
MedPAC also found that handling costs for drugs, biologicals, and 
radiopharmaceuticals were built into hospitals' charges for the 
products themselves, we stated in the proposed rule that we believed 
that the charges from hospital claims converted to costs were 
representative of hospital acquisition costs for these agents, as well 
as their overhead costs. These costs would appropriately reflect each 
hospital's potentially diverse patterns of acquisition or production of 
radiopharmaceuticals for use in the outpatient hospital setting and 
their related handling costs that vary across radiopharmaceutical 
products and the circumstances of their production and use. Therefore, 
we did not propose to create separate handling categories for 
radiopharmaceuticals for CY 2006.
    We received many public comments on this radiopharmaceutical 
proposal.
    Comment: Several commenters stated that CMS should not assume that 
the hospitals have incorporated handling costs in their hospital 
charges for radiopharmaceuticals. They indicated that there has been 
some ambiguity about what costs should be included in 
radiopharmaceutical charges, as opposed to procedure charges, and this 
matter is complicated by the difference in payment policies for 
physician offices as compared to the hospital outpatient setting. They 
also stated that differing payment policies and lack of clear billing 
instructions in the different settings contribute to uncertainty about 
where radiopharmaceutical costs are reported by hospitals. Commenters 
suggested that CMS specifically declare where the costs for 
radiopharmaceutical handling should reside for all delivery settings 
and give clear direction to providers. One commenter stated that, due 
to the variety of radiopharmaceuticals that can be used with the same 
procedure, it is most accurate to incorporate radiopharmaceutical 
handling costs in the charge for the radiopharmaceutical rather than in 
the charge for the nuclear medicine procedure.
    Response: We understand the commenters' concerns. We would 
emphasize that, in light of the policy that we are adopting in this 
final rule with comment period of paying for radiopharmaceuticals based 
on hospitals' charges converted to costs, it is appropriate for 
hospitals to include all the costs associated with acquiring and 
handling radiopharmaceuticals in their charges for the 
radiopharmaceuticals.
    However, because we proposed to collect ASP information for 
radiopharmaceuticals in CY 2006, we

[[Page 68665]]

requested specific comments on appropriate categories for potentially 
capturing radiopharmaceutical handling costs. We stated in the proposed 
rule that we believed that these handling costs may vary depending on 
many factors. We also indicated that the handling cost categories 
should exclude any resources associated with specific diagnostic 
procedures or administration codes for patient services that utilize 
the radiopharmaceuticals. However, the handling cost categories should 
include all aspects of radiopharmaceutical handling and preparation, 
including transportation, storage, compounding, required shielding, 
inventory management, revision of dosages based on patient conditions, 
documentation, disposal, and regulatory compliance. The MedPAC study 
contractor suggested a variety of discriminating factors that may be 
related to the magnitude of radiopharmaceutical handling costs, 
including the complexity of the calculations and manipulations involved 
with compounding, the intended use of the product for diagnostic or 
therapeutic purposes, the item's status as a radioimmunoconjugate or 
nonradioimmunoconjugate, short-lived agents produced in-house, and 
preparation of the radiopharmaceutical in-house versus production in a 
commercial radiopharmacy. We sought comments on the construction of 
radiopharmaceutical handling cost categories that would meaningfully 
reflect differences in the levels of necessary hospital resources and 
that could easily be understood and applied by hospitals characterizing 
their preparation of radiopharmaceuticals.
    We received numerous public comments concerning radiopharmaceutical 
handling cost categories.
    Comment: We received comments describing various proposals for 
creating radiopharmaceutical handling cost categories. One commenter 
recommended the creation of five handling categories for 
radiopharmaceuticals and assigning them G-codes, instead of C-codes as 
proposed, for drug handling categories. The commenter recommended this 
approach because G-codes are available to all insurers and would assist 
hospitals in more accurate, consistent, and efficient billing for 
radiopharmaceuticals. Another commenter suggested seven potential 
radiopharmaceutical handling categories for our consideration. Still 
another commenter proposed four categories for capturing the costs of 
radiopharmaceuticals. MedPAC also encouraged CMS to further study how 
to best construct categories of handling cost APCs for 
radiopharmaceuticals, which are generally likely to require greater 
resources for their preparation than drugs and biologicals. One 
commenter recommended that all radiopharmaceuticals be paid separately. 
The commenter believed that because of the potential for hospitals to 
bill one of the radiopharmaceutical handling category codes, this 
policy would facilitate appropriate data gathering, recognition, and 
payment of handling costs for all radiopharmaceuticals.
    One commenter was pleased that CMS did not intend to create C-codes 
for radiopharmaceutical handling costs for CY 2006. Other commenters 
stated that, if CMS implements its proposal to create handling cost 
categories for drugs and biologicals in CY 2006, it should also create 
handling cost categories for radiopharmaceuticals in CY 2006. These 
commenters added, however, if CMS delays implementation of these drug 
handling categories, it would be appropriate to delay the adoption of 
handling cost category codes for radiopharmaceuticals.
    Several commenters noted that if CMS implemented specific coding 
for handling and overhead costs of radiopharmaceuticals in CY 2006, it 
would have to initiate well in advance of January 2006 an educational 
effort to communicate to providers the need to use the new codes and to 
adjust radiopharmaceutical charges during CY 2006 to accurately reflect 
any changes in HCPCS code descriptors, along with identification of the 
relevant hospital CCR appropriate for calculating radiopharmaceutical 
payments. Another commenter suggested that CMS advise hospitals to make 
timely updates in charges to ensure that they fully, accurately, and 
uniformly report all relevant costs for radiopharmaceuticals.
    A few commenters were concerned about the usefulness of creating 
additional C-codes for hospitals to report radiopharmaceutical handling 
costs in CY 2006 for use in CY 2007 without providing any payment to 
hospitals for this additional work, citing that the process will place 
an undue administrative burden on hospitals. They recommended that CMS 
work with medical specialty societies and industry to develop 
appropriate handling cost categories for radiopharmaceuticals and 
establish a specific payment rate for each category to help deflect the 
additional costs to hospitals for this added burden and to ensure 
adequate data collection. In addition, the commenters asked for 
concurrent direction to hospitals about including the costs of handling 
in their charges for radiopharmaceuticals. Another commenter 
recommended that CMS incorporate these added handling costs directly 
into the final payment rates for radiopharmaceuticals by individual 
HCPCS codes.
    Response: As discussed earlier, we will not be implementing the C-
code handling categories for drugs and biologicals in CY 2006 due to 
the complex operational and policy issues surrounding this proposal. We 
will continue to study the possibility of creating handling cost 
categories for radiopharmaceuticals, as well as drugs, in order to 
develop viable options for making accurate payments for drug and 
radiopharmaceutical handling costs for consideration in future updates 
of the OPPS. In the meantime, as discussed earlier, payment for both 
acquisition and handling costs of radiopharmaceuticals in CY 2006 will 
be made based on hospital charges for these items converted to costs 
using each hospital's overall CCR. This methodology will allow us to 
pay simultaneously for radiopharmaceutical acquisition and handling 
costs, without creating additional administrative burden for hospitals.
    Comment: One commenter noted that CMS should include the costs 
associated with specially trained personnel to handle and compound 
radiopharmaceuticals, waste, and spoilage in its list of elements to 
consider including as part of radiopharmaceutical handling costs. The 
commenter also suggested that CMS make clear whether the 
radiopharmaceutical ``transportation'' costs should reside with the 
acquisition costs or with the handling costs. At present, many 
radiopharmaceutical invoice acquisition costs could include the 
``transportation'' costs, therefore, the commenter cautioned CMS 
regarding the potential for double counting.
    Response: Since in CY 2006 payment for both acquisition and 
handling costs of radiopharmaceuticals will be made based on hospital 
charges for these items converted to costs, we encourage hospitals to 
include in their charges the costs associated with specially trained 
personnel to handle and compound radiopharmaceuticals, waste, spoilage, 
and transportation costs as noted by the commenter. Whether hospitals 
associate these costs with radiopharmaceutical acquisition or handling 
is not significant, as both types of costs should be fully reflected in 
the hospitals' charges for radiopharmaceuticals.

[[Page 68666]]

b. Final CY 2006 Payment for Nonpass-Through Drugs, Biologicals, and 
Radiopharmaceuticals With HCPCS Codes, But Without OPPS Hospital Claims 
Data
    Pub. L. 108-173 does not address the OPPS payment in CY 2005 and 
after for new drugs, biologicals, and radiopharmaceuticals that have 
assigned HCPCS codes, but that do not have a reference AWP or approval 
for payment as pass-through drugs or biologicals. Because there is no 
statutory provision that dictated payment for such drugs and 
biologicals in CY 2005, and because we had no hospital claims data to 
use in establishing a payment rate for them, we investigated several 
payment options for CY 2005 and discussed them in detail in the CY 2005 
OPPS final rule with comment period (69 FR 65797 through 65799).
    In the CY 2006 OPPS proposed rule, we proposed to use the same 
methodology that we used in CY 2005. That is, we proposed to pay for 
these new drugs and biologicals with HCPCS codes but which do not have 
pass-through status at a rate that is equivalent to the payment they 
would receive in the physician office setting, which would be 
established in accordance with the ASP methodology described in the CY 
2006 Medicare Physician Fee Schedule final rule. As discussed in the CY 
2005 final rule with comment period (69 FR 65797), new drugs, 
biologicals, and radiopharmaceuticals may be expensive, and we were 
concerned that packaging these new items might jeopardize beneficiary 
access to them. In addition, we did not want to delay separate payment 
for these items solely because a pass-through application was not 
submitted. We noted in the proposed rule that this payment methodology 
is the same as the methodology that would be used to calculate the OPPS 
payment amount that pass-through drugs and biologicals would be paid in 
CY 2006 in accordance with section 1842(o) of the Act, as amended by 
section 303(b) of Pub. L. 108-173, and section 1847A of the Act. Thus, 
we proposed to continue to treat new drugs, biologicals, and 
radiopharmaceuticals with established HCPCS codes the same, 
irrespective of whether pass-through status has been determined. We 
also proposed to assign status indicator ``K'' to HCPCS codes for new 
drugs and biologicals for which we have not received a pass-through 
application.
    In the proposed rule, we stated that there were several drugs, 
biologicals, and radiopharmaceuticals that were payable during CY 2004 
or where HCPCS codes for products were created effective January 1, 
2005, for which we did not have any CY 2004 hospital claims data. In 
order to determine the packaging status of these items for CY 2006, in 
the proposed rule we calculated an estimate of the per day cost of each 
of these items by multiplying the payment rate for each product, as 
determined using the ASP methodology, by an estimated average number of 
units of each product that would be furnished to a patient during one 
administration. We proposed to package items for which we estimated the 
per administration cost to be less than $50 and pay separately for 
items with an estimated per administration cost greater than $50. We 
indicated that payment for the separately payable items would be based 
on rates determined using the ASP methodology established in the 
physician office setting. There were two codes HCPCS codes 90393 
(Vaccina ig, im) and Q9953 (Inj Fe-based MR contrast, ml), for which we 
were not able to determine payment rates based on the ASP methodology. 
Because we were unable to estimate the per administration cost of these 
items, we proposed to package them in CY 2006. We specifically 
requested public comments on our proposed policy for determining the 
per administration cost of these drugs, biologicals, and 
radiopharmaceuticals that were payable under the OPPS, but did not have 
any CY 2004 claims data.
    We received several public comments in response to our request.
    Comment: One commenter supported the proposal to price drugs that 
have a HCPCS code but do not have pass-through status at the same rate 
they would be paid in the physician office setting based on the ASP 
methodology.
    Response: We appreciate the commenter's support. We are finalizing 
our proposed policy to pay for new drugs, biologicals, and 
radiopharmaceuticals with HCPCS codes but which do not have pass-
through status at a rate that is equivalent to the payment they would 
receive in the physician office setting, which will be established in 
accordance with the ASP methodology. We are also paying separately for 
drugs, biologicals, and radiopharmaceuticals whose HCPCS codes will be 
payable for the first time under the OPPS in CY 2006 but whose codes do 
not crosswalk to other HCPCS codes previously recognized under the 
OPPS.
    In CY 2006, payment for these new drugs, biologicals, and 
radiopharmaceuticals will be based on ASP+6 percent. In accordance with 
the ASP methodology used in the physician office setting, in the 
absence of ASP data, we will use wholesale acquisition cost (WAC) for 
the product to establish the initial payment rate. We note, however, 
that if WAC is also unavailable, then we will calculate payment at 95 
percent of the most recent AWP that we have available at the time of 
the development of this final rule and for the quarterly updates. We 
note that with respect to items for which we currently do not have ASP 
data, once their ASP data become available in later quarter 
submissions, their payment rates under the OPPS will be adjusted so 
that the rates are based on the ASP methodology and set to ASP+6 
percent.
    For this final rule with comment period, we are basing the payment 
rates for these items on ASP data from the second quarter of CY 2005, 
which are effective in the physician office setting on October 1, 2005, 
because these are the most recent values available for the development 
of this rule. To be consistent with the ASP-based payments that would 
be made when these drugs and biologicals are furnished in physician 
offices as proposed, we plan to make any appropriate adjustments to the 
amounts shown in Addenda A and B to this final rule with comment period 
for these items on a quarterly basis as more recent ASP data become 
available. Changes in the payment rates will be posted on our Web site 
during each quarter of CY 2006. Accordingly, effective January 1, 2006, 
we will base payment rates for all separately payable drugs and 
biologicals on ASP data from the third quarter of CY 2005, which will 
also be the basis for setting payment rates for drugs and biologicals 
in the physician office setting effective January 1, 2006.
    For CY 2006, we will apply this policy to several drugs, 
biologicals, and radiopharmaceuticals that are new effective January 1, 
2006 and do not have pass-through status or hospital claims data. These 
items are listed in Table 26 below and will be separately payable under 
OPPS in CY 2006, and thus, we have assigned them to status indicator 
``K''.

[[Page 68667]]



 Table 26.--CY 2006 Payment Methodology for New Drugs, Biologicals, and
Radiopharmaceuticals Without Pass-Through Status and CY 2004 Claims Data
------------------------------------------------------------------------
        HCPCS code             Description          APC       CY 2006 SI
------------------------------------------------------------------------
90714.....................  Td vaccine no               1634          K
                             prsrv >/= 7 im.
A9567.....................  Technetium TC-              1679          H
                             99m aerosol.
A9535.....................  Injection,                  1640          K
                             methylene blue.
J0132.....................  Acetylcysteine              1680          K
                             injection.
J0278.....................  Amikacin sulfate            1681          K
                             injection.
J2425.....................  Palifermin                  1696          K
                             injection.
J2805.....................  Sincalide                   1699          K
                             injection.
J2850.....................  Inj secretin                1700          K
                             synthetic human.
J3471.....................  Ovine, up to 999            1702          K
                             USP units.
J3472.....................  Ovine, 1000 USP             1703          K
                             units.
J7341.....................  Non-human,                  1707          K
                             metabolic
                             tissue.
J8540.....................  Oral                        1708          K
                             dexamethasone.
J9225.....................  Histrelin                   1711          K
                             implant.
Q9958.....................  HOCM <=149 mg/ml            1714          K
                             iodine, 1ml.
Q9960.....................  HOCM 200-249mg/             1715          K
                             ml iodine, 1ml.
Q9961.....................  HOCM 250-299mg/             1734          K
                             ml iodine, 1ml.
Q9962.....................  HOCM 300-349mg/             1735          K
                             ml iodine, 1ml.
Q9963.....................  HOCM 350-399mg/             1736          K
                             ml iodine, 1ml.
Q9964.....................  HOCM >= 400 mg/             1737          K
                             ml iodine, 1ml.
------------------------------------------------------------------------

    Comment: One commenter agreed in principle with CMS' proposed 
methodology for determining the packaging status for drugs for which 
CMS did not have CY 2004 claims data. However, the commenter expressed 
concern about the proposal to package HCPCS code Q9953 (Inj Fe-based MR 
contrast, ml). The commenter noted that ASP data are available for 
Q9953, and the data demonstrated that the average per administration 
cost of Q9953 exceeded the $50 packaging threshold. Thus, the commenter 
believed that HCPCS code Q9953 should be paid separately in CY 2006. 
The commenter indicated that the most current ASP data submission, 
which was submitted to CMS on July 29, 2005, showed an ASP for Feridex 
I.V., the product described by HCPCS code Q9953, of $28.68 per ml. The 
commenter pointed out that using an average dosing of 3.5 ml per the 
Feridex I.V. package insert, the average cost per administration would 
be $100.39 for HCPCS code Q9953, which far exceeds the CY 2006 OPPS $50 
packaging threshold. Therefore, the commenter requested that CMS use 
the ASP data as reported to establish a CY 2006 OPPS payment amount for 
HCPCS code Q9953.
    Response: Consistent with the commenter's statement, we received 
ASP data from the second quarter of CY 2005 for HCPCS code Q9953 after 
the proposed rule was issued. For this final rule with comment period, 
we are using updated ASP data under the methodology we proposed to 
determine the packaging status for items that did not have any CY 2004 
hospital claims data, and our calculation of the per day cost of HCPCS 
code Q9953 indicated that it is higher than $50 per day. Therefore, we 
will make separate payment for HCPCS code Q9953 in CY 2006 and set 
payment at the rate determined using the ASP methodology.
    In this final rule with comment period, we are finalizing the 
proposed policy for determining the per administration cost of drugs, 
biologicals, and radiopharmaceuticals that are payable under the OPPS, 
but which do not have any CY 2004 claims data to determine their 
packaging status in CY 2006. Table 27 below lists all of the drugs and 
biologicals to which this policy will apply in CY 2006.
    We note that in the proposed rule, we indicated that we are 
packaging HCPCS code 90393 (Vaccina ig, im) as we were unable to 
determine a payment rate for this item based on the ASP methodology; 
thus, we were also unable to estimate the per administration cost of 
this item, For this final rule with comment period, we were still not 
able to determine an ASP-based payment for this item to estimate its 
per administration cost. Therefore, we will continue to package this 
code in this final rule with comment period.

               Table 27.--Drugs, Biologicals, and Radiopharmaceuticals Without CY 2004 Claims Data
----------------------------------------------------------------------------------------------------------------
                                                                                       Est. average
                                                                         ASP-based       number of      CY 2006
              HCPCS code                         Description           payment rate      units per        SI
                                                                                      administration
----------------------------------------------------------------------------------------------------------------
90581.................................  Anthrax vaccine, sc.........         $126.46           1              K
C1093*................................  TC99M fanolesomab...........        1,197.00           1              H
C9206*................................  Integra, per cm2............           10.69          19              K
C9224.................................  Injection, galsulfase.......        1,522.15          14              K
J0135.................................  Adalimumab injection........          293.98           2              K
J0190.................................  Inj biperiden lactate/5 mg..            3.14           1              N
J0200.................................  Alatrofloxacin mesylate.....           16.03           2.5            N
J0288.................................  Ampho b cholesteryl sulfate.           12.00          35              K
J0395.................................  Arbutamine HCl injection....          160.00           1              K
J1180.................................  Dyphylline injection........            8.05           8.4            K
J1457.................................  Gallium nitrate injection...            1.25         340              K
J3315.................................  Triptorelin pamoate.........          372.86           1              K

[[Page 68668]]

 
J3530.................................  Nasal vaccine inhalation....           15.00           1              N
J7350.................................  Injectable human tissue.....            5.35          33              K
J7674.................................  Methacholine chloride, neb..            0.40           8.875          N
J9357.................................  Valrubicin, 200 mg..........          369.60           4              K
Q2012*................................  Pegademase bovine, 25 iu....          166.07          56              K
Q2018*................................  Urofollitropin, 75 iu.......           48.45           2             K
----------------------------------------------------------------------------------------------------------------
* For CY 2006, C1093, C9206, Q2012, and Q2018 are deleted and replaced with A9566, J7343, J2504, and J3355
  respectively.

    Comment: One commenter requested that CMS clarify the coding and 
payment policies for high osmolar contrast medium (HOCM) that will be 
applicable during CY 2006. The commenter supported the proposal that 
would allow hospitals to bill and be paid for these agents using the 
recently assigned HCPCS codes Q9958--Q9964 and revenue code 636. In 
addition, the commenter requested that HOCM agents be paid using the 
ASP methodology in CY 2006. The commenter noted that section 3631 of 
CMS' Intermediary Manual currently states that ``if billing separately, 
hospitals use revenue code 255 for contrast material other than LOCM. 
To prevent confusion and the inappropriate denial of claims, the 
commenter further requested that CMS specify that hospitals should 
disregard the program manual instruction and use revenue code 636 and 
the Q-codes when billing for HOCM.
    Response: The HCPCS codes Q9958--Q9964 for HOCM were created 
effective July 1, 2005. We believe that these codes should be paid 
separately according to the ASP methodology in CY 2006, similar to our 
policy of paying separately for new items in CY 2006 because these 
codes had no predecessor codes in the OPPS and the codes themselves 
will first be recognized under the OPPS in CY 2006. In this final rule 
with comment period, we were able to determine ASP-based payment rates 
for all of the HOCM codes, except HCPCS code Q9959. We were unable to 
identify a product that crosswalked to this code; therefore, we could 
not calculate an appropriate payment for this code. Therefore, we are 
packaging HCPCS code Q9959 in this final rule with comment period. We 
note that if ASP data become available in later quarter submissions for 
this code, then we will pay for this code separately based on an 
appropriate payment rate. The ASP-based payment rates for the 
separately payable HOCM codes that are listed in Addenda A and B of 
this final rule with comment period are estimates and have not been 
published before as these codes are not currently separately paid in 
the physician office setting. In response to one of the commenter's 
concerns about appropriate billing for HOCM, the hospitals may wish to 
post their charges for HOCM on the claim with the revenue code that 
crosswalks to the cost center on the hospital Medicare cost report 
where the costs for HOCM are reported. We note that we will be closely 
examining hospital claims data for HOCM codes, as for all drugs, 
biologicals, and radiopharmaceuticals, to assess whether packaging or 
separate payment is appropriate for future OPPS updates.

C. Coding and Billing Changes for Specified Covered Outpatient Drugs

1. Background
    As discussed in the January 6, 2004 interim final rule with comment 
period (69 FR 826), we instructed hospitals to bill for sole source 
drugs using the existing HCPCS codes, which were priced in accordance 
with the provisions of section 1833(t)(14)(A)(i) of the Act, as added 
by Pub. L. 108-173. However, at that time, the existing HCPCS codes did 
not allow us to differentiate payment amounts for innovator multiple 
source and noninnovator multiple source forms of the drug. Therefore, 
effective April 1, 2004, we implemented new HCPCS codes via Program 
Transmittal 112 (Change Request 3144, February 27, 2004) and Program 
Transmittal 132 (Change Request 3154, March 30, 2004) that providers 
were instructed to use to bill for innovator multiple source drugs in 
order to receive appropriate payment in accordance with section 
1833(t)(14)(A)(i)(II) of the Act. We also instructed providers to 
continue to use the existing HCPCS codes to bill for noninnovator 
multiple source drugs to receive payment in accordance with section 
1833(t)(14)(A)(i)(III) of the Act. These coding policies allowed 
hospitals to appropriately code for drugs, biologicals, and 
radiopharmaceuticals based on their classification and to be paid 
accordingly. We continued this coding practice in CY 2005 with payment 
made in accordance with section 1833(t)(14)(A)(ii) of the Act.
2. CY 2006 Payment Policy
    In the CY 2006 OPPS proposed rule, we proposed to base the payment 
rates for drugs and biologicals and their pharmacy overhead costs on 
the ASP methodology that is used to set payment rates for these items 
in the physician office setting. Under this methodology, a single 
payment rate for the drug is calculated by considering the prices for 
both the innovator multiple source (brand) and noninnovator multiple 
source (generic) forms of the drug. Therefore, under the OPPS, we noted 
in the proposed rule that we believed that there was no longer a need 
to differentiate between the brand and generic forms of a drug. Thus, 
we proposed to discontinue use of the C-codes that were created to 
represent the innovator multiple source drugs. In CY 2006, hospitals 
would use the HCPCS codes for noninnovator multiple source (generic) 
drugs to bill for both the brand and generic forms of a drug as they 
did prior to implementation of section 1833(t)(14)(A) in Pub. L. 108-
173. We specifically requested comments on this proposed policy.
    We received a few public comments concerning this proposal.
    Comment: Several commenters supported the proposal to eliminate the 
use of the brand name drug C-codes in CY 2006 as there was no longer a 
need to distinguish between innovator (brand name) and noninnovator 
(generic) multiple source drugs. The commenters indicated that this 
policy will reduce the administrative burden of maintaining and 
reporting separate HCPCS codes for both generic and brand name drugs. 
However, some commenters pointed out that the availability of these 
drugs varies in the marketplace, and they asked CMS to clarify how it 
determines a single ASP payment for both brand and generic

[[Page 68669]]

drugs to ensure that the calculated APC payment accurately reflects the 
combined cost of both brand and generic forms of the drug. One 
commenter also requested that CMS clarify whether the ASP is based on 
the volume of brand versus generic drugs purchased by providers during 
a given quarter.
    Response: Section 1847A(b)(3) of the Act specifies that the payment 
amount for multiple source drugs is the volume-weighted average of the 
ASPs reported by the manufacturers of the NDCs assigned to the billing 
HCPCS code. The computation is weighted by the number of units sold 
during the reporting period. As availability of products changes in the 
marketplace, changes in purchasing patterns will be reported in the ASP 
data. For further discussion of the methodology used to determine the 
ASP-based payment amounts, see the related ``Frequently Asked 
Question'' at http://questions.cms.hhs.gov. This issue is also 
addressed in the CY 2006 Medicare Physician Fee Schedule final rule.
    For CY 2006, we are finalizing our proposal to discontinue use of 
the C-codes that were created to represent the innovator multiple 
source drugs, and note that hospitals are to use the HCPCS codes for 
noninnovator multiple source (generic) drugs to bill for both the brand 
and generic forms of a drug.

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

1. Background
    Historically, hospitals have used a HCPCS code for an unlisted or 
unclassified drug, biological, or radiopharmaceutical or used an 
appropriate revenue code to bill for drugs, biologicals, and 
radiopharmaceuticals furnished in the outpatient department that do not 
have an assigned HCPCS code. The codes for not otherwise classified 
drugs, biologicals, and radiopharmaceuticals are assigned packaged 
status under the OPPS. That is, separate payment is not made for the 
code, but charges for the code would be eligible for an outlier payment 
and, in future OPPS updates, the charges for the code are packaged with 
the separately payable service with which the code is reported for the 
same date of service.
    Drugs and biologicals that are newly approved by the FDA and for 
which a HCPCS code has not yet been assigned by the National HCPCS 
Alpha-Numeric Workgroup could qualify for pass-through payment under 
the OPPS. An application must be submitted to CMS in order for a drug 
or biological to be assigned pass-through status, a temporary C-code 
assigned for billing purposes, and an APC payment amount determined. 
Pass-through applications are reviewed on a flow basis, and payment for 
drugs and biologicals approved for pass-through status is implemented 
throughout the year as part of the quarterly updates of the OPPS.
2. CY 2006 Payment Policy
    Section 1833(t)(15) of the Act, as added by section 621(a)(1) of 
Pub. L. 108-173, provides for payment for new drugs and biologicals 
until HCPCS codes are assigned under the OPPS. Under this provision, we 
are required to make payment for an outpatient drug or biological that 
is furnished as part of covered outpatient hospital services but for 
which a HCPCS code has not yet been assigned in an amount equal to 95 
percent of AWP. This provision applies only to payments made under the 
OPPS on or after January 1, 2004.
    As noted in the proposed rule (70 FR 42733), we initially adopted 
the methodology for determining payment under section 1833(t)(15) of 
the Act on an interim basis on May 28, 2004, via Transmittal 188, 
Change Request 3287, and finalized the methodology for CY 2005 in our 
CY 2005 OPPS final rule with comment period. In that final rule with 
comment period, we also expanded the methodology to include payment for 
new radiopharmaceuticals to which a HCPCS code is not assigned (69 FR 
65804 through 65807). We instructed hospitals to bill for a drug or 
biological that is newly approved by the FDA by reporting the NDC for 
the product along with new HCPCS code C9399 (Unclassified drug or 
biological). When HCPCS code C9399 appears on a claim, the OCE suspends 
the claim for manual pricing by the fiscal intermediary. The fiscal 
intermediary prices the claim at 95 percent of its AWP using the Red 
Book or an equivalent recognized compendium, and processes the claim 
for payment. This approach enables hospitals to bill and receive 
payment for a new drug, biological, or radiopharmaceutical concurrent 
with its approval by the FDA. The hospital does not have to wait for 
the next OPPS quarterly release or for approval of a product-specific 
HCPCS code to receive payment for a newly approved drug, biological, or 
radiopharmaceutical. In addition, the hospital does not have to 
resubmit claims for adjustment. Hospitals discontinue billing HCPCS 
code C9399 and the NDC upon implementation of a HCPCS code, status 
indicator, and appropriate payment amount with the next OPPS quarterly 
update.
    For CY 2006, we proposed to continue the same methodology for 
paying for new drugs, biologicals, and radiopharmaceuticals without 
HCPCS codes. We received a few public comments in response to our 
proposal.
    Comment: Several commenters supported CMS' proposal to pay for new 
drugs prior to the assignment of a HCPCS code at an amount equal to 95 
percent of the drug's AWP and reiterated that the AWP should correspond 
to the payment rate established by the fiscal intermediaries using the 
Red Book or an equivalent recognized compendium. One commenter noted 
that this policy allows providers to receive payment for newer drugs in 
a timely fashion.
    Response: We appreciate the commenters' support for the 
continuation of our policy to pay for new drugs, biologicals, and 
radiopharmaceuticals without HCPCS codes at 95 percent of AWP. For CY 
2006, we are finalizing our proposed methodology, without modification.

E. Payment for Vaccines

    Outpatient hospital departments administer large numbers of 
immunizations for influenza (flu) and pneumococcal pneumonia (PPV), 
typically by participating in immunization programs. In recent years, 
the availability and cost of some vaccines (particularly the flu 
vaccine) have fluctuated considerably. As discussed in the November 1, 
2002 final rule (67 FR 66718), we were advised by providers that the 
OPPS payment was insufficient to cover the costs of the flu vaccine and 
that access of Medicare beneficiaries to flu vaccines might be limited. 
They cited the timing of updates to the OPPS rates as a major concern. 
They indicated that our update methodology, which uses 2-year-old 
claims data to recalibrate payment rates, would never be able to take 
into account yearly fluctuations in the costs of the flu vaccine. We 
agreed with this concern and decided to pay hospitals for influenza and 
pneumococcal pneumonia vaccines based on a reasonable cost methodology. 
As a result of this change, hospitals, home health agencies (HHAs), and 
hospices, which were paid for these vaccines under the OPPS in CY 2002, 
have been receiving payment at reasonable cost for these vaccines since 
CY 2003.
    Influenza, pneumococcal, and hepatitis B vaccines and their 
administration are specifically covered by Medicare under section 
1861(s)(10) of the Act. For CY 2006, we proposed

[[Page 68670]]

to continue to pay influenza and pneumococcal vaccines at reasonable 
cost. However, hepatitis B vaccines have been paid under clinical APCs 
that also included other vaccines. For CY 2006, we proposed to pay for 
all hepatitis B vaccines at reasonable cost, consistent with the 
payment methodology for influenza and pneumococcal vaccines. Influenza 
and pneumococcal vaccines are exempt from coinsurance and deductible 
payments under sections 1833(a)(3) and 1833(b) of the Act and have been 
assigned status indicator ``L''. However, hepatitis B vaccines have no 
similar coinsurance or deductible exemption. Therefore, we proposed to 
assign these items status indicator ``F''.
    Previously under the OPPS, separately payable vaccines other than 
influenza and pneumococcal were grouped into clinical APCs 0355 (Level 
I Immunizations) and 0356 (Level II Immunizations) for payment 
purposes. Payment rates for these APCs were based on the APCs' median 
costs, calculated from the costs of all of the vaccines grouped within 
the APCs. For CY 2006, we proposed to pay for each separately payable 
vaccine under its own APC, consistent with our policy for separately 
payable drugs other than vaccines, instead of aggregating them into 
clinical APCs with other vaccines. We believed this policy would allow 
us to more appropriately establish a payment rate for each separately 
payable vaccine based on the ASP methodology. Proposed and final policy 
changes to coding and payments for the administration of these vaccines 
are discussed in section VIII.C. of this preamble.
    During the August 2005 meeting of the APC Panel, the Panel 
recommended that CMS change the status indicator for CPT code 90660, 
intranasal influenza vaccine, to ``L,'' and that the code be reimbursed 
on a reasonable-cost basis. As discussed below, we accepted this 
recommendation.
    We specifically requested comments on our proposed vaccine policies 
for CY 2006. We received several public comments concerning our 
proposal.
    Comment: All commenters supported CMS' proposal to continue to pay 
for influenza and pneumococcal pneumonia vaccines based on reasonable 
cost. One commenter believed that payment based on reasonable cost 
helps to ensure that hospitals are adequately paid for providing these 
vaccines.
    Response: We appreciate the commenters' continued support of our 
policy. We are finalizing our proposal to pay for influenza and 
pneumococcal pneumonia vaccines at reasonable cost for CY 2006 in this 
final rule with comment period. We did not receive any comments on our 
proposals to also pay for Hepatitis B vaccines at reasonable cost and 
pay for each separately payable vaccine under its own APC. For CY 2006, 
we are also finalizing these two proposals.
    Comment: Several commenters noted that CMS assigned CPT code 90660 
(Intranasal influenza vaccine) status indicator ``E,'' indicating that 
Medicare does not cover the item, does not recognize it, or does not 
provide separate payment for it. The commenters urged CMS to implement 
the APC Panel's recommendation to pay for CPT code 90660 on a 
reasonable cost basis and exempt this code from coinsurance and 
deductible, similar to all other influenza vaccines.
    Response: We agree with the commenters that our proposal to pay 
influenza vaccines at reasonable cost should also apply to CPT code 
90660. Therefore, CPT code 90660 will be paid at reasonable cost and 
assigned to status indicator ``L'' in CY 2006, similar to all other 
influenza vaccines.

F. Changes in Payment for Single Indication Orphan Drugs

    Section 1833 (t)(1)(B)(i) of the Act gives the Secretary the 
authority to designate the hospital outpatient services to be covered. 
The Secretary has specified coverage for certain drugs as orphan drugs 
(section 1833(t)(14)(B)(ii)(III) of the Act, as added by section 
621(a)(1) of Pub. L. 108-173). Section 1833 (t)(14)(C) of the Act, as 
added by section 621(a)(1) of Pub. L. 108-173, gives the Secretary the 
authority in CYs 2004 and 2005 to specify the amount of payment for an 
orphan drug that has been designated as such by the Secretary.
    In the CY 2006 OPPS proposed rule (70 FR 42733), we indicated that 
we recognized that orphan drugs that are used solely for an orphan 
condition or conditions are generally expensive and, by definition, are 
rarely used. We believed that if the costs of these drugs were packaged 
into the payment for an associated procedure or visit, the payment for 
the procedure might be insufficient to compensate a hospital for the 
typically high costs of this special type of drug. Therefore, we 
proposed to continue paying for them separately.
    In the November 1, 2002 final rule (67 FR 66772), we identified 11 
single indication orphan drugs that are used solely for orphan 
conditions by applying the following criteria:
     The drug is designated as an orphan drug by the FDA and 
approved by the FDA for treatment of only one or more orphan 
condition(s).
     The current United States Pharmacopoeia Drug Information 
(USPDI) shows that the drug has neither an approved use nor an off-
label use for other than the orphan condition(s).
    Eleven single indication orphan drugs were identified as having met 
these criteria and payments for these drugs were made outside of the 
OPPS on a reasonable cost basis.
    In the November 7, 2003 final rule with comment period (68 FR 
63452), we discontinued payment for orphan drugs on a reasonable cost 
basis and made separate payments for each single indication orphan drug 
under its own APC. Payments for the orphan drugs were made at 88 
percent of the AWP listed for these drugs in the April 1, 2003 single 
drug pricer, unless we were presented with verifiable information that 
showed that our payment rate did not reflect the price that was widely 
available to the hospital market. For CY 2004, Ceredase (alglucerase) 
and Cerezyme (imiglucerase) were paid at 94 percent of the AWP because 
external data submitted by commenters on the August 12, 2003 proposed 
rule caused us to believe that payment at 88 percent of the AWP would 
be insufficient to ensure beneficiaries' access to these drugs.
    In the December 31, 2003 correction of the November 7, 2003 final 
rule with comment period (68 FR 75442), we added HCPCS code J9017 
(Arsenic trioxide, 1 mg) to our list of single indication orphan drugs. 
In the November 15, 2004 final rule with comment period (69 FR 65807), 
we retained the same criteria for identifying single indication orphan 
drugs and added two HCPCS codes to our list, HCPCS code C9218 
(Injection, Azactidine, per 1 mg) and HCPCS code J9010 (Alemtuzumab, 10 
mg) (69 FR 65808). As of CY 2005, the following are the 14 orphan drugs 
that we have identified as meeting our criteria: HCPCS code C9218 
(Injection, Azactidine, per 1 mg); HCPCS code J0205 (Injection, 
Alglucerase, per 10 units); HCPCS code J0256 (Injection, Alpha 1-
proteinase inhibitor, 10 mg); HCPCS code J9300 (Gemtuzumab ozogamicin, 
5mg); HCPCS code J1785 (Injection, Imiglucerase, per unit); HCPCS code 
J2355 (Injection, Oprelvekin, 5 mg); HCPCS code J3240 (Injection, 
Thyrotropin alpha, 0.9 mg); HCPCS code J7513 (Daclizumab, parenteral, 
25 mg); HCPCS code J9010 (Alemtuzumab, 10 mg); HCPCS code J9015 
(Aldesleukin, per single use vial); HCPCS code J9017 (Arsenic trioxide, 
1 mg); HCPCS code J9160 (Denileukin

[[Page 68671]]

diftitox, 300 mcg); HCPCS code J9216 (Interferon, gamma 1-b, 3 million 
units); and HCPCS code Q2019 (Injection, Basiliximab, 20 mg).
    In the November 15, 2004 final rule with comment period (69 FR 
65808), we stated that had we not classified these drugs as single 
indication orphan drugs for payment under the OPPS, they would have met 
the definition of single source specified covered outpatient drugs and 
received lower payments, which could have impeded beneficiary access to 
these unique drugs dedicated to the treatment of rare diseases. 
Instead, for CY 2005, under our authority at section 1833(t)(14)(C) of 
the Act, we set payment for all 14 single indication orphan drugs at 
the higher of 88 percent of the AWP or the ASP+6 percent. For CY 2005, 
we also updated on a quarterly basis the payment rates through 
comparison of the most current ASP and AWP information available to us. 
Given that CY 2005 was the first year of mandatory ASP reporting by 
manufacturers, we did not want potential significant fluctuations in 
the ASPs to affect payments to hospitals furnishing these drugs, which 
in turn might cause access problems for beneficiaries. Therefore, in 
the November 15, 2004 final rule, we did not implement the proposed 95 
percent AWP cap on payments for single indication orphan drugs, which 
was described in the August 16, 2004 proposed rule (69 FR 50518), as we 
intended to monitor the impact of our payment policy and consider the 
need for a cap in future OPPS updates if appropriate (69 FR 65809).
    As indicated in the proposed rule (70 FR 42734), as a part of the 
GAO study on hospital acquisition costs of specified covered outpatient 
drugs, the GAO provided the average hospital purchase prices for four 
orphan drugs: HCPCS code J0256 (Injection, Alpha 1-proteinase 
inhibitor, 10 mg), HCPCS code J1785 (Injection, Imiglucerase, per 
unit), HCPCS code J9160 (Denileukin difitox, 300 mcg), and HCPCS code 
J9010 (Alemtuzumab, 10 mg).
    For alpha 1-proteinase inhibitor (HCPCS code J0256), the hospitals 
in the study sample represented only about 14 percent of the estimated 
total number of hospitals purchasing the drug. The mean hospital 
purchase price was about 73 percent of the payment rate based on ASP+6 
percent rate and about 63 percent of the CY 2005 payment rate updated 
in April 2005. We noted in the proposed rule (70 FR 42734) that we 
believed the GAO acquisition data for alpha 1-proteinase inhibitor were 
likely not representative of hospital acquisition costs for the drug 
because the number of hospitals providing data was so small compared to 
the total number of hospitals expected to utilize the drug. 
Furthermore, we recognized that the GAO data on hospital drug 
acquisition costs did not reflect the current acquisition costs 
experienced by hospitals but instead, relied on past cost data from 
late CY 2003 through early CY 2004. On the other hand, we stated that 
the ASP data were more current and thus were likely more reflective of 
hospital acquisition costs for alpha 1-proteinase inhibitor at the time 
of issuance of the CY 2006 proposed rule.
    In contrast to the GAO data for alpha 1-proteinase inhibitor, the 
GAO data for imiglucerase (HCPCS code J1785) reflected hospital 
purchase prices from about 69 percent of the hospitals expected to 
utilize the drug. For this drug, the mean hospital purchase price was 
about 93 percent of the CY 2005 payment rate for imiglucerase updated 
in April 2005, which was based on ASP+6 percent rate. Thus, the ASP-
based payment rate also appeared to be appropriately reflective of 
hospital acquisition costs for imiglucerase, and to be consistent with 
the GAO mean purchase price.
    For denileukin difitox (HCPCS code J9160) and alemtuzumab (HCPCS 
code J9010), the GAO data for these drugs reflected hospital purchase 
prices from about 77 percent and 66 percent of the hospitals expected 
to acquire these drugs, respectively. The mean hospital purchase price 
for denileukin difitox was about 94 percent of the payment rate based 
on the ASP+6 percent rate and about 79 percent of the CY 2005 payment 
rate. As for alemtuzumab, the mean hospital purchase price was about 95 
percent of the payment rate based on the ASP+6 percent rate and about 
89 percent of the CY 2005 payment rate. For both of these drugs, the 
ASP-based payment rates also appeared to be appropriately reflective of 
their hospital acquisition costs, based on confirmation by the GAO 
average purchase price data from over two-thirds of the hospitals 
expected to acquire the drugs.
    During the quarterly updates to payment rates for single indication 
orphan drugs for CY 2005, we observed significant improvement in the 
accuracy and consistency of manufacturers' reporting of the ASPs for 
these orphan drugs. Overall, we found that the ASPs as compared to the 
AWPs were less likely to experience dramatic fluctuations in prices 
from quarter to quarter. We indicated in the proposed rule that we 
expected that as the ASP system continues to mature, manufacturers will 
further refine their quarterly reporting, leading to even greater 
stability and accuracy in their reporting of sales prices. As the ASPs 
reflect the average sales prices to all purchasers, the ASP data also 
include drug sales to hospitals. Past commenters have indicated to us 
that some orphan drugs are administered principally in hospitals, and 
to the extent that this is true their ASPs should predominantly be 
based upon the sales of drugs used by hospitals. For three of the 
orphan drugs for which the GAO provided average purchase prices from a 
large percentage of hospitals expected to acquire the drugs, the GAO 
data were very consistent with the ASP+6 percent. For the fourth drug, 
the GAO mean was significantly lower than the ASP+6 percent and the 
confidence interval around that mean was quite tight, although only a 
small proportion of hospitals expected to acquire the drug reported 
their purchase prices. Thus, in the proposed rule, we stated that we 
believed that proposing to pay for orphan drugs based on an ASP 
methodology was appropriate for the CY 2006 OPPS and should assure 
patients' continued access to these orphan drugs in the hospital 
outpatient department. Therefore, for CY 2006, we proposed to pay for 
single indication orphan drugs at the ASP+6 percent.
    We believed that paying for orphan drugs using the ASP methodology 
was consistent with our proposed general drug payment policy for other 
separately payable drugs and biologicals in the CY 2006 and reflected 
our general view that ASP-based payment rates serve as the best proxy 
for the average acquisition cost for these items as described in this 
section V. of the preamble. In addition, we proposed to pay an 
additional 2 percent of the ASP scaled for budget neutrality to cover 
the handling costs of these drugs, also consistent with our proposed 
general pharmacy overhead payment policy for handling costs associated 
with separately payable drugs and biologicals. We believed that the 
ASP+6 percent for orphan drugs would provide appropriate payment for 
hospital acquisition costs for these drugs that are administered by a 
relatively small number of providers, so that patients would continue 
to have access to orphan drugs in the hospital outpatient setting. 
Hospitals would also receive additional payments for costs associated 
with their storage, handling, and preparation of orphan drugs. We 
proposed to update the payment rates on a quarterly basis to reflect 
the most current ASPs available to us, and we also noted that 
appropriate adjustments to the payment amounts shown in

[[Page 68672]]

Addendum A and B of this final rule with comment period would be made 
if the ASP submissions in a later quarter indicated that adjustments to 
the payment rates were necessary. (70 FR 42735) These changes to the 
Addenda would be announced in our program instructions released on a 
quarterly basis and posted on our Web site at http://www.cms.hhs.gov.
    We specifically requested comments on our proposed payment policy 
for single indication orphan drugs in CY 2006. We received several 
public comments regarding our proposal.
    Comment: One commenter indicated that, under the proposed payment 
policy for orphan drugs, it did not anticipate access problems 
generally for orphan drugs that will be used in the hospital outpatient 
setting in CY 2006. However, the commenter also stated that orphan 
drugs should be given special consideration as a class and recommended 
that CMS adopt the definition of ``orphan drugs'' used in the Food, 
Drug, and Cosmetics Act for purposes of identifying drugs and 
biologicals that are treatments for rare diseases. The commenter 
further recommended that CMS establish an evaluation process to 
determine which orphan products may need special status or assistance 
to assure access. For example, the commenter suggested that CMS accept 
orphan products designated by the FDA as a valid class for initial 
consideration; develop prospective criteria to determine which orphan 
drugs should not be part of this class; work with stakeholders to 
identify any access problems that may occur or are likely to occur in 
the near future; and provide patients and pharmaceutical companies an 
opportunity to present data and receive a written explanation with 
examples before making a final decision that an orphan drug access 
problem exists.
    Response: As we stated in the CY 2005 final rule with comment 
period (69 FR 65808), using the statutory authority in section 
1833(t)(1)(B)(i) of the Act, which gives the Secretary broad authority 
to designate covered OPD services under the OPPS, we have established 
criteria which distinguish single indication orphan drugs from other 
drugs designated as orphan drugs by the FDA under the Orphan Drug Act. 
Our determination to provide special payment for these drugs in 
previous years neither affected nor deviated from FDA's classification 
of any drugs as orphan drugs. The special treatment given to this 
subset of FDA-designated orphan drugs was intended to ensure that 
beneficiaries had continued access to these life-saving therapies given 
that these drugs have a relatively low volume of patient use, lack any 
other nonorphan indication, and are typically very costly. We will 
consider the recommendation to establish an evaluation process to 
determine future changes to the OPPS orphan drug list and the payment 
rates for these drugs.
    Based on our analysis of the ASP rates using data from the fourth 
quarter of CY 2004 and the GAO reported mean purchase prices for four 
orphan drugs, we stated in the proposed rule (70 FR 42735) that we 
believed proposing to pay for orphan drugs using the ASP methodology at 
a payment rate of ASP+6 percent is appropriate for the CY 2006 OPPS and 
should ensure patients' continued access to these orphan drugs in the 
hospital outpatient department. Using updated ASP data reported from 
the second quarter of CY 2005, we found that our current analysis is 
consistent with the results we found for the proposed rule. As 
indicated in the proposed rule, we believe that paying for orphan drugs 
using the ASP methodology is consistent with our CY 2006 final drug 
payment policy for other separately payable drugs and biologicals and 
reflects our general view that ASP-based payment rates serve as the 
best proxy for the average acquisition costs for these items as 
described earlier in this preamble.
    Earlier in the preamble, we indicated that in CY 2006, we are 
basing payment for the average acquisition and overhead costs for other 
separately payable drugs and biologicals on ASP+6 percent because, in 
part, both the acquisition and pharmacy overhead costs are reflected in 
the charges submitted by hospitals for these items. In this final rule 
with comment period, we made this determination using updated ASP data, 
hospital claims data, and CCRs. We believe that the same observation is 
true for single indication orphan drugs, as we do not have any reason 
to believe that hospitals would include their acquisition and overhead 
costs in the charges for other separately payable drugs and 
biologicals, but would not follow the same charging practice when 
billing for single-indication orphan drugs. Therefore, we believe that 
in CY 2006, a combined payment rate of ASP+6 percent will be sufficient 
and appropriate for both the acquisition and overhead costs related to 
providing single-indication drugs to hospital outpatients. Accordingly, 
in this final rule with comment period, we are adopting the policy of 
paying for orphan drugs separately at ASP+6 percent, which represents a 
combined payment for the acquisition and overhead costs associated with 
furnishing these products. We note that this policy will no longer 
differentiate how we pay for orphan drugs based on the use of the drugs 
because all orphan drugs, both single-indication and multi-indication, 
will be paid under the same methodology.
    For this CY 2006 OPPS final rule with comment period, we are using 
payment rates for single-indication orphan drugs based on ASP data from 
the second quarter of CY 2005, which are effective in the physician 
office setting on October 1, 2005, because these are the most recent 
numbers available for the development of this rule. To be consistent 
with the ASP-based payments that would be made when these drugs and 
biologicals are furnished in physician offices, as proposed, we plan to 
make any appropriate adjustments to the amounts shown in Addenda A and 
B to this final rule with comment period for these items on a quarterly 
basis as more recent ASP data become available. Changes in the APC 
payment rates for these items will be posted on our Web site during 
each quarter of CY 2006. Therefore, effective January 1, 2006, we will 
base payment rates for single-indication orphan drugs on ASP data from 
the third quarter of CY 2005, which will also be the basis for setting 
payment rates for drugs and biologicals in the physician office setting 
effective January 1, 2006.
    Comment: One commenter indicated that payment at ASP+6 percent is 
inadequate for HCPCS code J9160 (Denileukin diftitox, 300 mcg) because 
the methodology has resulted in access issues for patients in the 
physician office setting, which influenced the shift of patients from 
physician offices to hospital outpatient sites. As CMS proposed to use 
the same methodology to establish payment rates in the hospital 
outpatient setting, the commenter is concerned that the consequence 
will be that patients will be left with no access to this biological. 
The commenter noted that the GAO data that supported the belief that 
the median purchase price for hospitals was almost exactly the same as 
the WAC price for this item for CY 2003. Therefore, the commenter 
recommended that CMS consider a temporary payment rate for one year 
that is closer to the actual hospital acquisition cost such as WAC or 
implement some other special methodology to ensure appropriate payment 
for this product in CY 2006. The commenter also indicated that an 
additional payment amount of 2 percent of the ASP for handling costs 
associated with this biological is inadequate and

[[Page 68673]]

requested a higher handling rate for a special class of products, like 
denileukin diftitox, that require special handling.
    Response: As we stated in the proposed rule, the GAO data for 
denileukin difitox reflected hospital purchase prices from about 77 
percent of the hospitals expected to acquire these drugs. The mean 
hospital purchase price from the GAO study for denileukin difitox was 
about 91 percent of the ASP+6 percent payment rate based on data from 
the second quarter of CY 2005 and about 79 percent of the CY 2005 
payment rate. We continue to believe in this final rule with comment 
period that the ASP-based payment rate for this drug appears to be 
appropriately reflective of its hospital acquisition costs, based on 
confirmation by the GAO average purchase price data from over three-
fourths of the hospitals expected to acquire the drug. Moreover, as 
stated previously, we believe that like for other single-indication 
orphan drugs and other separately payable drugs and biologicals, a 
combined payment of ASP+6 percent in CY 2006 for this drug is adequate 
to cover both its acquisition and pharmacy overhead costs.
    We received two public comments on the proposed payment rate for 
HCPCS code J0256.
    Comment: One commenter indicated that HCPCS code J0256 described 
three alpha 1-augmentation therapies currently available and urged CMS 
to recognize the critical importance of the access issues surrounding 
these therapies. Therefore, the commenter recommended that in CY 2006 
CMS set the payment rate for HCPCS code J0256 at the higher of the CY 
2005 fourth quarter payment rate or the proposed ASP+8 percent rate. 
The commenter added that setting a floor should provide access to all 
three therapies, which is critical because there is not a sufficient 
supply of any of the alpha 1-proteinase inhibitors to supply all 
patients for whom the therapy has been prescribed. Another commenter 
recommended that CMS establish brand-specific codes and payment rates 
for the different products described by HCPCS code J0256; synchronize 
operationally the lag time between the manufacturers' ASP reporting and 
CMS' posting of the updated ASP payment rates on its Web site so that 
such changes are implemented at the same time for drugs paid under the 
OPPS and those paid under the physician fee schedule; and consider a 
proxy add-on payment to cover the overhead costs associated with these 
drugs.
    Response: As discussed earlier in this preamble and noted in the 
proposed rule, we believe the GAO acquisition data for alpha 1-
proteinase inhibitor are likely not representative of hospital 
acquisition costs for the drug because the number of hospitals 
providing data is so small compared to the total number of hospitals 
expected to use the drug. Moreover, the GAO data relied on past 
hospital cost information from late CY 2003 through early CY 2004. As 
previously stated, the ASP data are more current, and thus are likely 
more reflective of present hospital acquisition costs for alpha 1-
proteinase inhibitor. We continue to believe this to be true, and 
therefore, based on rationale cited above, in CY 2006, we will pay for 
all single-indication orphan drugs, including alpha 1-proteinase 
inhibitor, at a rate of ASP+6 percent for both the acquisition and 
overhead costs associated with these items. We find no reason to 
establish a payment floor for alpha 1-proteinase inhibitor that is 
related to the CY 2005 payment rates, when we have more current ASP 
data available that reflect current market prices.
    With respect to establishing brand-specific HCPCS codes for the 
different products described by HCPCS code J0256, we suggest that the 
commenter pursue these changes through the process set up by the 
National HCPCS Panel to establish HCPCS codes. Lastly, we note that in 
CY 2006 there will not be a lag in the implementation of the ASP-based 
payment rates for the OPPS and the physician fee schedule. As noted 
earlier, effective January 1, 2006, we will base payment rates for 
single-indication orphan drugs on ASP data from the third quarter of CY 
2005, which will also be the basis for setting payment rates for drugs 
and biologicals in the physician office setting effective January 1, 
2006. We note that HCPCS codes C9128 and Q201 have been deleted 
effective December 31, 2005 and replaced with HCPCS codes J9025 and 
J0480, respectively, in CY 2006.

VI. Estimate of Transitional Pass-Through Spending in CY 2006 for 
Drugs, Biologicals, and Devices

A. Total Allowed Pass-Through Spending

    Section 1833(t)(6)(E) of the Act limits the total projected amount 
of transitional pass-through payments for drugs, biologicals, 
radiopharmaceuticals, and categories of devices for a given year to an 
``applicable percentage'' of projected total Medicare and beneficiary 
payments under the hospital OPPS. For a year before CY 2004, the 
applicable percentage was 2.5 percent; for CY 2005 and subsequent 
years, we specify the applicable percentage up to 2.0 percent.
    If we estimate before the beginning of the calendar year that the 
total amount of pass-through payments in that year would exceed the 
applicable percentage, section 1833(t)(6)(E)(iii) of the Act requires a 
uniform reduction in the amount of each of the transitional pass-
through payments made in that year to ensure that the limit is not 
exceeded. We make an estimate of pass-through spending to determine not 
only whether payments exceed the applicable percentage, but also to 
determine the appropriate reduction to the conversion factor for the 
projected level of pass-through spending in the following year.
    As stated in the proposed rule, making an estimate of pass-through 
spending for devices in CY 2006 entails estimating spending for two 
groups of items (70 FR 42735). The first group consists of those items 
for which we have claims data for procedures that we believe used 
devices that were eligible for pass-through status in CY 2004 and CY 
2005 and that would continue to be eligible for pass-through payment in 
CY 2006. The second group consists of those items for which we have no 
direct claims data, that is, items that became, or would become, 
eligible in CY 2005 and would retain pass-through status in CY 2006, as 
well as items that would be newly eligible for pass-through payment 
beginning in CY 2006.

B. Estimate of Pass-Through Spending for CY 2006

    As we proposed, in this final rule with comment period, we are 
setting the applicable percentage cap at 2.0 percent of the total OPPS 
projected payments for CY 2006. As we discuss in section IV.C. of this 
preamble, the three remaining device categories receiving pass-through 
payment in CY 2005 will expire on December 31, 2005. Therefore, we 
estimate pass-through spending attributable to the first group of items 
described above to equal zero.
    To estimate CY 2006 pass-through spending for device categories in 
the second group, that is, items for which we have no direct claims 
data, as we proposed, in this final rule with comment period, we used 
the following approach: For additional device categories that are 
approved for pass-through status after July 1, 2005, but before January 
1, 2006, we used price information from manufacturers and volume 
estimates based on claims for procedures that would most likely use the 
devices in question because we did not have any CY 2004 claims data 
upon which to base a spending estimate. We projected these data forward 
to CY 2006

[[Page 68674]]

using inflation and utilization factors based on total growth in OPPS 
services as projected by CMS' Office of the Actuary (OACT) to estimate 
CY 2006 pass-through spending for this group of device categories. For 
device categories that become eligible for pass-through status in CY 
2006, we used the same methodology. We anticipated that any new 
categories for January 1, 2006, would be announced after the 
publication of the proposed rule, but before publication of this final 
rule with comment period. Therefore, as indicated in the proposed rule 
(70 FR 42735), the estimate of pass-through spending in this final rule 
with comment period incorporates any pass-through spending for device 
categories made effective January 1, 2006, and during subsequent 
quarters of CY 2006.
    We did not announce pass-through status for any new device 
categories after July 1, 2005. There is one new device category that we 
may add for pass-through payment as of January 1, 2006. To estimate CY 
2006 pass-through spending for items for which we have no direct claims 
data, we are adhering to the methodology, as specified above, for 
estimating pass-through spending for the second group of items, with a 
refinement to the growth factor. That is, we are projecting forward to 
CY 2006 the OPPS volume of the procedure utilizing devices that could 
fall into the potential new device category at a higher rate of 
increase than the total rate of growth in OPPS services as projected by 
the OACT. The rate of growth of this relatively new procedure in the 
OPPS claims data from recent years is several times the overall growth 
rate of all OPPS services.
    With respect to CY 2006 pass-through spending for drugs and 
biologicals, as we noted in the proposed rule (70 FR 42735) and as 
explained in section V.A.3. of this final rule with comment period, the 
pass-through payment amount for new drugs and biologicals that we 
determine have pass-through status will equal zero. Therefore, our 
estimate of pass-through spending for drugs and biologicals with pass-
through status in CY 2006 equals zero.
    In the CY 2005 final rule with comment period (69 FR 65810), we 
indicated that we are accepting pass-through applications for new 
radiopharmaceuticals that are assigned a HCPCS code on or after January 
1, 2005. The pass-through amount for new radiopharmaceuticals approved 
for pass-through status in CY 2005 is the difference between the OPPS 
payment for the radiopharmaceutical, that is, the payment amount 
determined for the radiopharmaceutical as a sole source specified 
covered drug, and the payment amount for the radiopharmaceutical under 
section 1842(o) of the Act. However, we have no new 
radiopharmaceuticals that were added for pass-through payment in CY 
2005, and we have no information identifying new radiopharmaceuticals 
to which a HCPCS code might be assigned on or after January 1, 2006, 
for which pass-through status would be sought. We also have no data 
regarding payment for new radiopharmaceuticals with pass-through status 
under the methodology that we specified in the CY 2005 final rule with 
comment period. However, we do not believe that pass-through spending 
for new radiopharmaceuticals in CY 2006 will be significant enough to 
materially affect our estimate of total pass-through spending in CY 
2006. Therefore, we are not including radiopharmaceuticals in our 
estimate of pass-through spending for CY 2006.
    In accordance with the methodology described above and the 
methodology for estimating pass-through spending discussed in our 
proposed rule for CY 2006, we estimate that total pass-through spending 
for device categories that first become eligible for pass-through 
status during CY 2006 will equal approximately $45.5 million, which 
represents 0.17 percent of total OPPS projected payments for CY 2006. 
This figure includes estimates for the current device categories 
continuing into CY 2006, which equal zero, in addition to projections 
for categories that first become eligible during CY 2006.
    This estimate of total pass-through spending for CY 2006 is 
significantly lower than many previous years' estimates (except for the 
CY 2005 estimate, which was approximately $23.4 million) both because 
of the method we used, as discussed in section V.A.3. of this preamble, 
for determining the amount of pass-through payment for drugs and 
biologicals with pass-through status, and the fact that there are no CY 
2005 pass-through device categories that are being carried over to CY 
2006.
    Because we estimate pass-through spending in CY 2006 will not 
amount to 2.0 percent of total projected OPPS CY 2006 spending, we will 
return 1.83 percent of the pass-through pool to adjust the conversion 
factor, as we discuss in section II.C. of this preamble.
    We received one public comment on our estimated pass-through 
spending for CY 2006.
    Comment: One commenter commended us for returning, via an 
adjustment to the conversion factor, the portion of the pass-through 
spending pool that exceeds the estimated amount for pass-through 
payments in CY 2006. The commenter indicated that this will ensure 
beneficiary access to basic services.
    Response: We appreciate the commenter's support.
    Accordingly, we are finalizing our proposed methodology for 
estimating CY 2006 OPPS pass-through spending for drugs, biologicals, 
and categories of devices with the modification as discussed above. Our 
adoption of this proposal as modified will return 1.83 percent of the 
pass-through pool to adjust the conversion factor.

VII. Brachytherapy Source Payment Changes

A. Background

    Section 1833(t)(16)(C) and section 1833(t)(2)(H) of the Act, as 
added by sections 621(b)(1) and (b)(2) of Pub. L. 108-173, 
respectively, establish separate payment for devices of brachytherapy 
consisting of a seed or seeds (or radioactive source) based on a 
hospital's charges for the service, adjusted to cost. Charges for the 
brachytherapy devices may not be used in determining any outlier 
payments under the OPPS. In addition, consistent with our practice 
under the OPPS to exclude items paid at cost from budget neutrality 
consideration, these items must be excluded from budget neutrality as 
well. The period of payment under this provision is for brachytherapy 
sources furnished from January 1, 2004, through December 31, 2006.
    Section 621(b)(3) of Pub. L. 108-173 requires the Government 
Accountability Office (GAO) to conduct a study to determine appropriate 
payment amounts for devices of brachytherapy, and to submit a report on 
its study to the Congress and the Secretary, including recommendations. 
As indicated in the CY 2006 proposed rule, we are awaiting the report 
and any recommendations on the payment of devices of brachytherapy, 
which would pertain to brachytherapy payments after December 31, 2006.
    In the OPPS interim final rule with comment period published on 
January 6, 2004 (69 FR 827), we implemented sections 621(b)(1) and 
(b)(2)(C) of Pub. L. 108-173. In that rule, we stated that we will pay 
for the brachytherapy sources listed in Table 4 of the interim final 
rule with comment period (69 FR 828) on a cost basis, as required by 
the statute. Since January 1, 2004, we have used status indicator ``H'' 
to denote nonpass-through brachytherapy sources paid on a cost basis, a 
policy that we

[[Page 68675]]

finalized in the CY 2005 final rule with comment period (69 FR 65838).
    As we indicated in the January 6, 2004 interim final rule with 
comment period, we began payment for the brachytherapy source in HCPCS 
code C1717 (High Dose Rate Iridium 192) based on the hospital's charge 
adjusted to cost beginning January 1, 2004. Prior to enactment of Pub. 
L. 108-173, these sources were paid as packaged services in APC 0313. 
As a result of the requirement under Pub. L. 108-173 to pay for HCPCS 
code C1717 separately, we adjusted the payment rate for APC 0313, 
Brachytherapy, to reflect the unpackaging of the brachytherapy source. 
We finalized this payment methodology in our November 15, 2004 final 
rule with comment period (69 FR 65839).
    Section 1833(t)(2)(H) of the Act, as added by section 621(b)(2)(C) 
of Pub. L. 108-173, mandated the creation of separate groups of covered 
OPD services that classify brachytherapy devices separately from other 
services or groups of services. The additional groups must be created 
in a manner that reflects the number, isotope, and radioactive 
intensity of the devices of brachytherapy furnished, including separate 
groups for Palladium-103 and Iodine-125 devices. In accordance with 
this provision and based on recommendations of the APC Panel in the 
February 2004 meeting, we established the following two new 
brachytherapy source codes for CY 2005 (69 FR 65839):
     C2634 Brachytherapy source, High Activity Iodine-125, 
greater than 1.01 mCi (NIST), per source
     C2635 Brachytherapy source, High Activity Palladium-103, 
greater than 2.2 mCi (NIST), per source
    In addition to adopting the APC Panel's recommendation to establish 
new HCPCS codes that would distinguish high activity Iodine-125 from 
high activity Palladium-103 on a per source basis, we adopted this 
policy for other brachytherapy code descriptors, as well. Therefore, 
beginning January 1, 2005, we included ``per source'' in the HCPCS code 
descriptors for all those brachytherapy source descriptors for which 
units of payment were not already delineated. Table 40 published in the 
November 15, 2004 final rule with comment period (69 FR 65840) included 
a complete listing of the HCPCS codes, long descriptors, APC 
assignments, and status indicators that we used for brachytherapy 
sources paid under the OPPS in CY 2005 (69 FR 65840 and 65841).
    Further, for CY 2005, we added the following code of linear source 
Palladium-103 to be paid at cost: C2636 Brachytherapy linear source, 
Palladium-103, per 1 mm. We had indicated in our August 16, 2004 
proposed rule that we were aware of a new linear source Palladium-103, 
which came to our attention in CY 2003 through an application for a new 
device category for pass-through payment. We stated that, while we 
decided not to create a new category for pass-through payment, we 
believed that the new linear source fell under the provisions of Pub. 
L. 108-173. Therefore, we made final our proposal to add HCPCS code 
C2636 as a new brachytherapy source to be paid at cost in CY 2005.

B. Changes Related to Pub. L. 108-173

    As stated in the CY 2006 OPPS proposed rule (70 FR 42736), we 
consistently invite the public to submit recommendations for new codes 
to describe brachytherapy sources in a manner reflecting the number, 
radioisotope, and radioactivity intensity of the sources. We request 
that commenters provide a detailed rationale to support recommended new 
codes and to send recommendations to us. We endeavor to add new 
brachytherapy source codes and descriptors to our systems for payment 
on a quarterly basis. Such recommendations should be directed to the 
Division of Outpatient Care, Mail Stop C4-05-17, Centers for Medicare & 
Medicaid Services, 7500 Security Boulevard, Baltimore, MD 21244.
    Prior to the publication of the CY 2006 OPPS proposed rule, we had 
then recently received only one such request for coding and payment of 
a new brachytherapy source since we added separate APC payment 
beginning in CY 2005 for the three brachytherapy sources discussed 
above. Therefore, we did not propose any coding changes to the sources 
of brachytherapy for CY 2006 but listed in Table 26 of the CY 2006 
proposed rule (70 FR 42737) the separately payable brachytherapy 
sources that we proposed to continue for CY 2006. In addition, in that 
same proposed rule, we stated that we would evaluate the one request 
that we had received for establishment of a new brachytherapy source 
code prior to publishing this final rule with comment period (70 FR 
42736). Our decision regarding that coding request is discussed below.
    At the end of May 2005, we received a recommendation for the 
creation of a new code and descriptor that would be used to pay 
separately for Ytterbium-169, a new high activity brachytherapy source 
for use in High Dose Rate (HDR) brachytherapy, in accordance with 
sections 1833(t)(16)(C) and 1833(t)(2)(H) of the Act, as added by 
sections 621(b)(1) and (b)(2), respectively, of Pub. L. 108-173. We 
evaluated this new source and agree with the recommendation to 
establish a new code and descriptor for Ytterbium-169, effective 
October 1, 2005. The new coding information was first announced in 
Program Transmittal 662, dated August 26, 2005, for OPPS implementation 
effective October 1, 2005. The new code and long descriptor are as 
follow:
     C2637 Brachytherapy source, Ytterbium-169, per source
    This code and descriptor are also listed in Table 29 below.
    We received one public comment concerning payment for brachytherapy 
sources.
    Comment: One commenter requested CMS to identify a form of 
radiation therapy as utilizing a source of brachytherapy and provide a 
separate payment for the source.
    Response: We will evaluate this request and, if warranted, 
establish a code, descriptor, and separate payment for a source of 
brachytherapy. Evaluation of potential brachytherapy sources is often 
complex and requires a significant evaluation period. Because this 
request was received as one of our comments to the proposed rule for CY 
2006, we will continue to evaluate it and provide a code and 
descriptor, if appropriate, through one of our quarterly OPPS updates.

C. Final Policy for CY 2006

    Table 28 provides a complete listing of the HCPCS codes, long 
descriptors, APC assignments, and status indicators that we will use 
for brachytherapy sources paid separately on a cost basis under the 
OPPS in CY 2006.

[[Page 68676]]



                        Table 28.-- Separately Payable Brachytherapy Sources for CY 2006
----------------------------------------------------------------------------------------------------------------
                                                                                                          New
               HCPCS                      Long descriptor          APC             APC title            status
                                                                                                       indicator
----------------------------------------------------------------------------------------------------------------
C1716..............................  Brachytherapy source,           1716  Brachytx source, Gold 198          H
                                      Gold 198, per source.
C1717..............................  Brachytherapy source,           1717  Brachytx source, HDR Ir-           H
                                      High Dose Rate Iridium                192.
                                      192, per source.
C1718..............................  Brachytherapy source,           1718  Brachytx source, Iodine            H
                                      Iodine 125, per source.               125.
C1719..............................  Brachytherapy source, Non-      1719  Brachytx source, Non-HDR           H
                                      High Dose Rate Iridium                Ir-192.
                                      192, per source.
C1720..............................  Brachytherapy source,           1720  Brachytx source,                   H
                                      Palladium 103, per                    Palladium 103.
                                      source.
C2616..............................  Brachytherapy source,           2616  Brachytx source, Yttrium-          H
                                      Yttrium-90, per source.               90.
C2632..............................  Brachytherapy solution,         2632  Brachytx sol, I-125, per           H
                                      Iodine125, per mCi.                   mCi.
C2633..............................  Brachytherapy source,           2633  Brachytx source, Cesium-           H
                                      Cesium-131, per source.               131.
C2634..............................  Brachytherapy source,           2634  Brachytx source, HA, I-            H
                                      High Activity, Iodine-                125.
                                      125, greater than 1.01
                                      mCi (NIST), per source.
C2635..............................  Brachytherapy source,           2635  Brachytx source, HA, P-            H
                                      High Activity, Palladium-             103.
                                      103, greater than 2.2
                                      mCi (NIST), per source.
C2636..............................  Brachytherapy linear            2636  Brachytx linear source, P-         H
                                      source, Palladium-103,                103.
                                      per 1MM.
C2637..............................  Brachytherapy source,           2637  Brachytx, Ytterbium-169..          H
                                      Ytterbium-169, per
                                      source.
----------------------------------------------------------------------------------------------------------------

VIII. Coding and Payment for Drug Administration

A. Background

    From the start of the OPPS until the end of CY 2004, three HCPCS 
codes were used to bill drug administration services provided in the 
hospital outpatient department:
     Q0081 (Infusion therapy, using other than chemotherapeutic 
drugs, per visit)
     Q0083 (Chemotherapy administration by other than infusion 
technique only, per visit)
     Q0084 (Chemotherapy administration by infusion technique 
only, per visit).
    A fourth OPPS drug administration HCPCS code, Q0085 (Administration 
of chemotherapy by both infusion and another route, per visit) was 
active from the beginning of the OPPS through the end of CY 2003.
    Each of these four HCPCS codes mapped to an APC (that is, Q0081 
mapped to APC 0120, Q0083 mapped to APC 0116, Q0084 mapped to APC 0117, 
and Q0085 mapped to APC 0118), and the APC payment rates for these 
codes were made on a per-visit basis. The per-visit payment included 
payment for all hospital resources (except separately payable drugs) 
associated with the drug administration procedures. For CY 2004, we 
discontinued using HCPCS code Q0085 to identify drug administration 
services and moved to a combination of HCPCS codes Q0083 and Q0084 that 
allowed more accurate calculations when determining OPPS payment rates.
    In response to comments we received concerning the available 
opportunities to gather additional drug administration data (and 
subsequently facilitate development of more accurate payment rates for 
drug administration services in future years) and to reduce hospital 
administrative burden, we proposed for the CY 2005 OPPS to change our 
coding and payment methodologies related to drug administration 
services.
    After examining comments and suggestions, including recommendations 
of the APC Panel, we adopted a crosswalk for the CY 2005 OPPS that 
identified all active CY 2005 CPT drug administration codes and the 
corresponding OPPS Q-codes, which hospitals had previously used to 
report their charges for drug administration services. Hospitals were 
instructed to begin billing CPT codes for drug administration services 
in the hospital outpatient department effective January 1, 2005.
    Payment rates for CY 2005 drug administration services were set 
using CY 2003 claims data. These data reflected per-visit costs 
associated with the four Q-codes listed above. To allow for the time 
necessary to collect data at the more specific CPT code level and to 
continue accurate payments based on available claims data, we used the 
Q-code crosswalk to map CPT drug administration codes to existing drug 
administration APCs. While hospitals were instructed to bill all 
relevant CPT codes that describe the services provided, the OCE 
collapsed payments for drug administration services attributed to the 
same APC and paid a single APC amount for those services for each 
visit, unless a modifier was used to identify drug administration 
services provided more than once in a separate encounter on the same 
day.
    In 2004, the CPT Editorial Panel approved several new drug 
administration codes and revised several existing codes for use 
beginning in CY 2006. Those physicians paid under the Medicare 
Physician Fee Schedule were given HCPCS G-codes corresponding to these 
expected CY 2006 CPT codes to bill for drug administration services 
provided in CY 2005 in the physician office setting.

B. CY 2006 Drug Administration Policy Changes

    For CY 2006 OPPS billing purposes, we proposed to continue our 
policy of using CPT codes to bill for drug administration services 
provided in the hospital outpatient department, understanding that the 
CY 2005 CPT codes were likely going to change significantly for CY 
2006. We anticipated that the CY 2005 CPT codes would no longer be 
active in CY 2006. Therefore, we proposed a CY 2006 crosswalk that 
mapped CY 2005 CPT codes to the CPT drug administration codes approved 
by the CPT Editorial Panel in CY 2004. Our closest proxy to the 
expected CY 2006 CPT codes was the set of HCPCS G-codes used in the 
physician office setting for CY 2005 and we used these G-codes in an 
extensive crosswalk (Table 27 in the proposed rule) that provided an 
overview of our proposed billing and payment policies for CY 2006.
    The OPPS drug administration payment rates that we proposed for CY

[[Page 68677]]

2006 were dependent on CY 2004 data containing per-visit charges for 
HCPCS codes Q0081, Q0083, and Q0084. While HCPCS code Q0085 was used to 
inform payment rates for drug administration APCs for CY 2005, there 
are no data from this code to develop payment rates for drug 
administration APCs for CY 2006 because this code was not used in CY 
2004. We proposed to map the new CY 2006 CPT codes to existing drug 
administration APC groups (APC 0116, APC 0117, and APC 0120) as we did 
in CY 2005. Again, we indicated in our proposal that hospitals would be 
expected to bill all relevant CPT codes for services provided, despite 
the per-encounter payment hospitals would receive for services billed 
within the same APC group without the use of a proper modifier to 
signify services that were provided in a separate visit on the same 
day.
    The APC Panel approved the crosswalk presented in Table 27 of the 
CY 2006 OPPS proposed rule at both the February 2005 and August 2005 
meetings, and further recommended that CMS evaluate hospital claims 
data to ensure appropriate payments for subsequent hours of infusion.
    We received a number of public comments on several aspects of our 
proposed drug administration policy for CY 2006.
    Comment: Numerous commenters generally supported our proposed 
policy to use CPT codes to report drug administration services in the 
hospital outpatient setting in CY 2006. They stated that consistent 
coding across sites of service reduces hospital burden by simplifying 
the coding process. The majority of these commenters offered support in 
the context of the overall principle of utilizing CPT codes when 
applicable in the hospital outpatient setting to bill for services 
under the OPPS.
    Response: We agree with the commenters that consistent coding 
across sites of service is preferable when codes are applicable across 
settings. Our transition to CPT codes in CY 2005 was in response to 
numerous comments requesting that the OPPS recognize CPT drug 
administration codes to reduce the overall hospital administrative 
burden of billing one set of codes for Medicare and another set of 
codes for non-Medicare payers.
    Comment: Commenters expressed concern over the complexity and 
specificity of the CPT codes and the billing guidelines provided by the 
AMA for the new CY 2006 CPT codes for drug administration. 
Specifically, the commenters stated that CPT code descriptions that 
contain ``initial,'' ``sequential,'' or ``concurrent'' either did not 
apply or would be very difficult to correctly apply in the hospital 
setting due to the patient's likelihood of receiving numerous drug 
administration services from multiple hospital departments during the 
course of a patient's hospital outpatient encounter. The commenters 
recommended that CMS instruct hospitals to disregard these terms, 
particularly the word ``initial'' and the related CPT instruction to 
bill only one initial service when multiple intravenous injections and 
infusion are provided, when billing for outpatient services as these 
codes do not sufficiently describe the way hospital services are often 
provided. The commenters pointed out that because hospital outpatient 
charging for drug administration services currently occurs at the 
departmental level on a flow basis as services are provided, if 
hospitals were required to use the CPT codes in full accordance with 
the CPT instructions, extensive, disruptive, and burdensome involvement 
of medical records staff and coders would be required to bill for these 
very common hospital outpatient services.
    Response: While we understand the commenters' concerns regarding 
the granularity of the CY 2006 CPT codes, we do not agree that the 
concepts embedded in CPT codes described with the terms ``initial,'' 
``sequential,'' or ``concurrent,'' and the accompanying expectations of 
differential resources required to perform those services, are 
inapplicable in the hospital setting. Similar to a physician office 
setting, we believe it is reasonable to expect that different hospital 
resources would be used for the first (initial) drug administration 
service provided to a patient in a hospital outpatient setting on a 
single day. For example, the first intravenous infusion provided to a 
hospital outpatient would generally require either the start of an 
intravenous line or the accessing of an indwelling catheter or port. 
All subsequent intravenous infusions in the hospital on the same day 
would likely not involve those additional resources associated with the 
initial infusion. We understand that the concepts associated with drug 
administration coding using CY 2006 CPT codes are substantially 
different from the principles of drug administration coding used by the 
OPPS in the past. However, this conceptual difference alone does not 
lead us to conclude that the full adoption of the CY 2006 CPT codes and 
their descriptors in the hospital setting is inappropriate.
    While we acknowledge that hospital charging practices might need to 
change with implementation of the new CY 2006 CPT codes and their 
descriptors, in the OPPS we originally moved to the use of CPT codes 
for the billing of drug administration services at the request of 
hospitals so they could use one standard code set for billing all 
payers. We would expect that hospitals would nonetheless need to 
implement some administrative changes for other payers who will be 
making payments for hospital outpatient drug administration services 
based on the CY 2006 CPT codes. While we do not doubt the 
administrative burden on hospitals associated with billing changes, we 
cannot and do not understand how our instructing hospitals to ignore 
certain concepts in the code descriptors for the new CY 2006 CPT codes 
would substantially reduce the administrative changes necessary for 
hospitals to bill the codes appropriately to other payers, in addition 
to Medicare.
    Comment: Several commenters pointed out that if the proposed 
crosswalk were implemented as displayed in Table 27 of the proposed 
rule and no exceptions to CPT billing guidance were provided, our CY 
2005 payment policy of providing separate APC payments for chemotherapy 
services and nonchemotherapy infusions during the same episode of care 
would no longer apply. The commenters believed that if our proposal is 
to package all subsequent hours of infusion therapy (chemotherapy and 
nonchemotherapy), hospitals following CPT billing guidelines would have 
coded only one initial code, and therefore only received one APC 
payment. The commenters expressed concern about this situation and 
stated that they did not believe it was CMS' intent to reduce payment 
in this scenario.
    Response: The commenters are correct in that it was not our intent 
to change the drug administration payment policies in place in CY 2005. 
We appreciate the analysis submitted by the commenters who provided us 
with detailed recommendations to remedy this situation.
    Under CY 2006 CPT guidelines, hospitals would be required to bill 
one, and only one, initial service code for intravenous drug 
administration services (unless a modifier is used to indicate an 
additional episode of care on the same date of service). As many 
commenters noted, hospital billing personnel recently transitioned from 
a per-visit concept under the CY 2004 Q-codes to a per-treatment 
concept under CY 2005 CPT codes, and an additional transition in CY 
2006 to even more complex concepts does not allow

[[Page 68678]]

sufficient time to properly train and educate hospital personnel 
regarding correct coding for drug administration.
    As we considered the above comments, we developed preliminary OCE 
logic that would have potentially permitted some of the CY 2006 CPT 
codes for sequential and additional infusion services to be assigned 
status indicator ``Q,'' consistent with a variable payment status. That 
is, under some circumstances where the sequential infusion was the same 
type of infusion (that is, chemotherapy or nonchemotherapy) as the 
initial infusion, payment for the sequential infusion would be packaged 
into payment for the initial drug administration service. In contrast, 
for situations where the sequential infusion was of a different type 
than the initial infusion, separate OPPS payment for the sequential 
infusion would be made. Thus, in order to determine the payment status 
of some drug administration CPT codes (packaged or separately payable), 
hospitals would have to be meticulous in correctly coding their claims. 
Therefore, only expected code pairs that had been built into OCE logic 
were present on claims. Otherwise, claims would have to be returned to 
hospitals for correction. We grew concerned that hospitals would have 
an overwhelming burden not only implementing these new CPT codes in 
hospital software but also providing the necessary training to a 
variety of staff who provide and bill these high-volume drug 
administration services. It is our understanding that a system change 
this complex may have unintended consequences if implemented for 
January 1, 2006. One of our main concerns is that without sufficient 
time to train and educate staff, hospitals may experience a great 
number of returned claims and, therefore, experience a delay in payment 
for these high-volume services. We believe that the level of 
understanding required to properly bill for services under the CY 2006 
CPT codes will require substantial hospital efforts to minimize 
unintentional coding errors that could lead to returned claims.
    We have developed the advanced OCE logic that identifies separately 
payable instances of multiple drug administration services provided in 
the same episode of care but with only one initial CPT code. Claims not 
passing this extensive logic would not provide sufficient information 
in order to assign APC payment to the services billed, and would 
subsequently result in a return of such claims to providers. We are 
still reviewing the future use of such logic for drug administration 
services under the OPPS.
    Comment: Commenters provided a variety of other solutions that 
could permit continuation of CY 2005 OPPS drug administration payment 
policies while using CY 2006 CPT codes. The commenters' suggestions 
included reverting back to the three Q-codes (used prior to CY 2005), 
creating HCPCS codes to mimic the CY 2005 CPT codes, or creating a 
hybrid of CY 2005 and CY 2006 drug administration codes.
    Response: We appreciate the many ideas discussed in the comments we 
received on the proposed rule, and we considered the above mentioned 
options in addition to many others before making our decision. However, 
we believe we have discussed the inherent advantages of using CPT 
codes, and in order to continue in our efforts to use CPT codes 
whenever possible, we will be adopting 20 of the 33 CY 2006 drug 
administration CPT codes for billing and payment purposes under the 
OPPS for CY 2006 (Table 29).

BILLING CODE 4120-01-P

[[Page 68679]]

[GRAPHIC] [TIFF OMITTED] TR10NO05.022

BILLING CODE 4120-01-C
    In addition, we will not recognize under the OPPS 13 of the 33 CY 
2006 CPT codes, but instead will instruct hospitals to use 6 new HCPCS 
C-codes for billing and payment purposes under OPPS for CY 2006 (Table 
31). The C-codes generally parallel the less complex CY 2005 CPT codes 
for infusions and intravenous pushes, as those codes will be deleted 
for the CY 2006 OPPS. We are adopting these 6 newly created C-codes in 
an effort to minimize the administrative burden hospitals have 
indicated they will face if the OPPS were to adopt all 33 of the CY 
2006 drug administration CPT codes. The CY 2006 CPT drug administration 
codes that we will not be using in the OPPS for CY 2006 are codes that 
require determinations of initial, sequential, and concurrent infusions 
or intravenous pushes. The C-codes will permit straightforward billing 
of types of infusions and intravenous pushes, for the first hour and 
then each additional hour of infusion or for each intravenous

[[Page 68680]]

push, an approach to coding that commenters indicated was consistent 
with current patterns of delivery and billing of drug administration 
services in the hospital outpatient setting. The OCE logic to determine 
the appropriate CY 2006 APC payments to make for a single drug 
administration encounter in one day or multiple separate encounters in 
the same day will operate as it did for CY 2005. As the C-codes are 
similar to the CY 2005 CPT codes, we expect that their implementation 
for CY 2006 billing should be clear, as hospitals have 1 year of 
experience already with the use of very similar codes during CY 2005.
    We believe that providing hospitals with additional time to train 
staff on the correct billing of the CY 2006 drug administration CPT 
codes, combined with the opportunity for hospital staff to use these 
codes for non-Medicare payers during CY 2006, should allow a less 
burdensome transition to the remaining CPT drug administration codes in 
the future. In addition, because we will have more specific drug 
administration median cost data for use in the CY 2007 OPPS and beyond 
with the first availability of CY 2005 cost data for the CPT codes for 
drug administration services, we anticipate that ensuring more accurate 
payment with respect to these remaining CPT drug administration codes 
may be more feasible for future OPPS updates.

                               Table 30.--CY 2006 OPPS Drug Administration C-Codes
----------------------------------------------------------------------------------------------------------------
                   Code                               Description              Add-On        SI          APC
----------------------------------------------------------------------------------------------------------------
C8950....................................  Intravenous infusion for therapy/ ..........          S          0120
                                            diagnosis; up to 1 hour.
C8951....................................  Intravenous infusion for therapy/         Y           N
                                            diagnosis; each additional hour
                                            (List separately in addition to
                                            C8950).
C8952....................................  Therapeutic, prophylactic or      ..........          X          0359
                                            diagnostic injection;
                                            intravenous push.
C8953....................................  Chemotherapy administration,      ..........          S          0116
                                            intravenous; push technique.
C8954....................................  Chemotherapy administration,      ..........          S          0117
                                            intravenous; infusion
                                            technique, up to one hour.
C8955....................................  Chemotherapy administration,              Y           N
                                            intravenous; infusion
                                            technique, each additional hour
                                            (List separately in addition to
                                            C8954).
----------------------------------------------------------------------------------------------------------------

    Comment: Commenters requested that CMS provide various billing and 
coding instructions relating to the CY 2006 CPT drug administration 
codes, and that CMS include more specific definitions of CPT drug 
administration terminology in the final rule.
    Response: We appreciate the commenters' request for clarity on 
aspects of the proposed CY 2006 drug administration CPT codes. As we 
have done in the past, we will release instructions separately from 
this final rule with comment period that include drug administration 
billing and coding guidance for hospitals for CY 2006. In addition, as 
is our longstanding practice, we defer questions about CPT code 
definitions to the AMA CPT Editorial Panel members who are the creators 
and maintainers of CPT codes.
    Comment: Several commenters requested that CMS provide explicit 
billing and coding instructions regarding the administration of 
specific drugs and agents.
    Response: As stated above, we do not provide billing guidance to 
hospitals in the final rule. Information for hospitals that discusses 
billing and coding specifics will be distributed separately via CMS 
transmittal following the publication of this final rule with comment 
period. In addition, we expect that all drug administration codes used 
in the CY 2006 OPPS, including the new C-codes, will conform to CPT 
guidance regarding under what clinical circumstances they may be 
appropriately billed, including instructions related to appropriate 
coding for the administration of certain complex biologics.
    Comment: Commenters requested that a section within the AMA CPT 
Manual be created to identify and provide hospital-specific definitions 
for CPT codes that are used by the OPPS.
    Response: The OPPS does not issue or maintain CPT codes. Comments 
regarding the AMA CPT Manual or CPT codes should be directed to the 
AMA.
    Comment: Commenters requested that CMS create non-chemotherapy 
HCPCS codes similar to the CPT codes for initiation of a prolonged 
chemotherapy infusion requiring a pump and pump maintenance and 
refilling codes so hospitals can bill for these services when provided 
to patients who require extended infusions of non-chemotherapy 
medications, including drugs for pain. They argued that the CY 2006 CPT 
codes for drug administration do not include appropriate codes to bill 
for these services, which require specific and significant hospital 
resources.
    Response: We agree that codes for these services were needed, and 
we have created HCPCS codes C8956 (Refilling and maintenance of 
portable or implantable pump or reservoir for drug delivery for 
therapy/diagnosis, systemic (eg. intravenous, intra-arterial)) and 
C8957 (Intravenous infusion for therapy/diagnosis; initiation of 
prolonged infusion (more than 8 hours), requiring use of portable or 
implantable pump) for this purpose (Table 31).

                     Table 31.--Nonchemotherapy Prolonged Infusion Codes That Require a Pump
----------------------------------------------------------------------------------------------------------------
                   Code                                Description              Add-On       SI          APC
----------------------------------------------------------------------------------------------------------------
C8956.....................................  Refilling and maintenance of      .........          T          0125
                                             portable or implantable pump or
                                             reservoir for drug delivery for
                                             therapy/diagnosis, systemic
                                             (eg. intravenous, intra-
                                             arterial).
C8957.....................................  Intravenous infusion for therapy/ .........          S          0120
                                             diagnosis; initiation of
                                             prolonged infusion (more than 8
                                             hours), requiring use of
                                             portable or implantable pump.
----------------------------------------------------------------------------------------------------------------

    Comment: One commenter requested that the OPPS use the information 
present on the claim, specifically the pharmacy revenue code (636), to 
identify which payment would be best suited for administration of that 
type of drug.

[[Page 68681]]

    Response: We support minimizing the administrative burden that 
hospitals incur when billing for drug administration services in the 
outpatient department. However, we do not believe that this suggestion 
would yield more accurate claims data or reduce the administrative 
burden on hospitals to code for drug administration services. Hospitals 
are responsible for identifying which drug administration services are 
provided and establishing appropriate charges for those services, and 
implementing a system such as that conceived by the commenter that 
removes the determination from hospitals would be unproductive.
    Comment: Commenters noted that CY 2006 drug administration APC 
payment rates are derived from CY 2004 claims data and expressed 
concern that these data are outdated and inaccurate.
    Response: While we acknowledge the concern presented by commenters, 
we do not believe that our reliance on the most recent claims data 
available provides inaccurate payments for drug administration services 
provided in hospital outpatient departments. It has been the OPPS 
policy to set payments for drug administration services, as well as 
almost all other OPPS services, based on the most recent claims year 
data available, and we are continuing that methodology in CY 2006.
    Comment: Several commenters requested that CMS implement a 
chemotherapy demonstration program similar to the Quality of Care 
Demonstration program that was instituted in the physician office 
setting throughout CY 2005.
    Response: While we recognize the desire of the commenters to ensure 
beneficiary access to drug administration services by providing 
additional payments to hospitals for drug administration-related 
services, we believe that the drug administration payment methodology 
we are finalizing in this final rule with comment period provides 
accurate payments for hospital drug administration services. Further, 
we do not believe that there is a beneficiary access issue directly 
attributable to the OPPS payment policies for drug administration 
services.
    Comment: Many commenters requested that the OPPS provide payment 
for additional hours of infusion, instead of packaging subsequent hours 
of infusion into the payment for the initial hour of infusion therapy.
    Response: As discussed in the proposed rule, CY 2006 OPPS payment 
rates rely upon CY 2004 claims data that only has information on the 
three Q-codes mapped to APCs 0116, 0117 and 0120. For CY 2006, while 
the codes for initial hour of infusion and subsequent hour(s) of 
infusion were available for hospitals to report in CY 2005, appropriate 
CY 2005 claims data are not available to use for ratesetting purposes 
for the CY 2006 OPPS. As the most recent and complete year of data 
available from CY 2004 reflects per-visit payment rates for drug 
administration services, we must continue to use both our crosswalk 
methodology and the OCE claims logic during CY 2006 which allows us to 
collect more specific drug administration cost data while continuing to 
make appropriate drug administration payments. Because of the 
descriptors of the previous drug administration Q-codes upon which CY 
2006 drug administration payment rates are based, each payment for a 
drug administration APC in CY 2006 is necessarily a payment that 
reflects an ``average'' infusion service in CY 2004, constituting one 
or more hours. We appreciate hospitals' continued diligence in 
accurately billing for the additional hours of infusion for 
chemotherapy and nonchemotherapy treatments that will once again be 
packaged for CY 2006, as we gather additional hospital claims data to 
support our move to more specific payments for individual drug 
administration services in the future.
    Comment: One commenter noted that in Addendum B, Payment Status by 
HCPCS Code and Related Information Calendar Year 2006, HCPCS code G0258 
(IV infusion during obs stay) was incorrectly listed as payable with a 
status indicator of ``X.''
    Response: We agree that HCPCS code G0258 was incorrectly listed in 
Addendum B of the proposed rule as having status indicator ``X'' rather 
than ``B.'' However, HCPCS code G0258 is deleted for CY 2006; 
therefore, it will have no payment status in the CY 2006 OPPS.
    Comment: One commenter requested that CMS not reassign CPT codes 
95144 through 95165 (Antigen therapy services) to the injection APCs as 
listed in Addendum B of the proposed rule. Instead, the commenter 
suggested keeping these services within APC 0371 because of their 
similarity in resource use and for reasons of clinical coherence.
    Response: We agree with the commenter that the median cost data 
available for these codes do not correspond to the expected levels of 
service based on the CPT code descriptors. For example, in the proposed 
rule, HCPCS code 95149 (Professional services for the supervision of 
preparation and provision of antigens for allergen immunotherapy; five 
single stinging insect venoms) was mapped to APC 0352 (Level I 
Injections) based on a median cost of $11.43 from 9 single claims, 
while HCPCS code 95146 (Professional services for the supervision of 
preparation and provision of antigens for allergen immunotherapy; two 
single stinging venoms) was mapped to APC 0359 (Level III Injections) 
based on a median cost of $70.64 from 43 single claims. These 
unexpected median cost results may have arisen from miscoding or from 
the inherently high volatility in costs that may occur due to small 
numbers of claims. While we are unable to retain these codes in APC 
0371 as recommended by the commenter due to the restructuring of the 
injection codes into three levels of injection APCs, we have decided to 
place CPT codes 95144 through 95165 in APC 0353 (Level II Injections) 
because we believe that the services provided by these HCPCS codes are 
similar to other HCPCS codes within this APC and the CY 2006 median 
cost for APC 0353 most closely matches the CY 2005 median cost these 
codes experienced in APC 0371.

C. 2006 Vaccine Administration Policy Changes

    Hospitals currently use three HCPCS G-codes to indicate the 
administration of the following vaccines that have specific statutory 
coverage:
     G0008--Administration of Influenza Virus Vaccine.
     G0009--Administration of Pneumococcal Vaccine.
     G0010--Administration of Hepatitis B Vaccine.
    HCPCS codes G0008 and G0009 are exempt from beneficiary coinsurance 
and deductible applications and, as such, payment has been made outside 
of the OPPS since CY 2003 based on reasonable cost. We have made 
payment for HCPCS code G0010 through a clinical APC (that is, APC 0355) 
that included vaccines along with this vaccine administration code. 
Additional vaccine administration codes have been packaged or not paid 
under the OPPS.
    As stated in the CY 2006 OPPS proposed rule, we believe that HCPCS 
codes G0008, G0009 and G0010 are clinically similar and comparable in 
resource use to one another and to the administration of other 
immunizations and other therapeutic, prophylactic, or diagnostic 
injections. To that end, we concluded that the appropriate APC 
assignment for these vaccine administration services was newly 
reconfigured APC 0353 (Injection, Level

[[Page 68682]]

II). However, because of their statutory exemption regarding 
beneficiary deductible and coinsurance, for operational reasons we were 
unable to include HCPCS codes G0008 and G0009 in an APC with codes that 
did not share this exemption.
    Instead of including these codes within the same APC, we proposed 
to map HCPCS codes G0008 and G0009 to APC 0350 (Administration of flu 
and PPV vaccines). As dictated by statute, HCPCS codes G0008 and G0009 
would continue to be exempt from beneficiary coinsurance and 
deductible.
    We also proposed to change the status indicator for HCPCS code 
G0010 from ``K'' (Separate APC Payment) to ``B'' (Not paid under OPPS; 
Alternate code may be available), and to change the status indicators 
for vaccine administration codes 90471 and 90472 from ``N'' (Packaged) 
to ``X'' (Separate APC Payment), in agreement with the recommendation 
of the APC Panel to unpackage these services. Hospitals would code for 
hepatitis B vaccine administration using codes 90471 or 90472 (as 
appropriate), and payment would be mapped to reconfigured APC 0353 
(Injection, Level II) that would include other injection services that 
were clinically similar and comparable in resource use.
    In order to pay appropriately for services that we believed were 
clinically similar and comparable in resource use and, barring 
technical restrictions, would otherwise be assigned to the same APC, we 
proposed to calculate a combined median cost for all services assigned 
to APC 0350 and APC 0353 that would then serve as the median cost for 
both APCs. This combined median would be calculated using charges 
converted to costs from claims for services in both APCs and would have 
the effect of making the OPPS payment rates for APC 0350 and APC 0353 
identical, although beneficiary copayment and deductible would not be 
applied to services in APC 0350.
    Our vaccine administration proposed policy also included proposed 
changes to the status indicators for vaccine administration codes 90473 
and 90474 from ``E'' (Not paid under OPPS) to ``S'' (Paid under OPPS) 
and proposed to make payments for these services when they were covered 
through proposed APC 1491 (New Technology--Level IA ($0-$10)).
    Finally, we proposed to change the status indicators for the four 
remaining vaccine administration codes involving physician counseling 
(90465, 90466, 90467 and 90468) from ``N'' (Packaged) to ``B'' (Not 
paid under OPPS; Alternate code may be available). We proposed that 
hospitals providing immunization services with physician counseling 
would use the vaccine administration codes 90471, 90472, 90473, and 
90474 to report such services, as we did not believe the provision of 
physician counseling would significantly affect the hospital resources 
required for administration of immunizations.
    During its August 2005 meeting, the APC Panel made a recommendation 
to CMS to pay for the administration of flu vaccines similarly under 
the OPPS regardless of their method of administration. We agree that 
hospitals should always use the most specific HCPCS codes available, 
whose descriptors are consistent with the method of administration and 
type of vaccine, to bill for all vaccine administration services but, 
in particular, to bill for vaccine services that are congressionally 
exempt from deductible and coinsurance. However, we note that vaccine 
administration codes other than G0008 for administration of influenza 
virus vaccine and G0009 for administration of pneumococcal vaccine are 
not exempted in the OCE from charging beneficiary deductible and 
coinsurance and should not be used to report these services which are 
exempt from copayment.
    Comment: Similar to the APC Panel recommendation discussed above, 
commenters requested that CMS provide payment for the administration of 
intranasal influenza vaccine similar to payments for other methods of 
administration of the influenza vaccine.
    Response: As stated above, vaccine administration codes other than 
G0008 for administration of influenza virus vaccine are not exempted in 
the OCE from charging beneficiary deductible and coinsurance and they 
should not be used to report these services which are exempt from 
copayment.
    Comment: Numerous commenters supported our proposal to pay 
separately for vaccine administration services.
    Response: We appreciate the commenters' support of our proposed 
policy and are adopting it as final in this rule.
    Comment: Several commenters noted a typographical error in the CY 
2006 OPPS proposed rule preamble that incorrectly listed two codes to 
be used for the administration of hepatitis B vaccine as codes 96471 
and 96472 instead of codes 90741 and 90742.
    Response: We appreciate the commenters' note, and we have corrected 
the error in this final rule with comment period.
    After consideration of the public comments received, in this final 
rule with comment period, we are finalizing our proposed CY 2006 
methodology to pay separately for vaccine administration services as 
discussed above. Table 32 below specifies the CY 2006 vaccine 
administration codes, their APC median costs, the status indicator 
assigned to each code, and the APC payment amount.
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IX. Hospital Coding for Evaluation and Management (E/M) Services

    In the CY 2006 proposed rule (70 FR 42740), we again stated our 
concerns and directions for developing a set of national facility 
coding guidelines for emergency department and clinic visits. We noted 
that we intend to make available for public comment the proposed coding 
guidelines that we are considering through the CMS OPPS Web site as 
soon as we have completed them. We also stated that we will notify the 
public through our listserve when these proposed guidelines become 
available, and instructed interested parties to subscribe to this 
listserve by going to the following CMS Web site: http://www.cms.hhs.gov/medlearn/listserv.asp and following the directions to 
the OPPS listserve.
    We received a number of public comments on our proposal.
    Comment: Several commenters expressed disappointment that CMS has 
not yet proposed national E/M guidelines for facilities. While the 
majority of commenters were pleased that CMS is continuing to develop 
and test draft codes and guidelines, they were concerned that the 
ongoing lack of uniformity places hospitals at risk for

[[Page 68684]]

multiple interpretations of the level of service that should be coded, 
and hampers CMS' ability to gather consistent, meaningful data on 
services provided in the emergency department and hospital clinics. One 
commenter emphasized that the implementation of a uniform set of 
national guidelines for E/M services is especially important because 
CMS uses the mid-level clinic visit (APC 0601) to scale the relative 
payment weights for all other services paid under the OPPS. A few 
commenters recommended that CMS implement the E/M guidelines drafted by 
the independent panel of experts from the AHA and the AHIMA. Two other 
commenters provided their own model guidelines for CMS to consider.
    Several commenters reminded CMS that adoption of a new set of 
guidelines for E/M services will involve an enormous undertaking by 
large medical centers and that CMS had committed to providing a minimum 
of between 6 and 12 months' notice prior to implementation to allow 
providers adequate time to make necessary systems changes and educate 
their staff. The commenters also urged CMS to ensure adequate 
opportunity for the public to review and comment on the proposed 
guidelines before they are finalized.
    Response: Over the past year, we have engaged a contractor to 
assist us with testing the validity and reliability of a slightly 
modified draft of the guidelines recommended by the independent 
Hospital Evaluation and Management Coding Panel of the AHA and AHIMA. 
We have contracted a study of these guidelines using a sample of 
hospital outpatient claims to analyze the potential financial impact of 
the proposed guidelines on classes of hospitals and on the OPPS, as 
well as the potential burden that adoption of such guidelines might 
impose on hospitals. Although we have made much progress in our efforts 
to develop a set of national facility guidelines for emergency 
department and clinic visits, we believe additional testing is 
necessary and essential to providing hospitals with the least 
burdensome standard for achieving uniformity and to yielding more 
accurate, meaningful information related to hospital resources upon 
which to set the OPPS payments for emergency department and clinic 
services. We are committed to the goal of paying appropriately under 
the OPPS for the costs of hospital E/M services across the levels of 
care. Therefore, we will continue to develop and test the draft codes 
and guidelines. However, we have not yet set a date for their 
implementation.
    As stated in the CY 2006 OPPS proposed rule, we intend to make 
available for public comment the proposed coding guidelines that we are 
considering through the CMS OPPS Web site once we are satisfied with 
the results of the testing and have made appropriate modifications in 
light of these testing results. Furthermore, we will provide ample 
opportunity for the public to comment on such a major proposal. We will 
continue to be considerate of the time necessary to educate clinicians 
and coders on the use of the new codes and guidelines and for hospitals 
to modify their systems. We still anticipate providing a minimum notice 
of between 6 and 12 months prior to implementation of the new 
evaluation and management codes and guidelines.
    Comment: One commenter expressed a number of concerns that the 
commenter believed were related to proposals on the manner in which the 
Medicare program uses CPT code definitions that have been adopted by 
the AMA as a basis to classify patients who receive emergency 
department services for payment purposes under the Medicare OPPS.
    Response: In the CY 2006 OPPS proposed rule, we did not propose to 
make any changes related to the manner in which we use CPT code 
definitions as a basis to classify patients. We are not making any 
changes to our use of the CPT code definitions in this final rule with 
comment period. However, we remind the public that regulations 
implementing the HIPAA (42 CFR Parts 160 and 162) require that the 
HCPCS be used to report health care services, including outpatient 
services paid under the OPPS. The OPPS regulations at 42 CFR 419.2(a) 
establish HCPCS codes as the means for identifying services paid under 
the OPPS. The HIPAA regulations require that these codes be used in the 
manner described by the maintainer's guidelines. In accordance with our 
policy that was established in the April 7, 2000 final rule with 
comment period that implemented the OPPS, hospitals use internal 
guidelines only to distinguish among varying levels of resource 
intensity when determining an appropriate CPT code to bill for 
outpatient E/M services.

X. Payment for Blood and Blood Products

A. Background

    Since the implementation of the OPPS in August 2000, separate 
payments have been made for blood and blood products through APCs 
rather than packaging them into payments for the procedures with which 
they were administered. Hospital payments for the costs of blood and 
blood products, as well as the costs of collecting, processing, and 
storing blood and blood products, are made through the OPPS payments 
for specific blood product APCs. On April 12, 2001, CMS issued the 
original billing guidance for blood products to hospitals (Program 
Transmittal A-01-50). In response to requests for clarification of 
these instructions, CMS issued Transmittal 496 on March 4, 2005. The 
comprehensive billing guidelines in the Transmittal also addressed 
specific concerns and issues related to billing for blood-related 
services, which the public had brought to our attention.
    In CY 2000, payments for blood and blood products were established 
based on external data provided by commenters due to limited Medicare 
claims data. From CY 2000 to CY 2002, payment rates for blood and blood 
products were updated for inflation. For CY 2003, as described in the 
November 1, 2002 final rule with comment period (67 FR 66773), we 
applied a special dampening methodology to blood and blood products 
that had significant reductions in payment rates from CY 2002 to CY 
2003, when median costs were first calculated from hospital claims. 
Using the dampening methodology, we limited the decrease in payment 
rates for blood and blood products to approximately 15 percent. For CY 
2004, as recommended by the APC Panel, we froze payment rates for blood 
and blood products at CY 2003 levels as we studied concerns raised by 
commenters and presenters at the August 2003 and February 2004 APC 
Panel meetings.
    For CY 2005, we established new APCs that allowed each blood 
product to be assigned to its own separate APC, as several of the 
previous blood product APCs contained multiple blood products with no 
clinical homogeneity or whose product-specific median costs may not 
have been similar. Some of the blood product HCPCS codes were 
reassigned to the new APCs (Table 34 of the November 15, 2004 final 
rule with comment period (69 FR 65819)).
    We also noted in the November 15, 2004 final rule with comment 
period that public comments on previous OPPS rules had stated that the 
CCRs that were used to adjust charges to costs for blood products in 
past years were too low. Past commenters indicated that this approach 
resulted in an underestimation of the true hospital costs for blood and 
blood products. In response to these comments and APC Panel 
recommendations from its

[[Page 68685]]

February 2004 and September 2004 meetings, we conducted a thorough 
analysis of the OPPS CY 2003 claims (used to calculate the CY 2005 APC 
payment rates) to compare CCRs between those hospitals reporting a 
blood-specific cost center and those hospitals defaulting to the 
overall hospital CCR in the conversion of their blood product charges 
to costs. As a result of this analysis, we observed a significant 
difference in CCRs utilized for conversion of blood product charges to 
costs for those hospitals with and without blood-specific cost centers. 
The median hospital blood-specific CCRs were almost two times the 
median overall hospital CCR. As discussed in the November 15, 2004 
final rule with comment period, we applied a methodology for hospitals 
not reporting a blood-specific cost center, which simulated a blood-
specific CCR for each hospital that we then used to convert charges to 
costs for blood products. Thus, we developed simulated medians for all 
blood and blood products based on CY 2003 hospital claims data (69 FR 
65816).
    For CY 2005, we also identified a subset of blood products that had 
less than 1,000 units billed in CY 2003. For these low-volume blood 
products, we based the CY 2005 payment rate on a 50/50 blend of CY 2004 
product-specific OPPS median costs and the CY 2005 simulated medians 
based on the application of blood-specific CCRs to all claims. We were 
concerned that, given the low frequency in which these products were 
billed, a few occurrences of coding or billing errors may have led to 
significant variability in the median calculation. The claims data may 
not have captured the complete costs of these products to hospitals as 
fully as possible. This low-volume adjustment methodology also allowed 
us to further study the issues raised by commenters and by presenters 
at the September 2004 APC Panel meeting, without putting beneficiary 
access to these low-volume blood products at risk.

B. Proposed and Final Policy Changes for CY 2006

    For CY 2006, we proposed to continue to make separate payments for 
blood and blood products under the OPPS through individual APCs for 
each product. We also proposed to establish payment rates for these 
blood and blood products by using the same simulation methodology 
described in the November 15, 2004 final rule with comment period (69 
FR 65816), which utilized hospital-specific actual or simulated CCRs 
for blood cost centers to convert hospital charges to costs, with an 
adjustment applied to some products. We continue to believe that using 
blood-specific CCRs applied to hospital claims data will result in 
reasonably accurate payments that more fully reflect hospitals' true 
costs of providing blood and blood products than our general 
methodology of defaulting to the overall hospital CCR when more 
specific CCRs are unavailable.
    For blood and blood products whose CY 2006 simulated medians 
experienced a decrease of more than 10 percent in comparison to their 
CY 2005 payment medians, we proposed to limit the decrease in medians 
to 10 percent. Therefore, overall we proposed to base median costs for 
blood and blood products in CY 2006 on the greater of: (1) Simulated 
medians calculated using CY 2004 claims data; or (2) 90 percent of the 
APC payment median for CY 2005 for such products. We recognize that 
possible errors in hospital billing or coding for blood products in CY 
2004 may have contributed to these decreases in medians. In particular, 
hospitals may have been uncertain about which of their many different 
costs for providing blood and blood products should be captured in 
their charges for the products, based on variations in the specific 
circumstances of the services they provided. In addition, the six 
products affected by the proposed CY 2006 adjustment policy all were 
relatively low volume with fewer than 7,000 units billed in CY 2004. 
Three of these products were affected by the low-volume payment 
adjustment for CY 2005 because there were less than 1,000 units billed, 
and their CY 2005 payment medians would have decreased without the 
adjustment. In the interim, as hospitals become more familiar with the 
comprehensive billing guidelines for blood and blood products that are 
described in Program Transmittal 496 (Change Request 3681 dated March 
4, 2005), we acknowledge the need to protect beneficiaries' access to a 
safe blood supply and proposed to do so by limiting significant 
decreases in payment rates for blood and blood products from CY 2005 to 
CY 2006. We expect that our billing guidance will assist hospitals in 
more fully including all appropriate costs for providing blood and 
blood products in their charges for those products, so that our data 
for CY 2005, which will be used to set median costs for blood and blood 
products in the CY 2007 OPPS update, should more accurately capture the 
hospital costs associated with each different blood product.
    Therefore, for CY 2006, we proposed to establish payment rates for 
blood and blood products under the OPPS using the same simulation 
methodology described in the November 15, 2004 final rule with comment 
period (69 FR 65816). For blood and blood products whose CY 2006 
medians would have otherwise experienced a decrease of more than 10 
percent in comparison with their CY 2005 payment rates, we proposed to 
adjust the simulated medians by limiting their decrease to 10 percent.
    At the August 2005 APC Panel meeting, the Panel recommended that 
CMS use its CY 2005 payment rates as the floor for its CY 2006 payment 
rates for all blood and blood products. Specifically, the Panel 
recommended that CMS should pay the greater of: (1) The simulated 
median costs calculated from the CY 2004 hospitals claims data; or (2) 
the CY 2005 APC payment medians for these products. For reasons 
discussed in detail below, we are not adopting the Panel's 
recommendation for setting the CY 2006 payment rates for blood and 
blood products. Instead, for CY 2006, we are setting the final median 
costs for blood and blood products at the greater of: (1) The simulated 
median costs calculated from the CY 2004 hospital claims data; or (2) 
95 percent of the CY 2005 adjusted median costs for these products.
    We received numerous public comments concerning our proposed 
payment for blood and blood products.
    Comment: Numerous commenters applauded our March 2005 issuance of 
comprehensive billing guidelines (Program Transmittal 496) for blood 
and blood products, stating that the guidelines clarified many areas of 
confusion for providers and should result in improved hospital coding 
of blood and blood products. Other commenters recommended that CMS 
release guidance on blood and blood products on an annual basis.
    Response: We appreciate the comment and expect that the billing 
guidance that we issued in March 2005 will result in improved hospital 
coding of blood and blood products. We will continue to support 
educational efforts by interested organizations to clarify areas of 
confusion and improve accuracy of billing for hospitals related to the 
billing of blood and blood products. In addition, we will continue to 
issue guidance on billing for blood and blood products to provide 
clarification or additional explanation as needed, based on additional 
questions and issues that are brought to our attention.
    Comment: Numerous commenters expressed concern that the proposed 
payment rates for several blood products had decreased from their CY

[[Page 68686]]

2005 payment rates. Commenters stated that such payment declines would 
likely jeopardize beneficiary access to these products. Most notably, 
according to several organizations providing blood and blood products 
to hospitals, the proposed CY 2006 payment rate for leukocyte-reduced 
red blood cells (HCPCS code P9016), the most commonly billed blood 
product in the hospital outpatient setting, is significantly below 
hospitals' actual acquisition costs. Commenters urged CMS to set the CY 
2006 payment rates for blood and blood products at the greater of: (1) 
The simulated medians calculated using the CY 2004 claims data; or (2) 
the CY 2005 APC payment medians for these products.
    Response: We are displaying in Table 33 of this final rule with 
comment period the list of blood product HCPCS codes with their final 
CY 2006 adjusted median costs. Overall, median costs from CY 2005 and 
CY 2006 were relatively stable, with significant increases and adjusted 
decreases for some specific blood products. In addition, we expect that 
as hospitals improve their billing and coding practices, medians based 
on historical hospital claims data should continue to become more 
consistent and reflective of all hospital costs associated with 
providing blood products to hospital outpatients. We agree with 
commenters that beneficiary access to the safest and most immediately 
available blood supply is critical to saving lives. In addition, we 
understand that, in most cases, the hospital costs related to providing 
blood and blood products stem mainly from the costs of processing and 
storing the blood. We also acknowledge that new blood testing due to 
technological advances and challenges associated with donor recruitment 
and retention may contribute to rising costs of blood and blood 
products. However, there may be other environmental forces, including 
improved efficiencies through new technologies and changes in the 
clinical circumstances surrounding outpatient hospital transfusions, 
that may reduce the costs of providing blood products. While the above-
mentioned issues must all be carefully considered, we also remind 
commenters that the payment rates for services paid under the OPPS will 
naturally experience fluctuations from year to year. Such variation is 
inherent in any budget-neutral prospective payment system such as the 
OPPS, where payment rates are developed based on historical hospital 
claims data. However, when such fluctuations become large enough to 
potentially jeopardize access to services paid under the OPPS, we may 
acknowledge the need to balance these payment fluctuations with 
protecting beneficiary access to such services by moderating abrupt 
payment declines that occur over a 1-year period. We were concerned 
that our proposed allowance of a 10 percent decrease in median costs 
from the CY 2005 adjusted final medial costs might affect beneficiary 
access to these services. Therefore, for CY 2006, for blood and blood 
products whose CY 2006 simulated median costs would have otherwise 
experienced a decrease of more than 5 percent in comparison with their 
CY 2005 adjusted final median costs, we are adjusting the simulated 
medians by limiting their decrease to 5 percent. We applied this 
adjustment to 11 blood and blood product APCs for CY 2006. Table 33 of 
this final rule with comment period contains the adjusted payment 
medians for CY 2006. Those CY 2006 final median costs that we adjusted 
by moderating their decrease to 5 percent are indicated by an asterisk 
in the table. In summary, for the CY 2006 OPPS, the final median costs 
for blood and blood products are set at the greater of: (1) the 
simulated median costs calculated from the CY 2004 claims data; or (2) 
95 percent of the CY 2005 adjusted median costs for these products.

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    Comment: While one commenter thanked CMS for providing hospitals 
with detailed billing guidance for blood and blood products when 
furnished under the hospital outpatient setting, the commenter 
requested additional clarification on whether hospitals should charge 
inpatients, as they do outpatients, for blood administration services. 
The commenter explained that some hospitals do not charge inpatients 
separately for blood administration services; rather they consider such 
services to be included in the room and board rate. The commenter urged 
CMS to instruct hospitals to establish a charge structure for blood 
transfusion and administration services that applies uniformly to both 
inpatients and outpatients.
    Response: We appreciate the comment's recommendation. However, we 
do not consider the OPPS final rule, which addresses hospital 
outpatient payment policies, to be an appropriate forum for addressing 
detailed billing guidance for inpatient services. Rather, we encourage 
hospitals to consult their fiscal intermediaries with any concerns 
related to the billing of blood transfusion and administration services 
to inpatients.
    Comment: One commenter supported our proposal to set CY 2006 OPPS 
payments for blood and blood products based on hospital claims data 
rather than blood industry data. This commenter recommended that if CMS 
does consider using external data in some fashion for setting the 
payment rates for blood and blood products, that

[[Page 68688]]

CMS proceed very cautiously in considering whether to utilize blood 
industry data. The commenter stated that it is crucial that the 
external data be valid, reliable, publicly available, reflective of 
geographic variations in costs, and subject to audit.
    Response: Although we are not using external data for setting the 
CY 2006 payment rates for blood and blood products, we thank the 
commenter for the recommended and considered caution toward using such 
external data in this case.
    After carefully considering all comments received on our proposed 
CY 2006 OPPS methodology for establishing APC payment for blood and 
blood products, we are adopting as final our proposal with 
modification. To ensure beneficiaries' access to a safe blood supply, 
we are adopting a payment adjustment policy that will limit significant 
decreases in APC payment rates for blood and blood products from CY 
2005 to CY 2006 by not more than 5 percent rather than 10 percent as 
proposed. Therefore, for the CY 2006 OPPS, the final median costs for 
blood and blood products are set at the greater of: (1) The simulated 
median costs calculated from the CY 2004 claims data; or (2) 95 percent 
of the CY 2005 adjusted median costs for these products, as reflected 
in Table 34 above.
    For CY 2006, we also proposed to change the status indicator for 
CPT code 85060 (Blood smear, peripheral, interpretation by physician 
with written report) from ``X'' (separately paid under the OPPS) to 
``B'' (not paid under the OPPS). When a hospital provides a physician 
interpretation of an abnormal peripheral blood smear interpretation for 
a hospital outpatient, the charge for the facility resources associated 
with the interpretation should be bundled into the charge reported for 
the ordered hematology lab service, such as CPT code 85007 (Blood 
count; blood smear, microscopic examination with manual differential 
WBC count) or CPT code 85008 (Blood count; blood smear, microscopic 
examination without manual differential WBC count), that are paid under 
the Clinical Laboratory Fee Schedule (CLFS). A physician interpretation 
of an abnormal peripheral blood smear is considered a routine part of 
the ordered hematology lab service, such as CPT codes 85007 and 85008 
paid under the CLFS, so hospitals will receive duplicate payment for 
the facility resources associated with a physician's blood smear 
interpretation if we were to continue to pay separately for CPT code 
85060 under the OPPS for hospital outpatients. Therefore, for CY 2006, 
we proposed to discontinue payment under the OPPS for CPT code 85060 by 
changing its status indicator from ``X'' to ``B.''
    We did not receive any public comments on this proposal. 
Accordingly, we are finalizing our proposal to discontinue payment 
under the OPPS effective for services furnished on or after January 1, 
2006, for CPT code 85060 by changing its status indicator from ``X'' to 
``B.''

XI. Payment for Observation Services

A. Background

    Observation care is a well-defined set of specific, clinically 
appropriate services, which include ongoing short-term treatment, 
assessment, and reassessment, before a decision can be made regarding 
whether patients will require further treatment as hospital inpatients 
or if they are able to be discharged from the hospital. Observation 
status is commonly assigned to patients with unexpectedly prolonged 
recovery after surgery and to patients who present to the emergency 
department and who then require a significant period of treatment or 
monitoring before a decision is made concerning their next placement. 
For a detailed discussion of the clinical and payment history of 
observation services under the OPPS, we refer readers to the November 
1, 2002 final rule with comment period (67 FR 66794).
    For a detailed discussion of our proposed changes to payments for 
observation services for CY 2006, we refer readers to the CY 2006 OPPS 
proposed rule at 70 FR 42742 through 42745. A summary of the proposed 
changes is included below, followed by our responses to the public 
comments, and our final policies for CY 2006.

B. Proposed and Final CY 2006 Coding Changes for Observation Services 
and Direct Admission to Observation

    In response to comments received regarding the continuing 
administrative burden on hospitals when attempting to differentiate 
between packaged and separately payable observation services for 
purposes of billing correctly, and recommendations made by the APC 
Panel and participants at the February 2005 APC Panel meeting, in the 
CY 2006 OPPS proposed rule, we proposed two changes in observation 
coding and implementation of the OPPS payment policies for observation 
services in CY 2006. As we stated in the CY 2006 proposed rule (70 FR 
42743), these administrative changes were prompted by the fact that CY 
2004 hospital data do not reflect the CY 2005 policy changes 
implemented for separately payable observation services. We continued 
to receive incomplete and unreliable data as a result of inconsistent 
hospital reporting, with some hospitals reporting observation services 
per day, and others reporting each hour of observation as one unit. The 
CY 2006 proposed changes were an effort to ensure more consistent 
hospital billing for both separately payable and packaged observation 
services in order to guide our future analyses of observation care and 
to shift the administrative burden for determining separately payable 
observation services from hospitals to the OCE. We do not expect to see 
an increase in the number of separately payable observations services 
as a result of these changes.
    First, we proposed to discontinue HCPCS codes G0244 (Observation 
care by facility to patient), G0263 (Direct admission with CHF, CP, 
asthma), and G0264 (Assessment other than CHF, CP, asthma) and to 
create two new HCPCS codes to be used by hospitals to report all 
observation services, whether separately payable or packaged, and 
direct admission for observation care, whether separately payable or 
packaged:
     G0378--Hospital observation services, per hour (cited in 
the proposed rule as ``GXXXX'').
     G0379--Direct admission of patient for hospital 
observation care (cited in the proposed rule as ``GYYYY'').
    Second, we proposed to shift determination of whether or not 
observation services are separately payable under APC 0339 
(Observation) from the hospital billing department to the OPPS claims 
processing logic. That is, hospitals would bill HCPCS code G0378 when 
observation services are provided to any patient admitted to 
``observation status,'' regardless of the patient's condition. In 
addition to the HCPCS code G0378, hospitals would bill HCPCS code G0379 
when observation services are the result of a direct admission to 
``observation status'' without an associated emergency room visit, 
hospital outpatient clinic visit, or critical care service on the day 
of or day before the observation services.
    We proposed to assign both of these proposed new HCPCS codes a new 
status indicator ``Q'' (packaged service subject to separate payment 
based on criteria) that would trigger the OCE logic during the 
processing of the claim to determine if the observation service or 
direct admission service is packaged with the other separately payable 
hospital services provided, or if a separate APC payment for 
observation services or direct admission to observation is appropriate 
in accordance with the criteria discussed in section

[[Page 68689]]

XI.C. or XI.D. of this preamble. In addition, we proposed to change the 
status indicator for CPT codes 99217 through 99220 and 99234 through 
99236 from ``N'' (packaged) to ``B'' (code not recognized by the OPPS). 
We noted we would expect hospitals to use HCPCS code G0378 to 
accurately report all observation services provided to beneficiaries, 
whether the observation would be packaged or separately payable, to 
assist us in developing consistent and complete hospital claims data 
regarding the utilization and costs of observation services. The units 
of service reported with HCPCS code G0378 would equal the number of 
hours the patient is in observation status.
    Comment: Several commenters expressed support for the proposed 
changes and CMS' and the APC Panel's efforts to streamline the billing 
process for observation services in hospitals. Nine commenters stated 
that they appreciated our proposal to shift the burden of determining 
if observation is separately payable from the hospitals to the OCE 
logic.
    While most of these commenters approved the proposal to use the new 
HCPCS code G0378 to bill for hospital observation services, two 
commenters believed that HCPCS code G0378 is unnecessary. They 
recommended that providers should use CPT evaluation and management 
codes for observation care, specifically CPT codes 99218, 99219, and 
99220. The commenters also suggested that CMS should require hospitals 
to provide the hour information in the unit field and develop edits for 
these codes to edit for the qualifying conditions. A third commenter 
requested clarification on why G-codes are needed at all.
    Response: We disagree with the commenters that HCPCS code G0378 is 
unnecessary and disagree that the requirement of reporting the code per 
hour could be handled in the unit field for CPT observation codes. The 
CPT observation codes are per day codes by CPT definition. We believe 
that to instruct hospitals to bill multiple units of a per day code to 
report the hours of observation care provided would create confusion 
and many variances in claims reporting resulting in poor hospital 
claims data. Generally, we follow CPT instructions for coding, and in 
this case we believe that it would be most prudent to establish a per 
hour G-code for observation services to facilitate ease of coding 
observation services and to ensure that we will be able to obtain 
useful and consistent data from future claims.
    Comment: Five commenters sought clarification of the language in 
section XI.B. of the CY 2006 proposed rule on page 70 FR 42743 where we 
stated that hospitals would bill HCPCS code G0378 when observation 
services are provided to any patient admitted to ``observation 
status,'' regardless of the patient's status as inpatient or 
outpatient.
    Response: We mistakenly included the word ``inpatient'' in this 
statement. The statement should instead read, ``Hospitals would bill 
HCPCS code G0378 when observation services are provided to any patient 
admitted to `observation status' regardless of the patient's 
condition.''
    Comment: One commenter notified CMS of an omission on page 70 FR 
42745, under section XI.C.3.a of the CY 2006 proposed rule. The 
commenter pointed out that we had omitted direct admission from the 
bulleted list of additional hospital services.
    Response: We appreciate the commenter bringing this error to our 
attention. The omission was inadvertent. In this final rule with 
comment period, we have made the appropriate change to make the policy 
consistent with the CY 2005 OPPS payment policy. The corrected policy 
reads as follows for the billing of hospital observation services:
    ``Additional Hospital Services:
    a. The hospital must provide on the same day or the day before and 
report on the same claim:
     An emergency department visit (APC 0610 or 0612); or
     A clinic visit (APC 0600, 0601, or 0602); or
     Critical care (APC 0620); or
     Direct admission to observation using HCPCS code G0379.''
    Comment: Many commenters expressed overall approval for our 
proposed policy changes concerning the new G-codes for observation 
services and, specifically, approval of the new HCPCS code G0379 to 
report direct admission to observation when a Medicare beneficiary is 
directly admitted into a hospital outpatient department for observation 
care after being seen by a physician in the community.
    However, seven commenters believed that HCPCS code G0379 would be 
unnecessary if CMS would alter the OCE logic to look for revenue codes 
45X (Emergency Department) and 516 (urgent care) on claims for 
observation services coded with HCPCS code G0378. They reasoned that if 
one of these revenue codes is not on the claim, the OCE logic should 
determine that the observation services billed were as a result of a 
direct admission to observation care.
    Response: While we appreciate this suggestion and we agree that the 
OCE logic could recognize these revenue codes, we will implement HCPCS 
code G0379 as proposed. The OCE logic has no method of identifying if 
the direct admission to observation care service was actually provided. 
For example, the observation care billed with HCPCS code G0378 may have 
been an error in coding by a hospital, or the hospital may have failed 
to bill for an emergency room or clinic visit on the same day on the 
same claim as the observation services. Because we plan to pay 
separately for HCPCS code G0379 in some circumstances and the OPPS pays 
for services that were provided and billed with HCPCS codes on claims, 
the HCPCS code G0379 is necessary for billing and possible separate 
payment. In addition, if hospitals did not appropriately bill HCPCS 
code G0379 with its associated charges in cases of direct admission to 
observation, we would have no direct way of calculating the median cost 
of the direct admission to observation to facilitate analysis of its 
median cost in comparison with the OPPS payment rate for that service. 
If the observation care itself was not separately payable, and there 
were no other separately payable services on the claim, there would be 
no billed direct admission service with which to package the 
observation care and other packaged costs on the claim. Thus, in the 
absence of a code on a claim reporting a direct admission to 
observation services billed as HCPCS code G0379, Medicare will not use 
the OCE logic to infer that the patient was previously seen by a 
physician outside of the hospital who ordered the direct admission of 
the patient for observation services.
    In summary, while a few commenters questioned the necessity of 
creating new G-codes for reporting observation services and direct 
admission to observation, we agree with the many commenters who 
encouraged us to implement the new codes and to use the OCE logic to 
determine when observation services are separately payable for the CY 
2006 OPPS. Like those commenters, we believe that this change will both 
reduce the administrative burden on hospitals and will improve CMS 
claims data which will allow us to continue to evaluate our payment 
policies for observation services under the OPPS.

C. Proposed and Final Criteria for Separate Payment for Direct 
Admission to Observation

    Through claims processing logic, we proposed to continue paying for 
direct

[[Page 68690]]

admission to observation at a rate equal to that of a Low Level Clinic 
Visit (APC 0600) when a Medicare beneficiary seen by a physician in the 
community and then is directly admitted into a hospital outpatient 
department for observation care that does not qualify for separate 
payment under APC 0339. In order to receive separate payment for a 
direct admission into observation (APC 0600), the claim must show:
    1. Both HCPCS codes G0378 (Hourly Observation) and G0379 (Direct 
Admit to Observation) with the same date of service.
    2. That no services with a status indicator ``T'' or ``V'' or 
Critical care (APC 0620) were provided on the same day of service as 
HCPCS code G0379.
    3. The observation care does not qualify for separate payment under 
APC 0339.
    Comment: One commenter disagreed with our proposal that no service 
with a status indicator of ``V'' (clinic or emergency department visit) 
can be on the claim when provided on the same day of service as HCPCS 
code G0379. The commenter stated that because OPPS services performed 
on the same date of service must be reported on the same claim, the 
hospital would not receive any payment for observation services for 
patients who receive a service in a provider-based clinic in the 
morning and later in the day are directly admitted to observation by 
their primary care practitioner for an unrelated reason. The commenter 
recommended that CMS eliminate the requirement that a hospital must 
combine separate outpatient encounters on a single claim.
    Response: We appreciate the commenter's suggestion, but at this 
time we are not removing the requirement that services with status 
indicator ``V'' cannot be billed on the same claim with the same date 
of service as HCPCS code G0379 for direct admission to observation care 
for separate payment for HCPCS code G0379 to be made. We believe that 
the circumstances under which a patient would have a hospital visit 
(clinic or emergency room), sees a physician outside the hospital for 
an unrelated reason later in the same day, and then be directed on that 
same day to the same hospital where he or she had the first hospital 
visit for direct admission to observation for observation services that 
would be packaged (that is, not for chest pain, congestive heart 
failure, or asthma) but for which we would make separate payment for 
the direct admission to observation would be very rare. The OCE editing 
cannot deal with the complexity of this unusual sequence of events. 
Thus, if the observation services were not separately payable in such a 
scenario, payment for the direct admission to observation and the 
accompanying observation services would be packaged with payments for 
the other separately payable services on the claim, including the day's 
earlier hospital visit if all of these services were billed on the 
claim.
    As discussed in the data section (section II.A.) of this final rule 
with comment period and in Change Request 4047, issued on October 14, 
2005, some nonrepetitive OPPS services provided on the same day by a 
hospital may be billed on different claims, provided that all charges 
associated with each procedure or service being reported are billed on 
the same claim with the HCPCS code which describes that service. We 
reiterate that it is vitally important that all of the charges that 
pertain to a nonrepetitive, separately paid procedure or service be 
reported on the same claim with that procedure or service. Only thus 
can we develop complete and accurate median costs for ratesetting 
purposes. We also emphasize that this relaxation of same day billing 
requirements for some nonrepetitive services does not apply to 
nonrepetitive services provided on the same day as either direct 
admission to observation care or observation services because the OCE 
claim-by-claim logic cannot function properly unless all services 
related to the episode of observation care, including hospital clinic 
visits, emergency department visits, critical care services, and ``T'' 
status procedures, are reported on the same claim. Further instruction 
on billing repetitive and nonrepetitive hospital services can be found 
in Change Request 4047 cited above.
    Specifically with respect to the billing of HCPCS code G0379 for 
direct admission to observation care, we expect that hospitals will 
only bill this service if a patient is admitted directly to observation 
care after being seen by a physician in the community. Although our OCE 
logic is performed on a claim-by-claim basis, hospitals should not bill 
HCPCS code G0379 for direct admission to observation care on the same 
day as hospital clinic visits, emergency room visits, critical care 
services, and ``T'' status procedures that are related to the 
subsequent admission to observation care. Instead, hospitals should 
bill all of the services associated with the observation care, 
including hospital clinic visits, emergency room visits, critical care 
services, and ``T'' status procedures, on the same claim so that the 
OCE logic may appropriately determine the separately payable or 
packaged payment status of HCPCS codes G0378 and G0379.
    In summary, we are implementing as final our proposed CY 2006 
payment policies for observation services under the OPPS. We are also 
implementing the policy related to the new HCPCS code G0379 as proposed 
in order to continue paying for direct admission to observation at a 
rate equal to that of a Low Level Clinic Visit when a Medicare 
beneficiary is directly admitted into a hospital outpatient department 
for observation care that does not qualify for separate payment under 
APC 0339.

D. Proposed and Final Criteria for Separately Payable Observation 
Services (APC 0339)

    For CY 2006, we proposed to continue applying the existing CY 2005 
criteria (69 FR 65830), which determine if hospitals may receive 
separate payment for medically necessary observation care provided to a 
patient with congestive heart failure, chest pain, or asthma. In 
addition, we proposed to continue our policy of packaging payment for 
all other observation services into the payments for the separately 
payable services with which the observation service is reported. As 
explained previously in section XI.B. of this preamble, the only 
changes we proposed are related to the code hospitals will use to 
report observation services, and the point at which a payment 
determination is made. Rather than requiring the hospital to determine 
prior to claims submission whether patient condition and the services 
furnished meet the criteria for payment of APC 0339, that determination 
would shift to the claims processing modules installed by the fiscal 
intermediaries to process all OPPS bills, thereby reducing the 
administrative burden on hospitals.
    Criteria for separate observation service payments include 
documentation of specific ICD-9-CM diagnostic codes; the length of time 
a patient is in observation status; hospital services provided before, 
during, and after the patient receives observation care; and ongoing 
physician evaluation of the patient's status.
    As we stated in Program Transmittal A-02-129 released in January 
2003, we will continue to update any changes in the list of ICD-9-CM 
codes required for payment of HCPCS code G0378 resulting from the 
October 1 annual update of ICD-9-CM in the October quarterly update of 
the OPPS. The ICD-9-CM codes for CY 2006 through October 2006 are 
listed in Table 35. As we proposed, below are the criteria that we will 
continue using in CY 2006 to determine if hospitals may receive 
separate OPPS payment for medically necessary observation care provided 
to

[[Page 68691]]

a patient with congestive heart failure, chest pain, or asthma.
1. Diagnosis Requirements
    a. The beneficiary must have one of three medical conditions: 
congestive heart failure, chest pain, or asthma.
    b. The hospital bill must report as the reason for visit or 
principal diagnosis an appropriate ICD-9-CM code (as shown in Table 30 
below) to reflect the condition.
    c. The qualifying ICD-9-CM diagnosis code must be reported in Form 
Locator (FL) 76, Patient Reason for Visit, or FL 67, principal 
diagnosis, or both, in order for the hospital to receive separate 
payment for APC 0339. If a qualifying ICD-9-CM diagnosis code(s) is 
reported in the secondary diagnosis field but is not reported in either 
the Patient Reason for Visit field (FL 76) or in the principal 
diagnosis field (FL 67), separate payment for APC 0339 will not be 
allowed.

BILLING CODE 4120-01-P

[[Page 68692]]

[GRAPHIC] [TIFF OMITTED] TR10NO05.025


[[Page 68693]]


BILLING CODE 4120-01-C
2. Observation Time
    a. Observation time must be documented in the medical record.
    b. A beneficiary's time in observation (and hospital billing) 
begins with the beneficiary's admission to an observation bed.
    c. A beneficiary's time in observation (and hospital billing) ends 
when all clinical or medical interventions have been completed, 
including followup care furnished by hospital staff and physicians that 
may take place after a physician has ordered the patient be released or 
admitted as an inpatient.
    d. The number of units reported with HCPCS code G0378 must equal or 
exceed 8 hours.
3. Additional Hospital Services
    a. The hospital must provide on the same day or the day before and 
report on the same claim:
     An emergency department visit (APC 0610, 0611, or 0612) or
     A clinic visit (APC 0600, 0601, or 0602); or
     Critical care (APC 0620); or
     Direct admission to observation services using HCPCS code 
G0379 (APC 0600).
    b. No procedure with a ``T'' status indicator can be reported on 
the same day or day before observation care is provided.
4. Physician Evaluation
    a. The beneficiary must be in the care of a physician during the 
period of observation, as documented in the medical record by 
admission, discharge, and other appropriate progress notes that are 
timed, written, and signed by the physician.
    b. The medical record must include documentation that the physician 
explicitly assessed patient risk to determine that the beneficiary 
would benefit from observation care.
    The APC Panel met in August 2005 and made several recommendations 
for clarification of the observation policy, including that CMS offer 
further guidance regarding the definition of end-time of observation 
services, billing the new HCPCS G-codes in relation to the currently 
required evaluation and management visit codes, the typical length of 
observation time, and if the hospital has the ability to issue an 
Advance Beneficiary Notice (ABN) and under what circumstances.
    We appreciate the consideration of the issues by the APC Panel and 
will continue to evaluate its recommendations as we gather claims data 
based on the new G-codes. We also appreciate the APC Panel's concern 
for clear coding and billing guidance. We will provide detailed 
guidance regarding billing for observation services in an upcoming 
Internet-only manual update and ``Medlearn Matters'' article. For 
further clarification, this guidance will also include a restatement of 
when observation hours begin and end, and a discussion of appropriate 
billing of the G-codes for observation services in relationship to 
other services also billed by hospitals. As we have stated before in 
reference to the appropriate duration of observation services, we 
believe that in the overwhelming majority of cases, decisions can be 
and are routinely made in less than 48 hours, and generally in less 
than 24 hours, regarding whether to release a beneficiary from the 
hospital following resolution of the reason for the outpatient visit or 
whether to admit the beneficiary as an inpatient (69 FR 65830, November 
15, 2004).
    In response to the APC Panel's recommendation for clarification 
concerning if and when a hospital may issue an ABN, all hospital 
observation services, regardless of the duration of the observation 
care, that are medically reasonable and necessary are covered by 
Medicare, and hospitals receive OPPS payments for such observation 
services. We make separate payment for observation care only for the 
three conditions previously defined that also meet our specific 
criteria, and payments for all other reasonable and necessary 
observation services are packaged into the payments for other 
separately payable services provided to the patient on the same day. An 
ABN should not be issued in the context of reasonable and necessary 
observation services, whether packaged or not.
    The APC Panel also recommended that CMS reevaluate expanding the 
list of diagnoses eligible for separate payment for observation.
    We appreciate this recommendation by the APC Panel. While we 
believe that it is premature to expand the conditions for which we 
would separately pay for observation services, we believe that the 
coding changes we are finalizing for CY 2006 will result in more 
consistent and accurate hospital claims. The data gathered from these 
claims will allow further analysis of the appropriateness of expanding 
the number of separately payable conditions.
    In addition, the APC Panel recommended that CMS establish a 
mechanism to reimburse separately for observation services when 
specific HCPCS codes with status indicator ``T'' are also on the claim 
with observation services on the day of or the day preceding 
observation care. The APC Panel believed that sometimes observation 
services could be provided on the same day as ``T'' status procedures, 
but be unassociated with those procedures, as the observation care 
could be related to treatment of chest pain, asthma, or congestive 
heart failure for which we might otherwise make separate payment.
    Although we appreciate the discussion of the APC Panel and this 
recommendation, we believe that in most cases, where observation care 
is billed on a claim on the same date as a ``T'' status procedure, the 
observation services are most likely related to post-procedural 
observation for which we do not make separate payment. As we take on 
the administrative responsibility for determining which observation 
services we will pay separately for, we have limited ability to 
determine the temporal order of ``T'' status procedures in relationship 
to the observation services. In addition, considering that there are 
over 13,000 ``T'' status codes paid under the OPPS, it would be an 
extremely large administrative burden for us to individually evaluate 
each ``T'' status code to determine if there may be an exception to the 
rule in some clinical circumstances, where observation care would 
precede or be unassociated with the ``T'' status procedure. We will 
discuss this issue again with the APC Panel in future APC Panel 
meetings and will examine the utilization patterns and costs of 
procedure-related observation services in our claims data based on the 
new G-code reporting of observation care.
    We note, as described earlier in the context of billing HCPCS code 
G0379 for direct admission to observation, that through Change Request 
4047 issued on October 14, 2005, we have recently relaxed our previous 
requirement to bill all OPPS services provided on the same day on the 
same claim. In the case of observation care, because of the OCE claim-
by-claim logic, in order for us to make proper determinations regarding 
packaging or separate payment for observation services consistent with 
our payment policy to make separate observation payment only for the 
three specified medical conditions, all services associated with the 
observation care, including hospital clinic visits, emergency room 
visits, critical care services, and ``T'' status procedures that may 
have resulted in the need for observation care, must be reported on the 
same claim.
    Comment: Several commenters requested clarification of the billing 
process, such as how to bill observation services when the patient is 
seen over

[[Page 68694]]

the midnight hour. Three commenters requested that CMS issue further 
billing guidance in the form of prompt issuance of program transmittals 
and manual changes, as well as a possible training package for 
hospitals to use when training physicians so that physicians can 
receive the same instructions from all facilities to which they admit 
patients.
    Response: We appreciate these suggestions and, as stated earlier, 
we will provide detailed guidance regarding billing for observation 
services in an upcoming Internet-only manual update and ``Medlearn 
Matters'' article.
    Comment: Several commenters recommended that CMS reevaluate 
expanding the list of diagnoses eligible for separate payment for 
observation. One commenter requested that CMS consider adding the 
following diagnoses: 466.0--Acute bronchitis; 466.11 (Acute bronchitis 
due to RSV); 466.19 (Acute bronchitis due to oth infects organism); 
491.21 (Chr obstructive bronchitis, w acute exacerbation); 491.22 (Chr 
obstructive bronchitis, w acute bronchitis); and 496 (Chr obstructive 
pulmonary disease). The commenter stated that the current asthma 
diagnoses that receive separate payment include some patients with 
chronic obstructive pulmonary disease (COPD), but not all patients with 
COPD, and that physicians are frequently nonspecific when stating a 
diagnosis, which then leads to a wide variety of assignments of asthma 
and COPD codes. In addition, the commenter reasoned that the care of a 
patient with asthma, bronchitis, or COPD is very similar as far as the 
diagnostic tests performed, medications ordered, and clinical care 
provided.
    Response: Our separately payable observation policy includes only 
diagnoses directly related to asthma. While we acknowledge that some of 
these conditions may have similar symptoms or a similar clinical course 
to asthma, we do not consider these diagnoses codes to represent 
asthma. In addition, there may be significant differences in responses 
to treatment for patients with these other diagnoses. Therefore, we are 
not adding the suggested diagnoses at this time.
    Comment: One commenter requested that CMS and the APC Panel study 
the possible expansion of the conditions for which separate payment 
would be provided to include the diagnoses of febrile neutropenia, 
chemotherapy hypersensitivity reaction, and hypovolemia, electrolyte 
imbalance. Another commenter requested that CMS consider adding the 
diagnosis codes for coronary artery disease as valid conditions for 
separate payment of observation.
    Response: We appreciate the comments that we received from these 
commenters regarding possible additions to the list of diagnoses 
eligible for separate payment for observation services. Although we are 
not implementing in the CY 2006 OPPS the recommendations made by 
commenters and the APC Panel to expand separate payment for observation 
to include conditions in addition to congestive heart failure, asthma, 
and chest pain, we will continue to analyze our data based on the new 
G-codes and will study the feasibility and impact of such changes in 
eligible diagnoses as we consider future updates of the OPPS. We 
believe that the use of the new G-code for reporting hourly observation 
services should yield much more robust and reliable claims data upon 
which to base such further analyses.
    Comment: One commenter recommended that CMS establish a mechanism 
to reimburse separately for observation services when specific HCPCS 
codes with status indicator ``T'' are also on the claim with 
observation services on the day of or the day preceding observation 
care. The commenter stated that the intensity and types of service for 
these types of procedures can be similar and that procedural 
complications or physician planned overnight observation can apply to 
status ``T'' procedures such as breast procedures and interventional 
radiology procedures. The commenter also expressed concern that 
patients initially in observation for chest pain may proceed to cardiac 
catheterization evaluations, and the current rule would seem to limit 
separate payment for observation services in this situation, even 
though the observation was for chest pain and it preceded the cardiac 
catheterization. The commenter requested that CMS either allow both 
``S'' and ``T'' status services to be on the claim or discontinue this 
edit.
    Response: Our changes in coding and OCE logic for CY 2006 do not 
affect the criteria for separately payable observation services. We do 
not intend to make separate payment for observation services following 
surgical or interventional procedures, and, in general, these services 
may be most readily identified by their ``T'' status under the OPPS. As 
we stated previously in response to a similar recommendation by the APC 
Panel, we believe that in most cases, where observation care is billed 
on a claim on the same date as a ``T'' status procedure, the 
observation services are most likely related to post-procedural 
observation for which we do not make separate payment. We refer the 
readers to the previous response for further explanation.
    Comment: One commenter recommended that CMS reconsider requiring 
hospitals to report one of the ICD-9-CM diagnosis codes designated for 
payment of APC 0339 as the admitting or primary diagnosis on the 
hospital claim. The commenter was concerned that if we restrict the 
position of the diagnosis code to the admitting or principal field, 
many claims that otherwise meet the criteria for separate payment of 
observation services will not be payable because coding rules and the 
frequency by which Medicare beneficiaries with asthma, congestive heart 
failure, or chest pains have other presenting signs, symptoms, and 
clinical conditions will result in inappropriate placement of the 
requisite diagnosis code. The commenter recommended that CMS accept the 
required diagnosis in any diagnosis field.
    Response: As we stated in the CY 2005 OPPS final rule with comment 
period, we do not agree that this requirement will result in many 
claims for APC 0339 not being paid. Rather, we believe that requiring 
hospitals to report the signs, symptoms, and conditions that are the 
reason for the patient's visit will enhance coding accuracy and ensure 
that Medicare is paying appropriately for APC 0339 by limiting separate 
payment to those observation services furnished to monitor asthma, 
chest pain, and congestive heart failure. If we were to accept the 
required ICD-9-CM diagnosis code as a secondary diagnosis, we would 
remain concerned that we may be making separate payment for observation 
for conditions other than asthma, congestive heart failure, or chest 
pain because these conditions are reported in the secondary diagnosis 
field even though they are not the clinical reason that the patient is 
receiving observation services.
    In summary, after careful consideration of the comments we received 
related to the criteria required for separate payment of observation 
services (APC 0339), we have decided to continue using the criteria as 
proposed for CY 2006. We will analyze the data that will be gathered 
through the reporting of the new HCPCS codes G0378 and G0379 to further 
study the implications of expanding the list of conditions eligible for 
separate payment for observation services. In addition, we will be 
issuing additional guidance for reporting and billing observation 
services in the form of a change request

[[Page 68695]]

updating the Internet-only manual and a ``Medlearn Matters'' article.

XII. Procedures That Will Be Paid Only as Inpatient Procedures

A. Background

    Section 1833(t)(B)(i) of the Act gives the Secretary broad 
authority to determine the services to be covered and paid for under 
the OPPS. Before implementation of the OPPS in August 2000, Medicare 
paid reasonable costs for services provided in the outpatient 
department. The claims submitted were subject to medical review by the 
fiscal intermediaries to determine the appropriateness of providing 
certain services in the outpatient setting. We did not specify in 
regulations those services that were appropriate to provide only in the 
inpatient setting and that, therefore, should be payable only when 
provided in that setting.
    In the April 7, 2000 final rule with comment period, we identified 
procedures that are typically provided only in an inpatient setting 
and, therefore, would not be paid by Medicare under the OPPS (65 FR 
18455). These procedures comprise what is referred to as the 
``inpatient list.'' The inpatient list specifies those services that 
are only paid when provided in an inpatient setting because of the 
nature of the procedure, the need for at least 24 hours of 
postoperative recovery time or monitoring before the patient can be 
safely discharged, or the underlying physical condition of the patient. 
As we discussed in the April 7, 2000 final rule with comment period (65 
FR 18455) and the November 30, 2001 final rule (66 FR 59856), we use 
the following criteria when reviewing procedures to determine whether 
or not they should be moved from the inpatient list and assigned to an 
APC group for payment under the OPPS:
     Most outpatient departments are equipped to provide the 
services to the Medicare population.
     The simplest procedure described by the code may be 
performed in most outpatient departments.
     The procedure is related to codes that we have already 
removed from the inpatient list.
    In the November 1, 2002 final rule with comment period (67 FR 
66792), we removed 43 procedures from the inpatient list for payment 
under OPPS. We also added the following criteria for use in reviewing 
procedures to determine whether they should be removed from the 
inpatient list and assigned to an APC group for payment under the OPPS:
     We have determined that the procedure is being performed 
in multiple hospitals on an outpatient basis; or
     We have determined that the procedure can be appropriately 
and safely performed in an ambulatory surgical center (ASC) and is on 
the list of approved ASC procedures or proposed by us for addition to 
the ASC list.
    We believe that these additional criteria help us to identify 
procedures that are appropriate for removal from the inpatient list.
    In the November 7, 2003 final rule with comment period (68 FR 
63465), no significant changes were made to the inpatient list. In the 
November 15, 2004 final rule with comment period (69 FR 65834), we 
removed 22 procedures from the inpatient list, effective for services 
furnished on or after January 1, 2005.

B. Proposed and Final Changes to the Inpatient List

    For CY 2006 OPPS, we used the same methodology as described in the 
November 15, 2004 final rule with comment period (69 FR 65837) to 
identify a subset of procedures currently on the inpatient list that 
were being widely performed on an outpatient basis. These procedures 
were then clinically reviewed for possible removal from the inpatient 
list. We solicited input from the APC Panel on the appropriateness of 
the removal of 26 procedures from the inpatient list at the February 
2005 APC Panel meeting. The APC Panel recommended that these 26 
procedures be removed from the list and further recommended that CMS 
consider CPT code 37183 (Remove hepatic shunt (TIPS)) for removal. We 
agreed with the APC Panel's recommendation that CPT code 37183 be 
removed from the inpatient list for CY 2006 and we proposed to remove 
it from the inpatient list. In addition, the APC Panel recommended that 
CMS review site of service data on laminectomy services, which 
currently have status indicator C and are on the inpatient list, to 
determine whether the procedures are being performed in the hospital 
outpatient setting with enough frequency to be assigned to APCs for 
payment under the OPPS.
    However, subsequent to the APC Panel's February 2005 meeting, we 
conducted further clinical evaluations of three procedures (CPT codes 
33420, 65273, and 59856) included among the 26 procedures that the APC 
Panel recommended for removal from the inpatient list. Upon further 
clinical evaluation of CPT code 33420 (Valvotomy, mitral valve; closed 
heart), we found that the utilization data suggesting that this 
procedure is an office-based procedure were errant. Additional sources 
of utilization data suggested that this procedure is predominately 
performed on an inpatient basis. Concomitant with not meeting our 
criteria of being performed on an outpatient basis in multiple 
hospitals and not appearing on the ASC list of approved procedures, we 
were not compelled to support the removal of this procedure from the 
inpatient list. For this reason, we proposed to retain CPT code 33420 
on the inpatient list for CY 2006.
    CPT codes 65273 and 59856 were similarly reevaluated because of our 
concern with the HCPCS long descriptors for these two codes. The long 
descriptors for these codes are as follows: CPT code 65273 (Repair of 
laceration; conjunctiva, by mobilization and rearrangement, with 
hospitalization) and CPT code 59856 (Induced abortion, by one or more 
vaginal suppositories (eg, prostaglandin) with or without cervical 
dilation (eg, laminaria), including hospital admission and visits, 
delivery of fetus and secundines; with dilation and curettage and/or 
evacuation). The long descriptors indicate that hospital admission or 
hospitalization is included in the codes for these two procedures, 
which leads us to believe that these two procedures do not meet the 
established criteria for removal from the inpatient list. The same code 
descriptor for CPT code 65273, but without hospitalization, is assigned 
to CPT code 65272, which is already separately payable under the OPPS. 
Therefore, we proposed to retain CPT codes 65273 and 59856 on the 
inpatient list for CY 2006.
    In addition, we proposed to remove CPT code 62160 (Neuroendoscopy) 
from the inpatient list. Questions about this service have been raised 
to us by the hospital community because CPT code 62160 is an add-on CPT 
code (that is, a code that is commonly performed as an ``additional or 
supplemental'' procedure to the primary procedure). Two of the 
separately coded services that CPT indicates are to be used with the 
add-on code are currently payable under the OPPS. Further clinical 
evaluation of this add-on procedure and its use in various sites of 
service leads us to believe it is appropriate for removal from the 
inpatient list.
    Therefore, for CY 2006, we proposed to remove 25 procedures from 
the inpatient list and to assign 23 of these procedures to clinically 
appropriate APCs. We did not propose to assign two of these procedures 
to APC groups, that is, CPT codes 00634 (Anesthesia for

[[Page 68696]]

procedures in lumbar region; chemonucleoysis) and 01190 (Anesthesia for 
obturator neurectomy; intrapelvic) because they are anesthesia 
procedures for which no separate payment is made under the OPPS. 
Payment for these two procedures will be packaged into the procedures 
with which they are billed. We proposed that the changes to the 
inpatient list would be effective for services furnished on or after 
January 1, 2006.
    We received numerous public comments on our proposed assignment of 
procedures to the inpatient list for the CY 2006 OPPS.
    Comment: No commenter objected to the removal of the 25 procedures 
from the inpatient list. However, commenters requested that CMS 
eliminate the inpatient list. Among the reasons cited in the comments 
is that physicians are not bound by the list for payment for their 
professional services but are the decisionmakers regarding where a 
procedure is performed. The commenters stated that physicians often are 
unaware of the payment restrictions placed on the hospital by the 
inpatient list or, because their payment is unaffected by the list's 
constraints, may not be concerned with the hospital's payment. They 
pointed out that these factors make implementation and administration 
of the inpatient list very difficult for hospitals.
    The commenters requested that if CMS does retain the list, that CMS 
make a strong effort to educate physicians about the hospital issues 
related to the inpatient list by, at a minimum, posting the inpatient 
list and an explanation of it on CMS' physician Web sites and on 
carrier Web sites.
    Commenters also stated that teaching hospitals, where many of the 
procedures that are on the inpatient list are performed on an 
outpatient basis for the first time, are affected by the policy more 
than are nonteaching hospitals, because there is usually a significant 
time gap between when the services are performed safely in teaching 
hospital outpatient departments and ``most'' hospital outpatient 
departments. They asserted that criteria should be revised to allow a 
procedure to be removed from the list when it can be performed safely 
in a hospital outpatient department rather than based on the number of 
outpatient departments in which it may be safely performed.
    The commenters also urged CMS to establish an appeal process in the 
event that the list is not eliminated. They believe that a process that 
would allow for case-by-case review of the documentation for inpatient 
procedures that were performed in the outpatient department may serve 
to alleviate some hospital losses and provide information to CMS 
regarding procedures that may be good candidates for removal from the 
list.
    Finally, the commenters once again stated that they strongly 
supported the February, 2004 APC Panel's recommendation that CMS 
eliminate the inpatient list.
    Response: We are not eliminating the inpatient list at this time. 
We continue to believe that there are services that cannot be safely 
and effectively delivered to Medicare beneficiaries in the hospital 
outpatient setting. We are concerned that elimination of the inpatient 
list could result in unsafe or uncomfortable care for Medicare 
beneficiaries. Among the potential results of eliminating the list are 
long observation stays after some procedures and imposition of OPPS 
copayments, which could differ significantly from a beneficiary's 
inpatient cost-sharing responsibilities.
    We believe that it is important for hospitals to educate physicians 
on Medicare services provided under the OPPS to avoid inadvertently 
providing services in a hospital outpatient setting that are more 
appropriately performed in an inpatient setting. However, we will 
follow up on the commenters' recommendations regarding what CMS may be 
able to do to supplement hospitals' physician education efforts.
    Comment: Several commenters requested that CMS issue billing 
instructions for instances where hospitals have charges for an 
inpatient procedure performed in the outpatient department in addition 
to other services on the bill. Commenters were concerned that some 
fiscal intermediaries allow payment for the services other than the 
inpatient procedure, while other fiscal intermediaries do not. They 
also requested that CMS include in the proposed rule explanations for 
any new Category III CPT codes that CMS assigns to the inpatient list.
    Response: Billing instructions are outside of the scope of the 
final rule, but we will look into the billing issues as suggested by 
the commenters. With regard to new Category III CPT codes released by 
the AMA on January 1 for implementation on July 1 of a given year, we 
refer the readers to section III.E. of this final rule for a 
description of our process for recognizing these codes and receiving 
public comments on their status under the OPPS. We will respond to 
those comments in the final rule, here for CY 2007. With regard to new 
Category III CPT codes released by the AMA on July 1 for implementation 
in January and new Category I CPT codes released in the fall for 
implementation in January, because of the timing of the release of 
these codes we are unable to provide discussions of those assignments 
in any proposed rule. Instead, consistent with current practice, we 
will continue to designate these codes with comment indicator ``NI'' in 
the final rule to indicate that we are assigning them an interim 
payment status which is subject to public comment following publication 
of the final rule that implements the annual OPPS update. We believe 
that these processes provide ample opportunity for the public to 
comment regarding the assignments of new CPT codes to the inpatient 
list prior to our finalizing such assignments.
    Comment: One commenter requested that CMS clarify that just because 
services are not on the inpatient list that does not mean they can only 
be provided in the outpatient setting.
    Response: Many services payable under the OPPS may also be payable 
by Medicare when they are provided in other outpatient settings, 
including ASCs and physician offices, and in inpatient settings, 
depending on the clinical circumstances and health care delivery 
practices surrounding the care of specific Medicare beneficiaries. As 
we have stated previously, the OPPS inpatient list is a list of 
procedures that are only paid by Medicare when they are provided in an 
inpatient setting, and the absence of procedures from the inpatient 
list should not be interpreted as identifying those procedures as 
appropriately performed only in the outpatient setting.
    Comment: Several commenters requested that CMS remove additional 
procedures from the inpatient list. In addition, the APC Panel 
recommended that CMS review site of service data on certain laminectomy 
services, which currently have status indicator C and are on the 
inpatient list, to determine whether the procedures are being performed 
in the hospital outpatient setting with enough frequency to be assigned 
to APCs for payment under the OPPS. None of the commenters provided us 
with specific evidence to support statements that the procedures were 
being performed on an outpatient basis in a safe and effective manner, 
nor did they suggest appropriate APC assignments for the procedures.
    The commenters requested that the CPT codes for procedures shown in 
Table 35 below be removed from the inpatient list.

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[[Page 68697]]

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BILLING CODE 4210-01-C
    Response: We carefully evaluated each of the 17 procedures the 
commenters requested for deletion from the inpatient list. With the 
exception of one of the procedures, we found that 16 of the procedures 
are performed on Medicare beneficiaries more than 90 percent of the 
time in the inpatient setting and are associated with more than 23 hour 
recovery times. Some of the procedures are associated with an 
expectation of 4 to 5 day hospital stays. Two of the codes (63043 and 
63044) are for ``add-ons'' to procedures that are not included on the 
inpatient list (63040, Laminotomy (hemilaminectomy), with decompression 
of nerve root(s), including parital facetectomy, foraminotomy and/or 
excision of herniated intervertebral disk, reexploration, single 
interspace; cervical and 63042, Laminotomy (hemilaminectomy), with 
decompression of nerve root(s), including parital facetectomy, 
foraminotomy and/or excision of herniated intervertebral disk, 
reexploration, single interspace; lumbar). We are retaining codes 63043 
and 63044 on the inpatient list because when these ``add-on'' services 
are performed in addition to the base procedures, the resulting 
complete surgical sessions involve more extensive surgery, longer 
intraoperative times, longer recovery periods, and a higher frequency 
of performance in the inpatient setting, than do the base procedures 
alone that are not included on the inpatient list.
    We will take this opportunity to remind the public that the 
determinations for inclusion on the inpatient list are made for the 
Medicare population. Thus, although some procedures may be routinely 
performed on an outpatient basis for younger

[[Page 68698]]

patients, their safe performance in the outpatient hospital setting may 
be much rarer for older individuals who are likely to have a number of 
comorbidities and slower recovery times. For procedures that are not 
included on the inpatient list, we rely on the practitioners' judgment 
to determine on a patient-by-patient basis whether or not a particular 
procedure would be most appropriately performed in the inpatient 
setting. We believe that these 16 procedures should remain on the 
inpatient list for the CY 2006 OPPS.
    The one procedure that we believe is appropriate for deletion from 
the inpatient list is code 63075. We found evidence that this procedure 
is being performed safely in some outpatient settings with increasing 
frequency. We are deleting the procedure from the inpatient list and 
assigning it to APC 0208 (Laminotomies and Laminectomies) for CY 2006.

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C. Ancillary Outpatient Services When Patient Expires (-CA Modifier)

    In the November 1, 2002 final rule with comment period (67 FR 
66798), we discussed the creation of a new HCPCS modifier -CA to 
address situations where a procedure on the OPPS inpatient list must be 
performed to resuscitate or stabilize a patient (whose status is that 
of an outpatient) with an emergent, life-threatening condition, and the 
patient dies before being admitted as an inpatient. In Transmittal A-
02-129, issued on January 3, 2003, we instructed hospitals on the use 
of this modifier when submitting a claim on bill type 13x for a 
procedure that is on the inpatient list and assigned the payment status 
indicator (SI) ``C.'' Conditions to be met for hospital payment for a 
claim reporting a service billed with modifier -CA include a patient 
with an emergent, life-threatening condition on whom a procedure on the 
inpatient list is performed on an emergency basis to resuscitate or 
stabilize the patient. For CY 2003, a single payment for otherwise 
payable outpatient services billed on a claim with a procedure appended 
with this new -CA modifier was made under APC 0977 (New Technology 
Level VIII, $1,000-$1,250), due to the lack of available claims data to 
establish a payment rate based on historical hospital costs.
    As discussed in the November 7, 2003 final rule with comment 
period, we created APC 0375 to pay for services furnished on the same 
date as a procedure with SI ``C'' and billed with the modifier -CA (68 
FR 63467) because we were concerned that payment under a New Technology 
APC would not result in an appropriate payment. Payment under a New 
Technology APC is a fixed amount that does not have a relative payment 
weight and, therefore, is not subject to recalibration based on 
hospital costs. In the absence of hospital claims data to determine 
costs, the clinical APC 0375 payment rate for CY 2004 was set at of 
$1,150, which was the payment amount for the newly structured New 
Technology APC that replaced APC 0977.
    For CY 2005, payment for otherwise payable outpatient services 
furnished on the same date of service that a procedure with SI ``C'' 
was performed on an emergent basis on an outpatient who died before 
inpatient admission and where modifier -CA was appended to the 
inpatient procedure continued to be made under APC 0375 (Ancillary 
Outpatient Services When Patient Expires) at a payment rate of 
$3,217.47. As discussed in the November 15, 2004 final rule with 
comment period (69 FR 65841), the payment median was set in accordance 
with the same methodology we followed to set payment rates for the 
other procedural APCs in CY 2005, based on the relative payment weight 
calculated for APC 0375. A review of the 18 hospital claims utilized 
for ratesetting revealed a reasonable mix of outpatient services that a 
hospital could be expected to furnish during an encounter with a 
patient with an emergency condition requiring immediate medical 
intervention, as well as a wide range of costs.
    For CY 2006, we did not propose any changes to our payment policy 
for services billed on the same date as a ``C'' status procedure 
appended with modifier -CA. We proposed to continue to make one payment 
under APC 0375 for the services that meet the specific conditions 
discussed in previous rules for using modifier -CA, based on 
calculation of the relative payment weight for APC 0375, using charge 
data from CY 2004 claims for line items with a HCPCS code and status 
indicator ``V,'' ``S,'' ``T,'' ``X,'' ``N,'' ``K,'' ``G,'' and ``H,'' 
in addition to charges for revenue codes without a HCPCS code.
    In accordance with this methodology, for the CY 2006 proposed rule, 
we calculated a median cost of $2,528.61 for APC 0375 for the 
aggregated otherwise payable outpatient hospital services based on 300 
CY 2004 hospital claims reporting modifier -CA with an inpatient 
procedure. These 300 claims were billed by 218 different hospital 
providers, each submitting between 1 and 10 claims with modifier -CA 
appended to a ``C'' status procedure. This median cost for APC 0375 is 
relatively consistent with the median calculated for the CY 2005 OPPS 
update, and, as expected, the hospital claims once again show a wide 
range of costs. Nevertheless, we are concerned with the very large 
increase in the volume of hospital claims billed with the -CA modifier 
from CY 2003 to CY 2004, growing from 18 to 300 claims over that 1-year 
time period. We acknowledge that modifier -CA was first introduced in 
CY 2003, and in CY 2003 and CY 2004 hospitals may have been 
experiencing a learning curve with respect to its appropriate use on 
claims for services payable under the OPPS.
    However, our clinical review for the proposed rule of the 300 
claims reporting modifier -CA lends some support to our early concerns 
regarding the increased CY 2004 modifier volume and hospitals' possible 
incorrect use of the modifier for services that do not meet the payment 
conditions we established. Hospitals should be using this modifier only 
under circumstances described in section VI of Transmittal A-02-129, 
which provided specific billing guidance for the use of modifier -CA. 
In addition to expected use of the -CA modifier for exploratory 
laparotomies and insertions of intra-aortic balloon assist devices, 
other unanticipated examples of ``C'' status procedures reported with 
the -CA modifier by hospitals in CY 2004 include knee arthroplasty, 
thyroidectomy, repair of nonunion or malunion of the femur, and 
thromboendarterectomy of the carotid, vertebral, or subclavian 
arteries. Moreover, few of the claims also include a clinic or 
emergency room visit on the same date of service as the procedure 
appended with modifier -CA, as might be expected for some patients 
presenting to a hospital with serious medical conditions which require 
urgent interventions with inpatient procedures. We are concerned that 
some procedures reported by hospitals with the -CA modifier in CY 2004 
may not have been provided to patients with emergent, life-threatening 
conditions, where the inpatient procedure was performed on an emergency 
basis to resuscitate or stabilize the patient. Instead, those 
procedures may have been provided to hospital outpatients as scheduled 
inpatient procedures that were not emergency interventions for patients 
in critical or unstable condition and such circumstances would have 
been inconsistent with our billing and payment rules regarding correct 
use of the -CA modifier to receive payment for APC 0375. In light of 
these claims findings and our current analysis, we will continue to 
closely monitor hospital use of modifier -CA, following changes in the 
claims volume, noting inpatient procedures to which the -CA modifier is 
appended, examining other services billed on the same date as the 
inpatient procedure, and analyzing specific hospital patterns of 
billing for services with modifier -CA appended, to assess whether a 
proposal to change our policies regarding payment for APC 0375 would be 
warranted in the future or whether hospitals require further education 
regarding correct use of the modifier -CA.
    We received several public comments concerning our proposed payment 
for APC 0375.
    Comment: A few commenters indicated that the -CA modifier policy 
supports an important function for hospitals and should be retained. 
Commenters suggested that the increased use of the modifier noted by 
CMS may be due to hospitals only

[[Page 68701]]

recently becoming aware of the relatively new modifier.
    In response to CMS' question about why few of the claims with a -CA 
modifier included a clinic or emergency department visit on the same 
date of service, the commenters speculated that perhaps the beneficiary 
came in for a scheduled procedure but due to complications, the 
physician finds it necessary to provide a service that they had not 
otherwise intended to perform in an outpatient setting and the patient 
then died prior to inpatient admission.
    Response: Despite the comments we received, we remain concerned 
that, while our billing and payment rules indicate that the inpatient 
procedure on the claim should be performed on an emergency basis to 
stabilize the patient if the modifier -CA is to be reported, on many of 
our claims, the -CA modifier was appended to inpatient list procedures 
that would likely not have been emergency resuscitative procedures. We 
remind hospitals to review our billing and payment rules for using the 
-CA modifier described in section VI. Of Transmittal A-02-129. 
Hospitals should limit their use of the -CA modifier to only those 
claims where all of the conditions outlined are met.
    After careful consideration of the public comments received, we 
have decided that we will make no change to our -CA modifier policy at 
this time. We will continue to monitor the use of the modifier and will 
continue to encourage educational efforts by interested parties 
regarding appropriate use of the -CA modifier on OPPS claims.

XIII. Indicator Assignments

A. Status Indicator Assignments

    The payment status indicators (SIs) that we assign to HCPCS codes 
and APCs under the OPPS play an important role in determining payment 
for services under the OPPS because they indicate whether a service 
represented by a HCPCS code is payable under the OPPS or another 
payment system and also whether particular OPPS policies apply to the 
code. In the CY 2006 OPPS proposed rule, we provided for CY 2006 our 
proposed status indicator assignments for APCs in Addendum A, for the 
HCPCS codes in Addendum B, and the definitions of the status indicators 
in Addendum D1.
    Specifically, for CY 2006, we proposed to use the following status 
indicators in the specified manner:
     ``A'' to indicate services that are billable to fiscal 
intermediaries but are paid under some payment method other than OPPS, 
such as under the durable medical equipment, prosthetics, orthotics, 
and supplies (DMEPOS) fee schedule or the Medicare Physician Fee 
Schedule. Some, but not all, of these other payment systems are 
identified in Addendum D1.
     ``B'' to indicate the services that are billable to fiscal 
intermediaries but are not payable under the OPPS when submitted on an 
outpatient hospital Part B bill type, but that may be payable by fiscal 
intermediaries to other provider types when submitted on an appropriate 
bill type.
     ``C'' to indicate inpatient services that are not payable 
under the OPPS.
     ``D'' to indicate a code that is discontinued, effective 
January 1, 2006.
     ``E'' to indicate items or services that are not covered 
by Medicare or codes that are not recognized by Medicare.
     ``F'' to indicate acquisition of corneal tissue which is 
paid on a reasonable cost basis, certain CRNA services, and hepatitis B 
vaccines that are paid on a reasonable cost basis.
     ``G'' to indicate drugs and biologicals that are paid 
under the OPPS transitional pass-through rules.
     ``H'' to indicate pass-through devices, brachytherapy 
sources, and separately payable radiopharmaceuticals that are paid on a 
cost basis.
     ``K'' to indicate drugs and biologicals (including blood 
and blood products) that are paid in separate APCs under the OPPS, but 
that are not paid under the OPPS transitional pass-through rules.
     ``L'' to indicate flu and pneumococcal immunizations that 
are paid at reasonable cost but to which no coinsurance or copayment 
apply.
     ``M'' to indicate services that are only billable to 
carriers and not to fiscal intermediaries and that are not payable 
under the OPPS.
     ``N'' to indicate services that are paid under the OPPS, 
but for which payment is packaged into another service or APC group.
     ``P'' to indicate services that are paid under the OPPS, 
but only in partial hospitalization programs.
     ``Q'' to indicate packaged services subject to separate 
payment under OPPS payment criteria.
     ``S'' to indicate significant procedures that are not 
discounted when multiple and that are subject to separate APC payment 
under the OPPS.
     ``T'' to indicate significant services that are paid under 
the OPPS and to which the multiple procedure payment discount under the 
OPPS applies.
     ``V'' to indicate medical visits (including emergency 
department or clinic visits) that are paid under the OPPS.
     ``X'' to indicate ancillary services that are paid under 
the OPPS.
     ``Y'' to indicate nonimplantable durable medical equipment 
that must be billed directly to the durable medical equipment regional 
carrier rather than to the fiscal intermediary.
    We proposed the payment status indicators identified above, of 
which indicators ``M'' and ``Q'' are new for CY 2006, for each HCPCS 
code and each APC listed in Addenda A and B and we requested comments 
on the appropriateness of the indicators that we proposed to assign.
    We received numerous comments regarding the appropriateness of the 
status indicator assignment for specific HCPCS codes which we discuss 
in other related sections of this final rule with comment period. In 
addition, we received several general comments regarding the payment 
status indicators and their proposed uses, which are discussed below.
    Comment: Several commenters recommended that CMS revise the 
definition of status indicator ``H'' which had been initially used only 
for pass-through device categories paid on a cost basis that were not 
subject to coinsurance. The commenters argued that the proposed 
expansion of ``H'' to include brachytherapy sources that are paid on a 
cost basis and radiopharmaceuticals that we proposed to pay on a cost 
basis for CY 2006 is inconsistent in classification because coinsurance 
applies to these items.
    One commenter made recommendations regarding other status 
indicators. For indicator ``A,'' the commenter requested that CMS 
identify what fee schedule each HCPCS code is paid under. For indicator 
``B,'' the commenter recommended that if the HCPCS code was paid to 
physicians, the same code should be paid to hospitals. The commenter 
also requested that CMS revise the definition of status indicator ``E'' 
to separately identify services that were not covered by Medicare 
according to statute from those not covered for other reasons. Lastly, 
the commenter asked whether hospitals could automatically follow the 
language in the ``C'' status indicator descriptor, which states, ``Not 
paid under the OPPS. Admit patient. Bill as inpatient.''
    Response: We have established specific status indicators in the 
OPPS for the principal purpose of making appropriate payment for 
services under the OPPS because we must signal the claims processing 
system through the OCE software as to HCPCS codes that are paid under 
the OPPS and those codes to which particular OPPS payment policies 
apply.

[[Page 68702]]

    With respect to those HCPCS codes proposed for CY 2006 with the 
status indicator ``H,'' all of those codes have individual APC 
assignments that are unique. Because the APCs for these items each 
contain only one HCPCS code, we have chosen to associate the 
application of coinsurance or the lack thereof within each of these 
APCs in our claims processing system. Therefore, in CY 2005, the APCs 
for pass-through device categories do not have associated coinsurance, 
whereas the APCs for brachytherapy sources are subject to a 20-percent 
coinsurance. Similarly, for separately payable radiopharmaceuticals in 
CY 2006, their APCs will be subject to a 20-percent coinsurance. 
Therefore, we have no operational need to establish a new status 
indicator to separately identify the coinsurance status of HCPCS codes 
paid on a cost basis under the OPPS. However, we will indicate that 
pass-through device categories receive separate cost-based pass-through 
payments that are not subject to coinsurance in the OPPS payment status 
description of status indicator ``H'' in Addendum D. We are finalizing 
for CY 2006 our proposed expansion of the definition of status 
indicator ``H'' to include radiopharmaceutical agents.
    With respect to the comments concerning status indicators ``A'' and 
``E,'' the OPPS has no administrative need to make the distinctions 
suggested by the commenter. Regarding HCPCS codes assigned status 
indicator ``B,'' in some cases such services may be paid to physicians 
and not to hospitals because the services are professional services 
only, not requiring hospital resources. In other cases, there may be 
alternate HCPCS codes that are recognized for the services under the 
OPPS. Therefore, we do not believe that status indicator ``B'' needs to 
be modified.
    Lastly, status indicator ``C'' identifies services that are only 
paid in an inpatient setting because of the nature of the procedures, 
their associated recovery times, or the physical conditions of the 
patients. Therefore, these services are not paid by Medicare under the 
OPPS. While the OPPS payment status explanation suggests what a 
hospital might do regarding admission and billing for such services, 
hospitals must follow all of their own and Medicare's policies and 
procedures regarding inpatient hospital admissions and inpatient 
billing.
    We are finalizing the definitions of status indicators ``H'' and 
``K'' as noted in Table 37 below. Consequently, all pass-through device 
categories active in CY 2006 are assigned status indicator ``H'' and 
are not subject to coinsurance, while brachytherapy sources and 
radiopharmaceuticals assigned status indicator ``H'' will be subject to 
coinsurance.

   Table 37.--CY 2006 Definitions of Status Indicators ``H'' and ``K''
------------------------------------------------------------------------
     Status indicator         Item/code/service     OPPS payment status
------------------------------------------------------------------------
H.........................  (1) Pass-Through       (1) Separate cost-
                             Device Categories.     based pass-through
                                                    payment; Not subject
                                                    to coinsurance.
                            (2) Brachytherapy      (2) Separate cost-
                             Sources.               based nonpass-
                                                    through payment.
                            (3)                    (3) Separate cost-
                             Radiopharmaceutical    based nonpass-
                             Agents.                through payment.
K.........................  Non-Pass-Through       Paid under OPPS;
                             Drugs and              Separate APC
                             Biologicals.           payment.
------------------------------------------------------------------------

    We are also finalizing our policy regarding status indicator ``Q.'' 
HCPCS codes with status indicator ``Q'' are either separately payable 
or packaged, depending on the specific circumstances of their billing. 
Addendum B displays the APC assignments of those codes with ``Q'' 
status when they are separately payable. OCE claims processing logic 
will be applied to codes assigned status indicator ``Q'' in order to 
determine if the service will be packaged or separately payable. In the 
event that a code is separately payable, the HCPCS code will receive an 
APC payment that corresponds to the APC listed in Addendum B, and would 
be subject to any discounting policies applied to that APC (identified 
by the APC status indicator). For CY 2006, hospital observation G-codes 
are assigned ``Q'' status; specific discussion of the payment policy 
applying to these services can be found in section IX. of this final 
rule with comment period.

B. Comment Indicators for the CY 2006 OPPS Final Rule

    In the CY 2006 proposed rule, we proposed to continue to use the 
two comment indicators finalized in the November 15, 2004 final rule 
with comment period (69 FR 65827 and 65828) to identify in this CY 2006 
final rule the assignment status of a specific HCPCS code to an APC and 
the timeframe when comments on the HCPCS APC assignment will be 
accepted. The two comment indicators are listed below and in Addendum 
D2.
     ''NF''--New code, final APC assignment; Comments were 
accepted on a proposed APC assignment in the Proposed Rule; APC 
assignment is no longer open to comment.
     ''NI''--New code, interim APC assignment; Comments will be 
accepted on the interim APC assignment for the new code.
    Comment: Several commenters expressed concern regarding changes in 
the proposed APC assignments for several codes (for example, CPT codes 
63655 and 78700) that were not specifically addressed in the proposed 
rule. The commenters believed that the proposed new APC assignments for 
these codes were made in error.
    Response: In general, changes in proposed APC assignments that were 
not discussed in detail in the proposed rule were made to improve 
clinical and resource homogeneity of the APC groups. We noted in the 
proposed rule that the payment status indicators for each APC and HCPCS 
code in Addenda A and B are subject to comment (70 FR 42748), and 
included the APC assignment of all individual HCPCS codes.
    Specific changes based on APC Panel recommendations are noted in 
the related topic sections of this final rule with comment period under 
section I.D. We discuss other changes throughout the final rule to 
address particular interests or concerns of the public. Addendum B of 
this final rule with comment period provides the status indicator and, 
where applicable, the APC assignment for those HCPCS codes that are 
payable under the OPPS, as well as those HCPCS codes that are being 
discontinued in CY 2006. To facilitate review of these changes, we are 
establishing new comment indicator ``CH'' in this final rule with 
comment period to designate HCPCS codes in Addendum B whose status 
indicator or APC assignment, or both, for the upcoming year will change 
from what they are in the current year:
     ``CH''--Active HCPCS codes in current year and next 
calendar year;

[[Page 68703]]

status indicator and/or APC assignment have changed.
    For example, in Addendum B of this final rule with comment period, 
the APC assignment and/or status indicator assignment for HCPCS codes 
flagged with comment indicator ``CH'' will be different for services 
furnished on or after January 1, 2006, than they were for services 
furnished on December 31, 2005. A HCPCS code showing comment indicator 
``CH'' in Addendum B is not open to comment as they are so indicated 
only for the ease of the public to review the changes made from FY 2005 
to CY 2006. Rather, in Addendum B of this final rule with comment 
period, only HCPCS codes flagged with comment indicator ``NI'' are 
subject to public comment.

XIV. Nonrecurring Policy Changes

A. Payments for Multiple Diagnostic Imaging Procedures

    Currently, under the OPPS, hospitals billing for diagnostic imaging 
procedures receive full APC payments for each service on a claim, 
regardless of how many procedures are performed using a single imaging 
modality and whether or not contiguous areas of the body are studied in 
the same session. In its March 2005 Report to Congress, MedPAC 
recommended that the Secretary should improve Medicare coding edits 
that detect unbundled diagnostic imaging services and reduce the 
technical component payment for multiple imaging services when they are 
performed on contiguous areas of the body (Recommendation 3-B). MedPAC 
pointed out that Medicare's payment rates are based on each service 
being provided independently and that the rates do not account for 
efficiencies that may be gained when multiple studies using the same 
imaging modality are performed in the same session. Further, MedPAC 
stated that those efficiencies are especially likely when contiguous 
body areas are the focus of the imaging because the patient and 
equipment have already been prepared for the second and subsequent 
procedures, potentially yielding resource savings in areas such as 
clerical time, technical preparation, and supplies, elements of 
hospital costs for imaging procedures that are reflected in APC payment 
rates under the OPPS.
    Under the OPPS, we have a longstanding policy of reducing payment 
for multiple surgical procedures performed on the same patient in the 
same operative session (Sec.  419.44(a) of the regulations). In such 
cases, full payment is made for the procedure with the highest APC 
payment rate, and each subsequent procedure is paid at 50 percent of 
its respective APC payment rate. In the proposed rule, we indicated 
that we believed that a similar policy for payment of diagnostic 
imaging services would be more appropriate than our current policy 
because it would lead to more appropriate payment for multiple imaging 
procedures of contiguous body areas that are performed during the same 
session.
    In our efforts to determine whether or not such a policy would 
improve the accuracy of OPPS payments, in the CY 2006 OPPS proposed 
rule, we identified 11 ``families'' of imaging procedures by imaging 
modality (ultrasound, computerized tomography (CT) and computerized 
tomography angiography (CTA), magnetic resonance imaging (MRI) and 
magnetic resonance angiography (MRA)) and contiguous body area (for 
example, CT and CTA of Chest/Thorax/Abdomen/Pelvis), as displayed in 
Table 38. Using those families of procedures, we examined OPPS bills 
for CY 2004 and found that there were numerous claims reporting more 
than one imaging procedure within the same family provided to a 
beneficiary by a hospital on the same day.

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    For example, the imaging procedures described by CPT codes 72192 
(Computed tomography, pelvis; without contrast material) and 74150 
(Computed

[[Page 68707]]

tomography, abdomen; without contrast material) are for studies of two 
adjacent body regions. Appropriate diagnostic evaluation of many 
constellations of patients' signs and symptoms and potentially affected 
organ systems may involve assessment of pathology in both the abdomen 
and pelvis, body areas that are anatomically and functionally closely 
related. Therefore, both studies are frequently performed in the same 
session to provide the necessary clinical information to diagnose and 
treat a patient. Although each procedure, by itself, entails the use of 
hospital resources, including certain staff, equipment, and supplies, 
some of those resource costs are not incurred twice when the procedures 
are performed in the same session and, thus we believed, should not be 
paid as if they were. Beginning with the beneficiary's arrival in the 
outpatient department, costs are incurred only once for registering the 
patient, taking the patient to the procedure room, positioning the 
patient on the table for the CT scan, among others. We proposed a 
reduction because we believed that reducing the payment for the second 
and subsequent procedures within the identified families might result 
in more accurate payments with respect to the hospital resources 
utilized for multiple imaging procedures performed in the same session.
    OPPS bills do not contain detailed information on the hospitals' 
costs that are incurred in furnishing imaging procedures. Much of the 
cost is packaged and included in the overall charges for the 
procedures. Even if bundled costs are reported with charges on separate 
lines either with HCPCS codes or with revenue codes, when there are 
multiple procedures on the claims, it is impossible for us to 
accurately attribute bundled costs to each procedure. However, at the 
time of issuance of the proposed rule, our analysis of CY 2004 hospital 
claims convinced us that some discounting of multiple imaging 
procedures is warranted. In order to determine the level of adjustment 
that would be appropriate for the second and subsequent procedures 
performed within a family in the same session, we used the MPFS 
methodology and data.
    Under the resource-based practice expense methodology used for 
Medicare payments to physicians, specific practice expense inputs of 
clinical labor, supplies and equipment are used to calculate ``relative 
value units'' on which physician payments are based. When multiple 
images are acquired in a single session, most of the clinical labor 
activities are not performed twice and many of the supplies are not 
furnished twice. Specifically, we consider that the following clinical 
labor activities included in the ``technical component'' (TC) of the 
MPFS are not duplicated for subsequent procedures: Greeting, 
positioning and escorting the patient; providing education and 
obtaining consent; retrieving prior exams; setting up the IV; and 
preparing and cleaning the room. In addition, we consider that 
supplies, with the exception of film, are not duplicated for subsequent 
procedures. Equipment time and indirect costs are allocated based on 
clinical labor time in the physician payment methodology and therefore, 
we believe, these inputs should be reduced accordingly.
    We performed analyses and found that excluding those practice 
expense inputs, along with the corresponding portion of equipment time 
and indirect costs, supported a 50-percent reduction in the payment for 
the TC portion of subsequent procedures. The items and services that 
make up hospitals' facility costs are generally very similar to those 
that are counted in the TC portion of the MPFS for diagnostic imaging 
procedures. We believed that the analytic justification for a 50-
percent reduction of the TC for the second and subsequent imaging 
procedures using the MPFS input data also provided a basis for a 
similar relative reduction to payments for multiple imaging procedures 
performed in the hospital outpatient department. Therefore, we proposed 
to make a 50-percent reduction in the OPPS payments for some second and 
subsequent imaging procedures performed in the same session, similar to 
our policy of reducing payments for some second and subsequent surgical 
procedures.
    We proposed to apply the multiple imaging procedure reduction only 
to individual services described by codes within one family, not across 
families. Reductions would apply when more than one procedure within 
the family is performed in the same session. For example, no reduction 
would apply to an MRI of the brain (CPT code 70552) in code Family 5, 
when performed in the same session as an MRI of the spinal canal and 
contents (CPT code 72142) in code Family 6. We proposed to make full 
payment for the procedure with the highest APC payment rate, and 
payment at 50 percent of the applicable APC payment rate for every 
additional procedure in the same family, when performed in the same 
session.
    At its August 2005 meeting, the APC Panel heard testimony that 
provided evidence against proceeding with the proposal to discount for 
multiple diagnostic imaging procedures at this time based on logic that 
efficiencies related to multiple imaging procedures were already 
captured in the OPPS claims data. The Panel made its recommendation 
that CMS should postpone implementation of the policy for a year so 
that we may gather more data on the implications of those changes. The 
Panel also recommended that CMS work with the American College of 
Radiology and other stakeholders in that process.
    Comment: Many commenters on the proposed rule requested that we 
postpone implementation of the proposed discounting policy until we 
perform further analyses and are able to find more substantial, 
supporting hospital-based data. The commenters stated that our use of 
the MPFS data was an inappropriate basis for estimating costs and cost 
efficiencies in the hospital outpatient department and that a 50-
percent reduction for second and subsequent services provided in the 
same imaging session was unwarranted. Commenters stated that the 
hospital cost data used by CMS to set payment rates already reflect 
savings due to the efficiencies of performing multiple procedures 
during the same session, and that the proposed policy to discount 
second and subsequent procedures is actually tantamount to discounting 
those procedures twice.
    In addition, other commenters suggested that a lower percentage 
reduction may be more accurate. Some commenters also provided specific 
recommendations for modifications to the procedures included in the 
families eligible for discounting. One commenter indicated that CMS had 
failed to consider differences in patient preparation requirements for 
some imaging procedures that would necessitate significant additional 
time between the two tests, even though they are being performed during 
the same session. The commenters asserted that any discounting payment 
policy would systematically disadvantage hospitals relative to other 
settings for imaging services and that the negative effect on rural 
hospitals, who commonly lease expensive capital equipment such as MRI 
machines, would result in discontinuation of essential diagnostic 
radiology services in many areas. Finally, the commenters identified 
implementation issues that we had not addressed in the proposed rule, 
such as defining what we meant as ``the same session.''
    Response: After careful consideration of the public comments 
received, the results of additional analyses of CY 2004 OPPS claims 
data, and the APC

[[Page 68708]]

Panel recommendation, we have decided not to finalize our proposal to 
discount for multiple diagnostic imaging procedures at this time. In 
calculating median costs for outpatient imaging procedures in the 
radiology families we proposed for discounting, for most hospitals' 
claims, we used a hospital-specific diagnostic radiology CCR for the 
conversion of charges to costs. Some hospitals reported costs and 
charges in nonstandard cost centers for ultrasound, CT, or MRI 
services, and, in general, those modality-specific CCRs were lower than 
their CCRs for diagnostic radiology. Those lower CCRs were not 
inconsistent with hospitals' experiences of particular efficiencies in 
providing multiple ultrasound, CT, or MRI services in a single setting, 
without reductions in charges for those multiple procedure sessions.
    For the majority of hospitals for which we used diagnostic 
radiology CCRs to convert charges to costs for ultrasound, CT, and MRI 
procedures, we were concerned about whether these CCRs were too general 
and broad to reflect the efficiencies of providing multiple imaging 
procedures on contiguous body parts. We found that the imaging 
procedures we identified as eligible for the proposed payment 
reductions accounted for approximately half of the total OPPS charges 
attributed by the OPPS to hospitals' diagnostic radiology cost centers. 
This result suggests that costs and charges related to ultrasound, CT, 
and MRI services in the 11 proposed families are significant 
contributors from the OPPS to hospitals' diagnostic radiology cost 
centers; we also recognize that costs and charges are incurred in 
diagnostic radiology cost centers for inpatients and patients not 
insured by Medicare. We have no way of knowing how patterns of costs 
and charges for those patients contribute to hospitals' diagnostic 
radiology CCRs, but we have no specific reason to believe that their 
patterns of services would be very different than those for Medicare 
beneficiaries in the hospital outpatient setting. Thus, it may be 
correct that our median costs for imaging services in the 11 families 
proposed for the reduction policy reflect a reduced median based, in 
part, on hospitals' provision of multiple scans in one session.
    Although our analyses provided no definite answer regarding 
whether, and by how much, the OPPS median costs for single imaging 
services in the 11 proposed families are reduced due to existing 
hospital efficiencies related to multiple services as compared with the 
hypothetical median costs for actual single services, our analyses do 
not disprove the commenters' contentions that there are efficiencies 
already reflected in their hospital costs, and therefore, their CCRs 
and the median costs for the procedures. Further, the results of our 
initial analyses do support the recommendation that we should defer 
implementation of the proposed multiple imaging procedure reduction 
policy to perform additional analyses. Depending upon the results of 
our analyses, in a future rule we may propose revisions to the 
structure of our rates in order to ensure that these rates properly 
reflect the relative costs of initial and subsequent imaging 
procedures.
    Comment: MedPAC expressed support of our multiple imaging 
discounting proposal and suggested that it would be preferable for CMS 
to be able to make the proposed reductions without the requirement for 
budget neutrality so that budget savings and lower cost sharing for 
beneficiaries would result. MedPAC realized that CMS is statutorily 
required to maintain budget neutrality in all changes made to the OPPS 
and, therefore, suggested that the Secretary offer a legislative 
proposal to Congress to allow us to capture potential savings.
    Response: We appreciate MedPAC's support for our proposed policy. 
We are also appreciative of the preliminary work that MedPAC has 
provided in this area. We have carefully considered its suggestions, as 
well as those of other commenters, in determining whether to finalize 
our proposed multiple diagnostic imaging policy and will consider their 
suggestions regarding budget neutrality issues in our ongoing work on 
this issue.
    Given the evidence presented by the commenters, the recommendation 
of the APC Panel, and our further analysis of this issue, we are 
convinced that additional analyses are in order. Therefore, during the 
coming year, we will perform analyses of relevant data to determine 
what, if any, changes in our median cost calculations for imaging 
services or discounting policies, or both, could be appropriate to 
enable us to make more accurate payments for diagnostic imaging 
services. To the extent feasible, as recommended by the APC Panel, we 
will look to the stakeholders in this policy for additional information 
and input concerning further development. As we have stated, in a 
future rule we may propose revisions to the structure of our rates in 
order to ensure that these rates properly reflect the relative costs of 
initial and subsequent imaging procedures.

B. Interrupted Procedure Payment Policies (Modifiers -52, -73, and -74)

1. Modifier -52
    Since implementation of the OPPS in 2000, we have required 
hospitals to report modifiers -52, -73, and -74 to indicate procedures 
that were terminated before their completion. Modifier -52 indicates 
partial reduction or discontinuation of services that do not require 
anesthesia, while modifiers -73 and -74 are used for procedures 
requiring anesthesia, where the patient was taken to the treatment room 
and the procedure was discontinued before anesthesia administration or 
after anesthesia administration/procedure initiation, respectively. The 
elective cancellation of procedures is not reported. Hospitals are paid 
50 percent of the APC payment for services with modifier -73 appended 
and 100 percent for procedures with modifier -52 or -74 reported, in 
accordance with Sec.  419.44(b) of the regulations. In January 2005, we 
clarified, in Program Transmittal 442, the definition of anesthesia for 
purposes of billing for services furnished in the hospital outpatient 
department in the context of reporting modifiers -73 and -74. The APC 
Panel considered the current OPPS payment policies for interrupted 
procedures at its February 2005 meeting and made a number of 
recommendations that are addressed in the following discussion.
    Current OPPS policy requires providers to use modifier -52 to 
indicate that a service that did not require anesthesia was partially 
reduced or discontinued at the physician's discretion. The physician 
may discontinue or cancel a procedure that is not completed in its 
entirety due to a number of circumstances, such as adverse patient 
reaction or medical judgment that completion of the full study is 
unnecessary. The modifier is reported most often to identify 
interrupted or reduced radiological and imaging procedures, and our 
current policy is to make full payment for procedures with a -52 
modifier.
    We have reconsidered our payment policy for interrupted or reduced 
services not requiring anesthesia and reported with a -52 modifier. At 
its February 2005 meeting, the APC Panel recommended continuing current 
OPPS payment policy at 100 percent of the APC payment for reduced 
services reported with modifier -52, although the APC Panel members 
acknowledged their limited familiarity with the specific outpatient 
hospital services and their clinical circumstances that would warrant 
the reporting of modifier -52. We examined our data to determine the

[[Page 68709]]

appropriateness of our current policy regarding payment for services 
that are reduced, and although some hospital resources are used to 
provide even an incomplete service, such as a radiology service, we are 
skeptical that it is accurate to pay the full rate for a discontinued 
or reduced radiological service. Compared to surgical procedures that 
require anesthesia, a number of general and procedure-specific 
supplies, and reserved procedure rooms that must be cleaned and 
prepared prior to performance of each specific procedure, the costs to 
the hospital outpatient department for the rooms and supplies typically 
associated with procedures not requiring anesthesia are much more 
limited. For example, the scheduling maintained for radiological 
services not requiring anesthesia generally exhibits greater 
flexibility than that for surgical procedures, and the procedure rooms 
are used for many unscheduled services that are fit in, when possible, 
between those that are scheduled. Consequently, we believe that the 
loss of revenue that may result from a surgical procedure being 
discontinued prior to its initiation in the procedure room is usually 
more substantial than that lost as the result of a discontinued service 
not requiring anesthesia, such as a radiology procedure. Nonetheless, 
under our current policy, Medicare makes the full APC payment for 
discontinued or reduced radiological procedures and only 50 percent of 
the APC payment for surgical procedures that are discontinued prior to 
initiation of the procedure or the administration of anesthesia.
    Therefore, we proposed to pay 50 percent of the APC payment amount 
for a discontinued procedure that does not require anesthesia where 
modifier -52 is reported. We believed that this proposed payment would 
appropriately recognize the hospital's costs involved with the delivery 
of a typical reduced service, similar to our payment policies for 
interrupted procedures that require anesthesia.
    We received many comments on our proposal to reduce by 50 percent 
the OPPS payment for claims for discontinued procedures reported with 
modifier -52.
    Comment: All of the commenters requested that CMS continue to make 
full payment for those procedures. One argument presented by commenters 
was that the modifier cannot be used for elective cancellations, and 
that discontinuations are often associated with some unanticipated 
incident related to the beneficiary's clinical condition. They asserted 
that, in those cases, the provider must address the beneficiary's 
clinical needs and because of the costs incurred as a result of those 
interventions, no fewer resources are used during the attempt to 
complete the procedure than there would have been if it had been 
completed without complications.
    In fact, many commenters asserted that failed attempts to complete 
procedures often result in much higher resource use than completed, 
uncomplicated procedures because the procedure's discontinuation may 
come after many supplies and much time were expended. Further, they 
stated that a reduction in the OPPS payment is unfair because there are 
many times that no other procedures can be performed during the period 
that was scheduled for the incomplete procedure.
    Commenters also stated that CMS does not fully understand hospital 
operations and urged CMS to learn more before we implement such a 
payment reduction policy. They stated that there was no indication in 
the proposed rule that CMS conducted any analysis to support the 
proposed reduction. They believed that CMS must perform cost analyses 
regarding the procedures to which the modifier is applied in order to 
evaluate the types of other services delivered when procedures are 
interrupted and the resources expended in their delivery.
    Further, the commenters believed there is still confusion among 
providers regarding how to use the -52 modifier, and suggested that CMS 
review the data to evaluate the potential financial impact of the 
proposed policy because it may be applied disproportionately to those 
providers who use the modifier appropriately.
    Response: We have conducted analyses of our hospital claims data to 
examine the usage of the -52 modifier in CY 2004. Those analyses are 
the basis for our determination that a reduction in the OPPS payments 
for interrupted procedures reported with a -52 modifier is warranted. 
We discovered 120,000 procedures in the CY 2004 hospital claims data 
with a -52 modifier appended. That level of use seemed high, and more 
in-depth analysis revealed that, although most of the usage was for 
imaging procedures, some of the services reported with the -52 modifier 
were unexpected and inappropriate (that is, office visit and diagnostic 
colonoscopy).
    The results of our data analysis appear, to some degree, to 
conflict with much of the anecdotal information presented by the 
commenters. Although the commenters asserted that many times, 
discontinuation of procedures is associated with emergency 
interventions and use of additional resources, the data did not 
indicate that this was likely to have been the primary reason for the 
procedures to which the -52 modifier was appended in CY 2004. The 
highest frequency use of the -52 modifier was among diagnostic imaging 
procedures that are typically not associated with adverse reactions 
(the top three procedures are imaging services without contrast), and 
we believe that there are some cost savings that result from not 
performing the entire procedure (for example, less film, less computer 
time, and less room time). As the claims for many of these procedures 
included little packaging and we found the line item charges for the 
services were not reduced when the -52 modifier was reported, we could 
generally not detect significant differences in costs for the same 
procedure, with and without the -52 modifier reported. However, because 
the line item charges for the services were typically similar for 
completed and interrupted procedures, we do not believe that our claims 
analysis had the potential to reflect any true hospital cost savings 
when procedures were discontinued. In general, we did not observe 
increased costs for claims for services reported with the -52 modifier. 
Further, some of the services that had the -52 modifier appended do not 
require significant supplies or procedure rooms, but, rather, are 
provided in examination rooms or other nonspecific areas of the 
outpatient department. Therefore, only minimal costs would be incurred 
by the hospital for an incomplete procedure.
    Our data also indicated that the -52 modifier was often used 
inappropriately. For example, diagnostic colonoscopies ordinarily 
require anesthesia and, therefore, when discontinued, are to be 
reported using the -73 or -74 modifiers, rather than modifier -52. 
However, what we found in the hospital claims data was that diagnostic 
colonoscopy was the fifth most frequently reported procedure with the -
52 modifier. We expect that the frequency of -52 modifier use with 
procedures in which anesthesia was administered will have decreased for 
CY 2005 as a result of our clarification regarding the use of modifiers 
-52, -73 and -74 published in Transmittal 442 issued in January 2005.
    We have examined our data and given careful consideration to the 
public comments and the APC Panel's discussion and recommendations 
regarding OPPS payment policies for interrupted procedures. Given the 
nature of the procedures that were likely

[[Page 68710]]

reported appropriately with the -52 modifier in CY 2004, we continue to 
believe that there are considerable savings associated with their 
incomplete performance. We think that in the hospital outpatient 
setting, there are generally many opportunities to utilize the rooms 
and equipment that would otherwise be left unused as a result of 
discontinued procedures. We also believe that, although there may be 
occasional instances in which a discontinued procedure appropriately 
reported with the -52 modifier consumes more resources than one that is 
completed without interruption, those are unusual events and the vast 
majority of discontinued cases are significantly less costly than 
completed procedures. Therefore, we are finalizing our proposed policy 
to apply a 50 percent reduction to the APC payments for interrupted 
procedures reported with the -52 modifier in CY 2006.
    Comment: One commenter requested that CMS give special 
consideration to capsule endoscopy of the esophagus if CMS makes final 
its proposal to reduce payment for procedures with the -52 modifier. 
The commenter indicated that the procedure is correctly coded using CPT 
91110 (Gastrointestinal tract imaging, intraluminal (e.g., capsule 
endoscopy), esophagus through ileum, with physician interpretation and 
report), with -52 appended to indicate that the ileum was not 
visualized, even in cases where visualization of the ileum was not 
intended. The commenter stated that, although the professional 
component costs are reduced if the ileum is not included in the test, 
the technical costs of the procedure are the same whether or not the 
ileum is visualized.
    The commenter suggested several options for accommodating the 
capsule endoscopy of the esophagus procedure in case CMS goes forward 
with the proposed -52 modifier policy. These included exempting 
hospitals from reporting the modifier with CPT 91110, establishing an 
administrative exception so that intermediaries would not reduce 
payment under the OPPS for the procedure, and establishing a different 
code for the procedure that would obviate the need for the -52 
modifier.
    Response: We are finalizing our proposal to reduce payments for 
procedures to which the -52 modifier is appended. We do not believe 
that exempting the capsule endoscopy procedure from the reduction 
policy is practical or warranted, given our consideration of specific 
information available to use concerning the capsule endoscopy of the 
esophagus procedure and hospital cost and clinical information 
regarding other separately payable services under the OPPS. Moreover, 
even if we believed that it was appropriate, it is not feasible for us 
to selectively exempt individual procedures from the requirements of 
our OPPS payment policy for the -52 modifier, nor should providers 
knowingly misuse a CPT code in contradiction to CPT instructions.
    While we do not establish HCPCS codes for new technology procedures 
that are described by existing HCPCS codes or combinations of HCPCS 
codes, we acknowledge that the commenter is concerned about the current 
CPT coding structure and its applicability to capsule endoscopy of the 
esophagus, along with the implications of the CY 2006 OPPS payment 
policy for services reported with the -52 modifier. As the AMA, through 
the CPT Editorial Panel, develops new CPT codes, provides coding 
instructions, and makes editorial changes to existing CPT codes, we 
encourage the commenter to bring its concerns about appropriate CPT 
coding for capsule endoscopy of the esophagus to the attention of the 
CPT Editorial Panel.
2. Modifiers -73 and -74
    When a procedure requiring anesthesia is discontinued after the 
beneficiary was prepared for the procedure and taken to the room where 
it was to be performed but before the administration of anesthesia, 
hospitals currently report modifier -73 and receive 50 percent of the 
APC payment for the planned service. The APC Panel recommended that we 
make full APC payment for services with modifier -73 reported, because 
significant hospital resources were expended to prepare the patient and 
the treatment room or operating room for the procedure. Although the 
circumstances that require use of modifier -73 occur infrequently, we 
continue to believe that hospitals realize significant savings when 
procedures are discontinued prior to initiation but after the 
beneficiary is taken to the procedure room. We believe savings are 
recognized for treatment/operating room time, single use devices, 
drugs, equipment, supplies, and recovery room time. Thus, we believe 
our policy of paying 50 percent of the procedure's APC payment when 
modifier -73 is reported remains appropriate.
    Further, in the CY 2006 proposed rule, we explored the possibility 
of applying a payment reduction for interrupted procedures in which 
anesthesia was to be used (and may have been administered) and the 
procedure was initiated. Currently, those cases are reported using 
modifier -74, and we make the full APC payment for the planned service.
    The payment policy for interrupted procedures reported with 
modifier -74 was originally adopted because we believed that the 
facility costs incurred for discontinued procedures that were initiated 
to some degree were as significant to the hospital provider as for a 
completed procedure, including resources for patient preparation, 
operating room use, and recovery room care. However, we had come to 
question that underlying assumption, especially as many surgical 
procedures have come to require specialized and costly devices and 
equipment, and our APC payments include the costs for those devices and 
equipment. At the time of the CY 2006 proposed rule, we expressed our 
belief that there may be costs that are not incurred in the event of a 
procedure's discontinuation, if a hospital is managing its use of 
devices, supplies, and equipment efficiently and conservatively. For 
example, the patient's recovery time may be less than the recovery time 
would have been for the planned procedure, because less extensive 
surgery was performed or costly devices planned for the procedure may 
not be used.
    The APC Panel recommended that we continue to pay 100 percent of 
the procedural APC payment when modifier -74 is appended to the 
surgical service because, in its opinion, procedures may frequently be 
terminated prior to completion because the patient is experiencing 
adverse effects from the surgical service or the anesthesia. The APC 
Panel speculated that, in fact, significant additional resources could 
be expended in such a situation to stabilize and treat the patient if a 
procedure were discontinued because of patient complications. However, 
we believed that many of such additional services, including critical 
care, drugs, blood and blood products, and x-rays that may be necessary 
to manage and treat such patients, are separately payable under the 
OPPS and thus the hospital's costs need not be paid through the APC 
payment for the planned procedure. Because the OPPS is paying for the 
time in the operating room, recovery room, outpatient department staff, 
and supplies related to the typical procedure, it seemed that those 
costs might be lower in those infrequent cases when the procedure is 
initiated but not completed. We acknowledged that the costs on claims 
reporting a service with modifier -74 might be particularly diverse, 
depending upon the point in the procedure when the service was 
interrupted. Thus, in the proposed rule,

[[Page 68711]]

we specifically invited comment on the clinical circumstances in which 
modifier -74 is used in the hospital outpatient department, and the 
degree to which hospitals may experience cost savings in such 
situations where procedures are not completed. We were specifically 
interested in comments regarding the disposition of devices and 
specialized equipment that are not used because a procedure is 
discontinued after its initiation. In particular, we were interested in 
obtaining information about when during the procedure the decision to 
discontinue is typically made.
    We received numerous public comments on the use of modifiers-73 and 
-74 and the associated costs of procedures billed with one of those 
modifiers.
    Comment: A number of commenters encouraged CMS to continue to make 
full OPPS payments for interrupted services requiring anesthesia that 
were coded with the -74 modifier to indicate that the procedures were 
interrupted after their initiation or after the administration of 
anesthesia. In response to the proposed rule in which we discussed our 
concerns about the appropriateness of our current policy of making full 
payment for those discontinued procedures, the commenters provided 
extensive detail about the variable clinical circumstances where the -
74 modifier is correctly reported and provided examples of the hospital 
resources required in such circumstances. They believed that the 
resources were definitely not reduced because, in most cases, all 
supplies would have been opened, the patient would continue to require 
recovery time, and the operative session might actually be longer than 
usual because of patient complications or multiple unsuccessful 
attempts to complete a complicated procedure.
    In addition, numerous commenters recommended that CMS make full APC 
payments for services reported with a -73 modifier because of 
significant hospital resources required to prepare patients for those 
procedures. The commenters pointed out that the current OPPS payment 
policy indicates that CMS makes 50 percent of the APC payment when a -
73 modifier is appended to a procedure that requires anesthesia and was 
interrupted after the patient was taken into the treatment room but 
prior to the administration of anesthesia. The commenters provided 
multiple examples of the types of costs incurred by hospitals in such 
circumstances, noting that the procedure might have been interrupted 
because a patient required treatment for an evolving medical condition, 
requiring significant hospital resources. They added that sterile 
supplies may have been opened and other resources, including staff time 
and allocated procedure room time, used. The commenters recommended 
that CMS make 100 percent of the APC payment when a -73 modifier is 
reported with a procedure. In addition, several commenters requested 
that CMS modify the definition of when the -73 modifier is to be used. 
They indicated a preference that the modifier be used earlier, when a 
procedure is cancelled while a patient is still in a holding room or 
preoperative suite where the patient has been prepared for surgery, 
rather than being applicable only after the patient has been taken into 
the treatment room.
    Response: We made no proposals to change our payment policies for 
procedures reported with modifiers -73 and -74 for CY 2006. We 
appreciate the detailed comments we received on hospitals' experiences 
with their use. We continue to believe that payment at 50 percent of 
the APC rate is appropriate for procedures reported with modifier -73, 
as we believe, in particular, that there are significant savings 
associated with decreased procedure or operating room times and 
markedly reduced recovery times. We do not believe it is appropriate to 
make procedural APC payments for services cancelled prior to a 
patient's entering the treatment or operating room. While specific 
hospital resources used in individual circumstances to prepare patients 
for surgery differ, in general, costs incurred in preoperative 
preparation are similar across surgical procedures (for example, 
establishment of intravenous access, pre-operative medication) and are 
unlikely to be closely related to the APC payments for the planned 
procedures. We expect that hospitals will continue to be cautious in 
expending resources preoperatively for procedures that may be cancelled 
prior to the patient entering the treatment room. Therefore, we will 
continue our current policy of a 50-percent reduction in the APC 
payment for services reported with the -73 modifier for the CY 2006 
OPPS.
    We also will maintain our current policy of paying 100 percent of 
the APC payment for procedures reported with the -74 modifier for CY 
2006. We agree with the commenters that, in general, the clinical 
circumstances where the -74 modifier is reported may be particularly 
diverse and unpredictable. While we understand that any reductions in 
APC payments under such circumstances could pose some risk of the OPPS 
making inappropriate payments for hospital resources utilized for such 
discontinued procedures, we remain concerned that making the full APC 
payment could also be inappropriate if a discontinued procedure with 
the -74 modifier appended was a high cost service requiring an 
expensive device that was not actually utilized. In the future, we may 
further examine our hospital claims data to analyze cost information 
for procedures reported with and without the -74 modifier.
    We will provide billing guidance for CY 2006 regarding modifiers -
52, -73, and -74 to offer hospitals additional instructions regarding 
the appropriate use of the three modifiers in the OPPS. Our goal is to 
assure that hospitals understand and report these modifiers correctly 
so that they receive appropriate payments for the services they 
provide.

XV. OPPS Policy and Payment Recommendations

A. MedPAC Recommendations

1. Report to the Congress: Medicare Payment Policy (March 2005)
    The Medicare Payment Advisory Commission (MedPAC) submits reports 
to Congress in March and June that summarize payment policy 
recommendations. The March 2005 MedPAC report included the following 
two recommendations relating specifically to the hospital OPPS:
    a. Recommendation 1: The Congress should increase payment rates for 
the outpatient prospective payment system by the projected increase in 
the hospital market basket index less 0.4 percent for calendar year 
2006. A discussion regarding hospital update payments, and the effect 
of the market basket update in relation to other factors influencing 
OPPS payment rates, is included in section II.C. (``Conversion Factor 
Update for CY 2006'') of this preamble.
    b. Recommendation 2: The Congress should extend hold-harmless 
payments under the outpatient prospective payment system for rural sole 
community hospitals and other rural hospitals with 100 or fewer beds 
through calendar year 2006. A discussion of the expiration of the hold-
harmless provision is included in section II.F. of this preamble. See 
also section II.G. (``Adjustment for Rural Hospitals'') of this 
preamble for a discussion of section 411 of Pub. L. 108-173.

[[Page 68712]]

2. Report to the Congress: Issues in a modernized Medicare Program--
Payment for Pharmacy Handling Costs in Hospital Outpatient Departments 
(June 2005)
    A discussion of the MedPAC recommendations relating to pharmacy 
overhead payments in the hospital outpatient department can be found in 
section V. of the preamble of this final rule with comment period.

B. APC Panel Recommendations

    Recommendations made by the APC Panel are discussed in sections of 
this preamble that correspond to topics addressed by the APC Panel. 
Minutes of the APC Panel's February 2005 and August 2005 meeting are 
available online at http://www.cms.hhs.gov/faca/apc/default.asp.

C. GAO Hospital Outpatient Drug Acquisition Cost Survey

    A discussion of the June 30, 2005 GAO report entitled ``Medicare: 
Drug Purchase Prices for CMS Consideration in Hospital Outpatient Rate-
Setting'' and section 621(a)(1) of the MMA is included in section V. of 
the preamble of this final rule with comment period.

XVI. Physician Oversight of Nonphysician Practitioners in Critical 
Access Hospitals

A. Background

    Section 1820 of the Act, as amended by section 4201 of the Balanced 
Budget Act of 1997, Pub. L. 105-33, provides for the establishment of 
Medicare Rural Hospital Flexibility Programs (MRHFPs), under which 
individual States may designate certain facilities as critical access 
hospitals (CAHs). Facilities that are so designated and meet the CAH 
conditions of participations (COPs) under 42 CFR part 485, subpart F, 
will be certified as CAHs by CMS. The MRHFP replaced the Essential 
Access Community Hospital (EACH)/ Rural Primary Care Hospital (RPCH) 
program.

B. Proposed Policy Change in the Proposed Rule

    Under the former EACH/RPCH program, physician oversight was 
required for services provided by nonphysician practitioners such as 
physician assistants (PAs), nurse practitioners (NPs), and clinical 
nurse specialists (CNSs) in a CAH. Under the MRHFP, the statute 
likewise requires physician oversight for nonphysician practitioners.
    We note that under the EACH/RPCH program, we allowed for situations 
when the RPCH had an unusually high volume of outpatients (100 or more 
during a 2-week period) that were treated by nonphysician 
practitioners. We stated that it would be sufficient for a physician to 
review and sign a 25-percent sample of medical records for patients 
cared for by a nonphysician practitioner unless State practice and laws 
require higher standards for physician oversight for nonphysician 
practitioners.
    However, the current regulation does not distinguish between 
inpatient and outpatient physician oversight. Although the CAH CoPs at 
Sec.  485.631(b)(iv) provide that a doctor of medicine or osteopathy 
periodically reviews and signs the records of patients cared for by 
NPs, CNSs, or PAs, section 1820(c)(2)(B)(iv)(III) of the Act states 
that CAH inpatient care provided by a PA or NP is subject to the 
oversight of a physician. The review of outpatient records is not 
addressed in the statute. Presently, for patients cared for by 
nonphysician practitioners, the interpretative guidelines set forth in 
Appendix W of the State Operations Manual (CMS Publication 7) set 
parameters for inpatient and outpatient physician reviews. To maintain 
consistency from the EACH/RPCH program to the CAH program, we indicated 
in the Interpretative Guidelines that CAHs with a high volume of 
outpatients need to have a physician review and sign a random sample of 
25 percent of outpatient medical records. Therefore, the interpretative 
guidelines allow a physician to review and sign a 25-percent sample of 
outpatient records for patients under the care of a nonphysician 
practitioner.
    Nonphysician practitioners recently brought to our attention their 
concerns regarding their ability to practice under their State laws 
governing scope of practice. Particularly, the nonphysician 
practitioners believe the current regulations and guidelines impede 
their ability to practice in CAHs. Certified nurse midwives, NPs, and 
CNSs disagree with the need for a physician to review records of 
patients that have been in their care when State law permits them to 
practice independently.
    MedPAC, in its June 2002 Report to Congress, stated that certified 
nurse midwives, NPs, CNSs, and PAs are health care practitioners who 
furnish many of the same health care services traditionally provided by 
physicians, such as diagnosing illnesses, performing physical 
examinations, ordering and interpreting laboratory tests, and providing 
preventive health services. In many States, advance practice nurses are 
permitted to practice independently or in collaboration with a 
physician. MedPAC reported that NPs have independent practice authority 
in 21 States, and CNSs have independent practice authority in 20 
States. PAs, by law, must work under the supervision of a physician. 
Based on the American Medical Association's guidelines for PAs, the 
definition of supervision varies by State. Generally, the physician 
assistant is a representative of the physician, treating the patient in 
the style and manner developed and directed by the supervising 
physician.
    MedPAC further reported that several studies have shown comparable 
patient outcomes for the services provided by physician and 
nonphysician practitioners. MedPAC reported that research conducted by 
Mundinger et al.\2\ in 2000, Brown and Grimes \3\ in 1993, Ryan in 
1993,\4\ and the Office of Technology Assessment \5\ in 1986 has shown 
that nonphysician practitioners can perform about 80 percent of the 
services provided by primary care physicians with comparable quality. A 
randomized trial of physicians and NPs providing care in ambulatory 
care settings who had the same authority, responsibilities, 
productivity, and administrative requirements were shown to have 
comparable patient outcomes (see pages 5 and 11 of the June 2002 MedPAC 
report). Nonphysician practitioners are trained with the expectation 
that they will exercise a certain degree of autonomy when providing 
patient care. About 90 percent of NPs and 50 percent of PAs provide 
primary care.
---------------------------------------------------------------------------

    \2\ Mundinger, M.O., Kane, R.I., Lenez, E.R., et al., Primary 
Care Outcomes in Patients Treated by Nurse Practitioners or 
Physicians, A Randomized Trial, The Journal of the American Medical 
Association, January 5, 2000, Vol. 283, No. 1, pages 59-68.
    \3\ Brown, S.A. and Grimes, D.E., Nurse Practitioners and 
Certified Nurse Midwives: A Meta Analysis of Studies on Nurses in 
Primary Care Roles, American Nurses Association, Washington, DC, 
March 1993.
    \4\ Ryan, S.A., Nurse Practitioners: Educational Issues, 
Practice Styles, and Service Barriers. In Clawson, D.K., Osterweis, 
M., eds: The Role of Physician Assistants and Nurse Practitioners in 
Primary Health Care Association of Academic Health Centers, 
Washington, DC, 1993.
    \5\ Office of Technology Assessment, U.S. Congress: Nurse 
Practitioners, Physician Assistants, and Certified Nurse Midwives: A 
Policy Analysis, Health Technology Case Study 37, Washington, DC, 
U.S. Government Printing Office, 1986.
---------------------------------------------------------------------------

    We believe sufficient control and oversight of these nonphysician 
practitioners is generated by State laws which allow independent 
practice authority. However, we remain concerned that, in those States 
without independent practice laws, we have a responsibility to continue 
to ensure the

[[Page 68713]]

safety and quality of services provided to Medicare beneficiaries.
    Therefore, in the CY 2006 OPPS proposed rule (70 FR 42753), we 
proposed to revise the regulation at Sec.  485.631(b)(1)(iv) and to add 
new paragraphs (b)(1)(v) and (b)(1)(vi) to Sec.  485.631 to defer to 
State law regarding the review of records for outpatients cared for by 
nonphysician practitioners. We proposed that if State law allows these 
practitioners to practice independently, we would not require 
physicians to review and sign medical records of outpatients cared for 
by these nonphysician practitioners in CAHs. However, for those States 
that do not allow independent practice of nonphysician practitioners, 
we proposed to continue to maintain the requirement that periodic 
review is performed by the physician on outpatient records under the 
care of a nonphysician practitioner in a CAH. We believe a review at 
least every 2 weeks provides a sufficient time period without unduly 
imposing an administrative burden on the physician or the CAH. In 
addition, we proposed to allow the CAH to determine the sample size of 
the reviewed records in accordance with current standards of practice 
to allow the CAH flexibility in adapting the review to its particular 
circumstances. Specifically, we proposed that the physician 
periodically (that is, at least once every 2 weeks) reviews and signs a 
sample of the outpatient records of nonphysician practitioners 
according to the facility policy and current standards of practice. We 
proposed to still require periodic review and oversight of all 
inpatient records by physicians.

C. Public Comments Received on the Proposed Rule and Our Responses

    We received 11 public comments concerning our proposed revision of 
Sec.  485.631(b)(1)(iv) and the addition of Sec. Sec.  485.631(b)(1)(v) 
and (b)(1)(vi).
    Comment: The majority of commenters supported our proposal to defer 
to State law regarding the need for physicians to review and sign the 
medical records for outpatients cared for by nonphysician practitioners 
in CAHs. The commenters also stated that CMS should extend the 
application of this policy to physician review of inpatient records for 
patients cared for by nonphysician practitioners.
    Response: We appreciate the commenters' support of our proposed 
policy change to defer to State law for physician oversight of 
outpatients cared for by nonphysician practitioners in CAHs. However, 
we believe the statute is very specific as to the oversight requirement 
for inpatients treated by a nonphysician practitioner in a CAH. As we 
stated in the proposed rule, section 1820(c)(2)(B)(iv)(III) of the Act 
provides that CAH inpatient care provided by a PA, NP, or CNS is 
subject to the oversight of a physician. Therefore, we will still 
require physicians to periodically review and sign medical records of 
all inpatients cared for by a nonphysician practitioner.
    Comment: Two commenters stated that, given the growing clinical 
independence of NPs, they have concern with CMS adding additional 
Federal requirements for patient record reviews that go beyond existing 
State licensure laws. Some commenters stated that most States do not 
use the term ``independent practice,'' but instead define independent 
practice as the practitioner functioning autonomously. Another 
commenter stated that some States do not address independent practice 
and, instead, describe their oversight agreement as a ``collaborative'' 
agreement between the physician and the nonphysician practitioner.
    Response: We share the commenters' concern with imposing 
requirements that do not increase the safety and health outcomes of 
patients. We proposed the new policy to eliminate the requirement for a 
physician to review and sign all medical records of outpatients (or a 
random sample of 25 percent for CAHs with a high volume of outpatients) 
cared for by a nonphysician practitioner to provide CAHs with the 
flexibility to comply with State laws for outpatient oversight. We 
believe that sufficient control and oversight of nonphysician 
practitioners are generated by State laws.
    We also believe that the proposed policy on physician oversight of 
outpatient care provided by nonphysician practitioners allows for 
collaborative arrangements. Nonphysician practitioners who are required 
by State law to have a collaborative agreement with a physician would 
be expected to follow any State law, current standards of practice, and 
the CAH's policies concerning physicians collaborating with 
nonphysician practitioners who provide care for outpatients. We further 
understand that, in many instances, the terms ``autonomous'' and 
``independent'' are synonymous. Although PAs are not considered 
independent practitioners because they always work under physician 
supervision, PAs perform their duties with a high degree of autonomy in 
providing patient care and making medical decisions. Based on these 
comments, and to provide clarity, we are removing the word 
``independently'' from the final regulation at Sec.  485.63(b)(1)(v) 
and (vi) and further revising the regulation to state that, where State 
law requires record reviews or co-signatures, or both, by a 
collaborating physician, physicians must periodically, but not less 
than every 2 weeks, review and sign a sample of outpatient records of 
patients who were cared for by nonphysician practitioners in accordance 
with the policies of the CAH and current standards of practice. In 
addition, where State law does not require record reviews or co-
signatures, or both, by a collaborating physician, physician are not 
required to review and sign outpatient records of patients who were 
cared for by nonphysician practitioners.

D. Final Policy

    After carefully considering the public comments received, we are 
adopting the proposed policy changes as final with the following 
modifications: We are revising the regulation at Sec.  485.63(b)(1)(v) 
and (vi) by removing references to independent practice. We are further 
providing that physicians must review and sign a sample of outpatient 
records periodically, but not less than every 2 weeks, only if State 
law requires such record reviews or co-signatures, or both, by a 
collaborating physician.

XVII. Files Available to the Public Via the Internet

    Addenda A and B to this final rule with comment period provide 
various data pertaining to CY 2006 payment for services under the OPPS. 
In previous years, we have listed in Addendum B hundreds of HCPCS codes 
describing services that are not paid under the hospital OPPS. To 
conserve resources and to make Addendum B more relevant to the OPPS, in 
this final rule with comment period that updates the OPPS for CY 2006, 
we are including in Addendum B only the HCPCS codes for services that 
are paid under the OPPS, as well as HCPCS codes that will be 
discontinued in CY 2006. The HCPCS codes published in Addendum B to 
this final rule with comment period, as well as HCPCS codes for items 
or services furnished in a hospital outpatient setting that are paid 
under a fee schedule or payment methodology other than the OPPS, and 
HCPCS codes for items or services not recognized or covered by 
Medicare, are available to the public on the CMS Web site at: http://www.cms.hhs.gov/providers/hopps.
    For the convenience of the public, we are also including on this 
same CMS

[[Page 68714]]

Web site, in a format that can be readily downloaded and manipulated, a 
table that displays the HCPCS data in Addendum B sorted by APC 
assignment, which is identified on the Web site as Addendum C. In 
addition, we are including on the CMS Web site, in a format that can be 
easily downloaded and manipulated, Addendum A.
    We note that in the CY 2006 OPPS proposed rule, we included, as 
Addenda H, I, J, K, L, M, N, and O, reprints of wage index related 
tables from the IPPS that would be used for the OPPS for CY 2006. In 
this final rule with comment period, we are not reprinting these tables 
as they were issued in the final FY 2006 IPPS rule, and corrected. 
Rather, we are providing a link on the CMS Web site at: http://www.cms.hhs.gov/providers/hopps to all of the FY 2006 IPPS wage index 
related tables, except for the table containing the out-migration wage 
adjustment data referenced in section II.D. of this preamble. The out-
migration table is presented as Addendum L in this final rule with 
comment period. For additional assistance, contact Rebecca Kane, (410) 
786-0378.

XVIII. Collection of Information Requirements

    In the CY 2006 OPPS proposed rule, we solicited public comments on 
the following information collection requirement and the associated 
burden that is subject to the Paperwork Reduction Act of 1995 (PRA):

Section 485.631(b)(1)(iv), (b)(1)(v), and (b)(1)(vi)--Condition of 
Participation: Staffing and Staff Responsibilities

    In the proposed rule, we proposed to revise Sec.  485.631(b)(1)(iv) 
and add new Sec. Sec.  485.631(b)(v) and (vi) of the regulations to 
require, as a condition of participation for a CAH, that a doctor of 
medicine or osteopathy (1) periodically review and sign the records of 
all inpatients cared for by nurse practitioners, clinical nurse 
specialists, certified nurse midwives, or physician assistants; and (2) 
periodically, but not less than every 2 weeks, review and sign a sample 
of outpatient records of patients cared for by nurse practitioners, 
clinical nurse specialists, certified nurse midwives, or physician 
assistants according to the policy and standard practice of the CAH 
when State law does not allow these nonphysician practitioners to 
practice independently. In addition, we proposed to provide that a 
doctor of medicine or osteopathy is not required to review and sign 
outpatient records of patients cared for by nurse practitioners, 
clinical nurse specialists, certified nurse midwives, or physician 
assistants when State law allows these nonphysician practitioners to 
practice independently.
    Based on public comments received on the proposed policy changes in 
Sec.  485.631(b)(1), in this final rule with comment period, we have 
revised the proposed section to remove the term ``independently'' and 
to specify that where State law requires record review or co-
signatures, or both, by a collaborating physician, physicians must 
review and sign a sample of outpatient records of patients who were 
cared for by nonphysician practitioners in accordance with the policies 
of the CAH and current standards of practice. We refer the readers to 
section XVI.C. of this preamble for a fuller discussion of these final 
changes.
    The information collection requirements associated with these 
provisions are subject to the PRA. However, the collection requirement 
is currently approved under OMB control number 0938-0328 with an 
expiration date of January 31, 2008.

XIX. Regulatory Impact Analysis

A. OPPS: General

    We have examined the impacts of this final rule with comment period 
as required by Executive Order 12866 (September 1993, Regulatory 
Planning and Review), the Regulatory Flexibility Act (RFA) (September 
19, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, 
the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), and Executive 
Order 13132.
1. Executive Order 12866
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely reassigns responsibility of duties) directs agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year).
    We estimate that the effects of the provisions that will be 
implemented by this final rule with comment period will result in 
expenditures exceeding $100 million in any 1 year. We estimate the 
total increase (from changes in this final rule with comment period as 
well as enrollment, utilization, and case-mix changes) in expenditures 
under the OPPS for CY 2006 compared to CY 2005 to be approximately $1.4 
billion. Therefore, this final rule with comment period is an 
economically significant rule under Executive Order 12866, and a major 
rule under 5 U.S.C. 804(2).
2. Regulatory Flexibility Act (RFA)
    The RFA requires agencies to determine whether a rule would have a 
significant economic impact on a substantial number of small entities. 
For purposes of the RFA, small entities include small businesses, 
nonprofit organizations, and government agencies. Most hospitals and 
most other providers and suppliers are small entities, either by 
nonprofit status or by having revenues of $6 million to $29 million in 
any 1 year (65 FR 69432).
    For purposes of the RFA, we have determined that approximately 37 
percent of hospitals would be considered small entities according to 
the Small Business Administration (SBA) size standards. We do not have 
data available to calculate the percentages of entities in the 
pharmaceutical preparation manufacturing, biological products, or 
medical instrument industries that would be considered to be small 
entities according to the SBA size standards. For the pharmaceutical 
preparation manufacturing industry (NAICS 325412), the size standard is 
750 or fewer employees and $67.6 billion in annual sales (1997 business 
census). For biological products (except diagnostic) (NAICS 325414), 
with $5.7 billion in annual sales, and medical instruments (NAICS 
339112), with $18.5 billion in annual sales, the standard is 50 or 
fewer employees (see the standards Web site at http://www.sba.gov/regulations/siccodes/). Individuals and States are not included in the 
definition of a small entity.
3. Small Rural Hospitals
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. With 
the exception of hospitals located in certain New England counties, for 
purposes of section 1102(b) of the Act, we previously defined a small 
rural hospital as a hospital with fewer than 100 beds that is located 
outside of a Metropolitan Statistical Area (MSA) (or New England County 
Metropolitan Area (NECMA)). However, under the new labor market 
definitions that we adopted in the November 15, 2004 final rule with 
comment period, for CY 2005 (consistent with the FY

[[Page 68715]]

2005 IPPS final rule), we no longer employ NECMAs to define urban areas 
in New England. Therefore, we now define a small rural hospital as a 
hospital with fewer than 100 beds that is located outside of an MSA. 
Section 601(g) of the Social Security Amendments of 1983 (Pub. L. 98-
21) designated hospitals in certain New England counties as belonging 
to the adjacent NECMA. Thus, for purposes of the OPPS, we classify 
these hospitals as urban hospitals. We believe that the changes in this 
final rule with comment period will affect both a substantial number of 
rural hospitals as well as other classes of hospitals and that the 
effects on some may be significant. Therefore, we conclude that this 
final rule with comment period will have a significant impact on a 
substantial number of small entities.
4. Unfunded Mandates
    Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4) also requires that agencies assess anticipated costs and 
benefits before issuing any rule that may result in a single 
expenditure in any 1 year by State, local, or tribal governments, in 
the aggregate, or by the private sector, of $120 million. This final 
rule with comment period does not mandate any requirements for State, 
local, or tribal governments. This final rule with comment period also 
does not impose unfunded mandates on the private sector of more than 
$120 million dollars.
5. Federalism
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it publishes any rule (proposed or final rule) 
that imposes substantial direct costs on State and local governments, 
preempts State law, or otherwise has Federalism implications.
    We have examined this final rule with comment period in accordance 
with Executive Order 13132, Federalism, and have determined that it 
will not have an impact on the rights, roles, and responsibilities of 
State, local or tribal governments. As reflected in Table 39, the 
impact analysis shows that payments to governmental hospitals 
(including State, local, and tribal governmental hospitals) will 
increase by 1.9 percent under this final rule with comment period.
    Comment: Several commenters noted that OPPS is the only major 
Medicare payment system that does not include a teaching adjustment and 
urged CMS to compare the unit costs of teaching hospitals with other 
types of hospitals in order to support a teaching adjustment to the 
OPPS. One commenter suggested that such a study was necessary in light 
of the lower average payment increase estimated for major teaching 
hospitals in the proposed rule, 0.6 percent. The commenter hypothesized 
that teaching hospitals are more dependent on pass-through, outlier, 
and device-dependent APC payments, for which payments are less stable 
than for other hospitals, and that this is one reason for an 
adjustment. Finally, the commenter cited the statement in the April 7, 
2000 final rule, where CMS indicated that it would study cost and 
payment differentials among hospitals, including teaching facilities, 
once there was reliable claims data under the OPPS.
    Response: We do not believe that a study of the unit costs of 
teaching hospitals relative to other classes of hospitals is necessary 
at this time. As we stated in our April 7, 2000 final rule, we believe 
it is important to monitor ongoing trends for specific classes of 
hospitals. However, we also believe that such studies are especially 
warranted when hospitals experience a negative increase in payments. In 
this specific instance, major teaching hospitals are projected to 
experience an overall increase in payments of 1.0 percent. This 
increase is lower than the market basket update to the conversion 
factor because it reflects extra payments for drugs authorized by Pub. 
L. 108-173 for 2 years that expire in CY 2006. For the past 2 years, 
teaching hospitals have been receiving more payment for drugs than 
budget neutrality would allow. The increase in total payments for 
teaching hospitals is less this year because the provision allowing 
extra drug payments expires. Without considering these expiring 
payments for drugs, major teaching hospitals are projected to receive a 
3.5 percent increase in total payments and minor teaching hospitals are 
projected to experience an increase of 4.1 percent. In light of such 
large increases, we do not believe that a study of unit costs for 
teaching hospitals is necessary. In addition, we are not convinced that 
a reliance on pass-through, outlier, or device-dependent APCs is a 
reason to propose an adjustment. We believe that the source of payments 
is less important than total payments for each hospital.

B. Impact of Changes in This Final Rule With Comment Period

    We are adopting as final several proposed changes to the OPPS that 
are required by the statute. We are required under section 
1833(t)(3)(C)(ii) of the Act to update annually the conversion factor 
used to determine the APC payment rates. We are also required under 
section 1833(t)(9)(A) of the Act to revise, not less often than 
annually, the wage index and other adjustments. In addition, we must 
review the clinical integrity of payment groups and weights at least 
annually. Accordingly, in this final rule with comment period, we are 
updating the conversion factor and the wage index adjustment for 
hospital outpatient services furnished beginning January 1, 2006, as we 
discuss in sections II.C. and II.D., respectively, of this preamble. We 
also are revising the relative APC payment weights using claims data 
from January 1, 2004, through December 31, 2004 and updated cost report 
information. In response to a provision in Pub. L. 108-173 that we 
analyze the cost of outpatient services in rural hospitals relative to 
urban hospitals, we are increasing payments to rural SCHs. Section 
II.G. of this preamble provides greater detail on this rural 
adjustment. Finally, we are removing three device categories from pass-
through payment status. In particular, section IV.C.1. of this preamble 
discusses the expiration of pass-through status for devices.
    Under this final rule with comment period, the update change to the 
conversion factor as provided by statute will increase total OPPS 
payments by 3.7 percent in CY 2006. The inclusion in CY 2006 of payment 
for specific covered outpatient drugs within budget neutrality, and the 
expiration of additional drug payment outside budget neutrality, result 
in a net increase of 2.2 percent. The changes to the APC weights, 
changes to the wage indices, and the introduction of a payment 
adjustment for rural SCHs will not increase OPPS payments because these 
changes to the OPPS are budget neutral. However, these updates do 
change the distribution of payments within the budget neutral system as 
shown in Table 39 and described in more detail in this section.

C. Alternatives Considered

    Alternatives to the changes we are making and the reasons that we 
have chosen the options that we have are discussed throughout this 
final rule with comment period. Some of the major issues discussed in 
this final rule with comment period and the options considered are 
discussed below.
1. Option Considered for Payment Policy for Separately Payable Drugs 
and Biologicals
    As discussed in detail in section V.B.3 of this preamble, section 
1833(t)(14)(A)(iii) of the Act requires

[[Page 68716]]

that payment for specified covered outpatient drugs in CY 2006, as 
adjusted for pharmacy overhead costs, be equal to the average 
acquisition cost for the drug for that year as determined by the 
Secretary and taking into account the hospital acquisition cost survey 
data collected by the GAO in CY 2004 and CY 2005. If hospital 
acquisition cost data are not available, the law requires that payment 
be equal to payment rates established under the methodology described 
in section 1842(o), section 1847A, or section 1847B of the Act, as 
calculated and adjusted by the Secretary as necessary.
    The payment policy that we are adopting for CY 2006 is to pay for 
the acquisition and pharmacy overhead costs of all separately payable 
drugs and biologicals at the payment rates effective in the physician 
office setting as determined using the manufacturer's average sales 
price (ASP) methodology. (The payment rate in the physician office 
setting is ASP+6 percent.) These payment rates listed in this final 
rule with comment period are based on ASP data from the second quarter 
of 2005, which were used to set payment rates for drugs and biologicals 
in the physician office setting effective October 1, 2005, as these are 
the most recent numbers available to us during the development of this 
final rule with comment period. For the few drugs and biologicals, 
other than radiopharmaceuticals as discussed earlier, where ASP data 
are unavailable, we used the mean costs from the CY 2004 hospital 
claims data to determine their packaging status and for ratesetting. We 
believe that the ASP-based payment rates serve as the best proxy for 
the average acquisition and pharmacy overhead costs for the drug or 
biological because the rates calculated using the ASP methodology are 
based on the manufacturers' sales prices from the second quarter of CY 
2005 and take into consideration information on sales prices to 
hospitals. Furthermore, payments for drugs and biologicals using the 
ASP methodology will allow for consistency of drug pricing between the 
physician offices and hospital outpatient departments.
    In the CY 2006 proposed rule, we proposed paying for acquisition 
costs of drugs alone at the rate of ASP+6 percent, with an additional 2 
percent of ASP for the pharmacy overhead costs of drugs. At that time, 
we also considered paying for separately payable drugs and biologicals 
(before payment for pharmacy overhead) at ASP+3 percent, based on the 
average relationship between the GAO mean purchase prices and ASP. We 
also considered ASP+8 percent (again before payment for pharmacy 
overhead) based on the average relationship between the mean costs from 
hospital claims data and ASP.
    In the proposed rule, we did not set payment rates for separately 
payable drugs and biologicals at ASP+3 percent because the GAO data 
reflect hospital acquisition costs from a less recent period of time, 
as the midpoint of the time period when the survey was conducted is 
January 1, 2004, and it will be difficult to update the GAO mean 
purchase prices during CY 2006 and in future years. Because the changes 
in drug payments are required to be budget neutral by law, we note that 
paying for separately payable drugs and biologicals at ASP+3 percent 
relative to ASP+6 percent would have made available approximately an 
additional $60 million for other items and services paid under the 
OPPS.
    In the proposed rule, we also did not use ASP+8 percent to set 
payment rates for drugs and biologicals in CY 2006. The statute 
specifies that CY 2006 payments for specified covered outpatient drugs 
are required to be equal to the ``average'' acquisition cost for the 
drug. Payment at ASP+8 percent for drugs or biologicals, which 
represented the average relationship between the mean cost from 
hospital claims data and ASP at the time of the proposed rule, would 
reflect the product's acquisition cost plus pharmacy overhead cost, 
instead of acquisition cost only. Therefore, we believed at that time 
that it would not be appropriate for us to use ASP+8 percent to set the 
payment rates for drugs and biologicals in CY 2006.
    In this final rule with comment period, we have updated data on 
drug costs, and we have reviewed the available alternatives in the 
light of those data. Based on our updated data, the average 
relationship between the mean costs from hospital claims data and ASP 
is now ASP+6 percent, rather than ASP+8 percent as in the proposed 
rule. Therefore, in this final rule with comment period, we are 
adopting the policy of paying both for the acquisition and pharmacy 
overhead costs of separately payable drugs at a combined rate of ASP+6 
percent. As in the proposed rule, we considered several alternatives. 
We again considered paying for separately payable drugs and biologicals 
at ASP+3 percent, reflecting the GAO survey data on drug costs. 
However, payment at this level would reflect only the acquisition costs 
of drugs and, therefore, would not be sufficient to pay for acquisition 
and overhead costs. We also considered paying for the acquisition costs 
of drugs alone at the proposed rate of ASP+6 percent. A commenter from 
MedPAC noted that, given that ASP values have declined in recent 
quarters and that the GAO's data did not fully reflect rebates, the 
proposed drug payment rates of ASP+6 percent could be too high. In 
addition, our more recent claims data indicate that this rate would 
represent excessive payment for acquisition costs of drugs alone. 
Instead, the hospital claims data suggest that ASP+6 percent is an 
appropriate rate for the acquisition and pharmacy overhead costs of 
drugs because pharmacy overhead costs are already built into hospital 
charges for drugs. Therefore, we are adopting that policy in this final 
rule with comment period.
    Payment for drugs and biologicals under this methodology adds 
approximately $500 million to the amount of drug costs that was 
included in our budget neutrality calculation for the CY 2005 OPPS. The 
effect of the addition of this amount is offset by reductions in 
weights for other services that are largely a function of updated, 
reduced CCRs.
2. Payment Adjustment for Rural SCHs
    In section II.G. of this preamble, we are finalizing a 7.1 percent 
payment adjustment increase for rural SCHs. Section 1833(t)(13)(A) of 
the Act instructs the Secretary to conduct a study to determine if 
rural hospital outpatient costs exceed urban hospital outpatient costs. 
In addition, under section 1833(t)(13)(B) of the Act, the Secretary is 
given authorization to provide an appropriate adjustment to rural 
hospitals, by January 1, 2006, if rural hospital costs are determined 
to be greater than urban hospital costs.
    For this final rule with comment period, we conducted the same 
analyses that we conducted for the proposed rule with updated data, and 
in addition, we examined the relative costliness of several classes of 
hospitals identified in public comments. We used regression analysis to 
analyze the differences in the outpatient cost per unit between rural 
and urban hospitals in order to compare costs after accounting for 
other factors that influence unit cost, including local labor supply, 
and complexity and volume of services.
    As in the proposed rule, our initial regression analysis found that 
all rural hospitals give some indication of having higher cost per 
unit, after controlling for labor input prices, service-mix complexity, 
volume, facility size, and type of hospital. In order to assess whether 
the small difference in costs was uniform across rural hospitals or 
whether all of the variation was

[[Page 68717]]

attributable to a specific class of rural hospitals, we included more 
specific categories of rural hospitals in our explanatory regression 
analysis. We divided rural hospitals into categories indicated by their 
eligibility for the expiring hold harmless provision: rural SCHs, small 
rural hospitals with 100 or fewer beds, and all other rural hospitals. 
Further analysis revealed that only rural SCHs are more costly than 
urban hospitals holding all other variables constant. We also examined 
the relative costliness of other types of hospitals suggested by public 
comments, including urban SCHs and MDHs. We observed no significant 
difference in the unit costs of small rural hospitals with 100 or fewer 
beds, all other rural hospitals, MDHs, urban SCHs, and all other urban 
hospitals. Therefore, we are adopting a 7.1 percent payment increase 
for rural SCHs on all services except drugs, biologicals, and those 
paid under pass-through for CY 2006.
3. Change in the Percentage of Total OPPS Payments Dedicated to Outlier 
Payments
    In section II.H. of this preamble, we are changing the percentage 
of total OPPS payments dedicated to outlier payments to 1.0 percent in 
CY 2006 from the current policy of 2.0 percent. We also will continue 
using a fixed-dollar threshold in addition to the threshold based on a 
multiple of the APC amount, which we have applied since the beginning 
of the OPPS. In response to findings reported by the MedPAC in its 
March 2004 Report to Congress that the OPPS outlier policy based on a 
multiple threshold only targeted outlier payments to simple and low 
cost procedures. In the same report, MedPAC recommended eliminating the 
entire outlier policy from the OPPS because the OPPS pays by service 
rather than by case and, therefore, hospitals are already paid for 
every increased service associated with a costly case. In addition, 
cost variability is lower for expensive, complex procedures than less 
expensive and simpler procedures. We implemented the fixed-dollar 
threshold in the CY 2005 OPPS that targets outlier payments to complex 
and expensive procedures that ultimately could impact beneficiary 
access to services. Our decision to reduce the percentage of total 
payments dedicated to outlier payments continues to refine our outlier 
policy to improve its appropriateness for the OPPS. A reduction in the 
percentage of total payment set aside for outlier payments with the 
fixed-dollar threshold continues to target outlier payments to those 
services where one costly occurrence could pose a financial risk for 
hospitals, but limits these payments to the most complex and costly 
services. At 1.0 percent, the OPPS outlier policy becomes catastrophic 
insurance against an occurrence of a very costly service. At the same 
time, reducing the percentage of total payments dedicated to outlier 
payments increases the conversion factor, redistributing 1.0 percent of 
total payments to almost all services.
    Alternatives to this policy are either to remain at 2.0 percent or 
to increase the percentage of payments dedicated to outliers to the 
statutory limit of 3.0 percent. Increasing the percentage of payments 
dedicated to outliers could target more payment to outliers, but is at 
odds with OPPS payment by service rather than case. It is not possible 
to eliminate outlier payments entirely without a statutory change.

D. Limitations of Our Analysis

    The distributional impacts presented here are the projected effects 
of the final policy changes, as well as the statutory changes that will 
be effective for CY 2006, on various hospital groups. We estimate the 
effects of individual policy changes by estimating payments per service 
while holding all other payment policies constant. We use the best data 
available but do not attempt to predict behavioral responses to our 
policy changes. In addition, we do not make adjustments for future 
changes in variables such as service volume, service-mix, or number of 
encounters.

E. Estimated Impacts of This Final Rule With Comment Period on 
Hospitals

    The estimated increase in the total payments made under OPPS is 
limited by the increase to the conversion factor set under the 
methodology in the statute. The distributional impacts presented do not 
include assumptions about changes in volume and service-mix. The 
enactment of Pub. L. 108-173 on December 8, 2003, provided for the 
payment of additional dollars in CY 2004 and CY 2005 to providers of 
OPPS services outside of the budget neutrality requirement for 
specified covered outpatient drugs. These provisions expire in CY 2006. 
Pub. L. 108-173 also provided for additional payment outside of the 
budget neutrality requirement for wage indices for specific hospitals 
reclassified under section 508 through CY 2007. Table 39 shows the 
estimated redistribution of hospital payments among providers as a 
result of a new APC structure, wage indices, and adjustment for rural 
SCHs, which are budget neutral; the estimated distribution of increased 
payments in CY 2006 resulting from the combined impact of APC 
recalibration, wage effects, the rural SCH adjustment, and the market 
basket update to the conversion factor; and, finally, estimated 
payments considering all payments for CY 2006 relative to all payments 
for CY 2005, including the expiration of extra payment for specified 
covered outpatient drugs outside budget neutrality and the change in 
the percentage of total payments dedicated to outlier payments. Because 
the expiring payments for drugs were not budget neutral, most classes 
of hospitals will experience a positive update for CY 2006 that is 
lower than the market basket update. In essence, the presence of extra 
payment in previous years makes the increase for CY 2006 look 
artificially low. We also estimate that a few classes of hospitals may 
receive less payment in CY 2006. Because updates to the conversion 
factor, including the update of the market basket, the removal of 
additional money for pass-through payments, and a change in the 
percentage of total payments dedicated to outlier payments are applied 
uniformly, observed redistributions of payments in the impact table 
largely depends on the mix of services furnished by a hospital (for 
example, how the APCs for the hospital's most frequently furnished 
services would change), the impact of the wage index changes on the 
hospital, and the impact of the payment adjustment for rural SCHs. 
However, total payments made under this system and the extent to which 
this final rule with comment period redistributes money during 
implementation would also depend on changes in volume, practice 
patterns, and the mix of services billed between CY 2005 and CY 2006, 
which CMS cannot forecast. Overall, the final OPPS rates for CY 2006 
will have a positive effect for all hospitals paid under the OPPS. 
Adopted changes will result in a 2.2 percent increase in Medicare 
payments to all hospitals, exclusive of transitional pass-through 
payments. Removing cancer and children's hospitals because their 
payments are held harmless to the pre-BBA ratio between payment and 
cost, suggests that adopted changes will result in a 2.3 percent 
increase in Medicare payments to all other hospitals.
    To illustrate the impact of the CY 2006 changes adopted in this 
final rule with comment period, our analysis begins with a baseline 
simulation model that uses the final CY 2005 weights, the FY 2005 final 
post-reclassification IPPS wage indices, as subsequently corrected

[[Page 68718]]

and without additional increases resulting from section 508 
reclassifications, and the final CY 2005 conversion factor. Columns 2, 
3, and 4 in Table 39 reflect the independent effects of the APC 
reclassification and recalibration changes, updated wage indices, and 
the new adjustment for rural SCHs, respectively. These effects are 
budget neutral, which is apparent in the overall zero impact in payment 
for all hospitals in the top row. Column 2 shows the independent effect 
of changes resulting from the reclassification of services codes among 
APC groups and the recalibration of APC weights based on a complete 
year of CY 2004 hospital OPPS claims data and more recent cost report 
data. This column also shows the impact of incorporating drug payment 
at 106 percent of ASP and, for radiopharmaceuticals, payment at cost, 
within budget neutrality. We modeled the independent effect of APC 
recalibration by varying only the weights, the final CY 2005 weights 
versus the final CY 2006 weights, in our baseline model, and 
calculating the percent difference in payments. Column 3 shows the 
impact of updating the wage index used to calculate payment by applying 
the final FY 2006 IPPS wage index, as subsequently corrected. The OPPS 
wage index used in Column 3 does not include changes to the wage index 
for hospitals reclassified under section 508 of Pub. L. 108-173. We 
modeled the independent effect of updating the wage index by varying 
only the wage index, using the final CY 2006 scaled weights, and a CY 
2005 conversion factor that included a budget neutrality adjustment for 
changes in wage effects between CY 2005 and CY 2006. Column 4 shows the 
budget neutral impact of adding a 7.1 percent adjustment to payment for 
services other than drugs, biologicals, and those receiving pass-
through payments to rural SCHs. We modeled the independent effect of 
the payment adjustment for rural SCHs by varying only the presence of 
the rural adjustment, using CY 2006 scaled weights, the FY 2006 wage 
indices, and a CY 2005 conversion factor with budget neutrality 
adjustments for the new wage index and the adjustment for rural SCHs.
    Column 5 demonstrates the combined ``budget neutral'' impact of APC 
recalibration, the wage index update, and the new adjustment for rural 
SCHs on various classes of hospitals, as well as the impact of updating 
the conversion factor with the market basket update. We modeled the 
independent effect of budget neutrality adjustments and the market 
basket update by using the weights and wage indices for each year to 
model CY 2006 requirements, and using a CY 2005 conversion factor that 
included the market basket update and budget neutrality adjustments for 
differences in wages and the adjustment for rural SCHs.
    Finally, Column 6 depicts the full impact of the CY 2006 policy on 
each hospital group by including the effect of all the changes for CY 
2006 and comparing them to all payments in CY 2005, including those 
required by Pub. L. 108-173. Column 6 shows the combined budget neutral 
effects of Columns 2 through 5, plus the impact of changing the 
percentage of total payments dedicated to outlier payments to 1.0 
percent, the impact of changing the percentage of total payments 
dedicated to transitional pass-through payments to 0.17 percent, the 
impact of expiring payments for drugs added on top of OPPS payments in 
CY 2005 as a result of Pub. L. 108-173, and the continued presence of 
payment for wage index increases for hospitals reclassified under 
section 508 of Pub. L. 108-173.
    We modeled the independent effect of all changes in Column 6 using 
the final weights for CY 2005 with additional money for drugs 
authorized by Pub. L. 108-173 and the final weights for CY 2006. The 
wage indices in each year include wage index increases for hospitals 
eligible for reclassification under section 508 of Pub. L. 108-173. We 
used the final conversion factor for CY 2005 of $56.983 and the final 
CY 2006 conversion factor of $59.511. Column 6 also contains simulated 
outlier payments for each year. We used the charge inflation factor 
used in the final FY 2006 IPPS rule of 7.21 percent to increase 
individual costs on the CY 2004 claims to reflect CY 2005 dollars, and 
we used the most recent overall CCR for each hospital as calculated for 
the APC median setting process. Using the CY 2004 claims and a 7.21 
percent charge inflation factor, we currently estimate that actual 
outlier payments for CY 2005, using a multiple threshold of 1.75 and a 
fixed-dollar threshold of $1,175 will be 1.15 percent of total 
payments, which is .85 percent lower than the 2.0 percent that we 
projected in setting outlier policies for CY 2005. Outlier payments of 
only 1.15 percent appear in the CY 2005 comparison in Column 6. We used 
the same set of claims and a charge inflation factor of 14.94 percent 
to model the CY 2006 outliers at 1.0 percent of total payments using a 
multiple threshold of 1.75 and a fixed-dollar threshold of $1,250.

Column 1: Total Number of Hospitals

    Column 1 in Table 39 shows the total number of hospital providers 
(4,222) for which we were able to use CY 2004 hospital outpatient 
claims to model CY 2005 and CY 2006 payments by classes of hospitals. 
We excluded all hospitals for which we could not accurately estimate CY 
2005 or CY 2006 payment and entities that are not paid under the OPPS. 
The latter entities include CAHs, all-inclusive hospitals, and 
hospitals located in Guam, the U.S. Virgin Islands, and the State of 
Maryland. This process is discussed in greater detail in section II.A. 
of this preamble. At this time, we are unable to calculate a 
disproportionate share (DSH) variable for hospitals not participating 
in the IPPS. Hospitals for which we do not have a DSH variable are 
grouped separately and generally include psychiatric hospitals, 
rehabilitation hospitals, and long-term care hospitals. Finally, 
section 1833(t)(7)(D) of the Act permanently holds harmless cancer 
hospitals and children's hospitals to the proportion of their pre-BBA 
payment relative to their costs. Because this final rule with comment 
period will not impact these hospitals negatively, we removed them from 
our impact analyses. We show the total number (4,162) of OPPS 
hospitals, excluding the hold-harmless cancer hospitals and children's 
hospitals, on the second line of the table.

Column 2: APC Recalibration

    The combined effect of APC reclassification and recalibration, 
including the payment for drugs and biologicals at 106 percent of ASP 
for acquisition and pharmacy overhead costs, resulted in larger changes 
in Column 2 than are typically observed for APC recalibration. Overall, 
these changes have no impact on all urban hospitals, which show no 
projected change in payments, although some classes of urban hospitals 
experience decreases in payments. However, changes to the APC structure 
for CY 2006 tend to favor, slightly, urban hospitals that are not 
located in large urban areas. We estimate that large urban hospitals 
will experience a decline of 0.7 percent, while ``other'' urban 
hospitals experience an increase of 0.9 percent. Urban hospitals with 
between 0 and 99 beds and between 100 and 199 beds experience 
decreases, while the largest urban hospitals, those with beds greater 
than 500 experience increases of 0.7 percent. With regard to volume, 
all urban hospitals except those with the highest volume, experience 
decreases in payments. The lowest

[[Page 68719]]

volume hospitals experience the largest decrease of 5.4 percent. Urban 
hospitals providing the highest volume of services demonstrate a 
projected increase of 0.2 percent as a result of APC recalibration. 
Estimated decreases in payment for urban hospitals are also 
concentrated in some regions, specifically, New England, Pacific, South 
Atlantic, and Mountain, with the first two experiencing the largest 
decreases of 1.0 each. On the other hand, a few regions experience 
moderate increases. Urban hospitals in the East South Central and West 
North Central regions experience increases of 1.6 and 2.3 percent, 
respectively.
    Overall, rural hospitals show a modest 0.2 percent decrease as a 
result of changes to the APC structure, and this 0.2 percent decrease 
appears to be concentrated in rural hospitals that are not rural SCHs, 
which experience a 0.6 percent increase. Notwithstanding a modest 
overall decline in payments, there is substantial variation among 
classes of rural hospitals. Specifically, rural hospitals with less 
than 100 beds and between 150 and 199 beds experience decreases, with 
hospitals having less than 50 beds experiencing the largest decrease of 
1.6 percent. Rural hospitals with greater than 200 beds experience the 
largest increase of 1.6 percent. With regard to volume, all rural 
hospitals, except those with the highest volume, experience decreases 
in payments. The lowest volume hospitals experience the largest 
decrease of 5.7 percent. Rural hospitals providing the highest volume 
of services demonstrate a projected increase of 0.8 percent as a result 
of APC recalibration. Decreases for rural hospitals occur in every 
region except West North Central and the Middle Atlantic. The largest 
decreases are observed in the Pacific (-1.8 percent), New England (-1.4 
percent), and West South Central (-1.4 percent) regions. On the other 
hand, rural hospitals in the Middle Atlantic and West North Central 
regions experience increases of 1.8 and 3.5 percent, respectively.
    Among other classes of hospitals, the largest observed impacts 
resulting from APC recalibration include declines of 0.6 percent for 
nonteaching hospitals and increases of 0.4 percent for major teaching 
hospitals. Hospitals treating the most low-income patients (high DSH 
percentage) and the least low-income patients demonstrate declines of 
0.2 percent. Urban hospitals that are treating DSH patients and are 
also teaching hospitals experience increases of 0.5 percent. We project 
that hospitals for which a DSH percentage is not available, including 
psychiatric hospitals, rehabilitation hospitals, and long-term care 
hospitals will experience decreases in payments of 4.5 percent, and for 
the urban subset, 5.9 percent. Classifying hospitals by type of 
ownership suggests that proprietary and government hospitals will lose 
1.1 and 0.1 percent, respectively, while voluntary hospitals will gain 
0.2 percent.

Column 3: New Wage Indices

    Changes introduced by the final FY 2006 IPPS wage indices will have 
a modest impact in CY 2006, increasing payments to rural hospitals 
slightly and having no effect overall on urban hospitals. We estimate 
that rural SCHs will experience an increase in payments of 0.1 percent, 
while all other rural hospitals experience an increase of 0.2 percent. 
With respect to volume, rural hospitals with the least volume and rural 
hospitals with moderate volume experience decreases of 0.1 and 0.2 
percent, respectively. For both facility size and volume, no category 
of rural hospitals experiences an increase greater than 0.3 percent. 
Examining hospitals by region reveals slightly greater variability. We 
estimate that rural hospitals in several regions will experience 
decreases in payment up to 0.3 percent due to wage changes, including 
the Middle Atlantic, South Atlantic, West North Central, and West South 
Central regions. However, rural hospitals in the remaining regions 
experience increases. We estimate that the New England region will see 
the largest increase of 2.2 percent.
    Overall, urban hospitals experience no change in payments as a 
result of the new wage indices. With respect to facility size, we 
estimate that urban hospitals with between 300 and 499 beds will 
experience a decrease in payments of 0.2 percent. Urban hospitals with 
less than 99 beds experience the largest increase of 0.2 percent. When 
categorized by volume, urban hospitals with the largest volumes 
experience no change in payment as a result of changes to the wage 
index, and urban hospitals with the lowest volume experience a 0.4 
percent increase in payment. We estimate that urban hospitals in all 
but the Pacific, New England and the Middle Atlantic regions will 
experience modest decreases due to wage changes of no more than 0.5 
percent (except for urban hospitals in Puerto Rico, with a decrease of 
1 percent). Urban hospitals in the Pacific and New England regions will 
experience an increase of 1.2, and 0.2 percent, respectively. Urban 
hospitals in the Middle Atlantic region will experience no change in 
payments.
    Looking across other categories of hospitals, we estimate that 
updating the wage index will lead major teaching hospitals to lose 0.2 
percent and hospitals without graduate medical education programs are 
estimated to gain 0.1 percent. Hospitals serving between 0.0 and 0.10 
percent of low-income patients lose up to 0.1 percent, whereas 
hospitals serving other percentages of low-income patients experience 
no change. Government, voluntary, and proprietary hospitals as classes 
will experience no change in payment due to wage changes.

Column 4: New Adjustment for Rural SCHs

    As discussed in section II.G. of this preamble, we have increased 
payments for all services except drugs and biologicals to rural SCHs by 
7.1 percent. This resulted in an adjustment to the conversion factor of 
0.996. Targeting payments to these rural hospitals uniformly reduces 
payments to all other hospitals by 0.4 percent. The uniform reduction 
for all urban and other rural hospitals is evident in Column 4. The 
periodic appearance of a - 0.3 among urban classes of hospitals is due 
to the difference between the definition of rural used for this impact 
table and the broader definition of rural employed for the adjustment 
for rural SCHs. SCHs located in urban areas that are reclassified as 
rural for wage index purposes are eligible for the adjustment. The 
observed increase of 5.6 percent for rural SCHs is lower than 7.1 
percent because drugs and biologicals do not receive the payment 
adjustment. The remaining classes of rural hospitals show variable 
increases that reflect the distribution of rural SCHs. The largest 
increases are observed among rural hospitals with small numbers of 
beds, with moderate volume, and regions in the western half of the 
country.

Column 5: All Budget Neutrality Changes and Market Basket Update

    The addition of the market basket update alleviates any negative 
impacts on payments for CY 2006 created by the budget neutrality 
adjustments made in Columns 2, 3, and 4, with the exception of 
hospitals with the lowest volume of services and hospitals not paid 
under IPPS, including psychiatric hospitals, rehabilitation hospitals, 
and long-term care hospitals. In many instances, the redistribution of 
payments created by APC recalibration offset those introduced by 
updating the wage indices. However, in a few instances, negative APC 
recalibration changes compound a reduction in payment from updating the 
wage index. In addition,

[[Page 68720]]

all urban and rural hospitals that are not SCHs experience a decrease 
in payment of 0.4 percent as a result of the payment adjustment for 
rural SCHs.
    We estimate that the cumulative impact of the budget neutrality 
adjustments and the addition of the market basket update will result in 
an increase in payments for urban hospitals of 3.3 percent, which is 
less than the market basket update of 3.7 percent. Large urban 
hospitals will experience an increase of 2.5 percent and other urban 
hospitals will experience an increase of 4.2 percent. Most other 
classes of urban hospitals experience updates lower than the market 
basket update. Urban hospitals with the lowest volume experience a 
negative market basket update, which is largely a function of the 5.4 
percent decrease in payments attributable to changes to the APC 
structure. Urban hospitals with moderate volume will also lose the bulk 
of the market basket update as a result of a 2.9 percent decrease 
resulting from the APC recalibration and the addition of the payment 
adjustment for rural SCHs. The same compounding effect holds true for 
urban hospitals in the New England and South Atlantic regions and 
Puerto Rico, which experience the lowest overall increases of 2.5, 2.3, 
and 1.4 percent, respectively. Urban hospitals in the East South 
Central and West North Central regions experience increases in payment 
for CY 2006 above the market basket update.
    We estimate that the cumulative impact of budget neutrality 
adjustments and the market basket update will result in an overall 
increase for rural hospitals of 5.7 percent, with rural SCHs 
experiencing an update of 10.2 percent and other rural hospitals 
experiencing an update of 2.9 percent. In general, rural hospitals with 
more than 50 beds and the highest volume rural hospitals experience 
increases of more than 5.3 percent, which generally results from the 
combined impact of increases in payment from APC recalibration, wage 
changes, and the new adjustment for rural SCHs. We estimate that low-
volume rural hospitals will experience a decrease in payments of 1.1 
percent, which results from the combined impact of decreased payments 
attributable to APC recalibration and wage index update that are larger 
than the estimated 1.2 percent increase from the adjustment for rural 
SCHs. Rural hospitals also demonstrate large increases by region. We 
estimate that all regions except East South Central will experience 
increases larger than the market basket update. For these regions, in 
aggregate, the payment adjustment for rural SCHs compensates for 
observed decreases in payment due to APC recalibration or the update 
for the wage indices.
    The changes across columns for other classes of hospitals are 
fairly moderate and most show updates relatively close to the market 
basket update with the exception of hospitals not paid under the IPPS. 
These hospitals show negative payment updates as a result of negative 
payment changes for APC recalibration and the adjustment for rural 
SCHs. Proprietary hospitals also show an increase much less than the 
market basket as a result of negative payments under APC recalibration.

Column 6: All Changes for CY 2006

    Column 6 compares all changes for CY 2006 to final payment for CY 
2005 and includes any additional dollars resulting from provisions in 
Pub. L. 108-173 in both years, changes in outlier payment percentages 
and thresholds, and the difference in pass-through estimates. Overall, 
we estimate that hospitals will gain 2.2 percent under this final rule 
with comment period in CY 2006 relative to total spending in CY 2005, 
which included Pub. L. 108-173 dollars for drugs and wage indices. When 
we excluded cancer and children's hospitals, which are held harmless, 
the gain is 2.3 percent. While hospitals receive the 3.7 percent 
increase due to the market basket update appearing in Column 5 and the 
additional 0.85 percent in outlier payments that we estimate as not 
being paid in CY 2005, we estimate that hospitals also experience an 
overall 2.25 percent loss due to the expiration of additional payment 
for drugs in CY 2005, as well as a 0.07 percent reduction due to the 
change in estimated pass-through payments for CY 2006. That is, without 
the net additional 0.78 (0.85-0.07) percent increase in outlier 
payments due to lower than expected payment for outliers in CY 2005, 
hospitals will receive a positive increase in payments of 1.5 percent. 
Paying the net additional 0.78 percent in CY 2006 increases overall 
gains to 2.2 (rounded 2.23) percent, which is lower than the market 
basket update. The change in the outlier thresholds has a small 
redistributive impact by class of hospital and the vast majority of 
redistributive impacts observed between Columns 5 and 6 can be 
attributed to the loss of additional payment for drugs outside budget 
neutrality required by Pub. L. 108-173. The redistributive impact of 
the change in the outlier target from 2 to 1 percent is discussed in 
greater detail under section XIX.F. of this preamble.
    In general, urban hospitals appear to experience the largest 
negative impacts from the combined effects of losing additional 
payments for drugs, the decreases in payment from the payment 
adjustment for rural SCHs, and, frequently, negative changes in 
payments due to APC recalibration. We estimate that hospitals in large 
urban areas will gain 1.2 percent in CY 2006 and hospitals in other 
urban areas will gain 2.8 percent. We estimate that low-volume urban 
hospitals will experience a decrease in total payments of 1.0 percent 
between CY 2005 and CY 2006. This negative update includes the 
cumulative effect of negative payments from APC recalibration, a 
negative impact of the payment adjustment for rural SCHs, a loss of 
payments outside budget neutrality for drugs and a loss of some outlier 
payments. All other classes of urban hospitals show increases between 
0.4 and 3.8 percent. We note that urban hospitals in the East South 
Central and West North Central regions are estimated to receive 
slightly more than the market basket in spite of expiring drug 
payments, the largest increases for urban hospitals.
    Overall, rural hospitals experience larger increases than those 
observed for urban hospitals because the payment adjustment for rural 
SCHs tends to buffer the loss of payments for drugs from Pub. L. 108-
173. However, this adjustment is only for rural SCHs. Overall, we 
estimate that rural hospitals will experience an increase in payments 
of 3.9 percent. However, we also estimate that rural SCHs will 
experience an increase of 7.6 percent, and that the other rural 
hospitals will only experience an increase of 1.5 percent. With the 
exception of low-volume rural hospitals, no category of rural hospitals 
experiences a decrease in payments between CY 2005 and CY 2006, and a 
few groups of rural hospitals show increases comparable to, or better 
than, the market basket. For example, rural hospitals with more than 
100 beds experience increases of at least 4.1 percent. Rural hospitals 
with moderate to high volume experience increases of no less than 2.8 
percent. Across the regions, all rural hospitals except those in the 
New England and East North Central regions experience increases in 
payments greater than 3.2 percent. Rural hospitals in the West North 
Central region experience an increase of 6.1 percent. We project that 
low-volume rural hospitals, like low-volume urban hospitals, will 
experience a decrease in payments of 2.2 percent (due to decreases in 
payments for mid-level and high-level emergency visits).

[[Page 68721]]

    Among other classes of hospitals, we estimate that hospitals not 
paid under the IPPS (DSH Not Available) will experience decreases in 
payments between CY 2005 and CY 2006 of 1.5 percent. Factoring in 
expiring payments for drugs through Pub. L. 108-173, we estimate that 
major teaching hospitals will experience an increase of 1.0 percent.
BILLING CODE 4210-01-P
[GRAPHIC] [TIFF OMITTED] TR10NO05.031


[[Page 68722]]


[GRAPHIC] [TIFF OMITTED] TR10NO05.032


[[Page 68723]]


[GRAPHIC] [TIFF OMITTED] TR10NO05.033

BILLING CODE 4210-01-C

F. Estimated Impact of the Change in Outlier Policy

    As stated in section II.H. of this preamble, we are changing the 
percentage of payments that we have set aside for outlier payments from 
2.0 percent to 1.0 percent. In order to accommodate this reduction in 
outlier payments, we increased the fixed-dollar threshold to $1,250. 
This threshold changed from the $1,575 in the proposed rule because we 
used updated claims, final rule APC payment rates, an updated charge 
inflation factor of 14.94 percent, and each hospital's overall CCR that 
we calculate as part of our APC median estimation process.
    Table 40 shows the impact of reducing the amount of total aggregate 
OPPS payments set aside for outlier payments to 1.0 percent of CY 2006 
payments. Column 2 compares estimated CY 2006 total payments with a 1.0 
percent outlier policy and an additional 1.0 percent of total payments 
in the conversion factor with estimated CY 2006 total payment under a 
2.0 percent policy. Using updated claims data, a new charge inflation 
factor, new APC payment rates, and CCRs, we estimate that the fixed-
dollar threshold associated with a 2.0 percent outlier policy would 
have been $550. We used this fixed-dollar threshold to model the 2.0 
percent outlier policy. All other components of the payment system are 
held constant, including the multiple threshold of 1.75 times the APC 
payment rate. This impact differs from any impact attributable to 
outlier payments in Table 40 because the comparison here is within 
estimates of CY 2006 and not across CY 2005 and CY 2006. We expect that 
this policy change would slightly redistribute payments away from 
hospitals receiving a lot of outlier payments to hospitals generally 
not receiving outlier payments. We also would expect the losses to be 
concentrated in a few classes of hospitals and the benefits to be 
diffused across all other classes of hospitals.
    Table 40 depicts small changes in total payments across all classes 
of hospitals from reducing the amount of total payments set aside for 
outlier payments from 2.0 percent to 1.0 percent. As expected, modest 
reductions in total payments are observed for hospitals that probably 
receive a larger percentage of their total payments as outlier 
payments, including major teaching hospitals and large urban hospitals. 
We estimate that major teaching hospitals will experience a decrease of 
0.7 percent in total payments and that large urban hospitals will 
experience a decrease of 0.1 percent in total payments. These same 
hospitals are also responsible for the 0.4 percent decrease in total 
payments for urban hospitals with more than 500 beds, the 0.1 percent 
decrease for teaching hospitals with a disproportionate share of low-
income patients, and the 0.5 percent decrease for hospitals serving a 
large percentage of low-income patients. Also evident are slight 
increases in total payments for most other hospitals arising from the 
increase in the conversion factor. For example, rural hospitals gain 
0.2 percent overall. The

[[Page 68724]]

decreases in total payments for low-volume rural and low-volume urban 
hospitals appear to be attributable to a concentrated loss of outlier 
payments for moderate cost and moderate complexity services that fail 
to meet the higher fixed-dollar threshold.

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BILLING CODE 4210-01-C

G. Accounting Statement

    As required by OMB Circular A-4 (available at http://www.whitehousegov/omb/circulars/a004/a-4.pdf, in Table 41 below, we 
have prepared an accounting statement showing the classification of the 
expenditures associated with the provisions of this final rule with 
comment period. This table provides our best estimate of the increase 
in Medicare payments under the OPPS as a result of the changes 
presented in this final rule with comment period based on the data for 
4,222 hospitals. All expenditures are classified as transfers to 
Medicare providers (that is, OPPS).

      Table 41.--Accounting Statement: Classification of Estimated
                  Expenditures From CY 2005 to CY 2006
------------------------------------------------------------------------
                Category                            Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers.........  $660 Billion.
From Whom to Whom......................  Federal Government to OPPS
                                          Medicare Providers.
Category...............................  Reduction in Costs.
Annualized Monetized Reduction.........  $436 Million.
From Whom to Whom......................  Reduction in Payments from
                                          Beneficiaries to Federal
                                          Government.
    Total..............................  $1.1 Billion.
------------------------------------------------------------------------

H. Estimated Impacts of This Final Rule With Comment Period on 
Beneficiaries

    For services for which the beneficiary pays a copayment of 20 
percent of the payment rate, the beneficiary share of payment will 
increase for services for which OPPS payments will rise and will 
decrease for services for which OPPS payments will fall. For example, 
for a mid-level office visit (APC 0601), the minimum unadjusted 
copayment in CY 2005 was $11.22. In this final rule with comment 
period, the minimum unadjusted copayment for APC 601 is $12.05 because 
the OPPS payment for the service will increase under this final rule 
with comment period, and there is no national unadjusted copayment. In

[[Page 68727]]

another example, for a Level IV Needle Biopsy (APC 0037), in the CY 
2005 OPPS, the national unadjusted copayment in CY 2005 was $234.20, 
and the minimum unadjusted copayment was $106.47. In this final rule 
with comment period, the national unadjusted copayment for APC 0037 is 
$228.76 because the national unadjusted copayment is limited to 40 
percent of the APC payment rate for CY 2006, as discussed in section 
II. of the preamble to this final rule with comment period. The minimum 
unadjusted copayment for APC 0037 is $114.38. However, in all cases, 
the statute limits beneficiary liability for copayment for a service to 
the inpatient hospital deductible for the applicable year. For 2006, 
the inpatient deductible is $952.
    In order to better understand the impact of changes in copayment on 
beneficiaries we modeled the percent change in total copayment 
liability using CY 2004 claims. We estimate that total beneficiary 
liability for copayments will decline as an overall percentage of total 
payments from 33 percent in CY 2005 to 29 percent in CY 2006. This 
represents a decline in beneficiary liability of more than $400 million 
from the CY 2005 OPPS to the CY 2006 OPPS.
Conclusion
    The changes in this final rule with comment period will affect all 
classes of hospitals. Some hospitals experience significant gains and 
others less significant gains, but almost all hospitals will experience 
positive updates in OPPS payments in CY 2006. Table 39 demonstrates the 
estimated distributional impact of the OPPS budget neutrality 
requirements and an additional 2.2 percent increase in payments for CY 
2006, after considering the expiring provision for additional drug 
payment under Pub. L. 108-173 and a change in the percentage of total 
payments dedicated to outliers and transitional pass-through payments, 
exclusive of transitional pass-through payments, across various classes 
of hospitals. The accompanying discussion, in combination with the rest 
of this final rule with comment period constitutes a regulatory impact 
analysis.
    In accordance with the provisions of Executive Order 12866, this 
final rule with comment period was reviewed by the Office of Management 
and Budget.

XX. Waiver of Proposed Rulemaking

    We ordinarily publish a notice of proposed rulemaking in the 
Federal Register and invite public comment on the proposed rule. The 
notice of proposed rulemaking includes a reference to the legal 
authority under which the rule is proposed, and the terms and 
substances of the proposed rule or a description of the subjects and 
issues involved. This procedure can be waived, however, if an agency 
finds good cause that a notice-and-comment procedure is impracticable, 
unnecessary, or contrary to the public interest and incorporates a 
statement of the finding and its reasons in the rule issued.
    As established in regulations, HCPCS codes are used to identify 
services for which predetermined amounts are paid under the OPPS (42 
CFR 419.2(a)). The HCPCS is a national coding system comprised of Level 
I (CPT) codes and Level II (HCPCS National Codes) that are intended to 
provide uniformity to coding procedures, services, and supplies across 
all types of medial providers and suppliers. Level I (CPT) codes are 
copyrighted by the AMA and consist of several categories, including 
Category I codes which are five-digit numeric codes, and Category II 
codes which are temporary codes to track emerging technology, services, 
and procedures, as we discuss elsewhere in this preamble.
    AMA issues an annual update of the CPT code set each fall, with 
January 1 as the effective date for implementing the updated CPT codes. 
The HCPCS, including both Level I and Level II codes, is similarly 
updated annually on a calendar year basis. Annual coding changes are 
not available to the public until the fall immediately preceding the 
annual January update of the OPPS. Because of the timing of the release 
of these codes, it is impracticable for us to provide prior notice and 
solicit comment on these codes in advance of the publication of the 
annual final rule that implements the OPPS update. Yet it is imperative 
that these codes be accounted for and recognized timely under the OPPS 
for payment because services represented by these codes will be 
provided to Medicare beneficiaries by outpatient hospital departments 
once issued by the applicable group. Moreover, as we explain above, 
regulations implementing HIPAA (42 CFR parts 160 and 162) require that 
the HCPCS be used to report health care services, including outpatient 
services paid under the OPPS. Therefore, we believe it would be 
contrary to the public interest to delay recognition of these codes as 
payment could not then be made for those services provided under these 
codes and public access to these services would be impeded.
    Therefore, for good cause, we waive notice and comment rulemaking 
procedures with respect to these codes noted in Addendum B with the 
status indicator ``NI.'' However, we are providing a 60-day public 
comment period on these codes.

List of Subjects

42 CFR Part 419

    Hospitals, Medicare, Reporting and recordkeeping requirements.

42 CFR Part 485

    Grant program-health, Health facilities, Medicaid, Medicare, 
Reporting and recordkeeping requirements.


0
For the reasons stated in the preamble of this final rule with comment 
period, the Centers for Medicare & Medicaid Services is amending 42 CFR 
Chapter IV as set forth below:

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

0
A. Part 419 is amended as follows:
0
1. The authority citation for Part 419 continues to read as follows:

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


0
2. Section 419.43 is amended by adding a new paragraph (g) to read as 
follows:


Sec.  419.43  Adjustments to national program payment and beneficiary 
copayment amounts.

* * * * *
    (g) Payment adjustment for certain rural hospitals. (1) General 
rule. CMS provides for additional payment for covered hospital 
outpatient services not excluded under paragraph (g)(4) of this 
section, furnished on or after January 1, 2006, if the hospital--
    (i) Is a sole community hospital under Sec.  412.92 of this 
chapter; and
    (ii) Is located in a rural area as defined in Sec.  412.64(b) of 
this chapter or is treated as being located in a rural area under Sec.  
412.103 of this chapter.
    (2) Amount of adjustment. The amount of the additional payment 
under paragraph (g)(1) of this section is determined by CMS and is 
based on the difference between costs incurred by hospitals that meet 
the criteria in paragraphs (g)(1)(i) and (g)(1)(ii) of this section and 
costs incurred by hospitals located in urban areas.
    (3) Budget neutrality. CMS establishes the payment adjustment under 
paragraph (g)(2) of this section in a budget neutral manner, excluding 
services and groups specified in paragraph (g)(4) of this section.
    (4) Excluded services and groups. Drugs and biologicals that are 
paid

[[Page 68728]]

under a separate APC and devices of brachytheraphy consisting of a seed 
or seeds (including a radioactive source) are excluded from 
qualification for the payment adjustment in paragraph (g)(2) of this 
section.
    (5) Copayment. The payment adjustment in paragraph (g)(2) of this 
section is applied before calculating copayment amounts.
    (6) Outliers. The payment adjustment in paragraph (g)(2) of this 
section is applied before calculating outlier payments.

0
3. Section 419.66 is amended by revising paragraph (c)(1) to read as 
follows:


Sec.  419.66  Transitional pass-through payments: Medical devices.

* * * * *
    (c) Criteria for establishing device categories. * * *
    (1) CMS determines that a device to be included in the category is 
not appropriately described by any of the existing categories or by any 
category previously in effect, and was not being paid for as an 
outpatient service as of December 31, 1996.
* * * * *

PART 485--CONDITIONS OF PARTICIPATION: SPECIALIZED PROVIDERS

0
B. Part 485 is amended as follows:
0
1. The authority citation for Part 485 continues to read as follows:

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

0
2. Section 485.631 is amended by--
0
a. Republishing paragraph (b)(1) introductory text.
0
b. Revising paragraph (b)(1)(iv).
0
c. Adding new paragraphs (b)(1)(v) and (b)(1)(vi).
    The revision and additions read as follows:


Sec.  485.631  Condition of participation: Staffing and staff 
responsibilities.

* * * * *
    (b) Standard: Responsibilities of the doctor of medicine or 
osteopathy. (1) The doctor of medicine or osteopathy--
* * * * *
    (iv) Periodically reviews and signs the records of all inpatients 
cared for by nurse practitioners, clinical nurse specialists, certified 
nurse midwives, or physician assistants.
    (v) Periodically, but not less than every 2 weeks, reviews and 
signs a sample of outpatient records of patients cared for by nurse 
practitioners, clinical nurse specialists, certified nurse midwives, or 
physician assistants according to the policies of the CAH and according 
to current standards of practice where State law requires record 
reviews or co-signatures, or both, by a collaborating physician.
    (vi) Is not required to review and sign outpatient records of 
patients cared for by nurse practitioners, clinical nurse specialists, 
certified nurse midwives, or physician assistants where State law does 
not require record reviews or co-signatures, or both, by a 
collaborating physician.
* * * * *

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

    Dated: October 26, 2005.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.

    Dated: November 1, 2005.
Michael O. Leavitt,
Secretary.

    Editorial Note: The following Addenda will not be published in 
the Code of Federal Regulations.

BILLING CODE 4120-01-P

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[FR Doc. 05-22136 Filed 11-2-05; 4:13 pm]
BILLING CODE 4120-01-C